-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CKz3XbeRAtrt65W7NQy92sLUzVFkcXt2kVu0pqcw/ApG8PUMzBUVaDQu2V2Gfw8+ qNgkf8qJyPtTnYHZzmAIPw== 0000893220-03-000411.txt : 20030325 0000893220-03-000411.hdr.sgml : 20030325 20030325135915 ACCESSION NUMBER: 0000893220-03-000411 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14120 FILM NUMBER: 03615534 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19477 BUSINESS PHONE: 2154445051 MAIL ADDRESS: STREET 1: C/O WELSH & MCKEAN ROADS STREET 2: P.O. BOX 844 CITY: SPRING HOUSE STATE: PA ZIP: 19477-0844 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 10-K 1 w84552e10vk.txt ADVANTA CORP. FORM 10-K, DECEMBER 31, 2003. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-14120 ADVANTA CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 23-1462070 (STATE OR OTHER JURISDICTION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) WELSH & MCKEAN ROADS, P. O. BOX 844, SPRING HOUSE, PENNSYLVANIA 19477 19477 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- NONE N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK, $.01 PAR VALUE CLASS B COMMON STOCK, $.01 PAR VALUE CLASS A RIGHT CLASS B RIGHT (TITLE OF EACH CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Yes [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Note. If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this form. $260,379,447 as of June 30, 2002 which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by officers and directors of the Company (however, this does not constitute a representation or acknowledgment that any of such individuals is an affiliate of the Registrant). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 19, 2003 there were 10,041,017 shares of the Registrant's Class A Common Stock, $.01 par value, outstanding and 17,271,903 shares of the Registrant's Class B Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
DOCUMENT FORM 10-K REFERENCE - -------- ------------------- Definitive Proxy Statement relating to the Registrant's 2003 Part III, Items 10-13 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than 120 days following the end of the Registrant's last fiscal year
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I. ITEM 1. BUSINESS In this Form 10-K, "Advanta", "we", "us", "our" and the "Company" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. OVERVIEW Advanta is a highly focused financial services company serving the small business market. We leverage direct marketing and information based expertise to identify potential customers and new target markets and to provide a high level of service tailored to the unique needs of small businesses. We have been providing innovative financial products and solutions since 1951. Currently, our lending business consists of Advanta Business Cards, one of the nation's largest issuers of MasterCard(R)* business credit cards to small businesses. In addition to Advanta Business Cards, we have venture capital investments. We own two depository institutions, Advanta Bank Corp. and Advanta National Bank. We primarily fund and operate our business credit card business through Advanta Bank Corp. We also own two insurance companies, Advanta Life Insurance Company and Advanta Insurance Company, through which we offer specialty credit-related insurance and related products to our existing customers. At December 31, 2002, we had approximately $2.6 billion in managed receivables, comprised of $471 million of owned receivables and $2.1 billion of securitized receivables. Through the first quarter of 2001, we had two additional lending businesses, Advanta Mortgage and Advanta Leasing Services. In the first quarter of 2001, we exited our mortgage business and ceased originating new leases in our small ticket equipment leasing business. We are, however, continuing to service the existing leases in our small ticket equipment leasing portfolio rather than sell the business or the portfolio. Pursuant to the terms of the purchase and sale agreement, dated January 8, 2001, as amended, by and between Advanta and Chase Manhattan Mortgage Corporation, a New Jersey corporation ("Buyer"), Advanta and certain of its subsidiaries transferred and assigned to Buyer and certain of its affiliates substantially all of the assets and operating liabilities associated with Advanta's mortgage business. This transaction is referred to throughout this Form 10-K as the "Mortgage Transaction." The Mortgage Transaction was consummated on March 1, 2001, effective as of February 28, 2001 (the "Closing Date"). The assets acquired by Buyer in the Mortgage Transaction consisted of loans receivable, retained interests in securitizations and other receivables, contractual mortgage servicing rights and other contractual rights, property and equipment, and prepaid assets. The liabilities assumed by Buyer in the Mortgage Transaction consist primarily of certain of our contractual obligations and other liabilities that appeared on our balance sheet, as well as specified contingent liabilities arising out of the operation of the mortgage business before closing that are identified in the purchase and sale agreement. Following the Mortgage Transaction, we no longer operate a mortgage business. However, we have retained contingent liabilities, primarily relating to litigation, arising out of our operation of the mortgage business before the Closing Date that were not specifically assumed by Buyer in the Mortgage Transaction. Prior to February 20, 1998, we also issued consumer credit cards. Under the terms of a contribution agreement, dated October 27, 1997 and amended on February 20, 1998, we and Fleet Financial Group, Inc. ("Fleet") each contributed substantially all of the assets of our respective consumer credit card businesses, subject to liabilities, to Fleet Credit Card, LLC, a newly formed Rhode Island limited liability company controlled by Fleet. We acquired a 4.99% minority interest in Fleet Credit Card, LLC as of the date of closing of the transaction. This transaction is referred to in this Form 10-K as the "Consumer Credit Card Transaction." Advanta Corp. was incorporated in Delaware in 1974 as Teachers Service Organization, Inc., the successor to a business originally founded in 1951. In January 1988, we changed our name from TSO Financial Corp. to Advanta Corp. Our principal executive office is located at Welsh & McKean Roads, P.O. - --------------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc. 1 Box 844, Spring House, Pennsylvania 19477-0844. Our telephone number at our principal executive office is (215) 657-4000. CONTINUING OPERATIONS ADVANTA BUSINESS CARDS Overview Advanta Business Cards, a business unit of Advanta, is one of the nation's largest issuers of business credit cards to small businesses. The "Advanta Business Card" is issued and funded by Advanta Bank Corp. Advanta Business Cards offers business credit cards to small businesses through targeted direct mail and telemarketing solicitations and the Internet. To a limited extent, Advanta Business Cards markets our products at industry trade shows or other forums, as another solicitation channel. Our principal objective is to use our information based strategy to continue to prudently grow our business. Based on our experience and expertise in analyzing the credit behavior and characteristics of consumers and small businesses, we have developed an extensive database of customer information and attributes. We use this information in conjunction with proprietary credit scoring, targeting and other sophisticated analytical models we have developed to market our products to prospective customers. We measure the expected behavior of our prospects by analyzing, among other things, a prospect's responsiveness, creditworthiness and expected transaction volume. We continually validate our customer segments and models based on actual results from marketing campaigns, and use this information to refine and improve our analytical assumptions. The information we gather and analyze allows us to market directly to specific customer segments, target prospects effectively, anticipate customer needs and customize our pricing and products to meet those needs. We also use this information proactively to enhance and maintain our relationships with existing customers. Our primary product is a MasterCard business credit card. We also offer a limited number of Visa(R)** business credit cards. MasterCard and Visa license banks and other financial institutions, such as Advanta Bank Corp., to issue credit cards using their respective servicemarks and interchange networks. Advanta Bank Corp. receives an interchange fee, paid to us by merchant banks, based on the purchase activity of our cardholders as partial compensation for taking credit risk, absorbing fraud losses and funding credit card receivables for a limited period prior to initial billing. Our business credit cards provide approved customers with access, through merchants, banks, checks and ATMs, to an instant unsecured revolving business credit line. Under the terms of our cardholder agreements, our business cards may be used for business purposes only. We offer a number of benefits that we believe are important to small business owners including: - additional cards for employees at no fee with the ability to set individual spending limits; - on-line detailed expense management reports that categorize purchases and itemize charges for recordkeeping and tax purposes; - customized cards with the cardholder's business name displayed on the front of the card and customized business checks; and - free on-line account management. Our business credit card also offers free auto rental insurance, free purchase protection service for a specified time period and several free emergency assistance and referral services. We offer rewards programs on some of our business credit cards. Under the rewards programs, the cardholder may receive bonus miles that can be redeemed for air travel, cash rebates and/or other rewards, based on net purchases charged on their business credit card account. We expect to continue to expand - --------------- ** Visa is a registered servicemark of Visa International, Inc. 2 our business credit card product offerings and look for innovative ways to tailor products to the unique needs of small businesses. The interest rate and credit line size we offer vary and are ultimately determined based upon the credit history and creditworthiness of the borrower. At December 31, 2002, the average credit line was approximately $11,000. The interest rate is generally a variable rate based on a LIBOR (London Interbank Offered Rate) or Prime Rate index. In most cases, the interest rate will change with changes in LIBOR or the Prime Rate, as applicable, and is subject to a minimum below which the interest rate cannot fall. We generate interest and other income through finance charges assessed on outstanding balances, interchange income, cash advance and other credit card fees. We also generate income through specialty credit-related insurance products and services we offer to our business credit card customers through our insurance subsidiaries. The managed portfolio of Advanta Business Cards grew from approximately $2.0 billion at December 31, 2001 to approximately $2.6 billion at December 31, 2002. In 2002, substantially all of Advanta's total revenues from continuing operations were derived from Advanta Business Cards. See Note 18 to the consolidated financial statements for additional segment financial information about Advanta Business Cards. Originations We originate, directly and through the use of third parties, substantially all of our business credit card accounts using direct marketing techniques, including direct mail, telemarketing solicitation and the Internet. We periodically mail solicitations for an Advanta MasterCard or Visa business credit card. Similarly, we use inbound and outbound telemarketing to solicit applicants. We offer applications online. To a limited extent, we also market our business credit cards to small businesses at industry trade shows and other forums. We originated over 241,000 new business credit card accounts during the year ended December 31, 2002. Our sources for potential customers include credit reporting agencies, customer lists from establishments with a small business customer base, strategic alliances with companies and associations with a small business customer base and linking with websites on the Internet that serve small businesses. In an effort to expand our customer reach, we are testing new sources for identifying potential customers. We target prospects for our small business credit card products using relevant information from the sources described above, historical solicitation data and proprietary segmentation methods. Our targeting models are continually updated to reflect changes in the competitive environment. Underwriting We have developed sophisticated modeling techniques for assessing the creditworthiness of applicants. Because the owner of the business is a joint obligor on our business credit card, we may consider credit-related and other relevant data about both the business and the individual owner of the business in our assessment of the creditworthiness of potential cardholders. Through the application process, we verify the applicant's demographic information and collect relevant information about the applicant's business, including current sales and income statistics. This information, coupled with credit reports received from external credit reporting agencies, forms the basis for our decision to extend credit. Using a proprietary credit scoring system and other statistical techniques, we evaluate common applicant characteristics and their perceived correlation to credit risk. Periodically, our scoring models are updated to maintain and enhance their predictability. Pricing We continually test different pricing and reward strategies. Our pricing and reward strategies include a combination of promotional pricing and cashback or other rewards and/or rebates, including travel rewards, based on spending levels. The level of cashback rewards may also vary by the type of transaction. Our offers are subject to verification of information provided by the potential cardholder through the application process. We offer primarily variable rate credit card accounts. The periodic interest rates assessed on balances in most of these accounts are indexed to LIBOR or the Prime Rate, plus an add-on percentage or spread. In most cases, the rate will change with changes in LIBOR or the Prime Rate, as applicable, and is subject to a minimum below which the rate cannot fall. In addition, the rate may vary depending on the type of 3 transaction. For example, cash advances are generally subject to higher interest rates than merchandise purchase transactions. With notice, we may reprice any account at our discretion, based upon a variety of factors indicating a risk of future nonpayment, such as changes in a cardholder's credit standing. The credit line size may also be adjusted up or down based on our continual credit monitoring. To discourage delinquent payments, we use "penalty pricing" and automatically increase the interest rate assessed on any account that becomes in default in accordance with the terms of the applicable account agreement. The amount of the automatic increase may vary, but typically we add 3% or greater to the existing interest rate on an account. Servicing and Collections We perform most of the servicing and collections for our business credit card accounts in-house. Certain data processing and administrative functions associated with the servicing of our business credit card portfolio are outsourced to First Data Resources, Inc. Services performed by First Data Resources, Inc. include: authorizing transactions through the MasterCard and Visa systems; performing billing and settlement processes; generating and monitoring monthly billing statements; and issuing credit card plastics and new account agreements. Customer Service and Support We maintain several channels of communication for our customers, including a toll-free phone number, e-mail, postal and facsimile services. In addition, we leverage numerous technology solutions to manage key performance indicators and to increase efficiencies and reduce costs. We maintain multi-site contact centers in Spring House, Pennsylvania and Draper, Utah. Each contact center is managed as a virtual call center so that functions can be performed seamlessly regardless of geographic location. Our customer service function works closely with other functions across the Advanta Business Cards organization to achieve seamless service and problem resolution. Our strategy is to maximize every contact opportunity to provide best in class service to our customers and to create customer loyalty. Delinquencies and Collections We have a collections staff to provide the collection activities for our business credit cards. Accounts are "contractually delinquent" if the minimum payment is not received by the due date. We discourage delinquent payments by assessing a late fee and using "penalty pricing" as described above. The collections staff pursues late payments aggressively and immediately. Efforts to collect contractually delinquent credit cards currently are made by our collections personnel or their designees. Collection activities include statement messages, formal collection letters and telephone calls. Collection personnel initiate telephone contact with delinquent cardholders as early as the first day the cardholder becomes contractually delinquent. Based on the use of behavioral scoring and adaptive control techniques, we determine the timing of the collection activity to be implemented for each account. If initial telephone contact fails to resolve the delinquency, we continue to contact the cardholder by telephone and by mail. Delinquency levels are monitored by management of our collections and credit departments, and information is reported daily to senior management. Efforts to collect delinquent and charged-off accounts are generally made by our collection group and supplemented in certain cases by external collection agencies. Our credit evaluation, servicing and charge-off policies and collection practices may change from time to time in accordance with our business judgment and applicable laws and regulations. VENTURE CAPITAL INVESTMENTS We make venture capital investments through certain of our affiliates, including Advanta Partners LP and Advanta Growth Capital Fund LP. Advanta Partners LP focuses primarily on growth capital financings, restructurings and management buyouts in the financial services, electronic commerce relationship management services and other consumer and data information management services industries. Advanta Growth Capital Fund LP. focuses primarily on earlier stage investment opportunities in the technology and information services sectors. The investment objective of our investment affiliates is to earn attractive returns by building the long-term values of the businesses in which they invest. Our investment affiliates combine transaction expertise, management skills and a broad contact base with strong industry-specific knowledge. 4 We actively monitor the performance of our venture capital investments, and employees and officers of our investment affiliates participate on the boards of directors of some investees. Our investments in specific companies and industry segments may vary over time. We primarily invest in privately-held companies, including early stage companies. These investments are inherently risky as the market for the technologies and products the investees have under development may never materialize. See Note 18 to the consolidated financial statements for additional segment financial information about our venture capital investments. ADVANTA INSURANCE Our life/health and property/casualty insurance subsidiaries, Advanta Life Insurance Company and Advanta Insurance Company, respectively, provide insurance and related products mostly to existing Advanta customers. Together with unaffiliated insurance carriers, we offer specialty credit-related insurance products and services to our existing business credit card and leasing customers. Advanta Insurance uses direct mail marketing and telemarketing to enroll customers in these programs. The focus of these products is on the customer's ability to repay their debt. These products include coverage for loss of life, disability, involuntary unemployment, accidental death, and lost or damaged equipment. Our insurance subsidiaries generally reinsure all or a portion of the risks associated with these products or services. Under reinsurance agreements, our insurance subsidiaries assume a proportional quota share of the risk from the unaffiliated insurance carriers. In consideration for assuming these risks, our insurance subsidiaries receive reinsurance premiums equal to the proportional percentage of the net premiums collected by the insurance carriers, less a ceding fee as defined by the reinsurance treaties, and proportional acquisition expenses, premium taxes and loss payments made by the carriers on these risks. DEPOSITORY INSTITUTIONS We own two depository institutions, Advanta Bank Corp. and Advanta National Bank. Advanta Bank Corp. is an industrial loan corporation organized under the laws of the State of Utah with its principal executive offices located in Draper, Utah. Advanta Bank Corp.'s principal activity consists of the issuance of the "Advanta Business Card" credit card to small businesses. Prior to first quarter 2001, Advanta Bank Corp. also was involved in our small ticket equipment leasing business and our mortgage business. We no longer operate a mortgage business or originate new equipment leases. However, Advanta Bank Corp. continues to be involved as the servicer of our small ticket equipment leasing business because we are continuing to service our existing lease portfolio. See "-- DISCONTINUED OPERATIONS." Advanta National Bank is a national banking association organized under the laws of the United States of America with its headquarters and sole branch currently located in Wilmington, Delaware. Prior to the closing of the Mortgage Transaction, we conducted a large portion of our mortgage business through Advanta National Bank. DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS Deposits with each of our bank subsidiaries are insured by the Federal Deposit Insurance Corporation ("FDIC"). Through our banks we are able to offer a range of insured deposit products. Advanta Bank Corp.'s deposit products include money market savings accounts, retail certificates of deposit and large denomination certificates of deposit of $99,000 or more. Advanta Bank Corp. generates retail deposits from repeat deposits from existing customers and from new depositors attracted by direct mail solicitations, newspaper and other media advertising, and the Internet. In the past, Advanta National Bank's deposit products have included money market savings accounts, retail certificates of deposit and large denomination certificates of deposit of $99,000 or more. Following the Mortgage Transaction, Advanta National Bank had excess cash liquidity. As a result, Advanta National Bank suspended originating deposit accounts. At December 31, 2002, we had total deposits of approximately $714 million at our banks, compared to approximately $637 million as of December 31, 2001. Substantially all of the deposits at December 31, 2002 and 2001 were at Advanta Bank Corp. 5 Since 1951, Advanta Corp. and its predecessor, Teachers Service Organization, Inc., have offered unsecured debt securities of the corporation, in the form of RediReserve Certificates and Investment Notes, to retail investors through our retail note programs. Advanta Corp. has sold these debt securities, also referred to in this Form 10-K as "retail notes," predominantly on a direct basis in select states. The RediReserve Variable Rate Certificates are payable on demand and the maturities on the Investment Notes range from 90 days to ten years. The RediReserve Certificates and Investment Notes generally require an initial minimum investment of $5,000 and are obligations of Advanta Corp. and are not insured or guaranteed by any public or private entity. We change the interest rates that we offer frequently, depending on market conditions and our funding needs. The rates also vary depending on the size of each investment. At December 31, 2002, approximately $316 million of RediReserve Certificates and Investment Notes were outstanding with interest rates ranging from 2.75% to 11.56%. DISCONTINUED OPERATIONS ADVANTA LEASING SERVICES Overview On January 23, 2001, we announced that after a thorough review of strategic alternatives available for our leasing business, we decided to cease originating new equipment leases. However, we are continuing to service the existing leasing portfolio. Prior to January 23, 2001, Advanta Leasing Services, a business unit of Advanta, offered flexible lease financing programs to small businesses. The primary products that we offered through our leasing business consisted of leases for small-ticket items such as computers, copiers, fax machines and other office equipment. Advanta Leasing Services originated and funded its leases and other equipment financing arrangements through Advanta Bank Corp. Advanta Business Services Corp. conducted the marketing, lease originations, customer service and collections for our leasing business. Our leases are generally priced on a fixed rate basis. At December 31, 2002, the leases in our managed portfolio, consisting of owned and securitized lease receivables, had an average lease size of approximately $5,200 and an average lease term remaining of approximately 20 months. Managed lease receivables at December 31, 2002 totaled approximately $196 million, compared to approximately $421 million at December 31, 2001. By the end of 2003, the managed lease receivables are expected to total approximately $75 million. See Note 22 to the consolidated financial statements for additional financial information about Advanta Leasing Services. Originations Prior to our decision to cease new leasing originations, Advanta Leasing Services originated leases through marketing programs, vendors, brokers and bulk or portfolio purchases. Servicing and Collections We are continuing to service the existing portfolio of equipment leases. As part of our servicing we will continue to perform collection activities with respect to delinquent contracts. Each lease contract has a provision for assessing late charges in the event that a customer fails to make a payment on the contract on the related due date. We typically initiate telephone contact when an account is between one and 16 days past due, depending on certain established criteria. Telephone contact is continued throughout the delinquency period. If the account continues to be delinquent, Advanta Leasing Services may exercise any remedies available to it under the terms of the contract, including termination and acceleration of the payments due pursuant to the lease contract. We evaluate each contract on the merits of the individual situation taking into consideration the equipment value and the current financial strength of the customer. If collection activities are unsuccessful, we typically charge off the account at 120 days past due. An account may be charged off prior to 120 days if we determine that no further payments will be made. In cases where the customer files for bankruptcy, Advanta Leasing Services' Legal Recovery Department follows up with the debtor to determine whether the debtor intends to assume or reject the contract. In many cases, 6 although the customer has filed for bankruptcy protection from its creditors, it continues to make regular payments on its contract. At the time a non-bankruptcy account is charged off, the account is referred to our in-house litigation department to determine whether we will pursue the customer or any personal guarantor on the contract through litigation. If we determine not to pursue an account through litigation it may be referred to a third party collection agency to enforce the original terms of the contract. ADVANTA MORTGAGE Effective February 28, 2001, we completed the Mortgage Transaction and no longer operated a mortgage business. In accordance with the terms of the purchase and sale agreement, Buyer acquired substantially all of the assets and operating liabilities associated with our mortgage business for a purchase price, net of operating liabilities assumed by Buyer, exceeding $1 billion. Following the Mortgage Transaction, we retained contingent liabilities, primarily relating to litigation arising out of the operation of the mortgage business through the Closing Date, that were not specifically assumed by Buyer. See "-- OVERVIEW." Prior to the closing of the Mortgage Transaction, Advanta Mortgage, a business unit of Advanta, offered a broad range of mortgage products and services to consumers throughout the country. Advanta Mortgage originated and serviced non-conforming credit first and second lien mortgage loans, including home equity lines of credit. In addition to servicing and managing the loans we originated, Advanta Mortgage serviced the home equity loans of unaffiliated third parties through our subservicing business. Subserviced loans were not included in our portfolio of managed receivables and we did not bear the risk of credit loss on our subserviced portfolio. Prior to the closing of the Mortgage Transaction, at December 31, 2000, Advanta Mortgage's portfolio of subserviced loans totaled approximately $7.9 billion and our total serviced portfolio, including the "subserviced" portfolio, was $15.8 billion. See Note 22 to the consolidated financial statements for additional financial information about Advanta Mortgage. GOVERNMENT REGULATION ADVANTA CORP. Advanta Corp. is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). We own Advanta National Bank, which is a "bank" as defined under the BHCA, as amended by the Competitive Equality Banking Act of 1987 ("CEBA"). However, under grandfathering provisions of CEBA, we are not required to register as a bank holding company because Advanta National Bank, which takes demand deposits but does not make commercial loans, did not come within the BHCA definition of the term "bank" prior to the enactment of CEBA. Under CEBA, our other banking subsidiary, Advanta Bank Corp., also is not considered a "bank" for purposes of the BHCA. Accordingly, our ownership of Advanta Bank Corp. does not impact our exempt status under the BHCA. Because we are not a bank holding company, we are not subject to examination by the Federal Reserve Board, other than for purposes of assuring continued compliance with the CEBA restrictions discussed below. Under CEBA, Advanta National Bank is subject to certain restrictions, such as the limitation that it may either take demand deposits or make commercial loans, but may not do both. In addition, under CEBA Advanta National Bank may not acquire control of more than 5% of the stock or assets of an additional "bank" or "savings association," as these terms are defined in the BHCA. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "GLB Act") was adopted on November 12, 1999 and became effective on May 12, 2000. Prior to the enactment of the GLB Act, if Advanta Corp. or Advanta National Bank had ceased complying with the restrictions set forth in CEBA, registration as a bank holding company under the BHCA would have been required. Registration as a bank holding company is not automatic and, if we were to register, it would subject us and our subsidiaries to inspection and regulation by the Federal Reserve Board. Under the GLB Act, should Advanta Corp. or Advanta National Bank fail to comply with any of the restrictions applicable to them under CEBA, there is a 180-day right to cure period following receipt of a notice from the Federal Reserve Board. The opportunity to cure or remediate an activity that is out of compliance significantly reduces the risk that Advanta Corp. will be required to register as a bank holding company under the BHCA. 7 ADVANTA BANK CORP. Advanta Bank Corp., a Utah-chartered industrial loan corporation, is a depository institution subject to regulatory oversight and examination by both the FDIC and the Utah Department of Financial Institutions. See "-- Regulatory Agreements." Under its banking charter, Advanta Bank Corp. may make consumer and commercial loans and may accept all FDIC-insured deposits other than demand deposits such as checking accounts. Advanta Bank Corp. is subject to provisions of federal law which restrict and control its ability to extend credit and provide or receive services between affiliates. In addition, the FDIC has regulatory authority to prohibit Advanta Bank Corp. from engaging in any unsafe or unsound practice in conducting its business. Advanta Bank Corp. is subject to capital adequacy guidelines issued by the Federal Financial Institutions Examination Council (the "FFIEC"). These guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. Under the rules and regulations of the FFIEC, at least half of a bank's total capital is required to be "Tier I capital," comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock. The remaining capital, "Tier II capital," may consist of other preferred stock, certain hybrid debt/equity instruments, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses. The FFIEC has also adopted minimum leverage ratios for banks, which are calculated by dividing Tier I capital by total average assets. Recognizing that the risk-based capital standards address only credit risk, and not interest rate, liquidity, operational or other risks, many banks are expected to maintain capital in excess of the minimum standards. In addition, pursuant to provisions of the FDIC Improvement Act of 1991 (the "FDICIA") and related regulations with respect to prompt corrective action, FDIC-insured institutions such as Advanta Bank Corp. may only accept brokered deposits without FDIC permission if they meet specified capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are "well-capitalized." To be "well-capitalized" under the prompt corrective action provisions, a bank must have a ratio of combined Tier I and Tier II capital to risk-weighted assets of not less than 10%, Tier I capital to risk-weighted assets of not less than 6%, and a Tier I to average assets of not less than 5%. In each case, at December 31, 2002, Advanta Bank Corp. met the capital requirements of the FDICIA and had capital at levels a bank is required to maintain to be classified as "well capitalized" under the regulatory framework for prompt corrective action. See Note 16 to the consolidated financial statements. ADVANTA NATIONAL BANK Advanta National Bank is subject to regulation and periodic examination, primarily by the Office of the Comptroller of the Currency (the "OCC"). The OCC's regulations relate to the maintenance of reserves for certain types of deposits and other products offered by a bank, the maintenance of certain financial ratios, the terms on which a bank may engage in transactions with its affiliates and a broad range of other banking practices. As a national bank, Advanta National Bank is also subject to provisions of federal law which restrict its ability to extend credit to its affiliates or pay dividends to Advanta Corp. Advanta National Bank is subject to the FFIEC capital adequacy guidelines and the FDICIA provisions for accepting brokered deposits described above. See "-- Advanta Bank Corp." Presently, Advanta National Bank is required to maintain capital in excess of the minimum regulatory standards. At December 31, 2002, Advanta National Bank had capital at levels a bank is required to maintain to be classified as "well-capitalized" under the regulatory framework for prompt corrective action. However, Advanta National Bank does not meet the definition of "well-capitalized" because of the existence of its agreement with the OCC, even though it has achieved the higher imposed capital ratios required by the agreement with the OCC. See Note 16 to the consolidated financial statements and "-- Regulatory Agreements." REGULATORY AGREEMENTS In 2000, Advanta Bank Corp. entered into agreements with its bank regulatory agencies, primarily relating to the bank's subprime lending operations. These agreements imposed temporary deposit growth limits at 8 Advanta Bank Corp. and required prior regulatory approval of cash dividends. In April 2002, the agreements were removed and, as a result, the restrictions in the agreements on deposit growth and payment of cash dividends are no longer applicable. In connection with removing the agreements, Advanta Bank Corp. reached an understanding with its regulators, reflecting continued progress in our ongoing efforts to enhance Advanta Bank Corp.'s practices and procedures. Effective October 2002, the understanding was revised. The revised understanding replaces the provisions of the prior understanding and provides for the bank to enhance certain of its internal planning and monitoring processes. The revised understanding is consistent with the manner in which Advanta Bank Corp. is currently operating its business and includes no restrictions expected to have any impact on our financial results. In 2000, Advanta National Bank also reached agreements with its bank regulatory agency, primarily relating to the bank's subprime lending operations. The agreements established temporary asset growth limits at Advanta National Bank, imposed restrictions on taking brokered deposits and required that Advanta National Bank maintain certain capital ratios in excess of the minimum regulatory standards. In 2001, Advanta National Bank entered into an additional agreement with its regulatory agency regarding restrictions on new business activities and product lines at Advanta National Bank after the Mortgage Transaction, and the resolution of outstanding Advanta National Bank liabilities. The agreement also reduced the capital requirements for Advanta National Bank to 12.7% for Tier 1 and Total capital to risk-weighted assets, and to 5% for Tier 1 capital to adjusted total assets as defined in the agreement. In addition, the agreement prohibits the payment of dividends by Advanta National Bank without prior regulatory approval. Management believes that Advanta National Bank was in compliance with its regulatory agreement at December 31, 2002. LENDING ACTIVITIES Although our current lending activities are principally directed to small businesses, certain aspects of various federal and state laws, including the Equal Credit Opportunity Act, the Community Reinvestment Act, the Electronic Funds Transfer Act, the Truth-in-Lending Act, the Fair Credit Reporting Act (the "FCRA") and the Soldiers' and Sailors' Relief Act, apply to our lending activities. To the extent applicable, provisions of these statutes and related regulations require that certain disclosures be made to borrowers, prohibit discriminatory practices in extending credit, prohibit sending unsolicited credit cards, require our FDIC-insured banking institutions to serve the banking needs of their local communities, provide certain credit protections for activated military borrowers and regulate the dissemination and use of information relating to a borrower's creditworthiness. Important provisions of the FCRA that preempt individual states from enacting their own, different laws will expire on January 1, 2004. The provisions, some of which apply to our lending activities, relate to prescreening rules, credit bureau reinvestigation responsibilities in response to consumer disputes, adverse action requirements, information contained in a consumer report, responsibilities of data furnishers and the exchange of information among affiliated companies. If the provisions are not reenacted by Congress, states would be able to adopt different laws, potentially with different requirements in each of these areas, which could increase our operational and compliance costs. There can be no assurance that the provisions will be reenacted or that they will be reenacted in the same form as they exist today and therefore it is possible that states will not be preempted from adopting their own laws in the future. Additionally, the GLB Act contains privacy requirements dealing with the use of nonpublic information about consumer customers. Retail deposit customers of Advanta National Bank and Advanta Bank Corp. as well as investors who purchase Advanta Corp.'s retail notes are subject to the GLB Act and its accompanying regulations. The GLB Act is not preemptive and states may impose additional requirements. DIVIDENDS There are various legal limitations on the extent to which national banks, including Advanta National Bank, can supply funds through dividends to their parent companies or affiliates. The prior approval of the OCC is required if the total of all dividends declared by the national bank in any calendar year exceeds its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus accounts. In addition, a national bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. The OCC also has authority under the Financial 9 Institutions Supervisory Act to prohibit a national bank from engaging in any unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the OCC, pursuant to its authority under the Financial Institutions Supervisory Act, could claim that a dividend payment might under some circumstances be an unsafe or unsound practice. Under Advanta National Bank's current agreement with the OCC, Advanta National Bank is not eligible to pay any dividends without the OCC's prior approval. See "-- Regulatory Agreements." TRANSFERS OF FUNDS Sections 23A and 23B of the Federal Reserve Act and applicable regulations also impose restrictions on Advanta National Bank and Advanta Bank Corp. These restrictions limit the transfer of funds by the depository institution to certain of its affiliates, including Advanta Corp., in the form of loans, extensions of credit, investments or purchases of assets. These transfers by any one depository institution to us or any other single affiliate are limited in amount to 10% of the depository institution's capital and surplus, and transfers to all affiliates are limited in the aggregate to 20% of the depository institution's capital and surplus. These loans and extensions of credit are also subject to various collateral requirements. Sections 23A and 23B of the Federal Reserve Act also require generally that the depository institution's transactions with its affiliates be on terms no less favorable to the bank than comparable transactions with unrelated third parties. In addition, in order for us to maintain our grandfathered exemption under CEBA, Advanta National Bank is not permitted to make any loans to us or any of our subsidiaries. REGULATION OF INSURANCE Our insurance subsidiaries are subject to the laws and regulations of, and supervision by, the states in which they are domiciled or have obtained authority to transact insurance business. These states have adopted laws and regulations which govern all insurance policy underwriting, rating, licensing, marketing, administration and financial operations of an insurance company, including dividend payments and financial solvency. In addition, our insurance subsidiaries have registered as an Arizona Holding Company which requires an annual registration and the approval of certain transactions between all affiliated entities. The maximum dividend that any of our insurance subsidiaries can distribute to Advanta Corp., in any twelve-month period, without prior approval of the State of Arizona Department of Insurance, is the lesser of: - 10% of the subsidiary's statutory surplus; or - for any given twelve-month period, the subsidiary's net income, if it is a life insurance company; or - for any given twelve-month period, the subsidiary's net investment income, if it is a property and casualty insurance company. The State of Arizona has adopted minimum risk-based capital standards as developed by the National Association of Insurance Commissioners. Risk-based capital is the quantification of an insurer's investment, underwriting, reserve and business risks in relation to its total adjusted capital and surplus. The ratio of an insurer's total adjusted capital and surplus is compared to various levels of risk-based capital to determine what intervention, if any, is required by either the insurance company or an insurance department. At December 31, 2002, our insurance subsidiaries met all risk-based capital standards and required no intervention by any party. Our insurance subsidiaries reinsure risks using underwriting insurance practices and rates which are regulated in part or fully by state insurance departments. State insurance departments continually review and modify these rates based on prior historical experience. Any modifications may impact the future profitability of our insurance subsidiaries. LEGISLATIVE AND REGULATORY DEVELOPMENTS The banking and finance businesses in general are the subject of extensive regulation at the state and federal levels, and numerous legislative and regulatory proposals are advanced each year which, if adopted, could affect our profitability or the manner in which we conduct our activities. It is impossible to determine the 10 extent of the impact of any new laws, regulations or initiatives, or whether any of the federal or state proposals will become law. In the second quarter of 2002, the bank regulatory agencies issued an interagency advisory that required accrued interest receivable relating to securitized credit cards to be treated as a subordinated residual interest for regulatory capital calculations no later than December 31, 2002. Advanta Bank Corp. and Advanta National Bank adopted this guidance effective December 31, 2002. The adoption of this interagency guidance did not impact the regulatory capital requirements of Advanta National Bank. The adoption of this interagency guidance at Advanta Bank Corp. resulted in Advanta Bank Corp.'s combined total capital ratio being reduced by approximately six percentage points. The USA PATRIOT Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the "USA Patriot Act") was enacted on October 26, 2001 and is intended to detect and prosecute terrorism and international money laundering. The USA Patriot Act establishes new standards for verifying customer identification incidental to the opening of new accounts, including our business credit card and bank deposit accounts. Both Advanta Bank Corp. and Advanta National Bank have undertaken appropriate measures to comply with the USA Patriot Act and associated regulations. Other provisions of the USA Patriot Act provide for: special information sharing procedures governing communications with the government and other financial institutions with respect to suspected terrorists and money laundering activity; and enhancements to suspicious activity reporting, including electronic filing of suspicious activity reports over a secure filing network. Congress is considering legislation that would enhance the authority for banks to pay interest on business checking accounts and to fully implement interstate banking. With respect to both of these legislative proposals, there are initiatives under consideration that would limit their applicability so that they would not be applicable to state-chartered industrial banks, such as Advanta Bank Corp. If the proposals are so limited, Advanta Bank Corp. may lose future flexibility in branch locations or offering new products. Other federal legislative proposals that may impact Advanta and its businesses include privacy initiatives to restrict the permissible use of customer-specific credit information and statutory changes to those aspects of the Truth in Lending Act that are applicable to our business. In addition, Congress is continuing to consider legislation to reform the Bankruptcy Code. The bankruptcy reform bills would require that debtors pass a means test to determine eligibility for bankruptcy relief while adding new consumer protections, such as new minimum payment and introductory rate disclosures for some credit card products and exemptions for retirement savings in bankruptcy. While directed at consumer bankruptcies, if adopted the bankruptcy reform initiatives could also impact small businesses that file for bankruptcy liquidation under Chapter 7 of the Bankruptcy Code. Our current marketing is based on direct marketing to small businesses using primarily direct mail, telemarketing solicitations and the Internet. There are a number of federal and state legislative initiatives to restrict the use of unsolicited commercial e-mail and telemarketing to wireless telephones and to strengthen "do not call list" laws. Additionally, the Federal Trade Commission has adopted amendments to its rules that include a proposal for a nationwide registry for consumers who wish to block telemarketing calls. While these proposals are intended to apply to individual consumers, the practical application may impact our marketing to small businesses as well. Additionally, federal and state legislatures as well as government regulatory agencies are considering legislative and regulatory initiatives related to credit scoring disclosure, minimum monthly payments and other aspects of credit card lending and marketing. While these are generally directed at consumer transactions, it is possible that if any were to become effective they could impact small business lending. COMPETITION As a marketer of credit products, we face intense competition from numerous financial services providers. Within the highly competitive bank credit card industry there is increased competitive use of advertising, target marketing and pricing competition with respect to both interest rates and annual cardholder fees as both traditional and new credit card issuers seek to expand or to enter the market. Many of our competitors are 11 substantially larger and have more capital and other resources than we do. Competition among lenders can take many forms, including convenience in obtaining a loan, the size of their existing customer base and the ability to cross sell products to that customer base, customer service, size of loans, interest rates and other types of finance or service charges, the nature of the risk the lender is willing to assume and the type of security, if any, required by the lender. We have responded to the increased competition in the bank credit card industry primarily by marketing cards to a target market of small businesses with promotional pricing, including low or zero introductory rates, and rewards products tailored to the needs of our small business customers. Although we believe we are generally competitive in most of the geographic areas in which we offer our products and services, there can be no assurance that our ability to market our products and services successfully or to obtain an adequate yield on our loans will not be impacted by the nature of the competition that now exists or may develop. In seeking investment funds from the public, we face competition from banks, savings institutions, money market funds, mutual funds, credit unions and a wide variety of private and public entities that sell debt securities, some of which are publicly traded. Many of our competitors are larger and have more capital and other resources than we have. Competition relates to matters such as: rate of return, collateral, insurance or guarantees applicable to the investment, if any; the amount required to be invested; convenience and the cost to and conditions imposed upon the investor in investing and liquidating the investment, including any commissions which must be paid or interest forfeited on funds withdrawn; customer service; service charges, if any; and the taxability of interest. EMPLOYEES As of December 31, 2002, we had 889 employees. We believe that we have good relationships with our employees. None of our employees is represented by a collective bargaining unit. AVAILABLE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room located at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our principal Internet address is http://www.advanta.com. Through http://www.advanta.com our annual, quarterly and current reports, and amendments to those reports, are made available free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number: Investor Relations, Advanta Corp., Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477, telephone: (215) 444-5335. ------------------------ Information or statements provided by the Company from time to time may contain certain "forward-looking information" including information relating to: anticipated earnings per share; anticipated returns on equity; anticipated growth in loans outstanding and credit card accounts; anticipated net interest margins; anticipated operating expenses and employment growth; the level of new account acquisitions, customer spending and account attrition; anticipated payment and prepayment rates of outstanding loans; anticipated marketing expense; estimated values of our retained interests in securitizations and anticipated cash flows; our ability to replace existing credit facilities, when they expire, with appropriate levels of funding on similar terms and conditions; the value of the investments that we hold; anticipated delinquencies and charge-offs; realizability of net deferred tax asset; and anticipated outcome and effects of litigation. The cautionary statements provided below are being made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act for any such forward-looking information. 12 We caution readers that any forward-looking information provided by us is not a guarantee of future performance and that actual results may differ materially from those in the forward-looking information as a result of various factors, including but not limited to: - Increased credit losses and collection costs associated with a worsening of general economic conditions, rising interest rates, shifts in product mix within our portfolio of loans, rising delinquency levels, increases in the number of customers seeking protection under the bankruptcy laws resulting in accounts being charged off as uncollectible, and the effects of fraud by third parties or customers. - Intense and increasing competition from numerous providers of financial services who may employ various competitive strategies. We face competition from originators of business credit cards, some of which have greater resources than we do. - The completion of post-closing procedures following the Mortgage Transaction and revisions to estimated charges associated with the discontinued operations of our mortgage and leasing businesses. - The effects of interest rate fluctuations on our net interest margin and the value of our assets and liabilities; the continued legal or commercial availability of techniques, including loan pricing and repricing, hedging and other techniques, that we use or may use to manage the risk of those fluctuations. - Difficulties or delays in the securitization of our receivables and the resulting impact on the cost and availability of such funding. Difficulties and delays may result from the current economic, legal, regulatory, accounting and tax environments and adverse changes in the performance of the securitized assets or the market for asset-backed securities generally. - The amount, type and cost of financing available to us, including securitization of our receivables and secured financing, and any changes to that financing including any impact from changes in the current economic, legal, regulatory, accounting and tax environments, adverse changes in the performance of our loan portfolio, any impact from changes in the ratings on our debt or the debt of our subsidiaries and the activities of parties with which we have agreements or understandings, including any activities affecting any investment. - Factors affecting our aggregate number of accounts or receivable balances, and the growth rate thereof, including the amount of actual marketing investment made by us, changes in cardholder behavior or preferences affecting product mix, retention of cardholders after promotional periods have expired, the rate of repayment of receivable balances, changes in general economic conditions and other factors beyond our control. - The impact of "seasoning" (the average age of a lender's portfolio) on our level of delinquencies and losses which may require a higher allowance for receivable losses for on-balance sheet assets and may adversely impact securitization income. The addition of account originations or balances and the attrition of those accounts or balances could significantly impact the seasoning of our overall portfolio. - The amount of, and rate of growth in, our expenses (including employee and marketing expenses) as our businesses develop or change and we expand into new market areas; the acquisition or disposition of assets (interest-earning, fixed or other); and the effects of changes within our organization or in our compensation and benefit plans. - Difficulties or delays in the development, production, testing and marketing of products or services, including, but not limited to, a failure to implement new product or service programs when anticipated, the failure of or delay in customers' acceptance of these products or services, losses associated with the testing and implementation of new products or services or financial, legal or other difficulties as may arise in the course of such implementation. - The effects of, and changes in, tax laws, rates, regulations and policies. - The effects of, and changes in, political conditions, social conditions and general economic conditions, including inflation, recession or other adverse economic conditions. 13 - The effects of, and changes in the level of scrutiny, regulatory requirements and regulatory initiatives, including restrictions and limitations imposed by banking laws, examinations, audits, and agreements between our bank subsidiaries and their regulators, resulting from the fact that our banking and finance businesses are highly regulated and subject to periodic review and examination by federal and state regulators, including the OCC and the FDIC. - The effects of, and changes in, monetary and fiscal policies, federal and state laws and regulations (financial, consumer, regulatory or otherwise), and other activities of governments, agencies and other similar organizations, including the OCC and the FDIC. - The costs and other effects of legal and administrative cases and proceedings, settlements and investigations, claims and changes in those items, developments or assertions by or against us or any of our subsidiaries arising in the ordinary course of business or in connection with our discontinued operations. - Adoptions of new, or changes in existing, accounting policies and practices and the application of such policies and practices. - The proper design and operation of our disclosure controls and procedures. - Our relationships with customers, significant vendors and business partners. - Our ability to attract and retain key personnel. ITEM 2. PROPERTIES At December 31, 2002, Advanta owned two buildings in Horsham, Pennsylvania totaling approximately 198,000 square feet. Since the closing of the Mortgage Transaction, these buildings have been 100% leased to Buyer. At December 31, 2002, Advanta leased approximately 109,511 square feet in Spring House, Pennsylvania for its principal executive and corporate offices and for use by Advanta Business Cards. In addition, Advanta leased approximately 21,474 square feet in two buildings in the Pennsylvania suburbs of Philadelphia for certain corporate staff functions. Advanta leased approximately 21,328 square feet in Voorhees, New Jersey that is primarily used by our leasing business unit. Advanta also leased approximately 12,000 square feet of office space and 3,000 square feet of storage space in two buildings in Gibbsboro, New Jersey for our leasing and business cards operations. In Delaware, Advanta leased approximately 36,589 square feet of office space for Advanta National Bank and for other corporate and business cards operations, approximately 16,644 of this office space is subleased to an unrelated third party. In New York, Advanta leased approximately 6,000 square feet of office space in two buildings for Advanta Partners LP and Advanta Growth Capital Fund, LP. Advanta also leased approximately 50,625 square feet of office space in Draper, Utah for Advanta Bank Corp. In addition to the principal locations in Pennsylvania, New Jersey, New York, Delaware and Utah, until February 28, 2001, Advanta leased approximately 84,923 square feet of office space in twenty-one states to support the mortgage loan production offices and an additional 6,213 square feet of office space in five states to support Advanta Mortgage and Advanta Leasing Services. Since Advanta ceased origination of new leases and exited the mortgage business in the first quarter of 2001, Advanta has been buying out, assigning or subleasing these spaces. Accordingly, as of December 31, 2002, the remaining leased space totaled approximately 17,576 square feet. At December 31, 2002, the total leased and owned office space was approximately 459,459 square feet. ITEM 3. LEGAL PROCEEDINGS On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which we deny, center around Fleet's assertions that we failed to complete certain post-closing adjustments to the value of the assets and liabilities we contributed to Fleet Credit Card LLC in connection with the Consumer Credit Card Transaction in 1998. We filed an answer to the complaint, and we also filed a countercomplaint against Fleet for damages we believe have been caused by certain actions of Fleet. As a result of related litigation with Fleet, $70.1 million of our reserves in connection with this litigation were funded in an escrow account in February 2001. On January 22, 2003, the trial court issued a decision ruling on all but one of the remaining issues, and ordered further briefing on the remaining outstanding issue. In the year ended December 31, 2002, we recognized a $43.0 million pretax loss on the transfer of our consumer credit card business, representing the estimated impact of implementing the court's decisions. This amount represents the amount in excess of the reserves we have been 14 carrying for the litigation, which was based on our expectations of the outcome of the litigation. We estimate that the court's decisions will have a favorable impact to our liquidity since we would recoup approximately $8 million in cash from the escrow account funded in February 2001, after payment of amounts due to Fleet. The court's ruling on the remaining outstanding issue and/or the ultimate resolution of any issues that may be appealed could reduce or eliminate the charge to our earnings, although there can be no assurance as to the potential benefit, if any, to earnings at this time. In an ongoing element of Fleet's disputes with us, Fleet has claimed $508 million of tax deductions from its partnership with us in connection with the Consumer Credit Card Transaction, which are required under the law to be allocated solely to Advanta. As required, we reported these deductions on our 1998 corporate tax return. However, we have not used or booked the benefit from most of these deductions because for tax purposes we have a very substantial net operating loss carryforward. We have approximately $636 million of net operating loss carryforwards at December 31, 2002 and have booked no benefit from $402 million of these net operating loss carryforwards. The deductions are attributable to deductions for bad debt reserves that we expensed in computing our book income or loss before the Consumer Credit Card Transaction, but which were not deductible by Advanta for tax purposes until after the closing of the transaction in 1998. The tax law requires "built in losses" like these to be deducted by the party who contributed the assets to the partnership, in this case, Advanta. The Internal Revenue Service agents who have examined the returns at issue have to ensure that both parties do not obtain the deductions and therefore, following standard practice, proposed to disallow the deductions to both parties until there is a final resolution. The deductions, as well as the allocation of a gain from the sale of a partnership asset of approximately $47 million, are now before the IRS Regional Office of Appeals. On January 15, 2003, Fleet filed a complaint in Rhode Island Superior Court seeking a declaratory judgment that we indemnify Fleet under the applicable partnership agreement for any damage Fleet incurs by not being entitled to the $508 million of tax deductions. Fleet is also seeking a declaratory judgment that it should not indemnify us for any damages that we incur due to any allocation to Advanta of the $47 million gain on the sale of a partnership asset. Fleet's claim for indemnification appears to be brought by Fleet in the hope that we will advise the IRS that we will agree with a substantial part of Fleet's tax position. On February 28, 2003, we filed a motion to dismiss the complaint. We believe that the indemnification provision in the partnership agreement does not indemnify Fleet for damages incurred related to the tax deductions and that the lawsuit is frivolous, having no legal basis whatsoever. We do not expect this lawsuit or the tax issues discussed above to have a material adverse effect on our financial condition or results of operations. On December 5, 2000, a former executive of Advanta obtained a jury verdict against us in the amount of $3.9 million in the United States District Court for the Eastern District of Pennsylvania, in connection with various claims against Advanta related to the executive's termination of employment. In September 2001, the District Court Judge issued orders denying both parties' post-trial motions. A judgment in the amount of approximately $6 million, which includes the $3.9 million described above, was entered against Advanta. In September 2001, we filed an appeal to the United States Court of Appeals for the Third Circuit. We have posted a supersedeas bond in the amount of $8 million. On July 8, 2002, the Court of Appeals rendered a judgment affirming in part and reversing in part the judgment. The Court of Appeals reduced the total damage award by approximately $1.1 million and also ordered the District Court to reduce the amount of liquidated damages based on the reduced award. The effect of this decision will be to reduce the judgment to approximately $4.7 million rather than $6 million. On February 24, 2003, the Supreme Court of the United States denied our petition for certiorari seeking a new trial instead of the reduced verdict. The District Court Judge has not yet ruled on the executive's petition for attorney's fees and costs in the amount of approximately $1.4 million, which we have contested. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on our financial position or future operating results, based on the level of reserves we have established in connection with this litigation. On July 26, 2001, Chase Manhattan Mortgage Corporation ("Chase") filed a complaint against Advanta Corp. and certain of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, that we breached our contract with Chase in connection with the Mortgage Transaction. Chase claims that we misled Chase concerning the value of certain of the assets sold to Chase. In September 2001, we filed an answer to the complaint in which we denied all of the substantive allegations of the complaint and asserted a counterclaim against Chase for breach of contract relating to funds owed by Chase to us in connection with the 15 transaction. The matter is in discovery and trial is scheduled to begin in January 2004. We believe that the lawsuit is without merit and will vigorously defend Advanta in this litigation. We do not expect this lawsuit to have any impact on our continuing business and, based on the complete lack of merit, we do not anticipate that the lawsuit will have a material adverse impact on our financial position or future operating results. On November 8, 2001 and January 28, 2002, the accounting firm of Grant Thornton, LLP ("Grant Thornton") filed third-party complaints against Advanta Mortgage Corp., USA ("AMCUSA") in two related lawsuits in the United States District Court for the Southern District of West Virginia. The third-party claims alleged negligent misrepresentation, claiming without specificity or factual support that Grant Thornton received inaccurate information from AMCUSA concerning the amount of loans that AMCUSA had been servicing for the First National Bank of Keystone, West Virginia ("Keystone Bank"). Grant Thornton was the former auditor for Keystone Bank, which failed. Grant Thornton has been sued by the FDIC as receiver of Keystone Bank and by shareholders and others with purported ownership interests in Keystone Bank, alleging that Grant Thornton rendered an unqualified opinion for Keystone Bank's financial statements, when in fact the financial statements fraudulently overstated the bank's assets by more than $500 million. In February 2003, AMCUSA and Grant Thornton agreed to settle the litigation for an amount that is not material to our financial position or the results of our operations. In addition to the cases described above, Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. Management believes that the aggregate loss, if any, resulting from these actions will not have a material adverse effect on our financial position or results of our operations based on the level of litigation reserves we have established and our current expectations regarding the ultimate resolutions of these existing actions. Our litigation reserves are estimated based on the status of litigation and our assessment of the ultimate resolution of each action after consultation with our attorneys. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of our litigation, claims and other legal proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. Changes in estimates or other charges related to litigation are included in operating expenses of the respective business segment if related to continuing operations, or gain (loss) on discontinuance of mortgage and leasing businesses if related to discontinued operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 16 EXECUTIVE OFFICERS OF THE REGISTRANT The applicable Board of Directors elected each of the executive officers of Advanta Corp. and its subsidiaries listed below, to serve at the pleasure of the Board in the capacities indicated.
NAME AGE OFFICE DATE ELECTED - ------------------------------------------------------------------------------------------------------ Dennis Alter 60 Chairman of the Board and Chief Executive 1972 Officer William A. Rosoff 59 Vice Chairman of the Board and President 1996 Jeffrey D. Beck 54 Vice President and Treasurer of Advanta Corp. 2001 and President and Chief Investment Officer, Advanta Bank Corp. Philip M. Browne 43 Senior Vice President and Chief Financial 1998 Officer Christopher J. Carroll 43 Chief Credit Officer 2001 David B. Weinstock 38 Vice President and Chief Accounting Officer 2001
Mr. Alter became Executive Vice President and a Director of Advanta Corp.'s predecessor organization in 1967. He was elected President and Chief Executive Officer in 1972, and Chairman of the Board of Directors in August 1975. Mr. Alter has remained as Chairman of the Board since August 1975. In February 1986, he relinquished the title of President, and in August 1995 he relinquished the title of Chief Executive Officer. In October 1997, Mr. Alter reassumed the title of Chief Executive Officer. Mr. Rosoff joined Advanta Corp. in January 1996 as a Director and Vice Chairman. In October 1999, Mr. Rosoff became President and Vice Chairman of the Board of Advanta Corp. Prior to joining Advanta Corp., Mr. Rosoff was a long time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen LLP, Advanta Corp.'s outside counsel, where he advised Advanta Corp. for over 20 years. While at Wolf, Block, Schorr and Solis-Cohen LLP, he served as Chairman of its Executive Committee and, immediately before joining Advanta Corp., as a member of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff is a Trustee of Atlantic Realty Trust, a publicly held real estate investment trust. Mr. Beck joined Advanta Corp. in 1986 as Senior Vice President of Advanta National Bank and was elected Vice President and Treasurer of Advanta Corp. in 1992. In June 2000, Mr. Beck was elected Chief Investment Officer of Advanta Bank Corp. and in May 2001, he was elected President and a Director of Advanta Bank Corp. Mr. Browne joined Advanta Corp. in June 1998 as Senior Vice President and Chief Financial Officer. Prior to joining Advanta Corp., he was an Audit and Business Advisory Partner at Arthur Andersen LLP where, for over sixteen years, he audited public and private companies and provided business advisory and consulting services to financial services companies. Mr. Browne is a director of and serves as Chairman of the Audit Committee for The Bon-Ton Stores, Inc., a publicly held corporation. Mr. Browne is also a director of and serves as Chairman of the Audit Committee for AF&L Insurance Company, a privately held long-term care and home health care insurance company. Mr. Carroll joined Advanta Corp. in 2001 as Chief Credit Officer. Prior to joining Advanta Corp., Mr. Carroll was a consultant with The Secura Group for two years where he assisted clients, including Advanta, with bank regulatory issues in areas such as credit risk management, credit policy and process management, regulatory compliance, due diligence, and consolidation and conversion projects. Prior to that, he held a variety of positions in credit management and administration at First Interstate Bancorp. (now Wells Fargo), where he spent 11 years as a consumer and commercial lender, credit administrator, regulatory liaison and credit risk manager. Mr. Weinstock joined Advanta Corp. in 1998 and became Vice President and Chief Accounting Officer in March 2001. Mr. Weinstock served as the Controller from April 1999 to October 1999 when he became Vice President of Investor Relations. Prior to joining Advanta Corp., Mr. Weinstock served as Senior Manager at Arthur Andersen LLP from 1996 to 1998, where he audited public and private companies and provided business advisory and consulting services to financial services companies. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the National Market System of The Nasdaq Stock Market, Inc. under the symbols ADVNA (Class A voting common stock) and ADVNB (Class B non-voting common stock). Following are the high, low and closing prices and cash dividends declared for the last two years as they apply to each class of stock:
CASH DIVIDENDS QUARTER ENDED: HIGH LOW CLOSE DECLARED - -------------- ------ ------ ------ --------- CLASS A: March 31, 2001 $16.00 $ 8.75 $15.81 $0.063 June 30, 2001 16.00 12.86 16.00 0.063 September 30, 2001 19.10 8.00 9.40 0.063 December 31, 2001 11.72 8.00 9.94 0.063 March 31, 2002 $12.90 $ 8.47 $12.76 $0.063 June 30, 2002 14.55 10.40 10.86 0.063 September 30, 2002 11.45 7.60 10.05 0.063 December 31, 2002 11.00 8.25 8.98 0.063 CLASS B: March 31, 2001 $14.00 $ 7.16 $13.69 $0.076 June 30, 2001 14.00 11.90 13.97 0.076 September 30, 2001 17.10 8.10 8.95 0.076 December 31, 2001 10.79 6.85 9.10 0.076 March 31, 2002 $11.99 $ 7.90 $11.99 $0.076 June 30, 2002 14.04 10.24 10.93 0.076 September 30, 2002 11.44 7.35 10.33 0.076 December 31, 2002 11.10 8.00 9.39 0.076
At March 3, 2003, the Company had approximately 250 and 628 holders of record of Class A and Class B common stock, respectively. Although we anticipate that comparable cash dividends will continue to be paid in the future, the payment of future dividends by Advanta will be at the discretion of the Board of Directors and will depend on numerous factors including Advanta's cash flow, financial condition, capital requirements and such other factors as the Board of Directors deems relevant. The information disclosed under the heading "Equity Compensation Plan Information" in Item 12 is incorporated by reference herein. We have established an Employee Savings Plan, qualified under Section 401(k) of the Code (the "401(k) Plan"), which includes as an investment category available to participants our Class B Common Stock (the "Common Stock"). We also maintain an Employee Stock Purchase Plan (the "Stock Purchase Plan") which is a broad-based plan pursuant to which eligible employees may purchase shares of our Class B Common Stock at a discount. Through the 401(k) Plan and the Stock Purchase Plan during the period since 1998, we sold to certain of our employees who participate in the plans shares of Class B Common Stock which were inadvertently in excess of the number of shares of Class B Common Stock registered by us on Form S-8 Registration Statements for that purpose. Exemptions from registration may not be available for all of these transactions. All of the shares involved in these transactions were acquired by the plans on behalf of participants on the open market. For the two years ended December 31, 2001 and 2000, shares sold pursuant to the 401(k) Plan and the Stock Purchase Plan exceeded the number of registered shares of Class B 18 Common Stock by an aggregate for those years of approximately 279,388 shares and 169,724 shares, respectively. For the year ended December 31, 2002, shares sold pursuant to the 401(k) Plan and the Stock Purchase Plan exceeded the number of registered shares of Class B Common Stock by approximately 45,152 shares and 42,154 shares, respectively. During 2002, the shares were sold at prices ranging from $7.69 to $13.65, in the case of the 401(k) Plan and $8.27 to $13.22, in the case of the Stock Purchase Plan. Because all of the sales of unregistered shares were made utilizing shares purchased on the open market, we did not receive any net proceeds in connection with the transactions described above. Registration Statements on Form S-8 are being filed to register shares of Class B Common Stock for future issuance in connection with the plans. 19 ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Summary of Operations (1) Noninterest revenues $ 240,101 $ 178,876 $ 151,033 $ 105,370 $ 140,408 Interest revenues 103,604 127,935 142,148 104,584 111,502 Interest expense 47,580 82,470 86,508 80,800 101,226 Provision for credit losses 40,906 35,976 36,309 22,506 38,329 Operating expenses 201,741 180,186 150,292 95,506 136,835 Minority interest in income of consolidated subsidiary 8,880 8,880 8,880 8,880 8,880 Unusual charges (2) 0 41,750 0 16,713 125,072 Gain (loss) on transfer of consumer credit card business (43,000) 0 0 0 541,288 Income (loss) before income taxes 1,598 (42,451) 11,192 (14,451) 382,856 Income (loss) from continuing operations (15,572) (30,456) 11,192 41,334 408,604 Income (loss) from discontinued operations, net of tax 0 (8,438) (163,578) 8,484 39,276 Loss, net, on discontinuance of mortgage and leasing businesses, net of tax (8,610) (31,639) (4,298) 0 0 Net income (loss) (24,182) (70,533) (156,684) 49,818 447,880 - ---------------------------------------------------------------------------------------------------------- Per Common Share Data Basic income (loss) from continuing operations Class A $ (0.69) $ (1.23) $ 0.39 $ 1.59 $ 15.14 Class B (0.59) (1.17) 0.47 1.66 15.21 Combined (3) (0.63) (1.19) 0.44 1.63 15.18 Diluted income (loss) from continuing operations Class A (0.69) (1.23) 0.39 1.58 14.32 Class B (0.59) (1.17) 0.46 1.65 14.35 Combined (3) (0.63) (1.19) 0.44 1.62 14.33 Basic net income (loss) Class A (1.03) (2.79) (6.28) 1.95 16.62 Class B (0.94) (2.73) (6.21) 2.02 16.68 Combined (3) (0.97) (2.75) (6.24) 1.99 16.65 Diluted net income (loss) Class A (1.03) (2.79) (6.23) 1.94 15.69 Class B (0.94) (2.73) (6.16) 2.00 15.73 Combined (3) (0.97) (2.75) (6.19) 1.98 15.71 Cash dividends declared Class A 0.252 0.252 0.252 0.252 0.252 Class B 0.302 0.302 0.302 0.302 0.302 Book value-combined 13.11 14.20 17.06 23.14 21.26 Closing stock price: Class A 8.98 9.94 8.81 18.25 13.25 Class B 9.39 9.10 7.19 14.06 11.06 - ---------------------------------------------------------------------------------------------------------- Financial Condition -- Year End Investments (4) $ 503,479 $ 476,568 $ 866,376 $ 893,819 $1,290,373 Gross business credit card receivables: Owned 445,083 416,265 335,087 275,095 150,022 Securitized 2,149,147 1,626,709 1,324,137 765,019 664,712 -------------------------------------------------------------- Managed 2,594,230 2,042,974 1,659,224 1,040,114 814,734 Total owned assets 1,681,613 1,636,680 2,843,472 3,538,560 3,662,062 Deposits 714,028 636,915 1,346,976 1,512,359 1,749,790 Debt 315,886 323,582 755,184 788,508 1,030,147 Capital securities (5) 100,000 100,000 100,000 100,000 100,000 Stockholders' equity 321,313 366,299 440,902 589,631 560,304 - ----------------------------------------------------------------------------------------------------------
20
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Selected Financial Ratios Return on average assets (1.50)% (3.39)% (4.35)% 1.34% 11.95% Return on average common equity (6.74) (17.50) (31.37) 8.82 82.76 Return on average total equity (6.68) (17.42) (31.28) 8.74 74.75 Return on average total equity and capital securities (3.98) (12.82) (25.11) 8.30 64.81 Equity/owned assets 19.11 22.38 15.51 16.66 15.30 Equity and capital securities/owned assets 25.05 28.49 19.02 19.49 18.03 Equity/managed assets (6) 8.34 10.38 3.74 4.99 4.67 Equity and capital securities/managed assets (6) 10.93 13.21 4.59 5.83 5.50 Dividend payout (7) N/M N/M N/M 15.67 1.62 As a percentage of owned receivables: Total receivables 30 days or more delinquent 5.4 6.6 5.4 3.8 4.7 Net principal charge-offs (8) 7.5 6.7 4.2 5.4 7.0 As a percentage of managed receivables: Total receivables 30 days or more delinquent 6.2 6.6 5.0 3.7 4.4 Net principal charge-offs (8) 8.7 7.6 4.6 5.1 6.7 ==========================================================================================================
(1) Results through February 1998 include the results of the consumer credit card unit. The results of the mortgage and leasing businesses are reported as discontinued operations in all periods presented. (2) 2001 amounts included severance, outplacement and other compensation costs associated with restructuring our corporate functions commensurate with the ongoing businesses as well as expenses associated with exited businesses and asset impairments. 1999 amounts included charges associated with cost reduction initiatives in the first quarter and additional costs associated with products exited in the first quarter of 1998. 1998 amounts included severance and outplacement costs associated with workforce reduction, option exercises and other employee costs associated with the disposition of our consumer credit card business and tender offer, and expense associated with exited business/products and asset impairment. (3) Combined represents a weighted average of Class A and Class B (see Note 2 to the consolidated financial statements). (4) Includes federal funds sold, investments available for sale and trading investments, if applicable. (5) Represents company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of Advanta Corp. (6) See "Liquidity and Capital Resources" in Management's Discussion and Analysis of Operations and Financial Condition for calculation of managed assets. (7) The dividend payout ratio for the years ended December 31, 2002, 2001 and 2000 is negative and, therefore, not meaningful. (8) Effective October 1, 2000, business credit card charge-off statistics reflect the adoption of a new charge-off policy for bankruptcies. Bankrupt business credit cards are charged off within a 60-day investigative period after receipt of notification. The previous policy provided a 90-day investigative period. Managed and owned business credit card principal charge-offs for the year ended December 31, 2000 include a 0.2% acceleration of charge-offs in connection with the adoption of this policy. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Our primary business segment is Advanta Business Cards, one of the nation's largest issuers of business credit cards to small businesses. In addition to our business credit card lending business, we have venture capital investments. Through the first quarter of 2001, we had two additional lending businesses, Advanta Mortgage and Advanta Leasing Services. In the first quarter of 2001, we completed our exit from the mortgage business, announced the discontinuance of our leasing business, and restructured our corporate functions to a size commensurate with our ongoing businesses. We are continuing to service the existing leasing portfolio rather than sell the business or the portfolio. The results of the mortgage and leasing businesses are reported as discontinued operations in all periods presented. The results of our ongoing businesses are reported as continuing operations for all periods presented. For the year ended December 31, 2002, we reported net loss from continuing operations of $15.6 million, or $0.63 per combined common share, assuming dilution, compared to net loss from continuing operations of $30.5 million, or $1.19 per combined diluted common share, for the year ended December 31, 2001. For the year ended December 31, 2000, we reported net income from continuing operations of $11.2 million, or $0.44 per combined diluted common share. Loss from continuing operations for the year ended December 31, 2002 includes a pretax charge of $43.0 million related to a ruling in the litigation associated with the transfer of our consumer credit card business in 1998, and pretax investment losses on venture capital investments of $6.9 million. Loss from continuing operations for the year ended December 31, 2001 includes pretax investment losses on venture capital investments of $28.9 million and $41.8 million of pretax unusual charges representing costs associated with the restructure of our corporate functions to a size commensurate with our ongoing businesses and certain other unusual charges related to employee costs. Income from continuing operations for the year ended December 31, 2000 includes pretax investment gains, net, on venture capital investments of $7.7 million and a $7.0 million pretax charge for an increase in litigation reserves. Net income (loss) from continuing operations included the following business segment results:
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 - -------------------------------------------------------------------------------------------- Pretax income (loss): Advanta Business Cards $ 63,244 $ 63,515 $ 45,325 Venture Capital (10,101) (33,158) 3,382 Other (1) (51,545) (72,808) (37,515) - -------------------------------------------------------------------------------------------- Total pretax income (loss) 1,598 (42,451) 11,192 Income tax (expense) benefit (17,170) 11,995 0 - -------------------------------------------------------------------------------------------- Net income (loss) from continuing operations $(15,572) $(30,456) $ 11,192 - --------------------------------------------------------------------------------------------
(1) Other includes investment and other activities not attributable to the Advanta Business Cards or venture capital segments. In the year ended December 31, 2002, we recorded an after-tax loss on the discontinuance of our mortgage and leasing businesses of $8.6 million, or $0.34 per combined common share, assuming dilution. In the year ended December 31, 2001, we recorded an after-tax loss on the discontinuance of our mortgage and leasing businesses of $31.6 million, or $1.23 per combined diluted common share. We also recorded an after-tax loss on the discontinuance of our leasing business of $4.3 million, or $0.17 per combined diluted common share, effective December 31, 2000. The components of the after-tax loss on discontinuance recorded in 2002 include a pretax loss on the Mortgage Transaction of $25.3 million, a pretax gain on the discontinuance of our leasing business of $11.3 million, and tax benefit of $5.4 million. The components of the after-tax loss on discontinuance recorded in 2001 include a pretax gain on the Mortgage Transaction of $20.8 million, a pretax loss on the discontinuance of our leasing business of $45.0 million, and tax expense of $7.4 million. See "Discontinued Operations" in Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion. 22 Loss from discontinued operations, net of tax, was $8.4 million, or $0.33 per combined diluted common share, for the period from January 1, 2001 through February 28, 2001, the effective date of the Mortgage Transaction. In the year ended December 31, 2000, loss from discontinued operations, net of tax, was $163.6 million, or $6.45 per combined diluted common share. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our significant accounting policies are described in Note 2 to the consolidated financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We have identified the following as our most critical accounting policies and estimates in that they require management's most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates could have a material impact on our financial condition or results of operations. Fair Value of Venture Capital Investments Investments of our venture capital segment are included in investments available for sale and carried at estimated fair value. Management makes fair value determinations based on quoted market prices, when available, and considers the investees' financial results, conditions and prospects, values of comparable companies and market liquidity, when market prices are not available. In accordance with specialized industry accounting principles of venture capital companies, unrealized and realized gains and losses on these investments are included in other revenues in the consolidated income statements. The fair values of these equity investments are subject to significant volatility. Our investments in specific companies and industry segments may vary over time, and changes in concentrations may affect price volatility. We primarily invest in privately held companies, including early stage companies. These investments are inherently risky as the market for the technologies or products the investees have under development may never materialize. Allowance for Receivable Losses The allowance for receivable losses is maintained for on-balance sheet receivables and is intended to cover all losses inherent in the owned receivable portfolio. Business credit card receivables are comprised of principal amounts due from cardholders for purchase activities and cash advances, and amounts due from cardholders relating to billed interest and fees. The allowance for receivable losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of receivables in light of historical experience by loan type, the nature and volume of the receivable portfolio, adverse situations that may affect the borrowers' ability to repay and prevailing economic conditions. Since our receivable portfolio is comprised of large groups of smaller balance homogeneous loans, we generally evaluate each group collectively for impairment through the use of a migration analysis as well as the consideration of other factors that may indicate loss. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Provisions for credit losses, representing the portion of receivable losses attributable to principal, are reported separately on the consolidated income statements. Losses are charged against the allowance for receivable losses when management believes the uncollectibility of a receivable balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for receivable losses. Provisions for interest and fee losses are recorded as direct reductions to interest and fee income. The accrued interest and fee portion of charged-off receivables is charged against the allowance for receivable losses. All subsequent recoveries of charged-off receivables are classified as principal recoveries, since any amounts related to accrued interest and fees are de minimus. 23 Securitization Transactions A significant portion of our funding for Advanta Business Cards is through off-balance sheet business credit card securitizations using a securitization trust. The securitization trust was created to hold the collateral (the securitized receivables) and issue debt to investors. The securitization trust is a qualifying special-purpose entity as defined by Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125," and therefore, is not consolidated as part of Advanta Corp.'s consolidated financial statements. We do not provide any guarantee of the debt issued by the special-purpose entity and our recourse in the transactions is limited to the value of our interests in securitizations that serve as credit enhancement to the investors' interests in the securitized receivables. Our business credit card securitization transactions are accounted for as sales since we surrender control over the securitized receivables. Securitization income is recognized at the time of the sale, equal to the excess of the fair value of the assets obtained (principally cash) over the allocated cost of the assets sold and transaction costs. Fair value estimates used in the recognition of securitization income require assumptions of payment, default and interest rates. To the extent actual results are different than those estimates, the impact is recognized in securitization income. We generally retain an interest in securitized receivables in the form of restricted cash reserve accounts, retained interest-only strips and subordinated trust assets related to securitizations. Subordinated trust assets represent an ownership interest in the securitized receivables that is subordinated to the other investors' interests. Retained interests in securitizations serve as credit enhancement to the investors' interests in the securitized receivables. These assets are carried at estimated fair value and the resulting unrealized gain or loss from the valuation is included in securitization income. We estimate the fair value of retained interests in securitizations based on a discounted cash flow analysis when quoted market prices are not available. The cash flows of the retained interest-only strip are estimated as the excess of the weighted average interest yield on each pool of the receivables sold over the sum of the interest rate earned by the note holder, the servicing fee and an estimate of future credit losses over the life of the existing receivables. Cash flows are discounted from the date the cash is expected to become available to us (the "cash-out" method). These cash flows are projected over the life of the receivables using payment, default, and interest rate assumptions that management believes would be used by market participants for similar financial instruments subject to prepayment, credit and interest rate risk. The cash flows are discounted using an interest rate that management believes a purchaser unrelated to the seller of the financial instrument would demand. As estimates used are influenced by factors outside our control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. See Note 6 to the consolidated financial statements for the key assumptions used in the estimation of fair values of the retained interest in securitizations at December 31, 2002 and 2001. Interest income is recognized over the life of the retained interests in securitizations using the discount rate used in the valuation. Accrued interest and fees on securitized receivables are reduced by an allowance for amounts estimated to be uncollectible. The allowance is estimated using the same methodology as that used for on-balance sheet receivables that is described above in "Allowance for Receivable Losses." Provisions for interest and fee losses on securitized receivables are recorded as a reduction of securitization income. In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51." The interpretation requires a company to consolidate a variable interest entity if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. The consolidation requirements apply to all variable interest entities created after January 31, 2002. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. We do not anticipate that the adoption of this interpretation will have a material effect on our financial position or results of operations since qualifying special-purpose entities, as defined in SFAS 140, are exempt from the consolidation requirements of this interpretation. 24 Business Credit Card Rewards Programs We offer bonus mile and cash-back reward programs with certain of our business credit cards. Eligible cardholders earn bonus miles for air travel or up to 2% cash-back rewards based on net purchases charged on their business credit card account. The costs of future reward redemptions are estimated and a liability is recorded at the time bonus miles or cash-back rewards are earned by the cardholder. The estimated costs of future reward redemptions are classified as a reduction of other revenues in the consolidated income statements. Estimates of costs of future reward redemptions include an assumption regarding the percentage of cardholders that will redeem the rewards and vary depending on the structure of the rewards program. It is reasonably possible that actual results will differ from our estimates or that our estimated liability for these programs may change. Litigation Contingencies Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. See discussion in Note 11 to the consolidated financial statements. Management believes that the aggregate loss, if any, resulting from these actions will not have a material adverse effect on our financial position or results of our operations based on the level of litigation reserves we have established and our current expectations regarding the ultimate resolutions of these existing actions. Our litigation reserves are estimated based on the status of litigation and our assessment of the ultimate resolution of each action after consultation with our attorneys. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of these proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. Our litigation reserves are included in other liabilities on the consolidated balance sheets. Changes in estimates or other charges related to litigation are included in operating expenses of the respective business segment if related to continuing operations, or gain (loss) on discontinuance of mortgage and leasing businesses if related to discontinued operations. Income Taxes Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method. Under this method, we determine the net deferred tax asset or liability based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and give current recognition to changes in tax rates and laws. We evaluate the realizability of the deferred tax asset and recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In establishing the valuation allowance, we consider (1) estimates of expected future taxable income, (2) existing and projected book/tax differences, (3) tax planning strategies available, and (4) the general and industry specific economic outlook. This analysis is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Changes in estimate of deferred tax asset realizability, if applicable, are included in income tax expense (benefit) on the consolidated income statements and would affect all business segments since the consolidated effective tax rate is applied to all business segments' pretax income (loss). Discontinued Operations Our exit from the mortgage business and discontinuance of the leasing business represent the disposal of business segments following Accounting Principles Board ("APB") Opinion No. 30. Accordingly, results of these operations are classified as discontinued in all periods presented. Our accounting for discontinued operations was not impacted by the issuance of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," since its provisions for disposal groups of long-lived assets are effective for disposal activities initiated after January 1, 2002. Estimates of future cash flows are used in the accounting for discontinued operations, including estimates of the future costs of mortgage business-related litigation and estimates of operating results through the remaining term of the leasing portfolio. As all estimates used are influenced by factors outside our control, there is uncertainty inherent in these estimates, making it reasonably 25 possible that they could change in the near term. Changes in estimates related to discontinued operations are included in gain (loss) on discontinuance of mortgage and leasing businesses on the consolidated income statements. ADVANTA BUSINESS CARDS Advanta Business Cards originated, directly and through the use of third parties, 241,869 new accounts during the year ended December 31, 2002, 224,255 new accounts in 2001 and 311,275 new accounts in 2000. Our managed business credit card receivable portfolio is comprised of both owned business credit card receivables and securitized business credit card receivables. Managed business credit card receivables grew 27% in the year ended December 31, 2002 and 23% in the year ended December 31, 2001. We expect managed business credit card receivables to grow approximately 15% to 20% in the year ended December 31, 2003. Our originations in 2002 included a broader array of competitively-priced offerings and products, including promotional pricing and rewards programs, designed to selectively attract and retain more higher credit quality customers and to respond to the competitive environment in the credit card industry. The level of originations and growth in receivables in 2001 reflected our plan to grow the portfolio in a controlled manner that we believed was prudent given the prevailing economic environment. Pretax income for Advanta Business Cards was $63.2 million in the year ended December 31, 2002 as compared to $63.5 million in the year ended December 31, 2001 and $45.3 million in the year ended December 31, 2000. The components of pretax income for Advanta Business Cards in the years ended December 31 were as follows:
($ IN THOUSANDS) 2002 2001 2000 - ----------------------------------------------------------------------------------------------- Net interest income on owned receivables $ 55,204 $ 53,421 $ 53,087 Noninterest revenues 246,957 215,280 149,452 Provision for credit losses (40,006) (35,373) (36,307) Operating expenses (198,911) (169,813) (120,907) - ----------------------------------------------------------------------------------------------- Pretax income $ 63,244 $ 63,515 $ 45,325 - -----------------------------------------------------------------------------------------------
Net interest income on owned receivables and noninterest revenues in 2002 reflect a decrease in the average yield earned on our owned and securitized business credit card receivables. The decrease in yield is a result of a broader array of competitively-priced offerings and products in 2002, including promotional pricing, designed to selectively attract and retain more higher credit quality customers and to respond to the competitive environment. The increase in net interest income on owned receivables in 2002 as compared to 2001 is due to a $90 million increase in average owned business credit card receivables and a decrease in our cost of funds, partially offset by the decrease in average yield earned on our owned business credit card receivables. The increase in noninterest revenues in 2002 as compared to 2001 is comprised of increased securitization income, servicing revenues, interchange income and other fee revenues due to the growth in average managed receivables. Securitization income was also impacted by the decrease in yield on securitized receivables discussed above, a decrease in the interest rate earned by noteholders and an increased net charge-off rate on securitized receivables. The increase in the provision for credit losses in 2002 as compared to 2001 reflects an increase in average owned business credit card receivables, partially offset by estimates as of December 31, 2002 of a lower level of inherent losses in the portfolio, based on delinquency and net charge-off rate trends and the current composition of the portfolio, as compared to estimates as of December 31, 2001. The increase in operating expenses in 2002 as compared to 2001 resulted from growth in managed receivables and additional investments in initiatives to strengthen our position as a leading issuer of business credit cards to the small business market. The increase in noninterest revenues and operating expenses in 2001 as compared to 2000 was due primarily to growth in managed receivables. The provisions for credit losses and noninterest revenues in the year ended December 31, 2001 include the impact of an increase in managed credit losses due to the seasoning of the business credit card portfolio and the economic environment during the period. The provision for credit 26 losses in the year ended December 31, 2000 includes an $8 million increase attributable to a revision of our estimate of the allowance for receivable losses as a result of the following factors: (1) discussions with our banking regulators relating to the implementation of the agreement between Advanta Bank Corp. and the Federal Deposit Insurance Corporation that was disclosed in June 2000; (2) changes in the economic environment; and (3) the use of more conservative loss estimates for certain segments of the loan portfolio. See further discussion in the "Provision and Allowance for Receivable Losses" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. VENTURE CAPITAL The components of pretax income (loss) for our venture capital segment in the years ended December 31 were as follows:
($ IN THOUSANDS) 2002 2001 2000 - ------------------------------------------------------------------------------------------- Net interest expense $ (711) $ (1,508) $(1,481) Realized gains (losses), net (48) (9,296) 11,371 Unrealized losses, net (6,860) (19,583) (3,691) Other revenues 16 27 167 Operating expenses (2,498) (2,798) (2,984) - ------------------------------------------------------------------------------------------- Pretax income (loss) $(10,101) $(33,158) $ 3,382 - -------------------------------------------------------------------------------------------
As shown in the table above, pretax income (loss) of our venture capital segment is comprised primarily of realized and unrealized gains and losses on our venture capital investments, which reflect the market conditions for those investments in each respective period, and operating expenses. The estimated fair value of our venture capital investments was $13.5 million at December 31, 2002, and $18.6 million at December 31, 2001. INTEREST INCOME AND EXPENSE Interest income decreased by $24.3 million to $103.6 million in the year ended December 31, 2002 as compared to the year ended December 31, 2001. The decrease in interest income in 2002 was due primarily to a decrease in the average yield earned on our investments and receivables as a result of the prevailing interest rate environment and the competitively-priced offers described below. Also contributing to the decrease in interest income was a decrease in average federal funds sold, restricted interest-bearing deposits and investments of $377 million for the year ended December 31, 2002 as compared to 2001. Excess liquid assets resulting from the Mortgage Transaction in the first quarter of 2001 were held in short-term, high quality investments until they could be deployed. Partially offsetting these decreases were increases in average business credit card receivables of $90 million in the year ended December 31, 2002 as compared to 2001. In 2002, our marketing campaigns have included a broader array of competitively-priced offerings and products, including promotional pricing and rewards programs, designed to selectively attract and retain more higher credit quality customers and to respond to the competitive environment. In the year ended December 31, 2002, these competitively-priced offers resulted in a decline in yields on business credit card receivables, and are anticipated to result in lower credit losses in future periods and higher interchange income due to higher purchase volume. We anticipate that these trends on business credit card receivables will continue in 2003 and that our risk-adjusted revenues as a percentage of average managed business credit card receivables will be between 10.5% and 11.5% in the year ended December 31, 2003 as compared to 12% in the year ended December 31, 2002. Risk-adjusted revenues represent net interest margin and fee revenues, less net principal charge-offs. During the year ended December 31, 2002, interest expense decreased by $34.9 million to $47.6 million as compared to the year ended December 31, 2001. The decrease in interest expense in 2002 was due to a reduction in average outstanding deposits and debt and a decrease in our average cost of funds. Our average cost of funds decreased from 7.24% in the year ended December 31, 2001 to 5.17% in the year ended 27 December 31, 2002. The decrease in our average cost of funds is primarily a result of the prevailing interest rate environment. Interest income decreased by $14.2 million to $127.9 million in the year ended December 31, 2001 as compared to the year ended December 31, 2000. During the same period, interest expense decreased by $4.0 million to $82.5 million. The decrease in interest income was due primarily to a decrease in average business credit card receivables and investments. Also contributing to the decreased interest income was a decrease in the average yield earned on our investment portfolio caused by the interest rate environment and a shift in the composition of the portfolio. Short-term investments, including federal funds sold and interest-bearing deposits, represented 52% of the average investment portfolio in the year ended December 31, 2001 as compared to 27% in the year ended December 31, 2000. The decrease in interest expense was due to a decrease in interest-bearing liabilities, partially offset by an increase in our average cost of funds. The following table provides an analysis of interest income and expense data, average balance sheet data, net interest spread and net interest margin for both continuing and discontinued operations. The net interest spread represents the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets. Interest income includes late fees on business credit card receivables. Average receivables include deferred origination costs, net of deferred fees. INTEREST RATE ANALYSIS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, - ---------------- --------------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------- ------------------------------- ------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - --------------------------------------------------------------------------------------------------------------------------------- ON-BALANCE SHEET - ---------------------------- Interest-earning assets: Receivables: Business credit cards (1) $ 472,103 $ 81,391 17.24% $ 382,262 $ 75,998 19.88% $ 399,692 $ 77,528 19.40% Other receivables 27,600 1,278 4.63 28,271 1,245 4.40 23,067 979 4.25 ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ Total receivables 499,703 82,669 16.54 410,533 77,243 18.82 422,759 78,507 18.57 Federal funds sold 272,301 4,516 1.66 347,569 13,169 3.79 218,387 13,896 6.36 Restricted interest-bearing deposits 95,482 1,537 1.61 110,014 4,646 4.22 26,121 1,762 6.75 Tax-free investments (2) 1,281 84 6.56 4,295 392 9.13 3,786 348 9.19 Taxable investments 127,197 4,124 3.24 411,111 21,667 5.27 656,868 41,964 6.39 Retained interests in securitizations 96,185 10,658 11.08 84,028 10,084 12.00 50,401 6,048 12.00 Interest-earning assets of discontinued operations 52,238 5,391 10.32 205,605 29,121 14.16 1,457,218 179,957 12.35 ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ Total interest-earning assets (3) $1,144,387 $108,979 9.52% $1,573,155 $156,322 9.94% $2,835,540 $322,482 11.37% ========== ======== ====== ========== ======== ====== ========== ======== ====== Interest-bearing liabilities: Deposits Savings $ 168 $ 4 2.38% $ 29,438 $ 1,472 5.00% $ 182,112 $ 10,206 5.60% Time deposits under $100,000 329,414 13,675 4.15 478,381 30,307 6.34 883,803 57,758 6.54 Time deposits of $100,000 or more 316,827 12,528 3.95 381,078 22,134 5.81 785,603 50,807 6.47 ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ Total deposits 646,409 26,207 4.05 888,897 53,913 6.07 1,851,518 118,771 6.41 Debt 304,893 23,043 7.56 482,801 45,700 9.47 747,182 61,030 8.17 Other borrowings 3,527 67 1.90 17,730 1,035 5.84 137,024 8,792 6.42 ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ Total interest-bearing liabilities 954,829 49,317 5.17 1,389,428 100,648 7.24 2,735,724 188,593 6.89 Net noninterest-bearing liabilities 189,558 183,727 99,816 ---------- ---------- ---------- Sources to fund interest-earning assets (4) $1,144,387 $ 49,317 4.31% $1,573,155 $100,648 6.40% $2,835,540 $188,593 6.65% ========== ======== ====== ========== ======== ====== ========== ======== ====== Net interest spread 4.35% 2.70% 4.48% ====== ====== ====== Net interest margin 5.21% 3.54% 4.72% =================================================================================================================================
(1) Interest income includes late fees for on-balance sheet business credit cards of $7.8 million for the year ended December 31, 2002, $6.7 million for the year ended December 31, 2001 and $9.2 million for the year ended December 31, 2000. (2) Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%. (3) Includes assets held and available for sale and nonaccrual receivables. (4) Includes funding of assets for both continuing and discontinued operations. 28 INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET The following table presents the effects of changes in average volume and interest rates on individual financial statement line items on a tax equivalent basis using a statutory rate of 35%. The effects on individual financial statement line items are not necessarily indicative of the overall effect on net interest income. Total interest income includes income from assets held and available for sale.
($ IN THOUSANDS) 2002 VS. 2001 2001 VS. 2000 - ---------------- ----------------------------------------------- ----------------------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ---------------------------------- ---------------------------------- CHANGES CHANGES CHANGES IN TOTAL CHANGES CHANGES CHANGES IN TOTAL IN IN RATE/ INCREASE IN IN RATE/ INCREASE VOLUME (1) RATE (2) VOLUME (3) (DECREASE) VOLUME (1) RATE (2) VOLUME (3) (DECREASE) - --------------------------------------------------------------------------------------------------------------------------------- Interest income from: Receivables: Business credit cards $ 17,860 $(10,092) $(2,375) $ 5,393 $ (3,381) $ 1,919 $ (68) $ (1,530) Other receivables (30) 65 (2) 33 221 35 10 266 Federal funds sold (2,853) (7,403) 1,603 (8,653) 8,216 (5,613) (3,330) (727) Restricted interest-bearing deposits (613) (2,871) 375 (3,109) 5,663 (661) (2,118) 2,884 Tax-free investments (275) (110) 77 (308) 47 (2) (1) 44 Taxable investments (14,962) (8,346) 5,765 (17,543) (15,704) (7,357) 2,764 (20,297) Retained interests in securitizations 1,459 (773) (112) 574 4,036 0 0 4,036 Interest-earning assets of discontinued operations (21,717) (7,895) 5,882 (23,730) (154,574) 26,376 (22,638) (150,836) -------- -------- ------- -------- --------- -------- -------- --------- Total interest income $(21,131) $(37,425) $11,213 $(47,343) $(155,476) $14,697 $(25,381) $(166,160) -------- -------- ------- -------- --------- -------- -------- --------- Interest expense on: Deposits: Savings $ (1,464) $ (771) $ 767 $ (1,468) $ (8,550) $(1,093) $ 909 $ (8,734) Time deposits under $100,000 (9,445) (10,477) 3,290 (16,632) (26,515) (1,768) 832 (27,451) Time deposits of $100,000 or more (3,733) (7,088) 1,215 (9,606) (26,173) (5,185) 2,685 (28,673) Debt (16,848) (9,221) 3,412 (22,657) (21,600) 9,713 (3,443) (15,330) Other borrowings (829) (699) 560 (968) (7,659) (795) 697 (7,757) -------- -------- ------- -------- --------- -------- -------- --------- Total interest expense (32,319) (28,256) 9,244 (51,331) (90,497) 872 1,680 (87,945) -------- -------- ------- -------- --------- -------- -------- --------- Net interest income $ 11,188 $(9,169) $ 1,969 $ 3,988 $ (64,979) $13,825 $(27,061) $ (78,215) =================================================================================================================================
(1) Equals change in volume multiplied by prior year rate. (2) Equals change in rate multiplied by prior year volume. (3) Equals change in rate multiplied by change in volume. PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES In the year ended December 31, 2002, the provision for credit losses increased by $4.9 million to $40.9 million as compared to 2001, and the provision for interest and fee losses increased by $2.5 million to $6.9 million as compared to 2001. The provision for interest and fee losses in 2002 includes a $698 thousand increase due to the change in income billing practice effective October 1, 2002. See Note 2 to the consolidated financial statements. The increase in both provisions reflects growth in average owned business credit card receivables of $90 million in the year ended December 31, 2002 as compared to 2001, partially offset by a reduction in our estimate of losses inherent in the portfolio as of December 31, 2002, based on improving delinquency and charge-off rate trends from April to December 2002 and the current composition of the portfolio as compared to our estimate as of December 31, 2001. In 2001, we were anticipating worsening net charge-off rates for the first quarter of 2002 due to the composition and seasoning of the portfolio at December 31, 2001. DELINQUENCY AND CHARGE-OFF RATE TRENDS ON OWNED BUSINESS CREDIT CARD RECEIVABLES
DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, 2002 2002 2002 2002 2001 - -------------------------------------------------------------------------------------------------------- Receivables 90 days or more delinquent 2.7% 2.9% 3.3% 3.4% 3.3% Receivables 30 days or more delinquent 5.3 6.4 6.5 7.1 6.7 Net principal charge-offs as a % of owned business credit card receivables for the three months ended (annualized) 6.5 8.2 8.2 9.4 8.2 - --------------------------------------------------------------------------------------------------------
29 The improvements in delinquency rates are the result of the current composition of the portfolio and enhancements in the collections area of operations. In June 2000, we ceased origination of business credit card accounts with Fair, Isaac and Company ("FICO") credit scores of less than 661. We estimate that charge-offs for accounts with FICO credit scores of less than 661 at origination reached their peak in the first quarter of 2002, based on the average age of that segment of the portfolio. Although charge-off levels are not always predictable since they are impacted by the economic environment and other factors beyond our control, we anticipate charge-off rates for the year ended December 31, 2003 and for each quarter of 2003 to be lower than the comparable periods of 2002. This expectation is based on the current composition of the portfolio that reflects our strategic initiative to selectively attract and retain more higher credit quality customers, enhancements in the collections area of operations made in 2002, and the current level of delinquencies. However, we are expecting charge-off rates in the first and second quarters of 2003 to be higher than the rate experienced in the fourth quarter of 2002, due to the current level of receivables 90 days or more delinquent and historical seasonal trends of charge-offs and bankruptcy petitions. The provision for credit losses in the year ended December 31, 2001 was $36.0 million as compared to $36.3 million in the year ended December 31, 2000. The provision for interest and fee losses was $4.4 million in 2001 as compared to $2.3 million in 2000. The provision for credit losses in 2000 includes a revision in our estimate of the allowance for receivable losses on business credit card receivables. The revised estimate for the overall portfolio was recorded in September 2000 and was developed based on discussions with our banking regulators, changes in the economic environment and the use of more conservative loss estimates for certain segments of the receivable portfolio. Those segments included accounts with lower credit scores, accounts held by businesses in operation less than twelve months, and accounts in which cash borrowings comprise a significant portion of the outstanding balance. As a result of these changes in estimate in 2000, we increased our allowance for receivable losses by approximately $8 million, which increased the provision for credit losses and decreased net income by approximately $8 million or $0.32 per diluted combined share for the year ended December 31, 2000. The provisions for credit losses and interest and fee losses in 2001 reflect the seasoning of the business credit card portfolio and the economic environment. These factors were evident in the delinquency rates and charge-off rates in 2001 as compared to 2000. Total owned business credit card receivables 30 days or more delinquent increased from 5.5% at December 31, 2000 to 6.7% at December 31, 2001. The charge-off rate on owned business credit card receivables for the year ended December 31, 2001 was 7.2% as compared to 4.5% for the year ended December 31, 2000. At December 31, 2002, the allowance for receivable losses on a consolidated basis was $46.2 million, or 9.8% of owned receivables, compared to $42.0 million, or 9.4%, at December 31, 2001. The allowance for receivable losses on business credit card receivables was $44.5 million, or 10.0% of owned receivables, at December 31, 2002, as compared to $41.2 million, or 9.9%, at December 31, 2001. The allowance for receivable losses on other receivables was $1.7 million at December 31, 2002 and $802 thousand at December 31, 2001. The increase in the allowance for receivable losses on other receivables in the year ended December 31, 2002 was due to general economic conditions and corresponding increases in delinquency rates. The rate of other receivables 90 days or more delinquent was 3.11% at December 31, 2002 as compared to 2.07% at December 31, 2001. We follow the charge-off and re-age policies established by the Uniform Retail Credit Classification and Account Management Policy issued by the Federal Financial Institutions Examination Council. Under this policy, unpaid receivables are charged off in the month the account becomes 180 days contractually delinquent; unpaid balances of accounts that declare hardship or enter credit counseling are charged off in the month the account becomes 120 days contractually delinquent; unpaid receivables of accounts in bankruptcy are charged off within 60 days of receipt of notification of filing from the bankruptcy court or within the previous timeframes discussed, whichever is shorter; and fraudulent amounts are charged off after a 90-day investigative period, unless our investigation shows no evidence of fraud. Prior to October 1, 2000, unpaid receivables of accounts in bankruptcy were charged off within 90 days of receipt of notification of filing from the bankruptcy court. In July 2002, the bank regulatory agencies issued draft guidance on account management and loss allowance for credit card lending. It described the agencies' expectations for prudent risk management 30 practices for credit card activities, particularly with regard to credit line management, over-limit accounts, and workouts. The draft guidance also addressed income recognition and loss allowance practices for credit card lending. We completed our evaluation of the draft guidance in 2002 and did not expect the implementation of the guidance to have a material adverse effect on our financial condition or our results of operations. In January 2003, the bank regulatory agencies issued the final guidance. The guidance includes provisions generally applicable to all credit card issuers. We are still evaluating the impact the minimum payment provisions may have on our future delinquencies and charge-offs. We do not expect the other provisions of the final guidance to have a material adverse effect on our financial condition or our results of operations. However, similar to other examination guidance, this guidance provides wide discretion to the bank regulatory agencies in the application to any particular institution. Accordingly, our bank examiners could require changes in our account management or loss allowance practices in the future. The following table provides credit quality data as of and for the year-to-date periods indicated for our on-balance sheet receivable portfolio including a summary of allowances for receivable losses, nonaccrual receivables, accruing receivables past due 90 days or more, delinquencies and charge-offs. Consolidated data includes business credit cards, consumer credit cards through February 1998, and other receivables. Gross interest income that would have been recorded for nonaccrual receivables, had interest been accrued throughout the year in accordance with the assets' original terms, was $4.6 million in 2002.
DECEMBER 31, ----------------------------------------------------- ($ IN THOUSANDS) 2002 (1) 2001 2000 (2) 1999 1998 - ---------------------------------------------------------------------------------------------------------------- CONSOLIDATED -- OWNED Allowance for receivable losses $46,159 $41,971 $33,367 $14,865 $10,650 Receivables 90 days or more delinquent 12,755 14,474 9,090 5,215 3,610 Receivables 30 days or more delinquent 25,197 29,520 19,395 11,591 7,885 Nonaccrual receivables 5,525 20,052 10,700 7,028 7,719 Accruing receivables past due 90 days or more 10,535 0 0 0 0 As a percentage of gross receivables: Allowance for receivable losses 9.8% 9.4% 9.3% 4.9% 6.3% Receivables 90 days or more delinquent 2.7 3.3 2.5 1.7 2.2 Receivables 30 days or more delinquent 5.4 6.6 5.4 3.8 4.7 Nonaccrual receivables 1.2 4.5 3.0 2.3 4.6 Accruing receivables past due 90 days or more 2.2 0.0 0.0 0.0 0.0 Net principal charge-offs $37,416 $27,372 $17,807 $12,500 $38,312 As a percentage of average gross receivables: Net principal charge-offs 7.5% 6.7% 4.2% 5.4% 7.0% - ---------------------------------------------------------------------------------------------------------------- BUSINESS CREDIT CARDS -- OWNED Allowance for receivable losses $44,466 $41,169 $33,165 $14,663 $ 6,916 Receivables 90 days or more delinquent 11,959 13,891 8,530 4,595 3,348 Receivables 30 days or more delinquent 23,406 28,040 18,512 10,347 7,207 Nonaccrual receivables 4,729 19,469 10,140 6,408 7,481 Accruing receivables past due 90 days or more 10,535 0 0 0 0 As a percentage of gross receivables: Allowance for receivable losses 10.0% 9.9% 9.9% 5.3% 4.6% Receivables 90 days or more delinquent 2.7 3.3 2.5 1.7 2.2 Receivables 30 days or more delinquent 5.3 6.7 5.5 3.8 4.8 Nonaccrual receivables 1.1 4.7 3.0 2.3 5.0 Accruing receivables past due 90 days or more 2.4 0.0 0.0 0.0 0.0 Net principal charge-offs $37,400 $27,369 $17,805 $10,103 $10,033 As a percentage of average gross receivables: Net principal charge-offs 7.9% 7.2% 4.5% 4.8% 6.9% - ----------------------------------------------------------------------------------------------------------------
(1) See "Interest and Fee Income on Receivables" in Note 2 to consolidated financial statements for a discussion of the change in income billing practice effective October 1, 2002. (2) Effective October 1, 2000, business credit card charge-off statistics reflect the adoption of a new charge-off policy for bankruptcies. Bankrupt business credit cards are charged off within a 60-day investigative period after receipt of notification. The previous policy provided a 90-day investigative period. Business credit card principal charge-offs for the year ended December 31, 2000 include a 0.2% acceleration of charge-offs in connection with the adoption of this policy. 31 SECURITIZATION INCOME Securitization income was $119.0 million in the year ended December 31, 2002, $108.2 million in the year ended December 31, 2001, and $67.9 million in the year ended December 31, 2000. The increase in securitization income in 2002 as compared to 2001 was due primarily to increased volume of securitized receivables. Securitization income in 2002 was also impacted by a decline in yields on securitized receivables, a decrease in the interest rate earned by note holders, and an increased net charge-off rate on securitized receivables. These fluctuations in yields and rates are similar to those experienced in on-balance sheet business credit card receivables as discussed in the "Interest Income and Expense" and "Provision and Allowance for Receivable Losses" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations. In 2003, we anticipate an increase in the volume of securitized receivables, as a result of anticipated receivables growth, which is expected to result in an increase in securitization income as compared to 2002. The increase in securitization income in 2001 as compared to 2000 was due to increased volume of securitized receivables and increased yields on securitized receivables, partially offset by increased charge-offs on securitized receivables. Managed Receivable Data Performance on a managed receivable portfolio basis is relevant because we retain interests in the securitized receivables and, therefore, we have a financial interest in and exposure to the performance of the securitized receivables. The following table provides selected information on a managed receivable portfolio basis.
($ IN THOUSANDS) 2002 (2) 2001 2000 - ----------------------------------------------------------------------------------------------- Average business credit card receivables for the year ended December 31: Owned $ 472,103 $ 382,262 $ 399,692 Securitized 1,727,864 1,490,052 973,025 Total managed 2,199,967 1,872,314 1,372,717 Ending business credit card receivables at December 31: Owned 445,083 416,265 335,087 Securitized 2,149,147 1,626,709 1,324,137 Total managed 2,594,230 2,042,974 1,659,224 Ending number of business credit card accounts at December 31 780,326 682,890 585,836 As a percentage of average managed business credit card receivables for the year ended December 31: Interest income 18.7% 20.3% 19.8% Interest expense 3.5 5.3 7.0 Net interest margin 15.2 15.0 12.8 Fee revenues 5.6 5.6 5.4 Risk-adjusted revenues (1) 12.0 12.9 13.5 As a percentage of managed business credit card receivables: Receivables 90 days or more delinquent at December 31 3.1% 3.3% 2.3% Receivables 30 days or more delinquent at December 31 6.1 6.7 5.0 Nonaccrual receivables at December 31 1.2 4.0 2.7 Accruing receivables past due 90 days or more at December 31 2.8 0.0 0.0 Net principal charge-offs for the year ended December 31 8.8 7.7 4.7 ===============================================================================================
(1) Risk-adjusted revenues represent net interest margin and fee revenues, less net principal charge-offs. (2) See "Interest and Fee Income on Receivables" in Note 2 to the consolidated financial statements for a discussion of the change in income billing practice effective October 1, 2002. 32 SERVICING REVENUES Servicing revenues were $34.0 million in the year ended December 31, 2002, $29.2 million in the year ended December 31, 2001, and $17.3 million in the year ended December 31, 2000. The increase in servicing revenues in 2002 and 2001 was due to increased volume of securitized business credit card receivables. OTHER REVENUES
YEAR ENDED DECEMBER 31, ($ IN THOUSANDS) ------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- Interchange income $ 93,023 $ 80,721 $61,668 Business credit card rewards (12,542) (8,979) (3,162) Cash advance fees 3,602 2,547 1,227 Balance transfer fees 3,545 0 0 Investment securities gains (losses), net (6,169) (26,227) 5,473 Loss on sale of deposits 0 (2,835) 0 Insurance revenues (losses), net and other 5,693 (3,758) 600 - --------------------------------------------------------------------------------------------- Total other revenues, net $ 87,152 $ 41,469 $65,806 =============================================================================================
Interchange income includes interchange fees on both owned and securitized business credit cards. The increase in interchange income in the years ended December 31, 2002 and 2001 was primarily due to higher purchase volume related to the increase in average managed business credit card accounts and receivables. The average interchange rate was 2.1% in the year ended December 31, 2002, 2.2% in the year ended December 31, 2001 and 2.1% in the year ended December 31, 2000. Increases in business credit card rewards in the years ended December 31, 2002 and 2001, were due to the increase in average managed business credit card accounts in the rewards programs and the corresponding purchase activity in those accounts, partially offset by a change in estimate in 2002. In 2002, we revised our estimate of the bonus mile reward liability, including a change in the assumed percentage of cardholders that will ultimately claim rewards from 80% to 70% and a change in the estimated cost of future reward redemptions, based on experience for that program life-to-date. The impact of the change in estimate of the bonus mile reward liability was an approximate $1.9 million increase in other revenues in the year ended December 31, 2002. See Note 19 to the consolidated financial statements. We anticipate that this change in estimate will have a favorable impact on results of operations in future periods, depending on the levels of bonus mile rewards earned by cardholders in those periods. Increases in cash advance fees in the years ended December 31, 2002 and 2001 are due to growth in managed business credit card accounts. In 2002, our marketing campaigns have included a broader array of competitively-priced offerings and products, including balance transfer promotions, promotional pricing and rewards programs, geared specifically toward attracting more higher credit quality customers. We have experienced an increased volume of balance transfers to cardholder accounts in the year ended December 31, 2002 as compared to 2001 due to these marketing campaigns. In connection with offering promotional pricing on balance transfers, we began assessing balance transfer fees to cardholders in the first quarter of 2002. Investment securities gains (losses) include changes in the fair value and realized gains (losses) on venture capital investments. Investment securities gains (losses) in the year ended December 31, 2002 include $6.9 million of net decrease in valuations of venture capital investments, and $0.7 million of realized gains on other investments. Investment securities gains (losses) in the year ended December 31, 2001 include $9.3 million in realized losses on venture capital investments, $19.6 million in decreases in valuations of venture capital investments, and $2.7 million of realized gains on other investments. Investment securities gains (losses) in the year ended December 31, 2000 include $11.4 million in gains on the sale of venture capital investments, $3.7 million of net decrease in valuations of venture capital investments, and $2.2 million of realized losses on other investments. 33 In the second quarter of 2001, we sold $389.7 million of deposit liabilities to E*TRADE Bank, a wholly owned subsidiary of E*TRADE Group, Inc., resulting in a $2.8 million loss. Insurance revenues (losses), net, and other includes charges of $1.1 million in the year ended December 31, 2002 related to valuation adjustments on other receivables held for sale. In the first quarter of 2001, we successfully negotiated an early termination of our strategic alliance with Progressive Casualty Insurance Company to direct market auto insurance. Insurance revenues, net and other in the year ended December 31, 2001 includes operating results of insurance operations, the impact of the termination of the strategic alliance with Progressive Casualty Insurance Company and $10 million of charges related to the write-off of insurance-related deferred acquisition costs that were unrealizable subsequent to the termination of the auto insurance strategic alliance. Insurance revenues, net and other in the year ended December 31, 2000 includes a charge of approximately $3 million in the insurance business relating to the settlement of a large policy claim. LOSS ON TRANSFER OF CONSUMER CREDIT CARD BUSINESS On January 22, 1999, Fleet Financial Group and certain of its affiliates filed a lawsuit against Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court in connection with the transfer of our consumer credit card business in 1998. See Note 11 to the consolidated financial statements. On January 22, 2003, the trial court issued a decision ruling on all but one of the issues that were to be determined at trial, and ordered further briefing on the remaining outstanding issue. In the year ended December 31, 2002, we recognized a $43.0 million pretax charge representing the estimated impact of implementing the court's decisions. This charge was classified in continuing operations as a loss on transfer of consumer credit card business, consistent with the classification of the gain on transfer of consumer credit card business of $541 million in 1998. OPERATING EXPENSES
YEAR ENDED DECEMBER 31, ($ IN THOUSANDS) -------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- Salaries and employee benefits $ 69,227 $ 59,823 $ 42,499 Amortization of business credit card deferred origination costs, net 49,597 39,118 23,961 External processing 16,952 15,936 10,213 Professional fees 12,818 15,320 18,451 Marketing 11,061 10,574 11,492 Equipment 10,676 8,768 8,101 Occupancy 6,612 5,941 5,852 Credit 5,607 5,419 4,772 Telephone 4,145 2,404 1,811 Postage 3,470 3,304 2,947 Fraud loss 2,896 2,568 1,965 Insurance 2,870 4,607 4,628 Other 5,810 6,404 13,600 - --------------------------------------------------------------------------------------------- Total operating expenses $201,741 $180,186 $150,292 =============================================================================================
Salaries and employee benefits, external processing, equipment, telephone and fraud expense increased in the year ended December 31, 2002 as compared to the year ended December 31, 2001 due primarily to growth in managed business credit card receivables and additional investments in initiatives to strengthen our position as a leading issuer of business credit cards to the small business market. These included initiatives to provide additional value to our existing customers, customer retention activities, development of additional products and services, development of affinity cards and partnership relationships, and enhancement of internet capabilities for servicing our customers. External processing expenses in 2002 also reflect a reduction in the contracted rate for these services that occurred during the first quarter of 2002. The increase in amortization of business credit card deferred origination costs, net, in the year ended December 31, 2002 as compared to the year ended December 31, 2001, is attributable to our strategic 34 initiative to selectively attract and retain more higher credit quality customers and the competitive environment for credit card issuers. Amortization of business credit card deferred origination costs in the year ended December 31, 2002 also includes a change in estimate of $1.4 million. Effective July 1, 2002, we refined our estimate of the timing of when accounts are acquired to better match the resulting estimated period of benefit to the amortization of deferred acquisition costs. The impact of this change in estimate in the year ended December 31, 2002 was a decrease in amortization of business credit card deferred origination costs of $1.4 million. See Note 19 to the consolidated financial statements. The increase in marketing expense in the year ended December 31, 2002 as compared to the year ended December 31, 2001 also resulted from our strategic initiative to selectively attract and retain more higher credit quality customers and the competitive environment for credit card issuers, partially offset by decreased origination activities in our retail note program as a result of our high liquidity position subsequent to the Mortgage Transaction in 2001. Professional fees decreased in the year ended December 31, 2002 as compared to the year ended December 31, 2001 due primarily to a reduction in legal expenses related to the timing of litigation activity. Credit expense increased in the year ended December 31, 2002 as compared to the year ended December 31, 2001 due to growth in the volume of charged-off accounts, partially offset by the shift in the types of recoveries. There was an increase in the proportion of total recoveries collected through sales of pools of charged-off accounts and a decrease in the proportion collected through outsourced individual account recovery efforts. The decrease in insurance expense in the year ended December 31, 2002 as compared to 2001 is primarily a result of a decrease in FDIC insurance costs on deposit liabilities. Our FDIC insurance costs decreased due to the significant reduction in our outstanding deposits at Advanta National Bank subsequent to the Mortgage Transaction, and due to a decrease in the insurance assessment rate at Advanta Bank Corp. In addition, insurance expense in the year ended December 31, 2002 includes a $0.4 million reduction of our estimated liability related to worker's compensation insurance. Other operating expenses in the year ended December 31, 2002 include a $1.1 million decrease in litigation reserves resulting from a reduction of damages in a jury verdict. See further discussion in Note 11 to the consolidated financial statements. Other operating expenses in the year ended December 31, 2001 include a $2.2 million cash rebate related to prior periods' business credit card processing costs. Salaries and employee benefits, amortization of business credit card deferred origination costs, net, external processing and fraud loss expenses increased in the year ended December 31, 2001 as compared to the year ended December 31, 2000 due primarily to growth in managed business credit card receivables. Professional fees decreased by $3.1 million in the year ended December 31, 2001 as compared to the year ended December 31, 2000. The decrease in professional fees was due to consulting costs incurred in 2000 associated with the implementation of our bank regulatory agreements, partially offset by increased legal costs in 2001. The decrease in marketing expenses in the year ended December 31, 2001 as compared to 2000 reflects decreased origination activities in our retail note program as a result of our high liquidity position subsequent to the Mortgage Transaction in the first quarter of 2001. Other expenses in the year ended December 31, 2000 included an increase in litigation reserves of $7.0 million. UNUSUAL CHARGES Subsequent to our exit from the mortgage business and discontinuance of our leasing business in the first quarter of 2001, we implemented a plan to restructure our corporate functions to a size commensurate with our ongoing businesses and incurred certain other unusual charges related to employee costs. The restructuring activities had no significant impact on operations while they were ongoing. Due to the termination of employees and the write-off of certain assets no longer used, we expected and realized lower personnel expenses in the support functions in the 12 months following the charges, and expected to realize lower depreciation and amortization expense over the following 5-7 years. These decreases were due to the termination of employees and the write-off or write-down of assets previously deployed in connection with exited businesses. We also expected and realized the elimination of the costs of the contractual commitments 35 associated with exited business products from future operating results over the estimated timeframe of the contracts. Employee costs In the first quarter of 2001, we recorded a $4.1 million charge for severance and outplacement costs associated with the restructuring of corporate functions. There were 69 employees severed who were entitled to benefits. These employees worked in corporate support functions including accounting and finance, human resources, information technology, legal and facilities management. Employees were notified in March 2001, and severance amounts were payable over a 12-month period following the employee's termination date. These payments were completed in the third quarter of 2002. Additionally, during 2001, we incurred $23.2 million of other employee costs. This amount included approximately $10 million attributable to bonuses to certain key employees in recognition of their efforts on behalf of Advanta in the strategic alternatives process. It also included approximately $4.5 million of bonuses in recognition of the restructuring of the company and other significant transitional efforts. These bonuses were paid over a 12-month period. In the second quarter of 2001, we recorded a $1.0 million increase in employee costs related to a revision in estimate associated with these bonuses. In 2001, we accelerated vesting of 32% of outstanding options that were not vested at the date of the closing of the Mortgage Transaction. This acceleration resulted in a noncash charge of $1.3 million. In connection with reviewing our compensation plans after the Mortgage Transaction and restructuring of corporate functions, we implemented a program whereby all outstanding stock appreciation rights and shares of phantom stock were terminated in exchange for cash to be paid through a deferred compensation arrangement. We recorded charges of $2.9 million associated with this exchange. The charge reflects a $0.7 million reduction recorded in the three months ended September 30, 2001, as actual cash settlement costs were less than estimated. Due to the restructuring of the company, we implemented programs whereby certain out-of-the-money options were exchanged for shares of stock, and whereby certain shares of restricted stock were exchanged for cash and stock options in a tender offer, subject to certain performance conditions and vesting requirements. Noncash charges associated with the issuance of the stock, stock options and the tender offer totaled $3.6 million. This charge reflects a $1.4 million increase recorded in the three months ended September 30, 2001, as actual noncash charges associated with the tender offer were more than estimated. Expenses associated with exited businesses/products In the first quarter of 2001, we recorded charges of $2.2 million related to other products exited for which no future revenues or benefits would be received. In the third quarter of 2001, we were able to settle some of these commitments for less than originally estimated, and reduced the charge by $0.7 million. We paid the remaining costs, which included lease and other commitments, in the third quarter of 2002. In 1998, in connection with the transfer of our consumer credit card business to Fleet Credit Card LLC, we made major organizational changes to reduce corporate expenses incurred in the past: (1) to support the business contributed to Fleet Credit Card LLC in the transfer of our consumer credit card business, and (2) associated with the business and products no longer being offered or not directly associated with our mortgage, business credit card and leasing units. As of December 31, 2000, the remaining accrual related to charges associated with these organizational changes was $13.0 million. This accrual related to contractual commitments to certain customers, and non-related financial institutions that were providing benefits to those customers, under a product that was no longer offered and for which no future revenues or benefits would be received. A third party assumed the liabilities associated with these commitments in the first quarter of 2001, and we recorded an additional charge relating to the settlement of these commitments of $10.3 million. Asset impairments In connection with our plan to restructure our corporate functions to a size commensurate with our ongoing businesses during the first quarter of 2001, we identified certain assets that would no longer be used, and the carrying costs of these assets were written off resulting in a charge of $2.6 million. We estimated the realizable 36 value of these assets to be zero due to the nature of the assets, which include leasehold improvements and capitalized software. INCOME TAXES We reported a pretax loss in the year ended December 31, 2002 as a result of the $43.0 million charge related to the ruling in the litigation associated with the transfer of our consumer credit card business in 1998. See Note 11 to the consolidated financial statements. Since the gain on the transfer of our consumer credit card business in 1998 was not subject to income tax, the $43.0 million charge in 2002 did not result in a tax benefit. As a result, we reported income tax expense from continuing operations of $17.2 million for the year ended December 31, 2002. Our effective tax rate, excluding the $43.0 million charge, was 38.5% for the year ended December 31, 2002. We reported a pretax loss in the year ended December 31, 2001 as a result of unusual charges, valuation adjustments on venture capital investments and the loss on the discontinuance of the leasing business in 2001. A valuation allowance was provided against a portion of the resulting deferred tax asset given our pre-existing net operating loss carryforwards and the uncertainty of the realizability of the incremental deferred tax asset, resulting in an effective tax rate of 28% for income from continuing operations for 2001. In the year ended December 31, 2000, we also reported a pretax loss and a valuation allowance was provided against the resulting deferred tax asset, resulting in a 0% effective tax rate. At December 31, 2002, net operating loss carryforwards were $636 million, of which $391 million expire in 2018, $29 million expire in 2019, $1 million expire in 2020 and $215 million expire in 2021. We utilized net operating loss carryforwards of $49 million in 2002. Additionally in 2000, $29 million was carried back to prior years. See Note 11 to the consolidated financial statements for a discussion of tax matters currently before the Internal Revenue Service Regional Office of Appeals. DISCONTINUED OPERATIONS In the year ended December 31, 2002, we recorded an after-tax loss on the discontinuance of our mortgage and leasing businesses of $8.6 million. The components of this loss include a pretax charge of $7.5 million for a litigation settlement related to a mortgage loan servicing agreement termination fee collected in December 2000, a $17.8 million pretax charge primarily related to an increase in our estimated costs of mortgage business-related contingent liabilities, an $11.3 million pretax gain on leasing discontinuance, and a tax benefit of $5.4 million. The $17.8 million charge relates primarily to an increase in our estimated 2002 and future costs of mortgage business-related contingent liabilities in connection with (1) contingent liabilities and litigation costs arising from the operation of the mortgage business prior to the Mortgage Transaction that were not assumed by the buyer, and (2) costs related to Advanta's litigation with Chase Manhattan Mortgage Corporation in connection with the Mortgage Transaction. The change in estimate reflects the legal and consulting fees and other costs that we expect to incur based on current levels of contingent liabilities and expense rates, and considers the status of the discovery process associated with the Mortgage Transaction litigation. The $11.3 million pretax gain on leasing discontinuance represents a revision in the estimated operating results of the leasing segment over the remaining life of the lease portfolio due primarily to favorable credit performance. The leasing portfolio performed favorably as compared to the expectations and assumptions established in 2001. This improvement was the result of successfully obtaining a replacement vendor to service leased equipment for a former leasing vendor that had filed for bankruptcy protection, and operational improvements in the leasing collections area. In the year ended December 31, 2001, we recorded an after-tax loss on the discontinuance of our mortgage and leasing businesses of $31.6 million. The components of this net loss include a pretax gain on the Mortgage Transaction of $20.8 million, a pretax loss on the discontinuance of our leasing business of $45.0 million, and a tax provision of $7.4 million. The gain on the Mortgage Transaction does not reflect any impact from the post-closing adjustment process that has not yet been completed due to litigation related to the Mortgage Transaction. See Note 11 to the consolidated financial statements. The $45.0 million pretax loss on the discontinuance of the leasing business in 2001 was due to a change in estimate of the operating results 37 of the leasing segment over the remaining life of the lease portfolio. The change in estimate was needed due to an increase in estimated credit losses expected throughout the remaining term of the leasing portfolio based on credit loss experience in 2001. A principal factor contributing to the increased credit losses in 2001 was that one of our former leasing vendors had filed for bankruptcy protection and this vendor's financial problems were impacting its ability to service the leased equipment in a segment of our leasing portfolio. This vendor was unique from our other leasing vendors in that it had a significant servicing relationship with our customers and the equipment under lease provided fee revenue to our customers for usage. Also, our contract with the vendor provided that the vendor would provide a guaranty if the performance of the leases did not meet certain criteria. This guaranty was considered when underwriting the leases. We recorded a loss on the discontinuance of our leasing business of $4.3 million, net of tax, effective December 31, 2000, representing the estimated operating results through the remaining term of the leasing portfolio. Estimated operating results of the leasing business included estimated valuations of retained interests in leasing securitizations, estimated cash flows from on-balance sheet lease receivables, interest expense and operating expenses. Loss from discontinued operations, net of tax, was $8.4 million for the period from January 1, 2001 through February 28, 2001, the effective date of the Mortgage Transaction. Loss from discontinued operations, net of tax, was $163.6 million in the year ended December 31, 2000. Loss from discontinued operations in the year ended December 31, 2000 includes charges which were made in response to our regulatory review process, including the implementation of the agreements with the bank regulators that were signed during the second and third quarters of 2000, and changes during the second quarter in the market and the political and regulatory environment for subprime lending. These charges included a pretax reduction in the valuation of Advanta National Bank's retained interests in mortgage securitizations of $214.0 million and an increase in Advanta National Bank's on-balance sheet allowance for receivable losses related to mortgage loans of $22.0 million. These Advanta National Bank charges reduced net income by $236.0 million or $9.31 per combined common diluted share. In addition, loss from discontinued operations in the year ended December 31, 2000 includes $20.3 million of pretax charges resulting from changes in valuation assumptions related to retained interests in leasing securitizations, primarily due to higher credit losses associated with certain unprofitable segments of broker originations from prior periods. These charges reduced net income by $20.3 million or $0.80 per combined common diluted share. Loss from discontinued operations in the year ended December 31, 2000 also includes $25.3 million of revenues related to termination fees received under a mortgage servicing agreement. ASSET/LIABILITY MANAGEMENT We manage our financial condition with a focus on maintaining high credit quality standards, disciplined management of market risks and prudent levels of growth, leverage and liquidity. MARKET RISK SENSITIVITY Market risk is the potential for loss or diminished financial performance arising from adverse changes in market forces including interest rates and market prices. Market risk sensitivity is the degree to which a financial instrument, or a company that owns financial instruments, is exposed to market forces. Fluctuations in interest rates, changes in economic conditions, shifts in customer behavior, and other factors can affect our financial performance. Changes in economic conditions and shifts in customer behavior are difficult to predict, and our financial performance generally cannot be insulated from these forces. We are exposed to equity price risk on the equity securities in our investments available for sale portfolio. A significant portion of our equity securities at December 31, 2002 represented venture capital investments. We typically do not attempt to reduce or eliminate the market exposure on equity investments. A 20% adverse change in equity prices would result in an approximate $4.1 million decrease in the fair value of our equity investments as of December 31, 2002. A 20% adverse change would have resulted in an approximate $5.3 million decrease in fair value as of December 31, 2001. 38 Financial performance variability as a result of fluctuations in interest rates is commonly called interest rate risk. Interest rate risk generally results from mismatches in the timing of asset and liability repricing (gap risk) and from differences between the repricing indices of assets and liabilities (basis risk). We regularly evaluate our market risk profile and attempt to minimize the impact of interest rate risk on net interest income, securitization income and net income. In managing interest rate risk exposure, we may periodically securitize receivables, sell and purchase assets, alter the mix and term structure of our funding base, change our investment portfolio, or use derivative financial instruments. Derivatives are not used for trading or speculative activities. There were no interest rate swaps or other derivatives outstanding related to continuing operations at December 31, 2002 or 2001. Risk exposure levels vary continuously, as changes occur in our asset/liability mix, market interest rates and other factors affecting the timing and magnitude of cash flows. We attempt to analyze the impact of interest rate risk by regularly evaluating the perceived risks inherent in our asset and liability structure, including derivative instruments, if applicable. Computer simulations are used to generate expected financial performance in a variety of interest rate environments. Those results are analyzed to determine if actions need to be taken to mitigate our interest rate risk. We measure our interest rate risk using a rising rate scenario and a declining rate scenario. Net interest income is estimated using a third party software model that uses standard income modeling techniques. We also measure the effect of interest rate risk on our managed net interest income, which includes net interest income on owned assets and net interest income on securitized receivables. The measurement of managed net interest income in addition to net interest income on owned assets is meaningful because our securitization income fluctuates with yields on securitized receivables and interest rates earned by note holders. Both increasing and decreasing rate scenarios assume an instantaneous shift in rates and measure the corresponding change in expected net interest income as compared to a base case scenario. As of December 31, 2002 and 2001, we estimated that our owned net interest income and managed net interest income would change as follows over a twelve-month period:
2002 2001 - -------------------------------------------------------------------------- Estimated percentage increase (decrease) in owned net interest income: Assuming 200 basis point increase in interest rates 16 % 5 % Assuming 200 basis point decrease in interest rates 3 % (3)% Estimated percentage increase (decrease) in managed net interest income: Assuming 200 basis point increase in interest rates (4)% (7)% Assuming 200 basis point decrease in interest rates 9 % 7 % - --------------------------------------------------------------------------
Our owned and securitized business credit card receivables include interest rate floors that cause our managed net interest income to rise in the declining rate scenario. Our managed net interest income decreases in a rising rate scenario due to the portion of the business credit card portfolio that is effectively at a fixed rate because of the nature of the pricing of the accounts and the variable rate funding of off-balance sheet securitized receivables. Changes in the composition of our balance sheet, the current interest rate environment at December 31, 2002 as compared to December 31, 2001, and a reset of interest rate floors on a significant portion of our business credit cards portfolio during 2002 have also impacted the results of the owned and managed net interest income sensitivity analyses. The above estimates of net interest income sensitivity alone do not provide a comprehensive view of our exposure to interest rate risk. The quantitative risk information is limited by the parameters and assumptions utilized in generating the results. These analyses are useful only when viewed within the context of the parameters and assumptions used. The above rate scenarios in no way reflect management's expectation regarding the future direction of interest rates, and they depict only two possibilities out of a large set of possible scenarios. 39 LIQUIDITY AND CAPITAL RESOURCES Our goal is to maintain an adequate level of liquidity, for both long-term and short-term needs, through active management of both assets and liabilities. Since Advanta Corp.'s debt rating is not investment grade, our access to unsecured, institutional debt is limited. However, we do have access to a diversity of funding sources as described below, and had a high level of liquidity at December 31, 2002. At December 31, 2002, we had $332 million of federal funds sold, $177 million of receivables held for sale, and $126 million of investments, which could be sold to generate additional liquidity. Components of funding were as follows at December 31:
2002 2001 ---------------- ---------------- ($ IN THOUSANDS) AMOUNT % AMOUNT % - ------------------------------------------------------------------------------------------------- Off-balance sheet securitized receivables (1) $2,172,266 60% $1,893,162 56% Deposits 714,028 19 636,915 19 Debt and other borrowings 315,886 9 355,899 11 Capital securities 100,000 3 100,000 3 Equity 321,313 9 366,299 11 - ------------------------------------------------------------------------------------------------- Total $3,623,493 100% $3,352,275 100% =================================================================================================
(1) Includes both off-balance sheet business credit card receivables and off-balance sheet lease receivables related to discontinued operations. Excludes our ownership interest in the investor principal balance of securitizations (subordinated trust assets) that are held on-balance sheet and classified as retained interests in securitizations or assets of discontinued operations. At December 31, 2002, our ratio of equity, including capital securities, to on-balance sheet assets was 25.1% as compared to 28.5% at December 31, 2001. In managing our capital needs, we also consider our ratio of equity to managed assets, since our on-balance sheet assets include retained interests in securitizations that serve as credit enhancement to the investors' interests in the securitized receivables. The ratio of equity, including capital securities, to managed assets was 10.9% at December 31, 2002 as compared to 13.2% at December 31, 2001. We calculate managed assets as follows:
DECEMBER 31, ----------------------- ($ IN THOUSANDS) 2002 2001 - ------------------------------------------------------------------------------------- Total on-balance sheet assets $1,681,613 $1,636,680 Off-balance sheet securitized receivables 2,172,266 1,893,162 - ------------------------------------------------------------------------------------- Managed assets $3,853,879 $3,529,842 - -------------------------------------------------------------------------------------
Off-Balance Sheet Securitizations As shown in the components of funding table above, off-balance sheet securitizations provide a significant portion of our funding and they are one of our primary sources of liquidity. These transactions enable us to limit our credit risk in the securitized receivables to the amount of interests retained on-balance sheet. See Note 6 to the consolidated financial statements for key securitization data including income, cash flows and assumptions used in measuring the fair value of our retained interests in securitizations. Our accounting policies related to securitization transactions are discussed in the "Critical Accounting Policies and Estimates" section of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the consolidated financial statements. We completed one public business credit card securitization in each of 2002 and 2001, and our first two public business credit card securitizations in 2000. These public securitizations enabled us to grow off-balance sheet business credit card receivables as a component of our funding. In addition to the public securitizations, the securitization trust has two non-public series outstanding. The first series, Series 1997-A, provides off-balance sheet funding through a $330 million committed commercial paper conduit facility, through which $330 million of business credit card receivables were securitized at December 31, 2002. The commitment can 40 be withdrawn under certain conditions, similar to the conditions for an early amortization event, as described below, for the other series of the securitization trust. Our commercial paper conduit facility also requires the servicer, Advanta Bank Corp., to meet its minimum regulatory capital requirements. Upon the expiration of $50 million of this commercial paper conduit facility in March 2003 and the remainder of $280 million in June 2003, management expects to obtain the appropriate level of replacement funding under similar terms and conditions. The second non-public series was a securitization completed in 2000. The revolving periods for each series of the business credit card securitization trust extend to the following dates:
($ IN THOUSANDS) INVESTOR PRINCIPAL BALANCE AT SCHEDULED END OF DECEMBER 31, 2002 REVOLVING PERIOD - ------------------------------------------------------- Series 1997-A $341,725 June 2003 Series 2000-A 157,068 January 2003 Series 2000-B 600,000 March 2003 Series 2000-C 400,000 January 2005 Series 2001-A 300,000 July 2007 Series 2002-A 300,000 September 2004
In addition to investor principal balance, our securitized business credit card receivables include billed interest and fees of $50.4 million on those accounts at December 31, 2002. When the revolving periods of the series end and they start their expected amortization periods, we will need to replace the funding currently being provided by those series. We expect the $157 million Series 2000-A to complete its amortization period by April 2003 and the $600 million Series 2000-B to complete its amortization period by July 2003. Management expects to replace this funding through a combination of increased deposits and private and public securitization transactions under similar terms and conditions as our current private and public securitizations. However, based on recent trends in market rates for asset-backed securities issued by certain other credit card companies and our recent experience, we expect the costs of our public securitization transactions in 2003 will be higher than what we experienced in 2002. The securitization agreements contain conditions that would trigger an early amortization event. An early amortization event would result in the end of the revolving period prior to the expected dates above, which would require us to find an alternate means of funding new receivables generated on existing business credit card accounts. The conditions include the failure to make payments under the terms of the agreement, or the insolvency or other similar event of Advanta Bank Corp. An early amortization event would also be triggered for each individual series if the three-month average excess spread percentage was not maintained at a level greater than 0% for that series. Excess spread represents income-related cash flows on securitized receivables (interest, interchange and fees) net of note holders' interest, servicing fees, and credit losses. At December 31, 2002, our three-month average excess spread was 11%. Based on the current levels of excess spread, our financial condition and other considerations, management believes that it is unlikely that the trust or any individual series will have an early amortization event. The business credit card securitization agreements do not have any provisions or conditions involving the debt rating of Advanta Corp. Deposits, Debt, Other Borrowings and Equity In the first quarter of 2001, we received in excess of $1 billion in cash proceeds from the Mortgage Transaction that resulted in liquidity in excess of the needs of our continuing businesses. We strategically used the proceeds to strengthen Advanta for the future, including a significant reduction in our leverage. In the second quarter of 2001, we sold $389.7 million of our deposit liabilities to E*TRADE Bank, a wholly owned subsidiary of E*TRADE Group, Inc. We also paid off substantially all of our outstanding medium-term notes and reduced our outstanding retail notes. In the year ended December 31, 2001, we reduced debt and deposits by $1.1 billion. Also, Advanta National Bank suspended originations of deposit accounts. Excess liquid assets were held in short-term, high-quality investments earning money market rates until they could be deployed. As a result, we had interest expense in excess of interest income on this excess liquidity that was not included 41 in Advanta Business Cards or venture capital segment results. We do not anticipate that we will incur net interest expense unrelated to the funding of our Advanta Business Cards or venture capital segments in the year ended December 31, 2003 since the excess liquid assets described above have been deployed as of December 31, 2002. We continue to offer unsecured debt securities of Advanta Corp., in the form of RediReserve Certificates and Investment Notes, to retail investors through our retail note program. We change the interest rates we offer frequently, depending on market conditions and our funding needs. The rates also vary depending on the size of each investment. At December 31, 2002, $316 million of RediReserve Certificates and Investment Notes were outstanding with interest rates ranging from 2.75% to 11.56%. In the first quarter of 2001, after consideration of the parent liquidity and the capital requirements for the ongoing business, the Board of Directors of Advanta Corp. authorized management to purchase up to 1.5 million shares of Advanta Corp. common stock or the equivalent dollar amount of our capital securities, or some combination thereof. In August 2002, the Board of Directors authorized the purchase of up to an additional 1.5 million shares of Advanta Corp. common stock, bringing the total authorization to up to 3.0 million shares. We intend to continue to make purchases modestly and when we believe it is prudent to do so while we analyze evolving capital requirements. During the year ended December 31, 2001, we repurchased 693,300 shares of our Class B Common Stock. In the year ended December 31, 2002, we repurchased 1,554,759 shares of our Class B Common Stock. Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. Management believes that the aggregate loss, if any, resulting from existing litigation, claims and other legal proceedings will not have a material adverse effect on our liquidity or capital resources based on our current expectations regarding the ultimate resolutions of these actions and amounts held in escrow in connection with certain litigation. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of these proceedings are influenced by factors outside of our control, it is reasonably possible that the estimated cash flow related to these proceedings may change or that actual results will differ from our estimates. The following tables detail the composition of the deposit base and the composition of debt and other borrowings at year end for each of the past five years. COMPOSITION OF DEPOSIT BASE
($ IN MILLIONS) AS OF DECEMBER 31, ------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ------------ -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - --------------------------------------------------------------------------------------------------------------- Demand deposits $ 6.6 1% $ 6.5 1% $ 4.6 0% $ 5.8 0% $ 4.3 0% Money market savings 2.3 0 3.5 1 64.0 5 242.4 16 181.5 10 Time deposits of $100,000 or less 441.6 62 389.9 61 916.9 68 1,046.6 69 1,445.8 83 Time deposits of more than $100,000 263.5 37 237.0 37 361.5 27 217.6 15 118.2 7 - --------------------------------------------------------------------------------------------------------------- Total deposits $714.0 100% $636.9 100% $1,347.0 100% $1,512.4 100% $1,749.8 100% ===============================================================================================================
42 COMPOSITION OF DEBT AND OTHER BORROWINGS
($ IN MILLIONS) AS OF DECEMBER 31, ---------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ -------------- -------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - -------------------------------------------------------------------------------------------------------------- Subordinated retail notes and certificates $ 0.0 0% $ 0.6 0% $ 0.7 0% $ 1.0 0% $ 1.5 0% Senior retail notes and certificates 315.8 100 322.8 91 404.2 53 234.4 21 145.6 14 Medium-term bank notes 0.0 0 0.0 0 3.4 1 7.3 0 7.3 1 Medium-term notes 0.0 0 0.2 0 343.6 45 538.0 48 866.5 83 Value notes 0.0 0 0.0 0 3.3 0 7.8 1 9.3 1 Term fed funds, fed funds purchased and FHLB advances 0.0 0 0.0 0 0.0 0 220.0 20 0.0 0 Securities sold under agreements to repurchase 0.0 0 32.3 9 0.0 0 104.2 9 0.0 0 Other borrowings 0.0 0 0.0 0 4.3 1 9.0 1 17.8 1 - -------------------------------------------------------------------------------------------------------------- Total debt and other borrowings $315.8 100% $355.9 100% $759.5 100% $1,121.7 100% $1,048.0 100% ==============================================================================================================
Contractual Obligations The following table summarizes our contractual cash obligations at December 31, 2002 by period. The table does not include purchase obligations, representing agreements with minimum or fixed terms to purchase goods or services in the ordinary course of business. We expect that purchase obligations will be funded with operating cash flows and that they will not have a material impact on our liquidity or capital resources.
($ IN THOUSANDS) PAYMENTS DUE BY PERIOD ------------------------------------------------------- LESS THAN OR EQUAL TO 2-3 4-5 AFTER 5 TOTAL 1 YEAR YEARS YEARS YEARS - --------------------------------------------------------------------------------------------------- Time deposits $ 705,087 $486,874 $218,083 $ 130 $ 0 Debt and other borrowings 315,886 206,897 79,149 29,840 0 Operating leases 12,869 5,138 7,023 659 49 - --------------------------------------------------------------------------------------------------- Total $1,033,842 $698,909 $304,255 $30,629 $ 49 ===================================================================================================
Management expects to fund our deposit and debt obligations with replacement deposits or debt having similar terms and conditions. We expect to fund commitments related to operating leases with operating cash flows. In addition to these obligations, we have commitments to extend credit to our business credit card customers, representing unused lines of credit, of $6.1 billion at December 31, 2002 and $4.6 billion at December 31, 2001. Lines of credit on our customers' business credit cards totaled $8.6 billion at December 31, 2002 and $6.6 billion at December 31, 2001. We believe that our customers' utilization of their lines of credit will continue to be substantially less than the amount of the commitments, as has been our experience to date. We expect to fund the commitments to extend credit with the various components of funding described above, similar to the funding of other new receivables. Regulatory Agreements and Restrictions at Subsidiaries Advanta Bank Corp. and Advanta National Bank are subject to regulatory capital requirements and other regulatory provisions that restrict their ability to lend and/or pay dividends to Advanta Corp. and its affiliates. Our insurance subsidiaries are also subject to certain capital and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. See "Part I -- Government Regulation." In 2000, Advanta Bank Corp. entered into agreements with its bank regulatory agencies, primarily relating to the bank's subprime lending operations. These agreements imposed temporary deposit growth limits at Advanta Bank Corp. and required prior regulatory approval of cash dividends. In April 2002, the agreements were removed and, as a result, the restrictions in the agreements on deposit growth and payment of 43 cash dividends are no longer applicable. In connection with removing the agreements, Advanta Bank Corp. reached an understanding with its regulators, reflecting continued progress in our ongoing efforts to enhance Advanta Bank Corp.'s practices and procedures. Effective October 2002, the understanding was revised. The revised understanding replaces the provisions of the prior understanding and provides for the bank to enhance certain of its internal planning and monitoring processes. The revised understanding is consistent with the manner in which Advanta Bank Corp. is currently operating its business and includes no restrictions expected to have any impact on our financial results. In 2000, Advanta National Bank also reached agreements with its bank regulatory agency, primarily relating to the bank's subprime lending operations. The agreements established temporary asset growth limits at Advanta National Bank, imposed restrictions on taking brokered deposits and required that Advanta National Bank maintain certain capital ratios in excess of the minimum regulatory standards. In 2001, Advanta National Bank entered into an additional agreement with its regulatory agency regarding restrictions on new business activities and product lines at Advanta National Bank after the Mortgage Transaction, and the resolution of outstanding Advanta National Bank liabilities. The agreement also reduced the capital requirements for Advanta National Bank to 12.7% for Tier 1 and total capital to risk-weighted assets, and to 5% for Tier 1 capital to adjusted total assets as defined in the agreement. In addition, the agreement prohibits the payment of dividends by Advanta National Bank without prior regulatory approval. Management believes that Advanta National Bank was in compliance with its regulatory agreements at December 31, 2002. At December 31, 2002, Advanta Bank Corp.'s combined total capital ratio (combined Tier I and Tier II capital) was 18.46%, and Advanta National Bank's combined total capital ratio was 23.13%. At December 31, 2001, Advanta Bank Corp.'s combined total capital ratio was 18.80%, and Advanta National Bank's combined total capital ratio was 23.34%. In each case, Advanta Bank Corp. and Advanta National Bank had capital at levels a bank is required to maintain to be classified as "well-capitalized" under the regulatory framework for prompt corrective action. However, Advanta National Bank does not meet the definition of "well-capitalized" because of the existence of its agreement with its regulatory agency, even though it has achieved the higher imposed capital ratios required by the agreement. Total stockholders' equity of our banking and insurance affiliates was $280 million at December 31, 2002, of which $226 million was restricted. At January 1, 2003, $54.6 million of stockholders' equity of our bank and insurance affiliates was available for payment of cash dividends in 2003 under applicable regulatory guidelines without prior regulatory approval. In addition to dividend restrictions at banking subsidiaries, certain non-bank subsidiaries are subject to minimum equity requirements as part of securitization or other agreements. The total minimum equity requirement of non-bank subsidiaries was $10 million at December 31, 2002. At December 31, 2002, the non-bank subsidiaries were in compliance with these minimum equity requirements. Management believes that the restrictions, for both bank and non-bank subsidiaries, will not have an adverse effect on Advanta Corp.'s ability to meet its cash obligations due to the current levels of liquidity and diversity of funding sources. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- ASSET/LIABILITY MANAGEMENT." 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) ------------------------ 2002 2001 - -------------------------------------------------------------------------------------- ASSETS Cash $ 14,834 $ 20,952 Federal funds sold 332,257 229,889 Restricted interest-bearing deposits 79,449 113,956 Investments available for sale 171,222 246,679 Receivables, net: Held for sale 177,065 202,612 Other 278,282 220,795 ------------------------ Total receivables, net 455,347 423,407 Accounts receivable from securitizations 198,238 168,983 Premises and equipment (at cost, less accumulated depreciation of $26,959 in 2002 and $21,677 in 2001) 25,496 25,722 Other assets 277,658 264,689 Assets of discontinued operations, net 127,112 142,403 - -------------------------------------------------------------------------------------- TOTAL ASSETS $1,681,613 $1,636,680 ====================================================================================== LIABILITIES Deposits: Noninterest-bearing $ 6,561 $ 6,500 Interest-bearing 707,467 630,415 ------------------------ Total deposits 714,028 636,915 Debt 315,886 323,582 Other borrowings 0 32,317 Other liabilities 230,386 177,567 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,260,300 1,170,381 - -------------------------------------------------------------------------------------- Commitments and contingencies Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of Advanta Corp. 100,000 100,000 STOCKHOLDERS' EQUITY Class A preferred stock, $1,000 par value; Authorized, issued and outstanding -- 1,010 shares in 2002 and 2001 1,010 1,010 Class A voting common stock, $.01 par value; Authorized -- 200,000,000 shares; Issued -- 10,041,017 shares in 2002 and 2001 100 100 Class B non-voting common stock, $.01 par value; Authorized -- 200,000,000 shares; Issued -- 20,326,289 shares in 2002 and 17,939,639 shares in 2001 204 179 Additional paid-in capital 243,910 223,362 Deferred compensation (17,837) (64) Unearned ESOP shares (10,831) (11,295) Accumulated other comprehensive income 186 1,259 Retained earnings 147,205 179,370 Less: Treasury stock at cost, 2,896,112 Class B common shares in 2002 and 1,348,079 Class B common shares in 2001 (42,634) (27,622) - -------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 321,313 366,299 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,681,613 $1,636,680 ======================================================================================
See Notes to Consolidated Financial Statements. 45 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------- INTEREST INCOME: Receivables $ 82,720 $ 77,799 $ 78,506 Investments 10,226 40,052 57,594 Other interest income 10,658 10,084 6,048 - ----------------------------------------------------------------------------------------------- Total interest income 103,604 127,935 142,148 INTEREST EXPENSE: Deposits 23,825 43,968 53,201 Debt 23,696 37,658 29,369 Other borrowings 59 844 3,938 - ----------------------------------------------------------------------------------------------- Total interest expense 47,580 82,470 86,508 - ----------------------------------------------------------------------------------------------- Net interest income 56,024 45,465 55,640 Provision for credit losses 40,906 35,976 36,309 - ----------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 15,118 9,489 19,331 NONINTEREST REVENUES: Securitization income 118,976 108,186 67,917 Servicing revenues 33,973 29,221 17,310 Other revenues, net 87,152 41,469 65,806 Loss on transfer of consumer credit card business (See Note 11) (43,000) 0 0 - ----------------------------------------------------------------------------------------------- Total noninterest revenues 197,101 178,876 151,033 EXPENSES: Operating expenses 201,741 180,186 150,292 Minority interest in income of consolidated subsidiary 8,880 8,880 8,880 Unusual charges 0 41,750 0 - ----------------------------------------------------------------------------------------------- Total expenses 210,621 230,816 159,172 - ----------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,598 (42,451) 11,192 Income tax expense (benefit) 17,170 (11,995) 0 - ----------------------------------------------------------------------------------------------- Income (loss) from continuing operations (15,572) (30,456) 11,192 Loss from discontinued operations, net of tax 0 (8,438) (163,578) Loss, net, on discontinuance of mortgage and leasing businesses, net of tax (8,610) (31,639) (4,298) - ----------------------------------------------------------------------------------------------- NET LOSS $(24,182) $(70,533) $(156,684) =============================================================================================== Basic income (loss) from continuing operations per common share Class A $ (0.69) $ (1.23) $ 0.39 Class B (0.59) (1.17) 0.47 Combined (0.63) (1.19) 0.44 - ----------------------------------------------------------------------------------------------- Diluted income (loss) from continuing operations per common share Class A $ (0.69) $ (1.23) $ 0.39 Class B (0.59) (1.17) 0.46 Combined (0.63) (1.19) 0.44 - ----------------------------------------------------------------------------------------------- Basic net loss per common share Class A $ (1.03) $ (2.79) $ (6.28) Class B (0.94) (2.73) (6.21) Combined (0.97) (2.75) (6.24) - ----------------------------------------------------------------------------------------------- Diluted net loss per common share Class A $ (1.03) $ (2.79) $ (6.23) Class B (0.94) (2.73) (6.16) Combined (0.97) (2.75) (6.19) - ----------------------------------------------------------------------------------------------- Basic weighted average common shares outstanding Class A 9,152 9,101 9,110 Class B 15,909 16,581 16,033 Combined 25,061 25,682 25,143 - ----------------------------------------------------------------------------------------------- Diluted weighted average common shares outstanding Class A 9,152 9,101 9,149 Class B 15,909 16,581 16,202 Combined 25,061 25,682 25,351 - -----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 46 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ($ IN THOUSANDS)
---------------------------------------------------------- COMPREHENSIVE CLASS A CLASS A CLASS B ADDITIONAL INCOME PREFERRED COMMON COMMON PAID-IN (LOSS) STOCK STOCK STOCK CAPITAL - ----------------------------------------------------------------------------------------------- Balance at Dec. 31, 1999 $1,010 $105 $182 $232,585 Net loss $(156,684) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $(5,111) 9,492 --------- Comprehensive loss $(147,192) ========= Preferred and common cash dividends declared Exercise of stock options 155 Issuance of restricted stock 2 2,545 Amortization of deferred compensation Forfeitures of restricted stock (1) (4) (6,455) Retirement of treasury stock (4) (4) (8,496) ESOP shares committed to be released 37 - ----------------------------------------------------------------------------------------------- Balance at Dec. 31, 2000 $1,010 $100 $176 $220,371 Net loss $ (70,533) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $(1,379) 2,561 --------- Comprehensive loss $ (67,972) ========= Preferred and common cash dividends declared Exercise of stock options 4 3,476 Stock option exchange for stock and restricted stock tender offer 934 Modification of stock options 1,966 Issuance of restricted stock 1 720 Amortization of deferred compensation Forfeitures of restricted stock (2) (4,118) Stock buyback ESOP shares committed to be released 13 - ----------------------------------------------------------------------------------------------- Balance at Dec. 31, 2001 $1,010 $100 $179 $223,362 Net loss $ (24,182) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $577 (1,073) --------- Comprehensive loss $ (25,255) ========= Preferred and common cash dividends declared Exercise of stock options 1 362 Stock option exchange program stock distribution Issuance of restricted stock 28 22,529 Amortization of deferred compensation Forfeitures of restricted stock (4) (2,275) Stock buyback ESOP shares committed to be released (68) - ----------------------------------------------------------------------------------------------- Balance at Dec. 31, 2002 $1,010 $100 $204 $243,910 =============================================================================================== --------------------------------------------------------------------- DEFERRED ACCUMULATED COMPENSATION OTHER TOTAL & UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY - --------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1999 $(28,729) $(10,794) $ 421,741 $(26,469) $ 589,631 Net loss (156,684) (156,684) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $(5,111) 9,492 9,492 Comprehensive loss Preferred and common cash dividends declared (7,495) (7,495) Exercise of stock options 155 Issuance of restricted stock (2,547) 0 Amortization of deferred compensation 5,348 5,348 Forfeitures of restricted stock 6,460 0 Retirement of treasury stock 8,504 0 ESOP shares committed to be released 418 455 - --------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 2000 $(19,050) $ (1,302) $ 257,562 $(17,965) $ 440,902 Net loss (70,533) (70,533) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $(1,379) 2,561 2,561 Comprehensive loss Preferred and common cash dividends declared (7,659) (7,659) Exercise of stock options 3,480 Stock option exchange for stock and restricted stock tender offer 618 (2,152) (600) Modification of stock options 1,966 Issuance of restricted stock (721) 0 Amortization of deferred compensation 3,256 3,256 Forfeitures of restricted stock 4,120 0 Stock buyback (7,505) (7,505) ESOP shares committed to be released 418 431 - --------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 2001 $(11,359) $ 1,259 $ 179,370 $(27,622) $ 366,299 Net loss (24,182) (24,182) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $577 (1,073) (1,073) Comprehensive loss Preferred and common cash dividends declared (7,983) (7,983) Exercise of stock options 363 Stock option exchange program stock distribution 542 542 Issuance of restricted stock (22,557) 0 Amortization of deferred compensation 2,842 2,842 Forfeitures of restricted stock 1,941 (338) Stock buyback (15,554) (15,554) ESOP shares committed to be released 465 397 - --------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 2002 $(28,668) $ 186 $ 147,205 $(42,634) $ 321,313 =========================================================================================================
See Notes to Consolidated Financial Statements. 47 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ ($ IN THOUSANDS) 2002 2001 2000 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES -- CONTINUING OPERATIONS Net loss $ (24,182) $ (70,533) $ (156,684) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Loss from discontinued operations, net of tax 0 8,438 163,578 Loss, net, on discontinuance of mortgage and leasing businesses, net of tax 8,610 31,639 4,298 Investment securities (gains) losses 6,169 26,227 (5,473) Valuation adjustments on other receivables held for sale 1,085 0 0 Loss on sale of deposits 0 2,835 0 Depreciation 8,479 7,959 9,294 Provision for credit losses 40,906 35,976 36,309 Provision for interest and fee losses 6,889 4,404 2,293 Change in deferred origination costs, net of deferred fees (9,910) (6,556) (6,252) Change in receivables held for sale (466,364) (320,896) (509,989) Proceeds from sale of receivables held for sale 494,486 272,549 512,619 Change in accounts receivable from securitizations (29,255) (34,465) (69,195) Change in other assets and other liabilities 60,468 (11,888) 25,829 - -------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 97,381 (54,311) 6,627 - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES -- CONTINUING OPERATIONS Change in federal funds sold and restricted interest-bearing deposits (67,861) (219,863) 50,454 Purchase of investments available for sale (503,723) (1,144,064) (1,826,620) Proceeds from sales of investments available for sale 465,520 896,016 937,617 Proceeds from maturing investments available for sale 105,840 737,874 899,286 Change in receivables not held for sale (99,032) (68,593) (76,623) Purchases of premises and equipment, net (8,253) (7,698) (18,273) - -------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (107,509) 193,672 (34,159) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES -- CONTINUING OPERATIONS Change in demand and savings deposits (1,068) (8,055) (179,542) Proceeds from issuance of time deposits 412,170 724,665 1,325,125 Payments for maturing time deposits (343,447) (1,044,640) (1,310,966) Payments for sale of deposits and related accrued interest 0 (392,511) 0 Proceeds from issuance of debt 111,515 182,975 256,098 Payments on redemption of debt (141,910) (614,577) (289,422) Change in other borrowings (32,317) 28,028 (328,877) Proceeds from exercise of stock options 363 3,480 155 Cash dividends paid (7,983) (7,659) (7,495) Stock buyback (15,554) (7,505) 0 - -------------------------------------------------------------------------------------------------------- Net cash used in financing activities (18,231) (1,135,799) (534,924) - -------------------------------------------------------------------------------------------------------- DISCONTINUED OPERATIONS Proceeds from the exit of our mortgage business 0 1,093,975 0 Other cash provided by (used in) operating activities 22,241 (78,301) 312,668 ----------- ----------- ------------ Net cash provided by operating activities 22,241 1,015,674 312,668 Net cash provided by investing activities 0 0 322,155 Net cash used in financing activities 0 0 (76,435) - -------------------------------------------------------------------------------------------------------- Net cash provided by discontinued operations 22,241 1,015,674 558,388 - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (6,118) 19,236 (4,068) Cash at beginning of year 20,952 1,716 5,784 ======================================================================================================== Cash at end of year $ 14,834 $ 20,952 $ 1,716 ========================================================================================================
See Notes to Consolidated Financial Statements. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED) In these notes to consolidated financial statements, "Advanta", "we", "us", and "our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Advanta is a highly focused financial services company serving the small business market. We leverage direct marketing and information based expertise to identify potential customers and new target markets and to provide a high level of service tailored to the unique needs of small businesses. We have been providing innovative financial products and solutions since 1951. Our primary business segment is Advanta Business Cards, one of the nation's largest issuers of business credit cards to small businesses. In addition to our business credit card lending business, we have venture capital investments. We own two depository institutions, Advanta Bank Corp. and Advanta National Bank. Our banks are able to offer a variety of deposit products, such as retail and large denomination certificates of deposit and money market savings accounts, that are insured by the Federal Deposit Insurance Corporation (the "FDIC"). Advanta Business Cards is primarily funded and operated through Advanta Bank Corp. At December 31, 2002, we serviced approximately 780,000 business credit card customers and managed business credit card receivables of $2.6 billion. Through the first quarter of 2001, we had two additional lending businesses, Advanta Mortgage and Advanta Leasing Services. In the first quarter of 2001, we completed our exit from the mortgage business, Advanta Mortgage, through a purchase and sale agreement with Chase Manhattan Mortgage Corporation as buyer (the "Mortgage Transaction"), announced the discontinuance of our leasing business, and restructured our corporate functions to a size commensurate with our ongoing businesses. The mortgage and equipment leasing businesses represented 26% of our customers and 84% of our managed receivables at December 31, 2000. We are continuing to service the existing leasing portfolio rather than sell the business or the portfolio. The results of the mortgage and leasing businesses are reported as discontinued operations in all periods presented. The results of our ongoing businesses are reported as continuing operations for all periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Advanta Corp. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year's presentation. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the accounting for the fair value of venture capital investments, allowance for receivable losses, securitization income, business credit card rewards programs, litigation contingencies, income taxes, and discontinued operations. INVESTMENTS AVAILABLE FOR SALE Investments available for sale include securities that we sell from time to time to provide liquidity and in response to changes in the market. Debt and equity securities classified as available for sale are reported at fair value and unrealized gains and losses on these securities are reported in other comprehensive income, net of income taxes. The fair values of investments available for sale are based on quoted market prices, dealer quotes or estimates using quoted market prices for similar securities. Declines in the fair value of investments 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) available for sale below their cost that are deemed to be other than temporary, if any, are reflected in earnings as realized losses. There were no declines in the fair value of investments available for sale below their cost that were deemed to be other than temporary at December 31, 2002 or 2001. Investments of our venture capital segment are included in investments available for sale and are carried at estimated fair value. We primarily invest in privately held companies, including early stage companies. The fair values of these equity investments are subject to significant volatility. Our investments in specific companies and industry segments may vary over time, and changes in concentrations may affect price volatility. These investments are inherently risky as the market for the technologies or products the investees have under development may never materialize. Management makes fair value determinations based on quoted market prices, when available, and considers the investees' financial results, conditions and prospects, values of comparable companies and market liquidity, when market prices are not available. In accordance with the specialized industry accounting principles of venture capital investment companies, the unrealized and realized gains and losses on these investments are included in other revenues rather than other comprehensive income and the equity method of accounting for investments is not applied. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. RECEIVABLES HELD FOR SALE Receivables held for sale represent loans currently on the balance sheet that we intend to sell or securitize within the next six months. These assets are reported at the lower of aggregate cost or fair market value by loan type. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. ALLOWANCE FOR RECEIVABLE LOSSES The allowance for receivable losses is established as losses are estimated to have occurred through provisions charged to earnings. Business credit card receivables are comprised of principal amounts due from cardholders for purchase activities and cash advances, and amounts due from cardholders relating to billed interest and fees. Provisions for credit losses, representing the portion of receivable losses attributable to principal, are reported separately on the consolidated income statements. Provisions for interest and fee receivable losses are recorded as direct reductions to interest and fee income as described below in "Interest and Fee Income on Receivables." The allowance for receivable losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of receivables in light of historical experience by loan type, the nature and volume of the receivable portfolio, adverse situations that may affect the borrowers' ability to repay and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Since our receivable portfolio is comprised of large groups of smaller balance homogeneous loans, we generally evaluate each group collectively for impairment through the use of a migration analysis as well as the consideration of other factors that may indicate loss. Accordingly, we do not separately identify individual loans for impairment disclosures. Losses are charged against the allowance for receivable losses when management believes the uncollectibility of a receivable balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for receivable losses. Our charge-off policy for business credit card accounts is to charge off an unpaid receivable in the month the account becomes 180 days contractually delinquent. Business credit card accounts suspected of being fraudulent are charged off after a 90-day investigative period, unless our investigation shows no evidence of fraud. Effective October 1, 2000, bankrupt business credit cards are charged off within a 60-day investigative period after receipt of bankruptcy notification. The previous policy provided a 90-day investigative period. If customers declare hardship or enter credit counseling, we charge off affected accounts in the month the account becomes 120 days contractually delinquent. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTEREST AND FEE INCOME ON RECEIVABLES Interest income is accrued on the unpaid balance of receivables. Interest income includes late fees billed on business credit card receivables. Fee income is recognized when billed to the cardholder, with the exception of origination fees as discussed in "Origination Costs and Fees" below. Prior to October 1, 2002, the billing and recognition of interest and fees was discontinued when the related receivable became 90 days past due or upon notification of fraud, bankruptcy, death, hardship or credit counseling. Effective October 1, 2002, we continue to bill and recognize interest and fees on accounts when they become 90 days past due, and an additional allowance for receivable losses is established for the additional billings estimated to be uncollectible through a provision for interest and fee losses. The billing and recognition of interest and fees on fraudulent, bankrupt, deceased, hardship and credit counseling accounts is still discontinued upon receipt of notification of these events. Provisions for interest and fee losses are recorded as direct reductions to interest and fee income. The accrued interest and fee portion of charged-off receivables is charged against the allowance for receivable losses. All subsequent recoveries of charged-off receivables are classified as principal recoveries, since any amounts related to accrued interest and fees are de minimus. ORIGINATION COSTS AND FEES We engage an unrelated third party to solicit and originate business credit card account relationships. Amounts paid to third parties to acquire business credit card accounts and certain other origination costs are deferred and netted against any related business credit card origination fee, and the net amount is amortized on a straight-line basis over the privilege period of one year. These costs represent the cost of acquiring business credit card account relationships, and the net amortization is included in operating expenses. SECURITIZATION ACTIVITIES A significant portion of our funding for Advanta Business Cards is through off-balance sheet business credit card securitizations using a securitization trust. The securitization trust was created to hold the collateral (the securitized receivables) and issue debt to investors. The securitization trust is a qualifying special-purpose entity as defined by Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125," and therefore, is not consolidated as part of Advanta Corp.'s consolidated financial statements. We do not provide any guarantee of the debt issued by the special-purpose entity and our recourse in the transactions is limited to the value of our interests in securitizations that serve as credit enhancement to the investors' interests in the securitized receivables. We sell business credit card receivables through securitizations with servicing retained. When we securitize receivables, we surrender control over the transferred assets and account for the transaction as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. We allocate the previous carrying amount of the securitized receivables between the assets sold and the retained interests, based on their relative estimated fair values at the date of sale. Securitization income is recognized at the time of the sale, equal to the excess of the fair value of the assets obtained (principally cash) over the allocated cost of the assets sold and transaction costs. During the revolving period of each business credit card securitization, securitization income is recorded representing estimated gains on the sale of new receivables to the securitization trust on a continuous basis to replenish the investors' interest in securitized receivables that have been repaid by the business credit card account holders. Fair value estimates used in the recognition of securitization income require assumptions of payment, default and interest rates. To the extent actual results are different than those estimates, the impact is recognized in securitization income. On a monthly basis, income-related cash flows on securitized receivables (interest, interchange and fees) are used to pay note holders' interest and servicing fees, and any excess cash flow serves as credit enhancement to cover credit losses in that month. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS RECEIVABLE FROM SECURITIZATIONS Accounts receivable from securitizations include retained interests in securitizations, accrued interest and fees on securitized receivables, amounts due from the trust for the purchase of new loan receivables during the revolving period, and amounts due from the trust for one month's servicing fee and one month's income-related cash flows in excess of that month's note holders' interest, servicing fees and credit losses. Retained interests in securitizations include restricted cash reserve accounts, retained interest-only strips and subordinated trust assets related to securitizations. Subordinated trust assets represent an ownership interest in the securitized receivables that is subordinated to the other investors' interests. Retained interests in securitizations serve as credit enhancement to the investors' interests in the securitized receivables. We account for retained interests in securitizations as trading securities. These assets are carried at estimated fair value and the resulting unrealized gain or loss from the valuation is included in securitization income. We estimate the fair value of retained interests in securitizations based on a discounted cash flow analysis when quoted market prices are not available. The cash flows of the retained interest-only strip are estimated as the excess of the weighted average interest yield on each pool of the receivables sold over the sum of the interest rate earned by the note holder, the servicing fee and an estimate of future credit losses over the life of the existing receivables. Cash flows are discounted from the date the cash is expected to become available to us (the "cash-out" method). These cash flows are projected over the life of the receivables using payment, default, and interest rate assumptions that management believes would be used by market participants for similar financial instruments subject to prepayment, credit and interest rate risk. The cash flows are discounted using an interest rate that management believes a purchaser unrelated to the seller of the financial instrument would demand. The discounted cash flow analysis is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Interest income is recognized over the life of the retained interests in securitizations using the discount rate used in the valuation. Accrued interest and fees on securitized receivables are reduced by an allowance for amounts estimated to be uncollectible. The allowance is estimated using the same methodology as that used for on-balance sheet receivables that is described above in "Allowance for Receivable Losses" and "Interest and Fee Income on Receivables." Provisions for interest and fee losses on securitized receivables are recorded as a reduction of securitization income. SERVICING RIGHTS Servicing assets associated with business credit card securitization transactions are not recognized as the benefits of servicing are not expected to be more or less than adequate compensation for performing the servicing. PREMISES AND EQUIPMENT Premises, equipment, computers and software are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are charged to expense as incurred. Estimated useful lives used for premises and equipment are as follows: Furniture, fixtures and equipment 4 to 7 years Computers and software 3 to 4 years
Leasehold improvements are amortized over the shorter of the lives of the leases or estimated service lives. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTANGIBLE ASSETS In the fourth quarter of 2002, we purchased rights to host an annual sporting event that will be held in the Philadelphia area, to raise awareness of Advanta's involvement in the local community, for $3 million. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," this intangible asset was initially recorded at fair value. We determined that the intangible asset has an indefinite useful life, and therefore no amortization was recorded. It will be tested annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. BUSINESS CREDIT CARD REWARDS PROGRAMS We offer bonus mile and cash-back reward programs with certain of our business credit cards. Eligible cardholders earn bonus miles for air travel or up to 2% cash-back rewards based on net purchases charged on their business credit card account. The costs of future reward redemptions are estimated and a liability is recorded at the time bonus miles or cash-back rewards are earned by the cardholder. The estimated costs of future reward redemptions are classified as a reduction of other revenues in the consolidated income statements. Estimates of costs of future reward redemptions include an assumption regarding the percentage of cardholders that will redeem the rewards and vary depending on the structure of the rewards program. It is reasonably possible that actual results will differ from our estimates or that our estimated liability for these programs may change. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under agreements to repurchase are accounted for as secured borrowings because we maintain effective control over the transferred assets. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. We may be required to provide additional collateral based on the fair value of the underlying securities. DERIVATIVE FINANCIAL INSTRUMENTS We may use derivative financial instruments as part of our risk management strategy to reduce interest rate risk. Derivatives are not used for trading or speculative activities. We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133," on January 1, 2001. The adoption of SFAS No. 133 and No. 138 had no impact on income from continuing operations and was not material to income from discontinued operations. Effective January 1, 2001, we recognize all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, we may designate the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment, (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) a hedge of a net investment in a foreign operation. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. All derivatives used in continuing operations in the year ended December 31, 2001 were designated as fair value hedges. There were no derivatives designated as fair value hedges in the year ended December 31, 2002. There were also no derivatives designated as cash flow hedges or net investment hedges in the years ended December 31, 2002 or 2001. Prior to the adoption of SFAS No. 133 on January 1, 2001, gains or losses on derivatives designated as hedges of balance sheet items not carried at fair value were deferred and were ultimately recognized in income as part of the carrying amount of the related balance sheet item exposing us to interest rate risk. Accrual accounting was applied for derivatives designated as synthetic alterations with income and expense recorded in the same category as the related underlying on-balance sheet or off-balance sheet item synthetically altered. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For derivatives designated as hedges of balance sheet items where changes in fair value were recognized currently in earnings, the related derivative was included in the balance sheet at fair value, and changes in the fair value of the derivative were also recognized currently in earnings. INTERCHANGE INCOME Interchange income represents fees paid to us by merchant banks through the interchange network based on the purchase activity of our cardholders as partial compensation for taking credit risk, absorbing fraud losses and funding credit card receivables for a limited period prior to initial billing. Interchange income includes interchange fees on both owned and securitized business credit cards. INSURANCE Insurance premiums, net of commission expenses, on credit life, disability and unemployment policies, are earned monthly based upon the outstanding balance of the underlying receivables. Acquisition costs are deferred and amortized over the period the related premiums or commissions will be earned in order to match the expense with the anticipated revenue. Insurance loss reserves are based on estimated settlement amounts for reported losses, incurred but not reported losses and loss adjustment expenses. STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," defines a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it permits entities to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. We have elected to continue with the accounting methodology in Opinion No. 25 and, as a result, have provided pro forma disclosures of compensation expense for stock option plans, net of related tax effects, net income (loss) and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. Had compensation cost for these plans been determined using the fair value method, our compensation expense for stock option plans, net of related tax effects, net income (loss) and net income (loss) per common share would have changed to the following pro forma amounts:
2002 2001 2000 - --------------------------------------------------------------------------------------------- Compensation expense for stock option plans, net of related tax effects As reported $ 0 $ 0 $ 0 Pro forma 3,114 4,335 6,544 Net loss As reported $(24,182) $(70,533) $(156,684) Pro forma (27,296) (74,868) (163,228) Basic net loss per common share As reported Class A $ (1.03) $ (2.79) $ (6.28) Class B (0.94) (2.73) (6.21) Combined (0.97) (2.75) (6.24)
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2001 2000 - --------------------------------------------------------------------------------------------- Pro forma Class A $ (1.16) $ (2.96) $ (6.54) Class B (1.06) (2.90) (6.47) Combined (1.09) (2.92) (6.50) Diluted net loss per common share As reported Class A $ (1.03) $ (2.79) $ (6.23) Class B (0.94) (2.73) (6.16) Combined (0.97) (2.75) (6.19) Pro forma Class A $ (1.16) $ (2.96) $ (6.49) Class B (1.06) (2.90) (6.42) Combined (1.09) (2.92) (6.44) =============================================================================================
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31:
2002 2001 2000 - --------------------------------------------------------------------------------------------- Dividend yield 4% 3% 4% Expected life (in years) 7 7 7 Expected volatility 58% 56% 50% Risk-free interest rate 4.4% 4.6% 5.9% =============================================================================================
INCOME TAXES Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method. Under this method, we determine the net deferred tax asset or liability based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and give current recognition to changes in tax rates and laws. We evaluate the realizability of the deferred tax asset and recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In establishing the valuation allowance, we consider (1) estimates of expected future taxable income, (2) existing and projected book/tax differences, (3) tax planning strategies available, and (4) the general and industry specific economic outlook. This analysis is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Changes in estimate of deferred tax asset realizability, if applicable, are included in income tax expense (benefit) on the consolidated income statements. DISCONTINUED OPERATIONS Our exit from the mortgage business and discontinuance of the leasing business represent the disposal of business segments following Accounting Principles Board ("APB") Opinion No. 30. Accordingly, results of these operations are classified as discontinued in all periods presented. Our accounting for discontinued operations was not impacted by the issuance of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," since its provisions for disposal groups of long-lived assets are effective for disposal activities initiated after January 1, 2002. Estimates of future cash flows are used in the accounting for discontinued operations, including estimates of the future costs of mortgage business-related litigation and estimates of operating results through the remaining term of the leasing portfolio. As all estimates used are influenced by factors outside our control, there is uncertainty inherent in these estimates, making it reasonably 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) possible that they could change in the near term. Changes in estimates related to discontinued operations are included in gain (loss) on discontinuance of mortgage and leasing businesses on the consolidated income statements. EARNINGS PER SHARE Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Income available to common stockholders is computed by deducting preferred stock dividends from net income. Diluted earnings per common share is computed by dividing income available to common stockholders by the sum of average common shares outstanding plus dilutive common shares for the period. Potentially dilutive common shares include stock options and restricted stock issued under incentive plans. Since the cash dividends declared on our Class B Common Stock were higher than the dividends declared on the Class A Common Stock, basic and diluted earnings per common share have been calculated using the "two-class" method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. Both classes of our common stock share equally in undistributed earnings. We have also presented combined earnings per common share, which represents a weighted average of Class A and Class B earnings per common share. RECENTLY ISSUED ACCOUNTING STANDARDS In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which modifies the recognition and disclosure requirements of a company's guarantee arrangements. Effective January 1, 2003, the interpretation requires a company that enters into or modifies existing guarantee arrangements to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. Effective December 31, 2002, the interpretation also requires disclosure of additional information about guarantees. We do not expect the recognition and measurement provision to have a material impact on our financial position or results of operations. We have provided the disclosures required by the interpretation in Note 11. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51." The interpretation requires a company to consolidate a variable interest entity if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. The consolidation requirements apply to all variable interest entities created after January 31, 2002. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. We do not anticipate that the adoption of this interpretation will have a material effect on our financial position or results of operations since qualifying special-purpose entities, as defined in SFAS 140, are exempt from the consolidation requirements of this interpretation. CASH FLOW REPORTING Cash paid for interest was $52.2 million during 2002, $122.4 million during 2001, and $182.4 million during 2000. Cash paid for taxes was $1.7 million during 2002 and $4.1 million during 2000. The net cash refund received for taxes was $1.1 million in 2001. NOTE 3. RESTRICTED INTEREST-BEARING DEPOSITS AND INVESTMENTS AVAILABLE FOR SALE Restricted interest-bearing deposits include amounts held in escrow in connection with our litigation with Fleet Financial Group ("Fleet") of $73.4 million at December 31, 2002 and $72.0 million at December 31, 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2001. Restricted interest-bearing deposits also include amounts held in escrow in connection with other litigation-related contingencies of $2.6 million at December 31, 2002 and $36.1 million at December 31, 2001. Investments available for sale consisted of the following:
DECEMBER 31, ----------------------------------------------------------------------------------------------- 2002 2001 ---------------------------------------------- ---------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government securities $ 29,212 $ 45 $ 0 $ 29,257 $ 77,842 $1,238 $(100) $ 78,980 State and municipal securities 2,218 84 0 2,302 3,889 162 (46) 4,005 Collateralized mortgage obligations 3,408 29 (1) 3,436 20,909 409 0 21,318 Mortgage-backed securities 3,852 98 0 3,950 9,961 274 0 10,235 Equity securities (1) 20,223 30 0 20,253 26,621 0 0 26,621 Money market funds (2) 111,903 0 0 111,903 105,395 0 0 105,395 Other 121 0 0 121 126 0 (1) 125 - ------------------------------------------------------------------------------------------------------------------------- Total investments available for sale $170,937 $286 $(1) $171,222 $244,743 $2,083 $(147) $246,679 - ------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, ---------------------------------------------- 2000 ---------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------ ---------------------------------------------- U.S. Treasury and other U.S. Government securities $396,879 $ 831 $ (774) $396,936 State and municipal securities 4,280 192 (36) 4,436 Collateralized mortgage obligations 165,689 119 (2,911) 162,897 Mortgage-backed securities 91,520 764 (311) 91,973 Equity securities (1) 72,403 0 0 72,403 Money market funds (2) 4,289 0 0 4,289 Other 25,735 124 (1) 25,858 - ------------------------------------------------------------------------ Total investments available for sale $760,795 $2,030 $(4,033) $758,792 - ------------------------------------------------------------------------
(1) Includes venture capital investments of $13.5 million at December 31, 2002, $18.6 million at December 31, 2001 and $45.3 million at December 31, 2000. The amount shown as amortized cost represents fair value for these investments. See Note 2. (2) Money market funds include a $110.9 million investment at December 31, 2002 and a $97.0 million investment at December 31, 2001 in the Merrill Lynch Premier Institutional Money Market Fund. Distributions from money market funds were $1.1 million in the year ended December 31, 2002, $5.6 million in the year ended December 31, 2001 and $0.4 million in the year ended December 31, 2000 and were included in interest income on the consolidated income statements. Maturities of investments available for sale at December 31, 2002 were as follows:
AMORTIZED FAIR COST VALUE - ---------------------------------------------------------------------------------- Due in 1 year $ 22,816 $ 22,840 Due after 1 but within 5 years 1,981 2,028 Due after 5 but within 10 years 5,790 5,817 Due after 10 years 843 874 -------- -------- Subtotal 31,430 31,559 Collateralized mortgage obligations 3,408 3,436 Mortgage-backed securities 3,852 3,950 Equity securities 20,223 20,253 Money market funds 111,903 111,903 Other 121 121 - ---------------------------------------------------------------------------------- Total investments available for sale $170,937 $171,222 ==================================================================================
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net realized gains on the sale of investments are included in other revenues in the consolidated income statements. Realized gains and losses on sales of investments available for sale were as follows in the years ended December 31:
2002 2001 2000 - ----------------------------------------------------------------------------------------- Gross realized gains $1,240 $ 3,456 $11,728 Gross realized losses (549) (10,100) (2,564) - ----------------------------------------------------------------------------------------- Net realized gains (losses) $ 691 $ (6,644) $ 9,164 =========================================================================================
Investments deposited with insurance regulatory authorities to meet statutory requirements or held by a trustee for the benefit of primary insurance carriers were $6.1 million at December 31, 2002 and $6.2 million at December 31, 2001. At December 31, 2001, there were also $32.4 million of investments pledged to secure repurchase agreements. NOTE 4. RECEIVABLES Receivables on the balance sheet, including those held for sale, consisted of the following:
DECEMBER 31, - --------------------------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------------------------- Business credit card receivables $445,083 $416,265 Other receivables 25,589 28,189 - --------------------------------------------------------------------------------- Gross receivables 470,672 444,454 - --------------------------------------------------------------------------------- Add: Deferred origination costs, net of deferred fees 30,834 20,924 Less: Allowance for receivable losses Business credit cards (44,466) (41,169) Other receivables (1,693) (802) - --------------------------------------------------------------------------------- Total allowance (46,159) (41,971) - --------------------------------------------------------------------------------- Receivables, net $455,347 $423,407 =================================================================================
In June 2001, Advanta Corp. provided a $353 thousand mortgage financing loan and a $100 thousand revolving home equity line of credit to an executive officer as part of a relocation agreement. The line of credit may be used to finance certain costs associated with establishing and maintaining the residence. The interest rate on the mortgage financing loan and revolving note is 7% and both loans are secured with liens against the property. The mortgage financing loan extends through June 30, 2031 and the line of credit extends through June 30, 2011. Both loans are subject to certain acceleration provisions. Repayment of principal and interest is deferred for the initial three-year period of the respective loans. The outstanding balances on these loans are included in other receivables and were $427 thousand at December 31, 2002 and $367 thousand at December 31, 2001. Borrowings on the line of credit were $33 thousand in 2002. There were no borrowings on the line of credit in 2001. The aggregate of other advances to executive officers and directors was less than $225 thousand at December 31, 2002. There was no significant activity in these advances during the year ended December 31, 2002. Approximately 14% of our owned business credit card receivables are concentrated in the state of California. No other single state had a concentration of receivables in excess of 10% of total receivables. We have commitments to extend credit to our business credit card customers, representing unused lines of credit, of $6.1 billion at December 31, 2002 and $4.6 billion at December 31, 2001. Lines of credit on our customers' business credit cards totaled $8.6 billion at December 31, 2002 and $6.6 billion at December 31, 2001. We believe that our customers' utilization of their lines of credit will continue to be substantially less than the amount of the commitments, as has been our experience to date. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. ALLOWANCE FOR RECEIVABLE LOSSES The following table displays five years of allowance history:
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------- Balance at January 1 $ 41,971 $ 33,367 $ 14,865 $ 10,650 $129,053 Provision for credit losses 40,906 35,976 36,309 22,506 38,329 Provision for interest and fee losses (1) 6,889 4,404 2,293 889 9,396 Allowance on receivables sold or transferred 0 0 0 (5,791) (118,420) Gross principal charge-offs: Business credit cards (41,660) (30,540) (20,174) (11,341) (11,126) Other receivables (16) (3) (2) (2,404) 0 Consumer credit cards 0 0 0 0 (30,999) - ---------------------------------------------------------------------------------------------- Total gross principal charge-offs (41,676) (30,543) (20,176) (13,745) (42,125) - ---------------------------------------------------------------------------------------------- Principal recoveries: Business credit cards 4,260 3,171 2,369 1,238 1,093 Other receivables 0 0 0 7 1 Consumer credit cards 0 0 0 0 2,719 - ---------------------------------------------------------------------------------------------- Total principal recoveries 4,260 3,171 2,369 1,245 3,813 - ---------------------------------------------------------------------------------------------- Net principal charge-offs (37,416) (27,372) (17,807) (12,500) (38,312) - ---------------------------------------------------------------------------------------------- Interest and fee charge-offs: Business credit cards (6,191) (4,404) (2,293) (889) (816) Consumer credit cards 0 0 0 0 (8,580) - ---------------------------------------------------------------------------------------------- Total interest and fee charge-offs (6,191) (4,404) (2,293) (889) (9,396) - ---------------------------------------------------------------------------------------------- Balance at December 31 $ 46,159 $ 41,971 $ 33,367 $ 14,865 $ 10,650 ==============================================================================================
(1) See "Interest and Fee Income on Receivables" in Note 2 for a discussion of the change in income billing practice effective October 1, 2002. Provisions for interest and fee losses are recorded as direct reductions to interest and fee income. NOTE 6. SECURITIZATION ACTIVITIES Accounts receivable from securitizations consisted of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- Retained interests in securitizations $113,422 $ 88,658 Accrued interest and fees on securitized receivables, net 56,171 54,143 Amounts due from the trust 28,645 26,182 - ---------------------------------------------------------------------------------- Total accounts receivable from securitizations $198,238 $168,983 ==================================================================================
59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents business credit card securitization data for the years ended December 31, and the key assumptions used in measuring the fair value of retained interests in securitizations at the time of each new securitization or replenishment during those periods.
2002 2001 2000 - ------------------------------------------------------------------------------------------------- Average securitized receivables $1,727,864 $1,490,052 $ 973,025 Securitization income 118,976 108,186 67,917 Discount accretion 10,658 10,084 6,048 Interchange income 70,830 61,722 39,684 Servicing revenues 33,973 29,221 17,310 Proceeds from new securitizations 494,486 272,549 512,619 Proceeds from collections reinvested in revolving-period securitizations 3,964,178 3,283,737 2,011,733 Cash flows received on retained interests 205,027 175,445 91,517 Key assumptions: Discount rate 9.0% - 15.0% 12.0% - 15.0% 12.0% Monthly payment rate 18.2% - 21.0% 17.9% - 21.0% 18.8% - 19.7% Loss rate 9.4% - 12.8% 7.8% - 12.4% 7.2% - 7.8% Interest yield, net of interest earned by note holders 14.9% - 15.9% 10.8% - 15.8% 10.4% - 10.8% - -------------------------------------------------------------------------------------------------
There were no purchases of delinquent accounts during 2002, 2001 or 2000. In 2002, we revised our interest yield assumption to include both finance charge and late fee yield. Previously, the interest yield assumption included only finance charge yield. This change in assumption had no material impact on securitization income in the year ended December 31, 2002. The retained interest-only strip valuation includes cash flow projections over the three month weighted average life of existing receivables at both December 31, 2002 and 2001. The following assumptions were used in measuring the fair value of retained interests in business credit card securitizations at December 31, 2002 and 2001. The assumptions listed represent weighted averages of assumptions used for each securitization.
2002 2001 - ------------------------------------------------------------------------------------------ Discount rate 11.4% - 14.0% 12.0% - 15.0% Monthly payment rate 19.3% - 21.0% 18.2% - 21.0% Loss rate 9.4% - 10.3% 10.4% - 12.4% Interest yield, net of interest earned by note holders 15.0% 15.8% ==========================================================================================
In addition to the assumptions identified above, management also considered qualitative factors such as the impact of the current economic environment on the performance of the business credit card receivables sold and the potential volatility of the current market for similar instruments in assessing the fair value of retained interests in business credit card securitizations. We have prepared sensitivity analyses of the valuations of retained interests in securitizations. The sensitivity analyses show the hypothetical adverse effect on the fair value of those assets of two unfavorable variations from the expected levels for each key assumption, independently from any change in another key 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assumption. The following are the results of those sensitivity analyses on the valuation at December 31, 2002 and 2001.
2002 2001 - --------------------------------------------------------------------------------- Fair value at December 31: $113,422 $ 88,658 Effect on fair value of the following hypothetical changes in key assumptions: Discount rate increased by 2% $ (1,689) $ (741) Discount rate increased by 4% (3,313) (1,474) Monthly payment rate at 110% of base assumption (1,617) 0 Monthly payment rate at 125% of base assumption (2,936) (1,635) Loss rate at 110% of base assumption (5,245) (4,031) Loss rate at 125% of base assumption (13,111) (10,040) Interest yield, net of interest earned by note holders, decreased by 1% (5,609) (3,888) Interest yield, net of interest earned by note holders, decreased by 2% (11,218) (7,764) =================================================================================
The objective of these hypothetical analyses is to measure the sensitivity of the fair value of the retained interests to changes in assumptions. The methodology used to calculate the fair value in the analyses is a discounted cash flow analysis, the same methodology used to estimate fair value as described in Note 2. These estimates do not factor in the impact of simultaneous changes in other key assumptions. The above scenarios do not reflect management's expectation regarding the future direction of these rates, and they depict only certain possibilities out of a large set of possible scenarios. MANAGED RECEIVABLE DATA Our managed receivable portfolio is comprised of both owned receivables and securitized business credit card receivables. Performance on a managed receivable portfolio basis is relevant because we retain interests in the securitized receivables and, therefore, we have a financial interest in and exposure to the performance of the securitized receivables. Credit quality data on the managed receivable portfolio is as follows:
DECEMBER 31, - ------------------------------------------------------------------------------------- 2002 (1) 2001 - ------------------------------------------------------------------------------------- Owned business credit card receivables $ 445,083 $ 416,265 Owned other receivables 25,589 28,189 Securitized business credit card receivables 2,149,147 1,626,709 - ------------------------------------------------------------------------------------- Total managed receivables 2,619,819 2,071,163 - ------------------------------------------------------------------------------------- Receivables 90 days or more delinquent: Owned 12,755 14,474 Securitized 69,335 52,991 Total managed 82,090 67,465 Receivables 30 days or more delinquent: Owned 25,197 29,520 Securitized 136,128 107,997 Total managed 161,325 137,517 Nonaccrual receivables: Owned 5,525 20,052 Securitized 27,688 61,614 Total managed 33,213 81,666
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, - ------------------------------------------------------------------------------------- 2002 (1) 2001 - ------------------------------------------------------------------------------------- Accruing receivables past due 90 days or more: Owned 10,535 0 Securitized 61,045 0 Total managed 71,580 0 Net principal charge-offs for the year ended December 31 (2): Owned 37,416 27,372 Securitized 156,283 116,221 Total managed 193,699 143,593 =====================================================================================
(1) See "Interest and Fee Income on Receivables" in Note 2 for a discussion of the change in income billing practice effective October 1, 2002. (2) Net principal charge-offs for the year ended December 31, 2000 were $17.8 million on owned receivables and $46.8 million on securitized receivables, for a total of $64.6 million on managed receivables. The geographic concentration of managed receivables was as follows:
DECEMBER 31, - ---------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------- California $ 349,968 13% $ 269,860 13% Florida 190,500 7 157,555 8 Texas 189,412 7 147,268 7 New York 168,285 7 131,602 6 Illinois 114,681 4 91,910 4 All other 1,606,973 62 1,272,968 62 - ---------------------------------------------------------------------------------------------- Total managed receivables $2,619,819 100% $2,071,163 100% ==============================================================================================
NOTE 7. SELECTED BALANCE SHEET INFORMATION Other assets consisted of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- Current and deferred federal and state income taxes, net $ 84,684 $ 94,922 Amounts due from transfer of consumer credit card business 70,545 70,545 Cash surrender value of insurance contracts 24,437 26,065 Investment in Fleet Credit Card LLC 30,000 20,000 Intangible assets 3,085 100 Other 64,907 53,057 - ---------------------------------------------------------------------------------- Total other assets $277,658 $264,689 ==================================================================================
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other liabilities consisted of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- Accounts payable and accrued expenses $ 36,741 $ 43,554 Business credit card rewards 16,416 10,389 Accrued interest payable 5,641 9,095 Other (1) 171,588 114,529 - ---------------------------------------------------------------------------------- Total other liabilities $230,386 $177,567 ==================================================================================
(1) A substantial portion of other liabilities represents our litigation reserves. NOTE 8. DEPOSITS Deposit accounts consist of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- Demand deposits $ 6,561 $ 6,500 Money market savings 2,380 3,510 Time deposits of $100,000 or less 441,611 389,888 Time deposits of more than $100,000 263,476 237,017 - ---------------------------------------------------------------------------------- Total deposits $714,028 $636,915 ==================================================================================
Time deposit maturities are as follows: Year Ended December 31, 2003 $486,874 2004 188,314 2005 29,769 2006 27 2007 103
In the second quarter of 2001, we sold $389.7 million of deposit liabilities to E*TRADE Bank, a wholly owned subsidiary of E*TRADE Group, Inc. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9. DEBT The composition of debt was as follows:
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- SENIOR DEBT RediReserve demand certificates, variable (2.75%-3.50%) $ 37,313 $ 28,312 12 month senior retail notes, fixed (5.12%-5.59%) 101,319 125,450 18 month senior retail notes, fixed (5.59%-8.16%) 10,443 12,097 24 month senior retail notes, fixed (6.06%-11.42%) 70,398 77,228 30 month senior retail notes, fixed (6.16%-11.47%) 16,727 15,334 48 month senior retail notes, fixed (6.30%-11.51%) 11,978 9,670 60 month senior retail notes, fixed (6.53%-11.56%) 49,927 36,258 Medium-term notes, fixed (6.92%-6.98%) 0 199 Other senior retail notes, fixed (3.20%-11.33%) 17,781 18,453 - ---------------------------------------------------------------------------------- Total senior debt 315,886 323,001 Subordinated retail notes, fixed (9.08%-9.54%) 0 581 - ---------------------------------------------------------------------------------- Total debt $315,886 $323,582 ==================================================================================
The annual contractual maturities of debt are as follows: Year Ended December 31, 2003 $206,897 2004 62,379 2005 16,770 2006 8,293 2007 21,547
The average interest cost of our debt was 7.56% during 2002, 9.47% during 2001, and 8.17% during 2000. NOTE 10. OTHER BORROWINGS There were no other borrowings at December 31, 2002. Other borrowings at December 31, 2001 were comprised of $32.3 million of securities sold under repurchase agreements. At December 31, 2002, Advanta Bank Corp. had federal funds purchased facilities available with two correspondent banks totaling $77.5 million. Advanta Bank Corp had no borrowings under these facilities as of December 31, 2002 or 2001. There were no federal funds purchased facilities available at Advanta National Bank at December 31, 2002. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table displays information related to selected types of our short-term borrowings:
2002 2001 2000 - ----------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE - ----------------------------------------------------------------------------------------------- At year end: Securities sold under repurchase agreements $ 0 0% $ 32,317 2.09% $ 0 0% Average for the year: Securities sold under repurchase agreements $ 3,527 1.86% $ 16,705 5.74% $ 36,960 6.14% Term federal funds, federal funds purchased and FHLB advances 0 0 0 0 62,435 6.14 - ----------------------------------------------------------------------------------------------- Total $ 3,527 1.86% $ 16,705 5.74% $ 99,395 6.14% - ----------------------------------------------------------------------------------------------- Maximum month-end balance: Securities sold under repurchase agreements $25,035 $148,545 $149,628 Term federal funds, federal funds purchased and FHLB advances 0 0 210,000 - -----------------------------------------------------------------------------------------------
The weighted average interest rates were calculated by dividing the interest expense for the period by the average amount of short-term borrowings outstanding during the period, calculated as an average of daily amounts. NOTE 11. COMMITMENTS AND CONTINGENCIES LITIGATION CONTINGENCIES On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which we deny, center around Fleet's assertions that we failed to complete certain post-closing adjustments to the value of the assets and liabilities we contributed to Fleet Credit Card LLC in connection with the transfer of our consumer credit card business to Fleet Credit Card LLC (the "Consumer Credit Card Transaction") in 1998. We filed an answer to the complaint, and we also filed a countercomplaint against Fleet for damages we believe have been caused by certain actions of Fleet. As a result of related litigation with Fleet, $70.1 million of our reserves in connection with this litigation were funded in an escrow account in February 2001. On January 22, 2003, the trial court issued a decision ruling on all but one of the remaining issues, and ordered further briefing on the remaining outstanding issue. In the year ended December 31, 2002, we recognized a $43.0 million pretax loss on the transfer of our consumer credit card business, representing the estimated impact of implementing the court's decisions. This amount represents the amount in excess of the reserves we have been carrying for the litigation, which was based on our expectations of the outcome of the litigation. We estimate that the court's decisions will have a favorable impact to our liquidity since we would recoup approximately $8 million in cash from the escrow account funded in February 2001, after payment of amounts due to Fleet. The court's ruling on the remaining outstanding issue and/or the ultimate resolution of any issues that may be appealed could reduce or eliminate the charge to our earnings, although there can be no assurance as to the potential benefit, if any, to earnings at this time. In an ongoing element of Fleet's disputes with us, Fleet has claimed $508 million of tax deductions from its partnership with us in connection with the Consumer Credit Card Transaction, which are required under the law to be allocated solely to Advanta. As required, we reported these deductions on our 1998 corporate tax return. However, we have not used or booked the benefit from most of these deductions because for tax purposes we have a very substantial net operating loss carryforward. We have approximately $636 million of net operating loss carryforwards at December 31, 2002 and have booked no benefit from $402 million of these net operating loss carryforwards. The deductions are attributable to deductions for bad debt reserves that we expensed in computing our book income or loss before the Consumer Credit Card Transaction, but which 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) were not deductible by Advanta for tax purposes until after the closing of the transaction in 1998. The tax law requires "built in losses" like these to be deducted by the party who contributed the assets to the partnership, in this case, Advanta. The Internal Revenue Service agents who have examined the returns at issue have to ensure that both parties do not obtain the deductions and therefore, following standard practice, proposed to disallow the deductions to both parties until there is a final resolution. The deductions, as well as the allocation of a gain from the sale of a partnership asset of approximately $47 million, are now before the IRS Regional Office of Appeals. On January 15, 2003, Fleet filed a complaint in Rhode Island Superior Court seeking a declaratory judgment that we indemnify Fleet under the applicable partnership agreement for any damage Fleet incurs by not being entitled to the $508 million of tax deductions. Fleet is also seeking a declaratory judgment that it should not indemnify us for any damages that we incur due to any allocation to Advanta of the $47 million gain on the sale of a partnership asset. Fleet's claim for indemnification appears to be brought by Fleet in the hope that we will advise the IRS that we will agree with a substantial part of Fleet's tax position. On February 28, 2003, we filed a motion to dismiss the complaint. We believe that the indemnification provision in the partnership agreement does not indemnify Fleet for damages incurred related to the tax deductions and that the lawsuit is frivolous, having no legal basis whatsoever. We do not expect this lawsuit or the tax issues discussed above to have a material adverse effect on our financial condition or results of operations. On December 5, 2000, a former executive of Advanta obtained a jury verdict against us in the amount of $3.9 million in the United States District Court for the Eastern District of Pennsylvania, in connection with various claims against Advanta related to the executive's termination of employment. In September 2001, the District Court Judge issued orders denying both parties' post-trial motions. A judgment in the amount of approximately $6 million, which includes the $3.9 million described above, was entered against Advanta. In September 2001, we filed an appeal to the United States Court of Appeals for the Third Circuit. We have posted a supersedeas bond in the amount of $8 million. On July 8, 2002, the Court of Appeals rendered a judgment affirming in part and reversing in part the judgment. The Court of Appeals reduced the total damage award by approximately $1.1 million and also ordered the District Court to reduce the amount of liquidated damages based on the reduced award. The effect of this decision will be to reduce the judgment to approximately $4.7 million rather than $6 million. On February 24, 2003, the Supreme Court of the United States denied our petition for certiorari seeking a new trial instead of the reduced verdict. The District Court Judge has not yet ruled on the executive's petition for attorney's fees and costs in the amount of approximately $1.4 million, which we have contested. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on our financial position or future operating results, based on the level of reserves we have established in connection with this litigation. On July 26, 2001, Chase Manhattan Mortgage Corporation ("Chase") filed a complaint against Advanta Corp. and certain of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, that we breached our contract with Chase in connection with the Mortgage Transaction. Chase claims that we misled Chase concerning the value of certain of the assets sold to Chase. In September 2001, we filed an answer to the complaint in which we denied all of the substantive allegations of the complaint and asserted a counterclaim against Chase for breach of contract relating to funds owed by Chase to us in connection with the transaction. The matter is in discovery and trial is scheduled to begin in January 2004. We believe that the lawsuit is without merit and will vigorously defend Advanta in this litigation. We do not expect this lawsuit to have any impact on our continuing business and, based on the complete lack of merit, we do not anticipate that the lawsuit will have a material adverse impact on our financial position or future operating results. In addition to the cases described above, Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Management believes that the aggregate loss, if any, resulting from these actions will not have a material adverse effect on our financial position or results of our operations based on the level of litigation reserves we have established and our current expectations regarding the ultimate resolutions of these existing actions. Our litigation reserves are estimated based on the status of litigation and our assessment of the ultimate resolution of each action after consultation with our attorneys. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of our litigation, claims and other legal proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. Changes in estimates or other charges related to litigation are included in operating expenses of the respective business segment if related to continuing operations, or gain (loss) on discontinuance of mortgage and leasing businesses if related to discontinued operations. OBLIGATIONS UNDER GUARANTEES In the normal course of business, we enter into agreements pursuant to which we may be obligated under specified circumstances to indemnify the counterparties with respect to certain matters. These indemnification obligations typically arise in the context of contracts entered into by us to, among other things, purchase or sell assets or services, service assets (including for unaffiliated third parties), lease real property and license intellectual property. The contracts we enter into in the normal course of business generally require us to hold the other party harmless against losses arising from a breach of a representation, warranty or covenant. Under the indemnification provisions, payment by us is generally conditioned upon the other party making a claim pursuant to the procedures specified in the particular contract, and the procedures typically allow us to challenge the other party's claims. Further, our indemnification obligations may be limited in time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us under an indemnification agreement. Also, in connection with the securitization of receivables, we enter into agreements pursuant to which we agree to indemnify other parties to these transactions. The agreements contain standard representations and warranties about the assets and include indemnification provisions under certain circumstances involving a breach of these representations or warranties. In connection with the securitization transactions we also include indemnifications that protect other parties to the transactions upon the occurrence of certain events such as violations of securities law and certain tax matters. Contingencies triggering material indemnification obligations have not occurred historically and are not expected to occur. It is not possible to determine the maximum potential amount of future payments under these or similar arrangements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. There are no amounts reflected on the consolidated balance sheets as of December 31, 2002 or 2001 related to these indemnifications. In connection with our exit from certain businesses, we have entered into agreements that include customary indemnification obligations to the other parties. Litigation relating to an indemnification provision of an agreement we entered into with Fleet as part of the Consumer Credit Card Transaction is described above in "Litigation Contingencies." In general, the agreements we have entered into in connection with our disposition of assets, liabilities and/or businesses provide that we will indemnify the other parties to the transactions for certain losses relating to the assets, liabilities or business acquired by them. The obligations to indemnify are transaction and circumstance specific, and in most cases the other party must suffer a minimum threshold amount of losses before our indemnification obligation is triggered. Under the indemnification provisions, payment by us is generally conditioned upon the other party making a claim pursuant to the procedures specified in the particular contract, and the procedures typically allow us to challenge the other party's claims. It is not possible to determine the maximum potential amount of future payments under these or similar arrangements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. There are no amounts reflected on the consolidated balance sheets as of December 31, 2002 or 2001 related to these indemnifications. See Note 24 for discussion of parent guarantees of subsidiary obligations. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMITMENTS We lease office space in several states under leases accounted for as operating leases. Total rent expense related to continuing operations was $5.5 million in 2002, $5.2 million in 2001 and $5.6 million in 2000. The future minimum lease payments of non-cancelable operating leases are as follows: Year Ended December 31, 2003 $5,138 2004 4,057 2005 2,966 2006 462 2007 197 Thereafter 49
In the normal course of business, we have commitments to extend credit to our business credit card customers. See Note 4 for further discussion. NOTE 12. MANDATORILY REDEEMABLE PREFERRED SECURITIES In December 1996, a newly formed statutory business trust established and wholly-owned by Advanta Corp., issued $100 million of capital securities, representing preferred beneficial interests in the assets of the trust. We used the proceeds from the sale for general corporate purposes. The assets of the trust consist of $100 million of 8.99% junior subordinated debentures issued by Advanta Corp. due December 17, 2026. The capital securities will be subject to mandatory redemption under certain circumstances. These circumstances include the optional prepayment by Advanta Corp. of the junior subordinated debentures at any time on or after December 17, 2006 at an amount per capital security equal to 104.495% of the principal amount plus accrued and unpaid distributions. This amount declines ratably on each December 17 thereafter to 100% on December 17, 2016. Our obligations, in the aggregate, provide a full and unconditional guarantee of payments of distributions and other amounts due on the capital securities. Dividends on the capital securities are cumulative, payable semi-annually in arrears at an annual rate of 8.99%, and are deferrable at our option for up to ten consecutive semi-annual periods, provided that no extension may extend beyond December 17, 2026. We cannot pay dividends on our preferred or common stocks during deferments. Dividends on the capital securities have been classified as minority interest in income of consolidated subsidiary in the consolidated income statements. The trust has no operations or assets separate from its investment in the junior subordinated debentures. Separate financial statements of the trust are not presented because management has determined that they would not be meaningful to investors. NOTE 13. CAPITAL STOCK Class A Preferred Stock is entitled to 1/2 vote per share and a non-cumulative dividend of $140 per share per year, which must be paid prior to any dividend on the common stock. The redemption price of the Class A Preferred Stock is equivalent to its par value and redemption is only permitted upon approval of the Board of Directors of Advanta Corp. In 2000, we retired 405,000 shares of Class A Treasury stock and 445,600 shares of Class B Treasury stock. In 2001, the Board of Directors of Advanta Corp. authorized the purchase of up to 1.5 million shares of Advanta Corp. common stock or the equivalent dollar amount of our capital securities, or some combination thereof. In August 2002, the Board of Directors authorized the purchase of up to an additional 1.5 million shares of Advanta Corp. common stock, bringing the total authorization to up to 3.0 million shares. During the 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) year ended December 31, 2001, we repurchased 693,300 shares of our Class B Common Stock. In the year ended December 31, 2002, we repurchased 1,554,759 shares of our Class B Common Stock. Cash dividends per share of common stock declared during each of the years ended December 31, 2002, 2001 and 2000 were $0.252 for Class A Common Stock and $0.302 for Class B Common Stock. NOTE 14. BENEFIT PLANS We have adopted a stock-based incentive plan designed to provide incentives to participating employees to remain in our employ and devote themselves to Advanta's success. Our incentive plan authorizes an aggregate of 20.0 million shares of Advanta Corp. Class B Common Stock for the grant of options, awards of shares of stock or awards of stock appreciation rights to employees and directors. Shares available for future grant were 8.8 million at December 31, 2002 and 11.9 million at December 31, 2001. RESTRICTED STOCK AWARDS Under our management incentive programs, eligible employees were given the opportunity to elect to take portions of their anticipated or target bonus payments for future years in the form of restricted shares of Advanta Corp. Common Stock. The current program covers the performance years 2002 through 2005. To the extent that these elections were made, or were required by the terms of the programs for executive officers, restricted shares were issued to employees. The number of shares granted to employees is determined by dividing the amount of future target bonus payments that the employee had elected to receive in stock by the market price as determined under the incentive program. The restricted shares are subject to forfeiture prior to vesting should the employee terminate employment with us. Restricted shares vest 10 years from the date of grant. Vesting was and may continue to be accelerated annually with respect to the shares granted under the program covering the particular performance year, based on the extent to which the employee and Advanta met or meet their respective performance goals for that performance year. When newly eligible employees elect to participate in this program, the number of shares issued to them with respect to their target bonus payments for the relevant performance years is determined based on the average market price of the stock for the 90 days prior to the first day of the month in which they are eligible to join the program. Compensation expense on restricted shares is recognized over the vesting period of the shares. Compensation expense recognized in connection with restricted shares was $2.5 million in 2002, $3.3 million in 2001 and $5.3 million in 2000. Due to the restructuring of the company in the first quarter of 2001, we implemented a program whereby certain restricted stock was exchanged for cash and stock options in a tender offer. The cash and stock options are subject to the same performance conditions and vesting requirements as the tendered restricted stock. The stock options expire two years after the vesting date. There were 117 thousand shares of restricted stock tendered with a weighted average price at date of issuance of $21.11, and 232 thousand options were issued in connection with the tender offer with an exercise price of $10.63. Noncash charges associated with the tender offer and related issuance of stock options were $1.4 million and were included in unusual charges in the consolidated income statements. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Substantially all restricted shares outstanding during the three years ended December 31, 2002 were Class B Common Stock. The following table summarizes restricted share activity for the three years ended December 31:
2002 2001 2000 (SHARES IN THOUSANDS) ---------------------------- ---------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF PRICE AT DATE OF NUMBER OF PRICE AT DATE OF NUMBER OF PRICE AT DATE OF SHARES ISSUANCE SHARES ISSUANCE SHARES ISSUANCE - ----------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 187 $9 984 $17 1,750 $15 Issued 2,740 8 82 9 201 13 Released from restriction (135) 8 (486) 14 (540) 12 Exchanged in tender offer 0 0 (117) 21 0 0 Forfeited (300) 9 (276) 22 (427) 15 - ----------------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,492 $8 187 $ 9 984 $17 =================================================================================================================
STOCK OPTIONS Stock option transactions in the years ended December 31 were as follows:
2002 2001 2000 (SHARES IN THOUSANDS) ---------------------------- ---------------------------- ---------------------------- NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE - ----------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,897 $11 3,049 $13 2,728 $15 Granted 2,236 9 1,770 11 1,128 9 Exercised (45) 8 (424) 8 (20) 8 Forfeited (312) 9 (1,498) 16 (787) 14 - ----------------------------------------------------------------------------------------------------------------- Outstanding at end of year 4,776 $10 2,897 $11 3,049 $13 - ----------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 1,490 787 1,156 - ----------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 3.80 $ 4.93 $ 3.77 =================================================================================================================
The following table summarizes information about stock options outstanding at December 31, 2002.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------ (SHARES IN THOUSANDS) NUMBER WEIGHTED AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE - ---------------------------------------------------------------------------------------------------- $ 1.00 to $ 5.00 237 7.8 years $ 5 157 $ 5 $ 5.01 to $10.00 2,922 6.6 8 455 8 $10.01 to $15.00 1,340 7.0 13 603 12 $15.01 to $20.00 145 5.5 19 143 19 $20.01 to $25.00 132 3.5 22 132 22 - ---------------------------------------------------------------------------------------------------- Total 4,776 6.7 $10 1,490 $12 ====================================================================================================
70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options generally vest over a four-year period and expire 10 years after the date of grant. Substantially all options outstanding during the three years ended December 31, 2002 were options to purchase Class B Common Stock. In 2001, we accelerated vesting of 32% of outstanding options that were not vested at the date of the closing of the Mortgage Transaction. This acceleration resulted in a noncash charge of $1.3 million that was included in unusual charges in the consolidated income statements. We also extended the exercise period for options held by employees in the discontinued businesses for an additional six months following the date of the Mortgage Transaction, February 28, 2001. This extension resulted in a noncash charge of $650 thousand that was included in the loss on discontinuance of mortgage and leasing businesses in the consolidated income statements. Due to the restructuring of the company in the first quarter of 2001, we implemented a program whereby certain out-of-the-money options were exchanged for shares of stock. There were 510 thousand options forfeited in connection with this program with a weighted average exercise price of $19.42. Noncash charges associated with the issuance of the stock were $2.2 million and were included in unusual charges in the consolidated income statements. Shares granted in exchange for options were immediately vested but their distribution is deferred. Participants will receive distributions of 25% of their shares on the first, second, third and fourth anniversary of the program or they may elect to defer distributions of any installment of shares until the second through tenth anniversary of the program. If a participant terminates employment with Advanta, any unpaid installments will be distributed on the tenth anniversary of the program. As of December 31, 2002, there were 121 thousand shares remaining to be distributed. STOCK APPRECIATION RIGHTS AND PHANTOM STOCK In connection with reviewing our compensation plans after the Mortgage Transaction and restructuring of corporate functions in 2001, we implemented a program whereby all outstanding stock appreciation rights and shares of phantom stock were terminated in 2001 in exchange for cash to be paid through a deferred compensation arrangement. We recorded charges of $2.9 million in 2001 associated with this exchange as unusual charges in the consolidated income statements. Participants will receive distributions of 25% of their cash on the first, second, third and fourth anniversary of the program or they may elect to defer payment of any installment of cash until the second through tenth anniversary of the program. If a participant terminates employment with Advanta, any unpaid installments will be distributed on the tenth anniversary of the program. Compensation expense (benefit) related to stock appreciation rights was ($512) thousand in 2000. Compensation expense (benefit) related to the appreciation (depreciation) on shares of phantom stock was ($268) thousand in 2000. There was no compensation expense (benefit) related to stock appreciation rights or shares of phantom stock in 2001 prior to the exchange. There were no stock appreciation rights or shares of phantom stock outstanding at December 31, 2002 or 2001 due to the exchange discussed above. EMPLOYEE STOCK PURCHASE PLAN We have an Employee Stock Purchase Plan, which allows employees and directors to purchase Advanta Corp. Class B Common Stock at a 15% discount from the market price without paying brokerage fees. We report this 15% discount as compensation expense and incurred expense of $56 thousand in 2002, $83 thousand in 2001 and $163 thousand in 2000. All shares of Advanta Corp. Class B Common Stock purchased by the plan in the three years ended December 31, 2002 were purchased on the open market. EMPLOYEE SAVINGS PLAN Our Employee Savings Plan is a defined contribution plan available to all of our employees who have reached age 21 with one year of service. It provides tax-deferred savings and investment opportunities, including the ability to invest in Advanta Corp. Class B Common Stock. The plan provides for discretionary employer 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contributions equal to a portion of the first 5% of an employee's compensation contributed to the plan. For the three years ended December 31, 2002, 2001 and 2000, our contributions equaled 100% of the first 5% of participating employees' compensation contributed to the plan. The compensation expense for this plan totaled $1.2 million in 2002, $1.3 million in 2001 and $3.1 million in 2000. All shares of Advanta Corp. Class B Common Stock purchased by the plan in the three years ended December 31, 2002 were purchased on the open market. EMPLOYEE STOCK OWNERSHIP PLAN On September 10, 1998, our Board of Directors authorized the formation of an Employee Stock Ownership Plan (the "ESOP"), available to all of our employees who have reached age 21 with one year of service. During 1998, the ESOP borrowed approximately $12.6 million from Advanta Corp. and used the proceeds to purchase approximately 1,000,000 shares of Class A Common Stock. The ESOP loan is repayable with an interest rate of 8% over 30 years. We make annual contributions to the ESOP equal to the ESOP's debt service less dividends received on ESOP shares. As the ESOP makes each loan payment, an appropriate percentage of stock is allocated to eligible employees' accounts based on relative participant compensation. Shares are also allocated to participants equal to the value of dividends on allocated shares used for loan payments. Unallocated shares are reported as unearned ESOP shares in the balance sheet. As shares of common stock acquired by the ESOP are committed to be released to each employee, we report compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are used to fund debt service of the ESOP. ESOP compensation expense was $350 thousand in the year ended December 31, 2002, $431 thousand in the year ended December 31, 2001 and $455 thousand in the year ended December 31, 2000. At December 31, 2002, there were 860,804 unearned and unallocated ESOP shares with a fair value of $7.7 million. At December 31, 2001, there were 896,317 unearned and unallocated ESOP shares with a fair value of $8.9 million. DEFERRED CASH COMPENSATION PLANS We offer elective, nonqualified deferred compensation plans to eligible executives and non-employee directors, which allow them to defer a portion of their cash compensation on a pretax basis. The executive plan contains provisions related to minimum contribution levels and both plans have provisions related to deferral periods with respect to any individual's participation. Plan participants make irrevocable elections at the date of deferral as to deferral period and date of distribution. Distribution from the plans may be either at retirement or at an earlier date, and can be either in a lump sum or in installment payments. Interest is credited to participants' accounts at the rate of 125% of the 10-year rolling average interest rate on 10-Year U.S. Treasury Notes. To assist in funding the deferred compensation liability, we have invested in life insurance contracts. Compensation expense related to these deferred cash compensation plans was $369 thousand in the year ended December 31, 2002, $342 thousand in the year ended December 31, 2001 and $447 thousand in the year ended December 31, 2000. NOTE 15. REGULATORY AGREEMENTS Advanta Bank Corp. and Advanta National Bank are wholly owned subsidiaries of Advanta Corp. In 2000, Advanta Bank Corp. entered into agreements with its bank regulatory agencies, primarily relating to the bank's subprime lending operations. These agreements imposed temporary deposit growth limits at Advanta Bank Corp. and required prior regulatory approval of cash dividends. In April 2002, the agreements were removed and, as a result, the restrictions in the agreements on deposit growth and payment of cash dividends are no longer applicable. In connection with removing the agreements, Advanta Bank Corp. reached an understanding with its regulators, reflecting continued progress in our ongoing efforts to enhance Advanta Bank Corp.'s practices and procedures. Effective October 2002, the understanding was revised. The revised understanding replaces the provisions of the prior understanding and provides for the bank to enhance certain 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of its internal planning and monitoring processes. The revised understanding is consistent with the manner in which Advanta Bank Corp. is currently operating its business and includes no restrictions expected to have any impact on our financial results. In 2000, Advanta National Bank also reached agreements with its bank regulatory agency, primarily relating to the bank's subprime lending operations. The agreements established temporary asset growth limits at Advanta National Bank, imposed restrictions on taking brokered deposits and required that Advanta National Bank maintain certain capital ratios in excess of the minimum regulatory standards. In 2001, Advanta National Bank entered into an additional agreement with its regulatory agency regarding restrictions on new business activities and product lines at Advanta National Bank after the Mortgage Transaction, and the resolution of outstanding Advanta National Bank liabilities. The agreement also reduced the capital requirements for Advanta National Bank to 12.7% for Tier 1 and total capital to risk-weighted assets, and to 5% for Tier 1 capital to adjusted total assets as defined in the agreement. In addition, the agreement prohibits the payment of dividends by Advanta National Bank without prior regulatory approval. Management believes that Advanta National Bank was in compliance with its regulatory agreements at December 31, 2002. NOTE 16. CAPITAL RATIOS Advanta Bank Corp. and Advanta National Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the bank's and our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The banks' capital amounts and classification are also subject to qualitative judgments by the bank regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As set forth in the table below, as of December 31, 2002 and 2001, Advanta Bank Corp. and Advanta National Bank had capital at levels a bank is required to maintain to be classified as "well-capitalized" under the regulatory framework for prompt corrective action. However, Advanta National Bank does not meet the definition of "well-capitalized" because of the existence of its agreement with its regulatory agency, even though it has achieved the higher imposed capital ratios required by the agreement. As discussed in Note 15, Advanta National Bank's agreement with its regulatory agency requires 12.7% for Tier 1 and total capital to risk-weighted assets, and 5% for Tier 1 capital to adjusted total assets as defined in the agreement. In the second quarter of 2002, the bank regulatory agencies issued an interagency advisory that required accrued interest receivable relating to securitized credit cards to be treated as a subordinated residual interest for regulatory capital calculations no later than December 31, 2002. Advanta Bank Corp. and Advanta National Bank adopted this guidance effective December 31, 2002. The adoption of this guidance did not impact the regulatory capital requirements of Advanta National Bank. The adoption of this interagency guidance at Advanta Bank Corp. resulted in Advanta Bank Corp.'s combined total capital ratio being reduced by approximately six percentage points. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TO BE ADEQUATELY TO BE WELL- CAPITALIZED UNDER CAPITALIZED UNDER PROMPT CORRECTIVE PROMPT CORRECTIVE ACTUAL ACTION PROVISIONS ACTION PROVISIONS - ------------------------------------------------------------------------------------------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------ PERCENTAGE PERCENTAGE IS IS GREATER GREATER THAN OR THAN OR EQUAL TO EQUAL TO AS OF DECEMBER 31, 2002 Total Capital (to Risk-Weighted Assets) Advanta Bank Corp. $233,876 18.46% $168,726 8.0% $181,176 10.0% Advanta National Bank 48,904 23.13 16,916 8.0 21,145 10.0 Tier I Capital (to Risk-Weighted Assets) Advanta Bank Corp. $207,244 16.36% $122,544 4.0% $136,924 6.0% Advanta National Bank 47,924 22.66 8,458 4.0 12,687 6.0 Tier I Capital (to Average Assets) Advanta Bank Corp. $207,244 20.94% $ 32,594 4.0% $ 41,144 5.0% Advanta National Bank 47,924 19.45 9,855 4.0 12,319 5.0 AS OF DECEMBER 31, 2001 Total Capital (to Risk-Weighted Assets) Advanta Bank Corp. $160,520 18.80% $ 92,870 8.0% $105,420 10.0% Advanta National Bank 50,593 23.34 17,341 8.0 21,676 10.0 Tier I Capital (to Risk-Weighted Assets) Advanta Bank Corp. $145,633 17.06% $ 59,233 4.0% $ 73,132 6.0% Advanta National Bank 49,791 22.97 8,670 4.0 13,006 6.0 Tier I Capital (to Average Assets) Advanta Bank Corp. $145,633 15.07% $ 38,655 4.0% $ 48,319 5.0% Advanta National Bank 49,791 15.31 13,007 4.0 16,258 5.0
NOTE 17. DIVIDEND AND LOAN RESTRICTIONS In the normal course of business, Advanta Corp. and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in dividend and loan restrictions. FDIC-insured banks are subject to certain provisions of the Federal Reserve Act which impose various legal limitations on the extent to which banks may finance or otherwise supply funds to certain of their affiliates. In particular, Advanta Bank Corp. and Advanta National Bank are subject to certain restrictions on any extensions of credit to, or other covered transactions, such as certain purchases of assets, with Advanta Corp. or its affiliates. Advanta Bank Corp. and Advanta National Bank are prevented by these restrictions from lending to Advanta Corp. and its affiliates unless these extensions of credit are secured by U.S. Government obligations or other specified collateral. Further, secured extensions of credit are limited in amount: (1) as to Advanta Corp. or any affiliate, to 10 percent of each bank's capital and surplus, and (2) as to Advanta Corp. and all affiliates in the aggregate, to 20 percent of each bank's capital and surplus. Under grandfathering provisions of the Competitive Equality Banking Act of 1987, we are not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended, so long as Advanta Corp. and Advanta National Bank continue to comply with certain restrictions on their activities. These restrictions include limiting the scope of Advanta National Bank's activities to those in which it was engaged prior to March 5, 1987. Since Advanta National Bank was not making commercial loans at that time, it must continue to refrain from making commercial loans -- which would include any loans to Advanta Corp. or any of its subsidiaries -- in order for Advanta Corp. to maintain its grandfathered exemption under the Bank Holding Company Act. We have no present plans to register as a bank holding company under the Bank Holding Company Act. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Advanta National Bank's agreements with its regulatory agency prohibit the payment of dividends by Advanta National Bank without prior regulatory approval. In connection with the Mortgage Transaction in the first quarter of 2001, we sought and received regulatory approval for a return of capital of $261 million from Advanta National Bank. Advanta National Bank paid no dividends to Advanta Corp. during 2002, 2001, or 2000. In 2001, Advanta Bank Corp. transferred certain assets as a dividend to Advanta Corp. The fair value of the assets at time of the dividend in 2001 was $91.4 million. There were no dividends from Advanta Bank Corp. to Advanta Corp. during 2002 or 2000. Our insurance subsidiaries are also subject to certain capital and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. At December 31, 2002, the insurance subsidiaries were in compliance with these rules and regulations. Insurance subsidiaries paid dividends to Advanta Corp. of $2.2 million in 2002. In the year ended December 31, 2001, Advanta Corp. received a return of capital from insurance subsidiaries of $57.5 million. Insurance subsidiaries paid dividends to Advanta Corp. of $6.1 million in 2001. There were no dividends paid to Advanta Corp. by insurance subsidiaries in 2000. Total stockholders' equity of our banking and insurance affiliates was $280 million at December 31, 2002 and $220 million at December 31, 2001. Of our total equity in these affiliates, $226 million was restricted at December 31, 2002 and $218 million was restricted at December 31, 2001. At January 1, 2003, $54.6 million of stockholders' equity of our bank and insurance affiliates was available for payment of cash dividends in 2003 under applicable regulatory guidelines without prior regulatory approval. In addition to dividend restrictions at banking subsidiaries, certain non-bank subsidiaries are subject to minimum equity requirements as part of securitization or other agreements. The total minimum equity requirement of non-bank subsidiaries was $10 million at December 31, 2002. At December 31, 2002, the non-bank subsidiaries were in compliance with these minimum equity requirements. NOTE 18. SEGMENT INFORMATION Our reportable segments are Advanta Business Cards and our venture capital segment. During the first quarter of 2001, we made changes to the methods used to allocate centrally incurred interest and operating expenses to the reportable segments. These changes were made to better reflect the results of the continuing businesses due to the discontinuance of the mortgage and leasing segments and the restructuring of our corporate functions in the first quarter of 2001. Prior period segment results have been restated to reflect the current allocation methods. Advanta Business Cards offers business credit cards to small businesses through targeted direct mail and telemarketing solicitations and the Internet. This product provides approved customers with access, through merchants, banks, checks and ATMs, to an instant unsecured revolving business credit line. Advanta Business Cards generates interest and other income through finance charges assessed on outstanding balances, interchange income, cash advance and other credit card fees. Our venture capital segment makes venture capital investments through certain of our affiliates. The investment objective is to earn attractive returns by building the long-term values of the businesses in which we invest. Our investment affiliates combine transaction expertise, management skills and a broad contact base with strong industry-specific knowledge. We actively monitor the performance of our venture capital investments, and employees and officers of our investment affiliates participate on the boards of directors of some investees. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA BUSINESS VENTURE CARDS CAPITAL OTHER (1) TOTAL - --------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2002 Interest income $ 92,049 $ 3 $ 11,552 $ 103,604 Interest expense 36,845 714 10,021 47,580 Noninterest revenues (losses), net 246,957 (6,892) 36 240,101 Loss on transfer of consumer credit card business 0 0 (43,000) (43,000) Pretax income (loss) from continuing operations 63,244 (10,101) (51,545) 1,598 Average managed receivables 2,199,967 0 27,600 2,227,567 Total assets 659,963 13,994 1,007,656 1,681,613 Capital expenditures 823 0 7,607 8,430 Depreciation 689 30 7,760 8,479 - --------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2001 Interest income $ 86,925 $ 37 $ 40,973 $ 127,935 Interest expense 33,504 1,545 47,421 82,470 Noninterest revenues (losses), net 215,280 (28,852) (7,552) 178,876 Unusual charges (2) 0 0 41,750 41,750 Pretax income (loss) from continuing operations 63,515 (33,158) (72,808) (42,451) Average managed receivables 1,872,314 0 28,271 1,900,585 Total assets 619,062 20,929 996,689 1,636,680 Capital expenditures 2,924 0 5,691 8,615 Depreciation 2,227 10 5,722 7,959 - --------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2000 Interest income $ 84,472 $ 60 $ 57,616 $ 142,148 Interest expense 31,385 1,541 53,582 86,508 Noninterest revenues (losses), net 149,452 7,847 (6,266) 151,033 Pretax income (loss) from continuing operations 45,325 3,382 (37,515) 11,192 Average managed receivables 1,372,717 0 23,067 1,395,784 Total assets 462,317 45,677 2,335,478 2,843,472 Capital expenditures 3,949 23 9,522 13,494 Depreciation 1,385 17 7,892 9,294 =========================================================================================================
(1) Other includes investment and other activities not attributable to reportable segments. It also includes corporate overhead previously allocated to the mortgage and leasing business units while they were operating segments. Corporate overhead allocations were removed from the results of the discontinued segments as a result of the restatement for discontinued operations. Total assets in the "Other" segment include assets of discontinued operations. (2) Unusual charges in 2001 represent severance, outplacement and other compensation costs associated with restructuring our corporate functions commensurate with the ongoing businesses as well as expenses associated with exited businesses and asset impairments. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19. SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- Interchange income $ 93,023 $ 80,721 $61,668 Business credit card rewards (12,542) (8,979) (3,162) Cash advance fees 3,602 2,547 1,227 Balance transfer fees 3,545 0 0 Investment securities gains (losses), net (1) (6,169) (26,227) 5,473 Loss on sale of deposits 0 (2,835) 0 Insurance revenues (losses), net and other 5,693 (3,758) 600 - --------------------------------------------------------------------------------------------- Total other revenues, net $ 87,152 $ 41,469 $65,806 =============================================================================================
(1) Investment securities gains (losses), net include changes in the fair value and realized gains and losses on venture capital investments. We offer bonus mile and cash-back reward programs with certain of our business credit cards. Through the second quarter of 2002, we estimated that 80% to 100% of cardholders would ultimately claim rewards. The estimate of the percentage of cardholders that will ultimately claim rewards varies depending on the structure of the rewards program. In 2002, we revised our estimate of the bonus mile reward liability, including a change in the assumed percentage of cardholders that will ultimately claim rewards from 80% to 70% and a change in the estimated cost of future reward redemptions, based on experience for that program life-to-date. After this change, our estimated range of cardholders that will ultimately claim rewards for all programs is 70% to 100%. The impact of the change in estimate of the bonus mile reward liability was an approximate $1.9 million increase in other revenues in the year ended December 31, 2002, resulting in an increase in net income of approximately $1.2 million or $0.05 per diluted share. Insurance revenues, net and other in the year ended December 31, 2001 includes operating results of insurance operations, the impact of the termination of our strategic alliance with Progressive Casualty Insurance Company to direct market auto insurance and $10 million of charges related to the write-off of insurance-related deferred acquisition costs that were unrealizable subsequent to the termination of the auto insurance strategic alliance in the first quarter of 2001.
OPERATING EXPENSES YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- Salaries and employee benefits $ 69,227 $ 59,823 $ 42,499 Amortization of business credit card deferred origination costs, net 49,597 39,118 23,961 External processing 16,952 15,936 10,213 Professional fees 12,818 15,320 18,451 Marketing 11,061 10,574 11,492 Equipment 10,676 8,768 8,101 Occupancy 6,612 5,941 5,852 Credit 5,607 5,419 4,772 Telephone 4,145 2,404 1,811 Postage 3,470 3,304 2,947 Fraud loss 2,896 2,568 1,965 Insurance 2,870 4,607 4,628 Other 5,810 6,404 13,600 - --------------------------------------------------------------------------------------------- Total operating expenses $201,741 $180,186 $150,292 =============================================================================================
77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of business credit card deferred origination costs in the year ended December 31, 2002 includes a change in estimate of $1.4 million. Effective July 1, 2002, we refined our estimate of the timing of when accounts are acquired to better match the resulting estimated period of benefit to the amortization of deferred acquisition costs. The impact of this change in estimate in the year ended December 31, 2002 was a decrease in amortization of business credit card deferred origination costs of $1.4 million, resulting in an increase in net income of $875 thousand or $0.03 per diluted share. NOTE 20. UNUSUAL CHARGES Subsequent to the Mortgage Transaction and discontinuance of our leasing business in the first quarter of 2001, we implemented a plan to restructure our corporate functions to a size commensurate with our ongoing businesses and incurred certain other unusual charges related to employee costs. Costs associated with this restructuring activity and other employee costs are included in unusual charges in the consolidated income statements. Accruals related to these costs are included in other liabilities in the consolidated balance sheets. The details of these costs are as follows:
ACCRUED CHARGED TO DECEMBER 31, 2001 CHARGED TO DECEMBER 31, 2002 IN 2001 ACCRUAL IN 2001 ACCRUAL BALANCE ACCRUAL IN 2002 ACCRUAL BALANCE - --------------------------------------------------------------------------------------------------------------- Employee costs $27,296 $24,768 $2,528 $2,528 $0 Expenses associated with exited businesses/products 11,895 11,266 629 629 0 Asset impairments 2,559 2,559 0 0 0 - --------------------------------------------------------------------------------------------------------------- Total $41,750 $38,593 $3,157 $3,157 $0 ===============================================================================================================
EMPLOYEE COSTS In the first quarter of 2001, we recorded a $4.1 million charge for severance and outplacement costs associated with the restructuring of corporate functions. There were 69 employees severed who were entitled to benefits. These employees worked in corporate support functions including accounting and finance, human resources, information technology, legal and facilities management. Employees were notified in March 2001, and severance amounts were payable over a 12-month period following the employee's termination date. These payments were completed in the third quarter of 2002. Additionally, during 2001, we incurred $23.2 million of other employee costs. This amount included approximately $10 million attributable to bonuses to certain key employees in recognition of their efforts on behalf of Advanta in the strategic alternatives process. It also included approximately $4.5 million of bonuses in recognition of the restructuring of the company and other significant transitional efforts. These bonuses were paid over a 12-month period. In the second quarter of 2001, we recorded a $1.0 million increase in employee costs related to a revision in estimate associated with these bonuses. In 2001, we accelerated vesting of 32% of outstanding options that were not vested at the date of the closing of the Mortgage Transaction. This acceleration resulted in a noncash charge of $1.3 million. In connection with reviewing our compensation plans after the Mortgage Transaction and restructuring of corporate functions, we implemented a program whereby all outstanding stock appreciation rights and shares of phantom stock were terminated in exchange for cash to be paid through a deferred compensation arrangement. We recorded charges of $2.9 million associated with this exchange. The charge reflects a $0.7 million reduction recorded in the three months ended September 30, 2001, as actual cash settlement costs were less than estimated. Due to the restructuring of the company, we implemented programs whereby certain out-of-the-money options were exchanged for shares of stock, and whereby certain shares of restricted stock were exchanged for cash and stock options in a tender offer, subject to certain performance conditions and vesting requirements. Noncash charges associated with the issuance of the stock, stock options and the tender offer totaled $3.6 million. This charge reflects a $1.4 million increase recorded in the three months ended September 30, 2001, as actual noncash charges associated with the tender offer were more than estimated. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EXPENSES ASSOCIATED WITH EXITED BUSINESSES/PRODUCTS In the first quarter of 2001, we recorded charges of $2.2 million related to other products exited for which no future revenues or benefits would be received. In the third quarter of 2001, we were able to settle some of these commitments for less than originally estimated, and reduced the charge by $0.7 million. We paid the remaining costs, which included lease and other commitments, in the third quarter of 2002. In 1998, in connection with the Consumer Credit Card Transaction, we made major organizational changes to reduce corporate expenses incurred in the past: (1) to support the business contributed to Fleet Credit Card LLC in the Consumer Credit Card Transaction, and (2) associated with the business and products no longer being offered or not directly associated with our mortgage, business credit card and leasing units. As of December 31, 2000, the remaining accrual related to charges associated with these organizational changes was $13.0 million. This accrual related to contractual commitments to certain customers, and non-related financial institutions that were providing benefits to those customers, under a product that was no longer offered and for which no future revenues or benefits would be received. A third party assumed the liabilities associated with these commitments in the first quarter of 2001, and we recorded an additional charge relating to the settlement of these commitments of $10.3 million. ASSET IMPAIRMENTS In connection with our plan to restructure our corporate functions to a size commensurate with our ongoing businesses during the first quarter of 2001, we identified certain assets that would no longer be used, and the carrying costs of these assets were written off resulting in a charge of $2.6 million. We estimated the realizable value of these assets to be zero due to the nature of the assets, which include leasehold improvements and capitalized software. NOTE 21. INCOME TAXES Income tax expense (benefit) was as follows:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------------------ Income tax expense (benefit) attributable to: Continuing operations $ 17,170 $(11,995) $0 Discontinued operations 0 (3,812) 0 Loss on discontinuance of mortgage and leasing businesses (5,390) 7,392 0 - ------------------------------------------------------------------------------------------ Total income tax expense (benefit) $ 11,780 $ (8,415) $0 ==========================================================================================
79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense (benefit) on income from continuing operations consisted of the following components:
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- Current: Federal $ 0 $ 0 $ 6,636 State 262 300 4,753 - --------------------------------------------------------------------------------------------- Total current 262 300 11,389 - --------------------------------------------------------------------------------------------- Deferred: Federal 16,587 (12,923) (6,994) State 321 628 (4,395) - --------------------------------------------------------------------------------------------- Total deferred 16,908 (12,295) (11,389) - --------------------------------------------------------------------------------------------- Total income tax expense (benefit) $17,170 $(11,995) $ 0 =============================================================================================
The reconciliation of the statutory federal income tax to income tax expense (benefit) on income from continuing operations is as follows:
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- Statutory federal income tax $ 560 $(14,858) $ 3,917 State income taxes, net of federal income tax benefit 379 604 232 Loss on transfer of consumer credit card business 15,050 0 0 Nondeductible expenses 4,158 1,112 152 Insurance program income 347 499 242 Compensation limitation 196 350 140 Net operating losses (3,762) 0 (4,755) Other 242 298 72 - --------------------------------------------------------------------------------------------- Income tax expense (benefit) $ 17,170 $(11,995) $ 0 =============================================================================================
Deferred taxes are provided to reflect the estimated future tax effects of the differences between the financial statement and tax bases of assets and liabilities and enacted tax laws. The net deferred tax asset is comprised of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- Deferred tax liabilities $(65,469) $(72,902) Deferred tax assets 155,541 180,240 - ---------------------------------------------------------------------------------- Net deferred tax asset $ 90,072 $107,338 ==================================================================================
80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of deferred tax assets and liabilities follows:
DECEMBER 31, - ------------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------------ Deferred origination fees and costs $ (11,178) $ (4,009) Allowance for receivable losses 15,516 16,940 Net operating loss carryforwards 222,731 231,967 Securitization income (3,422) 10,189 Deferred compensation 4,068 9,259 Noncash unusual charges 0 5,068 Other 3,213 (13,182) Valuation allowance (140,856) (148,894) - ------------------------------------------------------------------------------------ Net deferred tax asset $ 90,072 $ 107,338 ====================================================================================
We reported a pretax loss in the year ended December 31, 2002 as a result of the $43.0 million charge related to the ruling in the litigation associated with the transfer of our consumer credit card business in 1998. See Note 11. Since the gain on the transfer of our consumer credit card business in 1998 was not subject to income tax, the $43.0 million charge in 2002 did not result in a tax benefit. As a result, we reported income tax expense from continuing operations of $17.2 million for the year ended December 31, 2002. Our effective tax rate, excluding the $43.0 million charge, was 38.5% for the year ended December 31, 2002. We reported a pretax loss in the year ended December 31, 2001 as a result of unusual charges, valuation adjustments on venture capital investments and the loss on the discontinuance of the leasing business in 2001. A valuation allowance was provided against a portion of the resulting deferred tax asset given our pre-existing net operating loss carryforwards and the uncertainty of the realizability of the incremental deferred tax asset, resulting in an effective tax rate of 28% for income from continuing operations for 2001. In the year ended December 31, 2000, we also reported a pretax loss and a valuation allowance was provided against the resulting deferred tax asset, resulting in a 0% effective tax rate. At December 31, 2002, net operating loss carryforwards were $636 million, of which $391 million expire in 2018, $29 million expire in 2019, $1 million expire in 2020 and $215 million expire in 2021. We utilized net operating loss carryforwards of $49 million in 2002. Additionally in 2000, $29 million was carried back to prior years. See Note 11 for a discussion of tax matters currently before the Internal Revenue Service Regional Office of Appeals. The net deferred tax asset is presented net with current income taxes receivable (payable) for financial reporting purposes, and is included in other assets. NOTE 22. DISCONTINUED OPERATIONS Effective February 28, 2001, we completed the Mortgage Transaction and exited our mortgage business, Advanta Mortgage, through a purchase and sale agreement with Chase Manhattan Mortgage Corporation as buyer. Prior to the Mortgage Transaction, Advanta Mortgage made nonconforming home equity loans directly to consumers and through brokers. This business unit originated and serviced first and second lien mortgage loans, including home equity lines of credit, through subsidiaries of Advanta. In addition to servicing and managing the loans it originated, Advanta Mortgage contracted with third parties to service their nonconforming home equity loans on a subservicing basis. Following the Mortgage Transaction, we no longer operate a mortgage business. The purchase and sale agreement provided for the sale, transfer and assignment of substantially all of the assets and operating liabilities associated with our mortgage business, as well as specified contingent liabilities arising from our operation of the mortgage business prior to closing that were identified in the purchase and sale agreement. We retained contingent liabilities, primarily relating to 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) litigation, arising from our operation of the mortgage business before closing that were not specifically assumed by the buyer. On January 23, 2001, we announced that after a thorough review of strategic alternatives available for our leasing business, Advanta Leasing Services, we decided to cease originating leases. Advanta leasing Services offered flexible lease financing programs on small-ticket equipment to small businesses. The primary products financed included office machinery, security systems and computers. We are continuing to service the existing portfolio rather than sell the business or the portfolio. Revenues and expenses of Advanta Mortgage and Advanta Leasing Services were as follows for the periods prior to our exit from the mortgage business on February 28, 2001 and our discontinuance of the leasing business effective December 31, 2000.
JANUARY 1, 2001 TO YEAR ENDED DECEMBER 31, FEBRUARY 28, 2001 2000 ------------------- ------------------------ ADVANTA ADVANTA ADVANTA LEASING ADVANTA LEASING MORTGAGE SERVICES MORTGAGE SERVICES - ---------------------------------------------------------------------------------------------------- Interest revenue $ 18,922 N/A $ 164,142 $ 15,632 Noninterest revenues 17,709 N/A 37,679 9,459 Interest expense (11,160) N/A (93,845) (12,777) Other expenses (37,721) N/A (245,004) (38,864) Income tax benefit 3,812 N/A 0 0 - ---------------------------------------------------------------------------------------------------- Loss from discontinued operations, net of tax $ (8,438) N/A $(137,028) $(26,550) ====================================================================================================
We allocated interest expense to the discontinued operations based on the ratio of net assets of discontinued operations to the total net assets of the consolidated company. The components of the gain (loss) on discontinuance of our mortgage and leasing businesses in the years ended December 31 were as follows:
2002 2001 2000 ------------------- ------------------- ------------------- ADVANTA ADVANTA ADVANTA ADVANTA LEASING ADVANTA LEASING ADVANTA LEASING MORTGAGE SERVICES MORTGAGE SERVICES MORTGAGE SERVICES - --------------------------------------------------------------------------------------------------------- Pretax gain (loss) on discontinuance of mortgage and leasing businesses $(25,300) $11,300 $20,753 $(45,000) $0 $(4,298) Income tax (expense) benefit 9,740 (4,350) (8,637) 1,245 0 0 - --------------------------------------------------------------------------------------------------------- Gain (loss) on discontinuance of mortgage and leasing businesses, net of tax $(15,560) $ 6,950 $12,116 $(43,755) $0 $(4,298) =========================================================================================================
The proceeds from the Mortgage Transaction exceeded $1 billion, subject to closing adjustments, resulting in an estimated pretax gain in the year ended December 31, 2001 of $20.8 million after transaction expenses, severance expenses and other costs. The gain does not reflect any impact from the post-closing adjustment process that has not yet been completed due to litigation related to the Mortgage Transaction. See Note 11. In the year ended December 31, 2002, we increased our estimate of other costs related to our exit from the mortgage business by $25.3 million, comprised of $7.5 million for a litigation settlement related to a mortgage loan servicing agreement termination fee collected in December 2000, and $17.8 million primarily related to an increase in our estimated future costs of mortgage business-related contingent liabilities. The $17.8 million charge relates primarily to an increase in our estimated 2002 and future costs of mortgage business-related contingent liabilities in connection with (1) contingent liabilities and litigation costs arising from the operation of the mortgage business prior to the Mortgage Transaction that were not assumed by the buyer, and (2) costs related to Advanta's litigation with Chase Manhattan Mortgage Corporation in connection with the Mortgage Transaction. The change in estimate reflects the legal and consulting fees and 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) other costs that we expect to incur based on current levels of contingent liabilities and expense rates, and considers the status of the discovery process associated with the Mortgage Transaction litigation. In connection with the discontinuance of the leasing business, we recorded a $4.3 million pretax loss effective December 31, 2000, representing the estimated operating results through the remaining term of the leasing portfolio. Estimated operating results of the leasing business included estimated valuations of retained interests in leasing securitizations, estimated cash flows from on-balance sheet lease receivables, interest expense and operating expenses. In the year ended December 31, 2001, we recorded an additional $45.0 million pretax loss due to a change in estimate of those operating results based on credit loss experience in 2001. A principal factor contributing to the increased credit losses in 2001 was that one of our former leasing vendors had filed for bankruptcy protection and this vendor's financial problems were impacting its ability to service the leased equipment in a segment of our leasing portfolio. In the year ended December 31, 2002, we recorded an $11.3 million pretax gain on leasing discontinuance representing a revision in the estimated operating results of the leasing segment over the remaining life of the lease portfolio due primarily to favorable credit performance. The leasing portfolio performed favorably as compared to the expectations and assumptions established in 2001. This improvement was the result of successfully obtaining a replacement vendor to service leased equipment for the former leasing vendor that had filed for bankruptcy protection, as described above, and operational improvements in the leasing collections area. Per share data was as follows for the years ended December 31:
ADVANTA MORTGAGE ADVANTA LEASING SERVICES ------------------------ -------------------------- - ------------------------------------------------------------------------------------------------------------ 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------ Basic loss from discontinued operations per common share Class A N/A $(0.33) $(5.45) N/A N/A $(1.06) Class B N/A (0.33) (5.45) N/A N/A (1.06) Combined N/A (0.33) (5.45) N/A N/A (1.06) Diluted loss from discontinued operations per common share Class A N/A $(0.33) $(5.41) N/A N/A $(1.05) Class B N/A (0.33) (5.41) N/A N/A (1.05) Combined N/A (0.33) (5.41) N/A N/A (1.05) Basic gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax, per common share Class A $(0.62) $ 0.47 $ 0.00 $0.28 $(1.70) $(0.17) Class B (0.62) 0.47 0.00 0.28 (1.70) (0.17) Combined (0.62) 0.47 0.00 0.28 (1.70) (0.17) Diluted gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax, per common share Class A $(0.62) $ 0.47 $ 0.00 $0.28 $(1.70) $(0.17) Class B (0.62) 0.47 0.00 0.28 (1.70) (0.17) Combined (0.62) 0.47 0.00 0.28 (1.70) (0.17) ============================================================================================================
The components of assets of discontinued operations, net, were as follows at December 31:
2002 2001 - --------------------------------------------------------------------------------- Loans and leases, net $ 40,064 $ 52,739 Other assets 91,686 100,061 Liabilities (4,638) (10,397) - --------------------------------------------------------------------------------- Assets of discontinued operations, net $127,112 $142,403 =================================================================================
As discussed above, we will continue to service the existing lease portfolio. At December 31, 2002, there were $152 million of securitized leases outstanding, and we had retained interests in leasing securitizations of $57 million. At December 31, 2001, there were $365 million of securitized leases outstanding, and we had 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) retained interests in leasing securitizations of $44 million. The retained interests in leasing securitizations are included in assets of discontinued operations in the consolidated balance sheets. At December 31, 2002, the fair value of the retained interests in leasing securitizations was estimated using a 12% discount rate on future cash flows, loss rates ranging from 5.0% to 5.4% and a weighted average life of 0.9 years. Actual results may vary from our estimates, and the impact of any differences will be recognized in income when determined. At December 31, 2001, the fair value of the retained interests in leasing securitizations was estimated using a 12.0% discount rate on future cash flows, loss rates ranging from 9.0% to 9.9% and a weighted average life of 1.1 years. We use interest rate swaps to manage the impact of fluctuating interest rates on the fair value of certain retained interests in leasing securitizations. The interest rate swaps effectively convert a leasing off-balance sheet variable securitization to a fixed rate. At December 31, 2002, the notional amount of interest rate swaps outstanding relating to leasing securitizations was $39.6 million, and the estimated fair value was a liability of $1.2 million. At December 31, 2001, the notional amount of interest rate swaps outstanding relating to leasing securitizations was $113.6 million, and the estimated fair value was a liability of $3.5 million. The interest rate swaps are recorded at fair value with changes in fair value recorded in Advanta Leasing Services operating results. As discussed above, the estimated operating results of Advanta Leasing Services through the remaining term of the lease portfolio were estimated in the determination of the loss on discontinuance. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 23. CALCULATION OF EARNINGS PER SHARE The following table shows the calculation of basic earnings per common share and diluted earnings per common share for the years ended December 31:
2002 2001 2000 - --------------------------------------------------------------------------------------------- Income (loss) from continuing operations $(15,572) $(30,456) $ 11,192 Less: Preferred A dividends (141) (141) (141) - --------------------------------------------------------------------------------------------- Income (loss) from continuing operations allocable to common shareholders (15,713) (30,597) 11,051 Loss from discontinued operations, net of tax 0 (8,438) (163,578) Loss, net, on discontinuance of mortgage and leasing businesses, net of tax (8,610) (31,639) (4,298) - --------------------------------------------------------------------------------------------- Net loss allocable to common shareholders (24,323) (70,674) (156,825) Less: Class A dividends declared (2,302) (2,294) (2,236) Less: Class B dividends declared (5,540) (5,224) (5,118) - --------------------------------------------------------------------------------------------- Undistributed net loss $(32,165) $(78,192) $(164,179) - --------------------------------------------------------------------------------------------- Basic income (loss) from continuing operations per common share Class A $ (0.69) $ (1.23) $ 0.39 Class B (0.59) (1.17) 0.47 Combined (1) (0.63) (1.19) 0.44 Diluted income (loss) from continuing operations per common share Class A $ (0.69) $ (1.23) $ 0.39 Class B (0.59) (1.17) 0.46 Combined (1) (0.63) (1.19) 0.44 Basic net loss per common share Class A $ (1.03) $ (2.79) $ (6.28) Class B (0.94) (2.73) (6.21) Combined (1) (0.97) (2.75) (6.24) Diluted net loss per common share Class A $ (1.03) $ (2.79) $ (6.23) Class B (0.94) (2.73) (6.16) Combined (1) (0.97) (2.75) (6.19) - --------------------------------------------------------------------------------------------- Basic weighted average common shares outstanding Class A 9,152 9,101 9,110 Class B 15,909 16,581 16,033 Combined 25,061 25,682 25,143 Options B 0 0 95 Restricted shares Class A 0 0 39 Restricted shares Class B 0 0 74 Diluted weighted average common shares outstanding Class A 9,152 9,101 9,149 Class B 15,909 16,581 16,202 Combined 25,061 25,682 25,351 Antidilutive shares Options Class B 4,838 2,629 2,097 Restricted shares Class B 2,446 516 1,059 =============================================================================================
(1) Combined represents a weighted average of Class A and Class B earnings per common share. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 24. PARENT COMPANY FINANCIAL STATEMENTS ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
DECEMBER 31, - ---------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- ASSETS Cash $ 76,563 $ 80,160 Restricted interest-bearing deposits 5,302 10,567 Investments 13,984 69,475 Investments in and advances to bank and insurance subsidiaries 284,245 239,440 Investments in and advances to other subsidiaries 337,017 353,460 Premises and equipment 1,237 1,153 Other assets 116,469 135,708 - ---------------------------------------------------------------------------------- Total assets $834,817 $889,963 - ---------------------------------------------------------------------------------- LIABILITIES Debt $418,979 $426,674 Other borrowings 0 32,317 Other liabilities 94,525 64,673 - ---------------------------------------------------------------------------------- Total liabilities 513,504 523,664 - ---------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 1,010 1,010 Common stock 304 279 Other stockholders' equity 319,999 365,010 - ---------------------------------------------------------------------------------- Total stockholders' equity 321,313 366,299 - ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity $834,817 $889,963 ==================================================================================
The parent company guarantees certain lease payments of its subsidiaries in connection with lease agreements extending through November 30, 2006. At December 31, 2002, the maximum amount of undiscounted future payments that the parent could be required to make under these lease agreement guarantees was $3.8 million. The parent company also guarantees payments of distributions and other amounts due on mandatorily redeemable preferred capital securities of its subsidiary Advanta Capital Trust I. See Note 12 for the terms of the mandatorily redeemable preferred capital securities. At December 31, 2002, the maximum amount of undiscounted future payments that the parent could be required to make under this guarantee was $324.8 million, representing the amount of capital securities outstanding of $100 million at December 31, 2002 and future dividends of approximately $9 million per year through December 2026. Advanta Capital Trust I holds $103 million of junior subordinated debentures of the parent, which are included in debt on the condensed balance sheet above. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- INCOME (LOSS): Dividends from bank and insurance subsidiaries (1) $ 2,152 $ 97,534 $ 0 Dividends from other subsidiaries 278 278 278 Interest income 4,886 22,470 40,481 Other revenues, net 696 22,476 37,912 Loss on transfer of consumer credit card business (43,000) 0 0 - --------------------------------------------------------------------------------------------- Total income (loss) (34,988) 142,758 78,671 - --------------------------------------------------------------------------------------------- EXPENSES: Interest expense 29,739 54,810 69,482 Operating expenses 7,204 64,676 73,099 Unusual charges 0 30,142 0 - --------------------------------------------------------------------------------------------- Total expenses 36,943 149,628 142,581 - --------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes and equity in undistributed net income (loss) in subsidiaries (71,931) (6,870) (63,910) Income tax benefit (12,773) (15,017) (30,317) - --------------------------------------------------------------------------------------------- Income (loss) from continuing operations before equity in undistributed net income (loss) of subsidiaries (59,158) 8,147 (33,593) Loss on discontinuance of mortgage business, net of tax (8,238) (5,962) 0 - --------------------------------------------------------------------------------------------- Income (loss) before equity in undistributed net income (loss) of subsidiaries (67,396) 2,185 (33,593) Equity in undistributed net income (loss) of subsidiaries 43,214 (72,718) (123,091) - --------------------------------------------------------------------------------------------- NET LOSS $(24,182) $ (70,533) $(156,684) =============================================================================================
(1) Dividends from bank and insurance subsidiaries in the year ended December 31, 2001 include a noncash dividend from Advanta Bank Corp. of $91.4 million. The Parent Company Only Statements of Changes in Stockholders' Equity are the same as the Consolidated Statements of Changes in Stockholders' Equity. 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (24,182) $ (70,533) $(156,684) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in net loss (income) of subsidiaries (45,644) (25,094) 122,813 Dividends received from subsidiaries 2,430 6,378 278 Depreciation 118 2,241 2,523 Change in other assets and other liabilities 75,618 32,493 (31,647) - --------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 8,340 (54,515) (62,717) - --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Investments in subsidiaries (2,332) (3,991) (119,226) Return of investment from subsidiaries 7,577 267,648 22,453 Purchase of investments available for sale (301,151) (744,610) (156,661) Proceeds from sales of investments available for sale 302,687 262,301 72 Proceeds from maturing investments available for sale 19,382 503,369 152,482 Net change in commercial paper equivalents and interest-bearing deposits 38,738 (6,894) 342,793 Net change in premises and equipment (202) 6,010 (6,941) - --------------------------------------------------------------------------------------------- Net cash provided by investing activities 64,699 283,833 234,972 - --------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of debt 111,515 182,973 256,091 Payments on redemption of debt (141,910) (611,172) (285,472) (Increase) decrease in affiliate borrowings 9,250 123,034 (4,452) Increase (decrease) in other borrowings (32,317) 32,317 0 Proceeds from exercise of stock options 363 3,480 155 Cash dividends paid (7,983) (7,659) (7,495) Stock buyback (15,554) (7,505) 0 - --------------------------------------------------------------------------------------------- Net cash used in financing activities (76,636) (284,532) (41,173) - --------------------------------------------------------------------------------------------- Net increase (decrease) in cash (3,597) (55,214) 131,082 Cash at beginning of year 80,160 135,374 4,292 - --------------------------------------------------------------------------------------------- Cash at end of year $ 76,563 $ 80,160 $ 135,374 =============================================================================================
In 2001, noncash transactions of the Parent Company included noncash dividends of $91.4 million from subsidiaries, noncash investment in subsidiaries of $22.3 million, noncash return of investments from subsidiaries of $50.9 million and noncash affiliate borrowings of $69.1 million. There were no significant noncash transactions of the Parent Company in 2002 or 2000. 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 25. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of our financial instruments are as follows at December 31:
2002 2001 - ---------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------- Financial assets: Cash $ 14,834 $ 14,834 $ 20,952 $ 20,952 Federal funds sold 332,257 332,257 229,889 229,889 Restricted interest-bearing deposits 79,449 79,449 113,956 113,956 Investments available for sale 171,222 171,222 246,679 246,679 Receivables, net 455,347 479,081 423,407 451,966 Accounts receivable from securitizations 198,238 198,238 168,983 168,983 Financial liabilities: Demand and savings deposits $ 8,941 $ 8,941 $ 10,010 $ 10,010 Time deposits 705,087 715,032 626,905 633,506 Debt 315,886 318,268 323,582 332,522 Other borrowings 0 0 32,317 32,317 Off-balance sheet financial instruments: Commitments to extend credit $ 0 $ 0 $ 0 $ 0 - ----------------------------------------------------------------------------------------------
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. We used the following methods and assumptions in estimating fair value disclosures for financial instruments: CASH, FEDERAL FUNDS SOLD AND RESTRICTED INTEREST-BEARING DEPOSITS For these short-term instruments, the carrying amount is a reasonable estimate of the fair value. INVESTMENTS AVAILABLE FOR SALE Investments available for sale are carried at fair value. The fair values of investments available for sale are based on quoted market prices, dealer quotes or estimates using quoted market prices for similar securities. For investments that are not publicly traded, management has made estimates of fair value that consider several factors including the investees' financial results, conditions and prospects, and the values of comparable public companies. RECEIVABLES, NET The fair values of receivables are estimated using a discounted cash flow analysis that incorporates estimates of the excess of the weighted average interest and fee yield over the aggregate cost of funds, servicing costs and an estimate of future credit losses over the life of the receivables. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS RECEIVABLE FROM SECURITIZATIONS Retained interests in securitizations are carried at fair value. The fair values of retained interests in securitizations are estimated based on discounted cash flow analyses as described in Note 2. See Note 6 for the assumptions used in the estimation of fair values of the retained interests in securitizations. The carrying amount is a reasonable estimate of the fair value of other components of accounts receivable from securitizations based on the short-term nature of the assets. DEMAND AND SAVINGS DEPOSITS The fair value of demand and money market savings deposits is the amount payable on demand at the reporting date. This fair value does not include any benefit that may result from the low cost of funding provided by these deposits compared to the cost of borrowing funds in the market. TIME DEPOSITS The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses based on the rates currently offered for deposits of similar remaining maturities. DEBT The fair value of our debt is estimated using discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements. OTHER BORROWINGS There were no other borrowings at December 31, 2002. Other borrowings at December 31, 2001 consisted of securities sold under repurchase agreements. The carrying amount of borrowings under repurchase agreements, which matured within ninety days, approximated their fair value. COMMITMENTS TO EXTEND CREDIT There is no fair value associated with commitments to extend credit to our business credit card customers, since any fees charged are consistent with the fees charged by other companies at the reporting date to enter into similar agreements. We had commitments to extend credit of $6.1 billion at December 31, 2002 and $4.6 billion at December 31, 2001. NOTE 26. DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. During 2001 and 2000, we used interest rate swaps to manage the impact of fluctuating interest rates on our cost of funds. The interest rate swaps effectively converted fixed rate medium-term notes to a LIBOR-based variable rate. There were no interest rate swaps or other derivatives outstanding related to continuing operations at December 31, 2002 or 2001 because of the substantial reduction in outstanding medium-term notes subsequent to the Mortgage Transaction in 2001. See Note 22 for a discussion of derivatives used in discontinued operations. The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of our exposure through our use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivative contracts. The following table 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) summarizes by notional amounts our interest rate swap activity in continuing operations for the periods presented:
TOTAL - ----------------------------------------------------------------------- Balance at 12/31/99 $ 619,500 Maturities (425,000) - ----------------------------------------------------------------------- Balance at 12/31/00 $ 194,500 Maturities (102,000) Terminations (92,500) - ----------------------------------------------------------------------- Balance at 12/31/01 $ 0 Maturities 0 Terminations 0 - ----------------------------------------------------------------------- Balance at 12/31/02 $ 0 =======================================================================
There were no net gains (losses) from hedge ineffectiveness or from excluding a portion of a derivative instrument's gain or loss from the assessment of hedge effectiveness included in other income in the periods presented. There was also no gain or loss recognized in earnings as a result of a hedged firm commitment no longer qualifying as a fair value hedge. 91 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Advanta Corp.: We have audited the accompanying consolidated balance sheet of Advanta Corp. (a Delaware corporation) and subsidiaries as of December 31, 2002, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The 2001 and 2000 financial statements of Advanta Corp. and subsidiaries were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated March 15, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Advanta Corp. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Philadelphia, PA March 24, 2003 92 THE REPORT BELOW IS A COPY OF A PREVIOUSLY ISSUED REPORT OF ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Advanta Corp.: We have audited the accompanying consolidated balance sheets of Advanta Corp. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanta Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Philadelphia, PA March 15, 2002 93 REPORT OF MANAGEMENT To the Stockholders of Advanta Corp.: The management of Advanta Corp. and its subsidiaries ("Advanta") is responsible for the preparation, content, integrity and objectivity of the consolidated financial statements. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and as such must, by necessity, include amounts based upon estimates and judgments made by management. The other financial information included in this Form 10-K was also prepared by management and is consistent with the financial statements. Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. These systems and controls are designed to provide reasonable, but not absolute, assurance that assets are safeguarded, that transactions are properly recorded and executed in accordance with management's authorization and that financial statements are reliable. Advanta's control structure includes: (l) organizational and budgetary arrangements which provide reasonable assurance that errors or irregularities would be detected promptly; (2) careful selection of personnel and communications programs aimed at assuring that policies and standards are understood by employees; (3) continuing management review and evaluation of systems and controls; (4) disclosure controls and procedures to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms and (5) a program of independent internal audit and risk management reviews to ensure compliance. Internal controls, disclosure controls and procedures, and corporate-wide systems, processes and procedures are regularly evaluated and enhanced. The consolidated financial statements for 2002 have been audited by KPMG LLP, independent auditors. Their audit was conducted in accordance with auditing standards generally accepted in the United States and considered Advanta's system of internal controls to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Their report is printed herewith. The Audit Committee of the Board of Directors, which consists solely of outside directors, meets at least quarterly with the independent auditors, Corporate Audit, Risk Management and representatives of management to discuss, among other items, accounting and financial reporting matters. Advanta's independent auditors, Corporate Audit function, Risk Management function and the Audit Committee have free access to each other. The management of Advanta evaluated its disclosure controls and procedures as of December 31, 2002. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer each concluded that as of December 31, 2002, Advanta maintained effective disclosure controls and procedures in all material respects, including those to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely disclosure. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to our most recent evaluation. /s/ DENNIS ALTER /s/ PHILIP M. BROWNE /s/ DAVID B. WEINSTOCK - ----------------------------- ----------------------------- ----------------------------- Chairman of the Board and Senior Vice President and Vice President and Chief Chief Executive Officer Chief Financial Officer Accounting Officer March 24, 2003 March 24, 2003 March 24, 2003
94 SUPPLEMENTAL SCHEDULES (UNAUDITED) QUARTERLY DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 - ----------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ----------------------------------------------------------------------------------------------------- Interest income $ 27,044 $23,919 $26,235 $26,406 Interest expense 11,049 11,052 12,369 13,110 - ----------------------------------------------------------------------------------------------------- Net interest income 15,995 12,867 13,866 13,296 Provision for credit losses 9,444 9,421 11,341 10,700 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 6,551 3,446 2,525 2,596 - ----------------------------------------------------------------------------------------------------- Noninterest revenues (1) 22,448 58,021 61,165 55,467 Operating expenses 53,919 48,977 49,887 48,958 Minority interest in income of consolidated subsidiary 2,220 2,220 2,220 2,220 - ----------------------------------------------------------------------------------------------------- Total expenses 56,139 51,197 52,107 51,178 - ----------------------------------------------------------------------------------------------------- Income (loss) before income taxes (27,140) 10,270 11,583 6,885 Income (loss) from continuing operations (33,246) 6,316 7,124 4,234 Loss, net, on discontinuance of mortgage and leasing businesses, net of tax (2) 0 0 (8,610) 0 - ----------------------------------------------------------------------------------------------------- Net income (loss) $(33,246) $ 6,316 $(1,486) $ 4,234 - ----------------------------------------------------------------------------------------------------- Basic income (loss) from continuing operations per common share Class A $ (1.38) $ 0.24 $ 0.27 $ 0.14 Class B (1.35) 0.26 0.29 0.17 Combined (3) (1.36) 0.25 0.28 0.16 - ----------------------------------------------------------------------------------------------------- Diluted income (loss) from continuing operations per common share Class A $ (1.38) $ 0.23 $ 0.26 $ 0.14 Class B (1.35) 0.25 0.27 0.17 Combined (3) (1.36) 0.25 0.27 0.16 - ----------------------------------------------------------------------------------------------------- Basic net income (loss) per common share Class A $ (1.38) $ 0.24 $ (0.07) $ 0.14 Class B (1.35) 0.26 (0.05) 0.17 Combined (3) (1.36) 0.25 (0.06) 0.16 - ----------------------------------------------------------------------------------------------------- Diluted net income (loss) per common share Class A $ (1.38) $ 0.23 $ (0.06) $ 0.14 Class B (1.35) 0.25 (0.05) 0.17 Combined (3) (1.36) 0.25 (0.06) 0.16 - ----------------------------------------------------------------------------------------------------- Basic weighted average common shares outstanding Class A 9,171 9,162 9,144 9,133 Class B 15,292 15,876 16,176 16,301 Combined (3) 24,463 25,038 25,320 25,434 - ----------------------------------------------------------------------------------------------------- Diluted weighted average common shares outstanding Class A 9,171 9,163 9,150 9,139 Class B 15,292 16,501 17,640 16,980 Combined (3) 24,463 25,664 26,790 26,119 - -----------------------------------------------------------------------------------------------------
(1) Noninterest revenues for the three months ended December 31, 2002 included a $43.0 million pretax loss on the transfer of our consumer credit card business. See Note 11 to the consolidated financial statements. (2) See Note 22 to the consolidated financial statements. (3) Combined represents a weighted average of Class A and Class B (see Note 2 to the consolidated financial statements). 95 SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED QUARTERLY DATA -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 - ----------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ----------------------------------------------------------------------------------------------------- Interest income $27,283 $ 29,048 $35,413 $ 36,191 Interest expense 15,156 16,919 26,119 24,276 - ----------------------------------------------------------------------------------------------------- Net interest income 12,127 12,129 9,294 11,915 Provision for credit losses 10,124 9,528 8,384 7,940 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 2,003 2,601 910 3,975 - ----------------------------------------------------------------------------------------------------- Noninterest revenues 61,180 46,631 43,253 27,812 Operating expenses 48,275 44,742 44,116 43,053 Minority interest in income of consolidated subsidiary 2,220 2,220 2,220 2,220 Unusual charges (1) 0 0 1,000 40,750 - ----------------------------------------------------------------------------------------------------- Total expenses 50,495 46,962 47,336 86,023 - ----------------------------------------------------------------------------------------------------- Income (loss) before income taxes 12,688 2,270 (3,173) (54,236) Income (loss) from continuing operations 7,803 2,270 (3,173) (37,356) Loss from discontinued operations, net of tax 0 0 0 (8,438) Gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax (2) 0 (44,000) (4,000) 16,361 - ----------------------------------------------------------------------------------------------------- Net income (loss) $ 7,803 $(41,730) $(7,173) $(29,433) - ----------------------------------------------------------------------------------------------------- Basic income (loss) from continuing operations per common share Class A $ 0.29 $ 0.08 $ (0.13) $ (1.49) Class B 0.31 0.09 (0.12) (1.48) Combined (3) 0.30 0.09 (0.12) (1.48) - ----------------------------------------------------------------------------------------------------- Diluted income (loss) from continuing operations per common share Class A $ 0.29 $ 0.08 $ (0.13) $ (1.49) Class B 0.31 0.09 (0.12) (1.48) Combined (3) 0.30 0.09 (0.12) (1.48) - ----------------------------------------------------------------------------------------------------- Basic net income (loss) per common share Class A $ 0.29 $ (1.62) $ (0.29) $ (1.18) Class B 0.31 (1.60) (0.27) (1.16) Combined (3) 0.30 (1.61) (0.28) (1.17) - ----------------------------------------------------------------------------------------------------- Diluted net income (loss) per common share Class A $ 0.29 $ (1.60) $ (0.29) $ (1.18) Class B 0.31 (1.59) (0.27) (1.16) Combined (3) 0.30 (1.59) (0.28) (1.17) - ----------------------------------------------------------------------------------------------------- Basic weighted average common shares outstanding Class A 9,125 9,116 9,098 9,103 Class B 16,552 16,820 16,744 16,200 Combined (3) 25,677 25,936 25,842 25,303 - ----------------------------------------------------------------------------------------------------- Diluted weighted average common shares outstanding Class A 9,128 9,120 9,098 9,103 Class B 16,716 17,121 16,744 16,200 Combined (3) 25,844 26,241 25,842 25,303 - -----------------------------------------------------------------------------------------------------
(1) See Note 20 to the consolidated financial statements. (2) See Note 22 to the consolidated financial statements. (3) Combined represents a weighted average of Class A and Class B (see Note 2 to the consolidated financial statements). 96 SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED ALLOCATION OF ALLOWANCE FOR RECEIVABLE LOSSES
($ IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- ----------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - --------------------------------------------------------------------------------------------------------------------------- Business credit cards $44,466 96% $41,169 98% $33,165 99% $14,663 99% $ 6,916 65% Other receivables 1,693 4 802 2 202 1 202 1 3,734 35 - --------------------------------------------------------------------------------------------------------------------------- Total $46,159 100% $41,971 100% $33,367 100% $14,865 100% $10,650 100% ===========================================================================================================================
COMPOSITION OF GROSS RECEIVABLES
($ IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 -------------- -------------- -------------- -------------- ------------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - --------------------------------------------------------------------------------------------------------------------------- Business credit cards $445,083 95% $416,265 94% $335,087 93% $275,095 90% $150,022 89% Other receivables 25,589 5 28,189 6 24,203 7 30,302 10 17,862 11 - --------------------------------------------------------------------------------------------------------------------------- Total $470,672 100% $444,454 100% $359,290 100% $305,397 100% $167,884 100% ===========================================================================================================================
YIELD AND MATURITY OF INVESTMENTS AT DECEMBER 31, 2002
($ IN THOUSANDS) MATURING - ------------------------------------------------------------------------------------------------------------------------------ AFTER ONE BUT AFTER FIVE BUT WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS ----------------------- ----------------------- ----------------------- ----------------------- MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) - ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury and other U.S. Government securities $22,723 1.61% $1,534 2.66% $5,000 2.42% $ 0 0.00% State and municipal securities (1) 117 5.02 494 5.39 817 4.21 874 5.37 Other (2) 0 0.00 0 0.00 2,815 6.50 4,692 6.19 - ------------------------------------------------------------------------------------------------------------------------------ Total investments available for sale $22,840 1.63% $2,028 3.33% $8,632 3.92% $5,566 6.06% ==============================================================================================================================
(1) Yield computed on a taxable equivalent basis using a statutory rate of 35%. (2) Equity investments and other securities without a stated maturity are excluded from this table. (3) Yields are computed by dividing interest by the amortized cost of the respective investment securities. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, ($ IN THOUSANDS) 2002 - -------------------------------------------------------------------------- Maturity: 3 months or less $ 25,343 Over 3 months through 6 months 15,375 Over 6 months through 12 months 217,176 Over 12 months 92,581 - -------------------------------------------------------------------------- Total $350,475 ==========================================================================
97 SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED COMMON STOCK PRICE RANGES AND DIVIDENDS Advanta's common stock is traded on the National Market tier of The Nasdaq Stock Market under the symbols ADVNA (Class A voting common stock) and ADVNB (Class B non-voting common stock). Following are the high, low and closing prices and cash dividends declared for the last two years as they apply to each class of stock:
CASH DIVIDENDS QUARTER ENDED: HIGH LOW CLOSE DECLARED - ------------------------------------------------------------------------------------------------ Class A: - ------------------------------------------------------------------------------------------------ March 31, 2001 $16.00 $ 8.75 $15.81 $0.063 June 30, 2001 16.00 12.86 16.00 0.063 September 30, 2001 19.10 8.00 9.40 0.063 December 31, 2001 11.72 8.00 9.94 0.063 March 31, 2002 $12.90 $ 8.47 $12.76 $0.063 June 30, 2002 14.55 10.40 10.86 0.063 September 30, 2002 11.45 7.60 10.05 0.063 December 31, 2002 11.00 8.25 8.98 0.063 - ------------------------------------------------------------------------------------------------ Class B: - ------------------------------------------------------------------------------------------------ March 31, 2001 $14.00 $ 7.16 $13.69 $0.076 June 30, 2001 14.00 11.90 13.97 0.076 September 30, 2001 17.10 8.10 8.95 0.076 December 31, 2001 10.79 6.85 9.10 0.076 March 31, 2002 $11.99 $ 7.90 $11.99 $0.076 June 30, 2002 14.04 10.24 10.93 0.076 September 30, 2002 11.44 7.35 10.33 0.076 December 31, 2002 11.10 8.00 9.39 0.076 ================================================================================================
At December 31, 2002, Advanta had approximately 252 holders of record of Class A stock and 673 holders of record of Class B stock. 98 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The text of the Proxy Statement under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" are hereby incorporated by reference, as is the text in Part I of this Report under the caption, "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The text of the Proxy Statement under the captions "Executive compensation," "Report on Executive Compensation" and "Election of Directors - Committees, Meetings and Compensation of the Board of Directors," "-- Compensation Committee Interlocks and Insider Participation" and "-- Other Matters" are hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The text of the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" are hereby incorporated herein by reference. The following table provides information about equity awards under our 2000 Omnibus Stock Incentive Plan and our Employee Stock Purchase Plan as of December 31, 2002. EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------- (A) (B) (C) - ------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) - ------------------------------------------------------------------------------------------------------------------- Equity Compensation plans approved by shareholders 4,775,952[1] $10.01 8,793,217[2] - ------------------------------------------------------------------------------------------------------------------- Equity Compensation Plans not approved by shareholders[3] -- -- -- - ------------------------------------------------------------------------------------------------------------------- Total 4,775,952 $10.01 8,793,217[2][3] ===================================================================================================================
(1) Does not include 2,492,102 shares of restricted Class B Common Stock granted pursuant to the Advanta Corp. 2000 Omnibus Stock Incentive Plan. Generally, restrictions on these shares may be removed between 2003 and 2012. (2) All of the shares remaining available for future issuance are available under the 2000 Omnibus Stock Incentive Plan which provides for the issuance of stock options, restricted stock, stock appreciation rights, phantom shares and other awards (collectively, "Awards"). (3) Advanta Corp.'s Employee Stock Purchase Plan (ESPP) does not specify a maximum number of shares that may be issued. An aggregate of 37,864 shares of Class B Common Stock were purchased under the ESPP in 2002. 99 ADVANTA CORP. 2000 OMNIBUS STOCK INCENTIVE PLAN The 2000 Omnibus Stock Incentive Plan (the "Omnibus Plan") was adopted by the Board of Directors in April 2000 and approved by the shareholders of the Company on June 7, 2000. The Omnibus Plan provides for the issuance of a maximum of 20,000,000 shares of Class B Common Stock (including 9,860,191 shares that were available for issuance under the Company's prior stock incentive plans that were in effect at the time the Omnibus Plan was approved by the shareholders and which plans were amended and restated by the Omnibus Plan). The plan provides for the issuance of options to acquire Class B Common Stock, awards of Class B Common Stock and/or awards of stock appreciation rights (referred to collectively as "Awards"). Shares of Class B Common Stock awarded pursuant to the plan must be authorized and unissued shares or shares acquired for the treasury of the Company. Generally, if an Award granted under the Omnibus Plan expires, terminates or lapses for any reason, without the issuance of shares of Class B Common Stock thereunder such shares shall be available for reissuance under the Omnibus Plan. Employees and directors of the Company, and consultants and advisors to the Company who render bona fide services to the Company unrelated to the offer of securities are eligible to receive Awards under the Omnibus Plan. The terms of any Award made pursuant to the Omnibus Plan are described and established in a grant document provided to the Award recipient. No Awards may be granted under the Omnibus Plan after April 5, 2010. Awards granted and outstanding as of the date the Omnibus Plan terminates will not be affected by the termination of the plan. In the event of a change of control of the Company, stock options and stock appreciation rights granted pursuant to the Omnibus Plan will become immediately exercisable in full, and all Awards will become fully vested. Shares subject to Awards granted pursuant to the Omnibus Plan are subject to adjustment for changes in capitalization for stock splits, stock dividends and similar events. ADVANTA CORP. EMPLOYEE STOCK PURCHASE PLAN In September 1989, the Board of Directors adopted its Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is a broad-based plan that has not been approved by stockholders and is not intended to qualify as an employee stock purchase plan pursuant to Section 423 of the Internal Revenue Code, as amended. All full-time and part-time employees and non-employee directors of the Company or its subsidiaries with at least six months of service with the Company are eligible to participate in the plan. Eligible employees may acquire shares of Class B Common Stock (and under certain limited circumstances Class A Common Stock) under the plan through payroll deductions. Non-employee directors may contribute a portion of their directors' fees to the plan to purchase shares of Class B Common Stock. No individual participant may purchase more than $25,000 of stock under the plan in any one year. Shares are purchased monthly under the plan. Participants in the Stock Purchase Plan in effect purchase shares at a 15% discount from the market price because the Company contributes to the plan an amount equal to 15% of the market price of the shares actually purchased for the month, and also pays all fees and commissions relating to the administration of the Stock Purchase Plan and the purchases of shares under the plan. The Company's contributions under the plan are treated as taxable income to the participants and constitute compensation expense to the Company. Cash dividends received on shares owned by plan participants and held in an account for the participant under the Stock Purchase Plan are reinvested in accordance with the terms of the plan. Shares are purchased by the plan administrator on the open market, unless the Company directs the administrator to purchase shares directly from the Company. The Stock Purchase Plan does not specify a maximum number of shares that may be issued pursuant to the plan. Since 1998, all purchases under the plan have been open market purchases. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The text of the Proxy Statement under the captions "Election of Directors -- Compensation Committee Interlocks and Insider Participation" and "Election of Directors -- Other Matters" are hereby incorporated herein by reference. 100 ITEM 14. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within the 90 days prior to the filing of this annual report, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. 101 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following Financial Statements, Schedules, and Other Information of the Registrant and its subsidiaries are included in this Form 10-K: (a)(1) Financial Statements. 1. Consolidated Balance Sheets at December 31, 2002 and 2001. 2. Consolidated Income Statements for each of the three years in the period ended December 31, 2002. 3. Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2002. 4. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002. 5. Notes to Consolidated Financial Statements. (a)(2) Schedules. Other statements and schedules are not being presented either because they are not required or the information required by such statements and schedules is presented elsewhere in the financial statements. (a)(3) Exhibits 2-a Purchase and Sale Agreement, dated January 8, 2001, by and between Advanta Corp. and Chase Manhattan Mortgage Corporation (incorporated by reference to Annex I to Advanta Corp.'s Definitive Proxy Statement filed January 25, 2001). 2-b Mortgage Loan Purchase and Sale Agreement, dated February 23, 2001, by and among Advanta Corp., Chase Manhattan Mortgage Corporation, and Chase Manhattan Bank USA, National Association (incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated March 14, 2000). 2-c Mortgage Loan Purchase and Sale Agreement, dated February 28, 2001, by and among Advanta Corp., Chase Manhattan Mortgage Corporation, and Chase Manhattan Bank USA, National Association (incorporated by reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated March 14, 2000). 3-a Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 33-53475), filed June 10, 1994), as amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS))(incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated August 15, 1995), as further amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A, dated March 17, 1997). 3-b By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 the Registrant's Current Report on Form 8-K dated March 17, 1997). 3-c Rights Agreement, dated as of March 14, 1997, by and between the Registrant and the Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated March 17, 1997), as amended by Amendment No. 1, dated as of June 4, 1998 (incorporated by reference to Exhibit 1 to the Registrant's Amended Registration Statement on Form 8-A/A, dated June 11, 1998), and Amendment No. 2, dated as of September 4, 1998, (incorporated by reference to Exhibit 1 to the Registrant's Amended Registration Statement on Form 8-A/A, dated September 23, 1998).
102 4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including Form of Debenture. 4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992). 4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993). 4-d Senior Trust Indenture, dated as of October 23, 1995, between the Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-62601), filed September 13, 1995). 4-e Indenture dated as of December 17, 1996 between Advanta Corp. and The Chase Manhattan Bank, as trustee relating to the Junior Subordinated Debentures (incorporated by reference to Exhibit 4-g to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-f Declaration of Trust dated as of December 5, 1996 of Advanta Capital Trust I (incorporated by reference to Exhibit 4-h to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-g Amended and Restated Declaration of Trust dated as of December 17, 1996 for Advanta Capital Trust I (incorporated by reference to Exhibit 4-i to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-h Series A Capital Securities Guarantee Agreement dated as of December 17, 1996. (incorporated by reference to Exhibit 4-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 10-a Advanta Corp. 2000 Omnibus Stock Incentive Plan (incorporated by reference to 4(f) to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (File No. 333-04469).+ 10-b Card Member License Agreement between Colonial National Financial Corp. (now known as Advanta Bank Corp.) and MasterCard International Incorporated dated April 14, 1994 (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-c VISA U.S.A. Inc. Membership Agreement and Principal Member Addendum executed by Advanta Corp. on February 27, 1997 (incorporated by reference to Exhibit 10-c to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-d VISA U.S.A. Inc. Membership Agreement executed by Advanta Bank Corp. on March 3, 2000 (incorporated by reference to Exhibit 10-d to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-e* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983. 10-f* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983. 10-g* Indenture of Trust dated May 11, 1984 between Linda Alter, as settlor, and Dennis Alter, as trustee. 10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda Alter, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File No. 33-58660), filed February 23, 1993).
103
10-h Advanta Corp. Executive Deferral Plan (incorporated by reference to the Exhibit 10-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-i Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by reference to Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-j Life Insurance Benefit for Certain Key Executives and Directors (filed herewith).+ 10-k Amended and Restated Agreement of Limited Partnership of Advanta Partners LP, dated as of October 1, 1996 (incorporated by reference to Exhibit 10-o to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 10-l Agreement of Limited Partnership of Advanta Growth Capital Fund L.P., dated as of July 28, 2000 (incorporated by reference to Exhibit 10-i to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000). 10-m Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-n Agreement dated May 11, 1998 between the Registrant and Philip M. Browne (incorporated by reference to Exhibit 10-r to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998).+ 10-o Contribution Agreement, dated as of October 28, 1997, by and between Advanta Corp. and Fleet Financial Group (incorporated by reference to Exhibit (c)(2) to the Registrant's Schedule 13E-4, dated January 20, 1998), as amended by the First Amendment to the Contribution Agreement, dated as of February 10, 1998, by and among Advanta Corp., Fleet Financial Group and Fleet Credit Card, LLC (incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K, filed March 6, 1998). 10-p Commercial Lease, dated September 28, 1995, by and between Draper Park North, L.C. and Advanta Financial Corp., as amended January 31, 1996 and May 20, 1996, as amended (filed herewith). 10-q Master Indenture, dated as of August 1, 2000, between Wilmington Trust Company, as Owner Trustee of the Advanta Business Card Master Trust and Bankers Trust Company, as Indenture Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.). 10-r Series 2000-B Indenture Supplement, dated as of August 1, 2000, between Advanta Business Card Master Trust and Bankers Trust Company (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.). 10-s Transfer and Servicing Agreement, dated as of August 1, 2000, among Advanta Business Receivables Corp., Advanta Bank Corp., as Servicer, and Advanta Business Card Master Trust (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.). 10-t Series 2000-C Indenture Supplement, dated as of November 1, 2000, between Advanta Business Card Master Trust and Bankers Trust Company, as indenture trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed November 21, 2000 by Advanta Business Receivables Corp.). 10-u Advanta Business Card Master Trust Trust Agreement, dated as of August 1, 2000, between Advanta Business Receivables Corp. and Wilmington Trust Company, as Owner Trustee (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.).
104 10-v Series 2001-A Indenture Supplement, dated as of April 1, 2001, between Advanta Business Card Master Trust and Bankers Trust Company (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed April 24, 2001 by Advanta Business Receivables Corp.). 10-w Series 2002-A Indenture Supplement, dated as of July 1, 2002, between Advanta Business Card Master Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed July 26, 2002 by Advanta Business Receivables Corp.). 10-x Agreement and General Release between Advanta Corp. and Rosemary Cauchon, dated December 18, 2002 (filed herewith).+ 10-y Master Agreement between Dun & Bradstreet, Inc. and Advanta Bank Corp., dated June 18, 2002 (filed herewith). 10-z Direct Marketing Agreement, dated effective as of December 15, 1999, by and among Advanta Bank Corp. and CFM Direct, as amended (filed herewith). 10-aa Advanta Corp. Employee Stock Purchase Plan, as amended (filed herewith). 10-bb Service Agreement between First Data Resources Inc. and Advanta Bank Corp., dated as of January 1, 2002 (incorporated by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-cc Relocation Agreement, made as of June 5, 2001, by and between Advanta Corp. and Jeffrey D. Beck (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).+ 10-dd Agreement of Lease, made as of January 1, 2002, by and between Advanta Corp. and Rosemary Cauchon (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).+
10-ee Lease Agreement, dated August 4, 1995, between Ortho Pharmaceutical Corporation and Advanta Corp. (filed herewith). 12 Computation of Ratio Earnings to Fixed Charges (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Independent Auditors (filed herewith). 23.2 Explanation Concerning Absence of Current Written Consent of Arthur Andersen LLP (filed herewith). 24 Powers of Attorney (included on the signature page hereof). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
- --------------- * Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985. + Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K 1. A Report on Form 8-K was filed by the Company on October 24, 2002 announcing results for the third quarter. 2. A Report on Form 8-K was filed by the Company on November 26, 2002 announcing earnings guidance for the fiscal year 2003. 105 3. A Report on Form 8-K was filed by the Company on January 17, 2003, reporting tax issues relating to tax deductions claimed by both Advanta and Fleet and a complaint filed by Fleet seeking a declaratory judgment. 4. A Report on Form 8-K was filed by the Company on January 23, 2003, announcing results for the fourth quarter and full year 2002. 5. A Report on Form 8-K was filed by the Company on January 27, 2003, announcing the trial court's ruling on all but one remaining issue in the lawsuit filed by Fleet against Advanta in January 1999. 106 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Advanta Corp. By: /s/ WILLIAM A. ROSOFF ---------------------------------------- William A. Rosoff, President and Vice Chairman of the Board Dated: March 24, 2003 KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby constitute and appoint Dennis Alter, William A. Rosoff, Philip M. Browne, David B. Weinstock and Elizabeth H. Mai, or any of them (with full power to each of them to act alone), his or her true and lawful attorney in-fact and agent, with full power of substitution, for him or her and on his or her behalf to sign, execute and file an Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 2002 relating to Advanta Corp. and any or all amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 24th day of March, 2003.
NAME TITLE ---- ----- /s/ DENNIS ALTER Chairman of the Board and - ------------------------------------------ Chief Executive Officer Dennis Alter /s/ WILLIAM A. ROSOFF President and Vice Chairman - ------------------------------------------ of the Board William A. Rosoff /s/ PHILIP M. BROWNE Senior Vice President and - ------------------------------------------ Chief Financial Officer Philip M. Browne /s/ DAVID B. WEINSTOCK Vice President and Chief - ------------------------------------------ Accounting Officer David B. Weinstock /s/ ARTHUR P. BELLIS Director - ------------------------------------------ Arthur P. Bellis /s/ ROBERT S. BLANK Director - ------------------------------------------ Robert S. Blank /s/ MAX BOTEL Director - ------------------------------------------ Max Botel /s/ DANA BECKER DUNN Director - ------------------------------------------ Dana Becker Dunn
107
NAME TITLE ---- ----- Director - ------------------------------------------ Ronald Lubner /s/ OLAF OLAFSSON Director - ------------------------------------------ Olaf Olafsson /s/ ROBERT H. ROCK Director - ------------------------------------------ Robert H. Rock /s/ MICHAEL STOLPER Director - ------------------------------------------ Michael Stolper
CERTIFICATIONS I, Dennis Alter, certify that: 1. I have reviewed this Annual Report on Form 10-K of Advanta Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls 108 subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ DENNIS ALTER ---------------------------------------- Dennis Alter Chief Executive Officer March 24, 2003 109 I, Philip M. Browne, certify that: 1. I have reviewed this Annual Report on Form 10-K of Advanta Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ PHILIP M. BROWNE ---------------------------------------- Philip M. Browne Chief Financial Officer March 24, 2003 110 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT AND MANNER OF FILING ------- ---------------------------- (a)(1) Financial Statements. 1. Consolidated Balance Sheets at December 31, 2002 and 2001. 2. Consolidated Income Statements for each of the three years in the period ended December 31, 2002. 3. Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2002. 4. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002. 5. Notes to Consolidated Financial Statements. (a)(2) Schedules. Other statements and schedules are not being presented either because they are not required or the information required by such statements and schedules is presented elsewhere in the financial statements. (a)(3) Exhibits 2-a Purchase and Sale Agreement, dated January 8, 2001, by and between Advanta Corp. and Chase Manhattan Mortgage Corporation (incorporated by reference to Annex I to Advanta Corp.'s Definitive Proxy Statement filed January 25, 2001). 2-b Mortgage Loan Purchase and Sale Agreement, dated February 23, 2001, by and among Advanta Corp., Chase Manhattan Mortgage Corporation, and Chase Manhattan Bank USA, National Association (incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated March 14, 2000). 2-c Mortgage Loan Purchase and Sale Agreement, dated February 28, 2001, by and among Advanta Corp., Chase Manhattan Mortgage Corporation, and Chase Manhattan Bank USA, National Association (incorporated by reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated March 14, 2000). 3-a Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 33-53475), filed June 10, 1994), as amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS))(incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated August 15, 1995), as further amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A, dated March 17, 1997). 3-b By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 the Registrant's Current Report on Form 8-K dated March 17, 1997). 3-c Rights Agreement, dated as of March 14, 1997, by and between the Registrant and the Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated March 17, 1997), as amended by Amendment No. 1, dated as of June 4, 1998 (incorporated by reference to Exhibit 1 to the Registrant's Amended Registration Statement on Form 8-A/A, dated June 11, 1998), and Amendment No. 2, dated as of September 4, 1998, (incorporated by reference to Exhibit 1 to the Registrant's Amended Registration Statement on Form 8-A/A, dated September 23, 1998).
EXHIBIT NUMBER EXHIBIT AND MANNER OF FILING ------- ---------------------------- 4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including Form of Debenture. 4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992). 4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993). 4-d Senior Trust Indenture, dated as of October 23, 1995, between the Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-62601), filed September 13, 1995). 4-e Indenture dated as of December 17, 1996 between Advanta Corp. and The Chase Manhattan Bank, as trustee relating to the Junior Subordinated Debentures (incorporated by reference to Exhibit 4-g to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-f Declaration of Trust dated as of December 5, 1996 of Advanta Capital Trust I (incorporated by reference to Exhibit 4-h to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-g Amended and Restated Declaration of Trust dated as of December 17, 1996 for Advanta Capital Trust I (incorporated by reference to Exhibit 4-i to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-h Series A Capital Securities Guarantee Agreement dated as of December 17, 1996. (incorporated by reference to Exhibit 4-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 10-a Advanta Corp. 2000 Omnibus Stock Incentive Plan (incorporated by reference to 4(f) to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (File No. 333-04469).+ 10-b Card Member License Agreement between Colonial National Financial Corp. (now known as Advanta Bank Corp.) and MasterCard International Incorporated dated April 14, 1994 (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-c VISA U.S.A. Inc. Membership Agreement and Principal Member Addendum executed by Advanta Corp. on February 27, 1997 (incorporated by reference to Exhibit 10-c to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-d VISA U.S.A. Inc. Membership Agreement executed by Advanta Bank Corp. on March 3, 2000 (incorporated by reference to Exhibit 10-d to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-e* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983. 10-f* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983. 10-g* Indenture of Trust dated May 11, 1984 between Linda Alter, as settlor, and Dennis Alter, as trustee.
EXHIBIT NUMBER EXHIBIT AND MANNER OF FILING ------- ---------------------------- 10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda Alter, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File No. 33-58660), filed February 23, 1993). 10-h Advanta Corp. Executive Deferral Plan (incorporated by reference to the Exhibit 10-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-i Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by reference to Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-j Life Insurance Benefit for Certain Key Executives and Directors (filed herewith).+ 10-k Amended and Restated Agreement of Limited Partnership of Advanta Partners LP, dated as of October 1, 1996 (incorporated by reference to Exhibit 10-o to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 10-l Agreement of Limited Partnership of Advanta Growth Capital Fund L.P., dated as of July 28, 2000 (incorporated by reference to Exhibit 10-i to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000). 10-m Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-n Agreement dated May 11, 1998 between the Registrant and Philip M. Browne (incorporated by reference to Exhibit 10-r to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998).+ 10-o Contribution Agreement, dated as of October 28, 1997, by and between Advanta Corp. and Fleet Financial Group (incorporated by reference to Exhibit (c)(2) to the Registrant's Schedule 13E-4, dated January 20, 1998), as amended by the First Amendment to the Contribution Agreement, dated as of February 10, 1998, by and among Advanta Corp., Fleet Financial Group and Fleet Credit Card, LLC (incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K, filed March 6, 1998). 10-p Commercial Lease, dated September 28, 1995, by and between Draper Park North, L.C. and Advanta Financial Corp., as amended January 31, 1996 and May 20, 1996, as amended (filed herewith). 10-q Master Indenture, dated as of August 1, 2000, between Wilmington Trust Company, as Owner Trustee of the Advanta Business Card Master Trust and Bankers Trust Company, as Indenture Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.). 10-r Series 2000-B Indenture Supplement, dated as of August 1, 2000, between Advanta Business Card Master Trust and Bankers Trust Company (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.). 10-s Transfer and Servicing Agreement, dated as of August 1, 2000, among Advanta Business Receivables Corp., Advanta Bank Corp., as Servicer, and Advanta Business Card Master Trust (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.).
EXHIBIT NUMBER EXHIBIT AND MANNER OF FILING ------- ---------------------------- 10-t Series 2000-C Indenture Supplement, dated as of November 1, 2000, between Advanta Business Card Master Trust and Bankers Trust Company, as indenture trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed November 21, 2000 by Advanta Business Receivables Corp.). 10-u Advanta Business Card Master Trust Trust Agreement, dated as of August 1, 2000, between Advanta Business Receivables Corp. and Wilmington Trust Company, as Owner Trustee (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K, filed August 30, 2000 by Advanta Business Receivables Corp.). 10-v Series 2001-A Indenture Supplement, dated as of April 1, 2001, between Advanta Business Card Master Trust and Bankers Trust Company (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed April 24, 2001 by Advanta Business Receivables Corp.). 10-w Series 2002-A Indenture Supplement, dated as of July 1, 2002, between Advanta Business Card Master Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed July 26, 2002 by Advanta Business Receivables Corp.). 10-x Agreement and General Release between Advanta Corp. and Rosemary Cauchon, dated December 18, 2002 (filed herewith).+ 10-y Master Agreement between Dun & Bradstreet, Inc. and Advanta Bank Corp., dated June 18, 2002 (filed herewith). 10-z Direct Marketing Agreement, dated effective as of December 15, 1999, by and among Advanta Bank Corp. and CFM Direct, as amended (filed herewith). 10-aa Advanta Corp. Employee Stock Purchase Plan, as amended (filed herewith). 10-bb Service Agreement between First Data Resources Inc. and Advanta Bank Corp., dated as of January 1, 2002 (incorporated by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001). 10-cc Relocation Agreement, made as of June 5, 2001, by and between Advanta Corp. and Jeffrey D. Beck (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).+ 10-dd Agreement of Lease, made as of January 1, 2002, by and between Advanta Corp. and Rosemary Cauchon (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).+ 10-ee Lease Agreement, dated August 4, 1995, between Ortho Pharmaceutical Corporation and Advanta Corp. (filed herewith). 12 Computation of Ratio Earnings to Fixed Charges (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23.1 Consent of Independent Auditors (filed herewith). 23.2 Explanation Concerning Absence of Current Written Consent of Arthur Andersen LLP (filed herewith). 24 Powers of Attorney (included on the signature page hereof). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
- --------------- * Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985. + Management contract or compensatory plan or arrangement. EX-10.J 3 w84552exv10wj.txt LIFE INSURANCE BENEFIT Exhibit 10-j As a taxable executive benefit, the Company pays the premiums for life insurance policies on the lives of non-employee Directors and certain key executives. The executive or Board member has the right to designate the beneficiary under the applicable life insurance policy. At December 31, 2002, Mr. Alter and Mr. Rosoff were covered by policies of $10,000,000 and $5,000,000, respectively. Each non-employee Director is eligible to receive a $500,000 policy. Upon termination of employment, the executive is entitled to acquire the insurance policy from the Company upon payment to the Company of an amount equal to the cash value of the policy at that time. The policies insuring the non-employee Directors are term life insurance policies, on which there is no build-up in cash value. EX-10.P 4 w84552exv10wp.txt COMMERCIAL LEASE, DATED SEPTEMBER 23, 1995... Exhibit 10-p COMMERCIAL LEASE THIS LEASE dated this 28th DAY OF SEPTEMBER, 1995, is entered into by and between DRAPER PARK NORTH, L.C., a Utah Limited Liability Company ("Landlord"), and ADVANTA FINANCIAL CORP., a Utah corporation ("Tenant"). 1. PREMISES. (a) Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the terms and conditions herein, to each and all of which Landlord and Tenant hereby mutually agree, those certain Occupied and Unoccupied premises (collectively "Premises", unless otherwise specifically noted), highlighted on Exhibit A attached hereto, which include APPROXIMATELY 35,000 RENTABLE SQUARE FEET OF OCCUPIED PREMISES (the exact square footage and load factor shall be determined by final space plan; said square footage shall not be less than 35,000 square feet). The location of the Premises is commonly known as: 11850 Election Dr., Draper, UT 84020. (b) Tenant shall also have the right herein to lease AN ADDITIONAL APPROXIMATE 15,000 SQUARE FEET OF "UNOCCUPIED PREMISES" as more specifically outlined in Article 4(a)(ii) herein. Finally, Tenant shall have a "Right of First Refusal" to further add to the Premises and Unoccupied Premises identified in this Lease, provided that such Right of First Refusal applies only to vacant and unrented space in the same building as the Premises and further provided that Tenant execute within five (5) business days, of written notice from Landlord, a lease for the additional space containing the same terms and conditions which have been agreed to by the prospective tenant other than Tenant (Advanta). (c) For purposes of this Lease, the Premises shall be measured in accordance with the Building Owners and Management Association (BOMA) Method, American National Standard (ANSI Z65.1-1980, reaffirmed 1989) of floor measurement. Landlord shall provide, upon Tenant's request, the calculations which show how the Total Rentable Area of the Building and Rentable and Useable Area of the Premises were derived. (d) In addition, the Premises shall include the appurtenant right to use, in common with others, the site, parking and landscaped areas. Landlord shall provide Tenant 6 NON-RESERVED PARKING STALLS PER 1,000 RENTABLE SQ. FT. OF OCCUPIED PREMISES (approximately 210 non-reserved parking stalls at the Commencement Date of this Lease) in the adjacent parking lots of the Premises; one (1) of the above parking stalls to be reserved stalls per each 4,500 square feet of Occupied Premises designated by Tenant. (e) Acceptance of Premises. Unless otherwise notified by Tenant within thirty (30) days of taking possession, by entry hereunder Tenant accepts the Premises as being in the condition in which Landlord is obligated to deliver the Premises. Tenant shall at the end of the term and any extension herein surrender to Landlord the Premises and all alterations, additions and improvements thereto in the same condition as when received; ordinary wear and tear, damage by fire, earthquake, or act of God excepted. Landlord has no liability and has made no representation to alter, improve, repair, or paint the Premises or any part thereof, except as specified in Article 2(c) & 6 herein. (f) Landlord understands and agrees that Tenant intends to be open for regular business during the hours of 6:00 a.m. to 7:00 p.m. Monday through Saturday. In addition, Tenant shall have 24-hour access to the Premises. 2. TERM, OPTION, TENANT IMPROVEMENTS. (a) Initial Term. The Lease term shall be five (5) years and shall commence FEBRUARY 15, 1996 ("Commencement Date"). In order to allow Tenant's possession by the Commencement Date, the Premises shall be ready by FEBRUARY 1, 1996, for systems and furniture installation by Tenant. In the event that the Premises is not ready for systems and furniture installation by February 1, 1996, Landlord shall provide one (1) day of free Base Rent for each day the Premises are not ready, provided that Landlord, its agents or employees, is solely or substantially the cause of such delay. However, if Landlord fails to deliver possession within thirty (30) days of the Commencement Date, Tenant shall have the right to terminate this Lease without any further liability to Landlord or Tenant, in which event Landlord shall refund to Tenant within sixty (60) days any advanced Rents and Security Deposit paid by Tenant. (b) Option. Provided that Tenant is not in default under this Lease, within one-hundred eighty (180) days of expiration of this Lease or any extension period herein and by written notice to Landlord, Tenant shall have the right to renew this Lease for three (3) additional periods of two (2) years each. Tenant shall possess the Premises during the option period upon the same terms and conditions of this Lease, except that Base Rent under Article 4(a) herein will be adjusted for the option period(s) by the proportionate increase in the Consumer Price Index (CPI), using the Commencement Date of this Lease as the base period. Base Rent during any option period(s) shall never decrease, even if the CPI decreases. (c) Tenant Improvements, Space Planning and Moving Allowance. At execution of this Lease, Landlord shall commence the building design, construction and installation of agreed-upon Tenant Improvements requested by Tenant ("Tenant Improvements"). Landlord shall provide Tenant $21.00 PER RENTABLE SQUARE FOOT OF OCCUPIED PREMISES (approximately $735,000) for Tenant Improvements, regardless of the actual costs thereof. It is understood and agreed that Tenant is solely responsible for any costs of Tenant Improvements above $21.00 per rentable sq. ft. of Occupied Premises. Any unexpended Tenant Improvements allowance shall be refunded to Tenant on a prorata basis over the Lease term. Tenant shall have the right to review and approve the bids for Tenant Improvements. The Tenant Improvements shall include all improvements to the Premises, but exclude, at no cost to Tenant, those items specifically the responsibility of Landlord as identified in the Base Building Improvements, incorporated herein and attached hereto as Exhibit B. LANDLORD SHALL FURTHER PROVIDE TENANT $1.50 PER RENTABLE SQ. FT OF OCCUPIED PREMISES FOR MOVING ALLOWANCE UPON TENANT'S TAKING OCCUPANCY, REGARDLESS OF TENANT'S ACTUAL COST, WHICH SHALL BE PAID TO TENANT WITHIN SIXTY (60) DAYS OF THE COMMENCEMENT DATE. (d) Substantial Completion of Tenant Improvements. The Premises shall be deemed complete upon substantial completion. "Substantial Completion" shall mean when (i) installation of Tenant Improvements has occurred to Tenant's reasonable satisfaction, (ii) building services are accessible to the Premises, (iii) Landlord's Architect/Contractor shall have issued a Certificate of Substantial Completion with respect to Premises or that portion of the Building 2 within which they are contained, whether or not Substantial Completion of the building itself shall has occurred, and (iv) issuance of a Certificate of Occupancy. Substantial Completion shall be deemed to have occurred notwithstanding a requirement to complete non-substantial "punchlist" work. Landlord shall use its best efforts to advise Tenant of Substantial Completion at least 30 days prior to such date, but failure to give such notice shall not constitute a default by Landlord. 3. NON-OCCUPANCY OF IMPROVED SPACE. In the event Tenant does not occupy the Premises and fails to pay Rents as required in Article 4 of this Lease, all reasonable and verifiable Tenant Improvements become due and payable upon invoicing by Landlord. Further, such invoicing by Landlord does not waive any other rights or remedies Landlord may have against Tenant for failure to occupy. 4. RENT. (a) Base Rent. (i) BASE RENT FOR OCCUPIED PREMISES. Base Rent for Occupied Premises shall be approximately $2,546,250.00, ($14.55 PER SQ. FT. X 35,000 RENTABLE SQ. FT. AND BASE RENT OF OCCUPIED PREMISES SHALL BE DETERMINED BY THE FINAL SPACE PLAN), payable as follows: $42,437.50 PER MONTH payable in advance each month on or before the 1st day of each month during the duration of the Lease, with the first such monthly rental payments being due upon the execution of the Lease. Base Rent for Occupied Premises includes $3.30 per sq. ft. for Operating Expenses as more specifically defined in Article 7 herein. (ii) BASE RENT FOR UNOCCUPIED PREMISES. Further, in order to accommodate Tenant's potential need for additional space, Tenant shall have the option to rent an additional 15,000 square feet of space upon payment of the Base Rent for Option Premises. Base Rent for Unoccupied Premises shall be APPROXIMATELY $553,500.00, $661,500.00, ($7.38 PER SQ. FT. X 15,000 UNOCCUPIED SQ. FT. APPROXIMATELY; THE EXACT SQ. FT. AND BASE RENT SHALL BE DETERMINED BY THE FINAL SPACE PLAN), payable as follows: $9,225 PER MONTH payable in advance each month on or before the 1st day of each month during the duration of the Lease, with the FIRST month rental payment being due upon execution of the Lease, subject to the following: 1. Tenant shall receive a discount of fifty percent (50%) of the Base Rent for Unoccupied Premises only for months 2 - 5 of the Lease. 2. Base Rent for Unoccupied Premises includes $1.86 per sq. ft. for Operating Expenses as more specifically defined in Article 7 herein, which amount includes a mutually-agreed reduction to Tenant for anticipated Operating Expenses not applicable to such Unoccupied Premises. 3 3. Tenant may terminate its option rights for additional Premises herein by providing 120 days written notice to Landlord, following which Tenant's obligation to pay further Base Rent of Unoccupied Premises shall cease herein. 4. Upon exercising Tenant's option herein, Tenant may possess the Unoccupied Premises pursuant to the same terms and conditions of the Lease (i.e.; Tenant Improvements, Moving Allowance, Base Rent for Occupied Premises, 6 non-reserved parking stalls per 1,000 rentable sq. ft. of Occupied Premises, etc.) in proportion to the balance of time remaining on the initial term of the Lease. (iii) Any partial months shall be prorated accordingly. All Base Rent for Occupied Premises, Base Rent for Unoccupied Premises, and Additional Rent (collectively "Rents") shall be paid as follows, unless otherwise directed in writing: Draper Park North, L.C.; Attn: Scott Waldron; 5200 South Main; Murray, UT 84107 (b) Additional Rent. All obligations payable by Tenant under this Lease other than Base Rent are called "Additional Rent". Unless otherwise provided, Additional Rent shall be paid with the next monthly installment of Base Rent upon invoicing from Landlord. (c) Interest, Late Charges, Costs and Attorneys' Fees. If Tenant fails to pay within ten (10) days of the date due any Rents which Tenant is obligated to pay under this Lease, the unpaid amount shall bear interest at ten (10%) percent per annum. Tenant acknowledges that any late payments of Rents shall cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation administrative, collection and accounting costs, the exact amount of which is difficult to ascertain. Therefore, in addition to interest, any payments not received by Landlord within ten (10) days from the date it is due, Tenant shall also pay Landlord a late charge equal to five (5%) percent of the late Rents. Further, as Additional Rent, Tenant shall be liable to Landlord for litigation or other enforcement proceeding costs and attorneys' fees actually and reasonably incurred as a result of late payments or non-payments. Acceptance of any interest, late charge, costs or attorneys' fees shall not constitute a waiver of any default by Tenant nor prevent Landlord from exercising any other rights or remedies under this Lease or at law. 5. USE. (a) The Premises shall be used for banking (including but not limited to retail banking), general office and warehouse, assembly, equipment, testing and development, and distribution purposes and no other, unless consented to in writing by Landlord, which consent will not be unreasonably withheld. Tenant shall not do or permit to be done in or about the Premises anything which is prohibited by or in any way in conflict with (in the case of hazardous materials, Tenant shall notify Landlord of any such materials and shall ensure that any such hazardous material is property controlled, safeguarded, and disposed of) any and all laws, statutes, ordinances, rules and regulations now in force or which may hereafter be enacted or 4 promulgated or which is prohibited by the standard form of fire insurance policy, or which will increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy covering the Building or any part thereof or any of its contents. Tenant shall not do or permit anything to be done in or about the Premises which will in any way violate Rules or Regulations reasonably promulgated by Landlord throughout this Lease, obstruct or interfere with the rights of other tenants, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance, in, on or about the Premises or commit or suffer to be committed any waste in, on or about the Premises. Landlord agrees to disclose to Tenant, or Tenant's agent, any information known by Landlord regarding the condition of the Premises, including but not limited to, relevant soil conditions, presence of hazardous or contaminated substances, PCB transformers, or other toxic substances. (b) Tenant shall not use the name of the Building in which the Premises are located, in connection with any business carried on in said Premises (except as Tenant's address) without written consent of Landlord. (c) Tenant shall not manufacture, assemble or store materials inside the common areas outside of Building. 6. LANDLORD'S SERVICES. Landlord, at its sole expense, is only responsible to maintain the roof and structural elements of the Premises, including the party wall. All other repairs, maintenance, insurance, taxes and property management for the Premises, the building(s) and common areas shall be provided by Landlord and be the responsibility of Landlord, but shall be reimbursed by Tenant through payment of Operating Expenses as more fully outlined in Article 7 herein. 7. OPERATING EXPENSES - REPAIRS, MAINTENANCE, INSURANCE, TAXES AND PROPERTY MANAGEMENT (EXCLUDES ELECTRIC AND GAS). Since the Premises is part of a larger building or group of buildings having common expenses and needs, Tenant agrees to pay for Operating Expenses as part of Base Rent $3.30 per rentable square foot per year for Occupied Premises and $1.86 per rentable square foot per year for Unoccupied Premises. Further, Tenant agrees to pay as Base Rent any allowed Operating Expenses Escalation as more specifically defined herein, subject to the Cap as provided for in Article 7(b)(iv) herein. For purposes of this Lease, the following definitions, terms and conditions apply: (a) Definitions. "Operating Expenses" - Operating Expenses include the expenses for all reasonable and necessary repairs, maintenance, insurance, taxes and property 5 *management for the operation and management of the Premises and the building(s) and common areas of Draper Park North, L.C. For purposes of this Lease, Operating Expenses specifically excludes electric and gas expenses which are the sole responsibility and cost of the Tenant. "Operating Expenses Escalation" - Operating Expenses Escalation allows the Landlord to recover increases, subject to the Cap as explained herein, in Operating Expenses (attributable to the Premises, the building(s) and common areas of Draper Park North, L.C.) by increasing prorata the rate (i.e., $3.30 per sq. ft for Occupied Premises and $1,86 per sq. ft. for Unoccupied Premises) for Operating Expenses. Operating Expenses Escalation is the difference between Tenant's prorata share of the Operating Expenses for the Base Year and Tenant's prorata share of Operating Expenses for the calendar year in question. Operating Expenses Escalation does not include Real Estate Taxes. "Real Estate Taxes" means real estate taxes levied or assessed against the Premises, building(s) and common areas as finally determined to be legally payable by legal proceedings or otherwise after taking into account any available discount, excluding any interest or penalty for late payment and any transfer, sales, use, or rent taxes. "Special Assessments" may be included with Real Estate Taxes to the extent that the Special Assessment benefits all tenants of a building(s) equally in proportion to each tenant's rentable sq. ft in the building(s); however, excluding any special assessment incurred or paid by Landlord in lieu of a capital expenditure. "Real Estate Taxes Escalation" - Real Estate Taxes Escalation allows the Landlord to recover increases in Real Estate Taxes (attributable to the Premises, the building(s) and common areas of the Draper Park North, L.C.) by passing through a prorata share of such tax increases. "Prorata Share" - Operating Expenses Escalation and Real Estate Taxes Escalation shall be calculated to establish a Prorata Share for each tenant of Draper Park North, L.C. by dividing the sq. ft. of each tenant's Premises by the total rentable sq. ft. of all tenants' Premises. (b) Operating Expenses Escalation. (i) Operating Expenses Escalation is intended to assure that Tenant pays for Tenant's share of all inflationary-type increases in the costs of operating and maintaining the Premises, building(s) and common areas over the costs of the Base Year (as hereinafter defined). For purposes of Operating Expenses Escalation, "Base Year" means calendar year 1996. In addition to the Base Rent, Tenant shall pay the Operating Expenses Escalation (beginning January 1997 as more fully described herein). In Landlord's and Tenant's mutual and reasonable discretion, Operating Expenses for the Base Year shall be adjusted, as necessary, to a level of 95% occupied 6 Landlord's building(s) in Draper Park North at cost levels for an entire year. This adjustment shall include: (a) when building systems are under warranty during the Base Year, an adjustment for the cost of service contracts and other expenses that would have been incurred in the absence of such warranties; (b) an adjustment for all other expenses that are not incurred if the Building is new and start-up discounts or similar savings have been achieved; and (c) adjustments for all other atypical costs that occur or do not occur during the Base Year other than those costs which would occur in the Base Year in the ordinary course of business. The purpose of these adjustments is to include in the Operating Expenses for the Base Year all reasonable cost components that occur or are likely to occur in later years. If at any time during the Lease Term, less than 95% of the rentable sq. ft. of the building(s) is occupied by tenants, the Operating Expenses for such calendar year shall be reasonably determined to be an amount equal to the expenses that would normally be expected to be incurred if such occupancy had been 95% of the total rentable sq. ft. of the building(s). The only expenses which shall be adjusted in this manner shall be variable expenses, otherwise includable as Operating Expenses, where the amount is directly related to the level of occupancy or square foot area receiving a particular service. If a new category of Operating Expenses is incurred after the Base Year, the first full year's expense for such items shall be added to the Operating Costs for the Base Year commencing with the first full calendar year that such expense is incurred, so that Tenant shall only be required to pay subsequent increases in such expense. The expense incurred for such items during the first year shall be subject to the adjustments described in the immediately preceding paragraphs of this sub-section. For the first full calendar year following the Base Year, the Operating Expenses Escalation shall be billed as a one-time charge at the close of the year and shall be paid by Tenant within sixty (60) days after receipt of the bill. For the second full calendar year following the Base Year, and all subsequent full or partial calendar years during the Lease, Tenant shall pay Landlord each month, on account as Base Rent, an amount equal to one twelfth (1/12) of the prior year's Operating Expenses Escalation, less any non-recurring expenses (hereinafter "Operating Expenses Escalation Paid on Account"). Landlord shall provide Tenant with a bill for the Operating Expenses Escalation after the close of each calendar year. Tenant shall, within thirty (30) days of the Tenant's receipt of such bill, pay Landlord the difference between the Operating Expenses Escalation Paid On Account and the final amount due as set forth in such bill. If for any calendar year the Operating Expenses Escalation Paid on Account exceeds the actual Operating Expenses Escalation, the excess shall be treated as a prepayment of the next due installment of Base Rent and Operating Expenses Escalation Paid on Account. (ii) Operating Expenses shall be limited to the following reasonable and 7 necessary expenses which are paid or incurred (as permitted pursuant to generally accepted accounting principals, consistently applied) for operating and maintaining the Premises, the building(s) and common areas: (1) Cleaning Expenses - All expenses for routine cleaning, including public areas, atriums, elevators, rest rooms and windows. Cleaning expenses shall include, but not be limited to maintenance of cleaning equipment, supplies, contract service and trash removal. Because of Tenant's banking operations, Tenant shall have the right to select the cleaning agent/personnel required hereunder, which cleaning agent/personnel may need to be bonded. Tenant shall pay as additional rent the additional costs of having a bonded cleaning agent/personnel. (2) General - All expenses for general repair and maintenance, including contracted services, elevator, electrical, roof, plumbing, fire and life safety expenses, and other building maintenance supplies. (3) Roads, Grounds and Security - Expenses related to exterior maintenance (e.g., landscaping, snow removal, parking lot repairs, site signage and lighting) and expenses for security. (4) Heating, Ventilation and Air Conditioning - Heating, ventilation and air conditioning expenses for labor and supplies to operate and maintain air conditioning, heating and ventilating systems, including the cost of contracted services. No replacement costs for major components of the heating, ventilation or air conditioning systems or energy costs are included in this category. (5) Insurance - All expenses for insurance of the Premises, building(s) and common areas. (6) Salaries - All salaries, wages, medical, surgical, union and general welfare benefits (including group life insurance), and pension payments of persons employed by the Landlord, however, not above the level of property manager, to the extent such employees are directly engaged in the repair, operations and maintenance of the Premises, building(s) and common areas, together with payroll taxes, workers' compensation insurance premiums, uniforms and related expenses pertaining to such employees, to the extent such expenses are competitive and commercially reasonable. (7) Management Fee - A management fee which in no event shall exceed three (3.0%) percent of the gross receipts from the building(s), as adjusted below. Management Fees for the Base Year and the Lease Term shall be computed as if the vacant areas of the building(s) were 95% rented at the Tenant's Base Rent, including reasonably anticipated amounts for escalations and other rents, without regard to rent abatements or other concessions, that would 8 have been collected had the building(s) been fully occupied. After the Base Year, management fees shall be computed by substituting the actual base rents, including reasonably anticipated amounts for escalations and other rents, without regard to rent abatements or other concessions of tenants, for so long as such other tenants occupy areas which were vacant during the Tenant's Base Year. (8) Utilities - Expenses for utilities servicing the common areas, including electricity, gas fuel oil, stream, water, and storm water/sewer; however, a tenant's overtime use of such utilities shall not be considered part of the Operating Expenses, but rather shall be separately charged to the specific tenant incurring such overtime utilities. Further, for purposes of this Lease, Operating Expenses specifically excludes electric and gas expenses which are the sole responsibility and cost of the Tenant. (9) Landlord Reasonable Diligence - Landlord shall exercise reasonable diligence, no later than twenty-four (24) hours after receiving actual notice of a problem, in providing services (repairs, maintenance, snow removal, etc.) under this Lease. (iii) Exclusions/Deductions. By way of illustration and not limitation, Operating Expenses shall not include, among other expenses or costs, any expenses or costs incurred or paid by Landlord for the following items: (1) Capital expenditures, including any capital replacement, capital repair or capital improvement made to the Premises, building's and common areas and any other expense which would be deemed to be a capital expenditure under generally accepted accounting principles, consistently applied. Replacement of an item or of a major component of an item and major repairs to such items in lieu of replacement shall each be considered a capital expenditure if the original item or a subsequent improvement to such item was, or could have been, capitalized. Capital expenditures of $1,000.00 or less may be included in Operating Expenses. For purposes of this clause, a group of expenditures related to the same capital project shall be considered a single expenditure. (2) Depreciation or amortization of the building(s) or its contents or components; (3) Expenses for the preparation of space or other work which Landlord performs for any tenant or prospective tenant of the building(s); (4) Expenses for repairs or other work which is caused by fire, windstorm, casualty or any other incurable occurrence, including costs subject to Landlord's insurance deductible; 9 (5) Expenses incurred in leasing or obtaining new tenants or retaining existing tenants, including leasing commissions, legal expenses, advertising or promotion; (6) Legal expenses incurred in enforcing the terms of any lease; (7) Interest, amortization or other costs, including legal fees, associated with any mortgage, loan or refinancing of the Premises, building(s) and common areas; (8) Expenses incurred for any necessary replacement of any item to the extent that it is covered under warranty, provided warranty is honored and is effective; (9) The cost of any item or service which Tenant separately reimburses Landlord or pays to third parties, or that Landlord provides selectively to one or more tenants of the building(s), other than Tenant, whether or not Landlord is reimbursed by such other tenant(s). This category shall include the actual cost of any special electrical, heating, ventilation or air conditioning required by any tenant that exceeds normal building standards; (10) Accounting and legal fees relating to the ownership, construction, leasing, sale or any litigation relating to the Building, the Common Area Facilities or the Land; (11) Any interest or penalty incurred due to the late payments of any Operating Expenses; (12) Any amount paid to an entity or individual related to Landlord which exceeds the amount which would be paid for similar goods or services on an arm's-length basis between unrelated parties; (13) The cost of correcting defects in the construction of the Premises, building(s) and common areas; repairs resulting from ordinary wear and tear shall not be deemed to be defects; (14) The initial cost or the replacement cost of any permanent landscaping, or the regular landscaping maintenance for any property other than the Land; (15) Costs of complying with any governmental laws, rules, regulations, or other requirements applicable to the Premises, building(s) and common areas; (16) Any ground rent, air space rent or other rent incurred for the real 10 property that the Premises, building(s) and common areas sit upon; (17) Any cost incurred to test, survey, cleanup, contain, abate, remove or otherwise remedy Hazardous Materials, or asbestos containing materials from the Premises, building(s) and common areas, including any damages or future claims asserted against Landlord in connection with the same; (18) Any personal property taxes of the Landlord for equipment or items not used directly in the operation or maintenance of the Premises, building(s) or common areas; (19) Except for management fees, all expenditures pertaining to the administration of the Premises, building(s) and common areas, including payroll and payroll-related expenses associated with administrative and clerical personnel; general office expenditures; other administrative expenditures (including expenditures for travel, entertainment, dues, subscriptions, donations, data processing, errors and omissions insurance, automobile allowances, charitable contributions, political donations and professional fees of any kind) unless enumerated as Operating Expenses; (20) Rentals and other related expenses, if any, incurred in leasing capital items; (21) Any costs or expenses for sculpture, paintings, or other works of art, including, costs incurred with respect to the purchase, ownership, leasing, repair, and/or maintenance of such works of art; (22) Contributions to reserves for Operating Expenses; (23) The cost of overtime or other expense to Landlord in performing work expressly provided in this Lease to be borne at Landlord's expense; (24) All expenses directly resulting from the negligence or willful misconduct of the Landlord, its agents, servants or other employees; (25) All bad debt loss, rent loss, or reserve for bad debt or rent loss; (26) Any other cost or expense which, under generally accepted accounting principles consistently applied, would not be considered to be Operating Expenses; and (27) Any additional costs incurred in order to operate or maintain the Premises, building(s) or common areas or costs directly incurred by the Landlord due to the nature of business conducted by any tenant(s) within the Building which would not customarily be incurred in an office building, including, 11 however not limited to, retail or food service tenants. (iv) The Cap. Notwithstanding any provision of this Lease to the contrary, Tenant shall not be obligated to pay for any annual increases in Operating Expenses per rentable sq. ft. for the Premises greater than four (4%) percent per year, accumulative, of the Operating Expenses per rentable sq. ft. for the Premises for the immediately preceding calendar year (the "Cap"). Such increase, if any, shall be paid as Operating Expenses Escalation during each calendar year, after the Base Year ('96). As an example, if the Base Year ('96) adjusted Operating Expenses for Occupied rentable sq. ft., as calculated under subsection 7(b)(i) herein, was $3.50 per Occupied rentable sq. ft. (an increase of $.20 per sq. ft. from 1996 contracted rate for Occupied Premises), then the following could apply for the 1997 calendar year Operating Expenses Escalation provision: Contracted Operating Expenses per Occupied Rentable sq. ft. $ 3.30 X 4.% Cap, Accumulative .04 ------ OPERATING EXPENSES ESCALATION ALLOWED FOR 1997 $ .132
As indicated, only $.132 would be allowed per sq. ft. as Operating Expenses Escalation for Occupied Premises for the 1997 calendar year. The difference of $.068 (.20 - .132) per sq. ft. could not be recovered by Landlord in 1997 calendar year, but the Cap described herein is accumulative resulting in the $.068 difference potentially being recovered in later years of the Lease. (c) Real Estate Tax Escalation. (i) This real estate tax escalation provision requires Tenant to pay Tenant's Prorata Share of increases in Real Estate Taxes from that of the Base Tax Year. In addition to the Base Rent, Tenant shall pay the Real Estate Taxes Escalation. (ii) "Tax Year" means the full fiscal period for each levied or assessed Real Estate Tax. (iii) "Base Tax Year" means the later to occur of (i) the first Tax Year which falls entirely within the Lease Term and for which Real Estate Taxes are levied or assessed, or (ii) the first Tax Year of the Lease Term during which the Building is 100% fully assessed and 100% fully taxed as a 100% completed structure. (iv) "Base Real Estate Taxes" means Real Estate Taxes for the Base Tax Year, provided that if the Building is not at least 95% leased and occupied, the Base Real Estate Taxes shall mean a fair and reasonable estimate of the Real Estate Taxes that would have been incurred for the Base Year if the Building had been 95% leased and occupied during the Base Year. 12 (iv) For the first Tax Year following the Base Tax Year, the Real Estate Tax Escalation shall be billed as a one-time charge at the close of the year and shall be paid by Tenant within thirty (30) days after receipt of the bill. Commencing with the second Tax Year following the Base Tax Year, and all subsequent Tax Years, no sooner than sixty (60) days prior to the earliest due date of the tax bill to the taxing authority, Tenant shall pay Landlord, on account, within thirty (30) days after receiving an invoice therefore, an amount not to exceed the Real Estate Taxes Escalation for the prior Tax year (the "Real Estate Taxes Escalation Paid on Account"). For all subsequent years of the Lease Term, at the close of each Tax Year, and after the applicable tax bills have been paid by Landlord, Landlord shall provide Tenant with an invoice for the Real Estate Taxes Escalation, including copies of the receipted Real Estate Tax bills. Tenant shall, within thirty (30) days of the Tenant's receipt of such invoice, pay Landlord the difference between the Real Estate Taxes Escalation Paid on Account and the final amount due as set forth in such invoice. If for any Tax Year the Real Estate Taxes Escalation Paid on Account exceeds the Real Estate Taxes Escalation, the excess shall be: (i) applied to reduce the Operating Expenses Escalation due pursuant to this Lease; (ii) treated as a prepayment of the next due installments of Base Rent, and/or Operating Expenses Escalation Paid on Account; or (iii) refunded to Tenant within sixty (60) days, at Tenant's option. (v) This Real Estate Taxes Escalation provision is intended to assure that Tenant pays Tenant's Prorata Share of ordinary increases in Real Estate Taxes due to ordinary jurisdiction-wide increases in tax rates and changes in the Premises, building(s) and common areas' assessments due to changes in local market values. It is understood and agreed that the Base Rent shall include all such Real Estate Taxes applicable to the Premises, building(s) and common areas at normal tax rates and assessment levels as of the Base Tax Year. Accordingly: (1) Tenant shall not be responsible for any increase in Real Estate Taxes which results solely from the creation of additional rentable area on the Land or in the building(s) or from improvements or alterations made by Landlord or other tenants. Tenant shall pay the full amount of any increase in Real Estate Taxes which are solely due to improvements to the Premises made by Tenant which are considered to be above-standard. If Tenant seeks to dispute any increase in Real Estate Taxes on its improvements, the burden of proof with respect thereto shall fall solely upon Tenant and Landlord shall reasonably cooperate with Tenant and give the necessary authority to challenge any such assessment on Landlord's behalf, and Tenant shall bear the full cost and expense of any such challenge. (2) If (i) there is a tax abatement program or other reduction in effect 13 at any time during the Lease Term which reduces Real Estate Taxes, or (ii) Real Estate Taxes are "phased in" during the Lease Term, Real Estate Taxes for the Base Tax Year shall be adjusted so that they are computed on the same basis as Real Estate Taxes for the Tax Year(s) during which the tax abatement or phase-in is in effect. If following the termination of this Lease, Landlord receives any Real Estate Tax refund(s) allocable to the Premises covering Tenant's tenancy under this Lease, then Landlord shall within sixty (60) days thereof pay to Tenant an equal amount of such refund(s). For example, if Real Estate Taxes for the Base Tax Year are reduced by 50% as part of a tax abatement program and Real Estate Taxes are reduced by 25% for the next Tax Year (year 2) and are not reduced at all for the following Tax Year (year 3), for purposes of computing the increase for year 2, the Base Year Real Estate Taxes shall be recomputed as if there were a 25% abatement in effect, and for purposes of computing the increase for year 3, the Base Real Estate Taxes shall be computed as if there were no abatement in effect. (3) If Tenant desires, Tenant may bring appropriate proceedings in Landlord's name or Tenant's name or both for contesting any assessment for any Tax Year during the Lease Term. The net amount of taxes recovered as a result of such proceedings (e.g., the amount recovered after payment of all sums necessary to attain such recovery) shall be shared between Landlord and Tenant with Tenant receiving Tenant's Prorata Share thereof. Landlord shall cooperate with Tenant with respect to the proceedings so far as is reasonably necessary. Notwithstanding the above, Landlord may but is not obligated to, in its sole discretion, contest any tax assessment if Landlord so determines. (4) Any increase in Real Estate Taxes for the Premises, building(s) or common areas resulting from a refinancing or sale of the Premises, building(s) or common areas shall be added to the Base Real Estate Taxes. (5) Other adjustments shall be made to the Real Estate Taxes Escalation as necessary in order to preserve the intent of this Subsection. (d) Escalation General Provisions. (i) Landlord shall maintain accurate books and records for the Operating Expenses and Real Estate Taxes in accordance with generally accepted accounting principles consistently applied, and shall keep copies of the actual paid bills, canceled checks and copies of any applicable contracts for each year including the Base Year, for the duration of the Lease Term, as extended, and for three (3) years thereafter. Upon request and at Tenant's sole expense, Landlord shall provide Tenant with copies of such books and records. However, adjustments to Operating Expenses and Real Estate Taxes shall be made as provided in the Lease. The Operating Expenses and Real Estate Taxes, including such books and records, may be audited by Tenant or Tenant's authorized 14 representative during normal business hours, upon reasonable prior notice to Landlord and at Tenant's sole expense. If Tenant challenges Landlord's computations of the Base Year's Operating Expenses, Real Estate Taxes, or the amount of the Operating Expenses Escalation or Real Estate Taxes Escalation, Tenant shall give Landlord written notice stating Tenant's objections. If Tenant's audit of the Operating Expenses or Real Estate Taxes for the Base Year or any subsequent year indicates that Tenant was overcharged for the Operating Expenses Escalation or Real Estate Taxes Escalation, Landlord shall promptly repay all such overpayments to Tenant and make any necessary adjustment to the Base Year. If Tenant's audit of the Operating Expenses, or Real Estate Taxes for the Base Year, or any subsequent year, indicates that Tenant was overcharged by an amount which is greater than five (5%) of the amount which should have been paid by Tenant, Landlord shall promptly reimburse Tenant for Tenant's audit fees and audit costs incurred. (ii) The escalation payments for the last year of the Lease shall be based upon the number of actual months Tenant occupied the Premises during that year and shall be prorated accordingly. (iii) If there is a change in ownership of the Premises, building(s) or common areas, Landlord agrees to make available complete copies of all records affecting Operating Expenses and Real Estate Taxes to the subsequent owner. (e) Tenant's Negligence. If damage to the Premises, building(s) or common areas, including Landlord supplied Tenant Improvements, is caused by the Tenant's, including Tenant's agents and employees', negligence or willful misconduct, Tenant shall be responsible for all repairs related thereto. 8. ALTERATIONS. (a) Tenant will not make or suffer to be made any alterations, additions, fixtures or improvements (in excess of $1,000) to or of the Premises or any part thereof, or attach any fixtures or equipment thereto, without first obtaining Landlord's written approval which shall not be unreasonably withheld. Any alterations, additions, fixtures or improvements (except the initial Tenant Improvements) to the Premises consented to by Landlord shall be made by Tenant at Tenant's sole cost and expense, and any contractor selected by Tenant to make the same shall be subject to Landlord's prior written approval. All alterations, additions, fixtures and improvements temporary in character, made in or upon the Premises by Tenant, shall remain the property of Tenant provided that such alterations, additions, fixtures and improvements can be and are removed at the end of the term or any extension hereof without damage to the Premises. However, to the extent that Tenant fails to remove the temporary alterations, additions, fixtures and improvements at the end of the term or any extension hereof, such property shall become Landlord's property and remain on the Premises without compensation to Tenant, unless Landlord requests that Tenant remove any such alterations, additions or improvements, excluding Tenant Improvements outlined in Article 2(c) herein. 15 (b) Any alteration, addition, fixture or improvement shall, when completed, be of such a character as not to lessen the value of the Premises or such improvements as may be then located thereon. Any alteration, addition, fixture or improvement shall be made promptly and in a good workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws and with all other laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments, departments, commissions, boards and offices. The costs of any such alteration, addition, fixture or improvement, excluding Tenant Improvements outlined in Article 2(c) herein, shall be paid by Tenant, so that the Premises be free of liens for services performed, labor and material supplied or claimed to have been supplied. Before any alternation, addition, fixture or improvement shall be commenced, excluding Tenant Improvements outlined in Article 2(c) herein, Tenant shall pay the amount of any increase in premiums on insurance policies (provided for herein) on account of endorsements to be made thereon covering the risk during the course of such alteration, addition, fixture or improvement and the increase value of the Premises. 9. PERSONAL PROPERTY. Tenant may place suitable trade signs or other personal property of Tenant not permanently affixed on the Premises. Such personal property must be removed at the end of the term and any extensions of this Lease or upon Tenant's failing to have possession of the Premises. Placement of signs on the exterior of the building and on any monument, including the type, size and lighting of the signs, must be approved in writing by Landlord prior to their installation, which approval shall not be unreasonably withheld. To the extent that governmental approval is necessary for signage, Landlord shall reasonably cooperate with Tenant in respect thereto at Tenant's sole expense. 10. LIENS. Tenant shall keep the Premises and the Building free from any mechanics' and/or materialmen's liens or other liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Tenant shall notify Landlord in writing at least seventy-two (72) hours before any work or activity is to commence on the Premises which may give rise to such liens to allow Landlord to post and keep posted on the Premises any notices which Landlord may deem to be proper for the protection of Landlord and the Premises from such liens. 11. DESTRUCTION OR DAMAGE. (a) If the Premises is partially damaged by fire, earthquake, or other Act of God, Landlord shall repair the same at Landlord's expense, subject to the provisions of this Article and provided such repairs can, in Landlord's reasonable opinion, be made within 60 days. During such repairs, this Lease shall remain in full force and effect, except that if there shall be damage to the Premises and such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, an abatement of Rents shall be allowed Tenant for such portion of Premises and period of time as the Premises was unusable by Tenant. 16 (b) If in Landlord's reasonable opinion the partially damaged Premises can be repaired, but not within 60 days, the Landlord may elect, upon written notice to Tenant within ten (10) days of such damages, to repair such damages over a longer time period and continue this Lease in full force and effect, but with Rents partially abated as provided in Article 11(a). In the event such repairs cannot be made within sixty (60) days, Tenant shall have the option to terminate this Lease, without any liability to Landlord, provided that notice is given to Landlord within ten (10) days of receipt of Landlord's notice stated in this paragraph. (c) If the partially damaged Premises is to be repaired under this Article, Landlord shall repair such damages to the Premises itself, and to the Tenant Improvements supplied by Landlord herein. Tenant shall be responsible for its equipment, furniture and fixtures, and Tenant Improvements made by Tenant located on the Premises. (d) If in Landlord's reasonable opinion, the Premises is totally or substantially destroyed by fire or other casualty, this Lease shall automatically terminate, unless otherwise mutually agreed in writing by the parties hereto. (e) If the partially or totalling damaged Premises was caused by a negligent act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord. 12. SUBROGATION. Landlord and Tenant shall each, prior to Tenant's taking possession or immediately after the execution of this Lease, procure from each of the insurers under all policies of fire, theft, public liability, workmen's compensation and other insurance now or hereafter existing during the term and any extension hereof and purchased by either of them insuring or covering the Premises and/or Building or any portion thereof or operations therein, a waiver of all rights of subrogation which the insurer might otherwise, if at all, have against the other. 13. INDEMNIFICATION. (a) Tenant shall indemnify, defend, and hold Landlord harmless from any damage to any property or injury to or death of any person arising from the use of the Premises by Tenant, its agents, employees and invitees, except such as is caused solely by reason of the gross negligence or willful act of Landlord, its agents or employees. The foregoing indemnity obligation of Tenant shall include reasonable attorney's fees, investigation costs and all other reasonable costs and expenses incurred by Landlord from the first notice that any claim or demand is to be made or may be made. The provisions of this Article shall survive this Lease's termination with respect to any damage, injury or death occurring prior to such termination. (b) Landlord shall indemnify, defend, and hold Tenant harmless from any damage to any property or injury to or death of any person arising from the use of the Premises by Landlord, its agents, employees and invitees, except such as is caused solely by reason of the gross negligence or willful act of Tenant, its agents or employees. The foregoing indemnity 17 obligation of Landlord shall include reasonable attorney's fees, investigation costs and all other reasonable costs and expenses incurred by Tenant from the first notice that any claim or demand is to be made or may be made. The provisions of this Article shall survive this Lease's termination with respect to any damage, injury or death occurring prior to such termination. 14. COMPLIANCE WITH LEGAL REQUIREMENTS (a) Tenant shall, at no cost or expense to Landlord, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises, insofar as any thereof relate to or affect Tenant's obligations under the lease or its use and occupancy of the Premises, excluding requirements related to or affected by construction of the Premises and Tenant Improvements made by or for Tenant, and excluding any matter which is the responsibility of the Landlord pursuant to Article 14(b) herein. (b) Landlord shall, at no cost or expense to Tenant, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements, including but not limited to the Americans With Disabilities Act ("ADA"), now in force or which may hereafter be in force, as well as the provisions of all recorded documents affecting the Premises, insofar as any thereof relate to or affect Landlord's obligations under this Lease, or its ownership of the Premises, building(s) or common areas. Further, Landlord represents that to the best of Landlord's knowledge, information and belief, the Premises is substantially free from environmental contamination by hazardous substances, except as may be noted in the Phase I environmental report prepared by Wasatch Environmental, a copy of which shall be provided to Tenant upon request. 15. INSURANCE. (a) Comprehensive General Liability. Tenant shall maintain a Comprehensive General Liability policy including all coverages normally provided by an "Extended Liability Endorsement." Such policies shall specifically name Landlord as an additional insured and shall include a cross-liability endorsement. Landlord may, at its discretion, request evidence of such insurance and products insurance. The minimum limits of liability acceptable are: (i) $1,000,000 Combined Single Limit for Bodily Injury and Property Damage, or (ii) $1,000,000 Bodily Injury and $1,000,000 Property Damage. (b) Premises Insurance. Landlord shall insure the Premises, including Landlord 18 supplied Tenant Improvements as deemed necessary in Landlord's sole discretion. Tenant shall pay for such insurance as outlined in Article 7 herein. (c) Tenant's Additional Insurance. Tenant may, at its sole cost and expense, cause all equipment, machinery, furniture and fixtures, personal property, and Tenant Improvements supplied by Tenant from time to time used or intended to be used in connection with the operation and maintenance of the Premises, to be insured by Tenant against loss or damage by fire and other casualty. Landlord is in no way liable for any uninsured Tenant's property, except as caused by Landlord's negligence or willful misconduct. 16. ASSIGNMENT AND SUBLETTING. In the event Tenant should desire to assign this Lease or sublet the Premises, Tenant shall give Landlord written notice of such desire at least forty-five (45) days in advance of the date on which Tenant desires to make such assignment or sublease. Landlord shall then have a period of fifteen (15) days following receipt of such notice within which to notify Tenant in writing that Landlord elects either (i) to terminate this lease as of the date so specified by Tenant, in which event Tenant will be relieved of all further obligations hereunder, or (ii) to permit Tenant to assign or sublet such space, subject to prior written approval of the proposed assignee by Landlord, such consent not to be unreasonably withheld so long as the use of the Premises by the proposed assignee would be a permitted use and the proposed assignee is of sound financial condition as reasonably determined by Landlord. If Landlord should fail to notify Tenant in writing of such election within said fifteen (15) day period, Landlord shall have deemed to have consented to such assignment or sublease. Failure by Landlord to approve a proposed assignee shall not cause a termination of this Lease. Any rents or other consideration realized by Tenant under any such sublease and assignment in excess of the Rents hereunder, after amortization of the reasonable costs of extra tenant improvements for which Tenant has paid and reasonable subletting and assignment costs, shall be divided and paid ninety percent (90%) to Landlord and ten percent (10%) to Tenant. Upon assignment or subletting by Tenant, approved by Landlord, Tenant shall be relieved of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. Notwithstanding the above, to the extent that Tenant has more than fifty (50%) percent direct common ownership with Tenant's proposed assignee or sublessee, Tenant shall be allowed to assign or sublease this Lease subject only, in the case of an assignment, to Tenant's proposed assignee executing, with Landlord, an assumption agreement agreeing to be fully bound to the terms and conditions of this Lease. 17. RULES. Tenant shall faithfully observe and comply with all Rules and Regulations reasonably promulgated by Landlord, in writing and after reasonable notice, during the term or any extensions of this Lease. Landlord shall not be responsible to Tenant for the non-performance by other Building tenants, or adjacent buildings' tenants, of any of said Rules and Regulations. 19 However, in the event of such non-performance by other tenants, Landlord shall, upon Tenant's request, make reasonable efforts to require such other tenants to perform. 18. ENTRY BY LANDLORD. Subject to United States Government security requirements if and as applicable, the Landlord may enter the Premises and/or Building at reasonable hours and upon 24 hours written notice to Tenant to (a) inspect the same, (b) show the same to prospective purchasers, lenders or tenants, (c) determine whether Tenant is complying with all of Tenant's obligations hereunder, (d) post notices of non-responsibility or (e) make repairs required of Landlord under this Lease, repairs to adjoining space or utility service, or make repairs, alterations or improvements to the Building, provided that all such work shall be done as promptly as possible and with as little interference to Tenant as reasonably possible. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such entry, unless caused by the reckless or intentional acts of Landlord or its agents. Landlord shall at all times have and retain a key to unlock all doors in, on or about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant). In the event of an emergency, Landlord shall have the right to use any and all means which Landlord may deem proper to enter the Premises, without notice, for the limited purpose of abating, as possible, said emergency. Such emergency entrance shall not be deemed to be a forcible or unlawful entry or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises. Notwithstanding Landlord's entering the Premises without notice in the case of an emergency, Landlord shall contact Tenant's Designated Representative (as identified below) regarding such emergency entry as soon as possible following such emergency entry. Tenant's Designated Representative is Duane Thurber, who may be contacted at (801) 254-6879, or such other person as Tenant my designate hereafter in writing. 19. EVENTS OF DEFAULT. The occurrence of any one or more of the following events ("Events of Default") shall constitute a breach of this Lease by Tenant: (a) if Tenant fails to pay Rents when and as the same becomes due and payable and such failure continues for more than ten (10) days, or (b) if Tenant fails to pay any other sum when and as the same becomes due and payable and such failure continues for more than ten (10) days; or (c) if Tenant fails to perform or observe any material term or condition of this Lease, such failure continues for more than thirty (30) days after written notice from Landlord, and Tenant does not within such period begin with due diligence and dispatch the curing of such default, or, having so began, thereafter fails or neglects to complete with due diligence and dispatch the curing of such default; or (d) if Tenant shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due or shall file a petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file any answer admitting or shall fail timely to contest the 20 material allegations of a petition filed against it in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or any material part of its properties; or (e) if within 60 days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any percent or future statute, law or regulation, such proceeding shall not have been dismissed, or if, within 60 days after the appointment without the consent or acquiescence of Tenant, of any trustee, receiver or liquidator of Tenant or of any material part of its properties, such appointment shall not have been vacated; or (f) vacation or abandonment of the Premises for a continuous period in excess of fifteen (15) days, provided that Tenant is otherwise in default or (g) if this Lease or any estate of Tenant hereunder shall be levied upon under any attachment or execution and such attachment or execution is not vacated within ten (10) days. 20. TERMINATION UPON TENANT'S DEFAULT. If an Event of Default shall occur, Landlord at any time thereafter may give a written termination notice to Tenant, and on the date specified in such notice (which shall not be less than fifteen (15) days for all non-Rents related defaults or five (5) days for Rents related defaults after Notice under Article 36 herein) Tenant's right to possession shall terminate and this Lease shall terminate, unless on or before such date all Rents, arrearages and other sums due by Tenant under this Lease, including reasonable costs and attorneys' fees actually incurred by or on behalf of Landlord, shall have been paid by Tenant and all other Events of Default by Tenant shall have been fully cured to the reasonable satisfaction of Landlord. To the extent that Tenant needs confirmation from Landlord of Tenant's having cured any noticed Event of Default or needs an extension to cure such noticed Event of Default, it is incumbent on Tenant to request and receive from Landlord confirmation that a noticed Event of Default has been cured or that an extension to cure has been granted. Landlord is under no unsolicited duty to notify Tenant that an Event of Default has been cured, nor is Landlord under any duty to grant an extension to cure an Event of Default. Upon such termination, Landlord may recover from Tenant: (a) the worth at the time of award of the unpaid Rents which had been earned at the time of termination; plus (b) the worth at the time of award of the amount by which the unpaid Rents which would have been earned after termination until the time of award exceeds the amount of such Rents loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid Rents for the balance of the term of this Lease after the time of award exceeds the amount of such Rents loss that Tenant proves could be reasonably avoided by Landlord through mitigation of its damages; and plus (d) any other amount necessary to compensate Landlord for all damages proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary 21 course of things would be likely to result therefrom, or by applicable law. The "worth at the time of award" of the amounts referred to in clauses (a) and (b) above is computed by allowing interest at the rate of 10% per annum from the time amounts were due to the time of award. The "worth at the time of award" of the amount referred to in clause (c) above means the present value of the monthly sum of the unpaid Rents under this Lease. In determining the present value of such unpaid Rents, the parties agree that the discount rate shall be equal to the prime rate of interest as published in the Wall Street Journal as of the time of award. Failure of Landlord to declare any default immediately upon occurrence thereof, or delay in taking any action in connection therewith, shall not waive such default, but Landlord shall have the right to declare any such default at any time thereafter. However, nothing herein limits Landlord's duty to reasonably mitigate Landlord's damages. 21. TERMINATION UPON LANDLORD'S DEFAULT; TENANT'S RIGHT TO CURE LANDLORD'S DEFAULT. (a) Any default by Landlord of any of its obligations under this Lease that remain reasonably uncured, for more than thirty (30) days after having received written notice of default from Tenant shall entitle Tenant to elect to terminate this Lease, without any further liability for Landlord or Tenant. (b) Notwithstanding the above, upon Landlord failing to cure or reasonably object to a noticed default of its obligations under this Lease, Tenant may, but is under no obligation to, reasonably satisfy such noticed default. To the extent that Tenant invokes such self-help, Tenant may withhold from Rents such amount actually and reasonably paid to cure such uncured and unobjected to Landlord default, provided that Tenant provide to Landlord evidence of such actual and reasonable amounts paid. In no event is Tenant allowed attorneys' fees, costs or interest under this provision. 22. CONTINUATION AFTER DEFAULT. Even though Tenant has defaulted this Lease and abandoned the Premises, this Lease shall continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all of its rights and remedies under this Lease, including the right to recover the Rents as they become due under this Lease, subject to Landlord reasonably mitigating any damages. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. If any fixture, equipment, improvement, installation or appurtenance shall be required to be removed from the Premises and/or Building by Tenant, then Landlord (in addition to all other rights and remedies) may, at its election by written notice to Tenant, deem that the same has been abandoned by Tenant to Landlord, or Landlord may remove and store the same and restore the Premises to its original condition at the expense of Tenant, as Additional Rent to be paid within ten (10) days after written notice to Tenant of such expense. 22 23. LANDLORD'S RIGHT TO CURE DEFAULTS. All terms and provisions to be performed by Tenant under this Lease shall be at its sole cost and expense and without any abatement of Rents. If Tenant falls to pay any sum of money, other than Rents, required hereunder or fails to perform any other act required hereunder and such failure continues for thirty (30) days after notice by Landlord, Landlord may, but shall not be obligated, and without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such act on Tenant's part to be made or performed as provided in this Lease. All sums paid by Landlord and all incidental costs shall be deemed Additional Rent hereunder and shall be payable within ten (10) days of written notice of such sums paid. 24. OTHER RELIEF. The remedies provided for in this Lease are in addition to any other remedies available to Landlord or Tenant at law or in equity by statute or otherwise. 25. ATTORNEYS' FEES. In the event either party places the enforcement of this Lease, or any part thereof, or the collection of any Rents, or recovery of the possession of the Premises, or files suit upon the same, then the prevailing party shall recover its reasonable attorneys' fees and costs. 26. EMINENT DOMAIN. If all or any part of the Premises shall be taken or conveyed as a result of the exercise of the power of eminent domain, this Lease shall terminate as to the part so taken as of the date of taking, and, in the case of a partial taking, either Landlord or Tenant shall have the right to terminate this Lease as to the balance of the Premises by written notice to the other within 30 days after such date; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Premises taken or conveyed shall be of such extent and nature as substantially to handicap, impede or impair Tenant's use of the balance of the Premises. In the event of any taking, Landlord shall be entitled to any and all compensation, damages, income, rent awards or any interest therein whatsoever which may be paid or made in connection therewith, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise, provided that Tenant shall be entitled to any and all compensation, damages, income, rent or awards paid for or on account of Tenant's moving expenses, trade fixtures, equipment and any leasehold improvements in the Premises, the cost of which was borne by Tenant, to the extent of the then unamortized value of such improvements for the remaining term of the Lease. In the event of a taking of the Premises which does not result in a termination of this Lease, the monthly rental herein shall be apportioned as of the date of such taking so that thereafter the rent to be paid by Tenant shall be in the ration that the area of the Premises not so taken bears to the total area of the Premises prior to such taking. 23 27. SUBORDINATION & NONDISTURBANCE. This Lease, at Landlord's option and subject to Landlord's proposed form, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the Building and to any and all advances made on the security thereof and to all renewals, modification, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of the Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed or trust or ground lease, and shall be deemed prior to such mortgage deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof, Tenant agrees to execute any reasonable documents required (in the form substantially similar to the sample documents attached hereto as Exhibits C & D) to effectuate such subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, so long as Landlord is not in material default and such mortgagee, trustee or ground lessor agrees not to disturb Tenant's quiet enjoyment of the Premises. 28. NO MERGER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies. 29. SALE. In the event the original Landlord hereunder, or any successor owner of the Premises, building(s) or common areas, shall sell or convey the Premises, building(s) or common areas, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing thereafter shall terminate and Tenant shall attorn to such new owner, provided such new owner expressly agrees to assume all such liabilities and obligations of such original Landlord, or such successor owner, from the date the Premises is sold or conveyed. 30. ESTOPPEL CERTIFICATE. At any time and from time to time but on not less than ten (10) days prior written request by Landlord, Tenant will execute, acknowledge and deliver to Landlord, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification), (b) the date, if any, to which rental and other sums payable hereunder have been paid, (c) that no notice has been received by Tenant of any default which has not been cured, except as to defaults specified in said certificate and (d) such other 24 matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary under any deed or trust of the Building or any part thereof. So long as the above representations are accurate, the failure of Tenant so to deliver such certificate within the time specified above shall be deemed to be a material breach of this Lease and shall entitle Landlord without notice to terminate this Lease. 31. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or reduction of light, air or view by any structure erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Landlord. 32. HOLDING OVER. If, without objection by Landlord, Tenant holds possession of the Premises after expiration of the term or any extension period of this Lease, Tenant shall become a tenant from month to month upon the terms herein specified, but at a monthly Base Rent equivalent to 110% of the Base Rent at the end of the term or extension period pursuant to Article 4, payable in advance on or before the 1st day of each month. All Additional Rent shall also apply. Each party shall give the other notice at least one month prior to the date of termination of such monthly tenancy of its intention to terminate such tenancy. 33. ABANDONMENT. If Tenant shall abandon or surrender the Premises, or be dispossessed by process of law or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 34. SECURITY DEPOSIT. Tenant has deposited with Landlord upon execution of this Lease a security deposit equal to a month's full rental payment ("Security Deposit"). The Deposit shall be held by Landlord as security for the faithful performance by Tenant of all of the provisions of this Lease to be performed or observed by Tenant. In the event Tenant fails to perform or observe any of the provisions of this Lease to be performed or observed by it, then, at the option of the Landlord, Landlord may (but shall not be obligated to do so) apply the Deposit, or so much thereof as may be necessary to remedy such default or to repair damages to the Premises caused by Tenant. In the event Landlord applies any portion of the Deposit to remedy any such default or to repair damages to the Premises caused by Tenant, Tenant shall pay to Landlord, within thirty (30) days after written demand for such payment by Landlord, all monies necessary to restore the Deposit up to the original amount. Any portions of the Deposit remaining upon termination of this Lease shall be returned within thirty (30) days. 25 35. WAIVER. All waivers by Landlord must be in writing and signed by Landlord. The waiver by Landlord of any term or conditions herein shall not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision herein contained, nor shall any custom or practice which may develop between the parties in the administration of the terms hereof be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with said terms. The subsequent acceptance of Rents hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term or conditions of this Lease, other than the failure of Tenant to pay the particular Rents so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rents. 36. NOTICES. All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing and shall be deemed to have been fully given when deposited in the United States mail, certified or registered, postage prepaid, and addressed as follows: to Tenant at ADVANTA FINANCIAL CORP., ATTN: JOHN L. RICHARDS, PRESIDENT, 11850 ELECTION DR., DRAPER UT 84020, or to such other place as Tenant may from time to time designate in a notice to Landlord; to Landlord at DRAPER BUSINESS PARK, L.C., ATTN: SCOTT WALDRON, 5200 SOUTH MAIN STREET, SALT LAKE CITY, UTAH, 84107 or to such other place as Landlord may from time to time designate in a notice to Tenant, or in the case of Tenant, delivered to Tenant at the Premises. Tenant hereby appoints as its agent to receive the service of all dispossessory or distraint proceedings and notices hereunder the person in charge of or occupying the Premises at the time, and if no person shall be in charge of or occupying the same, then service may be made by attaching same on the main entrance of the Premises. 37. COMPLETE AGREEMENT. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between Landlord and Tenant with respect to the subject matter of this Lease. This Lease may not be altered, changed or amended, except by an instrument in writing signed by both parties hereto. 38. CORPORATE AUTHORITY. If Tenant signs as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that (a) Tenant is a duly authorized and validly existing corporation, (b) Tenant has and is qualified to do business in Utah, (c) the corporation has full right and authority to enter into this Lease, and (d) each person executing this Lease on behalf of the corporation is authorized to do so. 26 39. GUARANTEE OF LEASE. Tenant guarantees to occupy the Premises, subject to the terms and conditions of this Lease. Any failure to occupy the Premises does not release the Tenant from the obligation of paying Rents or any other terms set forth herein. 40. MISCELLANEOUS. (a) The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. (b) Time is of the essence on this Lease and each and all of its terms and conditions. (c) The terms and conditions herein shall apply to and bind the heirs, executors, administrators, successors and assigns of the parties hereto. (d) The captions of this Lease are solely to assist the parties and are not a part of the terms or conditions of this Lease. (e) This Lease shall be governed by and construed in accordance with the laws of the State of Utah, and is deemed to be executed within the State of Utah. 41. SEVERABILITY. If any term of provision of this Lease, or the application thereof to any person or circumstance, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and shall be enforceable to the extent permitted by law. 42. BROKERS. Tenant is represented by CB Commercial. Landlord is represented by Prime Commercial, Inc. Agreed-upon commissions shall be due and payable by Landlord 50% upon execution, and 50% upon Tenant taking possession. 27 IN WITNESS WHEREOF, the parties have executed this Lease dated the day and year first above written. TENANT, LANDLORD, ADVANTA FINANCIAL CORP. DRAPER PARK NORTH, L.C. By: /s/ John L. Richards By: /s/ Scott M. Waldron -------------------------------- ---------------------------------- John L. Richards, President Scott M. Waldron, Manager 28 EXHIBIT A LOT 2, PROPOSED PLAT OF REYNOLDS INDUSTRIAL PARK: Beginning at a point South 89 deg. 46'37" East along the section line 958.59 feet from the North quarter corner of Section 25, Township 3 South, Range 1 West, Salt Lake Base and Meridian; and running thence South 89 deg. 46' 37" East along the section line 203.93 feet; thence South 09 deg. 21'26" East 178.49 feet; thence South 89 deg., 46'37" East 407.75 feet to the true point of beginning; thence South 00 deg. 04'00" West 487.00 feet to the North right of way line of Election Road; thence South 89 deg. 46' 37" East along the North line of said Election Road 377.32 feet to a point of curvature; thence along the arc of a 41.00 foot radius curve to the left through a central angle of 97 deg. 18'23" a distance of 69.63 feet to a point of tangency; thence North 7 deg. 05'00" West along the West right of way line of said Election Road 444.39 feet; thence North 89 deg. 46' 37" West 362.80 feet to the point of beginning. CONTINUING GUARANTY In consideration of, and as an inducement for the granting, execution and delivery of the foregoing Lease attached hereto and made a part hereof, dated SEPTEMBER 28, 1995 ("Lease"), by and between DRAPER PARK NORTH, L.C. ("Landlord") and ADVANTA FINANCIAL CORPORATION ("Tenant"), and other good and valuable consideration given by Landlord to the undersigned guarantor, ADVANTA CORP. ("Guarantor") hereby guarantees to Landlord (herein including its successors and assigns) the full and prompt payment of all Rents by the Tenant (herein including its successors and assigns); and the Guarantor (herein including its successors and assigns) hereby covenants and agrees to and with the Landlord that if Tenant shall be in default under the Lease, the Guarantor will forthwith pay such Rents to the Landlord, including, without limitation, all costs and reasonable attorneys' fees incurred by the Landlord as a result of Tenant's default and enforcement of this Guaranty. This Guaranty is an absolute and unconditional Guaranty of payment. It is enforceable against the Guarantor, upon ten (10) days written notice of Tenant's default, without the necessity of legal suit or proceedings whatsoever on Landlord's part against the Tenant, or acceptance of this Guaranty. Any other notice or demand to which the Guarantor might otherwise be entitled is hereby expressly waived. The Guarantor hereby expressly agrees that the validity of this Guaranty and the obligations of the Guarantor hereunder shall not be terminated, affected or impaired by reason of the assertion or the failure to assert by the Landlord against Tenant of any of Landlord's rights or remedies under the Lease. This Guaranty shall be a continuing Guaranty, and the liability of the Guarantor shall not be effected or impaired by reason of any assignment or extension of the Lease, or by reason of any modification, waiver or change in any terms and conditions of the Lease, or by reason of any dealings between Landlord and Tenant, whether or not notice is given to the Guarantor. Any written notice or contact with Guarantor shall be addressed to: Advanta Corp. Attn: General Counsel Five Horsham Business Center 300 Welsh Road Horsham, PA 19044-2209 Notwithstanding the preceding paragraphs, at the expiration of the Lease and any extensions or holdovers, and providing that Tenant is in full compliance with all obligations under the Lease, Guarantor's obligations under this Guaranty shall automatically terminate. DATED: March 12, 1996 GUARANTOR: ADVANTA CORP. /s/ John J. Crowe, Jr. - ------------------------ Vice President STATE OF PA ) NOTARIAL SEAL ) BETTY VAN SANT, NOTARY PUBLIC :ss HORSHAM TWP., MONTGOMERY COUNTY ) MY COMMISSION EXPIRES FEB. 22, 1999 COUNTY OF MONTGOMERY ) On this 14 day of March, 1996 before me a Notary Public, personally appeared John J. Crowe, Jr., who represented to me to be the _________________ of Advanta Corp., a _______________, that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he/she had the capacity and was duly authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunder set my hand and official seal on the day first above written. /s/ BETTY VAN SANT ------------------------------- NOTARY PUBLIC 2 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE ("AMENDMENT") dated this 31st DAY OF JANUARY, 1996, is entered into by and between DRAPER BUSINESS PARK, L.C., a Utah Limited Liability Company ("Landlord"), and ADVANTA FINANCIAL CORP., a Utah corporation ("Tenant"). W I T N E S S E T H WHEREAS, Landlord and Tenant entered into a Lease dated September 28th, 1995, ("Lease") which is incorporated herein by reference; and WHEREAS, the parties hereto desire to amend certain terms and conditions of the Lease as specifically indicated in this Amendment. However, unless specifically amended herein, all terms and conditions of the Lease remain in full force and effect; NOW THEREFORE, in consideration of the mutual promises, representations and covenants contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows. 1. The recitals contained herein are hereby incorporated by reference. 2. Article 2(a). Initial Term is replaced in its entirety by the following: (a) Initial Term. The Lease term shall be five (5) years and shall commence APRIL 15, 1996 ("Commencement Date"). In order to allow Tenant's possession by the Commencement Date, the Premises shall be ready by APRIL 1, 1996, for systems and furniture installation by Tenant. In the event that the Premises is not ready for systems and furniture installation by APRIL 1, 1996, Landlord shall provide one (1) day of free Base Rent for each day the Premises are not ready, provided that Landlord, its agents or employees, is solely or substantially the cause of such delay. However, if Landlord fails to deliver possession within thirty (30) days of the Commencement Date, Tenant shall have the right to terminate this Lease without any further liability to Landlord or Tenant, in which event Landlord shall refund to Tenant within sixty (60) days any advanced Rents and Security Deposit paid by Tenant. IN WITNESS WHEREOF, the parties have executed this Lease dated the day and year first above written. TENANT, LANDLORD, ADVANTA FINANCIAL CORP. DRAPER PARK NORTH, L.C. By: /s/ John L. Richards By: /s/ Scott M. Waldron --------------------------- ------------------------- John L. Richards, President Scott M. Waldron, Manager SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE ("2nd AMENDMENT") dated this 20th DAY OF MAY, 1996, is entered into by and between DRAPER PARK NORTH, L.C., a Utah Limited Liability Company ("Landlord"), and ADVANTA FINANCIAL CORP., a Utah corporation ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant entered into a Lease dated September 28, 1995, ("Lease") which is incorporated herein by reference; WHEREAS, Landlord and Tenant entered into a First Amendment to Lease dated January 31, 1996 ("1st Amendment") which is incorporated herein by reference; and WHEREAS, the parties hereto desire to amend certain terms and conditions of the Lease as specifically indicated in this 2nd Amendment. However, unless specifically amended herein, all terms and conditions of the Lease and 1st Amendment remain in full force and effect; NOW THEREFORE, in consideration of the mutual promises, representations and covenants contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows. 1. The recitals contained herein are hereby incorporated by reference. 2. Article 1(a) and 1(b) shall be replaced in its entirety by the following: (a) Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the terms and conditions herein, to each and all of which Landlord and Tenant hereby mutually agree, those certain Occupied and Unoccupied premises (collectively "Premises", unless otherwise specifically noted), as identified on Exhibit A attached hereto, which includes 35,822 RENTABLE SQUARE FEET OF OCCUPIED PREMISES (34,090 Useable; approx, 5.08% load factor), as determined by final space plan. The location of the Premises is commonly known as: 11850 Election Dr., Draper, UT 84020. (b) Tenant shall also have the right herein to lease AN ADDITIONAL 14,803 RENTABLE SQUARE FEET OF "UNOCCUPIED PREMISES" (14,088 Useable; 5.08 % load factor), as more specifically outlined in Article 4(a)(ii) herein. Finally, Tenant shall have a "Right of First Refusal" to further add to the Premises and Unoccupied Premises identified in this Lease, provided that such Right of First Refusal applies only to vacant and unrented space in the same building as the Premises and further provided that Tenant execute within five (5) business days, of written notice from Landlord, a lease for additional space containing the same terms and conditions which have been agreed to by the prospective tenant other than Tenant (Advanta). 3. Article 2(a). Initial Term is replaced in its entirety by the following: (a) Initial Term. The Lease term shall be five (5) years and shall commence MAY 1, 1996 ("Commencement Date"). However, if Landlord fails to deliver possession within thirty (30) days of the Commencement Date, Tenant shall have the right to terminate this Lease without any further liability to Landlord or Tenant, in which event Landlord shall refund to Tenant within sixty (60) days any advanced Rents and Security Deposit paid by Tenant. 4. Article 4(a)(i) and (ii) shall be replace in its entirety by the following: (i) BASE RENT FOR OCCUPIED PREMISES. Base Rent for Occupied Premises shall be $ 2,606,050.50, ($14.55 PER SQ. FT. X 35,822 RENTABLE SQ. FT. X 5 YRS.), payable as follows: $43,434.18 PER MONTH payable in advance each month on or before the 1ST day of each month during the duration of the Lease, with the first such monthly rental payments being due upon the execution of the Lease. Base Rent for Occupied Premises includes $3.30 per sq. ft. for operating Expenses as more specifically defined in Article 7 herein. (ii) BASE RENT FOR UNOCCUPIED PREMISES. Further, in order to accommodate Tenant's potential need for additional space, Tenant shall have the option to rent an additional 14,803 Rentable sq. ft. upon payment of the Base Rent for Unoccupied Premises. Base Rent for Unoccupied Premises shall be $ 546,230.70 ($7.38 PER SQ. FT. X 14,803 UNOCCUPIED SQ. FT. X 5 YRS.), payable as follows: $ 9,103.85 PER MONTH payable in advance each month on or before the 1ST day of each month during the duration of the Lease, with the FIRST month rental payment being due upon execution of the Lease, subject to the following: 1. Tenant shall receive a discount of fifty (50%) percent of the Base Rent for Unoccupied Premises only for months 2-5 of the Lease. 2. Base Rent for Unoccupied Premises includes $1.86 per sq. ft. for Operating Expenses as more specifically defined in Article 7 herein, which amount includes a mutually-agreed reduction to Tenant for anticipated Operating Expenses not applicable to such Unoccupied Premises. 3. Tenant may terminate its option rights for additional Premises herein by providing 120 days written notice to Landlord, following which Tenant's obligation to pay further Base Rent of Unoccupied Premises shall cease herein. 4. Upon exercising Tenant's option herein, Tenant may possess the Unoccupied Premises pursuant to the same terms and conditions of the Lease (i.e.; Tenant Improvements, Moving Allowance, Base Rent for Occupied Premises, 6 non-reserved parking stalls per 1,000 rentable sq. ft. of Occupied Premises, etc.) in proportion to the balance of time remaining on the initial term of the Lease. 2 IN WITNESS WHEREOF, the parties have executed this Lease date the day and year first above written. TENANT, LANDLORD, ADVANTA FINANCIAL CORP. DRAPER PARK NORTH, L.C. By: /s/ John L. Richards By: /s/ Scott M. Waldron --------------------------- ------------------------- John L. Richards, President Scott M. Waldron, Manager 3 THIRD AMENDMENT TO COMMERCIAL LEASE [CarrAmerica Realty, L.P,/Advanta Bank Corp.] THIS THIRD AMENDMENT (this "Third Amendment") is entered into as of the 27 day of October 2000, between CARRAMERICA REALTY, L.P., a Delaware limited partnership ("Landlord"), whose address is 1850 K Street, N.W., Suite 500, Washington, D.C. 20006, and ADVANTA BANK CORP., a Utah corporation, formerly known as Advanta Financial Corp. ("Tenant"), whose address is 11850 South Election Road, Draper, UT 84020. FOR THE SUM OF TEN DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Landlord and Tenant agree as follows: 1. Definitions. As used in this Third Amendment, each of the following terms shall have the indicated meaning: 1.1. "Adjustment Date" means May 1, 2001, and, if the Lease is renewed by Tenant for the second period of two (2) additional years pursuant to Section 2(b) of the Lease, May 1, 2003, and if the Lease is renewed for the third period of two (2) additional years pursuant to Section 2(b) of the Lease May 1, 2005. 1.2. "Base Rent," means (a) with respect to the Occupied Premises (as defined in the Lease), $43,434. 1 8 per calendar month; and (b) with respect to the Unoccupied Premises (as defined in the Lease), $9,103.85 per calendar month. 1.3. "Consumer Price Index" means "Consumer Price Index--U.S. City Average For All Items For All Urban Consumers "(1982-84= 100)" (the "CPI-U") published monthly in the "Monthly Labor Review" or other publication by the Bureau of Labor Statistics, United States Department of Labor (the "Labor Bureau"); provided, however, that: 1.3.1. if the CPI-U is discontinued, "Consumer Price Index" shall mean "Consumer Price Index--U.S. City Average For All Items For Urban Wage Earners and Clerical Workers (1982-84= 100)" (the "CPI-W") published monthly in the "Monthly Labor Review" or other publication by the Labor Bureau; 1.3.2. if the CPI-W is discontinued, "Consumer Price Index" shall refer to comparable statistics on the purchasing power of the consumer dollar published by the Labor Bureau or by another agency of the United States reasonably selected by Landlord; 1.3.3. if the Labor Bureau or another agency of the United States no longer publishes comparable statistics on the purchasing power of the consumer dollar, "Consumer Price Index" shall refer to comparable statistics published by a responsible financial periodical or recognized authority reasonably selected by Landlord, and adjustments shall be made in the computation set forth in Paragraph 4, as the circumstances may require in order to carry out the intent of such Paragraph; and 1.3.4. if the base year "(1982-84=100)" or other base year used in computing the CPI-U or the CPI-W is changed, the figures used in making the adjustments in Paragraph 4 shall be changed accordingly so that all increases in the CPI-U and CPI-W are taken into account no standing any such change in the base year. 1.4. "Lease" means the Commercial Lease, dated September 28, 1995, as amended by the First Amendment to Lease, dated January 31, 1996 and the Second Amendment to Lease, dated May 20, 1996, all entered into between Draper Park North, L.C., a Utah limited liability company, the predecessor in interest to Landlord, as landlord, and Tenant, as tenant. 2. Purpose. Tenant has exercised its right to renew the Lease for one (1) additional period of two (2) years pursuant to Section 2(b) of the Lease. Tenant still has the right to renew the Lease for two (2) additional periods of two (2) years each. Landlord and Tenant desire to enter into this Third Amendment to memorialize such renewal. 3. Term. Unless renewed for two (2) additional years pursuant to Section 2(b) of the Lease, the Lease term shall expire on April 30, 2003. 4. Base Rent. The Base Rent payable during that portion of the Lease term on and after May 1, 2001 shall be determined in accordance with this Paragraph 4. The Base Rent shall be increased as of each Adjustment Date to the product obtained by multiplying the Base Rent by a fraction, the numerator of which is the Consumer Price Index for the third month preceding the Adjustment Date concerned (February, 2001, February, 2003 or February, 2005, as the case may be), and the denominator of which is the Consumer Price Index for the third month preceding the Commencement Date (February, 1996). The amount of such increase shall be determined by Landlord as soon as reasonably practicable after the Consumer Price Index for the third month preceding each such Adjustment Date becomes available. Tenant shall pay such increased Base Rent until the later of the next Adjustment Date or the date on which Landlord provides to Tenant the amount of the next increase in the Base Rent. Landlord may invoice Tenant retroactively for the increased portion of the Base Rent due for the period between any such Adjustment Date and the date of such invoice. The delay or failure of Landlord to compute or to bill Tenant for any adjustment to be made pursuant to this Paragraph 4 up to six (6) months after the availability of the applicable index shall not impair the continuing obligation of Tenant to pay the increased portion of the Base Rent resulting from such adjustment. In no event shall the Base Rent be decreased as a result of this Paragraph 4. 5. General Provisions. In the event of any conflict between the provisions of the Lease and the provisions of this Third Amendment, the provisions of this Third Amendment shall control. As modified by this Third Amendment, the Lease and all of Tenant's rights and obligations under the Lease are ratified and affirmed in their entirety, including Tenant's ongoing right to terminate its option rights for additional Premises upon one hundred twenty (120) days written notice to Landlord pursuant to Section 4 of the Second Amendment to Lease. This Third Amendment shall inure to the benefit of, and be binding on, Landlord and Tenant and their respective successors and assigns. This Third Amendment shall be governed by, and construed and interpreted in accordance with, the laws (excluding the choice of laws rules) of the State of Utah. This Third Amendment may be executed in any number of duplicate originals or counterparts, each of which when so executed shall constitute in the aggregate but one and the same document. Each individual executing this Third Amendment represents and warrants that such individual has been duly authorized to execute and deliver this Third Amendment in the capacity and for the entity set forth where such individual signs. 6.0 -- Notices. Section 36 of the Lease shall be amended so that all notices to Tenant, including service of process, shall be directed to Attn: Mark Hales, President, at the Premises, and copies of all such notices must simultaneously be sent to: Advanta Corp. and Advanta Corp. 800 Ridgeview Drive Welsh and McKean Roads Horsham, PA 19044 P.O. Box 844 Attn: Director of Real Estate Spring House, PA 19477-0844 Attn: General Counsel and so that all notices to Landlord shall include notices to: CarrAmerica Realty Corp. and CarrAmerica Realty Corp. 7600 E. Orchard Road, Suite 360N 4179 S. Riverboat Road, Suite 106 Greenwood Village, CO 80111 Salt Lake City, UT 84123 Attn: Market Officer Attn: Director of Operations Further, copies of any notices to Guarantor must also be sent to the Tenant addresses listed above. 6.1 -- Assignment and Subletting. The second paragraph of Section 16 of the Lease shall be deleted in its entirety and the following substituted therefor: Notwithstanding the foregoing to the contrary, provided that Tenant is not in default under this Lease beyond any applicable cure period, Tenant may, after at least ten (10) days' prior written notice to Landlord, but without Landlord's consent, assign this Lease or sublease all or a portion of the Premises to any entity which (i) controls, is controlled by, or is under common control with, Tenant, where "control" is the ownership of more than fifty percent (50%) of the outstanding voting interests in the entity concerned; (ii) is a successor entity (whether by merger, acquisition, reorganization or otherwise); or (iii) purchases a controlling interest in Tenant or all or substantially all of Tenant' s assets; provided that the assignee or sublessee entity in clauses (ii) and (iii) has a net worth equal to or greater than Tenant's net worth as of the date of the assignment. Tenant shall remain primarily liable for all of its obligations under this Lease, notwithstanding any such assignment or subleasing. The provisions in the first paragraph of this Section 16 regarding Landlord's termination rights and Landlord's right to collect excess Rents or other consideration shall expressly not apply to any of the transactions permitted under this second paragraph, provided that such transaction is not accomplished for the primary purpose of avoiding such provisions. 6.2 -- Entry by Landlord. Section 18 of the Lease shall be amended by changing the Tenant's Designated Representative in the final sentence to Ken Durbin office telephone 801-523-2994, cellular telephone number 801-556-5467, and by adding to the end thereof the following: Notwithstanding anything to the contrary contained in this Lease, Landlord acknowledges that Tenant, in the ordinary course of its business, collects and maintains confidential financial information ("Records") pertaining to its customers. Landlord agrees that in the exercise of any of its rights hereunder, Landlord will not inspect, review or otherwise access any of those Records, and will at all times maintain the confidentiality and privacy thereof. Landlord will not interfere with Tenant's removal of Records from the Premises. 6.3 -- Lender Approval. Landlord represents and warrants that it shall submit this Third Amendment to its lender(s) for approval immediately upon its mutual execution or that no such approvals are required for the Amendment to be effective against all current lenders or other holders of prior interests in the Premises, the Building or the land on which they are located. Landlord shall cause its lender(s) to issue written approval or rejection within ten (10) business days after the date of mutual execution hereof. LANDLORD AND TENANT have executed this Third Amendment on the respective dates set forth below, to be effective as of the date first set forth above. LANDLORD: CARRAMERICA REALTY, L.P., by its general partner: CARRAMERICA REALTY GP HOLDINGS, INC. a Delaware Corporation By /s/ William P. Krokowski ------------------------------------ William P. Krokowski Its Managing Director ----------------------------------- Date 11/14/00 ---------------------------------- TENANT: ADVANTA BANK CORP. By /s/ M. B. Hal ------------------------------------ Its President ----------------------------------- Date 10/30/00 ---------------------------------- CONSENT AND CONFIRMATION OF GUARANTOR THE UNDERSIGNED, ADVANTA CORPORATION, a Delaware corporation, the guarantor of the Lease identified in the foregoing Third Amendment to Commercial Lease, (i) consents to such amendment, (ii) agrees that the undersigned's guaranty of the Lease is in full force and effect and will continue to apply to the Lease, as amended by the foregoing amendment, or as otherwise amended on or after the date of this instrument, and (iii) agrees that the undersigned has no defenses to the enforcement of such guaranty, which is and shall continue to be enforceable in accordance with its terms. DATED: Oct. 27, 2000 ADVANTA CORPORATION By /s/ Marcia M. Wilf ------------------------ Its V.P. Corporate Admin. ----------------------- Date 10/27/00 ---------------------- FOURTH AMENDMENT TO COMMERCIAL LEASE [CarrAmerica Realty, L.P./Advanta Bank Corp.] THIS FOURTH AMENDMENT (this "Fourth Amendment") is entered into as of the 3rd day of May, 2001, between CARRAMERICA REALTY, L.P., a Delaware limited partnership ("Landlord"), whose address is 1850 K Street, N.W., Suite 500, Washington, D.C. 20006, and ADVANTA BANK CORP., a Utah corporation, formerly known as Advanta Financial Corp. ("Tenant"), whose address is 11850 South Election Road, Draper, Utah 84020. FOR THE SUM OF TEN DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Landlord and Tenant agree as follows: 1. Definition--Lease. As used in this Fourth Amendment, "Lease" means the Commercial Lease, dated September 28, 1995, as amended by the First Amendment to Lease, dated February 13, 1996, the Second Amendment to Lease, dated May 20, 1996, and the Third Amendment to Commercial Lease (the "Third Amendment"), dated October 27, 2000, all entered into between Landlord or its predecessor in interest, Draper Park North, L.C., a Utah limited liability company, as landlord, and Tenant, as tenant. Any capitalized term that is used but not defined in this Fourth Amendment shall have the meaning set forth in the Lease. 2. Purpose. Pursuant to Paragraph 4 of the Third Amendment, the Base Rent is to be increased as of May 1, 2001. Pursuant to Paragraph 7 of the Lease, Tenant is to pay for an Operating Expenses Escalation, effective as of January 1, 2001. The purpose of this Fourth Amendment is to memorialize such increase and escalation. 3. Base Rent Increase; Operating Expenses Escalation. (a) Commencing on May 1, 2001, the Base Rent shall be the total aggregate amount of $59,626.76 per month, comprised of $49,294.57 per month for the Occupied Premises and $10,332.19 per month for the Unoccupied Premises. Such amount is calculated by multiplying the existing Base Rent ($43,434.18 per month for the Occupied Premises and $9,103.85 per month for the Unoccupied Premises) times a fraction, the numerator of which is the Consumer Price Index for February, 2001 (175.8), and the denominator of which is the Consumer Price Index for February, 1996 (154.9). (b) The Cap permits Landlord to recover in calendar year 2001 an Operating Expenses Escalation of only (i) $.715 per Rentable square foot for the Occupied Premises, which is equal to a total of $25,612.68 or $2,134.39 per month, and (ii) $4.03 per Rentable square foot for the Unoccupied Premises, which is equal to a total of $5,965.56 or $497.13 per month, for a total aggregate amount of $31,578.24 or $2,631.52 per month. Inasmuch as the estimated aggregate Operating Expenses Escalation for calendar year 2001 is in excess of the Cap amount, the monthly amount payable by Tenant during calendar year 2001 shall be the Cap amount or $2,631.52. (c) Therefore, commencing on May 1, 2001, the total aggregate monthly payment for Base Rent and Operating Expenses Escalation during calendar year 2001 shall be $62,258.28 per month. 4. General Provisions. In the event of any conflict between the provisions of the Lease the provisions of this Fourth Amendment, the provisions of this Fourth Amendment shall control. As modified by this Fourth Amendment, the Lease and all of Tenant's obligations under the Lease are ratified and affirmed in their entirety. This Fourth Amendment shall inure to the benefit of, and be binding on, Landlord and Tenant and their respective successors and assigns. This Fourth Amendment shall be governed by, and construed and interpreted in accordance with, the laws (excluding the choice of laws rules) of the State of Utah. This Fourth Amendment may be executed in any number of duplicate originals or counterparts, each of which when so executed shall constitute in the aggregate but one and the same document. Each individual executing this Fourth Amendment represents and warrants that such individual has been duly authorized to execute and deliver this Fourth Amendment in the capacity and for the entity set forth where such individual signs. LANDLORD AND TENANT have executed this Fourth Amendment on the respective dates set forth below, to be effective as of the date first set forth above. LANDLORD: CARRAMERICA REALTY, L.P., by its general partner: CARRAMERICA REALTY GP HOLDINGS, INC. a Delaware Corporation By /s/ William P. Krokowski ------------------------------------ William P. Krokowski Its Managing Director ----------------------------------- Date 5/4/01 ---------------------------------- TENANT: ADVANTA BANK CORP. By /s/ William A. Rosoff ------------------------------------ Its Vice Chairman William A. Rosoff ----------------------------------- Date 4/26/01 ---------------------------------- -2- CONSENT AND CONFIRMATION OF GUARANTOR THE UNDERSIGNED, ADVANTA CORPORATION, a Delaware corporation, the guarantor [ILLEGIBLE] the Lease identified in the foregoing Fourth Amendment to Commercial Lease, (i) consents to such amendment, (ii) agrees that the undersigned's guaranty of the Lease is in full force and effect and will continue to apply to the Lease, as amended by the foregoing amendment, or as otherwise amended on or after the date of this instrument, and (iii) agrees that the undersigned has no defenses to the enforcement of such guaranty, which is and all continue to be enforceable in accordance with its terms. DATED: 4/26/200l ADVANTA CORPORATION ADVANTA BANK CORP. By /s/ [ILLEGIBLE] ------------------------------------ Its Sr. Vice President ----------------------------------- Date 4-26-01 ---------------------------------- -3- FIFTH AMENDMENT TO COMMERCIAL LEASE [CarrAmerica Realty, L.P./Advanta Bank Corp.] THIS FIFTH AMENDMENT (this "Fifth Amendment") is entered into as of the 28th day of February, 2002, between CARRAMERICA REALTY, L.P., a Delaware limited partnership ("Landlord"), whose address is 1850 K Street, N.W., Suite 500, Washington, D.C. 20006, and ADVANTA BANK CORP., a Utah corporation, formerly known as Advanta Financial Corp. ("Tenant"), whose address is 11850 South Election Road, Draper, Utah 84020. FOR THE SUM OF TEN DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Landlord and Tenant agree as follows: 1. Definitions. As used in this Fifth Amendment, each of the following terms shall have the indicated meaning, and any capitalized term that is used but not defined in this Fifth Amendment shall have the meaning set forth in the Lease (as defined below in this Paragraph 1): 1.1. "Expansion Date" means the date on which Tenant occupies all or any portion of the Unoccupied Premises, which is anticipated to occur on or about May 1, 2002. 1.2. "Lease" means the Commercial Lease, dated September 28, 1995, as previously amended by the First Amendment to Lease, dated February 13, 1996, the Second Amendment to Lease, dated May 20, 1996, the Third Amendment to Commercial Lease, dated October 27, 2000, and the Fourth Amendment to Lease, dated May 3, 2001, all entered into between Landlord or its predecessor in interest, Draper Park North, L.C., a Utah limited liability company, as landlord, and Tenant, as tenant. 2. Purpose. Tenant has exercised its rights to do the following: 2.1. renew the Lease for one (1) additional period of two (2) years pursuant to Section 2(b) of the Lease (leaving the right to renew the Lease for one (1) final additional period of two (2) years); and 2.2. possess and occupy the Unoccupied Premises pursuant to Section(a)(ii) of the Lease. Landlord and Tenant desire to enter into this Fifth Amendment to memorialize the exercise of such rights. 3. Term. Unless renewed for two (2) additional years pursuant to Section 2(b) of the Lease, the Lease term shall expire on April 30, 2005. 4. Premises; Initial Improvement. Commencing on the Expansion Date, the Premises shall include (as part of the Premises, without differentiation), and all references hereafter in this Fifth Amendment to the "Premises" shall include, the additional space heretofore described in the Lease as the Unoccupied Premises, and shall consist of a total of 50,625 rentable square feet. Such additional space may be improved by Tenant, at its sole cost and expense, in accordance with and subject to Section 8 of the Lease. 5. Base Rent; Operating Expenses Escalation. 5.1. Base Rent. Pursuant to Section 4 of the Lease, commencing on the Expansion Date and continuing until the next Adjustment Date (May 1, 2003), the Base Rent for the Premises shall be the total aggregate amount of $69,664.94 per month. This amount was calculated by multiplying the initial Base Rent ($14.55 per rentable square foot) times 50,625 rentable square feet times a fraction, the numerator of which is the Consumer Price Index for February, 2001 (175.8), and the denominator of which is the Consumer Price Index for February, 1996 (154.9), and dividing the product by 12, as follows: $14.55 x 50,625 x 175.8/154.9/12 = $69,664.94 5.2. Operating Expenses Escalation. Pursuant to Section 7(b)(iv) of the Lease, the Cap permits Landlord to recover in calendar year 2002 an Operating Expenses Escalation of only $.88 per rentable square foot, which is equal to a total of $44,550.00 or $3,712.50 per month, calculated by multiplying $.88 times 50,625 rentable square feet, and dividing the product by 12, as follows: $.88 x 50,625/12 = $3,712.50 Inasmuch as the estimated Operating Expenses Escalation, without reference to the Cap, for calendar year 2002 is equal to a total of $3,712.50 per month, the monthly amount payable by Tenant during calendar year 2002, commencing on the Expansion Date, shall be the Cap amount or $3,712.50 per month. (Tenant shall be separately invoiced by Landlord for the Operating Expenses Escalation deficit (the difference between what was actually paid by Tenant and what was actually due) for the period from January 1, 2002 up to the Expansion Date.) 5.3. Aggregate Monthly Payment. Based on Paragraphs 5.1 and 5.2 of this Fifth Amendment, commencing on the Expansion Date, the total aggregate monthly payment for Base Rent and Operating Expenses Escalation during calendar year 2002 shall be $73,377.44 per month. 6. Parking Stalls Pursuant to Section 1(d) of the Lease, commencing on the Expansion Date, Landlord shall provide Tenant with 293 non-reserved parking stalls and 11 reserved parking stalls in the parking lots adjacent to the Premises. 7. General Provisions. In the event of any conflict between the provisions of the Lease and the provisions of this Fifth Amendment, the provisions of this Fifth Amendment shall control. As modified by this Fifth Amendment, the Lease and all of Tenant's obligations under the Lease are ratified and affirmed in their entirety. This Fifth Amendment shall inure to the benefit of, and -2- be binding on, Landlord and Tenant and their respective successors and assigns. This Fifth Amendment shall be governed by, and construed and interpreted in accordance with, the laws (excluding the choice of laws rules) of the State of Utah. This Fifth Amendment may be executed in any number of duplicate originals or counterparts, each of which when so executed shall constitute in the aggregate but one and the same document. Each individual executing this Fifth Amendment represents and warrants that such individual has been duly authorized to execute and deliver this Fifth Amendment in the capacity and for the entity set forth where such individual signs. -3- LANDLORD AND TENANT have executed this Fifth Amendment on the respective dates set forth below, to be effective as of the date first set forth above. LANDLORD: CARRAMERICA REALTY, L.P., by its general partner: CARRAMERICA REALTY GP HOLDINGS, INC. a Delaware Corporation By /s/ William P. Krokowski ------------------------------------ William P. Krokowski Its Managing Director ----------------------------------- Date 3/12/02 ---------------------------------- TENANT: ADVANTA BANK CORP. By /s/ Kirk S. [ILLEGIBLE] ------------------------------------ Its V.P. Finance/Treasurer ----------------------------------- Date 3/6/02 ---------------------------------- -4- CONSENT AND CONFIRMATION OF GUARANTOR THE UNDERSIGNED, ADVANTA CORP., /s/ MMW a Delaware corporation, the guarantor of the Lease identified in the foregoing Fifth Amendment to Commercial Lease, (i) consents to such amendment, (ii) agrees that the undersigned's guaranty of the Lease is in full force and effect and will continue to apply to the Lease, as amended by the foregoing amendment, or as otherwise amended on or after the date of this instrument, and (iii) agrees that the undersigned has no defenses to the enforcement of such guaranty, which is and shall continue to be enforceable in accordance with its terms. DATED: March 4, 2002 ADVANTA CORP. /s/ MMW By /s/ Marcia M. Wilf ------------------------------------------ Its Vice President, Corporate Administration ----------------------------------------- Date March 4, 2002 ---------------------------------------- -5- EX-10.X 5 w84552exv10wx.txt AGREEMENT AND GENERAL RELEASE EXHIBIT 10-X AGREEMENT AND GENERAL RELEASE WHEREAS, Rosemary Cauchon (referred to in this Agreement as "Employee") has been employed by Advanta Corp. and/or any of its subsidiaries and affiliates (referred to in this Agreement as "Advanta"); and WHEREAS, Employee's employment terminated on October 17, 2002 ("Termination Date") and Advanta and Employee desire to resolve all aspects of Employee's separation from employment with Advanta; Employee and Advanta agree as follows: 1. Employee, in consideration of Advanta's undertakings set forth in Paragraph 2 and intending to be legally bound, agrees: (a) to release and forever discharge Advanta and its past, present and future officers, directors, employees, shareholders and agents, attorneys, and all of their respective successors and assigns, jointly and severally, from all claims, actions or causes of action of any kind, known or unknown, which Employee now has or hereafter may have, arising out of any matter, occurrence, omission or event occurring prior to the execution of this Agreement, including, but not limited to: (i) any claims relating to or arising out of Employee's employment with and/or termination of employment with Advanta; (ii) any claims for unpaid or withheld wages, vacation, sick and/or personal time pay, un-reimbursed expenses, severance pay, notice, bonuses, management incentive programs, and/or other compensation or benefits of any kind; (iii) any and all claims of discrimination in employment arising before the execution of this Agreement, including, but not limited to claims for discrimination or harassment on the basis of age, sex, race, religion, color, creed, handicap, disability, citizenship, national origin or sexual orientation arising under Title VII of the Civil Rights Act of 1964, The Americans with Disabilities Act, The Family and Medical Leave Act of 1993, The Age Discrimination in Employment Act, 29 USCA ss.621, et seq. ("ADEA") and/or any other similar federal, state and local laws, and any claims for retaliation thereunder; (iv) any other claims arising out of or in any way related to Employee's employment or the separation of her employment with Advanta, including, but not limited to breach of contract, breach of Employee's letter agreement dated September 26, 2001 ("Employment Letter"), breach of covenant of good faith and fair dealing, defamation, fraud, promissory or equitable estoppel, misrepresentation, violation of public policy, wrongful discharge, unfair dismissal, or any other common law claim now or hereafter recognized; and (v) all claims for attorneys' fees; and (b) to resign as of the Termination Date any and all officer and director positions held with Advanta or any of its affiliates or subsidiaries; and (c) effective as of the Termination Date, to vacate the premises which she leased from Advanta, subject to Employee's access to the premises for thirty days after the Termination Date to remove her personal property; and (d) to fully cooperate with and assist the Company and their counsel in connection with any litigation, corporate transactions, general business matters, or agency investigations or audits, and to make herself reasonably available to the Company to do so at times and locations as to not interfere with her duties and responsibilities to any future employer. Employee will be reimbursed for reasonable and customary expenses incurred in complying with this subparagraph (d) according to the Company's then-current reimbursement policies. 2. Advanta, in consideration of the promises of Employee set forth in this Agreement and intending to be legally bound, agrees to: (a) release and forever discharge Employee from any claims, actions, or causes of action in connection with any acts or omissions of Employee arising out of any matter, occurrence, omission or event occurring prior to the execution of this Agreement. Notwithstanding the foregoing, Advanta does not release Employee from claims, actions or causes of action associated with the disclosure of trade secrets, proprietary information, or confidential information as set forth in this Agreement and the Business Ethics Agreement attached as Exhibit A hereto or any claim for breach of this Agreement; and (b) pay employee $602,386 in 26 equal bi-weekly installments commencing with the first payroll period of Advanta after this Agreement becomes effective, less applicable federal, state and local taxes; and (c) provide for the benefit of Employee that portion of Employee's COBRA health insurance premium which is equal to the amount which the Company contributes for employees of the Company, ($606.02 monthly in 2002 and $664.28 monthly in 2003 for medical, dental and vision benefits) provided Employee elects continued participation in the Company's group medical, dental or vision plans pursuant to COBRA (subject to COBRA's eligibility requirements and other terms and conditions), during the period that Employee is receiving payments pursuant to subparagraph 2(b) above; and (d) vest Employee as of the effective date of this Agreement in 150,000 options for a total of 200,000 vested options to purchase Advanta stock issued to her pursuant to the terms of the Employment Letter at an exercise price of $7.52 per share. Employee shall have one year from the Termination Date to exercise these 200,000 options; and (e) reimburse Employee for all previously unreimbursed housing, furnishing and incremental living expenses incurred prior to the Termination Date in accordance with -2- paragraph 7 of the Employment Letter in the amount of $227,269.80, on the effective date of this Agreement. Employee hereby acknowledges that she purchased the furniture for which she is being reimbursed on behalf of Advanta and that Advanta is the owner of the furniture. (f) provide Employee with reimbursement of the cost of executive outplacement services of the employee's choice at a cost not to exceed $10,000. 3. Employee acknowledges and agrees that the money and benefits she will receive under Paragraph 2 above exceed the money and benefits to which she otherwise would be entitled, and that such excess is sufficient consideration to support the grant of the General Release in Paragraph 1 above. 4. Employee agrees that she will not voluntarily cooperate in litigation, regulatory or administrative proceedings or investigations against the Company or affiliates, nor will she act in any manner disloyal to the Company or contrary to its interests as determined by the Company, provided that this restriction will not prevent Employee from (a) engaging in Competition with the Company; (b) after notification to the Company, providing factual information to a federal regulator which would be subject to subpoena; and (c) testifying truthfully under subpoena in any legal proceeding. 5. Employee represents that she has not instituted or permitted to be instituted against Advanta any claim or suit. Employee agrees not to institute any claim or suit against Advanta that is within the scope of her release of Advanta in subparagraph 1(a) above other than any claim seeking to determine the validity of her waiver of her rights under the ADEA. 6. Employee agrees that she will not issue any press release or make any public statement concerning her employment, her departure, or the financial affairs of the Company without the prior written consent of the Company. Employee agrees that she will not disclose the existence or the terms of this Agreement to anyone except her spouse, her tax advisor, her attorney and taxing authorities. Further, Employee agrees that unless she is given written consent from the Company, she will not participate in any interview or make any oral statement, and will not draft, edit or otherwise be involved in any way in the publication of any written document, audio or visual presentation or other publication, or the preparation or presentation of any speeches, courses or consulting which in any manner, directly or indirectly, describes, discusses or alludes to any matter or experience in which Employee was involved or learned about while employed by the Company. This paragraph 7 will not prevent Employee from engaging in competition with the Company or using her general skill, ability, experience and industry knowledge in any future business activity. 7. Employee agrees that she will continue to comply after the termination of her employment with the confidentiality provisions of the Advanta Code of Conduct (attached as -3- Exhibit B hereto) and all of the terms of the Business Ethics Agreement signed by her on September 26, 2001. Employee further agrees that she will immediately return any and all documents and other property she may have which belongs to Advanta. Employee further agrees to return to Advanta any other of its documents and property that she may discover she has at a later time. 8. Advanta will provide plaintiff with W-2 forms for all taxable income received by Employee as required by law. 9. If any term, covenant, restriction or provision of this Agreement is determined by any court to be unenforceable, illegal or invalid, the other terms, covenants, restrictions and provisions shall remain in full force and effect. 10. This Agreement constitutes the entire agreement between the parties. Any modifications to this Agreement must be in writing and signed by a duly authorized representative of Advanta. 11. This Agreement is made in Pennsylvania and is to be governed by Pennsylvania law to the extent that state law is applicable. Employee expressly waives any rule or custom requiring construction against the drafter of this Agreement. 12. Employee agrees and represents that: (a) she has read carefully the terms of this Agreement, including the General Release and non-disclosure provision contained in Paragraph 1; (b) she has been informed by the terms of this document that she may have this document reviewed by his own attorney; (c) she understands the meaning and effect of the terms of this Agreement, including the General Release and non-disclosure provision contained in Paragraph 1; (d) she was given at least twenty-one (21) days in which to consider this Agreement; (e) she entered into this Agreement voluntarily and without compulsion of any kind; -4- (f) she has not filed any claims, complaints or suits against Advanta; and (g) no promise or inducement not expressed in this Agreement has been made to her. 13. Employee may revoke this Agreement for a period of seven (7) days following his execution of it. This Agreement shall not be effective or enforceable until the revocation period has expired. Any revocation must be in writing signed by Employee and mailed to the office of Elizabeth Mai, Senior Vice President, Welsh & McKean Roads, Spring House, PA 19477, before the revocation period has expired. The date the letter is post-marked will be deemed to be the date of mailing. Any revocation should be sent by certified mail. -5- THEREFORE, the parties, intending to be legally bound by this Agreement, execute this document on the 18th day of December, 2002. EMPLOYEE: ADVANTA: /s/ Rosemary Cauchon /s/ William A. Rosoff -------------------------------- -------------------------------- Rosemary Cauchon William A. Rosoff /s/________________________________ Witness -6- EX-10.Y 6 w84552exv10wy.txt ADP/MDP INITIAL ORDER FORM & MASTER AGREEMENT. . . . EXHIBIT 10-Y ADP/MDP INITIAL ORDER FORM & MASTER AGREEMENT
[ ] NEW THIS IS AN INITIAL ORDER PLACED PURSUANT TO THE EXISTING MASTER AGREEMENT DATED 5/19/02 PLUS INTERIM ORDER -------------------------- CUSTOMER DATED 3/19/02=$1,120,000.00. --------------------------- Initial order is effective as of: 5/19/02 thru 3/18/03 ----------------------- DUNS #: 12-268-3253 ------------------------- SUBSCRIBER#: 004-012511 ------------------ - ------------------------------------------------------------------------------------------------------------------------------------
CUSTOMER ELECTS TO USE THE ANNUAL DISCOUNT PLAN (ADP) PACKAGE. ANNUAL [x] DISCOUNT PAYMENT OPTIONS: [x] ANNUAL EFF. DATE [ ] ANNUAL EFF. DATE 30/60 [ ] QUARTERLY [ ] MONTHLY PLAN Annual service amount:.................................................................... $ Brand discount eligibility: [ ] PREMIER --------------------- -------------------------- --------------------- Annual service* fee:...................................................................... $ 342.00 --------------------- No. of additional locations (see Schedule of Locations) 2 @ $114 = $ 228.00 --------- ---- --------------------- REFERENCE SERVICES (SEE REFERENCES SERVICES SECTION BELOW): .............................. $ --------------------- TOTAL BASIC SERVICE - ANNUAL DISCOUNT PLAN: .............................................. $ $1,680,570.00 ---------------------- * Annual Subscription includes Customer Service Toll Free #, Customer Manual and Local Training. - ------------------------------------------------------------------------------------------------------------------------------------ [ ] MONTHLY CUSTOMER ELECTS TO USE THE MONTHLY DISCOUNT PLAN (MDP). INFORMATION AND SOFTWARE USED WILL BE INVOICED ON DISCOUNT A MONTHLY BASIS ACCORDING TO THE CHARGES PROVIDED IN THE PRODUCT & SERVICE PRICING GUIDE. PLAN THE RECURRING MONTHLY FEES ARE AS FOLLOWS: Monthly service* fee: ..................................................................... $ --------------------- NO. of additional locations (see Schedule of Locations) @ $ = $ ------- ------- --------------------- TOTAL MONTHLY SERVICE FEES: ............................................................... $ --------------------- Current month Reference Service charges (if applicable): .................................. $ --------------------- (Refer to the Product & Service Pricing Guide for current year Reference Services charges. Reference Services are billed upon delivery.) *MDP includes Customer Service Toll Free #, Customer Manual, and Local Training. - ------------------------------------------------------------------------------------------------------------------------------------
[ ] REFERENCE SERVICE GEOGRAPHIC COVERAGE: [ ] NAT'L [ ] REG 1 [ ] REG 2 [ ] REG 3 [ ] REG 4 [ ] REG 5 [ ] Ref. Book of American Bus. [ ]Q1(Jan-Mar) [ ]Q2(Apr-Jun) [ ]Q3(Jul-Sep) [ ]Q4(Oct-Dec) [ ] D&B Ratings Plus Click Here [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec [ ] Duns Reference Plus-LAN [ ] 2-5 [ ]6-10 [ ] 11-25 [ ]26-100 [ ] 101-250 [ ]251-500 [ ]501+ Service State(s): --------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------
[X] OTHER TITLE OF SOFTWARE: Bonus Dollars=$543,000.00 [ ] CD [ ] Diskette $ SERVICES OTHER SERVICES: ------------------------------------- --------------------- D&B Commitment=$2,800,570.00 [ ] International $ ------------------------------------- --------------------- Total Availability=$3,343,570.00 .............................. $ TOTAL OTHER SERVICES: --------------------- - ------------------------------------------------------------------------------------------------------------------------------------ PURCHASE ORDER #: TOTAL DUN & BRADSTREET SERVICE*: $ 1,680,570.00 --------------------- * Exclusive of state and local sales/use taxes Tax Exempt [ ] No [ ] Yes (Provide Tax Exempt Certificate) ____________________________________________________________________________________________________________________________________
IMPORTANT CUSTOMER (1) ACCEPTS ACCOMPANYING MASTER AGREEMENT REFERENCED ABOVE; (2) PLACES ABOVE ORDER PURSUANT TO THE EXISTING MASTER AGREEMENT; AND (3) ACKNOWLEDGES RECEIPT OF THE MASTER AGREEMENT AND A PRODUCT & SERVICE PRICING GUIDE THAT SETS FORTH PRICES. THIS PRODUCT AND SERVICE PRICING GUIDE IS ALSO AVAILABLE THROUGH THE INTERNET AT DNB.COM. ____________________________________________________________________________________________________________________________________
DUN & BRADSTREET, INC. CUSTOMER D&B Relationship Manager: Linda Reeves Customer Business Name: Advanta Bank Corp ----------------------------- --------------------------------------------------- Phone: 410 348-9997 Street Address: Welsh & McKean Roads ------------------------- ----------------------------------------------------------- City: Springhouse State: PA Zip: 19477 ----------------- -------- ------------------------------- ACCEPTED BY: Bill To Address:* D&B Management: THOMAS M. WICKERSHAM City: State: Zip: ------------------------------------- ------------------ -------- ------------------------------- Signature: X /s/ THOMAS M. WICKERSHAM ----------------------------------------- Date: X 6/18/02 PRINT Signer's Name: Mr. David Weinstock Title: Vice President, Accounting ------------------------------------------------- ------------------- -------------------------- INTERNAL USE ONLY: Authorized Signature: /s/ David B Heinstock Date: X Accountable Position: ---------------------- --------------------- -------------------------------- For: Steve Pinado Telecoverage Position: Phone: 215 444-5667 Fax: -------------------------------- ---------------------- --------------------------------------- Supporting Position: E-Mail Address: spinado@advanta.com -------------------------------- -----------------------------------------------------------
MASTER AGREEMENT (MA-01-02) [D&B LOGO] DECIDE WITH CONFIDENCE Dun & Bradstreet, Inc. ("D&B") and the customer named on the attached Order ("Customer") agree that D&B shall make available to Customer business information services ("Services"), which may include information ("Information"); computer programs or applications (including those accessed remotely), documentation and media (collectively, "Software"); and other services, subject to this Master Agreement ("Agreement"). The Services subject to this Agreement are identified in Orders entered into from time to time by D&B and Customer. No obligation to furnish or to pay for a particular Service arises under this Agreement until D&B accepts an order and any attachments thereto placed by Customer. All accepted orders and their attachments (collectively, the "Order(s)") for Services are subject to this Agreement, and the terms of such Orders are incorporated by reference in this Agreement. Subject to paragraph 10.2, this Agreement continues in force even though no Order may then be outstanding. The Services will also be made available to U.S. companies that are subsidiaries, divisions or affiliates, wholly-owned or controlled by Customer and that are identified on a "Customer-Related Companies" schedule. 1. LICENSES 1.1 D&B grants to Customer a non-exclusive, non-transferable license ("License") to use and display the Information and Software (in object code format only) constituting each D&B product specified in an Order, subject to the limitations contained in this Agreement and such Order. D&B retains all ownership rights (including copyrights and other intellectual property rights) in the Services, in any form, and Customer obtains only such rights as are explicitly granted in this Agreement and such Order. The Services will include a custom model developed by D&B through the use of D&B and Customer information. To the extent such model is customized for Customer, the customized model shall be owned by Customer; provided that (i) Customer grants D&B a license to use such model in connection with its provision of Services to Customer hereunder, (ii) Customer's ownership of the customized model does not (x) include ownership of any D&B information, techniques, processes, methods, expertise, or other intellectual property included therein (which collectively remain D&B intellectual property) or (y) affect D&B's ability or rights with respect to the use of such D&B information, techniques, processes, methods, expertise, or other intellectual property for the purpose of developing custom models for other customers for any purpose, and (iii) Customer shall not license, sell, distribute or otherwise make available such custom model to any third party, other than those third parties to which Customer may make Information or Software available pursuant to the first sentence of paragraph 2.2. 1.2 Each License and Order is for a term, beginning on the date of the Order, of 12 months, unless another term is specified in the Order. D&B may extend the term for an additional period, in its discretion, while the parties are engaged in renewal discussions. Any such extension shall be subject to this Agreement. Each License or Order may be renewed as set forth in the Order and by mutual written agreement and payment of renewal fees and applicable product and service fees (the initial term and any renewal period for an Order or License constitute "the Term" for such Order or License). 1.3 Software "Updates" (i.e., minor enhancements, additions, and substitutions to Software, including corrections and bug fixes) are provided at no additional fee, if available. "Upgrades" (i.e., modifications, additions or substitutions that result in a substantial change, improvement or addition to Software), if available, are provided for an additional fee, if applicable. The determination of whether a matter involves an Update or an Upgrade is within the sole discretion of D&B. All Updates and Upgrades obtained by Customer are subject to this Agreement. 1.4 Telephone and email based software support is available during the Term of an Order for the currently licensed Software versions, and only if Customer has installed all Updates received. 2. RESTRICTIONS ON USE 2.1 Information and Software are licensed for Customer's internal use only and (i) only at the points of service specified in the Order; (ii) only for the frequency of use or total number of users set forth in the Order; and (iii) subject to any other restrictions set forth in the Order. 2.2 Customer will not provide Information or Software to others, whether directly in any media or indirectly through incorporation in a database, marketing list, report or otherwise, or use or permit the use of Information to generate any statistical or other information that is or will be provided to third parties (including as the basis for providing recommendations to others); use or permit the use of Information to prepare any comparison to other information databases that is or will be provided to third parties; or voluntarily produce Information in legal proceedings; except that Customer may provide Information or Software to Representatives as defined below, in response to regulatory requests, or as otherwise required by law. Customer shall: (i) maintain the Information in strict confidence, including by restricting disclosure of the Information solely to those of its employees, consultants, agents and advisors (collectively, "Representatives") with a need to know and not allowing it to be disclosed, through negligence or otherwise, to third parties, (ii) advise Representatives who receive the Confidential Information of their obligations hereunder and assume full responsibility for any breach by them of such obligations, (iii) use the Confidential Information only in furtherance of the business relationship described in Paragraph 1 above, and (iv) take all steps to ensure that no unauthorized persons have access to Confidential Information and that all persons having access to Confidential Information refrain from any unauthorized disclosure. 2.3 Customer will not attempt to access, use, modify, copy, reverse engineer, or otherwise derive the source code of Software. 2.4 Upon reasonable notice and during regular business hours, Customer will permit D&B to inspect the locations at, or computer systems on which, Information and Software are used, stored or transmitted so that D&B can verify Customer's compliance with this Agreement. 2.5 Customer will be responsible for any direct damages or lost profits incurred by D&B as a result of Customer's breach of this paragraph 2. 3. COPYING 3.1 Customer will not copy, download, upload or in any other way reproduce Information or Software except for (i) creating a reasonable number of copies of Information in any format for internal use only in accordance with this Agreement and not for general internal distribution; and (ii) making one copy of Information and of Software for internal archival purposes. 4. D-U-N-S NUMBERS 4.1 D-U-N-S Numbers are proprietary to and controlled by D&B. D&B grants Customer a non-exclusive, perpetual, limited license to use D-U-N-S Numbers solely for identification purposes and only for Customer's internal business use. Where practicable, Customer will refer to the number as a "D-U-N-S Number" and state that D-U-N-S is a registered trademark of D&B. 5. THIRD PARTY SERVICES 5.1 Customer may engage a third party to process or host Information (the "Processor") provided that the Processor and D&B enter into a D&B Processor's Agreement before any Information or Software is provided to the Processor. 5.2 Third parties that provide Information to D&B for use in providing the Services are intended third party beneficiaries of paragraphs 8 and 11. 6. PAYMENT 6.1 Customer will pay D&B in accordance with the Order. Prices and product descriptions are those set forth in the Order, or, if not included in the Order, in the applicable pricing and product policies made available to Customer in hard copy or on any D&B Internet site, which policies are incorporated herein. A late payment charge of the lesser of 1 1/2% per month or the highest lawful rate may be applied to any outstanding balances until paid. 6.2 Customer will pay any applicable taxes relating to this Agreement, other than taxes based on D&B income and franchise - related taxes. 6.3 For certain Orders for a committed volume or usage represented by an upfront payment by Customer, Customer may be entitled to "carry over" portions of unused volume or usage upon renewal. In addition, if Customer's MA-01-02 usage exceeds the committed amount, such excess usage shall be billed at a specified "overrun" rate. Such carryover and/or overrun rate, if applicable, will be determined in accordance with the Order, or, if not included in the Order, in the applicable pricing and product policies made available to Customer in hard copy or on any D&B Internet site. 6.4 If Customer's pricing with respect to a particular Order is based on Customer's expected volume or usage as indicated on such Order and Customer does not meet such volume or usage levels, Customer will pay D&B a "true-up amount" based on the pricing applicable to the volume or usage actually utilized by Customer. 7. COMPLIANCE WITH LAW 7.1 Customer will not use Information as a factor in establishing an individual's eligibility for (i) credit or insurance to be used primarily for personal, family, or household purposes, or (ii) employment. In addition, Customer will not use any Service to engage in any unfair or deceptive practices and will use the Services only in compliance with applicable state, local, federal or foreign laws or regulations, including laws and regulations regarding telemarketing, customer solicitation (including fax and/or e-mail solicitation), data protection and privacy. 8. DISCLAIMERS 8.1 Though D&B uses extensive procedures to keep its database current and to maintain accurate data, Customer acknowledges that the Information will contain a degree of error and that Customer is responsible for determining that the Information is sufficiently accurate for Customer's purposes. If the Information is not sufficiently accurate for Customer's purposes, then Customer must so notify D&B, in writing, within 15 days after receipt of such Information. D&B will, at its option, either correct the inaccuracy at D&B's expense or refund any amounts paid relating to the unusable Information. 8.2 ALL SERVICES ARE PROVIDED ON AN "AS IS," "AS AVAILABLE" BASIS. OTHER THAN AS EXPLICITLY STATED IN THIS AGREEMENT, D&B DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTIES OF ACCURACY, COMPLETENESS, CURRENTNESS, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. D&B DOES NOT WARRANT THAT THE SERVICES WILL BE UNINTERRUPTED OR ERROR-FREE AND DISCLAIMS ANY WARRANTY OR REPRESENTATION REGARDING AVAILABILITY OF A SERVICE, SERVICE LEVELS OR PERFORMANCE. D&B WILL NOT BE LIABLE FOR ANY LOSS OR INJURY ARISING OUT OF, IN WHOLE OR IN PART, D&B'S CONDUCT IN PROCURING, COMPILING, COLLECTING, INTERPRETING, REPORTING OR DELIVERING SERVICES. 9. COPYRIGHTS AND OTHER PROPRIETARY RIGHTS 9.1 Customer acknowledges that Information and Software are proprietary works of D&B and comprise: (i) works of original authorship, including compiled Information containing D&B's selection, arrangement and coordination and expression of such Information or pre-existing material it has created, gathered or assembled; (ii) trade secret and other confidential information, including information that derives value or potential value from not being readily known or available; and (iii) information that has been created, developed and maintained by D&B at great expense, such that misappropriation or unauthorized use by others for commercial gain would unfairly and/or irreparably harm D&B or reduce D&B's incentive to create, develop and maintain such information. Customer will not knowingly commit or permit any act or omission that would contest or impair D&B's proprietary and intellectual property rights in Information and Software or that would cause the Information or Software to infringe the proprietary or intellectual property rights of a third party. Customer will reproduce D&B's copyright and proprietary rights legend on all copies of Information and Software which are so marked when received. Customer will be responsible for any direct damages or lost profits incurred by D&B as a result of Customer's breach of this paragraph 9.1. 9.2 Customer and D&B will not (i) use any trademark, service mark or trade name of each other or any of their affiliated companies, except that D&B and its affiliates may include Customer's trade names in the data base of business information included within the Services it offers to Customer and others or otherwise as permitted by law, or (ii) publish any press releases regarding this Agreement or any Order. 9.3 D&B will treat all information that Customer designates in writing to be proprietary in the same manner as D&B treats its own proprietary information. D&B agrees not to use such identified proprietary information except for the purposes of performing its obligations to Customer and for internal analytical purposes (i.e., analyzing such data to improve D&B's products and services). Such proprietary information shall not include information that (i) is or becomes a part of the public domain through no act or omission of D&B; (ii) was in D&B's lawful possession prior to Customer's disclosure to D&B; (iii) is lawfully disclosed to D&B by a third-party with the right to disclose such information and without restriction on such disclosure; or (iv) is independently developed by D&B without use of or reference to the proprietary information. 9.4 D&B represents and warrants to Customer that, to D&B's knowledge, the Software and Information, when used in accordance with this Agreement, do not violate any existing U.S. copyrights, patents, trademarks, or other intellectual property rights of any third party. The foregoing warranty does not apply to the extent Customer modifies the Software or Information in any way or combines the Software or Information with material from third parties. 10. TERMINATION 10.1 In the event of material breach (including, without limitation, an assignment in violation of paragraph 13.2 hereof) by Customer or D&B, the non-breaching party may immediately terminate this Agreement or particular Orders without prior notice. In addition, D&B may terminate this Agreement or particular Orders upon 30 days' prior written notice; provided that if D&B terminates this Agreement or particular Orders other than for cause, D&B will refund to Customer the unused balance of any amounts paid under the relevant Orders. If Customer terminates this Agreement or particular Orders due to a material breach by D&B pursuant to this section, D&B will refund to Customer the unused balance of any amounts paid under the relevant Orders so long as such material is proved in any judicial proceeding. 10.2 If Customer has no Orders in effect during a period of six consecutive months, then D&B may terminate this Agreement at the end of such six-month period by sending written notice to Customer. 10.3 The provisions set forth in paragraphs 2, 3, 4, 6, 7, 8, 9, 10.3, 10.4, 10.5, 11 and 12 will survive the termination of this Agreement. 10.4 If, without D&B's written permission, Customer continues after termination to obtain Services covered by a terminated Order or Agreement, Customer will be liable to D&B for the undiscounted fees for such Services in effect on the date of such termination. 10.5 Upon termination of a Term with respect to particular Information or Software, or upon receipt of Software or Information that is intended to supersede previously obtained Software or Information, unless D&B instructs Customer otherwise, Customer will immediately delete or destroy all originals and copies (other than archival copies permitted by paragraph 3) of the Information or Software, and upon request, provide D&B with certification thereof. 10.6 Termination of this Agreement will result in a termination of all outstanding Orders. 11. LIMITATION OF LIABILITY 11.1 NEITHER D&B NOR CUSTOMER WILL BE LIABLE FOR SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING OUT OF THIS AGREEMENT OR THE DELIVERY, USE, SUPPORT OR OPERATION OF THE SERVICES, EXCEPT AS OTHERWISE PROVIDED HEREIN. 11.2 D&B's LIABILITY FOR A PARTICULAR CLAIM WILL NOT EXCEED THE AMOUNT PAID BY CUSTOMER TO D&B FOR THE PARTICULAR INFORMATION OR SOFTWARE UPON WHICH THE CLAIM IS BASED OR $20,000, WHICHEVER IS GREATER. ANY CLAIMS AGAINST D&B WILL BE BROUGHT, IN ACCORDANCE WITH THIS AGREEMENT, WITHIN 12 MONTHS OF DISCOVERY OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIMS, BUT IN NO CASE MORE THAN TWENTY- MA-01-02 FOUR (24) MONTHS FROM THE FIRST OCCURRENCE, OR SUCH CLAIMS WILL BE FOREVER BARRED. 12. CHOICE OF LAW; DISPUTES 12.1 This Agreement is governed by and construed in accordance with the laws of the State of New Jersey, without regard to choice of law provisions. Any disputes arising out of this Agreement that cannot be resolved by the parties will be brought in state or federal court located in Newark, New Jersey. 12.2 Each party shall bear its own costs and expenses, including reasonable attorneys' fees incurred in any action to enforce the obligations of the other party under this Agreement, however, Customer will reimburse D&B for all costs and expenses (including all reasonable attorneys' fees and costs as well as all damages incurred) in D&B's enforcement of the Customer-Related Companies compliance with this Agreement. 13. MISCELLANEOUS 13.1 This Agreement, all Orders, addenda and schedules, and D&B's published policies and procedures referred to herein and in effect from time to time, including those published on D&B's web site, constitute the entire agreement between D&B and Customer regarding the Services. Unless an Order states otherwise, where there is a conflict between the terms of any addenda or schedules and this Agreement, the terms of the Agreement shall control with respect to the Services. Where there is a conflict between the terms of any Order and this Agreement, the terms of the Order shall control with respect to the Services set forth in such Order and solely to the extent of the conflict. Any amendments of or waivers relating to this Agreement or any Order must be in writing signed by both parties. 13.2 This Agreement binds and inures to the benefit of the parties and their successors and assigns, except that neither party will assign this Agreement without the prior written consent of the other party; however, either party may assign the Agreement (i) to an affiliate controlled by, controlling or under common control with that party; provided such affiliate is not a direct competitor of D&B, or (ii) in connection with a merger or consolidation (so long as the assignment is to the newly merged or consolidated entity) or the sale of substantially all of its assets (so long as the assignment is to the newly merged or consolidated entity). Notwithstanding the foregoing, with respect to an assignment pursuant to (ii) above, the non-assigning party may terminate this agreement upon thirty (30) days written notice if such party objects to the assignment. 14 Indemnification D&B shall defend or settle at its expense any claim, suit or proceeding arising from or alleging: (a) infringement of any existing U.S. copyrights, patents, trademarks, or other intellectual property rights of any third party ("Intellectual Property Right") by Service or part thereof furnished under this Agreement; (b) property damage or personal injury, including death, directly caused by or personal injury, including death, directly caused by or sustained in connection with the performance of the Services or any activities of D&B in connection therewith; and (c) a breach of the warranties and representations made by D&B in this Agreement. D&B shall indemnify and hold Customer harmless from and pay any and all losses, costs and damages, including royalties and license fees, reasonable counsel fees attributable to such claim, suit or proceeding. Customer shall give D&B prompt notice of, and the parties shall cooperate in, the defense of any such claim, suit or proceeding, including appeals, negotiations and any settlement or compromise thereof, provided that the Customer shall approve the terms of any settlement or compromise. If any Service or part thereof furnished under this Agreement, including without limitation Software, system design, equipment or Documentation, becomes or in the Customer's or D&B's reasonable opinion is likely to become, the subject of any claim, suit, or proceeding arising from or alleging infringement of, or in the event of any adjudication that such Service or part thereof infringes on, any Intellectual Property Right, D&B, at its own expense shall take the following actions in the listed order of preference: (i) secure for the Customer the right to continue using the Service or part thereof; or (ii) if efforts are unavailing, replace or modify the Service or part thereof to make it non-infringing; provided, however, that such modification or replacement shall not degrade the operation or performance of the Service MA-01-02 EX-10.Z 7 w84552exv10wz.txt DIRECT MARKETING AGREEMENT Exhibit 10-Z DIRECT MARKETING AGREEMENT This AGREEMENT, dated effective as of December 15, 1999 by and among Advanta Bank Corp. ("ABC"), a corporation having a place of business at 11850 Election Road, Salt Lake City, Utah, 84020 and CFM DIRECT ("CFM"), having a place of business at Oakbrook Terrace Tower, One Tower Lane, Suite 2400, Oakbrook Terrace, IL 60181. WITNESSETH WHEREAS, CFM is in the business of providing direct mail and other marketing services; and WHEREAS, ABC is in the commercial credit card business, seeks to attract customers interested in obtaining commercial credit cards ("Customers") and markets its commercial credit cards in a manner consistent with CFM's business; and WHEREAS, ABC wishes to retain CFM to perform various services in connection with ABC's direct marketing program for originating its commercial credit cards, and CFM is willing to undertake to perform such services, as more particularly set forth below; NOW THEREFORE, the parties hereto, in consideration of the mutual premises and covenants herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby agree as follows: SECTION 1. PERFORMANCE OF SERVICES BY CFM ---------- ------------------------------ A. CFM shall develop and execute marketing programs for the origination of MasterCard credit cards from prospective commercial Customers, including, but not limited to, creative development, list sourcing, list processing and file audits. Prospective commercial Customers to whom CFM mails promotional material applications will be selected by CFM in accordance with criteria established by ABC. The particulars of each mail campaign, including the number of prospective Customers to be solicited, shall be documented in the form attached hereto as Schedule A (the "Schedule"). The parties hereby acknowledge that the actual number of prospective Customers to be solicited in any mail campaign may be larger or smaller than that listed written approval before using any particular type or form of marketing material (such as layout and copy, paper, envelopes and the like), and CFM shall obtain ABC's prior written approval with respect to all mailing lists CFM proposes to use with respect to such mailings, which approval shall not be unreasonably withheld. B. CFM may, in its discretion, seek and retain one or more subcontractors, agents or other representatives ("Outside Agents") to perform all or any portion of the services it has undertaken to perform hereunder. CFM shall obtain ABC's prior written approval before utilizing the services of any such Outside Agents, and CFM shall cause such Outside Agents to execute a confidentiality agreement in the form attached hereto as Exhibit "A-1". C. CFM shall perform its obligations hereunder and shall complete the mailings for the origination of ABC credit cards as agreed pursuant to each Schedule provided, however, that the completion of such mailings may be delayed up to 60 days without constituting a breach of this Agreement by CFM, to the extent that such delay: 1) is caused by a subcontractor engaged by CFM on the recommendation of ABC and/or 2) is specifically requested in writing by ABC. D. ABC will cooperate fully with CFM in CFM's performance of its duties hereunder and, upon request, will provide such advice and render such assistance as CFM may reasonably request; provided, however, that nothing in this Section 1.D. shall be deemed to impose any obligation upon ABC to provide any financial contribution or assistance to CFM. CFM may, but shall not be obliged to, rely upon any advice provided by ABC, it being agreed and understood that CFM and ABC are completely independent and unrelated parties and that CFM is free to exercise its own discretion and judgment in fulfilling its obligations hereunder. E. At the request of ABC from time to time, CFM will inform ABC as to what steps it has taken, is taking and is intending to take to fulfill, or to cause to be fulfilled, CFM's obligations hereunder. 2 SECTION 2. PAYMENT FOR SERVICES ---------- -------------------- A. ABC shall compensate CFM for performance of its obligations under this Agreement in the manner specified below, which compensation may be amended only in writing by the parties hereto. B. ABC will make progress payments to CFM as outlined in each Schedule. These payments are intended as progress payments and are not to be construed as guarantees or compensation by ABC to CFM. Subject to the following paragraph, ABC will pay CFM for each credit card "Account Booked". An "Account Booked" is a properly established credit card account which meets ABC's credit underwriting and other standard criteria and which is opened as a result of marketing programs developed by CFM and which is reflected on the report furnished to CFM by ABC. Compensation to CFM, if any, with respect to properly established credit card accounts opened shall be determined as agreed to by the parties within sixty (60) days of the date the final statement of compensation to CFM is rendered pursuant to each Schedule. C. On the dates stated in each Schedule (or if any such date is not a business date for ABC, on the next succeeding business day), ABC shall prepare, certify and deliver to CFM a statement setting forth CFM's Compensation (as defined in each Schedule), and based on a statement from ABC setting forth the total number of Accounts Booked as of the previous month end resulting from the origination of credit cards under the programs developed by CFM. In order to calculate the above accurately, the responses received and credit cards issued by ABC will be coded by the application processor so as to identify them as resulting from the marketing programs developed by CFM. Notwithstanding the foregoing, however, in the event that the completion of mailings for the origination of credit cards is delayed pursuant to Paragraph C of Section 1 of this Agreement, the preparation of statements, and any payments due as a result thereof shall be delayed by the same amount of time as the aforesaid delay in the completion of mailings. D. The parties hereto have used their experience and best efforts to accurately and fully anticipate the costs, and thereby the appropriate payments 3 associated with the program contemplated hereunder. The parties acknowledge that the pricing in each Schedule reflects expenditures which are anticipated to be incurred by CFM in performing its obligations under this Agreement. Nevertheless, in the event that any material cost-related discrepancies occur and/or such expenditures are materially larger or smaller than those anticipated (unless due to the negligence of or willful breach by CFM), the parties hereto agree to resolve such in good faith and through fair dealing within sixty (60) days of the date the final statement of compensation to CFM is rendered pursuant to each Schedule. SECTION 3. RELATIONSHIP BETWEEN THE PARTIES Each of the parties hereto is acting as a principal and not as an agent of the other, and the relationship and arrangements created hereunder shall not create, and shall not be deemed to create, a partnership, joint venture or any similar relationship or arrangements between the parties hereto. In carrying out its duties and performing its obligations hereunder, each of the parties hereto is acting as an independent contractor, and the employees, subcontractors, agents or other representatives of one of them shall not be deemed to be employees, subcontractors, agents or other representatives of the other. SECTION 4. REPRESENTATIONS AND WARRANTIES A. ABC represents, warrants and covenants to CFM that: 1. ABC is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah; it has the power and authority to conduct all of the activities conducted by it and to own or lease all of the assets owned or leased by it; and it is duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it and/or the character of the assets owned or leased by it makes such qualification or licensing necessary. All corporate action necessary to authorize the execution, delivery and performance of this Agreement by ABC has been taken, and no other consent, approval or other authorization of any government, governmental agency or other third party is 4 necessary for the execution, delivery and performance of this Agreement by ABC, or if any such consent, approval or authorization is necessary, it has been obtained. 2. There is no material action, suit, proceeding or investigation pending, or, to the extent of its knowledge, threatened, against or affecting ABC or any of its assets. ABC is not in default under or with respect to any judgment, order, writ, injunction or decrees of any court of any federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality. ABC is not involved in any labor dispute or disturbance, other than routine grievances, none of which is material. ABC has complied in all material respects with all laws, regulations and orders applicable to it or its business. ABC is not in default in any material respect under any contract or other instrument to which it is a party in any manner which could affect its ability to perform its obligations hereunder. 3. ABC has the power and authority to execute and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by it pursuant to the provisions hereof; and this Agreement has been validly executed and delivered by ABC and is intended to be binding upon it in accordance with its terms. Neither the execution and delivery of this Agreement by it nor the consummation of the transaction hereby contemplated to be performed by it will constitute any violation or breach of its Articles of Association or By-Laws or of any provision of any contract or other instrument to which ABC is a party or by which any of its assets may be affected, secured or bound, or any order, writ, injunction, decree, statute, rule or regulations, or will result in the creation of any lien, charge or encumbrance on any of its assets. 4. ABC has not incurred any liability for finder's or brokerage fees or agent's commissions in connection with this Agreement or the transactions contemplated hereby. 5. ABC is currently capable of performing its obligations hereunder and knows of no fact or circumstance that could reasonably be anticipated to occur and that would prevent or hinder its full and timely performance of such obligations. 5 6. Provided that the materials utilized by CFM in originating credit cards pursuant to this agreement are submitted by CFM to ABC for approval prior to use thereof by CFM, ABC shall be solely responsible for assuring that all such materials shall be in full compliance with applicable regulatory requirements including, but not limited to, those under federal Equal Credit Opportunity Act with which ABC and CFM are required to comply in performing their obligations hereunder. B. CFM represents, warrants and covenants to ABC that: 1. CFM is duly formed, validly existing and in good standing under the laws of the State of Delaware; it has the power and authority to conduct all of the activities conducted by it and to own or lease all of the assets owned or leased by it, and it is duly licensed or qualified to do business and in good standing as a corporation in all jurisdictions in which the nature of the activities conducted by it and/or the character of the assets owned or leased by it makes such qualification or licensing necessary. All corporate action necessary to authorize the execution, delivery and performance of this Agreement by CFM has been taken, and no other consent, approval or authorization of any government, governmental agency or other third party is necessary for the execution and delivery of this Agreement by CFM, or if any such other consent, approval or authorization is necessary, it has been obtained. 2. There is no action, suit, proceeding or investigation pending, or, to the extent of its knowledge, threatened, against or affecting CFM which would have a materially adverse impact against any of CFM's assets. CFM is not in default under or with respect to any judgment, order, writ, injunction or decree of any court or any federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality. CFM is not involved in any labor dispute or disturbance, other than routine grievances, none of which is material. CFM has compiled in all material respects with all laws, regulations and orders applicable to it or its business. CFM is not in default in any material respect under any contract or other instrument to 6 which it is a party, and no other party under any such contract or other instrument is in default in any material respect thereunder. 3. CFM has the power and authority to execute and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by it pursuant to the provisions hereof; and this Agreement has been validly executed and delivered by CFM and is intended to be binding upon CFM in accordance with its terms. Neither the execution and delivery of this Agreement by CFM nor the consummation of the transactions hereby contemplated to be performed by it will constitute any violation or breach of CFM's Articles or Certificate of Incorporation, its By-Laws or of any provision of any contract or other instrument to which CFM is a party or by which any of its assets may be affected, secured or bound, or in any order, writ, injunction, or decree, or will result in the creation of any lien, charge or encumbrance on any of its assets. 4. CFM has not incurred any liability for finders's or brokerage fees or agent's commissions in connection with this Agreement or the transactions contemplated hereby. 5. CFM is currently capable of performing its obligations hereunder and knows of no fact or circumstance that could reasonably be anticipated to occur and that would prevent or hinder its full and timely performance of such obligations. 6. CFM shall keep all proprietary information about ABC, their business, and their actual or prospective customers confidential during the term of this Agreement and thereafter. Further, CFM shall cause all Outside Agents (as defined in Section 1.B hereof) to keep all such proprietary information of ABC confidential. 7. Each party warrants that it will correctly handle the change of the century in a standard and compliant manner, meaning that its systems and software will operate and correctly process calculations, interfaces and reports involving dates and all software complies with industry standards regarding the change of the century and the year 2000 compliance. 7 SECTION 5. INDEMNIFICATION A. Each party hereto (the "Indemnifying Party") shall indemnify and hold harmless the other parties hereto from and against, and shall reimburse the other parties hereto for, any and all costs, expenses (including reasonable attorneys' and accountants' fees and charges), charges, claims, losses and liabilities incurred or suffered by such other parties for or on account of, or arising or resulting from, any breach or violation by the Indemnifying Party of any of its representations, warranties, covenants or obligations contained in this Agreement or in any certificate or other document delivered by it to such other parties as provided for herein; it being agreed and understood, however, that no party hereto shall be indemnified hereunder for any cost, expense, charge, claim, loss or liability incurred or suffered by such party as a result of such party's breach or violation of its own representations, warranties, covenants or obligations under this Agreement. B. ABC agrees that it shall indemnify and hold harmless CFM from and against, and shall reimburse CFM for, any and all costs, expenses (including reasonable attorneys' and accountants' fees and charges), charges, claims, losses and liabilities incurred or suffered by CFM for or on account of, or arising or resulting from, any claim arising out of or based upon the violation of any patent, trademark copyright laws occasioned by CFM's publication, distribution or other use of any material provided by ABC, in connection with the transactions contemplated herein. C. In addition to the foregoing, CFM agrees that it shall indemnify and hold harmless ABC from and against, and shall reimburse ABC for, any and all costs, expenses (including reasonable attorneys' and accountant's fees and charges), charges, claims, losses and liabilities incurred or suffered by ABC for or on account of, or arising or resulting from, any claim arising out of or based upon an Outside Agent's (as defined in Section 1.B above) negligence, willful misconduct, unlawful acts, or breach of its confidentiality agreement in favor of ABC (the form of which agreement is attached hereto as Exhibit "A-1") in connection with the transactions contemplated herein. 8 SECTION 6. MISCELLANEOUS ---------- ------------- A. Any notice or other communication required or permitted to be given hereunder shall be in writing and delivered personally (including by courier) or mailed by registered or certified mail, return receipt requested and postage prepaid, to the party to which directed at its address as set forth at the beginning of this Agreement or at such other address of which such party has given notice to the other party in the manner provided in this Section 6.A. B. Neither this Agreement nor any interest herein may be assigned by ABC without prior written consent of CFM. Except to the extent that CFM may delegate the performance of certain of its obligations under Section 1.B. hereof to Outside Agents, neither this Agreement nor any interest herein may be assigned by CFM without the prior written consent of ABC. Subject to the foregoing, this Agreement shall be binding upon, and shall inure to the benefit of and be enforceable by and against, the parties hereto and their respective successors and assigns. C. In no event whatsoever shall any officer, director, employee or shareholder of a party hereto have any liability with respect to any of such party's obligations under this Agreement. In the event a party hereto (the "Damaged Party") shall suffer any damages, or have any claim or cause of action against another party hereto (the "Defaulting Party"), on account of any breach or violation of this Agreement by such Defaulting Party, the remedy and recovery of the Damaged Party shall be limited to the assets and property of the Defaulting Party. D. This Agreement, including all exhibits and Schedules hereto, constitutes the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, merging herein all prior arrangements, negotiations and agreements and superseding all prior agreements and understandings, either oral or written, with respect to the subject matter hereof. There are no representations, warranties, promises, covenants or understandings with respect to such subject matter other than those expressly set forth herein. 9 E. Neither this Agreement nor any condition, term or provision hereof may be changed, modified, waived, discharged or terminated except by, and as provided in, a written instrument, signed by the party against whom enforcement of such change, modification, waiver, discharge or termination is sought to be enforced. No waiver of a breach of any provision hereof or a default under any provision hereof shall be deemed a waiver of such provision or of any subsequent breach or default of any kind or nature. F. No delay, act or failure to act on the party of a party hereto to enforce its rights hereunder shall be construed as a waiver of such party's rights hereunder. G. All disputes hereunder shall be determined in accordance with the expedited dispute resolution procedure of the then existing Commercial Arbitration rules of the American Arbitration Association in Pennsylvania. H. All Schedules and Exhibits annexed to this Agreement shall be deemed incorporated herein and made a part hereof and, except as the terms and provisions herein are inconsistent with the terms and provision in any such Schedules, the terms and provisions contained herein shall be deemed incorporated in and made a part of such Schedules. I. Irrespective of the residence, domicile, jurisdiction or incorporation or formation or place of doing business of either party hereto, this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Pennsylvania applicable to contracts executed and to be wholly performed within that State, without giving effect to the conflict of laws principles thereof. J. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall be deemed an original and all of which together shall be deemed to be one and the same instrument. 10 K. The captions and headings in the Agreement are for reference purposes only and shall not affect the meaning of interpretation of this Agreement or of any provision hereof. IN WITNESS WHEREOF, each of the parties hereto, intending to be bound hereby, has caused this Agreement to be executed by its officer thereunto duly authorized, as of the date indicated. ADVANTA BANK CORP. CFM DIRECT BY: /s/ Mark Hales BY: /s/ William R. Aylesworth - -------------------- ------------------------------ MARK HALES WILLIAM R. AYLESWORTH PRESIDENT PRESIDENT 11 AMENDMENT To Direct Marketing Agreement Between Advanta Bank Corp. ("ABC") and CFM Direct ("CFM") Dated December 15, 1999 This Amendment is made as of the 1st day of May, 2002, by and between ABC and CFM. WHEREAS, ABC and CFM entered into a Direct Marketing Agreement dated as of December 15, 1999 (the "Agreement"); and WHEREAS, the commercial credit products offered by ABC have expanded from those products contemplated by the Agreement; and WHEREAS, the parties desire to amend the Agreement as set forth below. NOW THEREFORE, in consideration of the mutual promises and covenants contained in this Amendment, and intending to be legally bound thereby, ABC and CFM agree as follows: 1. The first sentence of Section 1(A) shall be deleted and replaced by the following language: "CFM shall develop and execute marketing programs to attract prospective commercial Customers to obtain ABC's commercial credit products including, but not limited to, lines of credit and credit cards displaying either the MasterCard, VISA or other brand. The marketing services provided by CFM shall include, without limitation, creative development, list sourcing, list processing, and file audits." 2. All references in the Agreement to "credit card(s)" shall hereby include any an all credit products of ABC for which marketing services may be provided by CFM as directed by ABC from time to time. 3. All terms and conditions of the Agreement not addressed in this Amendment shall remain in full force and effect. The terms of this Amendment shall prevail in the event of any inconsistency between this Amendment and the Agreement. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this amendment to be executed by their duly authorized representatives as of the date first above written. ADVANTA BANK CORP. CFM DIRECT By: /s/ Mark W. Wlaz By: /s/ David R. Furlong ---------------- -------------------- Name: MARK W. WLAZ Name: DAVID R. FURLONG --------------- ------------------- Title: VP Title: VP -------------- ----------------- EX-10.AA 8 w84552exv10waa.txt ADVANTA CORP. EMPLOYEE STOCK PURCHASE PLAN. EXHIBIT 10-aa ADVANTA CORP. EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. The purpose of this Plan is to encourage eligible Employees and Directors to acquire an ownership interest in ADVANTA Corp. or to increase such ownership interest by providing a convenient and economical means of purchasing Common Stock. 2. Definitions. (a) "Administrator" shall mean the entity with which the Company contracts to handle the account maintenance, recordkeeping and stock purchasing obligations pursuant to this Plan. (b) "Board of Directors" shall mean the Board of Directors of the Company. (c) "Commencement Date" shall mean December 15, 1989. (d) "Committee" shall mean the individual or group of individuals designated pursuant to Section 3 of the Plan to control and manage the operation and administration of the Plan to the extent set forth therein. (e) "Common Stock" shall mean ADVANTA Corp. common stock, $.01 par value per share. (f) "Company" shall mean ADVANTA Corp., a Delaware Corporation. (g) "Compensation" shall mean the cash remuneration, excluding overtime, bonuses and expense reimbursements of any kind, payable to an Employee, or the fees payable to a Director for all services performed in such capacity, as the case may be. (h) "Determination Date" shall mean the first business day following the second payday of each month. (i) "Director" shall mean a non-employee member of the Board of Directors of the Company. (j) "Employee" shall mean each and every person employed as a permanent full-time or permanent part-time employee of the Company or a subsidiary thereof. 1 (k) "Enrollment Date" shall mean, with respect to any calendar quarter, the tenth day of the month preceding the beginning of such calendar quarter. (l) "Market Price" shall mean either (i) On any Determination Date on which Common Stock is purchased by the Administrator from the Company, then with respect to such Common Stock, the average of the high and low prices paid for Common Stock in the market on such Determination Date, as reported on the national Association of Securities Dealers' Automated Quotation (NASDAQ) National Market System; or (ii) On any Determination Date on which Common Stock is purchased by the Administrator on the open market, then with respect to such Common Stock, the weighted average price paid for all shares so purchased on such Determination Date. (m) "Participant" shall mean each and every Employee or Director who satisfies the requirements for participation under Section 5 hereof and who elects to have amounts withheld from his Compensation pursuant to Section 8 hereof. (n) "Plan" shall mean the ADVANTA Corp. Employee Stock Purchase Plan as set forth herein effective December 15, 1989, and the same as may be amended from time to time. 3. Administration. This Plan shall be administered by the Committee appointed by the Board of Directors. Each member of the Committee must be either a director, officer or employee of the Company or a subsidiary thereof, and each is appointed for an indeterminate term and may be removed at the discretion of the Board of Directors. The Committee may (i) delegate all or a portion of the responsibilities of controlling and managing the operation and administration of this Plan to one or more persons, and (ii) appoint agents, administrators, counsel or other representatives to render advice with regard to any of its responsibilities under this Plan. The Board of Directors may remove, with or without cause, the Committee or any Committee member. The Committee may remove, with or without cause, any delegate or advisor designated by it. The Committee shall make such rules and regulations as it deems desirable or necessary for the administration of this Plan. Subject to the express provisions of this Plan, the Committee shall have full authority to interpret this Plan and any 2 such interpretation shall be conclusive and binding on the Company and all Participants. 4. Stock. In the event of any reorganization, recapitalization, stock split, reverse stock split, stock dividend, combination of shares, merger, consolidation, offering of rights or any other similar change in the capital structure of the Company, the Board of Directors may make such adjustment, if any, as it deems appropriate in the kind and purchase price of the shares available for purchase under this Plan and in the maximum number of shares that a Participant is entitled to purchase under this Plan. 5. Eligibility to Participate in this Plan. (a) Any individual who is an Employee or Director as of November 24,1989, is eligible to participate as of the Plan Commencement Date; and (b) Any Employee or director who does not join this Plan as of the Plan Commencement Date and any Employee hired or Director elected after November 24, 1989 shall be eligible to participate in this Plan as of the beginning of the first calendar quarter (i.e., January 1, April 1, July 1 or December 1) following the completion of six months of service. 6. Enrollment. Any individual described in Subsection 5(a) may enroll in this Plan as of the Plan Commencement Date by filing the appropriate forms by November 24, 1989. Any eligible Employee or Director may enroll or re-enroll in this Plan as of the beginning of any calendar quarter by filing the appropriate forms on or before the related Enrollment Date, except that any former Participant who has withdrawn from this Plan will not be eligible to re-enroll until the beginning of the first calendar quarter occurring at least three months after the date of withdrawal from this Plan. 7. Annual Limitation on Purchases. During any calendar year, no Participant may purchase shares of Common Stock under this Plan and any other employee stock purchase plans of the Company and its subsidiaries with an aggregate fair market value, determined as of the dates of purchase of such Common Stock, in excess of $25,000. 3 8. Contributions. (a) Employee. Each Employee eligible to participate pursuant to Section 5 may voluntarily designate an amount to be contributed to this Plan of 1% to 10%, in whole 1% increments, of his Compensation for each payroll period. (b) Director. Each Director eligible to participate pursuant to Section 5 may voluntarily designate an amount to be contributed to this Plan of 10% to 100%, in whole increments of 10%, of his Compensation. (c) Payroll Deduction. Each Participant shall authorize payroll deduction (or in the case of Directors, deduction from the payment of Directors' fees) as the method by which contributions to this Plan are to be made. In the event that a Participant for any reasons shall cease to receive a paycheck which is subject to payroll deduction, such Participant shall be prohibited from continued participation in this Plan until such time as his receipt of such paychecks has resumed. The Company shall hold all amounts withheld, without interest, for application as provided in this Plan. (d) Enrollment Forms. Each Participant in order to initiate, change or cease contributions to this Plan shall execute such forms as shall be designated by the Committee and shall file the forms as directed by the Company's Human Resources Department. (e) Changes to Participant Contributions. (i) A Participant may reduce or cease contributions as of the beginning of any calendar month by filing the appropriate form by the tenth day of the preceding month. (ii) A Participant may increase his contribution rate as of the beginning of any calendar quarter, by filing the appropriate form on or before the related Enrollment Date. (iii) Such changes in contribution rates shall be consistent with the percentage amounts stated in Subsections 8(a) and 8(b) hereof. (f) Company Contributions. On or immediately prior to each Determination Date, the Company will make a contribution for the account of each Participant, in an amount (equal to approximately 17.64% of each Participant's contributions) such that the Company's contributions will constitute 15% of the total of Participant and Company contributions to be invested on such Determination Date. 4 9. Purchase of Shares. (a) On the business day immediately preceding each Determination Date, the Company shall deliver to the Administrator all Participant contributions made under the Plan since the preceding Determination Date, together with the related Company contributions to be invested in Common Stock on such Determination Date. (b) On the Determination Date, the Administrator shall purchase as many shares of the Common Stock as can be purchased with the funds delivered by the Company pursuant to Subsection 9(a). Such purchases shall be made by the Administrator on the open market, unless the Company directs the Administrator to make some or all of such purchases from the Company. (c) The number of whole and fractional shared purchased for (and to be allocated to) each Participant's account as of each Determination Date shall be determined by the ratio of each Participant's contributions to the total of all Participants' contributions used to purchase shares on that Determination Date. (d) All brokerage fees on purchases of Common Stock and administration costs for this Plan will be paid for by the Company. (e) On June 1, 1990, the Company shall contribute 10 shares of common Stock to the account of any individual who became a Participant on the Plan Commencement Date, provided that such individual is still an Employee or a Director on June 1, 1990. (f) Stock dividends and/or stock splits with respect to shares held in a Participant's account will be credited to such account without charge. Cash dividends and proceeds of sales of rights and other distributions received for each account will be reinvested in the purchase of additional shares of Common Stock. 10. Participant Records and Access to Stock. (a) Each Participant will receive a statement from the Administrator following the occurrence of every transaction made with respect to the Participant's account which shall specify, as applicable, the number of shares of Common Stock purchased or sold, the purchase or sale price, and the total shares in the Participant's account. Each Participant will receive a statement on a monthly basis if account activity is limited to the purchase of Common Stock pursuant to Section 9 hereof. 5 (b) Unless otherwise legally restricted, Participants may at any time request to have shares withdrawn from their account and sold or to have certificates issues in their own names. Any fee charged by the Administrator for such services shall be paid by the Participant. 11. Termination of Participation. A Participant may terminate participation in this Plan as of the beginning of any calendar month upon prior written notice as specified in Subsection 8(e)(i) hereof. Any funds withheld from a Participant's Compensation after the Determination Date in the month preceding the month for which the termination is effective shall be distributed to such Participant without interest as soon as administratively feasible. 12. Termination of Employment. Participation in this Plan shall immediately terminate upon a Participant's retirement, resignation, death or other termination of employment. All funds withheld from a Participant's Compensation since the previous Determination Date shall be distributed to such Participant without interest as soon as administratively feasible after the termination occurs. 13. Employment Rights Not Conferred by this Plan. Neither the establishment nor continuance of this Plan, nor the granting of options hereunder, shall be construed as conferring any legal rights upon any Participant or other employee for a continuation of employment. 14. Assignment. The rights of a Participant under this Plan shall not be transferable by such Participant except by will or the laws of descent and distribution and are exercisable, during a Participant's lifetime, only by the Participant. The options granted by this Plan may not be sold, pledged or otherwise disposed of or encumbered. 15. Government Regulations. The Company's obligations to sell and deliver shares under this Plan are subject to the approval of any governmental authority required in connection with authorization, issuance or sale of such stock. 16. Registration of Shares. The Company intends to register the shares to be sold under this Plan pursuant to the Securities Act of 1933. 17. Applicable Law. This Plan shall be governed by the substantive laws of the State of Delaware, without regard to the conflicts of law provisions thereof. 18. Amendment or Termination. The Board of Directors of the Company may at any time terminate or amend this Plan. No such termination shall affect options previously granted, nor may an amendment make any change in any option theretofore granted which would adversely affect the rights of any Participant (unless consented to by such Participant). 19. Board Approval. This Plan was approved by the Board of Directors on September 14, 1989 and shall be effective December 15, 1989. 20. Non-Qualified Status. This Plan is not intended to qualify as an "Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. 6 ADVANTA CORP. EMPLOYEE STOCK PURCHASE PLAN AMENDMENT AMENDMENT APPROVED BY THE ADVANTA CORP. BOARD OF DIRECTORS ON AUGUST 8, 1996 1. Section 2(g) of the Plan is hereby amended to read: (g) "Compensation" shall mean the base salary, excluding adjustments to salary and allowances paid due to international service, overtime paid for work in excess of forty hours per week, bonuses, and expense reimbursements of any kind, paid to an Employee by a Participating Company and in a Plan Year. In addition, "Compensation" shall include the commissions paid to certain classifications of employees who may from time to time be designated by the Administrative Committee of the Plan. 2. In all other respects the Plan is hereby ratified and confirmed. 1 EX-10.EE 9 w84552exv10wee.txt LEASE AGREEMENT... EXHIBIT 10-ee LEASE AGREEMENT THIS LEASE, (sometimes referred to as the "Lease" or "Agreement"), made between Ortho Pharmaceutical Corporation, a Delaware corporation, by its division Ortho McNeil Pharmaceutical Division, with a principal place of business at U.S. Route #202, Raritan, New Jersey 08869-0602, ("Landlord" or "Ortho") and Advanta Corp., a Delaware corporation with an office for the conduct of business at 5 Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044 ("Tenant" or "Advanta"). WITNESSETH: Landlord does hereby lease unto Tenant, and Tenant hereby leases and takes from Landlord the following described premises for the term and upon the rentals and conditions hereinafter set forth. ARTICLE I PREMISES AND TERM 1.1 Description of Premises. Landlord does hereby lease unto Tenant, and Tenant hereby leases and takes from Landlord for the term and upon the rentals and conditions hereinafter set forth: ALL THAT CERTAIN 109,511 square foot space located in the Township of Lower Gwynedd, County of Montgomery, Commonwealth of Pennsylvania, which is more particularly described on Schedule "A", attached hereto (the "Leased Premises", "Premises" or "premises"). The Leased Premises are part of a larger parcel of land with improvements thereupon (the "Total Premises" or "campus") and the building of which the Leased Premises are a part is sometimes referred to as the "Spring House Facility" or "Building" as outlined on Schedule A. Tenant acknowledges that it is leasing the Leased Premises in their "as-is" condition, except as otherwise specifically provided in this Lease; and that Landlord is not responsible for providing any services to Tenant with respect to the Leased Premises except as otherwise specifically provided in this Lease. Landlord grants to Tenant the right and non-exclusive easement to use, subject to section 6.1 below, and the other terms of this Lease, those portions of the Building referred to as the auditorium, cafeteria, visitor's dining room and video conference center shown on Schedule B. Landlord grants to Tenant the exclusive easement, subject to the terms of this Lease, to use 320 parking spaces, which are designated on Schedule B (the "Parking Areas"). Landlord grants to Tenant the right and non-exclusive easement to use the outdoor athletic facilities, subject to the terms of this Lease at Tenant's own risk. Landlord grants to Tenant the right and non-exclusive easement, subject to the terms of this Lease to use all parking areas, access and egress roads, streets, driveways, exterior ramps and walks in the Total Premises (all hereinafter called the "Interior Roadways"). Tenant agrees and acknowledges that Landlord and its employees (but not Landlord's visitors) shall have the non-exclusive right of access to the portion of the Spring House Facility retained by Landlord through the lobby of the Leased Premises as shown in Schedule A on the terms and conditions set forth on Schedule D, including compliance with the reasonable rules and regulations of Tenant. Landlord acknowledges that the lobby is part of the Leased Premises, will be known as the Advanta lobby, will be staffed by an Advanta receptionist and will reflect the presence of Advanta. 1.2 Term. The initial term of Lease (sometimes referred to as the "Initial Term") shall be for a period of 120 months, commencing on November 1, 1995 and terminating on October 31, 2005, 2 unless earlier terminated as provided herein or unless extended as provided herein with respect to any specified Tenant option to extend, or unless otherwise extended by the written agreement of the parties. ARTICLE II RENT Tenant agrees to pay to Landlord at such place designated by Landlord, without any prior demand therefor and without any deduction (except for the initial free base rent period specified below) or setoff whatsoever, the following rents: (a) Base Rent ("Base Rent"):
Respective Monthly 12 Month Period Annual Rent Installments - --------------- ----------- ------------ First 12 month period $2,025,953.50 $168,829.46 through end of fifth (based on a gross 12 month period, except rate of $18.50 per as set forth in the square foot). last sentence of this paragraph (a). The Base Rent for this period includes electric and other utilities as specified in Schedule B, but excludes Special Service Fees (defined below), and janitorial. Sixth 12 month $2,228,548.85 $185,712.40 period through end (based on a gross of tenth 12 month rate of $20.35 per period. The Base square foot) Rent for this period includes electric and the other specified utilities, but excludes Special Service Fees, janitorial and Tenant's Share of real estate taxes as specified in (b) below.
3 All of such monthly installments shall be payable on or before the first day of each calendar month during the term hereof, in advance. Payments for any period of less than a full month shall be prorated for the days actually covered. Tenant shall be responsible for paying any sales tax or other taxes (except for any net income, excess profit, excise, franchise, estate, succession and inheritance taxes, penalties due to Landlord's lateness or failure to pay taxes when due and transfer taxes imposed on Landlord) with respect to the rent payable under this Lease, and Landlord may at its option collect such taxes from Tenant. Notwithstanding the foregoing, Tenant shall not be obligated to make any rent payments reflected above during the first 6 months of the Initial Term. (b) Additional Rent: (i) Real Estate Taxes: With respect to the sixth 12 month period through the end of the tenth 12 month period during this Lease, Tenant shall pay 17.64% (Tenant's Share") of any increase in real estate taxes pertaining to the Total Premises which is not caused by any reassessment due to construction on the Spring House Facility and which is in excess of 10% above the real estate taxes of $989,404 in effect at the commencement of the Lease. Tenant's Share of the increase in real estate taxes calculated as set forth above will be paid within 30 days of delivery of a bill by Landlord to Tenant. At Landlord's discretion following an Event of Default by Tenant, Landlord will reasonably estimate the Tenant's tax payment for the applicable 12 month period, and can collect 1/12 of such estimated payment as additional monthly rent; with the parties effecting a year end adjustment if needed when the final taxes are known for such 12 month period to reflect Tenant's Share based on such final tax figures. Tenant shall not be obligated to pay any portion of real estate taxes or real estate tax increases for the period prior to the end of the fifth l2-month period of the Initial Term. 4 (ii) Special Service Fees: In addition to Base Rent, Tenant shall pay an amount to Landlord in payment for the services listed on Schedule B, attached hereto and made a part hereof, pursuant to Article VI, below (the "Special Service Fees"). Special Service Fees will be billed monthly by Landlord, if applicable, and will be payable by Tenant within 30 days of delivery of the monthly bill by Landlord. ARTICLE III USE OF PREMISES Tenant shall use the Leased Premises solely for business office use and accessory office use purposes and shall not alter such use without the prior written consent of Landlord. Landlord represents and warrants that, to Landlord's best knowledge, the Leased Premises may be used as a business office use. Landlord advises Tenant that Landlord has been advised by the Zoning Officer for Lower Gwynedd Township/Spring House that the current zoning of the Total Premises permits multi-tenant use by Special Exception. Landlord, at its sole cost and expense, shall use reasonable efforts to obtain or cause to be obtained all zoning approvals, use permits and certificates of occupancy (but not relating to any Tenant improvements/alterations or licenses or permits required for the conduct of Tenant's business as opposed to Tenant's use of the Leased Premises as an office) ("Permits"), with all applicable appeal periods having expired and in final, irrevocable and uncontestable form, necessary and required by all state and municipal governments (the "Authorities"), for the lawful use, occupancy, maintenance and operation of the Spring House Facility by Tenant for its intended purposes. If the Landlord fails to obtain all the necessary Permits, under the conditions stated above, on or before October 31, 1995 or Tenant is unable to obtain any license or permit required from Lower Gwynedd Township for the conduct of Tenant's business on or prior to such date, either Landlord or Tenant may terminate this Lease, upon which the parties 5 shall have no further obligations hereunder. Tenant shall be responsible for conducting its operations in the Leased Premises in accordance with all applicable laws and regulations. ARTICLE IV QUIET ENJOYMENT Provided that Tenant complies with its obligations in this Lease, Landlord agrees that Landlord will permit Tenant to occupy, possess and enjoy the Leased Premises under the provisions of this Lease during the term as set forth herein, without hindrance or molestation from Landlord or from any person claiming by, from or under Landlord. ARTICLE V IMPROVEMENTS, REPAIRS AND MAINTENANCE 5.1 Repairs and Maintenance by Landlord. Landlord shall be required to make all structural repairs and/or replacements, to the Leased Premises or the Building of which the Leased Premises are a part, including the repair or replacement of the roof, foundations, and exterior walls and interior load bearing walls that are necessary to maintain the Leased Premises and the Building in a first class condition. Landlord shall also be required to make all repairs and/or replacements, to the heating, air-conditioning, ventilation, mechanical, electrical and plumbing systems both in the Building outside of the Leased Premises, and in the Leased Premises to the extent such systems are within the walls or above the ceilings, or below the floors in the Leased Premises, that are necessary to maintain such systems in a first class condition. Landlord shall also make all repairs, replacements and maintenance to the Parking Areas and the Interior Roadways that are reasonably necessary to maintain the Total Premises in a first-class condition. 6 Any repairs/replacements deemed Landlord's responsibility but caused by the negligence of the Tenant, its agents, servants and/or invitees hereunder shall be the responsibility of the Tenant to repair. 5.2 Tenant's Repair/Maintenance Obligations. Tenant shall, at its own expense, be required (subject to Section 5.3) to make all repairs to the portion of the Leased Premises within the interior faces of the ceilings, walls, and the floors necessary to maintain the Leased Premises in a first-class condition, but excluding, repairs/replacement or maintenance required to the heating, air-conditioning, ventilation, mechanical, electrical and plumbing systems in the Leased Premises beyond the interior faces of the walls, ceilings and floors. Tenant shall repair and replace any window glass within the Leased Premises. Any repairs/replacements deemed Tenant's responsibility, but caused by the negligence of Landlord, its agents, servants and/or invitees shall be the responsibility of the Landlord to repair. 5.3 Improvements/Alternations by Tenant. Tenant shall make no structural improvements/alterations to the Leased Premises without the prior written consent of the Landlord, which Landlord agrees shall not be unreasonably withheld or delayed. Tenant shall not require the prior written consent of Landlord for any non-structural improvements/alterations for which the estimated cost for a specific project does not exceed $10,000, or where the aggregate of all such projects does not exceed $75,000. For any improvements/alterations for which Landlord's consent is required, Landlord shall endeavor to respond to Tenant's plans within 10 business days of receipt. In the event Landlord does not approve Tenant's plans, it shall notify Tenant in writing, listing its specific objections to the plans. Any improvements/alterations by Tenant must be made in a workmanlike manner. Tenant shall provide suitable evidence of Worker's Compensation Liability Insurance covering all persons working at its direction. Tenant shall be 7 liable for any damage or injury to the Leased Premises, persons or property arising out of or associated with the construction or installation of such improvements/alterations. Tenant shall allow no liens to be filed against the Building or any part of Landlord's interest in the Building or the Leased Premises in connection with any work performed by or on behalf of Tenant with respect to the Leased Premises. Tenant agrees that Landlord shall have the right with respect to any proposed Tenant repair to be made under Section 5.2 or any proposed Tenant improvement/alteration for which Landlord's consent is required under Section 5.3 to elect to approve a contractor selected by Tenant who shall perform the repair or improvement/alteration at Tenant's expense. Landlord agrees that its consent to Tenant's contractor shall not be unreasonably withheld or delayed. Tenant shall have the right, from time to time throughout the term of the Lease, to install within the Leased Premises and to attach thereto any trade fixtures, equipment or other personal property ("Tenant's Fixtures") deemed necessary by Tenant for the operation of its business within the Leased Premises. Title to any Tenant's Fixtures which may be placed in or upon or affixed to the Leased Premises by, for, or under Tenant shall remain in Tenant and Tenant alone shall be entitled to claim depreciation therefor, Tenant may remove Tenant's Fixtures at any time before or upon vacating the Leased Premises. Without limiting the foregoing, it is acknowledged that Tenant intends to submit plans to alter at Tenant's expense the Leased Premises. Landlord acknowledges that the Leased Premises will be substantially gutted and will undergo substantial renovations, and as part of the renovations, Tenant shall renovate the Lobby portion of the Leased Premises to manifest its presence and occupancy of the Leased Premises as generally described in Schedule A-2 hereto, but subject to submission of specific plans as referenced below. Landlord agrees that its consent to Tenant's plans shall not be unreasonably withheld or delayed, and shall endeavor to respond to Tenant's submission of plans within 10 business days of receipt. In the event Landlord does not approve Tenant's plans, it shall notify 8 Tenant in writing listing its specific objections to the plans. If Landlord notifies Tenant of specific objections to the plans, Tenant shall make such revisions as it deems acceptable and resubmit the plans to Landlord, Landlord shall endeavor to respond to Tenant's resubmission of plans within 5 business days of receipt. If Landlord does not approve of Tenant's plans as resubmitted, Landlord shall notify Tenant in writing, listing the specific objections to the resubmitted plans. Thereafter, Tenant may further modify Tenant's plans for a second resubmission and to repeat the process. During the course of construction, Tenant may make minor revisions to approved plans, provided any such changes are promptly delivered to Landlord. 5.4 Surrender in Good Order. Tenant shall, upon the expiration or sooner termination of the term of this Lease, surrender to Landlord the entire Leased Premises, broom-clean, free of subtenancies, and in good condition and repair, reasonable wear and tear excepted. Any improvements/alterations belonging to Tenant or any subtenant, if not removed by such termination (subject to the provisions below), shall be deemed abandoned and shall become the property of Landlord. Tenant may however, before the expiration of this Lease, remove from the Leased Premises all fixtures, non-structural improvements/alterations, machinery, equipment, furniture and partitions, except those installed by Landlord (and subject to the provisions below Tenant shall remove all such referenced items of Tenant at the end of this Lease if requested by Landlord). Tenant shall repair, restore and save Landlord harmless from all damages to the Leased Premises caused by such removal by Tenant. Tenant agrees not to cause any waste during the term of this Lease. Without limiting the foregoing, Tenant shall be obligated at Tenant's expense upon the request of Landlord to restore the Leased Premises at the termination of the Lease to the condition existing prior to any alterations/improvements effected by Tenant after the initial alterations contemplated in Section 5.3 above, unless the parties have specifically agreed otherwise in writing with respect 9 to any specific Tenant improvement/alteration made after the initial alterations contemplated in Section 5.3 above, The parties acknowledge that any initial alterations contemplated in Section 5.3 shall be left in the Leased Premises by Tenant, and Landlord shall not be obligated to pay anything to or on behalf of Tenant with respect to such alterations, and Landlord shall own all such alterations upon termination of this Lease; provided that Tenant shall be allowed to remove any of Tenant's Fixtures including without limitation its personal property). ARTICLE VI UTILITIES, SERVICES, PERSONAL PROPERTY TAXES AND OTHER EXPENSES 6.1 Utilities/Services. Landlord shall cause to be supplied the utilities/services with respect to the Leased Premises as specified in Schedule B hereto at the times set forth in Schedule B. The charge for the utilities/services is included in the Base Rent under the Lease, except as otherwise provided in Schedule B. To the extent that Tenant shall pay amounts in addition to the Base Rent for extended or extra utilities/services, such amounts are referenced in Schedule B (the "Special Service Fees"). Landlord shall not be liable for any failure to supply such utilities/services to the extent due to any causes beyond the reasonable control of Landlord, Landlord will use its reasonable best efforts to minimize any interruption in utilities/services. If Landlord and Tenant agree to have Landlord provide any additional services/utilities, such agreement must be specified in writing signed by the parties. Without limiting the foregoing, it is acknowledged that Tenant's specified rental charges do not include any provision for janitorial services with respect to the Leased Premises, and Tenant is responsible for arranging and paying for such janitorial services. 10 6.2 Tenant's Personal Property Taxes. Tenant shall be responsible for the payment of all personal property taxes levied or assessed upon the fixtures, equipment, leasehold improvements/alterations or inventory of Tenant contained within the Leased Premises. 6.3 Other Expenses/Items. Except as specified in this Lease as items to be supplied by Landlord to Tenant, Tenant shall be responsible for arranging at its expense for all services, utilities and any other items in connection with Tenant's use of the Leased Premises. ARTICLE VII INSURANCE 7.1 Fire Insurance. Tenant agrees to obtain and maintain in full force and effect during the term of this Lease, fire insurance with extended coverage endorsement, for full replacement value with respect to the leasehold improvements made by Tenant to the Leased Premises and Tenant's Fixtures, including Tenant's personal property. Landlord shall be named as an additional insured under such policy. Landlord agrees to obtain and maintain in full force and effect fire insurance with extended coverage endorsement, for the full replacement value with respect to the Building, including the heating, ventilating and air conditioning systems in the Leased Premises to the extent such systems are within the walls or above the face of the ceiling or below the floor in the Leased Premises. 7.2 Tenant's Other Insurance. Tenant, at its sole cost and expense, but for the mutual benefit of Landlord and Tenant (Landlord being named as an additional insured under such policy) will throughout the entire term of this Lease maintain general public liability insurance against claims for bodily injury, death or property damage occurring in the Leased Premises; such insurance 11 to afford immediate protection, at the time of the commencement of the term of this Lease, to the limit of not less than $5,000,000 per occurrence liability/property damage combined. Upon request, Tenant will provide Landlord with evidence of such insurance coverage, as well as the insurance coverage under Section 7.1. In the event Tenant effects any option to extend under this Lease, the amounts of such Tenant insurance shall be increased (but not decreased) during any such option term to reflect the percent increase in the United States National Consumer Price Index ("CPI"), as reported by the United States Federal Government, between the CPI in effect at the commencement of the Initial Term and the CPI in effect at the beginning of the option term effected by Tenant. 7.3 Qualification of Insurers. All insurance provided by Tenant in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility, reasonably acceptable to Landlord, and licensed to do business in the state where the Leased Premises are located. ARTICLE VIII DESTRUCTION OF PREMISES 8.1 Partial Destruction. In the event that the Leased Premises, shall, while this Lease continues, be partially destroyed by fire or other casualty to the extent of less than 50% of the replacement cost of the Leased Premises, then Landlord shall forthwith repair, rebuild or restore the Leased Premises as speedily as practicable to the condition which existed immediately prior to the damage or destruction. In effecting such repairs, Landlord shall submit its plans for the work to Tenant to obtain Tenant's approval, which approval shall not be unreasonably withheld or delayed. If the Leased Premises cannot, in Landlord's reasonable opinion, be repaired or restored within 120 days from the date of such damage or destruction, Landlord shall notify Tenant in writing 12 within 20 days of the date of said damage or destruction, of its opinion that the Leased Premises cannot be repaired within such 120 day period. In such event, Tenant may elect to terminate this Lease by giving written notice to Landlord, and thereupon this Lease shall terminate and Landlord shall not be obligated to rebuild and the Landlord shall release any claim to the proceeds of insurance maintained by Tenant on the Leased Premises, If Tenant does not elect to terminate, Landlord shall be obligated to repair the Leased Premises forthwith. The percentage of the rent pertaining to the untenantable portion of the Leased Premises shall abate from the occurrence of such damage until said Leased Premises shall be restored to a tenantable condition and, after such restoration, the rent shall be payable as before such damage. 8.2 Substantial Destruction, In the event the Leased Premises, while this Lease continues, shall be destroyed by fire or other casualty to the extent of more than 50% of the replacement cost of the Leased Premises, Landlord shall have the option to decide whether or not to rebuild. Landlord shall notify Tenant in writing of its decision to rebuild or not to rebuild within 45 days after the occurrence of such damage or destruction. Tenant shall also have the right for a period of 30 days, in such event, to elect to terminate this Lease and, if Tenant so elects, this Lease shall terminate. In the event that Landlord shall decide to rebuild, and Tenant shall not have elected to terminate, Landlord shall forthwith start and complete the repair, rebuilding or restoration of the Leased Premises as soon as commercially reasonable. The rent hereunder shall abate to the extent of the percentage of the Leased Premises which is untenantable from the occurrence of such damage until said repair, rebuilding or restoration has been completed. After such repair, rebuilding or restoration has been completed, Tenant shall pay rent in accordance with the terms hereof, from the time the rebuilding is completed. If Landlord shall decide not to rebuild, or if Tenant shall elect to terminate, then in such event this Lease shall be cancelled and of no effect, except that Tenant 13 shall pay the rent up to the date of the fire or other casualty, and the Landlord shall release any claim to Tenant's insurance proceeds. 8.3 Destruction of Substantial Portion of the Spring House Facility. In the event that the Spring House Facility is damaged to the extent of 80% or more of its replacement cost, Landlord may elect to terminate this Lease upon written notice to Tenant, such decision to be given if at all within 45 days after the occurrence of such damage. In the event Landlord does not terminate this Lease pursuant to this Section 8,3, Landlord shall either: (i) restore such portion of the Spring House Facility to a condition as similar as is reasonably possible in design, character and quality to the building which existed before such destruction or (ii) raze the damaged portion of the Spring House Facility and put the same in good order by paving or landscaping. ARTICLE IX CONDEMNATION OR EMINENT DOMAIN PROCEEDINGS If the whole of the Leased Premises or if such portion thereof as may be required for the reasonable use of the Leased Premises by Tenant shall be taken or condemned by any authority for any public or quasi-public use or purpose, or if it shall be sold to any such authority under threat of condemnation, then and in any such event, the term of this Lease shall cease and terminate from the date when possession shall be required for such use or purpose. Landlord shall be entitled to all awards for damages with respect to such taking; provided that Tenant may also make its own claims against the applicable public authority (but not against Landlord) for taking of any Tenant's equipment or improvements. If the condemning authority shall refuse to permit separate claims to be made, then and in that event Landlord shall prosecute with counsel satisfactory to Tenant the claims of both Landlord and Tenant (and with Tenant reimbursing Landlord for an equitable portion of such 14 counsels' fees), and the proceeds of the award shall be divided between Landlord and Tenant in such manner as is fair and equitable. The rent shall be paid up to the date of such taking and any rent paid in advance shall be apportioned as applicable. ARTICLE X SUBLETTING AND ASSIGNMENT Tenant shall not have the right to assign or sublet the Leased Premises or any part thereof without the prior written consent of Landlord, which shall not be unreasonably withheld. Provided however, that upon written notice to Landlord, Tenant shall have the right to assign or sublet all or any part of its interest in the Lease to any other affiliate of Tenant. An affiliate shall mean any subsidiary of Tenant or any entity in which the majority of ownership interests are owned directly or indirectly by Tenant or any subsidiary of Tenant. In the event of such assignment or subletting as authorized herein, Tenant shall also continue to remain liable for its obligations under this Lease. ARTICLE XI DEFAULT BY TENANT 11.1 Events Constituting Default. In the event Tenant shall: (a) fail to pay the rent or any part thereof for a period of 20 business days after Landlord shall have given written notice to Tenant of such default; or (b) fail to reasonably perform any of the terms and conditions of this Lease to be performed by Tenant for 30 business days after Landlord shall have given to Tenant written notice of such default and the Tenant fails to commence within such 30 day period to cure such default and thereafter to prosecute the curing of such default with due diligence and in good faith; or (c) be adjudicated a bankrupt or petition for voluntary bankruptcy, or 15 have an involuntary bankruptcy proceeding filed against it which is not dismissed within 60 days after such filing; or (d) be dissolved; then, and in any of such events, Tenant shall be deemed to have committed an "Event of Default." Following an Event of Default by Tenant, Landlord may at its option, upon 15 business days written notice by registered or certified mail of its intention to do so, terminate this Lease and repossess the Leased Premises, unless Tenant shall in the meantime remedy such default or proceed promptly to do so. 11.2 Re-entry by Landlord. If Tenant commits an Event of Default, and Landlord elects, following the 15 day notice and grace period in Section 11.1, to re-enter, or takes possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may either terminate this Lease or make such alterations and repairs as may be necessary in order to relet the Leased Premises, and relet the Leased Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable. Upon such reletting, all rentals received by Landlord from such reletting shall be applied: first, to the payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorney's fees, and costs of such repairs (but not the costs of alterations); third, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month be less than those to be paid during the month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. 16 No such re-entry or taking possession of the Leased Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination hereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time either seek to enforce a provision of or terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Leased Premises, reasonable attorney's fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Leased Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to Landlord. ARTICLE XII SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT 12.1 Subordination. Subject to Section 12.2, Tenant shall at all times, on demand, execute and deliver any and all further instruments that may be required by any mortgagees or by Landlord for the purpose of subordinating this Lease to the lien of any mortgages. 12.2 Non-Disturbance and Attornment. The execution by Tenant of any subordination agreement pursuant to Section 12.1 above shall be expressly contingent upon the covenant of the mortgagee that should the mortgagee become the owner of the Total Premises by reason of foreclosure of the mortgage or otherwise, or if the Total Premises shall be sold as a result of any action or 17 proceeding to foreclose the mortgage or by a deed given in lieu of foreclosure, (i) the Lease shall continue in full force and effect, without necessity for executing any new lease, as a direct lease between Tenant, as tenant thereunder, and the then owner of the Total Premises, as landlord thereunder, upon all of the same terms, covenants and provisions contained in the Lease, and (ii) such new owner shall be bound to Tenant under all of the terms, covenants and provisions of this Lease, including any amendments of the Lease whether made before or after the date of the mortgage, which terms, covenants and provisions such new owner hereby agrees to assume and perform. Subject to the foregoing, Tenant hereby agrees such agreement may require Tenant to attorn to such new owner and to recognize such new owner as Landlord under this Lease provided that such attornment shall not relieve Landlord of any of its liabilities to Tenant arising under the Lease prior to such attornment. 12.3 No Existing Mortgage. Landlord represents and warrants that as of the date hereof, there is no mortgage encumbering the Leased Premises or the Total Premises. ARTICLE XIII EXTENSION AND HOLDING-OVER 13.1 Holding-over. If Tenant remains in the Leased Premises beyond the expiration of this Lease, or any renewal or extension thereof, without the written consent of Landlord, such holding-over shall be deemed to create a month-to-month tenancy on all the terms and conditions contained herein. The preceding sentence in no way gives Tenant any right to so hold over in the Premises beyond the specified term of the Lease. 13.2 Option to Extend Term. Provided Tenant has not committed an Event of Default which has not been cured, Tenant shall have one option to extend the term of this Lease for a period of 60 additional months (sometimes referred to as the "Option Term") 18 following the expiration of the Initial Term of the Lease as referenced in Section 1.2 herein. In order to exercise such option, Tenant must provide Landlord with written notice of exercise of such option at least one year prior to the expiration of the Initial Term. In the event of such option exercise, the rental for the Option Term shall be a gross rate of $22.38 per square foot, plus Tenant's Share of additional taxes and electric charge increases as set forth below. With respect to real estate taxes, Tenant would pay Tenant's Share of any increase in real estate taxes pertaining to the Total Premises which is in excess of 20% above the real estate taxes of $989,404 in effect at the commencement of the Lease. With respect to electric, Tenant would pay Tenant's Share of any increase in electric charges for the Spring House Facility in excess of 20% above the rate per KW hours of $0.0741 in effect at the commencement of the Lease (i.e. Tenant's Share of the excess, if any, of the product of the then current rate per KW hours times the then current usage reduced by the product of 120% times $0.0741 times the then current usage. (For purposes of this Lease, the rate per KW hour is the sum of the annual billings from the applicable electric utility with respect to the Spring House Facility divided by the total KW hours used for the Spring House Facility.) Unless the parties otherwise agree in writing, all other terms of the Lease other than the original free rental period and the new rental rates shall be in effect with respect to the Option Term, provided that Tenant shall have no additional options to extend. ARTICLE XIV SIGNS, WINDOW TREATMENTS AND FLAGPOLES Tenant shall not place or suffer to be placed or maintained on any exterior door, wall, or window of the Leased Premises any sign, drape, shade or window treatment, without first obtaining Landlord's written approval and consent, which shall not be unreasonably withheld or delayed. Tenant further agrees to maintain such sign, or other thing as may be approved, in good 19 condition and repair at all times. All signs shall have the approval of municipal authorities, if required. Without limiting the foregoing, Tenant shall be entitled to erect and maintain during the term of this Lease an identifying sign at Welsh Road and a sign on the face of the Spring House Facility, as identified in Schedule A-1 hereto, It is acknowledged that Landlord's signage at Welsh Road shall be directional only, with further internal signs directing Landlord's visitors to entrances to the Spring House Facility other than the Lobby. Tenant shall have exclusive use of the 3 flagpoles situated at the main entrance of Tenant's Lobby for the purpose of displaying a corporate identifying flag, and the flags of the United States and the Commonwealth of Pennsylvania and no other flags. Tenant shall have the right to place a piece of sculpture in the area outside the Lobby, subject to Landlord's consent, which Landlord shall not unreasonably withhold or delay. Tenant may locate no more than three small rooftop antennas or dishes on the roof over the Leased Premises provided Tenant obtains all necessary permits and approvals (including without limitation Landlord's consent, which Landlord shall not unreasonably withhold or delay), such antennas or dishes are not readily visible from the ground and Tenant repairs any and all damage caused by such antennas or dishes or the placement, repair or removal of such antennas or dishes. ARTICLE XV RESPONSIBILITY OF TENANT AND LANDLORD Landlord and Tenant shall be responsible for and shall fully indemnify each other against any claims or causes of action in any way pertaining to such party's operations in their respective premises, except to the extent any such claims or causes of action result due to the negligence or other fault of the other. ARTICLE XVI MISCELLANEOUS PROVISIONS 20 16.1 Fees and Expenses. If during the term of this Lease, either party incurs any reasonable expenses, including but not limited to attorneys' fees, relating to enforcing the provisions of this Lease or pursuing any default hereunder, provided that party prevails in a legal action or proceeding against the other party, then the losing party agrees to reimburse the prevailing party for all such expenses. Notwithstanding any provision of this Lease to the contrary, "Attorneys' Fees" wherever used in this Lease shall mean only the reasonable charges for services actually performed and rendered by independent, outside legal counsel and also reasonably allocated charges of any applicable in-house counsel actually working on such legal action or proceeding. 16.2 Notices. All notices shall be given by registered or certified mail, return receipt requested, or overnight delivery service addressed as follows: To Landlord: Ortho-McNeil Pharmaceutical Division of Ortho Pharmaceutical Corporation U.S. Route # 202 Raritan, New Jersey 0369-0602 Attention: Vice President Operations To Tenant: Advanta Corp. 5 Horsham Business Center 300 Welsh Road Horsham, PA 19044 Attention: Senior Vice President Mr. James W. John With a copy to: Wolf, Block, Schorr and Solis-Cohen 12th Floor Packard Building Philadelphia, Pennsylvania 19102 Attention: Bernard Lee, Esq. 21 Landlord and Tenant may each designate different notice recipients/addresses than those referenced above by providing written notice of such changes in accordance with this Lease. (Tenant's notice address shall be changed to the Spring House Facility, Welsh and McKean Roads, Spring House, Pennsylvania 19477-0776 when Tenant commences occupancy of the Leased Premises.) 16.3 Partial Invalidity. The invalidity of one or more phrases, sentences, clauses, sections or articles contained in this Lease shall not affect the remaining portions hereof. 16.4 Entire Agreement. This Lease contains the entire agreement and understanding between the parties. There are no oral understandings, terms, or conditions, and neither party has relied upon any representation, expressed or implied, not contained herein. 16.5 Amendment. This Lease shall not be amended, modified, altered or changed in any respect whatsoever except by further agreement, in writing, duly executed by Landlord and Tenant. 16.6 Successors. This Lease shall bind and inure to the benefit of Landlord and Tenant and their respective successors and assigns. 16.7 Joint Effort. The preparation of this Lease has been the joint effort of the parties and the resulting document shall not be construed more severely against one of the parties than the other. 16.8 Counterparts. This Lease may be executed in two or more counterparts, and each executed copy shall be deemed an original which shall be binding upon all the parties hereto. 22 16.9 Governing Law. This Lease and the performance thereof shall be governed, interpreted, construed and regulated by the laws of the Commonwealth of Pennsylvania. 16.10 Captions. The captions of this Lease are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope or intent of this Lease. 16.11 Governmental Regulations. Tenant shall, at its sole cost and expense, comply with all of the requirements of all county, municipal, state, Federal and other applicable governmental authorities now in force and which may hereafter be in force pertaining to Tenant's activities in the Leased Premises. The foregoing is not intended to limit or modify Landlord's obligation to perform structural repairs and maintenance, as set forth in the Lease, which obligation shall include any such structural repairs and maintenance required to comply with the requirements of all Federal, state, county, municipal, and other applicable authorities and for which Tenant is not otherwise responsible under the Lease. 16.12 Right of Entry. Subject to any reasonable security requirements of Tenant after notification of Tenant's authorized representative, Landlord or its agents shall have the right to enter the Leased Premises at all reasonable times to examine the same or to make such repairs, alterations or improvements as may be necessary or desirable. In the event of any bona fide emergency, Landlord may also take whatever action is reasonable when immediate entry of the Leased Premises is required. 16.13 Recording. Tenant shall not record this Lease on the Land Records. However, upon the request of either Landlord or Tenant, the other party shall join in the execution of a so-called "Notice of Memorandum of Lease" for the purposes of recordation. Said Notice of Memorandum of Lease shall describe the parties, the 23 Leased Premises, the term of this Lease, and the commencement date hereof, and shall incorporate this Lease by reference. 16.14 Excuse of Landlord's Performance. Anything in the Lease to the contrary notwithstanding, providing such cause is not due to the willful act or neglect of Landlord, Landlord shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions hereof, if same shall be due to any strike, lockout, civil commotion, war-like operation, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations or controls, inability to obtain any material, or service through Act of God, or other cause beyond Landlord's control. Landlord shall use its reasonable best efforts to cure or correct any such failure of performance even if Landlord shall not be deemed in default. 16.15 Non-waiver. The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No covenant, term or condition of this Lease (other than payment of rent which has been accepted as aforesaid) shall be deemed to have been waived by Landlord unless such waiver be in writing. 16.16 Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent 24 be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to its right to recover the balance of such rent. 16.17 Loss and Damage to Tenant's Property. Landlord shall not be liable for any damage to or theft of property of Tenant or others, which property is located in the Leased Premises, unless the damage or loss is attributable to Landlord's employees. Landlord shall not be liable for any damage caused by other tenants or persons in the Leased Premises, unless the damage or loss is attributable to Landlord's employees. All property of Tenant kept or stored on the Leased Premises shall be so kept or stored solely at the risk of Tenant, unless the damage or loss is attributable to Landlord's employees. 16.18 Landlord's and Tenant's Non-Responsibility for Certain Damages, It is acknowledged that neither Landlord nor Tenant shall be liable for any punitive, indirect or consequential damages to the other with respect to this Lease. 16.19 Rules/Regulations. Tenant shall comply with the Landlord's rules/regulations for the Leased Premises/Spring House Facility as referenced in Schedules C-C-1 hereto. Landlord represents that it does, and shall continue, to operate the Total Premises in a first-class manner. If Landlord desires to lease space in or transfer ownership of, the Total Premises to a non-affiliate of Landlord, Landlord or the new landlord, as the case may be, shall implement, or cause to be implemented, rules and regulations consistent with those applicable to Tenant under this Lease. Landlord's employees shall comply with the reasonable rules and regulations of Tenant in the use of the Lobby. 16.20 Tenant's Right to Cure Landlord's Default. Landlord agrees that if Landlord fails to pay any installment of real estate taxes, or any other liens and encumbrances affecting 25 the Leased Premises and to which this Lease may be subordinate when any of the same become due, or if Landlord fails to make any repairs required of Landlord by the provisions of this Lease, then and in any such event or events Tenant, after the continuance of any such failure or default for 30 business days after notice thereof is given by Tenant to Landlord, may pay, but shall be under no obligation to pay, said real estate taxes, and other charges, and may cure such defaults all on behalf of and at the expense of Landlord and do all necessary work and make all necessary payments in connection therewith (but without any right of deduction or setoff against any rent payable to Landlord). Landlord agrees to pay to Tenant forthwith the amount so paid by Tenant, together with interest thereon at the prime rate of interest publicly announced from time to time by Chase Manhattan Bank or its successor or the survivor in the event of bank merger (the "Prime Rate") plus 3%. ARTICLE XVII SECURITY DEPOSIT The Tenant shall deposit with the Landlord the sum of $0 Dollars (no security deposit) as security for the faithful performance and observance by Tenant of all the terms, provisions and conditions of this Lease which deposit shall be payable upon signing of the Lease by the Tenant. Said sum shall not be considered as advance payment of rent. If Tenant shall fully and faithfully perform all of the terms, provisions, covenants and conditions of this Lease, the security deposit shall be returned to Tenant on expiration. In the event of a sale of the Land and Building, Landlord may deliver Tenant's security deposit to such purchaser and upon the mailing by such purchaser to Tenant of written acknowledgment of the receipt of said security deposit, Landlord shall be discharged from any further liability with respect to the deposit. 26 ARTICLE XVIII LATE CHARGE The Tenant shall pay to the Landlord as a "late charge" the sum equivalent to 5% of any amount due the Landlord from the Tenant not received on or before the 10th day following the date on which said payment is due. Said late charge shall be paid as additional rent by the Tenant to the Landlord. ARTICLE XIX RUBBISH, TPASHAND GARBAGE REMOVAL The parties hereby agree that the Tenant shall deposit all of its normal rubbish, trash and garbage from the Leased Premises in such containers as directed by Landlord. Tenant shall not allow any unreasonable accumulation of boxes, trash, garbage or waste within the Leased Premises. Tenant shall not generate any hazardous wastes (as such are defined under any applicable Federal, state or local rule or regulation) in connection with its operations in the Leased Premises, except as provided below. Landlord represents and warrants that the Leased Premises do not contain any such hazardous wastes (as such are defined under any applicable Federal, state or local rule or regulation) in any amounts which would violate any applicable laws or regulations. Tenant shall not generate any hazardous wastes in connection with its operations in the Leased Premises in excess of amounts routinely used in an office, and which do not violate any applicable laws or regulations. Tenant shall indemnify Landlord from any liability or violations under any environmental laws respecting the use by Tenant of the Leased Premises or arising from the use by Tenant of any other portion of the Total Premises. Landlord represents and warrants that to Landlord's best knowledge, the Total Premises are in compliance with all environmental laws. Landlord shall indemnify Tenant from any liability or violations under any environmental laws respecting the portion of the Total Premises other than the use of the Leased 27 Premises, except to the extent any liability or violations are caused by Tenant. ARTICLE XX REAL ESTATE BROKERAGE The parties hereby recognize CB Commercial Real Estate Group, Inc. ("CB"), as the real estate broker involved in this transaction and the Landlord shall pay all real estate brokerage fees due pursuant to its agreement with CB. IN WITNESS WHEREOF, Landlord and Tenant have executed this instrument, this _______ day of _____, 1995. Signed, sealed and delivered in the presence of: LANDLORD Ortho Pharmaceutical Corporation, acting through its Ortho-McNeil Pharmaceutical Division By /s/ [ILLEGIBLE] - -------------------------------- --------------------------------------- TENANT Advanta Corp. By /s/ Richard A. Greenawalt - -------------------------------- --------------------------------------- Richard A. Greenawalt, President & COO 28 EX-12 10 w84552exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES. EXHIBIT 12 ADVANTA CORP. AND SUBSIDIARIES Statement setting forth details of computation of ratio of earnings to fixed charges COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in thousands) For The Years Ended December 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Income (loss) from continuing operations $ (15,572) $ (30,456) $ 11,192 $ 41,334 $ 408,604 Federal and state income tax expense (benefit) 17,170 (11,995) 0 (55,785) (25,748) --------- --------- --------- --------- --------- Earnings (loss) before income tax expense (benefit) 1,598(A) (42,451)(B) 11,192 (14,451) 382,856(C) --------- --------- --------- --------- --------- Fixed charges: Interest 47,580 82,470 86,508 80,800 101,226 One-third of all rentals 1,822 1,736 1,853 1,759 1,366 Preferred stock dividend of subsidiary trust 8,990 8,990 8,990 8,990 8,990 --------- --------- --------- --------- --------- Total fixed charges 58,392 93,196 97,351 91,549 111,582 --------- --------- --------- --------- --------- Earnings (loss) before income tax expense (benefit) and fixed charges $ 59,990 $ 50,745 $ 108,543 $ 77,098 $ 494,438 --------- --------- --------- --------- --------- Ratio of earnings to fixed charges (D) 1.03x N/M (E) 1.11x N/M (E) 4.43x
(A) Earnings before income taxes in 2002 included a charge of $43.0 million related to a ruling in the litigation associated with the transfer of our consumer credit card business in 1998. (B) Earnings before income taxes in 2001 included $41.8 million of unusual charges. Unusual charges include severance, outplacement and other compensation costs associated with restructuring our corporate functions commensurate with the ongoing businesses as well as expenses associated with exited businesses and asset impairments. (C) Earnings before income taxes in 1998 included a $541.3 million gain on the transfer of the consumer credit card business and $125.1 million of unusual charges including severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with the Consumer Credit Card Transaction/Tender Offer; expense associated with exited businesses/products; and asset impairment. (D) For purposes of computing these ratios, "earnings" represent income (loss) from continuing operations before income taxes plus fixed charges. "Fixed charges" consist of interest expense, one-third (the portion deemed representative of the interest factor) of rental expense on operating leases, and preferred stock dividends of subsidiary trust. (E) The ratios calculated in the years ended December 31, 2001 and 1999 are less than 1.00 and therefore, not meaningful. In order to achieve a ratio of 1.00, earnings before income taxes and fixed charges would need to increase by $42,451 for the year ended December 31, 2001 and $14,451 for the year ended December 31, 1999. EX-21 11 w84552exv21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 CURRENT LIST OF SUBSIDIARIES OF REGISTRANT Advanta Corp. (DE) Advanta National Corp. (DE) Advanta National Bank Advanta Bank Corp. (UT) Advanta Business Receivables Corp. (NV) Advanta Equipment Receivables Series 2000-1 LLC Advanta GP Corp. (DE) Advanta Partners LP (PA) Advanta 101 GP Corp. (DE) Advanta GP II Corp. (DE) Advanta GCF GP Corp. (DE) Advanta Growth Capital Fund LP (DE) Advanta Investment Corp. (DE) Advanta Investment Corp. II (DE) E-Commerce Investments, Inc. Advanta Information Services, Inc. (DE) Advanta International Corporation I (DE) Advanta International Corporation II (DE) Advanta Business Services Holding Corp. (DE) Advanta Business Services Corp. (DE) Advanta Leasing Receivables Corp. (DE) Advanta Leasing Receivables Corp. II (DE) Advanta Leasing Receivables Corp. III (NV) Advanta Business Receivables LLC (NV) Advanta Leasing Receivables Corp. IV (NV) Advanta Leasing Receivables Corp. V (NV) Advanta Leasing Receivables Corp. VI (NV) Advanta Leasing Receivables Corp. VII (NV) Advanta Leasing Receivables Corp. VIII (NV) Advanta Leasing Receivables Corp. IX (NV) Advanta Commercial Credit Corp. (NV) Mt. Vernon Leasing, Inc. (NJ) Advanta Service Corp. (DE) Advanta Shared Services Corp. (DE) Coltex Leverage Lease Corporation I (DE) TSLL Jedobert Cal, Inc. (DE) Advanta Properties I Corp. (PA) Advanta Properties II Corp. (PA) Advanta Life Insurance Company (AZ) Advanta Insurance Company (AZ) Advanta Insurance Agency Inc. (DE) First Advanta Insurance Agency Inc. (PA) AICM, Inc. (AZ) Advanta Name Corp. (DE) Advanta Advertising, Inc. (DE) ADVANTENNIS Corp. (DE) Advanta Residual Holding Corp. (DE) Advanta Mortgage Holding Company (DE) Advanta Auto Finance Corporation (NV) Advanta Auto Receivables Corp. I (NV) Advanta Mortgage Corp. USA (DE) Advanta Finance Corp. (NV) Advanta Finance Residential Mortgage Corp. (NV) Advanta Finance Residual Corporation (DE) Advanta Mortgage Corp. Midatlantic (PA) Advanta Mortgage Corp. Midatlantic II (PA) Advanta Mortgage Corp. New Jersey (NJ) Advanta Mortgage Corp. Northeast (NY) Advanta Mortgage Corp. Midwest (PA) Advanta Nominee Services, Inc. (DE) Advanta Mortgage Conduit Services, Inc. (DE) Advanta Conduit Receivables, Inc. (NV) Advanta Mortgage Receivables Inc. (DE) Advanta Mortgage Funding Corp. (DE) EX-23.1 12 w84552exv23w1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS. Exhibit 23.1 Independent Auditors' Consent The Board of Directors Advanta Corp.: We consent to the incorporation by reference in the registration statements (No. 33-19290, No. 33-31456, No. 33-32969, No.33-47305, No. 33-47308, No. 33-53205, No. 33-53475, No. 33-54991, No. 33-59219, No. 33-60419,No. 333-01681, No. 333-01833, No. 333-04471, No. 333-05701, No. 333-18993, No. 333-74575, No. 333-71995, No. 333-92151, No. 333-33136, No. 333-49116 and No. 333-90642) of Advanta Corp. of our report dated March 24, 2003, relating to the consolidated balance sheet of Advanta Corp. and subsidiaries as of December 31, 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended, which report appears in the December 31, 2002 Form 10-K of Advanta Corp. KPMG LLP Philadelphia, Pennsylvania March 24, 2003 EX-23.2 13 w84552exv23w2.txt CONSENT REGARDING ARTHUR ANDERSEN LLP... Exhibit 23.2 EXPLANATION CONCERNING ABSENCE OF CURRENT WRITTEN CONSENT OF ARTHUR ANDERSEN LLP On June 28, 2002, Advanta Corp. (the "Company") announced that it had appointed KPMG LLP to replace Arthur Andersen LLP as its independent public accountants. Prior to the date hereof, the Arthur Andersen partners who reviewed the Company's audited financial statements as of December 31, 2001 and December 31, 2000 and for the years then ended resigned from Arthur Andersen LLP. As a result, after reasonable efforts, the Company has been unable to obtain Arthur Andersen's updated written consent to the incorporation by reference in this document of Arthur Andersen's audit reports with respect to the financial statements as of December 31, 2001 and December 31, 2000 and for the years then ended for this Annual Report on Form 10-K. Under these circumstances, Rule 437a under the Securities Act of 1933 permits the Company to omit Arthur Andersen's updated written consent from this filing, and permits us to incorporate by reference the financial statements, supplementary data and financial statement schedule included herein into present and future registration statements, without the written consent of Arthur Andersen LLP. Section 11(a) of the Securities Act of 1933 provides that if any part of a registration statement at the time it becomes effective contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may sue, among others, every accountant who has consented to be named as having prepared or certified any part of the registration statement or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report or valuation which purports to have been prepared or certified by the accountant. As noted above, Arthur Andersen LLP has not consented to the incorporation by reference of its audit report in this filing, although it has consented to the incorporation by reference of its audit report contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2001. While the extent of any resulting limitations on recovery is unclear, Arthur Andersen LLP may not be liable under Section 11(a) of the Securities Act of 1933 because it has not consented to being named as an expert in any present or future registration statement into which this Annual Report on Form 10-K may be incorporated by reference, or the lack of a currently dated consent could limit the time in which any such liability could be asserted. The Company believes, however, that other persons who may be liable under Section 11(a) of the Securities Act of 1933, including the Company's officers and directors, may still rely on Arthur Andersen's audit reports as being made by an expert under the due diligence defense provision of Section 11(b) of the Securities Act of 1933. The following is a copy of Arthur Andersen's consent which was issued on March 15, 2002 and filed with the Securities and Exchange Commission as Exhibit 23 to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2001. This consent has not be reissued by Arthur Andersen LLP. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements; File No. 33-19290, No. 33-31456, No. 33-32969, No. 33-47305, No. 33-53205, No. 33-53475, No. 33-54991, No. 33-59219, No. 33-60419, No. 333-01681, No. 333-01833, No. 333-04471, No. 333-05701, No. 333-18993, 333-74575, No. 333-71995, No. 333-92151, No. 333-33136 and No. 333-49116. /s/ ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania March 15, 2002 -2- EX-99.1 14 w84552exv99w1.txt SARBANES-OXLEY CERTIFICATION... EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Advanta Corp. (the "Company") for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis Alter, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Dennis Alter - --------------------------- Dennis Alter Chief Executive Officer March 24, 2003 EX-99.2 15 w84552exv99w2.txt SARBANES-OXLEY CERTIFICATION... EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Advanta Corp. (the "Company") for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Philip M. Browne, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Philip M. Browne - --------------------------- Philip M. Browne Chief Financial Officer March 24, 2003 -----END PRIVACY-ENHANCED MESSAGE-----