-----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, PM5fKPBnid0EMn+54/5NMrqgStW5iwaool2nKqo3slplBzOgVQkSBCDOGycHy1Ms 0Uxzr/NoDdWo/Oz7/PtmNQ== 0000893220-03-000925.txt : 20030515 0000893220-03-000925.hdr.sgml : 20030515 20030514175250 ACCESSION NUMBER: 0000893220-03-000925 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14120 FILM NUMBER: 03700450 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: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-Q 1 w86454e10vq.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2003 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 Number 0-14120 Advanta Corp. (Exact name of registrant as specified in its charter) Delaware 23-1462070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477 (Address of Principal Executive Offices) (Zip Code) (215) 657-4000 (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Outstanding at May 5, 2003 Common Stock, $.01 par value 10,041,017 shares Class B Outstanding at May 5, 2003 Common Stock, $.01 par value 17,187,202 shares
TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) 3 Consolidated Income Statements (Unaudited) 4 Consolidated Statements of Changes in Stockholders' Equity (Unaudited) 5-6 Consolidated Statements of Cash Flows (Unaudited) 7 Notes to Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 Item 4. Controls and Procedures 35 PART II - OTHER INFORMATION Item 1. Legal Proceedings 35 Item 6. Exhibits and Reports on Form 8-K 36
2 ITEM 1. FINANCIAL STATEMENTS ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) MARCH 31, DECEMBER 31, 2003 2002 ---- ---- ASSETS Cash $ 45,032 $ 14,834 Federal funds sold 367,830 332,257 Restricted interest-bearing deposits 78,447 79,449 Investments available for sale 159,251 171,222 Receivables, net: Held for sale 181,530 177,065 Other 287,494 278,282 ----------- ----------- Total receivables, net 469,024 455,347 Accounts receivable from securitizations 397,980 198,238 Premises and equipment, net 22,653 25,496 Other assets 291,621 277,658 Assets of discontinued operations, net 119,219 127,112 ----------- ----------- TOTAL ASSETS $ 1,951,057 $ 1,681,613 ----------- ----------- LIABILITIES Deposits: Noninterest-bearing $ 7,219 $ 6,561 Interest-bearing 923,185 707,467 ----------- ----------- Total deposits 930,404 714,028 Debt 318,490 315,886 Other liabilities 278,728 230,386 ----------- ----------- TOTAL LIABILITIES 1,527,622 1,260,300 ----------- ----------- 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 2003 and 2002 1,010 1,010 Class A voting common stock, $.01 par value: Authorized - 200,000,000 shares; issued - 10,041,017 shares in 2003 and 2002 100 100 Class B non-voting common stock, $.01 par value: Authorized - 200,000,000 shares; issued - 20,315,007 shares in 2003 and 20,326,289 shares in 2002 203 204 Additional paid-in capital 243,824 243,910 Deferred compensation (17,250) (17,837) Unearned ESOP shares (10,719) (10,831) Accumulated other comprehensive income 200 186 Retained earnings 151,073 147,205 Less: Treasury stock at cost, 3,175,362 Class B common shares in 2003 and 2,896,112 Class B common shares in 2002 (45,006) (42,634) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 323,435 321,313 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,951,057 $ 1,681,613 ----------- -----------
See Notes to Consolidated Financial Statements 3 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31, -------------------- 2003 2002 ---- ---- Interest income: Receivables $17,473 $20,476 Investments 1,926 3,270 Other interest income 3,592 2,660 ------- ------- Total interest income 22,991 26,406 Interest expense: Deposits 6,221 6,265 Debt 5,049 6,786 Other borrowings 1 59 ------- ------- Total interest expense 11,271 13,110 ------- ------- Net interest income 11,720 13,296 Provision for credit losses 9,446 10,700 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 2,274 2,596 NONINTEREST REVENUES: Securitization income 29,610 29,647 Servicing revenues 10,027 7,942 Other revenues, net 25,432 17,878 ------- ------- TOTAL NONINTEREST REVENUES 65,069 55,467 ------- ------- EXPENSES: Operating expenses 55,522 48,958 Minority interest in income of consolidated subsidiary 2,220 2,220 ------- ------- TOTAL EXPENSES 57,742 51,178 ------- ------- Income before income taxes 9,601 6,885 Income tax expense 3,696 2,651 ------- ------- NET INCOME $ 5,905 $ 4,234 ------- ------- Basic net income per common share Class A $ 0.22 $ 0.14 Class B 0.25 0.17 Combined 0.24 0.16 ------- ------- Diluted net income per common share Class A $ 0.22 $ 0.14 Class B 0.25 0.17 Combined 0.24 0.16 ------- ------- Basic weighted average common shares outstanding Class A 9,183 9,133 Class B 14,816 16,301 Combined 23,999 25,434 ------- ------- Diluted weighted average common shares outstanding Class A 9,184 9,139 Class B 15,212 16,980 Combined 24,396 26,119 ------- -------
See Notes to Consolidated Financial Statements 4 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) ($ IN THOUSANDS)
CLASS A CLASS A CLASS B ADDITIONAL COMPREHENSIVE PREFERRED COMMON COMMON PAID-IN INCOME (LOSS) STOCK STOCK STOCK CAPITAL ------------- ----- ----- ----- ------- ------ ---- ---- -------- BALANCE AT DECEMBER 31, 2001 $1,010 $100 $179 $223,362 ------ ---- ---- -------- Net income (loss) $(24,182) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $577 (1,073) --------- Comprehensive income (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 DECEMBER 31, 2002 $1,010 $100 $204 $243,910 ------ ---- ---- -------- Net income (loss) $ 5,905 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $(7) 14 -------- Comprehensive income (loss) $ 5,919 ======== Preferred and common cash dividends declared Issuance of restricted stock 603 Amortization of deferred compensation Forfeitures of restricted stock (1) (649) Stock buyback ESOP shares committed to be released (40) ------ ---- ---- -------- BALANCE AT MARCH 31, 2003 $1,010 $100 $203 $243,824 ------ ---- ---- --------
See Notes to Consolidated Financial Statements 5 ($ IN THOUSANDS)
DEFERRED ACCUMULATED COMPENSATION OTHER TOTAL & UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY ----------- ------------- -------- ----- ------ -------- ------ -------- -------- -------- BALANCE AT DECEMBER 31, 2001 $(11,359) $ 1,259 $179,370 $(27,622) $366,299 -------- ------ -------- -------- -------- Net income (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 income (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 DECEMBER 31, 2002 $(28,668) $ 186 $147,205 $(42,634) $321,313 -------- ------ -------- -------- -------- Net income (loss) 5,905 5,905 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $(7) 14 14 Comprehensive income (loss) Preferred and common cash dividends declared (2,037) (2,037) Issuance of restricted stock (603) 0 Amortization of deferred compensation 622 622 Forfeitures of restricted stock 569 (81) Stock buyback (2,372) (2,372) ESOP shares committed to be released 111 71 -------- ------ -------- -------- -------- BALANCE AT MARCH 31, 2003 $(27,969) $ 200 $151,073 $(45,006) $323,435 -------- ------ -------- -------- --------
See Notes to Consolidated Financial Statements 6 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ IN THOUSANDS) THREE MONTHS ENDED MARCH 31, ------------------- 2003 2002 ---- ---- OPERATING ACTIVITIES - CONTINUING OPERATIONS Net income $ 5,905 $ 4,234 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Investment securities losses 608 2,627 Depreciation 2,118 1,946 Provision for credit losses 9,446 10,700 Provision for interest and fee losses 2,594 1,437 Change in deferred origination costs, net of deferred fees 4,016 (611) Change in receivables held for sale (76,990) 12,706 Proceeds from sale of receivables held for sale 72,525 5,000 Change in accounts receivable from securitizations (199,742) (2,740) Change in other assets and other liabilities 40,421 12,753 -------- ------ Net cash provided by (used in) operating activities (139,099) 48,052 -------- ------ INVESTING ACTIVITIES - CONTINUING OPERATIONS Change in federal funds sold and restricted interest-bearing deposits (34,571) (40,017) Purchase of investments available for sale (117,897) (90,097) Proceeds from sales of investments available for sale 117,331 125,193 Proceeds from maturing investments available for sale 11,949 36,645 Change in receivables not held for sale (25,268) (7,924) Sales (purchases) of premises and equipment, net 725 (1,170) -------- ------ Net cash provided by (used in) investing activities (47,731) 22,630 -------- ------ FINANCING ACTIVITIES - CONTINUING OPERATIONS Change in demand and savings deposits (93) (391) Proceeds from issuance of time deposits 253,497 98,386 Payments for maturing time deposits (39,175) (98,818) Proceeds from issuance of debt 28,910 27,576 Payments on redemption of debt (29,595) (65,294) Change in other borrowings 0 (32,317) Proceeds from exercise of stock options 0 28 Cash dividends paid (2,037) (2,195) Stock buyback (2,372) (2,073) -------- ------ Net cash provided by (used in) financing activities 209,135 (75,098) -------- ------ DISCONTINUED OPERATIONS Net cash provided by operating activities of discontinued operations 7,893 3,305 -------- ------ Net increase (decrease) in cash 30,198 (1,111) Cash at beginning of period 14,834 20,952 -------- ------ Cash at end of period $ 45,032 $ 19,841 -------- ------
See Notes to Consolidated Financial Statements 7 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED) MARCH 31, 2003 (UNAUDITED) In these notes to consolidated financial statements, "we", "us", and "our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. NOTE 1) BASIS OF PRESENTATION Advanta Corp. (collectively with its subsidiaries, "Advanta") has prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto included in our latest annual report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the full year. 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. Certain prior period balances have been reclassified to conform to the current period presentation. 8 Statement of Financial Accounting Standards ("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 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 and net income per common share would have changed to the following pro forma amounts:
THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Compensation expense for stock option plans, net of related tax effects As reported $ 0 $ 0 Pro forma 613 753 --------- --------- Net income As reported $ 5,905 $ 4,234 Pro forma 5,292 3,481 --------- --------- Basic net income per common share As reported Class A $ 0.22 $ 0.14 Class B 0.25 0.17 Combined 0.24 0.16 Pro forma Class A $ 0.20 $ 0.11 Class B 0.22 0.14 Combined 0.21 0.13 --------- --------- Diluted net income per common share As reported Class A $ 0.22 $ 0.14 Class B 0.25 0.17 Combined 0.24 0.16 Pro forma Class A $ 0.20 $ 0.11 Class B 0.22 0.14 Combined 0.21 0.13 --------- ---------
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 three months ended March 31:
2003 2002 ---- ---- Dividend yield 3% 4% Expected life (in years) 7 7 Expected volatility 59% 58% Risk-free interest rate 3.3% 4.4%
9 NOTE 2) 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, we adopted this interpretation, which 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. The adoption of this interpretation did not have a material impact on our financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51." This 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. The adoption of this interpretation did not have a material effect on our financial position or results of operations since qualifying special-purpose entities, as defined in SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125," are exempt from the consolidation requirements of this interpretation. NOTE 3) RECEIVABLES Receivables on the balance sheet, including those held for sale, consisted of the following:
MARCH 31, DECEMBER 31, 2003 2002 ---- ---- Business credit card receivables $ 465,436 $ 445,083 Other receivables 24,300 25,589 --------- --------- Gross receivables 489,736 470,672 --------- --------- Add: Deferred origination costs, net of deferred fees 26,818 30,834 Less: Allowance for receivable losses Business credit cards (45,818) (44,466) Other receivables (1,712) (1,693) --------- --------- Total allowance (47,530) (46,159) --------- --------- Receivables, net $ 469,024 $ 455,347 ========= =========
10 NOTE 4) ALLOWANCE FOR RECEIVABLE LOSSES The following table presents activity in the allowance for receivable losses for the periods presented:
THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Beginning balance $ 46,159 $ 41,971 Provision for credit losses 9,446 10,700 Provision for interest and fee losses 2,594 1,437 Gross principal charge-offs: Business credit cards (9,274) (10,383) Other receivables (20) 0 -------- -------- Total gross principal charge-offs (9,294) (10,383) -------- -------- Principal recoveries: Business credit cards 866 1,084 -------- -------- Net principal charge-offs (8,428) (9,299) -------- -------- Interest and fee charge-offs: Business credit cards (2,241) (1,437) -------- -------- Ending balance $ 47,530 $ 43,372 ======== ========
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. Provision for interest and fee losses are recorded as direct reductions to interest and fee income. NOTE 5) SECURITIZATION ACTIVITIES Accounts receivable from securitizations consisted of the following:
MARCH 31, DECEMBER 31, 2003 2002 ---- ---- Retained interests in securitizations $165,547 $113,422 Accrued interest and fees on securitized receivables, net 57,673 56,171 Amounts due from the trust 174,760 28,645 -------- -------- Total accounts receivable from securitizations $397,980 $198,238 -------- --------
11 The following represents business credit card securitization data and the key assumptions used in estimating the fair value of retained interests in securitizations at the time of each new securitization or replenishment if quoted market prices were not available.
THREE MONTHS ENDED ---------------------------- MARCH 31, MARCH 31, 2003 2002 ---- ---- Average securitized receivables $2,171,815 $1,615,656 Securitization income 29,610 29,647 Discount accretion 3,592 2,660 Interchange income 20,404 15,655 Servicing revenues 10,027 7,942 Proceeds from new securitizations 72,525 5,000 Proceeds from collections reinvested in revolving-period securitizations 1,058,392 903,768 Cash flows received on retained interests 48,300 51,394 KEY ASSUMPTIONS: Discount rate 11.4% - 14.6% 12.0% - 15.0% Monthly payment rate 18.9% - 21.0% 18.2% - 21.0% Loss rate 8.8% - 10.3% 10.4% - 12.8% Interest yield, net of interest earned by note holders 14.3% - 15.0% 15.8% - 15.9%
Beginning in the fourth quarter of 2002, our interest yield assumption includes both finance charge and late fee yield. Previously, the interest yield assumption included only finance charge yield. There were no purchases of delinquent accounts during the three months ended March 31, 2003 or 2002. The following assumptions were used in estimating the fair value of retained interests in business credit card securitizations at March 31, 2003 and December 31, 2002 if quoted market prices were not available. The assumptions listed represent weighted averages of assumptions used for each securitization.
MARCH 31, DECEMBER 31, 2003 2002 ---- ---- Discount rate 12.5% - 14.6% 11.4% - 14.0% Monthly payment rate 18.9% - 21.0% 19.3% - 21.0% Loss rate 8.8% - 9.7% 9.4% - 10.3% Interest yield, net of interest earned by note holders 14.3% 15.0%
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. 12 We have prepared sensitivity analyses of the valuations of retained interests in securitizations estimated using the assumptions identified above. The sensitivity analyses show the hypothetical 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 assumption. The following are the results of those sensitivity analyses on the valuation at March 31, 2003. Effect on fair value of the following hypothetical changes in key assumptions: Discount rate increased by 2% $ (1,923) Discount rate increased by 4% (3,773) Monthly payment rate at 110% of base assumption (1,567) Monthly payment rate at 125% of base assumption (3,029) Loss rate at 110% of base assumption (5,355) Loss rate at 125% of base assumption (13,387) Interest yield, net of interest earned by note holders, decreased by 1% (6,085) Interest yield, net of interest earned by note holders, decreased by 2% (12,170)
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 the fair value of the retained interests when quoted market prices are not available at each reporting date. 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. 13 MANAGED RECEIVABLE DATA Our managed business credit card receivable portfolio is comprised of both owned business credit card receivables and securitized business credit card receivables. Performance on a managed receivable portfolio basis is useful and 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 business credit card receivable portfolio is as follows:
MARCH 31, DECEMBER 31, MARCH 31, 2003 (1) 2002 (1) 2002 -------- -------- ---- Owned business credit card receivables $ 465,436 $ 445,083 $ 395,766 Securitized business credit card receivables 2,278,746 2,149,147 1,630,309 --------- --------- --------- Total managed receivables 2,744,182 2,594,230 2,026,075 --------- --------- --------- Receivables 30 days or more delinquent: Owned 27,846 23,406 28,119 Securitized 146,570 136,128 117,274 Total managed 174,416 159,534 145,393 Receivables 90 days or more delinquent: Owned 13,403 11,959 13,297 Securitized 71,255 69,335 55,228 Total managed 84,658 81,294 68,525 Nonaccrual receivables: Owned 6,581 4,729 17,872 Securitized 35,166 27,688 74,364 Total managed 41,747 32,417 92,236 Accruing receivables past due 90 days or more: Owned 11,640 10,535 0 Securitized 61,824 61,045 0 Total managed 73,464 71,580 0 Net principal charge-offs for the three months ended March 31 and twelve months ended December 31: Owned 8,408 37,400 9,299 Securitized 45,475 156,282 38,986 Total managed 53,883 193,682 48,285 --------- --------- ---------
(1) See Note 4 for a discussion of the change in income billing practice effective October 1, 2002. NOTE 6) SELECTED BALANCE SHEET INFORMATION Other assets consisted of the following:
MARCH 31, DECEMBER 31, 2003 2002 ---- ---- Current and deferred income taxes, net $ 81,653 $ 84,684 Amounts due from transfer of consumer credit card business 70,545 70,545 Investment in Fleet Credit Card Services, L.P. 34,500 34,000 Cash surrender value of insurance contracts 24,754 24,437 Intangible assets 3,081 3,085 Other assets 77,088 60,907 -------- -------- Total other assets $291,621 $277,658 ======== ========
14 Other liabilities consisted of the following:
MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ Amounts due to the securitization trust $ 42,515 $ 3,255 Accounts payable and accrued expenses 35,489 33,486 Business credit card rewards 17,138 16,416 Accrued interest payable 10,878 5,641 Other (1) 172,708 171,588 -------- -------- Total other liabilities $278,728 $230,386 ======== ========
(1) A substantial portion of other liabilities represents our litigation reserves. NOTE 7) DEPOSITS Deposit accounts consist of the following:
MARCH 31, DECEMBER 31, 2003 2002 ---- ---- Demand deposits $ 7,219 $ 6,561 Money market savings 1,629 2,380 Time deposits of $100,000 or less 422,314 441,611 Time deposits of more than $100,000 499,242 263,476 -------- -------- Total deposits $930,404 $714,028 ======== ========
Time deposit maturities are as follows:
Year Ended December 31, 2003 $466,252 2004 399,698 2005 48,979 2006 6,523 2007 104
NOTE 8) CONTINGENCIES On January 22, 1999, Fleet Financial Group, Inc. ("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 Services, L.P. in connection with the transfer of our consumer credit card business to Fleet Credit Card Services, L.P. (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 represented the amount in excess of the reserves we had 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. 15 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. 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 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 and a judgment in the amount of approximately $6 million was entered against Advanta. On July 8, 2002, the Court of Appeals partially reversed the judgement. On May 6, 2003, the District Court entered an amended judgement in the amount of approximately $4.7 million plus interest from December 7, 2000 and on May 12, 2003, we paid the amended judgement in full. The payment had no impact on our operating results, due to the reserves we established in connection with this litigation. 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 item will not have a material adverse effect on our financial position or future operating results. 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 16 with the transaction. The matter is in discovery and the parties extended the discovery period. 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 our exit from that business 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. NOTE 9) CAPITAL STOCK The Board of Directors of Advanta Corp. has authorized management to purchase up to 3.0 million shares of Advanta Corp. common stock. In the year ended December 31, 2002, we repurchased 1,554,759 shares of our Class B Common Stock. In the three months ended March 31, 2003, we repurchased 279,250 shares of our Class B Common Stock. Cash dividends per share of common stock declared during the three months ended March 31, 2003 and 2002 were $0.063 for Class A Common Stock and $0.076 for Class B Common Stock. 17 NOTE 10) SEGMENT INFORMATION
ADVANTA BUSINESS VENTURE CARDS CAPITAL OTHER (1) TOTAL ----------- ---------- -------------- ------------- THREE MONTHS ENDED MARCH 31, 2003 Interest income $ 20,754 $ 0 $ 2,237 $ 22,991 Interest expense 10,734 140 397 11,271 Noninterest revenues (losses), net 64,949 (610) 730 65,069 Pretax income (loss) from continuing operations 10,977 (1,376) 0 9,601 Total assets 915,667 13,934 1,021,456 1,951,057 ------- ------ --------- --------- THREE MONTHS ENDED MARCH 31, 2002 Interest income $ 22,778 $ 2 $ 3,626 $ 26,406 Interest expense 8,771 205 4,134 13,110 Noninterest revenues (losses), net 58,139 (2,579) (93) 55,467 Pretax income (loss) from continuing operations 13,744 (3,435) (3,424) 6,885 Total assets 575,397 17,529 973,065 1,565,991 ------- ------ --------- ---------
(1) Other includes investment and other activities not attributable to reportable segments. Total assets in the "Other" segment include assets of discontinued operations. NOTE 11) SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Interchange income $ 26,138 $ 20,193 Business credit card rewards (4,132) (2,004) Balance transfer fees 1,351 294 Cash advance fees 755 808 Investment securities losses, net (608) (2,627) Insurance revenues, net, and other 1,928 1,214 -------- -------- Total other revenues, net $ 25,432 $ 17,878 ======== ========
OPERATING EXPENSES THREE MONTHS ENDED MARCH 31, ------------------- 2003 2002 ---- ---- Salaries and employee benefits $17,991 $17,131 Amortization of deferred origination costs, net 14,184 12,022 External processing 4,620 4,177 Professional fees 3,434 3,835 Equipment 3,394 2,601 Marketing 2,927 1,911 Occupancy 1,789 1,611 Credit 1,185 1,673 Telephone 1,074 627 Fraud 915 741 Postage 902 791 Other 3,107 1,838 ------- ------- Total operating expenses $55,522 $48,958 ======= =======
18 NOTE 12) CALCULATION OF EARNINGS PER SHARE The following table shows the calculation of basic earnings per common share and diluted earnings per common share.
THREE MONTHS ENDED MARCH 31, ------------------------- 2003 2002 ---- ---- Net income $ 5,905 $ 4,234 Less: Preferred A dividends (141) (141) -------- -------- Net income available to common shareholders 5,764 4,093 Less: Class A dividends declared (576) (574) Less: Class B dividends declared (1,320) (1,480) -------- -------- Undistributed net income $ 3,868 $ 2,039 -------- -------- Basic net income per common share Class A $ 0.22 $ 0.14 Class B 0.25 0.17 Combined (1) 0.24 0.16 Diluted net income per common share Class A $ 0.22 $ 0.14 Class B 0.25 0.17 Combined (1) 0.24 0.16 -------- -------- Basic weighted average common shares outstanding Class A 9,183 9,133 Class B 14,816 16,301 Combined 23,999 25,434 Dilutive effect of: Options Class B 117 346 Restricted shares Class A 1 6 Restricted shares Class B 279 333 Diluted weighted average common shares outstanding Class A 9,184 9,139 Class B 15,212 16,980 Combined 24,396 26,119 Antidilutive shares Options Class B 2,736 1,589 Restricted shares Class B 142 1,979 -------- --------
(1) Combined represents net income available to common shareholders divided by the combined total of Class A and Class B weighted average common shares outstanding. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this Form 10-Q, "Advanta", "we", "us", and "our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. OVERVIEW For the three months ended March 31, 2003, we reported net income of $5.9 million or $0.24 per combined diluted common share, compared to net income of $4.2 million or $0.16 per combined diluted common share for the same period of 2002. The increase in net income is the result of lower unrealized losses on our venture capital investments and the reduction in net interest expense on excess liquidity not attributable to the Advanta Business Cards or Venture Capital segments. These favorable variances are partially offset by a decrease in Advanta Business Cards net income. Net income included the following business segment results ($ in thousands):
THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Pretax income (loss): Advanta Business Cards $ 10,977 $ 13,744 Venture Capital (1,376) (3,435) Other (1) 0 (3,424) -------- -------- Total pretax income 9,601 6,885 Income tax expense (3,696) (2,651) -------- -------- Net income $ 5,905 $ 4,234 -------- --------
(1) Other includes investment and other activities not attributable to the Advanta Business Cards or Venture Capital segments. This report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements can be identified by the use of forward-looking phrases such as "will likely result," "may," "are expected to," "is anticipated," "estimate," "projected," "intends to" or other similar words or phrases. The most significant among these risks and uncertainties are: (1) our managed net interest income; (2) competitive pressures; (3) political, social and/or general economic conditions that affect the level of new account originations, customer spending, delinquencies and charge-offs; (4) factors affecting fluctuations in the number of accounts or loan balances including retention of cardholders after promotional pricing periods have expired; (5) interest rate fluctuations; (6) the level of expenses; (7) the timing of the securitizations of our receivables; (8) factors affecting the value of investments that we hold; (9) the effects of government regulation, including restrictions and limitations imposed by banking laws, regulators, examinations, and agreements between our bank subsidiaries and their regulators; (10) relationships with customers, significant vendors and business partners; (11) the amount and cost of financing available to us; (12) the ratings on our debt and the debt of our subsidiaries; 20 (13) revisions to estimates associated with the discontinued operations of our mortgage and leasing businesses; (14) the impact of litigation; (15) the proper design and operation of our disclosure controls and procedures; (16) difficulties or delays in the development, production, testing and marketing of products or services; and (17) the ability to attract and retain key personnel. Additional risks that may affect our future performance are set forth elsewhere in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2002 and in our other filings with the Securities and Exchange Commission. ADVANTA BUSINESS CARDS Advanta Business Cards originated, directly and through the use of third parties, 53,931 new accounts during the three months ended March 31, 2003 compared to 42,291 new accounts for the same period of 2002. Our managed business credit card receivable portfolio is comprised of both owned business credit card receivables and securitized business credit card receivables. The managed business credit card receivable portfolio grew from $2.0 billion at March 31, 2002 to $2.6 billion at December 31, 2002 and to $2.7 billion at March 31, 2003. We expect owned and managed business credit card receivables to grow approximately 15% to 20% in the year ended December 31, 2003. Our originations in 2002 and 2003 have included a broad 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. Pretax income for Advanta Business Cards was $11.0 million for the three months ended March 31, 2003 as compared to $13.7 million for the same period of 2002. The components of pretax income for Advanta Business Cards for the three months ended March 31, 2003 and 2002 were as follows ($ in thousands):
THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Net interest income on owned receivables $ 10,020 $ 14,007 Noninterest revenues 64,949 58,139 Provision for credit losses (9,408) (10,500) Operating expenses (54,584) (47,902) -------- -------- Pretax income $ 10,977 $ 13,744 -------- --------
Net interest income on owned receivables decreased by $4.0 million for the three months ended March 31, 2003 as compared to the same period of 2002 due primarily to a decrease in the average yield earned on our business credit card receivables, partially offset by an increase in average owned business credit card receivables of $118 million. The decrease in yield is a result of a broad array of competitively-priced offerings and products, including promotional pricing, designed to selectively attract and retain more higher credit quality customers and to respond to the competitive environment. The increase in noninterest revenues is comprised of increased servicing revenues, interchange income and other fee revenues due to growth in average owned and securitized receivables. A decrease in yield on securitized receivables was offset by increased 21 volume of securitized receivables, a decrease in the floating interest rates earned by note holders and a decreased net principal charge-off rate on securitized receivables resulting in consistent levels of securitization income in both periods. The decrease in provision for credit losses in the three months ended March 31, 2003 as compared to the same period of 2002 reflects estimates of a lower level of inherent losses in the portfolio, based on delinquency and net principal charge-off trends and the current composition of the portfolio as compared to estimates as of March 31, 2002, partially offset by the increase in average owned business credit card receivables. The increase in operating expenses resulted from growth in owned and securitized receivables. In addition, amortization of deferred origination costs increased due to the number and timing of new account originations. VENTURE CAPITAL The components of pretax loss for our venture capital segment for the three months ended March 31, 2003 and 2002 were as follows ($ in thousands):
THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Net interest expense $ (140) $ (203) Unrealized losses (610) (2,579) Operating expenses (626) (653) ------- ------- Pretax loss $(1,376) $(3,435) ------- -------
As shown in the table above, pretax loss of our venture capital segment is comprised primarily of net unrealized 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 $12.9 million at March 31, 2003 and $13.5 million at December 31, 2002. INTEREST INCOME AND EXPENSE Interest income decreased by $3.4 million to $23.0 million for the three months ended March 31, 2003 as compared to the same period of 2002. The decrease in interest income for the three months ended March 31, 2003 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. Partially offsetting these decreases were increases in average owned business credit card receivables of $118 million and average investments of $6.4 million for the three months ended March 31, 2003 as compared to the same period of 2002. In 2002 and 2003, our marketing campaigns have included a broad 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. These competitively-priced offers have resulted in a decline in yields on our business credit card receivable portfolio and are anticipated to result in lower credit losses in future periods and higher interchange income due to higher purchase volume. We expect yields for the remaining three quarters of 2003 to be relatively consistent with those experienced in the first quarter, due in part to the expiration of promotional pricing periods on a portion of the business credit card portfolio that we anticipate will offset the decline in yields created by new offers at promotional rates. 22 During the three months ended March 31, 2003, interest expense decreased by $1.8 million to $11.3 million as compared to the same period of 2002. The decrease in interest expense for the three months ended March 31, 2003 was due primarily to a decrease in our average cost of funds, partially offset by an increase in average deposits and debt of $175 million. Our average cost of funds decreased to 4.21% for the three months ended March 31, 2003 from 5.85% during the same period of 2002. The decrease in our average cost of funds is primarily a result of the prevailing interest rate environment. The following table provides an analysis of interest income and expense data, average balance sheet data, net interest spread and net interest margin for both continuing and discontinued operations. The net interest spread represents the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets. Interest income includes late fees on business credit card receivables. Average receivables include deferred origination costs, net of deferred fees. 23 INTEREST RATE ANALYSIS AND AVERAGE BALANCES
($ IN THOUSANDS) THREE MONTHS ENDED MARCH 31, --------------------------------------------------------------------------------- 2003 2002 ------------------------------------- -------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- Owned receivables: Business credit cards(1) $ 515,452 $ 17,162 13.50% $ 397,447 $20,119 20.53% Other receivables 24,860 311 5.07 28,191 336 4.83 ---------- -------- ---------- --------- Total owned receivables 540,312 17,473 13.11 425,638 20,455 19.49 Investments(2) 575,099 1,932 1.35 568,657 3,294 2.32 Retained interests in securitizations 134,005 3,592 10.72 88,649 2,660 12.00 Interest-earning assets of discontinued operations 41,786 1,277 12.22 54,536 1,159 8.50 ---------- -------- ---------- --------- Total interest-earning assets(3) 1,291,202 $ 24,274 7.60% 1,137,480 $27,568 9.80% Noninterest-earning assets 518,488 468,996 ---------- ---------- Total assets $1,809,690 $1,606,476 ========== ========== Interest-bearing liabilities(4) $1,125,707 $ 11,674 4.21% $ 951,073 $13,716 5.85% Noninterest-bearing liabilities 262,225 187,953 ---------- ---------- Total liabilities 1,387,932 1,139,026 Company-obligated mandatorily preferred securities of subsidiary trust holding solely subordinated debentures of Advanta Corp. 100,000 100,000 Stockholders' equity 321,758 367,450 ---------- ---------- Total liabilities and stockholders' equity $1,809,690 $1,606,476 ========== ========== Net interest spread 3.39% 3.95% Net interest margin 3.96% 4.94% ---- ----
(1) Interest income includes late fees for on-balance sheet business credit cards receivables of $1.5 million for the three months ended March 31, 2003 and $2.8 million for the three months ended March 31, 2002. (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 non-accrual receivables. (4) Includes funding of assets for both continuing and discontinued operations. 24 PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES For the three months ended March 31, 2003, provision for credit losses decreased by $1.3 million to $9.4 million as compared to the same period in 2002. The decrease in provision for credit losses reflects a reduction in our estimate of losses inherent in the portfolio as of March 31, 2003, based on the improvement of delinquency and principal charge-off trends and the current composition of the portfolio as compared to our estimate as of March 31, 2002. This favorable impact was partially offset by an increase in the average owned business credit card receivables of $118 million to $515 million at March 31, 2003. For the three months ended March 31, 2003, provisions for interest and fee losses, which are recorded as direct reductions to interest and fee income, increased by $1.2 million to $2.6 million as compared to the same period in 2002. The increase is due to a change in income billing practice effective October 1, 2002. 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. The allowance for receivable losses on business credit card receivables was $45.8 million at March 31, 2003, or 9.8% of owned receivables, which was relatively consistent with the allowance of $44.5 million, or 10.0% of owned receivables at December 31, 2002. DELINQUENCY AND CHARGE-OFF RATE TRENDS ON OWNED BUSINESS CREDIT CARD RECEIVABLES
MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, 2003 2002 2002 2002 2002 ---- ---- ---- ---- ---- Receivables 30 days or more delinquent 6.0% 5.3% 6.4% 6.5% 7.1% Receivables 90 days or more delinquent 2.9% 2.7% 2.9% 3.3% 3.4% Net principal charge-offs as a % of owned business credit card receivables for the three months ended (annualized) 6.5% 6.5% 8.2% 8.2% 9.4%
The improvements in delinquency rates at March 31, 2003 as compared to the rates at March 31, 2002 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 principal 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 principal charge-off rates for the remaining quarters of 2003 will 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. 25 In July 2002, the bank regulatory agencies issued draft guidance on account management and loss allowance for credit card lending. It describes the agencies' expectations for prudent risk management 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 any impact the minimum payment provisions in the final guidance may have on our future delinquencies and charge-offs. Any impact may depend on the effect of different account management and collection strategies or other actions we may take to reduce any potentially negative impact of the change in minimum payments on 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. 26 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 principal charge-offs. Consolidated data includes business credit cards and other receivables.
($ in thousands) MARCH 31, DECEMBER 31, MARCH 31, 2003 (1) 2002 (1) 2002 -------- -------- ---- CONSOLIDATED - OWNED Allowance for receivable losses $ 47,530 $ 46,159 $ 43,372 Receivables 30 days or more delinquent 29,207 25,197 30,154 Receivables 90 days or more delinquent 14,207 12,755 13,968 Nonaccrual receivables 7,385 5,525 18,543 Accruing receivables past due 90 days or more 11,640 10,535 0 As a percentage of gross receivables: Allowance for receivable losses 9.7% 9.8% 10.2% Receivables 30 days or more delinquent 6.0 5.4 7.1 Receivables 90 days or more delinquent 2.9 2.7 3.3 Nonaccrual receivables 1.5 1.2 4.4 Accruing receivables past due 90 days or more 2.4 2.2 0.0 Net principal charge-offs $ 8,428 $ 37,416 $ 9,299 As a percentage of average gross receivables: Net principal charge-offs 6.2% 7.5% 8.7% BUSINESS CREDIT CARDS - OWNED Allowance for receivable losses $ 45,818 $ 44,466 $ 42,370 Receivables 30 days or more delinquent 27,846 23,406 28,119 Receivables 90 days or more delinquent 13,403 11,959 13,297 Nonaccrual receivables 6,581 4,729 17,872 Accruing receivables past due 90 days or more 11,640 10,535 0 As a percentage of gross receivables: Allowance for receivable losses 9.8% 10.0% 10.7% Receivables 30 days or more delinquent 6.0 5.3 7.1 Receivables 90 days or more delinquent 2.9 2.7 3.4 Nonaccrual receivables 1.4 1.1 4.5 Accruing receivables past due 90 days or more 2.5 2.4 0.0 Net principal charge-offs $ 8,408 $ 37,400 $ 9,299 As a percentage of average gross receivables: Net principal charge-offs 6.5% 7.9% 9.4%
(1) See Note 4 to the consolidated financial statements for a discussion of the change in income billing practice effective October 1, 2002. 27 SECURITIZATION INCOME Securitization income was $29.6 million for each of the three-month periods ended March 31, 2003 and 2002. Increased volume of securitized receivables, a decrease in the floating interest rates earned by note holders and a decreased net principal charge-off rate on securitized receivables offset a decrease in yield on securitized receivables, resulting in consistent levels of securitization income in both periods. These fluctuations in yields and rates are similar to those experienced in on-balance sheet business credit card receivables as discussed in the "Interest Income and Expense" and "Provision and Allowance for Receivable Losses" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations. MANAGED RECEIVABLE DATA Performance on a managed receivable portfolio basis is useful and relevant because we retain interests in the securitized receivables and, therefore, we have a financial interest in and exposure to the performance of the securitized receivables. The following tables provide selected information on a managed business credit card receivable portfolio basis as of March 31 and for the three months then ended ($ in thousands):
2003 (1) ---------------------------------------- ADJUSTMENTS TO REVERSE EFFECTS OF TOTAL OWNED SECURITIZATIONS MANAGED ----- --------------- ------- Average business credit card receivables $ 515,452 $ 2,171,815 $2,687,267 Ending business credit card receivables $ 465,436 $ 2,278,746 $2,744,182 Number of business credit card accounts 792,626 N/A 792,626 Interest income $ 20,754 $ 87,095 $ 107,849 Interest expense 10,734 9,521 20,255 Net interest income 10,020 77,574 87,594 Noninterest revenues 64,949 (32,099) 32,850 Net principal charge-offs 8,408 45,475 53,883 Risk-adjusted revenues (2) 66,561 0 66,561 Receivables 30 days or more delinquent 27,846 146,570 174,416 Receivables 90 days or more delinquent 13,403 71,255 84,658 Nonaccrual receivables 6,581 35,166 41,747 Accruing receivables past due 90 days or more 11,640 61,824 73,464
28
2002 ------------------------------------------------- ADJUSTMENTS TO REVERSE EFFECTS OF TOTAL OWNED SECURITIZATIONS MANAGED ----- --------------- ------- Average business credit card receivables $397,447 $1,615,656 $2,013,103 Ending business credit card receivables $395,766 $1,630,309 $2,026,075 Number of business credit card accounts 684,418 N/A 684,418 Interest income $ 22,778 $ 79,643 $ 102,421 Interest expense 8,771 9,059 17,830 Net interest income 14,007 70,584 84,591 Noninterest revenues 58,139 (31,598) 26,541 Net principal charge-offs 9,299 38,986 48,285 Risk-adjusted revenues (2) 62,847 0 62,847 Receivables 30 days or more delinquent 28,119 117,274 145,393 Receivables 90 days or more delinquent 13,297 55,228 68,525 Nonaccrual receivables 17,872 74,364 92,236 Accruing receivables past due 90 days or more 0 0 0
(1) See Note 4 to the consolidated financial statements for a discussion of the change in income billing practice effective October 1, 2002. (2) Risk-adjusted revenues represent net interest income and noninterest revenues, less net principal charge-offs. SERVICING REVENUES Servicing revenues were $10.0 million for the three months ended March 31, 2003 and $7.9 million for the three months ended March 31, 2002. The increase in servicing revenue was due to increased volume of securitized business credit card receivables. 29 OTHER REVENUES
($ in thousands) THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ---- ---- Interchange income $ 26,138 $ 20,193 Business credit card rewards (4,132) (2,004) Balance transfer fees 1,351 294 Cash advance fees 755 808 Investment securities losses, net (608) (2,627) Insurance revenues, net, and other 1,928 1,214 -------- -------- Total other revenues, net $ 25,432 $ 17,878 ======== ========
Interchange income includes interchange fees on both owned and securitized business credit cards. The increase in interchange income in the three months ended March 31, 2003 as compared to the same period in 2002 was primarily due to higher purchase volume related to the increase in average business credit card accounts and receivables. The average interchange rate was 2.1% in each of the three months ended March 31, 2003 and 2002. The increase in business credit card rewards in the three months ended March 31, 2003, as compared to 2002, was due to the increase in average owned and securitized business credit card accounts in the rewards programs and the corresponding purchase activity in those accounts, partially offset by a change in redemption terms of certain reward programs in 2003 that decreased the anticipated costs of future reward redemptions in those programs by approximately $867 thousand. Balance transfer fees have increased in the three months ended March 31, 2003 as compared to the same period of 2002 due to higher volume of balance transfers in 2003 associated with an increase in the volume of balance transfer promotional offers included in our marketing campaigns in 2003. In 2002 and 2003, our marketing campaigns have included a broad array of competitively-priced offerings and products, including balance transfer promotions, promotional pricing and rewards programs, geared specifically toward attracting more higher credit quality customers. Investment securities losses for both the three months ended March 31, 2003 and 2002 are comprised primarily of decreases in valuations of venture capital investments reflecting the market conditions for the investments in those periods. In the three months ended March 31, 2003, insurance revenues, net, and other includes an estimate of the earnings allocable to our partnership interest in Fleet Credit Card Services, L.P. 30 OPERATING EXPENSES
($ in thousands) THREE MONTHS ENDED MARCH 31, ------------------- 2003 2002 ------- ------- Salaries and employee benefits $17,991 $17,131 Amortization of deferred origination costs, net 14,184 12,022 External processing 4,620 4,177 Professional fees 3,434 3,835 Equipment 3,394 2,601 Marketing 2,927 1,911 Occupancy 1,789 1,611 Credit 1,185 1,673 Telephone 1,074 627 Fraud 915 741 Postage 902 791 Other 3,107 1,838 ------- ------- Total operating expenses $55,522 $48,958 ======= =======
Salaries and employee benefits, external processing, occupancy, telephone, fraud, postage and other expenses have increased in the three months ended March 31, 2003 as compared to the same period of 2002 due primarily to growth in owned and securitized business credit card receivables. The increase in amortization of deferred origination costs, net is attributable to an increase in the number and timing of new account originations. We originated a significant volume of new accounts in the fourth quarter of 2002, and expect to have increased amortization expense through the third quarter of 2003 as those costs amortize over the privilege period of one year. Equipment expense increased in the three months ended March 31, 2003 as compared to the same period of 2002 due to an increase in technology costs, including a licensing fee, and the growth in owned and securitized business credit card receivables. The increase in marketing expense in the three months ended March 31, 2003 as compared to the same period of 2002 was primarily attributable to our initiatives to enhance and maintain our relationships with existing high credit quality customers including marketing programs to stimulate usage, enhance customer loyalty and retain existing accounts, and the development of programs to acquire new customers. Credit expense decreased in the three months ended March 31, 2003 as compared to the same period of 2002 due to a 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. 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 our exit from that business in the first quarter of 2001. See discussion in Note 8 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 31 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. INCOME TAXES Income tax expense was $3.7 million for the three months ended March 31, 2003 and $2.7 million for the same period of 2002. Our effective tax rate was 38.5% for both periods. See Note 8 to the consolidated financial statements for a discussion of tax matters currently before the Internal Revenue Service Regional Office of Appeals. MARKET RISK SENSITIVITY As of March 31, 2003, there were no material changes in our market risk exposures that affect the quantitative and qualitative market risk disclosures presented as of December 31, 2002 in our Form 10-K. 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 March 31, 2003. At March 31, 2003, we had $368 million of federal funds sold, $182 million of receivables held for sale, and $115 million of investments, which could be sold to generate additional liquidity. Components of funding were as follows ($ in thousands):
MARCH 31, 2003 DECEMBER 31, 2002 -------------------------- ---------------------- AMOUNT % AMOUNT % ------ - ------ - Off-balance sheet securitized receivables (1) $2,226,117 57% $2,172,266 60% Deposits 930,404 24 714,028 19 Debt and other borrowings 318,490 8 315,886 9 Capital securities 100,000 3 100,000 3 Equity 323,435 8 321,313 9 ---------- --- ---------- --- Total $3,898,446 100% $3,623,493 100% ========== === ========== ===
(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 March 31, 2003, we had a $280 million committed commercial paper conduit facility, through which $55 million of business credit card receivables were securitized at March 31, 2003. Upon the expiration of the $280 million commercial paper conduit facility in June 2003, management expects to obtain the appropriate level of replacement funding under similar terms and conditions. When a business credit card securitization series is in its revolving period, principal collections on securitized receivables allocated to that series are used 32 to purchase additional receivables to replenish receivables that have been repaid. In contrast, when a series of our securitization trust starts its amortization period, principal collections are held in the trust until the payment date of the notes. Our $157 million Series 2000-A business credit card securitization started its scheduled amortization period in February 2003 and our $600 million Series 2000-B business credit card securitization started its scheduled amortization period in April 2003. As principal is collected on securitized receivables in those series during their amortization periods, we need to replace that amount of funding. Balances of accounts receivable from securitizations and amounts due to the securitization trust have increased at March 31, 2003, as compared to December 31, 2002, primarily as a result of principal collections of receivables allocated to Series 2000-A during its amortization period. The increases in these assets were primarily funded through an increase in deposits. Series 2000-A completed its scheduled amortization period in March 2003 and the note holders were paid in full in April 2003. We expect Series 2000-B to complete its scheduled amortization period in June 2003 and the note holders to be paid in full by July 2003. Management expects future funding needs related to amortization periods to be met 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 securitization transactions in 2003 to be higher than what we experienced in 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 March 31, 2003, $318 million of RediReserve Certificates and Investment Notes were outstanding with interest rates ranging from 1.98% to 11.56%. In 2002, we began to lengthen the maturities of our unsecured debt securities to take advantage of the low interest rate environment. Debt maturing in one year or less totaled $181 million at March 31, 2003, as compared to $207 million at December 31, 2002 and $227 million at March 31, 2002. The Board of Directors of Advanta Corp. has authorized management to purchase up to 3.0 million shares of Advanta Corp. common stock. As of December 31, 2002, we had repurchased 2,248,059 shares of our Class B Common Stock. In the three months ended March 31, 2003, we repurchased 279,250 shares of our Class B Common Stock. We intend to continue to make purchases under the remaining unused authorization when we believe it is prudent to do so while we analyze evolving capital requirements. Our bank subsidiaries 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. Advanta Bank Corp issues and funds our business credit cards and is the servicer of our discontinued leasing business. Prior to our exit from the mortgage business in the first quarter of 2001, Advanta National Bank issued and funded a large portion of our mortgage business. Advanta National Bank's operations are currently not material to our consolidated operating results. 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. Management believes that these restrictions, for both bank and insurance 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. In 2000, Advanta Bank Corp. entered into agreements with its bank regulatory agencies, primarily relating to the bank's subprime lending operations. These 33 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 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. At March 31, 2003, Advanta Bank Corp.'s combined total capital ratio (combined Tier I and Tier II capital to risk-weighted assets) was 14.46% as compared to 18.46% at December 31, 2002. In each case, Advanta Bank Corp. had capital in excess of levels a bank is required to maintain to be classified as "well-capitalized" under the regulatory framework for prompt corrective action. We expect Advanta Bank Corp's capital to remain at "well-capitalized" levels throughout the remainder of 2003. However, we expect its combined total capital ratio at June 30, 2003 to be lower than the ratio at March 31, 2003 due to the amortization of the 2000-B securitization discussed above and the corresponding increase in on-balance sheet assets. Assets of discontinued operations include two buildings formerly used in our mortgage business that are under contract for sale at March 31, 2003. The proceeds from the sale of the buildings in May 2003 will be approximately $27 million, which is expected to increase our liquidity position. 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 our exit from that business 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set forth in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report on Form 10-Q. See "Asset/Liability Management-Market Risk Sensitivity." 34 ITEM 4. 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 Securities and Exchange Commission'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 quarterly 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 Securities and Exchange Commission'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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The legal proceedings and claims described under the heading captioned "Contingencies" in Note 8 of the Notes to Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report are hereby incorporated by reference. 35 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The following exhibits are being filed with this report on Form 10-Q.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 10 AT&T Master Custom Agreement, dated February 10, 2003, between Advanta Shared Services Corp. and AT&T Corp. 12 Consolidated Computation of Ratio of Earnings to Fixed Charges 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K (b)(1) A Current Report on Form 8-K, dated January 17, 2003, was filed by Advanta announcing that Fleet filed a complaint seeking a declaratory judgment for indemnification of damages incurred by not being entitled to the tax deduction arising from Fleet's purchase of Advanta's consumer credit card business in 1998. (b)(2) A Current Report on Form 8-K, dated January 22, 2003, was filed by Advanta announcing that the trial court issued a decision ruling on all but one of the remaining issues on the lawsuit filed by Fleet on January 22, 1999. (b)(3) A Current Report on Form 8-K, dated January 23, 2003, was filed by Advanta setting forth the financial highlights of Advanta's results of operations for the year ended December 31, 2002.
36 SIGNATURES Pursuant to the requirements 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. (Registrant) May 14, 2003 By /s/Philip M. Browne ------------------- Senior Vice President and Chief Financial Officer May 14, 2003 By /s/David B. Weinstock --------------------- Vice President and Chief Accounting Officer 37 CERTIFICATIONS I, Dennis Alter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Advanta Corp.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) Presented in this quarterly 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 quarterly 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/ Dennis Alter - ----------------------- Dennis Alter Chief Executive Officer May 14, 2003 38 I, Philip M. Browne, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Advanta Corp.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) Presented in this quarterly 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 quarterly 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 May 14, 2003 39 EXHIBIT INDEX
MANNER OF EXHIBIT DESCRIPTION FILING 10 AT&T Master Custom Agreement, dated February 10, 2003, between * Advanta Shared Services Corp. and AT&T Corp. 12 Consolidated Computation of Ratio of Earnings to Fixed Charges * 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted * Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 electronically herewith.
40 EX-10 3 w86454exv10.txt AGREEMENT BETWEEN ADVANTA AND AT&T CORP EXHIBIT 10 AT&T CUSTOM MASTER AGREEMENT MA REFERENCE NO. 120497 CUSTOMER LEGAL NAME ("CUSTOMER", "YOU" OR "YOUR") AT&T CORP. ("AT&T") Advanta Shared Services Corp. AT&T Corp. CUSTOMER ADDRESS AT&T ADDRESS Welsh and McKean Roads 55 Corporate Drive Springhouse Bridgewater, New Jersey 08807 PA 19477 CUSTOMER CONTACT AT&T CONTACT Name: Lakshmi Venkataswamy Master Agreement Support Team Title: Vice President Email: mast@att.com Telephone: 215-444-5757 Fax: Email: lvenkataswamy@advanta.com This Agreement consists of the attached General Terms and Conditions and all service attachments ("Attachments") attached hereto or subsequently signed by the parties and that reference this Agreement (collectively, this "Agreement"). In the event of a conflict between the General Terms and Conditions and any Attachment, the Attachment shall take precedence. This Master Agreement consists of this Cover Page, the attached General Terms and Conditions, including its addenda, and all Service Attachments ("Attachments"), including those Surviving MA Attachments that were part of Master Agreement # 12640 as of the Effective Date of this Agreement as well as new Attachments that are attached hereto or subsequently signed by the parties and that reference this Agreement (collectively, this "Agreement") . All other attachments are hereby terminated as of the effective date of this Agreement. The Surviving MA Attachments shall be deemed to be Attachments to this Agreement. References in the Surviving MA Attachments to this replacement MA shall be construed as referring to this Agreement. In the event of conflict between the General Terms and Conditions and any Attachment, the Attachment shall take precedence. This Agreement shall become effective and shall automatically supercede and replace the MA 12640 when signed by both parties ("Effective Date") and shall continue in effect for as long as any Attachment remains in effect, unless earlier terminated in accordance with the provisions of the Agreement. The term of each Attachment is stated in the Attachment. As of the Effective Date of this Agreement, the Surviving MA Attachments are as follows: 1. AT&T Internet Transport Services - 2. AT&T Internet Transport Services- 3. AT&T Internet Transport Service Order Attachment - Managed Service Order Attachment - Managed Services - Service Order Internet Service- MDS000308160390, SOA Internet Services - CSM020820140352, SOA Attachment - Managed Internet #1315 # MIS85876 Services - MDS0102005141830, SOA #34191
SIGNATURE BELOW BY YOUR AUTHORIZED REPRESENTATIVE IS YOUR CONSENT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT CUSTOMER: ADVANTA SHARED SERVICES CORP. AT&T CORP. By: /s/ Leonard Di Williams By: /s/ Frances M. Mikulic ---------------------------------- ------------------------ (Authorized Signature) (Authorized Signature) LENNY DI WILLIAMS District Manager (Typed or Printed Name) (Typed or Printed Name) CIO, SVP, Advanta Shared Services Corp. - --------------------------------------- ------------------------------- (Title) (Title) 2/7/2003 2/10/2003 (Date) (Date) AT&T MA REFERENCE NO. __________ GENERAL TERMS AND CONDITIONS The following terms and conditions shall apply to the provision and use of the products and services ("Service" or "Services") provided by AT&T pursuant to this Agreement. 1.0 DEFINITIONS 1.1 "Affiliate" of a party means any entity that directly or indirectly controls, is controlled by or is under common control with such party, and, in the case of AT&T, it also means any entity which AT&T has authorized to offer any Service or part of any Service. 1.2 "Content" means information made available, displayed or transmitted in connection with a Service (including, without limitation, information made available by means of an HTML "hot link", a third party posting or similar means) including all trademarks, service marks and domain names contained therein as well as the contents of any bulletin boards or chat forums, and, all updates, upgrades, modifications and other versions of any of the foregoing. 1.3 "User" means anyone who uses or accesses any Service purchased by You under this Agreement. 2.0 CHARGES AND BILLING 2.1 You shall pay AT&T for Your and Users' use of the Services at the rates and charges specified in the Attachments, without deduction, setoff or delay for any reason except for amounts not yet due because they are disputed in good faith as provided in Section 2.3 below. Charges set forth in the Attachments are exclusive of any applicable taxes. You may be required at any time to pay a deposit if AT&T determines that You are not creditworthy. 2.2 You shall pay all shipping charges, taxes (excluding those on AT&T's net income) and other similar charges (and any related interest and penalties) relating to the sale, transfer of ownership, installation, license, use or provision of the Services, except to the extent a valid tax exemption certificate is provided by You to AT&T prior to the delivery of Services. If You dispute the taxability or desire to seek a refund of any tax imposed by any federal, state or local jurisdiction as a result of the existence or operation of this Agreement, You may at Your own expense and in Your own name, may file a claim for refund or protest the imposition of the disputed tax. In the event such claim for refund or protest must be made in the name of AT&T Corp, AT&T shall in good faith and due diligence contest the imposition of such tax at Your sole expense, provided that AT&T will not be required to pursue such a protest if the action will result in (i) a lien against AT&T for which You have not adequately indemnified AT&T or (ii) a penalty being assessed against AT&T for which You have not adequately indemnified AT&T or (iii) AT&T taking a position that would increase AT&T's tax liability. 2.3 Payment in U.S. currency is due within thirty (30) days after the date of invoice, except for amounts disputed in good faith, and shall refer to the invoice number. Restrictive endorsements or other statements on checks accepted by AT&T will not apply. You shall reimburse AT&T for all costs (including reasonable attorney fees) associated with collecting properly due, yet delinquent or dishonored payments. AT&T shall reimburse You for all costs (including reasonable attorney fees) associated with collecting properly due, yet delinquent credits or refunds of overcharges. At AT&T's option, interest charges may be added to any undisputed past due amounts at the lower of 1.5% per month or the maximum rate allowed by law. Charges shall be considered past due, if not paid in full within thirty (30) days after the date of an invoice, except that, in the event of a bona fide dispute over a charge specifically identified by You through written notice to AT&T in good faith, payment of the identified charge will not be considered past due and no interest will be charged for non-payment of such disputed charges pending investigation by AT&T. Upon completion of AT&T's investigation of such disputed charge, AT&T will advise You of the results of the investigation and will make such adjustments as deemed appropriate in AT&T's sole discretion. Payment of any disputed charges that are determined by AT&T to be correct as a result of such investigation and consultation shall be considered past due if not paid in full within thirty (30) days after completion of the foregoing process. 2.4 Bona fide disputes concerning invoices shall be addressed by the AT&T Customer Billing Service Center ("CBSC") pursuant to its established methods and procedures, after the dispute is referred to the CBSC by either You or Your account team. If the dispute cannot be addressed by the CBSC within thirty (30) days from the referral to the CBSC, it shall be escalated to the parties' representatives as specified below. However, nothing herein shall absolve You from promptly submitting reasonable security for payment of any withheld amounts upon demand by AT&T, in the event that AT&T determines that Your financial condition is such that Your ability to pay is in reasonable doubt. Upon AT&T's resolution of the dispute, Customer shall promptly pay all amounts consistent with the resolution, plus interest charges (at AT&T's option) calculated from the date of AT&T's notice to Customer of the results of the investigation, at the lower of 1.5% per month or the maximum rate allowed by law.
AT&T CUSTOMER TIME TO RESOLVE - ------------------------------------------------------------------- Client Business Mgr. Vice President IT 30 days - ------------------------------------------------------------------- Sales Center V.P. CFO 15 days - ------------------------------------------------------------------- Regional V.P. President 15 days - -------------------------------------------------------------------
3.0 RESPONSIBILITIES OF THE PARTIES 3.1 AT&T agrees to provide Services to You, subject to the availability of the Services, in accordance with the terms and conditions, and at the charges specified in this Agreement, consistent with all applicable laws and regulations. 3.2 You shall assure that Your and Users' use of the Services and Content will at all times comply with all applicable laws, regulations and written and electronic instructions for use. AT&T reserves the right to terminate affected Attachments, suspend affected Services, and/or remove Your or Users' Content from the Services, if AT&T determines, in the exercise of its reasonable discretion, that such use or Content does not conform with the requirements set forth in this Agreement or interferes with AT&T's ability to provide Services to You or others or receives notice from a reputable source that Your or Users' use or Content may violate any laws or regulations. AT&T's actions or inaction under this Section shall not constitute review or approval of Your or Users' use or Content. AT&T will use reasonable efforts to provide notice to You before taking action under this Section. 4.0 USE OF INFORMATION 4.1 All documentation, technical information, Software, business information, or other materials that are disclosed by either party to the other in the course of performing this Agreement shall be considered proprietary information ("INFORMATION") of the disclosing party, provided such information is in written or other tangible form that is clearly marked as "proprietary" or "confidential". This Agreement shall be deemed to be AT&T and Your INFORMATION. Your Content shall be deemed to be Your INFORMATION. 4.2 Each party's INFORMATION shall, for a period of three (3) years following its disclosure (except in the case of Software or Your personally identifiable customer, consumer or applicant information, for an indefinite period): (i) be held in confidence; (ii) be used only for purposes of performing this Agreement (including in the case of AT&T, the ability to monitor and record Your transmissions in order to detect fraud, check quality, and to operate, maintain and repair the Services) and using the Services; and (iii) not be disclosed except to the receiving party's employees, agents, potential acquirors, and contractors having a need-to-know (provided that such agents and contractors are not direct competitors of either party and agree in writing to use and disclosure restrictions as restrictive as this Article 4), or to the extent required by law (provided that prompt advance notice is provided to the disclosing party to the extent practicable). 4.3 The restrictions in this Article shall not apply to any information that: (i) is independently developed by the receiving party; or (ii) is lawfully received by the receiving party free of any obligation to keep it confidential; or (iii) becomes generally available to the public other than by breach of this Agreement. 4.4 AT&T shall implement appropriate security measures, policies, and procedures that are designed to meet the objectives of the Interagency Guidelines establishing standards for safeguarding customer information issued by any regulatory agency with jurisdiction over CUSTOMER, including, but not limited to, the Board of Governors of the Federal Reserve (the "Guidelines"). These objectives require a bank to contract with its service providers, including AT&T, to implement appropriate measures to (1) ensure the security and confidentiality of CUSTOMER's End Customer Information, (2) protect against any anticipated threats or hazards to the security or integrity of such End Customer Information, Page 1 of 4 AT&T PROPRIETARY CUSTOM TERMS - WJN AT&T MA REFERENCE NO.________ and (3) protect against unauthorized access to or use of such Information that could result in substantial harm or inconvenience to any customer of CUSTOMER. AT&T shall monitor the effectiveness of its security measures, policies, and procedures in meeting these objectives and shall provide CUSTOMER, upon CUSTOMER's written request, with information available to AT&T that provides the results of AT&T's monitoring as aforesaid (including, but not limited to, audits, summaries of test results, or other equivalent evaluations of AT&T in monitoring the effectiveness of such security measures, policies and procedures). All such information shall, when disclosed to CUSTOMER, be deemed to be AT&T INFORMATION under Article 4. As used in this Section 4.4, "End Customer Information" nonpublic personal information of customers of CUSTOMER, as defined in the Guidelines. 5.0 PUBLICITY AND MARKS 5.1 No public statements or announcements relating to this Agreement shall be issued by either party without the prior written consent of the other party, or unless required by law in which event You shall provide AT&T written notice prior to such use. 5.2 Each party agrees not to display or use, in advertising or otherwise, any of the other party's trade names, logos, trademarks, service marks or other indicia of origin (collectively "Marks") without the other party's prior written consent, provided that such consent may be revoked at any time. 6.0 SOFTWARE 6.1 AT&T grants You and Your Affiliates a personal, non-transferable and non-exclusive license (without the right to sublicense) to use, in object code form, all software and associated written and electronic documentation and data furnished pursuant to the Attachments (collectively, the "Software"), solely in connection with the Services and solely in accordance with applicable written and electronic documentation. You will refrain from taking any steps to reverse assemble, reverse compile or otherwise derive a source code version of the Software. The Software shall at all times remain the sole and exclusive property of AT&T or its suppliers. "Third-Party Software" means Software that bears a copyright notice of a third party. "AT&T Software" means all Software other than Third-Party Software. 6.2 You shall not copy or download the Software, except that You shall be permitted to make two (2) copies of the Software, one for archive and the other for disaster recovery purposes. Any copy must contain the same copyright notices and proprietary markings as the original Software. 6.3 You shall assure that Your Users comply with the terms and conditions of this Article 6. 6.4 The term of the license granted hereunder shall be coterminous with the Attachment which covers the Software. 6.5 You agree to comply with any additional restrictions that are provided with any Third-Party Software. 6.6 AT&T warrants that all AT&T Software will perform substantially in accordance with its applicable published specifications for the term of the Attachment which covers the Software. If You return to AT&T, within such period, any AT&T Software that does not comply with this warranty, then AT&T, at its option, will either repair or replace the portion of the AT&T Software that does not comply or refund any amount You prepaid for the time periods following return of such failed or defective AT&T Software to AT&T. This warranty will apply only if the AT&T Software is used in accordance with the terms of this Agreement and is not altered, modified or tampered with by You or Users. 6.7 TO THE EXTENT THAT, PURSUANT TO AT&T'S AGREEMENT WITH ANY THIRD PARTY REGARDING SOFTWARE, SUCH THIRD PARTY PERMITS AT&T TO EXTEND WARRANTIES FROM SUCH THIRD PARTY TO END USERS AS PART OF THE RELATED THIRD PARTY TERMS, AT&T WILL USE REASONABLE EFFORTS TO ENSURE THAT SUCH WARRANTIES ARE EXTENDED TO YOU AS PART OF THE THIRD PARTY TERMS. FOR THE PURPOSES OF THIS PARAGRAPH, THIRD PARTY TERMS SHALL BE DEFINED AS THE TERMS AND CONDITIONS OF SUCH SOFTWARE. AT&T'S SOLE OBLIGATIONS EXCEPT AS PROVIDED IN THIS SECTION 6.7 WITH RESPECT TO SUCH SOFTWARE SHALL BE PROVIDED IN THE APPLICABLE ATTACHMENT, AND THE APPLICABLE SERVICE LEVEL AGREEMENT, IF ANY. 7.0 ADJUSTMENTS TO MINIMUM PURCHASE COMMITMENTS 7.1 In the event of a business downturn beyond Your control, or a corporate divestiture, merger, acquisition or significant restructuring or reorganization of Your business, or network optimization using other AT&T Services, or reduction of the rates and charges, or chronic Service failures, or force majeure events, any of which significantly impairs your ability to meet Your minimum annual revenue commitments under an Attachment, AT&T will offer to adjust the affected minimum annual revenue commitments so as to reflect Your reduced traffic volumes, after taking into account the effect of such a reduction on AT&T's costs and the AT&T prices that would otherwise be available at the revised minimum annual revenue commitment levels. Both parties agree to negotiate in good faith and use commercially reasonable efforts to reach agreement on adjusting the MARC as a result of any of the events listed above in this Section. If we reach mutual agreement on revised minimum annual revenue commitments, we will amend or replace the affected Attachment, as applicable. This provision shall not apply to a change resulting from a decision by You to transfer portions of Your traffic or projected growth to service providers other than AT&T. You must give AT&T written notice of the conditions You believe will require the application of this provision. This provision does not constitute a waiver of any charges, including, but not limited to, monthly recurring charges and shortfall charges, incurred by You prior to amendment or replacement of the affected Attachment. 7.2 In the event You acquire or merge with another entity or experience internal growth with the result that Your telecommunications requirements increase substantially, at Your request AT&T and You will cooperate in efforts to develop a mutually agreeable alternative proposal that will satisfy the concerns of both parties and comply with all applicable legal and regulatory requirements. By way of example and not limitation, such alternative proposals may include combining AT&T Agreements, term or discount plans (without a reduction in commitments), changes in rates, nonrecurring charges, revenue and/or volume commitments, discounts, the multi-year service period, exclusivity, and other provisions. . Both parties agree to negotiate in good faith and use commercially reasonable efforts to reach agreement on an alternative upturn / growth proposal as a result of any of the events listed above in this Section. If the parties reach mutual agreement on an alternative, the parties will sign a contractual amendment to implement any mutually agreeable alternative proposal, subject to all applicable legal and regulatory requirements. 8.0 FORCE MAJEURE 8.1 Neither AT&T nor You shall be liable for any delay, failure in performance, loss or damage due to: fire, explosion, power blackout, earthquake, flood, the elements, strike, embargo, labor disputes, acts of civil or military authority, war, acts of God, acts or omissions of carriers or suppliers, acts of regulatory or governmental agencies, or other causes beyond such party's reasonable control, whether or not similar to the foregoing, except that Your obligation to pay for charges incurred for Services received by You shall not be excused. 8.2 If AT&T cannot promptly provide a suitable temporary substitute for any Service component interrupted or delayed by a Force Majeure Condition reasonably anticipated to last more than five (5) business days in the case of a delay and more than forty-eight (48) hours in the case of an interruption, You may, at Your option, obtain substitute service from another vendor, provided that (i) You shall notify AT&T in writing prior to activating any temporary substitute service, and (ii) You shall subscribe to such service for the minimum commercially available period that would cover the reasonably expected duration of the Force Majeure Condition based upon AT&T's good faith estimate thereof. AT&T's obligation to provide the affected Service component shall be suspended for such period, and such obligation shall resume upon the later of the termination or expiration of Your contracts with third parties for substitute service or the cessation of the Force Majeure Condition. Subject to any commitment for substitute services for the minimum commercially available period, You shall resume use of the affected Service component promptly upon its restoration. AT&T shall not charge You for any Service component that is not provided as a result of a delay or interruption excused as a Force Majeure Condition during the period of such delay or interruption, nor shall AT&T charge You any reactivation, reinstallation, or reconnection charge to resume use of the restored Service component. Page 2 of 4 AT&T PROPRIETARY CUSTOM TERMS - WJN AT&T MA REFERENCE NO.________ For purposes of this Section 8.2: (i) Interruptions shall not include downtime attributable to: Your site conditions; scheduled maintenance of which You had reasonable advance notice; services or products not supplied by AT&T; acts or omissions of You or any of Your agents, employees, suppliers (including LEC access providers) or contractors (except AT&T); or, acts or omissions of a third party (that is not an agent or contractor of AT&T). (ii) Delays shall not include missed Due Dates due to: Your postponement due to non-readiness; Your site conditions; scheduled maintenance of which You had reasonable advance notice; services or products not supplied by AT&T; acts or omissions of You or any of Your agents, employees, suppliers (including LEC access providers) or contractors (except AT&T); or, acts or omissions of a third party (that is not an agent or contractor of AT&T). 9.0 LIMITATIONS OF LIABILITY 9.1 For purposes of all exclusive remedies and limitations of liability set forth in this Agreement or any Attachment, "AT&T" shall be defined as AT&T, its Affiliates, and its and their employees, directors, officers, agents, representatives, subcontractors, interconnection service providers and suppliers; and "You" shall be defined as You, Your Affiliates, and Your and their employees, directors, officers, agents, and representatives; and "Damages" will refer collectively to all injury, damage, liability, loss, penalty, interest and expense incurred. 9.2 EITHER PARTY'S ENTIRE LIABILITY AND THE OTHER PARTY'S EXCLUSIVE REMEDIES, FOR ANY DAMAGES CAUSED BY ANY SERVICE DEFECT OR FAILURE, OR FOR OTHER CLAIMS ARISING IN CONNECTION WITH ANY SERVICE OR OBLIGATIONS UNDER THIS AGREEMENT SHALL BE: (i) FOR BODILY INJURY OR DEATH TO ANY PERSON, OR REAL OR TANGIBLE PROPERTY DAMAGE, NEGLIGENTLY CAUSED BY A PARTY, OR DAMAGES ARISING FROM THE WILLFUL MISCONDUCT OF A PARTY OR ANY BREACH OF ARTICLES 4 OR 5, THE OTHER PARTY'S RIGHT TO PROVEN DIRECT DAMAGES; (ii) FOR DEFECTS OR FAILURES OF SOFTWARE, THE REMEDIES SET FORTH IN SECTION 6.6; (iii) FOR INTELLECTUAL PROPERTY INFRINGEMENT, THE REMEDIES SET FORTH IN ARTICLE 11; (iv) FOR DAMAGES OTHER THAN THOSE SET FORTH ABOVE AND NOT EXCLUDED UNDER THIS AGREEMENT, EACH PARTY'S LIABILITY SHALL BE LIMITED TO PROVEN DIRECT DAMAGES NOT TO EXCEED PER CLAIM (OR IN THE AGGREGATE DURING ANY TWELVE (12) MONTH PERIOD) AN AMOUNT EQUAL TO THE TOTAL NET PAYMENTS MADE BY YOU FOR THE AFFECTED SERVICE DURING THE THREE (3) MONTHS PRECEDING THE MONTH IN WHICH THE DAMAGE OCCURRED. THIS SHALL NOT LIMIT YOUR RESPONSIBILITY FOR THE PAYMENT OF ALL PROPERLY DUE CHARGES UNDER THIS AGREEMENT. 9.3 EXCEPT FOR THE PARTIES' ARTICLE 11 OBLIGATIONS, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, RELIANCE OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOST PROFITS, ADVANTAGE, SAVINGS OR REVENUES OF ANY KIND OR INCREASED COST OF OPERATIONS. 9.4 AT&T ALSO SHALL NOT BE LIABLE FOR ANY DAMAGES ARISING OUT OF OR RELATING TO: INTEROPERABILITY, ACCESS OR INTERCONNECTION OF THE SERVICES WITH APPLICATIONS, EQUIPMENT, SERVICES, CONTENT OR NETWORKS PROVIDED BY YOU OR THIRD PARTIES; SERVICE INTERRUPTIONS (EXCEPT WHERE A CREDIT IS EXPLICITLY SET FORTH IN AN ATTACHMENT OR SERVICE GUIDE) OR LOST OR ALTERED MESSAGES OR TRANSMISSIONS; OR, UNAUTHORIZED ACCESS TO OR THEFT, ALTERATION, LOSS OR DESTRUCTION OF YOUR, USERS' OR THIRD PARTIES' APPLICATIONS, CONTENT, DATA, PROGRAMS, INFORMATION, NETWORK OR SYSTEMS. 9.5 EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, AT&T MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AND SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE OR NON-INFRINGEMENT OR ANY WARRANTY ARISING BY USAGE OF TRADE, COURSE OF DEALING OR COURSE OF PERFORMANCE. 9.6 THE LIMITATIONS OF LIABILITY SET FORTH IN THIS AGREEMENT SHALL APPLY: (i) REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE; AND (ii) WHETHER OR NOT DAMAGES WERE FORESEEABLE. THESE LIMITATIONS OF LIABILITY SHALL SURVIVE FAILURE OF ANY EXCLUSIVE REMEDIES PROVIDED IN THIS AGREEMENT. 10.0 TERMINATION 10.1 If a party fails to perform or observe any material term or condition of this Agreement and the failure continues unremedied for thirty (30) days after receipt of written notice, (i) the other party may terminate for cause any Attachment affected by the breach, or (ii) where the failure is a non-payment by You of any charge when due except those charges disputed in accordance with Section 2.3 above, AT&T may, at its option, terminate or suspend Service and/or require a deposit under affected Attachments. 10.2 An Attachment may be terminated immediately upon written notice by: (i) either party if the other party has violated the other party's Marks, becomes insolvent or involved in a liquidation or termination of its business, files a bankruptcy petition, has an involuntary bankruptcy petition filed against it (if not dismissed within thirty (30) days of filing), becomes adjudicated bankrupt, or becomes involved in an assignment for the benefit of its creditors; or (ii) either party due to a material breach of any provision of Article 4 by the other party.. 10.3 You shall be responsible for payment of all charges except those charges disputed in accordance with Section 2.3 above under a terminated Attachment incurred as of the effective date of termination. You shall also be liable to AT&T for Termination Charges, if specified in a terminated Attachment, in the event that AT&T terminates under Section 10.1 or 10.2, or You terminate without cause. 10.4 Termination by either party of an Attachment does not waive any other rights or remedies it may have under this Agreement. Termination or suspension of an Attachment shall not affect the rights and obligations of the parties under any other Attachment. 11.0 FURTHER RESPONSIBILITIES 11.1 AT&T agrees to defend or settle any claim against You and to pay all Damages that a court or settlement may award against You in any suit that alleges a Service or AT&T Software infringes any patent, trademark, copyright or trade secret, except where the claim or suit arises out of or results from: Your or User's Content; modifications to the Service or AT&T Software or combinations of the Service with other services or products not authorized by AT&T, by You or others; AT&T's adherence to Your written requirements; or, use of the Service or AT&T Software in violation of this Agreement. You agree to defend or settle any claim against AT&T and to pay all Damages that a court may award against AT&T in any suit that alleges a Service or AT&T Software infringes any patent, trademark, copyright or trade secret, due to any of the exceptions in the preceding sentence. 11.2 Whenever AT&T is responsible under Section 11.1, AT&T may at its option either procure the right for You to continue using, or may replace or modify the alleged infringing Service or AT&T Software so that the Service or AT&T Software becomes noninfringing provided that there is no substantial decrease in the functionality or performance of the Service, but if those alternatives are not reasonably achievable, AT&T may terminate the affected Attachment without liability other than as stated in Section 11.1. 11.3 AT&T grants to You the right to permit Users to access and use the Services, provided that You shall remain solely responsible for such access and use. Any use or access by Users shall be deemed to be use or access by You. AT&T shall be solely responsible to You, and not Users, for the Services. 11.4 The indemnified party under this Article 11: (i) must notify the other party in writing promptly upon learning of any claim or suit for which indemnification may be sought, provided that failure to do so shall have no effect except to the extent the other party is prejudiced thereby; (ii) shall have the right to participate in such defense or settlement with its own counsel and at its sole expense, but the other party shall have control of the defense or settlement; and (iii) shall reasonably cooperate with the defense. Page 3 of 4 AT&T PROPRIETARY CUSTOM TERMS - WJN AT&T MA REFERENCE NO.________ 12.0 GENERAL PROVISIONS 12.1 Any supplement, modification or waiver of any provision of this Agreement must be in writing and signed by authorized representatives of both parties. A waiver by either party of any breach of this Agreement shall not operate as a waiver of any other breach of this Agreement. 12.2 This Agreement may not be assigned by either party without the prior written consent of the other, except that either party may, without the other party's consent, assign this Agreement or any Attachment to a present or future Affiliate or successor, provided that any such assignment by You shall be contingent upon AT&T reasonably determining the assignee to be creditworthy and in compliance with any standard eligibility criteria for the Services. AT&T may subcontract work to be performed under this Agreement, but shall retain responsibility for all such work. 12.3 If any portion of this Agreement is found to be invalid or unenforceable, the remaining provisions shall remain in effect and the parties shall promptly negotiate to replace invalid or unenforceable portions that are essential parts of this Agreement. 12.4 Any legal action arising in connection with this Agreement must begin within two (2) years after the cause of action arises. 12.5 All required notices under this Agreement to AT&T shall be in writing and either mailed by certified or registered mail, postage prepaid return receipt requested, sent by express courier or hand delivered and addressed to AT&T at the address set forth on the cover page of this Agreement or, if the notice relates to a specific Attachment, the address set forth in such Attachment, or such other address that AT&T indicates in writing. All required notices under this Agreement to You shall be in writing and either mailed by certified or registered mail, postage prepaid return receipt requested, sent by express courier or hand delivered and addressed to You and Your General Counsel at the address set forth on the cover page of this Agreement or, if the notice relates to a specific Attachment, the address set forth in such Attachment, or such other address that a party indicates in writing. 12.6 State law issues concerning construction, interpretation and performance of this Agreement shall be governed by the substantive law of the State of New York, excluding its choice of law rules. The United Nations Convention on Contracts for International Sale of Goods shall not apply. 12.7 This Agreement does not provide any third party (including Users) with any remedy, claim, liability, reimbursement, cause of action or other right or privilege. 12.8 The respective obligations of You and AT&T, which by their nature would continue beyond the termination or expiration of any Attachment or this Agreement, including, without limitation, the obligations regarding Use of Information, Publicity and Marks, Further Responsibilities and Limitations of Liability, shall survive termination or expiration. 12.9 THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SERVICES. THIS AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS ( INCLUDING MA #12640 EXCEPT FOR ITS SURVIVING ATTACHMENTS), PROPOSALS, REPRESENTATIONS, STATEMENTS OR UNDERSTANDINGS, WHETHER WRITTEN OR ORAL CONCERNING THE SERVICES, OR THE RIGHTS AND OBLIGATIONS RELATING TO THE SERVICES. THIS AGREEMENT SHALL NOT BE CONTRADICTED, OR SUPPLEMENTED BY ANY WRITTEN OR ORAL STATEMENTS, PROPOSALS, REPRESENTATIONS, ADVERTISEMENTS, SERVICE DESCRIPTIONS OR YOUR PURCHASE ORDER FORMS NOT EXPRESSLY SET FORTH IN THIS AGREEMENT OR AN ATTACHMENT. 13.0 MATERIAL CHANGE BY AT&T The parties acknowledge that AT&T's tariffs and Service Guides, which may be modified from time to time by AT&T, may govern or affect certain Services. AT&T may amend an applicable Tariff or Service Guide from time to time consistent with this Agreement, provided, however, that if AT&T revises an applicable Tariff or Service Guide in a manner that is material and adverse to You and AT&T does not effect revisions that remedy such adverse and material effect within thirty (30) days after receipt of written notice from You, then You may, as Your sole remedy, elect to terminate the affected Attachments on thirty (30) days' written notice given not later than ninety (90) days after You first learn of the event(s) giving rise to the termination right. However, a revision to a Tariff or Service Guide shall not be considered material and adverse to Customer if (i) it affects only Services or Service Elements not in substantial use by Customer at the time of the revision or (ii) it changes Rates and Charges that are not fixed in an Attachment. Page 4 of 4 AT&T PROPRIETARY CUSTOM TERMS - WJN AT&T MA REFERENCE NO. ___________ INSTRUCTIONS -- FOR AT&T USE ONLY [USE THESE INSTRUCTIONS TO COMPLETE AT&T SERVICE ORDER ATTACHMENT-VOICE/DATA SERVICES COVER PAGE AND ATTACHMENT TERMS AND CONDITIONS AND THEN DISCARD THIS PAGE.] 1. MASTER AGREEMENT. Verify whether Customer has a signed Master Agreement with AT&T and whether that Agreement is still in effect. If no Master Agreement is in effect, you should deliver the AT&T Master Agreement to Customer for execution along with this Attachment. 2. CUSTOMER INFORMATION. Insert the Customer's full legal name and corporate address in the space provided at the top of the form. If the Customer has more than one address, insert the address to which AT&T should send any official notices under this agreement. 3. AT&T SALES CONTACT INFORMATION. Insert the name of the primary AT&T account manager (AT&T Contact Name), and the account manager's telephone number and address in the space provided at the top of the form. This will be the address to which the Customer sends notice to AT&T under this agreement 4. CHECK ONE OR MORE OF THE APPLICABLE BOXES ON THE FRONT OF THE FORM BASED UPON THIS OFFER: NEW ATTACHMENT - Attach copy of the applicable authorized Attachment Pages. EXISTING ATTACHMENT: First verify that the Attachment is still available and that the Customer is eligible for it. Then insert the applicable Attachment number and attach the applicable authorized Attachment pages. AMENDMENT OF EXISTING ATTACHMENT - Insert applicable Attachment number and attach copy of the applicable authorized Attachment Pages 5. EXISTING PRICING PLAN REPLACEMENT/DISCONTINUANCE: Identify CT, Attachment and/or Pricing Plan being discontinued (if any) in conjunction with this order, by specifying the CT No./Attachment No., Plan ID No. or Main Billed Account No. of the discontinued plan(s). Note that the discontinued CT/Attachment/Pricing Plan may require the Customer to pay termination liability charges and/or other charges for early termination pursuant to the provisions in those agreements. No Attachment to the Master Agreement should be accepted by AT&T if the agreement has been altered in any way from the agreement pages presented to the Account Team, i.e., no unauthorized changes, no handwritten modifications to the contract documents and no side letters attached. Also note that agreements will not be implemented until ALL ORIGINAL PAPERWORK has been sent to the appropriate location outlined below. The Account Team contact should keep a complete copy of each agreement for their records. 8. RETURN INFORMATION: Please return two originals of the Master Agreement package consisting of: If new Master Agreement, include the following: (1) the customer-signed Master Agreement Cover Page, (2) the Master Agreement Terms and Conditions; (3) the Service Order Attachment Cover Page - Voice/Data Services (no signature required), (4) the applicable Attachment pages and (5) the completed Signature Authorization Form If the Attachment is being added as a new attachment to an existing Master Agreement OR the Attachment is being amended, include the following: (1) the customer-signed Service Order Attachment Cover Page - Voice/Data Services, (2) the applicable Attachment pages and (3) the completed Signature Authorization Form AT&T Master Agreement Support Team Central Repository 55 Corporate Drive Room 33D24 Bridgewater, NJ 08807 CUSTOM TERMS-WJN - ADVANTA AT&T PROPRIETARY 02/04/03 AT&T MA REFERENCE NO. 120497 AT&T SERVICE ORDER ATTACHMENT-VOICE/DATA SERVICES COVER PAGE - --------------------------------------------------------------------------------------------------------------------------------- CUSTOMER LEGAL NAME ( "CUSTOMER", AT&T CORP. ("AT&T") AT&T SALES CONTACT NAME "YOU" OR "YOUR") - --------------------------------------------------------------------------------------------------------------------------------- Advanta Shared Services AT&T Corp. Daniel Kennedy - --------------------------------------------------------------------------------------------------------------------------------- CUSTOMER ADDRESS AT&T ADDRESS AT&T SALES CONTACT ADDRESS - --------------------------------------------------------------------------------------------------------------------------------- Welsh and McKean Roads 55 Corporate Drive 170 South Warner Road Springhouse Bridgewater, New Jersey 08807 Wayne PA USA PA USA 19477 19087 - --------------------------------------------------------------------------------------------------------------------------------- CUSTOMER CONTACT AT&T CONTACT AT&T SALES CONTACT INFORMATION - --------------------------------------------------------------------------------------------------------------------------------- Name: Lakshmi Venkataswamy Master Agreement Support Team Telephone: 610-341-5106 Title: Vice President Email: mast@att.com Fax: 610-971-3903 Telephone: 215-444-5757 url: http://ma.kweb.att.com/ Email: kennedydj@att.com Fax: Fax: 908-658-2562 Branch Manager: Brian Troup Email: lvenkataswamy@advanta.com Sales Strata: Globals Sales Region: Hoppe - --------------------------------------------------------------------------------------------------------------------------------- CUSTOMER BILLING ADDRESS CUSTOMER ACCOUNT INFORMATION - --------------------------------------------------------------------------------------------------------------------------------- Welsh and McKean Roads Master Customer Number (MCN): 691560B2 Springhouse Plan ID No. PA USA Plan ID No. 19477 - ---------------------------------------------------------------------------------------------------------------------------------
This Service Order Attachment (including its addenda, if any) is an Attachment to the Master Agreement between Customer and AT&T dated 2/10/03, nd is an integral part of that Agreement. The order of priority in the event of inconsistency among terms shall be the Attachment, then the Master Agreement, and then the AT&T Business Service Guide at http://www.att.com/serviceguide/business. In the event any of the Services Provided are detariffed, any references in this Attachment to the "Applicable Tariffs" relating to such services will be construed as references to the non-tariffed successor, known as the AT&T Business Service Guide at http://www.att.com/serviceguide/business CUSTOMER HEREBY PLACES AN ORDER FOR: [ ] NEW ATTACHMENT [ ] EXISTING ATTACHMENT NO. [ ] AMENDMENT OF EXISTING ATTACHMENT NO.
EXISTING PRICING PLAN REPLACEMENT/DISCONTINUANCE: [ ] Check here and identify any AT&T CT, Attachment, or other AT&T pricing plan being discontinued in conjunction with this order. Also specify the CT No./Attachment No., Plan ID No. or Main Billed Account No. (Note: Charges may apply as specified in the plan being discontinued.) CT No./Attachment No. Plan ID No. Main Billed Account No. CUSTOMER HAS READ AND UNDERSTANDS THE TERMS AND CONDITIONS OF THIS SERVICE ORDER ATTACHMENT AND AGREES TO BE BOUND BY THEM. CUSTOM TERMS-WJN - ADVANTA AT&T PROPRIETARY 02/04/03 AT&T MA REFERENCE NO. ___________ AT&T SERVICE ORDER ATTACHMENT-VOICE/DATA SERVICES TERMS AND CONDITIONS MARC-ELIGIBLE SERVICES: 1. For purposes of this Agreement, the Other AT&T Services designated by AT&T as MARC-Eligible, pursuant to Section 3 of the Attachment, are as follows: [ ] AT&T Asynchronous Transfer Mode Service & AT&T Frame/Relay/Asynchronous Transfer Mode Interworking Service [ ] AT&T Frame Relay Plus [ ] AT&T Managed Internet Service [ ] DSL Internet Service [ ] Business Internet Service (a/k/a AGNS Corporate Dial) [ ] Enterprise Hosting Service (formerly known as Dedicated Hosting) [ ] AT&T Virtual Private Network Tunneling Services [ ] AT&T Teleconference Service Options [ ] AT&T Concert VNS [ ] AT&T Concert Inbound Service [ ] AT&T North American Voice Services 2. AT&T may add additional MARC-Eligible Services to this list by written notice to You. 3. Notwithstanding the foregoing, the following charges shall NOT be deemed MARC-Eligible Charges: (a) charges for or in connection with equipment; (b) charges for outsourcing services; (c) taxes or regulatory charges (such as USF, PICC, payphone service provider compensation, and state USF). 4 Upon Your written request, but not more than once in any rolling twelve (12) month period and no later than the ninth month of this Attachment's term year, AT&T will review with You the status of Your revenue/volume commitments compared to available traffic, and the pricing (taken as a whole) of the AT&T services provided under this Attachment compared to similarly-situated AT&T customers. Both parties agree to negotiate in good faith and use commercially reasonable efforts to reach agreement on an alternative revenue commitment or pricing as described in this Section. If AT&T and You agree that revisions to this Attachment would be advantageous to both parties, then AT&T and You will cooperate in efforts to develop a mutually agreeable alternative proposal that will satisfy the concerns of both parties and comply with all applicable legal and regulatory requirements. By way of example and not limitation, such alternative proposal may include changes in rates, nonrecurring charges, revenue and/or volume commitments, discounts, the multi-year service period and other provisions. If the parties reach mutual agreement on an alternative, AT&T will prepare and file any necessary tariff revisions and/or the parties will sign a contractual amendment to implement any mutually agreeable alternative proposal, subject to all applicable legal and regulatory requirements. This provision shall not apply to a change resulting from a decision by You to transfer portions of Your traffic or projected growth to carriers other than AT&T. This provision does not constitute a waiver of any charges, including shortfall charges, incurred by You prior to the time any revised Attachment goes into effect. 5. If as a proximate result of the following events listed below, Customer's payments for the Services will be insufficient to satisfy any minimum purchase requirement in this Attachment, then the parties will make appropriate changes to the affected Attachment(s): (a) AT&T's discontinuance of Services as permitted by this Agreement, for reasons other than due to breach or default of Customer, where purchases of the discontinued Services were included in the initial demand set for development of a minimum purchase requirement; or (b) Customer's termination of Services or an Attachment for AT&T's material breach, as permitted by any provision of the Agreement that permits Customer to terminate Services or the Attachment without liability for AT&T's material breach, where purchases of the terminated Services or under the terminated Attachment were included in the initial demand set for development of a minimum purchase requirement. 6. The parties agree to meet periodically, at the request of either party, to discuss their relationship hereunder, each party's performance under this Agreement and any relevant changes in circumstances affecting either party hereunder. The parties acknowledge that federal and state regulatory and legislative actions and other marketplace development, including but not limited to technology migration to other services provided by AT&T and its Affiliates, may make changes to this Agreement and the AT&T Business Service Guide provisions appropriate from time to time. Upon review of such changes of circumstance, at the Customer's request but not more frequently than once per year, AT&T and Customer will cooperate in determining any appropriate modifications to this Agreement. Such mutually agreeable modifications may include, without limitation, changes to the Minimum Annual Charge, minimum service element requirements, the Multi-year Service period, applicable rates and charges, and/or other provisions, but any such mutually agreeable modifications must conform to all applicable legal and regulatory requirements and restrictions, including, without limitation, those established by the Federal Communications commission and the Communications Act of 1934, as amended. Subject to all such applicable legal and regulatory requirements and restrictions, AT&T will prepare any tariff revisions necessary to implement such mutually agreeable alternative provisions. This section shall not act as a waiver or require a waiver of any charge (including any CUSTOM TERMS-WJN - ADVANTA AT&T PROPRIETARY 02/04/03 AT&T MA REFERENCE NO. ___________ shortfall charge) incurred prior to the effectiveness of any revisions necessary to implement any agreement between the parties hereunder. 7. The parties agree that for the purposes of this Attachment, Section 9.2(i) of the Master Agreement is deleted and replaced with the following: (i)FOR BODILY INJURY OR DEATH TO ANY PERSON, OR REAL OR TANGIBLE PROPERTY DAMAGE, NEGLIGENTLY CAUSED BY A PARTY, OR DAMAGES ARISING FROM THE WILLFUL MISCONDUCT OF A PARTY OR ANY BREACH OF ARTICLES 4 OR 5 OR A WRONGFUL TERMINATION OF THIS ATTACHMENT (E.G., NOT IN ACCORDANCE WITH SECTION 10 OF THE MASTER), THE OTHER PARTY'S RIGHT TO PROVEN DIRECT DAMAGES; CUSTOM TERMS-WJN - ADVANTA AT&T PROPRIETARY 02/04/03 ADVANTA CORP WK-37113V6 For AT&T Administrative Use Only MASTER AGREEMENT NO. __________ ATTACHMENT NO. __________ ORIGINAL EFFECTIVE DATE: __________ AMENDED EFFECTIVE DATE: __________ AT&T SERVICE ORDER ATTACHMENT-VOICE/DATA SERVICES 1. SERVICES/OFFERS PROVIDED AT&T will provide the following Services/Offers to the Customer under this Attachment pursuant to AT&T Business Service Guide located at http://www.att.com/serviceguide/business (the "Service Guide") as amended from time to time. The Rates, Discounts and other provisions stated in this Attachment are in lieu of the comparable provision stated in the Service Guide. - - AT&T SDN OneNet Services - - AT&T Global Inbound Service - - AT&T Audio and Vide TeleConference Services* - - AT&T Toll-Free Services - - AT&T Frame Relay Services (FRS) - - AT&T International Satellite Services - - AT&T Private Line Services - - AT&T Local Channel Services * - The Customer must identify with each order for AT&T Audio and Video TeleConference Services that such services are to be provided under this Attachment 2. ATTACHMENT TERM, RENEWAL OPTIONS The term of this Attachment is 4 years. The Effective Date of this Attachment (EDA) is upon signature by both parties. The EDA is used to determine the Applicable Rate Effective Date. The Rates and Discounts commence beginning on the applicable Rate Effective Date as shown below. The Attachment Term begins on the Rate Effective Date for Voice Services. This Attachment may be renewed in its entirety for an additional one-year period at the rates, terms and conditions then in effect under this Attachment, provided AT&T receives in writing, the Customer's order to renew at least 45 days prior to the last day of the initial term.
THEN THE RATES AND FOR THE FOLLOWING DISCOUNTS FOR SERVICES/OFFERS PROVIDED THESE SERVICES CAN UNDER THIS ATTACHMENT IF THE EDA IS: COMMENCE ON: - ------------------------------------------------------------------------ VOICE SERVICES: On or before the The first day of AT&T SDN OneNet 10th of the the first full billing Services/AT&T Toll-Free month month following Services, AT&T Global the EDA ("Rate Inbound Service and AT&T Effective Date") Audio and Video TeleConference Services - ------------------------------------------------------------------------ VOICE SERVICES: After the 10th of The first day of AT&T SDN OneNet the month the second full Services/AT&T Toll-Free billing month Services, AT&T Global following the EDA Inbound Service and AT&T ("Rate Effective Audio and Video Date") TeleConference Services - ------------------------------------------------------------------------
FOR THE FOLLOWING SERVICES/OFFERS PROVIDED THEN THE RATES AND DISCOUNTS FOR UNDER THIS ATTACHMENT THESE SERVICES CAN COMMENCE ON - -------------------------------------------------------------------- DATA SERVICES: AT&T Private Line Services, AT&T On the EDA Frame Relay ("Rate Effective Date") Services, AT&T International Satellite Service and AT&T Local Channel Services - --------------------------------------------------------------------
3. MINIMUM COMMITMENTS/CHARGES The Customer agrees to satisfy the following Minimum Annual Revenue Commitment (MARC):
YEAR 1 YEAR 2 YEAR 3 - ----------------------------------------------------- MARC $3,500,000 $3,500,000 $3,500,000 - ----------------------------------------------------- YEAR 4 - ------------------------- MARC $3,500,000 - -------------------------
The MARC will be satisfied by the "MARC-eligible charges": Gross Monthly Usage Charges (GMUCs) for AT&T SDN OneNet Services and AT&T Toll-Free Services, AT&T Global Inbound Service, AT&T Audio and Video TeleConference Services Undiscounted Recurring Charges for AT&T SDN OneNet Optional Features, AT&T Toll-Free Service Optional Features, AT&T Advanced Toll-Free Services, AT&T Global Inbound Service, Digital Services Volume Pricing Plan (DSVPP)-Eligible Services and Service Components, Primary Rate Interface (PRI), AT&T Terrestrial 1.544 Mbps Local Channel Service provided under an Access Value Arrangement or Access Value Plan (AVP), AT&T ACCU-Ring Network Access Service which have been ordered under a separate contract between the Customer and AT&T, excluding Special Construction Charges and Individual Case Basis contracts Other AT&T Services which have been mutually designated in writing by the parties prior to or during the term of this Attachment If, on any anniversary of the start of the Attachment Term, the Customer has failed to satisfy the MARC for the preceding 12 month period, the Customer will be billed a shortfall charge in an amount equal to the greater of: (i) the difference between the MARC and the total of the actual MARC-eligible charges incurred for that year Page 1 ADVANTA CORP WK-37113V6 For AT&T Administrative Use Only MASTER AGREEMENT NO. __________ ATTACHMENT NO. __________ ORIGINAL EFFECTIVE DATE: __________ AMENDED EFFECTIVE DATE: __________ AT&T SERVICE ORDER ATTACHMENT-VOICE/DATA SERVICES 4. ATTACHMENT PRICE The Customer will receive Connected Pricing for AT&T SDN OneNet Services as specified in the Service Guide. Regardless of any stabilization that may appear in this Attachment for the Services/Offers Provided, AT&T reserves the right to increase charges as a result of expenses incurred by AT&T relating to regulatory assessments stemming from an order, rule or regulation of the Federal Communications Commission or other regulatory authority or court having competent jurisdiction (including but not limited to payphone, PICC and USF related expenses). 5. DISCOUNTS All discounts are applied in the same manner as specified in the applicable section of the Service Guide, and no other discounts will apply. AT&T SDN ONENET SERVICES/AT&T TOLL-FREE SERVICES - The Customer will receive the following discounts on the AT&T SDN OneNet Discount Plan qualified usage charges:
- ------------------------------------------------------------------- Discount applied to Domestic SDN OneNet, Discount Domestic and applied to International Toll- International For Gross Monthly Free Services SDN OneNet Usage Charges of: Usage Usage - ------------------------------------------------------------------- Between $0 and $300,000 36.0% 25.0% - ------------------------------------------------------------------- over $300,000 up to $480,000 38.0% 26.0% - ------------------------------------------------------------------- over $480,000 up to $760,000 40.0% 27.0% - ------------------------------------------------------------------- over $760,000 42.0% 27.0% - -------------------------------------------------------------------
AT&T GLOBAL INBOUND SERVICE - The Customer will receive a 38% discount on AT&T Global Inbound (U.S. to foreign and foreign to U.S.) usage charges. AT&T FRAME RELAY, INTERNATIONAL SATELLITE, DOMESTIC AND INTERNATIONAL PRIVATE LINE AND AT&T LOCAL CHANNEL SERVICES - The Customer will receive the following discounts on the DSVPP-Eligible Service Components associated with the Services listed below:
DSVPP-Eligible Services Discount - ---------------------------------------------------------------- Frame Relay Service 52% - ---------------------------------------------------------------- ACCUNET Spectrum of Digital Service (ASDS) 64 kbps 14% and below - ---------------------------------------------------------------- ACCUNET Spectrum of Digital Service (ASDS) 128 kbps 27% and above - ---------------------------------------------------------------- ACCUNET T1.5 Service 57% - ---------------------------------------------------------------- ACCUNET T45 Service 35% - ---------------------------------------------------------------- ACCUNET Fractional T45 Service 45% - ---------------------------------------------------------------- International ACCUNET 2.048 Mbps Service-Mexico 51% - ---------------------------------------------------------------- ACCUNET SONET T155 Service 36% - ---------------------------------------------------------------- SONET OC12 Service 36% - ---------------------------------------------------------------- ACCUNET Generic Digital Access (GDA) 9.6/56/64 kbps 30% - ---------------------------------------------------------------- Terrestrial 1.544 Mbps Local Channel Service 34% - ---------------------------------------------------------------- Voice Grade Local Channel Service 9% - ---------------------------------------------------------------- Digital Data Local Channel Service 9.6/56/64 kbps 9% - ---------------------------------------------------------------- Terrestrial 45 Mbps Local Channels 15% - ---------------------------------------------------------------- Voice Grade Private Line Service-Overseas Half 37% Channel - ---------------------------------------------------------------- International ACCUNET Digital Services-Half Channel 58% - ---------------------------------------------------------------- International Full Channel Service-Overseas-Overseas 52% Cable Digital Channel - ---------------------------------------------------------------- International Satellite Shared Earth Station 47% Service-Half Channel - ----------------------------------------------------------------
6. CLASSIFICATIONS, PRACTICES AND REGULATIONS 6.1 PROMOTIONS The Customer is ineligible for any promotions, credits or waivers in the Service Guide, except that the Customer is eligible for Waiver Package Options A, B, C and D, as specified in the Service Guide. 6.2 CREDITS AT&T will apply a credit equal to: 6.2.1 $120,000 to the Customer's OneNet bill in the 3rd full billing month following the start of the Attachment Term. If the Customer discontinues this Attachment for any reason during the year the credit is applied, AT&T will bill the Customer, an amount equal to any credits received. 6.3 WAIVERS AT&T will waive the following charges, provided such components remain installed for a minimum retention period of 12 months or unless otherwise indicated below, equal to: Page 2 ADVANTA CORP WK-37113V6 For AT&T Administrative Use Only MASTER AGREEMENT NO. __________ ATTACHMENT NO. __________ ORIGINAL EFFECTIVE DATE: __________ AMENDED EFFECTIVE DATE: __________ AT&T SERVICE ORDER ATTACHMENT-VOICE/DATA SERVICES 6.3.1 The recurring Monthly Charges for the following new and existing AT&T DSVPP eligible service components (1) ACCUNET T1.5 Service Access Connections (2) ACCUNET T1.5 Service M-24 Multiplexing Office Functions, (3) AT&T Terrestrial 1.544 Mbps Local Channel Service Access Coordination Functions; (4) ASDS Access Connections; and (5) ACCUNET GDA Service 9.6/56/64 kbps Access Coordination Functions There is no minimum retention period associated with this waiver. 6.3.2 The recurring Monthly Charges for the following new and existing DSVPP-eligible service components. (1) ACCUNET T45 Service Access Connections; (2) ACCUNET T45 Service M-28 Multiplexing Office Functions; and (3) AT&T Terrestrial 45 Mbps Local Channel Service Access Coordination Functions There is no minimum retention period associated with this waiver. 6.4 DISCONTINUANCE The Customer may discontinue this Attachment under one of the following provisions without incurring any termination charges. However, the Customer shall remain liable for shortfall charges (if any) incurred prior to the effective date of discontinuance, and any other charges and liabilities. (1) In the event of a breach of any material term or condition of this Attachment or the underlying applicable sections of the Service Guide by AT&T where such failure continues unremedied for thirty (30) days after receipt of written notice by AT&T. (2) At any time after the 2nd anniversary of the start of the Attachment Term, provided: (1) AT&T receives, in writing, the Customer's order to discontinue at least 30 days prior to the day on which the service is to be discontinued; and (2) the Customer, by the time of discontinuance, satisfied an amount equal to the sum of $20,000,000 of undiscounted usage. (3) Prior to the end of the Attachment Term, provided the Customer: (1) is current in payment to AT&T for its existing telecommunication services and (2) replaces this Attachment with other domestic and/or international telecommunications Services (excluding Wireless and Broadband Service) provided by AT&T having: (i) an equal or greater new Minimum Annual Revenue Commitment (MARC), and (ii) a new term equal to or greater than the remaining term of this Attachment. If the Customer is terminating more than one Attachment per this provision, the new MARC must be equal to or greater than the sum of all the MARCs in the Attachments that are being discontinued. However, the Customer will be billed a shortfall charge equal to: the difference between (1) the prorated MARC for the year in which the Customer discontinues and (2) the total of the actual MARC-eligible charges incurred for that year. This shortfall charge will only be billed if the amount in (2) is less than the amount in (1). If the Customer discontinues this Attachment without cause other than as stated in the preceding paragraphs or if AT&T terminates as contractually permitted for cause (e.g., due to Customer's uncured material breach), prior to the expiration of the Attachment Term, a Termination Charge will apply. The Termination Charge will be an amount equal to 35% of the unsatisfied MARC for the year in which the Customer discontinues this Attachment and 35% of the MARC for each year remaining in the Attachment Term. This Termination Charge is in addition to any Termination Charge for service components disconnected prior to the end of the minimum retention period, if applicable. In addition, the Customer shall remain liable for shortfall charges (if any) incurred prior to the effective date of discontinuance, and any other charges and liabilities. 6.5 OTHER REQUIREMENTS The Customer shall subscribe to AT&T Telecommunications services for at least 90% of the Customer's Interexchange telecommunications requirements, as measured by Customer's total Interexchange telecommunications expenditures on an annual basis beginning as of the start of the Attachment Term. However, this requirement shall not (1) require Customer to breach any contract which exists as of the date the Customer orders service under this Attachment, or (2) prevent the Customer from obtaining from other Interexchange carriers, at any time during the Term of this Attachment, those telecommunications service(s) or technologies desired at a Customer location but which are unavailable from AT&T. If the Customer fails to satisfy this requirement during any year of the Term of this Attachment, the Customer will be billed an amount equal to the greater of (i) 10% of the charges under this Attachment, after the application of any discounts or (ii) 10% of the applicable MARC. Any such bill must be paid by the Customer within 30 days. This charge will not apply to items 1 and 2 of this paragraph. 6.6 AVAILABILITY This Attachment is available only to Customers who: (1) order this Attachment only once, either by the Customer or any Affiliate of the Customer, which is any entity that controls, is controlled by or is under common control with the Customer; and (2) order this Attachment within 30 days after the effective date of this Attachment for initial installation of the Services/Offers Provided under this Attachment within 30 days after the date ordered. Page 3 EX-12 4 w86454exv12.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 ADVANTA CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES THREE MONTHS ENDED ($ IN THOUSANDS) MARCH 31, - ---------------- --------- 2003 2002 ------- ------- Net income $ 5,905 $ 4,234 Income tax expense 3,696 2,651 ------ ------ Earnings before income taxes 9,601 6,885 Fixed charges: Interest 11,271 13,110 One-third of all rentals 640 486 Preferred stock dividend of subsidiary trust 2,248 2,248 ------ ------ Total fixed charges 14,159 15,844 ------ ------ Earnings before income taxes and fixed charges $23,760 $22,729 Ratio of earnings to fixed charges (1) 1.68x 1.43x (1) For purposes of computing these ratios, "earnings" represent income 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. EX-99.1 5 w86454exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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 Quarterly Report on Form 10-Q of Advanta Corp. (the "Company") for the quarterly period ended March 31, 2003 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 May 14, 2003 EX-99.2 6 w86454exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 Quarterly Report on Form 10-Q of Advanta Corp. (the "Company") for the quarterly period ended March 31, 2003 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 May 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----