-----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, LMfemfTrSy1UVE5DtA9D3TVFpH1ozB6vM8Y8LswL1r4NiEoevNMOyxLw9vP/WigQ BcYMRmayGV5FkNkiSn3M/g== 0000950005-04-000319.txt : 20040330 0000950005-04-000319.hdr.sgml : 20040330 20040330114621 ACCESSION NUMBER: 0000950005-04-000319 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH BAY BANCORP/CA CENTRAL INDEX KEY: 0001102595 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 680434802 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31080 FILM NUMBER: 04698881 BUSINESS ADDRESS: STREET 1: 1500 SOSCOL AVE CITY: NAPA STATE: CA ZIP: 94559 BUSINESS PHONE: 7072578500 MAIL ADDRESS: STREET 1: 1500 SOSCOL AVE CITY: NAPA STATE: CA ZIP: 94559 10-K 1 p18310_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the fiscal year ended December 31, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-31080 NORTH BAY BANCORP (Name of Registrant in its Charter) California 68-0434802 (State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.) 1190 Airport Road, Suite 101, Napa, California 94558 (Address of principal office including Zip Code) Issuer's telephone number, including area code: (707) 252-5026 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Preferred Share Purchase Rights Check whether the issuer (1) 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 Act). Yes ___ No _X_ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of Common Stock held by non-affiliates of North Bay Bancorp as of June 30, 2003: $50,376,975. State the number of shares of the North Bay Bancorp's Common Stock outstanding as of March 12, 2003: 2,290,174
Documents Incorporated by Reference: - ------------------------------------ 2003 Annual Report to Stockholders. Part II, Items 6 and 7 and Part III, Item 13 Proxy Statement for 2004 Annual Meeting Part III, Items 9, 10, 11 and 12 of Shareholders to be filed pursuant to Regulation 14A.
TABLE OF CONTENTS PART I Item 1 - Business 3 Item 2 - Properties 25 Item 3 - Legal Proceedings Item 4 - Submission of Matters to a Vote of Security Holders 27 PART II Item 5 - Market for the Company's Common Stock and Related Security Holder Matters 28 Item 6 - Selected Financial Data 28 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7 - Financial Statements and Supplementary Data 29 Item 7A - Quantitative and Qualitative Disclosure about Market Risk 29 Item 8 - Financial Statements and Supplementary Data 29 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29 Item 9A - Controls and Procedures 32 PART III Item 10 - Directors, Executive Officers, Promoters and Control Persons Compliance with Section 16(a) of the Exchange Act 31 Item 11 - Executive Compensation 31 Item 12 - Security Ownership of Certain Beneficial Owners and Management 32 Item 13 - Certain Relationships and Related Transactions 32 Item 14 - Principal Accountant Fees and Services 32 PART IV Item 16 - Exhibits and Reports on Form 8-K 32
-2- FORWARD LOOKING STATEMENTS In addition to the historical information, this Annual Report contains certain forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "Safe Harbor" created by those Sections. The reader of this Annual Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, (i) variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, and fee and other noninterest income earned; (ii) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (iii) enactment of adverse government regulation; (iv) adverse conditions and volatility, including as a result of recent economic uncertainty created by the September 11, 2001 terrorists attacks on the World Trade Center and the Pentagon, the United States' war on terrorism, the war in Iraq, in the stock market, the public debt market and other capital markets and the impact of such conditions on the Company; (v) continued changes in the interest rate environment may reduce interest margins and adversely impact net interest income; (vi) as well as other factors. This entire Annual Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Moreover, wherever phrases such as or similar to "In Management's opinion", or "Management considers" are used, such statements are as of and based upon the knowledge of Management, at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements. PART I Item 1 - Business North Bay Bancorp General North Bay Bancorp (Bancorp), headquartered in Napa, California, is a California corporation incorporated in 1999. Bancorp is the Holding Company for The Vintage Bank and Solano Bank (Banks) and North Bay Statutory Trust I, which are wholly owned subsidiaries, collectively (the Company). North Bay Statutory Trust I was formed in June 2002 for the purpose of issuing trust preferred securities. Bancorp is a registered financial holding company under the Bank Holding Company Act of 1956, as amended, and is subject to the regulations of, and examination by, the Board of Governors of the Federal Reserve System. At present, Bancorp does not engage in any material business activities other than the ownership of the Banks. North Bay has announced its intention, subject to regulatory approval, to consolidate its subsidiary banks to simplify the company's corporate structure. The Vintage Bank General The Vintage Bank is a California corporation organized as a state chartered bank in 1984. The Vintage Bank engages in commercial banking business in Napa County from its main banking office located at 1500 Soscol Avenue in Napa, California. The Vintage Bank established a Real Estate Investment Trust (REIT) subsidiary in February 2003. The Vintage Bank has four other banking offices; one located at 3271 Browns Valley Road, Napa, California, one at 3626 Bel Aire Plaza, Napa, California, one located at 1065 Main Street, St. Helena, California and one at 1190 Airport Road, Napa, California. Automated teller machines are located at all offices and at Ranch Market Too in Yountville, providing 24-hour service. The Vintage Bank is a member of the STAR, VISA and PLUS ATM networks, providing customers with access to Point of Sale and ATM service worldwide. The Vintage Bank offers its customers Internet banking services; this service supports account inquiries, transfers between accounts, and automatic reconciliation and bill -3- payment services. The Vintage Bank is a member of the Federal Reserve System. The deposits of each depositor of The Vintage Bank are insured by the Federal Deposit Insurance Corporation up to the maximum allowed by law. The Vintage Bank offers a full range of commercial banking services to individuals and the business and agricultural communities in Napa County. The Vintage Bank emphasizes retail commercial banking operations. The Vintage Bank accepts checking and savings deposits, makes consumer, commercial, construction and real estate loans, and provides other customary banking services. The Vintage Bank does not offer trust services and does not plan to do so in the near future. There have been no material changes in services offered by The Vintage Bank. The Vintage Bank makes annuities and mutual funds available to its customers through Linsco Private Ledger. Solano Bank General Solano Bank is a California corporation organized as a state chartered bank in 2000. Solano Bank engages in commercial banking business in Solano County from its main banking office located at 403 Davis Street in Vacaville, California. Solano Bank has three other banking offices; one located at 1411 Oliver Road, Fairfield, California, one at 1395 E. Second Street, Benicia, California, and one located at 976-A Admiral Callaghan Lane, Vallejo, California. Automated teller machines are located at all offices and 1100 Texas Street, Fairfield California, providing 24-hour service. Solano Bank is a member of the STAR, VISA and PLUS ATM networks, providing customers with access to Point of Sale and ATM service worldwide. Solano Bank offers its customers Internet banking services; this service supports account inquiries, transfers between accounts, and automatic reconciliation and bill payment services. Solano Bank is a member of the Federal Reserve System. The deposits of each depositor of Solano Bank are insured by the Federal Deposit Insurance Corporation up to the maximum allowed by law. Solano Bank offers a full range of commercial banking services to individuals and the business and agricultural communities in Solano County. Solano Bank emphasizes retail commercial banking operations. Solano Bank accepts checking and savings deposits, makes consumer, commercial, construction and real estate loans, and provides other customary banking services. Solano Bank does not offer trust services and does not plan to do so in the near future. Website Access to Reports The Company maintains the following websites, www.northbaybancorp.com, www.vintagebank.com and www.solanobank.com. The Company makes available, free of charge, on its www.northbaybancorp.com website the annual report on Form 10-K, the quarterly reports on Form 10-Q and current reports on Form 8-K as soon as reasonably practical after we file such reports with the Securities & Exchange Commission. Each of the Banks' websites have an investor relations page that hyperlinks to the Bancorp website. Consolidated Lending Activities The Banks concentrate their lending activities in commercial, installment, construction, and real estate loans made primarily to businesses and individuals located in Napa and Solano Counties. At December 31, 2003, total loans outstanding were $306,663,000 resulting in a loan-to-deposit ratio of 75.5%. At December 31, 2002, total loans outstanding were $237,627,000 resulting in a loan-to-deposit ratio of 64.6%. As of December 31, 2003, The Vintage Bank's loan limits to individual customers were $4,716,000 for unsecured loans and $12,577,000 for unsecured and secured loans combined. Solano Bank loan limits to individual customers were $1,108,000 for unsecured loans and $2,954,000 for unsecured and secured loans combined. As of December 31, 2002, The Vintage Bank's lending limits were $3,892,000 for unsecured loans and $10,380,000 for unsecured and secured loans combined. Solano Bank lending limits were $1,120,000 for unsecured loans and $2,987,000 for unsecured and secured loans combined. For customers desiring loans in excess of the Bank's lending limits, the Banks may loan on a participation basis with another bank taking the amount of the loan in excess of Banks' lending limits. At December 31, 2003, the Banks' commercial loans outstanding totaled $45,991,000 (15.0% of total loans), commercial loans secured by real estate totaled $33,519,000 (10.9% of total loans), construction loans totaled $35,205,000 (11.5% of total loans), real estate loans totaled $163,088,000 (53.2% of total loans), and installment loans totaled $28,860,000 (9.4% of total loans). At December 31, 2002, commercial loans outstanding totaled $46,061,000 (19.4% of total loans), commercial loans secured by real estate totaled $16,991,000 (7.2% of total loans), construction loans totaled $19,306,000 (8.1% of total loans), real estate loans totaled -4- $131,167,000 (55.2% of total loans) and installment loans totaled $24,102,000 (10.1% of total loans). At December 31, 2001, commercial loans outstanding totaled $29,730,000 (16.0% of total loans), commercial loans secured by real estate totaled $7,930,000 (4.3% of total loans), construction loans totaled $21,453,000 (11.5% of the total loans), real estate loans totaled $106,851,000 (57.4% of total loans), and installment loans totaled $20,301,000 (10.9% of total loans). As of December 31, 2003, the total of undisbursed loans and similar commitments was $88,092,000 as contrasted with $84,564,000 as of December 31, 2002 and $59,692,000 as of December 31, 2001. The Banks expect all but approximately $1,108,000 of their undisbursed loans and similar commitments to be exercised during 2004. The Banks take real estate, listed securities, savings and time deposits, automobiles, machinery and equipment, inventory and accounts receivable as collateral for loans. The interest rates charged for the various loans made by the Banks vary with the degree of risk and the size and maturity of the loans involved and are generally affected by competition and by current money market rates. Commercial Loans The Banks make commercial loans primarily to professionals, individuals and businesses in the Counties of Napa and Solano. The Banks offer a variety of commercial lending products, including revolving lines of credit, working capital loans, equipment financing and issuance of letters of credit. Typically, lines of credit have a floating rate of interest based on the Banks' Base Rate and are for a term of one year or less. Working capital and equipment loans have a floating or a fixed rate typically with a term of five years or less. Approximately 58% of the Banks' commercial loans are unsecured or secured by personal property and, therefore, represent a higher risk of ultimate loss than loans secured by real estate. However, as a result of the lending policies and procedures implemented by the Company, management believes it has adequate commercial loan underwriting and review procedures in place to manage the risks inherent in commercial lending. In addition, commercial loans not secured by real estate typically require higher quality credit characteristics to meet underwriting requirements. The remaining 42% of the Banks' commercial loans are secured by real estate. Real Estate Loans Real estate loans consist of loans secured by deeds of trust on residential and commercial properties. The purpose of these loans is to purchase real estate or refinance an existing real estate loan, as compared with real estate secured commercial loans, which have a commercial purpose unrelated to the purchase or refinance of the real estate taken as collateral. The Banks' real estate loans bear interest at rates ranging from 3% to 13% and have maturities of thirty years or less. The Banks originate and service residential mortgage loans. Most of the residential mortgage loans originated by the Banks are sold to institutional investors according to their guidelines. Servicing of these loans is not retained by the Banks, however the Banks do receive a loan fee. Real Estate Construction Loans The Banks make loans to finance the construction of commercial, industrial and residential projects and to finance land development. The Banks portfolio is diversified between the categories of residential, spec, and commercial construction. This segment of the portfolio represents less than 100% of combined capital and does not require additional monitoring. Construction loans typically have maturities of less than one year, have a floating rate of interest based on Bank's base rate and are secured by first deeds of trust. Generally, the Banks do not extend credit in an amount greater than 50% of the appraised value of the real estate securing land and land development loans, or in an amount greater than 70% of the appraised value of the real estate securing non-owner occupied residential construction loans and commercial constructions, or 80% of the appraised value in the case of owner occupied residential construction loans. Commercial loans secured by real estate are generally granted in an amount no greater than 75% of the appraised value. Installment Loans Installment loans are made to individuals for household, family and other personal expenditures. These loans typically have fixed rates and have maturities of five years or less. Lending Policies and Procedures The Banks' lending policies and procedures are established by senior management of the Company and are approved by the Boards of Directors of the Bancorp, The Vintage Bank and Solano Bank. The Boards of Directors have established internal procedures, which limit loan approval authority of the Banks' loan officers. The Board of Directors of each bank has delegated lending authority to executive officers who in turn have delegated lending authority to selected loan officers. -5- The Directors' Loan Committee of each Bank must approve all new loans and loan renewals in excess of specified amounts (excluding savings secured, which is unlimited in amount). For The Vintage Bank this includes any loan in excess of $1,500,000 if secured and $1,000,000 if unsecured. For Solano Bank this includes any loan in excess of $500,000 if secured and $250,000 if unsecured. Solano Bank has also established individual approval limits of up to $400,000 for equipment leases. Loans to directors and executive officers of the Banks or their affiliates must be approved in all instances by a majority of the Board of Directors. In accordance with law, directors and officers are not permitted to participate in the discussion of or to vote on loans made to them or their related interests. In addition, loans to directors and officers must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing for comparable transactions with other nonaffiliated persons at the time each loan was made, subject to the limitations and other provisions in California and Federal law. These loans also must not involve more than the normal risk of collectibility or present other unfavorable terms. Consolidated Deposits Napa County and "south-central" Solano County currently constitutes the Company's primary service areas and most of the Banks' deposits are attracted from these areas. No material portion of the Banks' deposits have been obtained from a single person or a few persons, the loss of any one or more of which would have a material adverse effect on the business of the Banks. Total deposits as of December 31, 2003 were $406,445,000. Total deposits as of December 31, 2002 were $367,803,000. The Banks offer courier service in both Napa County and Solano County. Business Hours In order to attract loan and deposit business, both The Vintage Bank and Solano Bank maintain lobby hours at their Main Offices between 9:00 a.m. and 5:00 p.m. Monday through Thursday, between 9:00 a.m. and 6:00 p.m. on Friday, and between 9:00 a.m. and 1:00 p.m. on Saturday. Drive-up hours are between 8:00 a.m. and 6:00 p.m. Monday through Friday, and between 9:00 a.m. and 1:00 p.m. on Saturday at The Vintage Bank's Main Office. All branch offices are open between 9:00 a.m. and 5:00 p.m. Monday through Thursday, between 9:00 a.m. and 6:00 p.m. on Friday. All branch offices, with the exception of St. Helena, Gateway and Fairfield, are open between 9:00 a.m. and 1:00 p.m. on Saturday. Employees At December 31, 2003, the Company employed one hundred seventy-two (172) persons, forty-six (46) of whom are part-time employees, including six (6) executive officers and forty-two (42) other officers. At December 31, 2002 the Company employed one hundred fifty-eight (158) persons, twenty-one (21) of whom were part-time employees, including seven (7) executive officers and thirty-eight (38) other officers. At December 31, 2001, the Company employed one hundred fifty-two (152) persons, twenty-six (26) of whom were part-time employees, including seven (7) executive officers and thirty (30) other officers. None of the Company's employees are presently represented by a union or covered under a collective bargaining agreement. Management of the Company believes its employee relations are excellent. -6- Composition of Loans LOAN PORTFOLIO The following table shows the composition of loans as of December 31, 2003, 2002, 2001, 2000 and 1999.
(In 000's) 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Commercial Loans $ 45,991 $ 46,061 $ 29,730 $ 28,600 $ 21,463 Commercial Loans Secured by Real Estate 33,519 16,991 7,930 5,115 13,011 Installment Loans 28,860 24,102 20,301 23,432 20,869 Real Estate Loans 163,088 131,167 106,851 86,886 58,368 Construction Loans 35,205 19,306 21,453 8,243 8,441 -------- -------- -------- -------- -------- 306,663 237,627 186,265 152,276 122,152 Less - Allowance for Loan Losses 3,524 3,290 2,717 2,268 1,987 -------- -------- -------- -------- -------- $303,139 $234,337 $183,548 $150,008 $120,165 ======== ======== ======== ======== ========
The following table shows maturity distribution of loans and sensitivity in interest rates as of December 31, 2003. (In 000's) AFTER ONE IN ONE YEAR THROUGH AFTER OR LESS FIVE YEARS FIVE YEARS TOTAL -------- -------- -------- -------- Commercial (Including Real Estate Secured) $ 31,387 $ 34,142 $ 13,981 $ 79,510 Installment 26,460 2,039 361 28,860 Real Estate 24,251 95,942 42,895 163,088 Construction 19,270 14,128 1,807 35,205 -------- -------- -------- -------- $101,368 $146,251 $ 59,044 $306,663 ======== ======== ======== ======== The following table shows maturity sensitivity to changes in interest rates as of December 31, 2002. (In 000's) Loans With Fixed Interest Rates $ 12,306 $ 21,692 $ 42,998 $ 76,996 Loans With Floating Interest Rates 89,062 124,559 16,046 229,667 -------- -------- -------- -------- $101,368 $146,251 $ 59,044 $306,663 ======== ======== ======== ========
Nonaccrual Past Due and Restructured Loans There were no nonaccrual loans as of December 31, 2003, 2002, 2001, 2000 or 1999. The Company held no OREO as December 31, 2003, 2002, 2001, 2000 or 1999. There were no loans accruing interest 90 days past due as of December 31, 2003, 2002, 2001, 2000, or 1999. There are no loans upon which principal and interest payments were 90 days past due at December 31, 2003 and with respect to which serious doubt existed as to the ability of the borrower to comply with the present loan payment terms. There were no restructured loans at December 31, 2003. See the Company's "Management Discussion and Analysis" for policies as it relates to nonaccrual loans. -7- The table summarizing the allocation of the allowance for loan losses between loan types at December 31, 2003, 2002, 2001, 2000 and 1999 is included in the Management and Discussion and Analysis of the 2003 Annual Report. Summary of Loan Loss Experience A table providing a summary of the Banks' loan loss experience as of December 31, 2003, 2002, 2001, 2000 and 1999 is included in the Management and Discussion and Analysis of the 2003 Annual Report. Time Deposits The following table sets forth the maturity of time certificates of deposit of $100,000 or more at December 31, 2003, 2002 and 2001.
2003 2002 2001 -------------------- ------------------- ------------------- 3 months or less $17,584 49.8% $24,661 62.5% $19,260 50.4% Over 3 months through 6 months 6,122 17.4% 6,182 15.7% 8,243 21.6% Over 6 months through 12 months 3,822 10.8% 3,887 9.9% 6,302 16.5% Over 12 months 7,762 22.00% 4,695 11.9% 4,419 11.5% ------- ------ ------- ----- ------- ----- $35,290 100% $39,425 100% $38,224 100% ======= ====== ======= ===== ======= =====
Trust Preferred Securities On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of 90 day Libor plus 3.45% and had an initial interest rate of 5.34% and the rate as of December 31, 2003 was 4.62%; the Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debentures, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. Borrowings There were no short-term borrowings at December 31, 2003 or December 31, 2002. Short-term borrowings consist primarily of federal funds purchased and borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Banks' maintain a collateralized line of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2003, the lines provided for maximum borrowings of approximately $116 million; the Company also has available unused lines of credit totaling $17.5 million for Federal funds transactions at December 31, 2003. -8- Return on Equity and Assets The following sets forth key ratios for the periods ending December 31, 2003, 2002 and 2001. 2003 2002 2001 ----- ----- ----- Net Income as a Percentage of Average Assets 1.00% .99% 1.00% Net Income as a Percentage of Average Equity 11.70% 11.36% 10.61% Average Equity as a Percentage of Average Assets 8.50% 10.09% 9.45% Dividends Declared Per Share as a Percentage of Net Income Per share 11.17% 11.49% 13.70% Competition The banking business in California, generally and in the service areas served by the Banks specifically, is highly competitive with respect to both loans and deposits and is dominated by few major banks which have many offices operating over wide geographic areas. The Banks compete for deposits and loans principally with these major banks, savings and loan associations, finance companies, credit unions and other financial institutions located in the Banks' market areas. Among the advantages which the major banks have over the Banks are their ability to finance extensive advertising campaigns and to allocate their investment assets to regions of highest yield and demand. Many of the major commercial banks operating in the Banks' service areas offer certain services (such as trust and international banking services) which are not offered directly by the Banks and, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Banks. Moreover, banks generally, and the Banks in particular, face increasing competition for loans and deposits from non-bank financial intermediaries such as savings and loan associations, thrift and loan associations, credit unions, mortgage companies insurance companies and other lending institutions. Further, the recent trend has been for other institutions, such as brokerage firms, credit card companies, and even retail establishments, to offer alternative investment vehicles, such as money market funds, as well as offering traditional banking services such as check access to money market funds and cash advances on credit card accounts. In addition, the other entities (both public and private) seeking to raise capital through the issuance and sale of debt or equity securities also compete with the Banks in the acquisition of deposits. In order to compete with the other financial institutions in their market areas, the Banks rely principally upon local promotional activity, personal contacts by their officers, directors, employees and the Company's shareholders, and specialized services. In conjunction with the Banks' business plans to serve the financial needs of local residents and small-to medium-sized businesses, they also rely on officer calling programs to existing and prospective customers, focusing their overall marketing efforts towards their local communities. The Banks' promotional activities emphasize the advantages of dealing with a locally owned and headquartered institution sensitive to the particular needs of their local communities. For customers whose loan demands exceed a Bank's lending limit, the Banks attempt to arrange for such loans on a participation basis with other financial institutions. The Banks' strategy for meeting competition has been to maintain a sound capital base and liquidity position, employ experienced management, and concentrate on particular segments of the market and by offering customers a degree of personal attention that, in the opinion of management, is not generally available through the Banks' larger competitors. -9- Supervision And Regulation A. General North Bay Bancorp North Bay Bancorp, as a financial holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended, and is registered with and subject to the supervision of the Board of Governors of the Federal Reserve System. It is the policy of the Federal Reserve that each bank holding company serve as a source of financial and managerial strength to its subsidiary banks. The Federal Reserve has the authority to examine Bancorp. The Bank Holding Company Act requires Bancorp to obtain the prior approval of the Federal Reserve before acquisition of all or substantially all of the assets of any bank or ownership or control of the voting shares of any bank if, after giving effect to such acquisition, Bancorp would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Recent amendments to the Bank Holding Company Act expand the circumstances under which a bank holding company may acquire control of or all or substantially all of the assets of a bank located outside the State of California. Bancorp may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries, with the exception of certain activities which, in the opinion of the Federal Reserve, are so closely related to banking or to managing or controlling banks as to be incidental to banking. The Gramm-Leach-Bliley Act, federal legislation enacted in 2000, offers bank holding companies an opportunity to broaden the scope of activities engaged in by electing to be treated as a financial holding company. A financial holding company enjoys broader powers than a bank holding company, specifically including the ability to own securities and insurance companies in addition to financial institutions. Bancorp became a financial Holding Company on August 23, 2000. Bancorp is generally prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company unless that company is engaged in such authorized activities and the Federal Reserve approves the acquisition. Bancorp and its subsidiaries are prohibited from engaging in certain tie in arrangements in connection with any extension of credit, sale or lease of property or provision of services. For example, with certain exceptions The Vintage Bank may not condition an extension of credit on a customer obtaining other services provided by it, Bancorp or any other subsidiary, or on a promise by the customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between The Vintage Bank and its affiliates. As affiliates, The Vintage Bank, Solano Bank and Bancorp are subject with certain exceptions, to the provisions of federal law imposing limitations on and requiring collateral for extensions of credit by The Vintage Bank and Solano Bank to any affiliate. The Banks As California state chartered banks, The Vintage Bank and Solano Bank are subject to regulation, supervision and periodic examination by the California Department of Financial Institutions. As members of the Federal Reserve System, The Vintage Bank and Solano Bank are also subject to regulation, supervision and periodic examination by the Federal Reserve Bank of San Francisco. The Banks' deposits are insured by the Federal Deposit Insurance Corporation to the maximum amount permitted by law, which is currently $100,000 per depositor in most cases. Insured banks are subject to FDIC regulations applicable to all insured institutions. The regulations of these state and federal bank regulatory agencies govern, or will govern, most aspects of the Banks' businesses and operations, including but not limited to, the scope of their business, its investments, its reserves against deposits, the nature and amount of any collateral for loans, the timing of availability of deposited funds, the issuance of securities, the payment of dividends, bank expansion and bank activities, including real estate development and insurance activities, and the payment of interest on certain deposits. The Vintage Bank and Solano Bank are also subject to the requirements and restrictions of various consumer laws, regulations and the Community Reinvestment Act. B. Payment of Dividends North Bay Bancorp The shareholders of Bancorp are entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available, subject to the dividends preference, if any, on preferred shares that may be outstanding and also subject to the restrictions of the California Corporations Code. At December 31, 2003, Bancorp had no outstanding shares of preferred stock. -10- Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Trust Preferred Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. The principal sources of cash revenue to Bancorp will be dividends and management fees received from The Vintage Bank and Solano Bank. The Banks' ability to make dividend payments to Bancorp is subject to state and federal regulatory restrictions. The Banks Under state law, the Board of Directors of a California state chartered bank may declare a cash dividend, subject to the restriction that the amount available for the payment of cash dividends is limited to the lesser of the bank's retained earnings, or the bank's net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the Commissioner of Financial Institutions, to the greater of the retained earnings of the bank, the net income of the bank for its last fiscal year or the net income of the bank for its current fiscal year. Federal Reserve regulations also govern the payment of dividends by a state member bank. Under Federal Reserve regulations, dividends may not be paid unless both capital and earnings limitations have been met. First, no dividend may be paid if it would result in a withdrawal of capital or exceed the member bank's net profits then on hand, after deducting its losses and bad debts. Exceptions to this limitation are available only upon the prior approval of the Federal Reserve and the approval of two-thirds of the member bank's shareholders. Second, a state member bank may not pay a dividend without the prior written approval of the Federal Reserve if the total of all dividends declared in one year exceeds the total of net profits for that year plus the preceding two calendar years, less any required transfers to surplus under state or federal law. The Federal Reserve has broad authority to prohibit a bank from engaging in banking practices which it considers to be unsafe or unsound. It is possible, depending upon the financial condition of the bank in question and other factors, that the Federal Reserve may assert that the payment of dividends or other payments by a member bank is considered an unsafe or unsound banking practice and therefore, implement corrective action to address such a practice. Accordingly, the future payment of cash dividends by The Vintage Bank or Solano Bank to Bancorp will generally depend not only on the banks' earnings during any fiscal period but also on the banks' meeting certain capital requirements and the maintenance of adequate allowances for loan and lease losses. C. Change in Control The Bank Holding Company Act of 1956, as amended and the Change in Bank Control Act of 1978, as amended, together with regulations of the FRB and the Comptroller, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the Comptroller and not disapproved prior to any person or company acquiring "control" of a national bank, such as the Bank, subject to exemptions for some transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or no other person will own a greater percentage of that class of voting securities immediately after the transaction. D. Capital Standards The Board of Governors, the FDIC and other federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained -11- earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Trust preferred securities, limited to 25% of capital, are also considered Tier 1 capital for regulatory purposes up to 25% of capital. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet items of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to average total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators' rating. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, the Company and the Banks are required to maintain certain levels of capital. The regulatory capital guidelines as well as the actual capitalization for the Banks and the Company on a consolidated basis as of December 31, 2003 follow:
REQUIREMENT -------------------------- ADEQUATELY WELL The Vintage Solano CAPITALIZED CAPITALIZED Bank Bank Company -------------------------- ------------------------------------------ Total risk-based capital ratio 8.0% 10.0% 11.07% 10.70% 13.47% Tier 1 risk-based capital ratio 4.0% 6.0% 10.14% 9.84% 12.57% Tier 1 leverage capital ratio 4.0% 5.0% 8.66% 8.82% 10.61%
E. Impact of Monetary Policies The earnings and growth of the Banks are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The earnings of the Banks are affected not only by general economic conditions but also by the monetary and fiscal policies of the United States and federal agencies, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States Government securities and by its control of the discount rates applicable to borrowings by banks from the Federal Reserve System. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and affect the interest rates charged on loans and paid on deposits. The Federal Reserve's policies have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The nature and timing of any future changes in monetary policies are not predictable. -12- F. Extensions of Credit to Insiders and Transactions with Affiliates The Federal Reserve Act and FRB Regulation O, which are applicable to national banks, place limitations and conditions on loans or extensions of credit to: a bank's or bank holding company's executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10% of any class of voting securities); any company controlled by any such executive officer, director or shareholder; or any political or campaign committee controlled by such executive officer, director or principal shareholder. Loans extended to any of the above persons must comply with loan-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to such person exceed specified amounts, must be made on substantially the same terms (including interest rates and collateral) as, and follow credit-underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with non-insiders, and must not involve more than the normal risk of repayment or present other unfavorable features. Regulation O also prohibits a bank from paying an overdraft on an account of an executive officer or director, except pursuant to a written pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or a written pre-authorized transfer of funds from another account of the officer or director at the bank. The provisions of Regulation O summarized above reflect substantial strengthening as a result of the adoption of FDICIA. FDICIA also resulted in an amendment to Regulation O which provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank's unimpaired capital and unimpaired surplus. An exception to this limitation is provided for banks with less than $100,000,000 in deposits. The aggregate limit applicable to such banks is two times the bank's unimpaired capital and unimpaired surplus, provided the bank meets or exceeds all applicable capital requirements. The Sarbanes-Oxley Act of 2002, generally prohibits North Bay from making loans to its directors and officers. Loans made by the Banks in accordance with Regulation 0 exempt for this prohibition. G. Consumer Protection Laws and Regulations The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below. The Community Reinvestment Act ("CRA") is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank's record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of "outstanding" to a low of "substantial noncompliance." The Vintage Bank has not been examined for CRA compliance by their primary regulator in the last 12 months. Solano Bank was examined June 11, 2002 and was rated satisfactory. The Equal Credit Opportunity Act ("ECOA") generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act. The Truth in Lending Act ("TILA") is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things. The Fair Housing Act ("FH Act") regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself. The Home Mortgage Disclosure Act ("HMDA") grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the -13- neighborhoods and communities in which they are located. The HMDA also includes a "fair lending" aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. Finally, the Real Estate Settlement Procedures Act ("RESPA") requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community. H. Recent and Proposed Legislation The operations of Bancorp and the Banks are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of their respective operations. Bancorp believes that it is in substantial compliance in all material respects with applicable federal, state, and local laws, rules and regulations. Because the business of Bancorp and the Banks is highly regulated, the laws, rules and regulations applicable to each of them are subject to regular modification and change. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Sarbanes-Oxley Act On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client will require pre-approval by the company's audit committee members. In addition, the audit partners must be rotated. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, legal counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted. The Act accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company's securities within two business days of the change. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company's financial statements for the purpose of rendering the financial statement's materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to stockholders. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a "registered public accounting firm" in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC. Effective for filings due after August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Company's chief executive officer and chief financial officer were each required to certify that the Company's Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are -14- responsible for establishing, maintaining and regularly evaluating the effectiveness of Company's internal controls; they have made certain disclosures to Bancorp's auditors and the audit committee of the Board of Directors about the Company's internal controls; and they have included information in the Company's Quarterly and Annual Reports about their evaluation and whether there have been significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. USA PATRIOT Act In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and "know your customer" standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps: * To conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction; * To ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions; * To ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and * To ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information. Under the USA PATRIOT Act, financial institutions were given 180 days from enactment to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including: * The development of internal policies, procedures, and controls; * The designation of a compliance officer; * An ongoing employee training program; and * An independent audit function to test the programs. On June 20, 2002, the Board of Directors of each of the Banks adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act, and management believes that both of the Banks are currently in full compliance with the Act. Financial Services Modernization Legislation On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act. This legislation eliminated many of the barriers that have separated the insurance, securities and banking industries since the Great Depression. The federal banking agencies (the Board of Governors, FDIC and the Office of the Comptroller of the Currency) among others, continue to draft regulations to implement the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act is the result of a decade of debate in the Congress regarding a fundamental reformation of the nation's financial system. The law is subdivided into seven titles, by functional area. -15- The major provisions of the Gramm-Leach-Bliley Act are: Financial Holding Companies and Financial Activities Title I establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through qualification as a new entity known as a financial holding company. North Bay has qualified as a financial holding company. Activities permissible for financial subsidiaries of national banks, and, also permissible for financial subsidiaries of state member banks, include, but are not limited to, the following: (a) Lending, exchanging, transferring, investing for others, or safeguarding money or securities; (b) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State; (c) Providing financial, investment, or economic advisory services, including advising an investment company; (d) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and (e) Underwriting, dealing in, or making a market in securities. Securities Activities Title II narrows the exemptions from the securities laws previously enjoyed by banks. The Board of Governors and the SEC continue to work together to draft rules governing certain securities activities of banks and creates a new, voluntary investment bank holding company. Insurance Activities Title III restates the proposition that the states are the functional regulators for all insurance activities, including the insurance activities of federally-chartered banks, and bars the states from prohibiting insurance activities by depository institutions. Privacy. As required under Title V of the Gramm-Leach-Bliley Act, federal banking regulators issued final rules on May 10, 2000 to implement the privacy provisions of Title V. Pursuant to the rules, financial institutions must provide (i) initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; (ii) annual notices of their privacy policies to current customers; and (iii) a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. Compliance with the rules was optional until July 1, 2001. As of July 1, 2001 the Banks were in compliance with the privacy provisions of the Gramm-Leach-Bliley Act and the implementing regulations promulgated by the FDIC, and subsequently, as necessary, has updated and enhanced its procedure and practice in this critical area. Safeguarding Confidential Customer Information. Under Title V of the Gramm-Leach-Bliley Act, federal banking regulators were required to adopt rules requiring financial institutions to implement a program to protect confidential customer information. In January 2000, the federal banking agencies adopted guidelines requiring financial institutions to establish an information security program to: o identify and assess the risks that may threaten customer information; o develop a written plan containing policies and procedures to manage and control these risks; o implement and test the plan; and o adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information and internal or external threats to information security. The guidelines were effective July 1, 2001. The Banks each implemented a security program appropriate to its size and complexity and the nature and scope of its operations in advance of the July 1, 2001 effective date, and subsequently, as necessary, has refined and improved its security program. -16- Community Reinvestment Act Sunshine Requirements. In February 2001, the federal banking agencies adopted final regulations implementing Section 711 of Title VII, the CRA Sunshine Requirements. The regulations require nongovernmental entities or persons and insured depository institutions and affiliates that are parties to written agreements made in connection with the fulfillment of the institution's CRA obligations to make available to the public and the federal banking agencies a copy of each such agreement. The regulations impose annual reporting requirements concerning the disbursement, receipt and use of funds or other resources under each such agreement. The effective date of the regulations was April 1, 2001. The Banks are not a party to any agreement that would be subject of reporting pursuant to the CRA Sunshine Requirements. The Banks intend to comply with all provisions of the Gramm-Leach-Bliley Act and all implementing regulations. California Financial Information Privacy Act/Fair Credit Reporting Act In 1970, the federal Fair Credit Reporting Act (the "FCRA") was enacted to insure the confidentiality, accuracy, relevancy and proper utilization of consumer credit report information. Under the framework of the FCRA, the United States has developed a highly advanced and efficient credit reporting system. The information contained in that broad system is used by financial institutions, retailers and other creditors of every size in making a wide variety of decisions regarding financial transactions. Employers and law enforcement agencies have also made wide use of the information collected and maintained in databases made possible by the FCRA. The FCRA affirmatively preempts state law in a number of areas, including the ability of entities affiliated by common ownership to share and exchange information freely, and the requirements on credit bureaus to reinvestigate the contents of reports in response to consumer complaints, among others. The California Financial Information Privacy Act, which was enacted in 2003, requires a financial institution to provide specific information to a consumer related to the sharing of that consumer's nonpublic personal information. The Act would allow a consumer to direct the financial institution not to share his or her nonpublic personal information with affiliated or nonaffiliated companies with which a financial institution has contracted to provide financial products and services, and would require that permission from each such consumer be acquired by a financial institution prior to sharing such information. These provisions are much more restrictive than the privacy provisions of the Financial Services Modernization Act, and would require the Banks to adopt new policies, procedures and disclosure documentation if implemented as enacted. The cost of complying with this legislation is not predictable at this time. Congress enacted the FACT Act, ("Fair and Accurate Credit Transaction Act") of 2003, which will have the effect of avoiding the sunset preemption provision of the Fair Credit Reporting Act (FCRA) that were due to expire on December 31, 2003. The President signed the FACT Act into law on December 4, 2003. In general, the FACT Act amends the FCRA and, in addition, provides that, when the implementing regulations have been issued and become effective, the FACT Act will preempt elements of the California Financial Information Privacy Act. The FACT Act requires the Board of Governors and the Federal Trade Commission to issue final regulations within nine months of the effectiveness of the FACT Act, and that those regulations must become effective within six months of issuance. The provisions of the regulations that will implement the FACT Act, and the timing of their effect on the Banks, cannot be determined at this time. Check 21 Act On December 22, 2003, the Board of Governors approved a proposed rule to amend Regulation CC and its commentary to implement the Check Clearing for the 21st Century Act ("Check 21 Act"). The Check 21 Act was enacted on October 28, 2003 and becomes effective on October 28, 2004. To facilitate check truncation and electronic check exchange, the Check 21 Act authorizes a new negotiable instrument called a "substitute check" and provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. A substitute check is a paper reproduction of the original check that can be processed just like the original check. The Check 21 Act does not require any bank to create substitute checks or to accept checks electronically. The Board's proposed amendments: 1) set forth the requirements of the Check 21 Act that apply to banks; 2) provide a model disclosure and model notices relating to substitute -17- checks; and 3) set forth bank endorsement and identification requirements for substitute checks. The proposed amendments also clarify some existing provisions of the rule and commentary. I. Other Various other legislation, including proposals to overhaul the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is introduced into Congress or the California Legislature from time to time. The Bancorp and the Banks cannot determine the ultimate effect that any potential legislation, if enacted, or regulations promulgated thereunder, would have upon the financial condition or operations of the Bancorp or the Banks. Item 2 - PROPERTIES North Bay Bancorp 222 Gateway Rd. West Napa, Ca. Effective March 1, 2003 North Bay Bancorp, centralized its administrative offices at the new location - 222 Gateway Rd. West, Napa. This new office eliminated the need for usage of space at the Bel Aire branch and the Soscol - main branch. Managers and staff were relocated to this office which consists of 8,523 square feet. The lease commenced on March 1, 2003, for an initial term of five years with one option to renew for an additional five-year term provided notice is given not less than 3 months but not more than 6 months prior to the expiration of the initial term. Base rent is $9,805 per month subject to annual adjustments not greater than 3% based upon increases in the Consumer Price Index and Fair Market Value. Common Area Maintenance charges are being estimated and paid monthly of $2,301 and will be adjusted at the end of the first year. By the terms of the lease Bancorp is required to: o Maintain and repair the leased premises. o Maintain comprehensive general liability insurance. o Pay its share of real property taxes assessed against the premises, and o Pay for all utilities used. 1100 Texas St. Fairfield, Ca. Bancorp leases a building located at 1100 Texas St. Fairfield, Ca. for the use of the Information Services and Technology Division. This building contains approximately 5,700 square feet. The lease term commenced on August 15, 2000, for an initial term of five years and one-half month, with one option to renew for five years provided notice is given not less than ninety days but not more than one hundred eighty days prior to expiration of the initial term. Rent is subject to an annual adjustment on September l of each year based on the consumer price index. January 1, 2003 - August 31, 2003 the base rent was $4,582 per month and on September 1, 2003 it was adjusted to $4,650 per month. Bancorp subleased to Solano Bank, a portion of the building, approximately 2,254 square feet, until August 15, 2003 at which time Solano Bank moved into its new facility at 1411 Oliver Road, Fairfield, Ca. An ATM Machine remains at the Texas St. location for which Solano Bank pays $100 rent per month. The Information Services and Technology Division, has expanded to utilize the entire building for its staff and management. By the terms of the lease Bancorp is required to : o Keep the premises in good order, condition and repair. o Maintain comprehensive general liability insurance. o Pay all real property taxes assessed against the premises and, o Pay all utilities used. 1190 Airport Blvd. Napa, Ca. Bancorp utilizes approximately 1,918 square feet in The Vintage Bank's Gateway Branch located at 1190 Airport Boulevard, Suite 101. Pursuant to the terms of a sublease between Bancorp and The Vintage Bank, Bancorp will pay to The Vintage Bank 38.31% of the rent that The Vintage Bank pays on its lease of the Gateway facility, making the initial base rent $4,525 plus estimated CAM charges of $1,237 for a total of $5,762 per month as the Bancorp share. Rent is then subject to annual adjustments in accordance with adjustments to The Vintage Bank's rent, based on increases in the Consumer Price Index with a minimum annual increase of 2.5% and a maximum annual increase of 5%. -18- 499 Edison Court, Cordelia, Ca. (Central Warehouse) Bancorp has entered into a 3-year lease for the benefit of central warehousing of all retention files, idle furniture, fixtures & equipment and all operating supplies for all business entities. The lease commencement date is January 19, 2004 with a termination date of 2/18/2007. This is an Industrial Gross lease at the rate of $1,900 per month with a fixed annual increase of 3%. Bancorp will pay all utilities. Bancorp owns certain leasehold improvements and furniture, fixtures & equipment located at its offices, all of which are used in Bancorp's business. In the opinion of management, the properties of Bancorp are adequately covered by insurance. The Vintage Bank 1500 Soscol Avenue Napa, Ca. (Main Office) The Vintage Bank's main office is located in a two-story building at 1500 Soscol Avenue, Napa, California. The real property on which the building is located was acquired by The Vintage Bank in 1988, and construction of the building was completed in 1989. In 1993 an additional 2,500 square feet of previously unoccupied space on the Main Office was remodeled, thereby increasing usable space from approximately 7,500 to 10,000 square feet. The real property and all improvements at the Main Office are owned by The Vintage Bank. In January, 1996 The Vintage Bank purchased approximately 11,000 square feet of land adjacent to the Main Office to facilitate expansion of The Vintage Bank's motor banking facility. 3271 Browns Valley Rd. Napa, California The Vintage Bank leases the premises for its Browns Valley Office, consisting of approximately 2,000 square feet, located at 3271 Browns Valley Road, Napa, California. The lease commenced on October 22, 1990 for a term of five years, with three successive options to renew for five years each. To exercise an option, the lease requires three months prior notice of the bank's intent to renew. The lease was renewed for an additional five years in October 2000. Rent is subject to annual adjustments in accordance with increases in the Consumer Price Index. Effective January 1, 2003, monthly rental was $3,207 per month. By the terms of the lease The Vintage Bank is required to: o Maintain and repair the leased premises. o Maintain combined single limit, bodily injury and property damage insurance, and o Pay its pro rata share of real property taxes and common area maintenance expenses. 3626 Bel Aire Plaza, Napa, California The Vintage Bank leases the premises for its Bel Aire Shopping Center Office, consisting of approximately 5,850 square feet, located at 3626 Bel Aire Plaza, Napa, California. The lease term commenced on January 1, 1997, for a term of ten years, with two successive options to renew for five years each upon at least 180 days' notice. Effective January l, 2003, monthly rental was $8,39. per month. Rent is subject to annual adjustments as set forth in the lease schedule and thereafter in accordance with increases in the Consumer Price Index. By the terms of the lease The Vintage Bank is required to: o Maintain and repair the leased premises. o Pay for all utilities used. o Maintain public liability insurance. o Pay its pro rata share of common area maintenance, and o Pay its pro rata share of all real property taxes assessed against the shopping center. 1065 Main St. St. Helena, California In January 2001 The Vintage Bank entered into an agreement for the purchase of a building and real property located at 1065 Main Street, St. Helena, California, for the sum of $1,500,000. The purchase of the Main Street property consummated on February 2, 2001. The purchase of the property was not financed. The Vintage Bank completed an extensive remodel of the building in January, 2002 at a cost of approximately $965,000. In November 2001 The Vintage Bank entered into a Real Estate Purchase agreement for the purchase of real property located adjacent to the bank's St. Helena branch for the sum of $175,000. The subject property became part of the bank's St. Helena branch property. The purchase of the property was not financed. The property is currently improved with a parking lot, which is used to supplement existing branch parking. It is not anticipated that any additional improvements will be made to the property. -19- 1190 Airport Blvd. Napa, California In December 2001 The Vintage Bank entered into a lease for its Gateway branch located at 1190 Airport Boulevard, suite 100. The lease commenced on February 2003, after the majority of construction was completed, for an initial term of ten years with two successive options to renew for ten years each upon at least 120 days' notice. The premises is located in a multi-tenant professional office building consisting of 16,000 square feet, of which The Vintage Bank occupies approximately 5,100 square feet. The branch opened for business March 6, 2003. The Vintage Bank paid for the leasehold improvements to the premises at an approximate cost of $400,000. Monthly rent for the initial year is $11,810 per month plus $3,231 monthly for the estimated common area charges. As mentioned above 38.31% of this facility (and related rent expense) is Sub-Leased to North Bay Bancorp for Executive Offices. Rent is subject to annual adjustments in accordance with increases in the Consumer Price Index with a minimum annual increase of 5%. By the terms of the lease The Vintage Bank is required to: o Maintain and repair the leased premises. o Pay for all utilities used. o Maintain public liability insurance, and o Pay its pro rata share of common area operating expenses, including real property taxes. The Vintage Bank owns certain leasehold improvements and furniture, fixtures and equipment located at its offices all of which are used in the banking business. In the opinion of management, the properties of The Vintage Bank are adequately covered by insurance. Solano Bank 403 Davis Street, Vacaville, California Solano Bank's Main office is located in a multi-tenant building at 403 Davis Street, Vacaville, California. On July 23, 2001 Solano Bank consummated the purchase of the building for the sum of $2,200,000. The purchase was not financed. The building contains a total of approximately 22,000 square feet of which Solano Bank occupies approximately 5,000 square feet. Of the remaining 17,000 square feet, BC Stocking, Inc. occupies 10,300 square feet, Rob Wood, a director of Solano Bank, occupies 650 square feet and Chase Manhattan Mortgage Corp., occupies 1,956 square feet. The remaining 4,744 square feet has been unoccupied, however, improvements have been made in February, 2004 and a lease has been entered into with Pac Bell Yellow Pages. This is a short term lease but has provided the funds to convert our unoccupied space to a long term revenue potential. 1395 E. 2nd Street, Benicia, California Solano Bank leases the premises for its Benicia Office, consisting of approximately 2,000 square feet located at 1395 E. 2nd Street, Benicia, California. The lease commenced December 1, 1999 at an initial monthly rent of $2,980. Effective January 1, 2003, monthly rental was $3,996 per month and as of May 1, 2003 was escalated to $4,144. The initial lease is for a period of five (5) years and four (4) months, with three options to extend for five years each. To exercise the option, the lease requires three months prior notice of the bank's intent to renew. Rent is subject to adjustments with increases in the Consumer Price Index. By the terms of the lease Solano Bank is required to: o Maintain and repair the leased premises. o Pay for all utilities used. o Maintain public liability insurance. o Pay its pro rata share of common area maintenance, and o Pay its pro rata share of all real property taxes assessed against the shopping center of which the bank premises are a part of. 976-A Admiral Callaghan Lane, Vallejo, California Solano Bank leases the premises for its Vallejo Office, consisting of approximately 2,166 square feet located at 976-A Admiral Callaghan Lane, Vallejo, California. The lease commenced March 15,2001 at an initial monthly rent of $4,332. Effective January l, 2003, monthly rental was $4,462 per month and at May 1, 2003 was increased to $4,595 per month in accordance with the lease agreement. The initial lease is for a period of five (5) years, with three options to extend for five years each. To exercise the option, the lease requires 180 days prior notice of the bank's intent to renew. Rent is subject to annual adjustment with increases in the Consumer Price Index. By the terms of the lease Solano Bank is required to: o Maintain and repair the leased premises. o Pay for all utilities used. o Maintain public liability insurance. o Pay its pro rata share of common area maintenance, and -20- o Pay its prorate share of all real property taxes assessed against the shopping center of which the premises are a part. The premises were improved to make them suitable for a bank branch at a cost of $119,019. 1411 Oliver Rd. Fairfield, California The Solano Bank original location in Downtown Fairfield, was relocated on August 15, 2003. The new location is in a very desirable business district on the west side of the City. The new branch at 1411 Oliver Rd. Fairfield, California, is in a new business building that contains a total of 38,606 square feet. Solano Bank has leased 3,078 square feet. The lease is a Ten year lease with three additional five year options. Base rent will be adjusted on June 1 of each year based on the consumer price index. The current base rent is $7,695 per month. In addition the bank's proportionate share (7.9%) of any operating expense increases over the base year, will be due in the form of rent when determined after the first year. Solano Bank owns certain leasehold improvements and furniture, fixtures & equipment located in its offices, all of which are used in the banking business. In the opinion of management, the properties of Solano Bank are adequately covered by insurance. Item 3 - LEGAL PROCEEDINGS None Item 4 - Submission of Matters to a Vote of Security Holders None -21- PART II Item 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The stock is listed in the Nasdaq National Market System under the symbol NBAN effective September 3, 2002. Prior to the Nasdaq listing, the stock traded over-the-counter and is quoted on the OTC "Bulletin Board". The following table (adjusted for the 2002, 2003, and 2004 stock dividends) summarizes the common stock high and low bid prices based upon transactions of which Bancorp is aware: Quarter ended High Low - ------------- ---- --- March 31, 2002 $24.94 $17.28 June 30, 2002 24.94 21.54 September 30, 2002 26.08 20.05 December 31, 2002 24.04 21.54 March 31, 2003 28.81 24.29 June 30, 2003 27.62 24.19 September 30, 2003 26.59 23.81 December 31, 2003 29.40 24.38 There may be other transactions of which Bancorp is not aware and accordingly, they are not reflected in the range of actual sales prices stated. Further, quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Additionally, since trading in Bancorp's common stock is limited, the range of prices stated is not necessarily representative of prices which would result from a more active market. On October 28, 2002, the Board of Directors of North Bay Bancorp declared a dividend of one share purchase right (a "Right") for each outstanding share of common stock, no par value of the Company, payable on December 6, 2002 to shareholders of record as of November 15, 2002. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share (a "Unit") of Series A Preferred Stock (the "Preferred Stock") of the Company, at a price of $90.00 per Unit, subject to adjustment. The rights are only exercisable in the event of certain changes in contract. The description and terms of the Rights are set forth in a Rights Agreement between the Company and Registrar and Transfer Company, as Rights Agent. The Company paid cash dividends of $0.20 per share in 2002 and $0.20 per share in 2003. The holders of common stock of Bancorp are entitled to receive cash dividends when and as declared by the Board of Directors, out of funds legally available for the payment of dividends. On January 26, 2004, the Board of Director of Bancorp declared a $0.20 per share cash dividend and a 5% stock dividend payable March 29, 2004 to shareholders of record as of March 12, 2004. North Bay Bancorp is restricted in its ability to pay dividends to its shareholders. For a discussion of restrictions imposed, see "SUPERVISION and REGULATION - Payment of Dividends." As of March 12, 2004, there were 1,001 holders of record of North Bay Bancorp's common stock. The following chart provides information as of December 31, 2003 concerning the Company's Stock Option Plans, the Company's only equity compensation plans:
Plan Category Number of securities to Weighted-average Number of securities be issued upon exercise exercise price of remaining available for of outstanding options, outstanding options, future issuance under warrants, and rights warrants and rights equity compensation plans (excluding securities reflecting in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 318,474 $20.80 148,220 Equity compensation plans not approved by security holders 0 0 0 ------- ------ ------- Total 318,474 $20.80 148,220
-22- Item 6 - SELECTED FINANCIAL DATA The selected financial data is included in Bancorp's 2003 Annual Report to Shareholders which information is incorporated herein by reference. Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The management's discussion and analysis of financial condition and results of operations is included in Bancorp's 2003 Annual Report to Shareholders which information is incorporated herein by reference. Item 7 A - QUANTITATIVE AND QUALITATIVE DISCLOUSURE ABOUT MARKET RISK Management's discussion of Quantitative and Qualitative and market risk is included in Bancorp's 2003 Annual Report to Shareholders which information is incorporated herein by reference. Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Bancorp's consolidated balance sheets, statements of operations, statements of changes in shareholders' equity, statements of cash flows and related notes thereto are included in Bancorp's 2003 Annual Report to Shareholders which information is incorporated herein by reference. Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE N/A Item 9A - CONTROLS AND PROCEEDURES Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. As of December 31, 2003 the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"), and its "internal controls and procedures for financial reporting" ("Internal Controls"). This evaluation (the "Controls Evaluation") was done under the supervision and with the participation of management, including our President and Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Rules adopted by the SEC require that in this section of the Annual Report we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation. CEO and CFO Certifications. Appearing immediately following the Signatures section of this Annual Report there are two separate forms of "Certifications" of the CEO and the CFO. The first form of Certification is required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). The section of the Annual Report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certification and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. Disclosure Controls and Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper -23- use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. Limitations on the Effectiveness of Controls. The Company's management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls' objectives and design, the controls' implementation by the Company and the effect of the controls on the information generated for use in this Annual Report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Our Internal Controls are also evaluated on an ongoing basis by our Internal Audit Department and by other personnel in our organization. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. Among other matters, we sought in our evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in the Company's Internal Controls, or whether the Company had identified any acts of fraud involving personnel who have a significant role in the Company's Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board's Audit Committee and to our independent auditors and to report on related matters in this section of the Annual Report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accord with our on-going procedures. We concluded that were no material weaknesses in the Company's Internal Controls. In accord with Commission requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Annual Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to the Company and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles. -24- PART III Item 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT For information regarding the directors, executive officers, promoters and control persons of Bancorp, see "ELECTION OF DIRECTORS" and "REPORTS OF CHANGES IN BENEFICIAL OWNERSHIP" in the Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated herein by reference. Code of Ethics North Bay Bancorp has adopted a Code of Ethics that applies to all its directors, officers and employees, a current copy of which is available to shareholders on the Company's web-sit. The Company's web-site is located at www.northbaybancorp.com. Item 11 - EXECUTIVE COMPENSATION For information concerning compensation of the executive officers of Bancorp, see "EXECUTIVE COMPENSATION" in the Proxy Statement, which is incorporated herein by reference. Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning the security ownership of certain beneficial owners and management of Bancorp, see "SECURITY OWNERSHIP OF MANAGEMENT" in the Proxy Statement, which is incorporated herein by reference. Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see "MANAGEMENT INDEBTEDNESS" in the Proxy Statement, which is incorporated herein by reference. Item 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES For information concerning amounts paid for audit and related fees See "Proposal No. 3" in the Proxy Statement, which is incorporated herein by reference. -25- Part IV Item 16 - EXHIBITS AND REPORTS ON FORM 8-K Page of 2003 Annual Report ------------- (a) 1. Financial Statements (i) Balance Sheets, December 31, 2003 and 2002 15 (ii) Income Statements for the years ended December 2003, 2002, and 2001 16 (iii) Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002, and 2001 17 (iv) Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 18 (v) Notes to Financial Statements 19 (vi) Report of Independent Auditors 40 Schedules have been omitted as inapplicable or because the information required is included in the financial statements or notes thereto. 3. Exhibits See Exhibit Index on page 28 of this Report. (b) Reports on Form 8-K The Registrant has filed the following Reports on Form 8-K during the quarter ended December 31, 2003: 1. Form 8-K filed on October 31, 2003 under item 12, with an attached press release announcing earnings for the quarter ended September 30, 2003. 2. Form 8-K filed on December 17, 2004 under item 9, with an attached newsletter to Shareholders outlining financial data for the quarter ended September 30, 2003. -26- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTH BAY BANCORP By: /s/Terry L. Robinson -------------------------------------------------- Terry L. Robinson, President & Chief Executive Officer Dated: March 25, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/Thomas N. Gavin - ------------------------------------ Thomas N. Gavin Director March 23, 2004 /s/David B. Gaw Director and March 26, 2004 - ------------------------------------ Chairman of the Board David B. Gaw /s/Fred J. Hearn Jr. - ------------------------------------ Fred J. Hearn Jr. Director March 26, 2004 /s/Conrad W. Hewitt Director March 26, 2004 - ------------------------------------ Conrad W. Hewitt /s/Richard S. Long Director March 26, 2004 - ------------------------------------ Richard S. Long /s/Thomas H. Lowenstein Director March 26, 2004 - ------------------------------------ Thomas H. Lowenstein /s/Thomas F. Malloy Director March 26, 2004 - ------------------------------------ Thomas F. Malloy /s/Terry L. Robinson President, Chief March 25, 2004 - ------------------------------------ Executive Officer and Director Terry L. Robinson (Principal Executive Officer) /s/James E. Tidgewell Director March 24, 2004 - ------------------------------------ James E. Tidgewell /s/Lee-Ann Cimino Sr. Vice President March 25, 2004 - ------------------------------------ Chief Financial Officer Lee-Ann Cimino (Principal Financial Officer)
-27- EXHIBIT INDEX Exhibit No. Description 2.1 Plan of Reorganization and Merger Agreement entered into as of July 30, 1999 by and among The Vintage Bank, Vintage Merger Co. and North Bay Bancorp. (1) 3.1 Articles of Incorporation of Registrant. (2) 3.2 Amended and Restated Bylaws. 4.1 Certificate Evidencing Floating Rate Capital Securities. (6) 4.2 Floating Rate Junior Subordinated Deferrable Interest Debenture. (6) 4.3 Certificate Evidencing Floating Rate Common Securities. (6) 4.4 Guarantee Agreement. (6) 4.5 Indenture dated June 26, 2002 , North Bay Bancorp Issuer, State Street Bank and Trust Company of Connecticut, N.A., as Trustee for Floating Rate Junior Subordinated Deferrable Interest Debenture. (6) 4.6 Rights Agreement, dated as of October 24, 2002, between the Company and Registrar and Trans Company, as Rights Agent. (7) 4.7 Certificate of Determination for the Series A Preferred Stock (attached as Exhibit A to Rights Agreement). (7) 4.8 Rights Certificate (attached as Exhibit B to Rights Agreement.). Printed Rights Agreement will not be mailed until the Distribution Date as defined therein. (7) 4.9 Summary of Rights to Purchase Preferred Shares (attached as Exhibit C to Rights Agreement). (7) 10.1 Amended North Bay Bancorp Stock Option Plan. (6) * 10.2 North Bay Bancorp 2002 Stock Option Plan and Related Agreement (8)* 10.3 Sublease by and between The Vintage Bank, as Lessor, and North Bay Bancorp, as Lessee, with respect to premises at 1190 Airport Road, Napa California. (10) 10.4 Lease entered into May 9, 2003 by Solano Bank and Fairfield West Partners, LLC for premises at 1411 Oliver Road, Fairfield California. 10.5 North Bay Bancorp Directors Deferred Fee Plan.(4)* 10.6 Employment Agreement entered into as of May 1, 2004 by and between North Bay Bancorp and Terry L. Robinson.* 10.7 Employment Agreement entered into as of May 1, 2001 by and between Solano Bank and Glen C. Terry. (5) * 10.8 Employment Agreement entered into as of May 1, 2001 by and between North Bay Bancorp and Kathi Metro. (5) * 10.9 [RESERVED] -28- 10.10 Life Insurance Endorsement Method Split Dollar Plan Agreement for Terry L. Robinson (9). * 10.11 Lease entered into January 5, 2004 by North Bay Bancorp and James N. Ditmer, dba Cordelia Edison Partners for a central warehousing facility located at 499 Edison Court Suite A-1, Cordelia California. 10.12 Life Insurance Endorsement Method Split Dollar Plan Agreement for Lee-Ann Cimino. (9). * 10.13 Life Insurance Endorsement Method Split Dollar Plan Agreement for Kathi Metro. (9)* 10.14 Life Insurance Endorsement Method Split Dollar Plan Agreement for Glen C. Terry. (9)* 10.15 Employment Agreement dated as of April 15, 2002 by and between Solano Bank and John A. Nerland. (6) * 10.16 North Bay Bancorp 2002 Deferred Fee Plan. (6)* 10.17 Amended and Restated Declaration of Trust by and Among State Street Bank and Trust Company of Connecticut, N.A, as Institutional Trustee, North Bay Bancorp as Sponsor, and Administrators, Dated as of June 26, 2002. (6) 11. Statement re: computation of per share earnings is included in Note 1 to the financial statements to the prospectus included in Part I of this Registration Statement. 13. North Bay Bancorp 2003 Annual Report to Shareholders. 21. Subsidiaries of Registrant are: The Vintage Bank, a California banking corporation, Solano Bank, a California Corporation, and North Bay Bancorp Statutory Trust I, a Connecticut trust. 23. Consent of KPMG LLP as independent public accountants for North Bay Bancorp, The Vintage Bank and Solano Bank. 25. Power of Attorney. 31.1 Certificate of Principal Executive Officer Pursuant to SEC Release 33-8238. 31.2 Certificate of Principal Financial Officer Pursuant to SEC Release 33-8238. 32.1 Certificate of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certificate of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. * Employment Contracts and Compensation Plans. (1) Attached as Exhibit 7(c)(2) to North Bay Bancorp's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 29, 1999, and incorporated herein by reference. (2) Attached as Exhibits 3.1 and 10.2, respectively, to Registration Statement No. 333-93365 filed by North Bay Bancorp with the Securities and Exchange Commission under the Securities Act of 1933, and incorporated herein by reference. (3) Intentionally left blank. (4) Attached as Exhibits 10.5 to North Bay Bancorp's Annual Report as Form 10-KSB for the year ended December 31, 2000 filed with the Securities and Exchange Commission, and incorporated herein by reference. -29- (5) Attached as Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to North Bay Bancorp's Quarterly Report as Form 10-Q for the quarter ended June 30, 2001 filed with the Securities and Exchange Commission, and incorporated herein by reference. (6) Attached as Exhibits 4.1, 4.2, 4.3, 4.4, 4.5, 10.1, 10.15, 10.16, and 10.17, respectively, to North Bay Bancorp's Quarterly Report as Form 10-Q for the quarter ended June 30, 2002 filed with the Securities and Exchange Commission, and incorporated herein by reference. (7) Attached as Exhibits 4.1, 4.2, 4.3, and 4.4, respectively, to the Form 8-A Registration Statement filed by North Bay Bancorp with the Securities and Exchange Commission on October 31, 2002 and incorporated herein by reference. (8) Attached as Exhibit 99.1 to Registration Statement No. 333-90006 on Form S-8 filed by North Bay Bancorp with the Securities and Exchange Commission on June 7, 2002 and incorporated herein by reference. (9) Attached as Exhibits 10.10, 10.11, 10.12, 10.13, and 10.14, respectively, to North Bay Bancorp's Annual Report as Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission and incorporated herein by reference. (10) Attached as Exhibits 10.3 to North Bay Bancorp's Annual Report as Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission and incorporated herein by reference. -30- EX-3.2.(II) 3 p18310_ex3-2.txt AMENDED AND RESTATED BYLAWS AMENDED AND RESTATED BYLAWS OF NORTH BAY BANCORP A California Corporation TABLE OF CONTENTS ARTICLE I. Offices........................................................... 1 Section 1. Principal Office.................................. 1 Section 2. Other Offices..................................... 1 ARTICLE II. Meetings of Shareholders......................................... 1 Section 3. Place of Meetings................................. 1 Section 4. Annual Meetings................................... 1 Section 5. Special Meetings.................................. 2 Section 6. Notice of Shareholders' Meetings.................. 2 Section 7. Quorum............................................ 2 Section 8. Adjourned Meeting................................. 3 Section 9. Waiver or Consent by Shareholders................. 3 Section 10. Action Without Meeting............................ 3 Section 11. Voting Rights; Cumulative Voting.................. 4 Section 12. Proxies........................................... 4 Section 13. Voting by Joint Holders or Proxies................ 4 Section 14. Inspectors of Election............................ 5 ARTICLE III. Directors; Management........................................... 5 Section 15. Powers............................................ 5 Section 16. Number and Qualification of Directors............. 5 Section 17. Election and Term of Office....................... 6 Section 18. Removal of Directors.............................. 6 Section 19. Vacancies......................................... 6 Section 20. Place of Meetings................................. 7 Section 21. Organizational Meetings........................... 7 Section 22. Other Regular Meetings............................ 7 Section 23. Special Meetings.................................. 7 Section 24. Quorum............................................ 7 Section 25. Contents of Notice and Waiver of Notice........... 8 Section 26. Adjournment....................................... 8 -i- Section 27. Notice of Adjournment............................. 8 Section 28. Telephone Participation........................... 8 Section 29. Action Without Meeting............................ 8 Section 30. Fees and Compensation............................. 8 ARTICLE IV. Officers......................................................... 8 Section 31. Officers.......................................... 8 Section 32. Election.......................................... 9 Section 33. Subordinate Officers.............................. 9 Section 34. Removal and Resignation........................... 9 Section 35. Vacancies......................................... 9 Section 36. Chairman of the Board............................. 10 Section 37. President......................................... 10 Section 38. Vice Presidents................................... 10 Section 39. Secretary......................................... 10 Section 40. Chief Financial Officer........................... 11 ARTICLE V. General Corporate Matters......................................... 11 Section 41. Record Date and Closing of Stock Books............ 11 Section 42. Corporate Records and Inspection by Shareholders.. 12 Section 43. Checks, Drafts, Evidences of Indebtedness......... 12 Section 44. Corporate Contracts and Instruments; How Executed. 12 Section 45. Stock Certificates................................ 12 Section 46. Lost Certificates................................. 12 Section 47. Reports to Shareholders........................... 13 Section 48. Indemnity of Officers, Directors, etc............. 13 Section 49. Fiscal Year....................................... 13 Section 50. Construction and Definitions...................... 13 ARTICLE VI. Amendments....................................................... 13 Section 51. Amendments by Shareholders........................ 13 Section 52. Amendment by Directors............................ 13 -ii- BYLAWS OF NORTH BAY BANCORP (A California Corporation) ARTICLE I. Offices Section 1. Principal Office. The principal executive office in the State of California for the transaction of the business of the corporation (called the principal office) is fixed and located at 1190 Airport Road, Suite 101, Napa, California, 94558. The Board of Directors shall have the authority from time to time to change the principal office from one location to another within or without the State by amending this Section 1 of the Bylaws. Section 2. Other Offices. One or more branches or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate. ARTICLE II. Meetings of Shareholders Section 3. Place of Meetings. Meetings of the shareholders shall be held at any place within the State of California that may be designated either by the Board of Directors in accordance with these Bylaws. If no such designation is made, the meetings shall be held at the principal office of the corporation. Section 4. Annual Meetings. The annual meeting of the shareholders shall be held on the 4th Tuesday of April of each year. The exact date and time of such annual meeting shall be fixed by resolution of the Board of Directors; provided, however, that should such day fall on a legal holiday, then the meeting shall be held on the next succeeding business day, at which time the shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting. If the annual meeting of shareholders shall not be held during the time above specified, the Board of Directors shall cause such a meeting to be held as soon thereafter as convenient and -1- any business transacted or election held at such meeting shall be as valid as if transacted or held at an annual meeting during the time above specified. Section 5. Special Meetings. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by a majority of the Board of Directors, the Chairman of the Board of Directors, the President, or by holders of shares entitled to cast not less than 10 percent (10%) of the votes at the meeting. Section 6. Notice of Shareholders' Meetings. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 (or, if sent by third class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of Section 601(f) of the California Corporations Code, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by first class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders' meeting, notice may be sent by third class mail or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal office of the corporation is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder to the principal office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. Upon request in writing to the Chairman of the Board of Directors, the President, or the Secretary by any person entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. Section 7. Quorum. The presence at any meeting, in person or by proxy, of persons entitled to vote a majority of the voting shares of the corporation shall constitute a quorum for the transaction of business. Shareholders present at a valid meeting at which a quorum is initially present may continue to do business until adjournment notwithstanding the withdrawal -2- of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 8. Adjourned Meeting. Any annual or special shareholders' meeting may be adjourned from time to time, even though a quorum is not present, by vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy, provided that in the absence of a quorum, no other business may be transacted at the meeting except as provided in Section 7 of these Bylaws. Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 9. Waiver or Consent by Shareholders. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by Section 6 of these Bylaws or Section 601(f) of the California Corporations Code to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the California Corporations Code. Section 10. Action Without Meeting. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, except that unanimous written consent shall be required for election of directors to non-vacant positions. Unless the consents of all shareholders entitled to vote have been solicited or received in writing, notice shall be given to non-consenting shareholders to the extent required by Section 603(b) of the California Corporations Code. Any shareholder giving written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the corporation prior to the time that -3- written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 11. Voting Rights. Only persons in whose names shares entitled to vote stand on the stock records of the Company at the close of business on the record date fixed by the Board of Directors as provided in Section 41 of these Bylaws for the determination of shareholders of record are entitled to notice of and to vote at a meeting of shareholders. Except as may be provided in the Articles of Incorporation or in these Bylaws, each shareholder entitled to vote is entitled to one vote for each share held on each matter submitted to a vote of shareholders. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. Voting may be by voice or ballot, provided that any election of directors must be by ballot upon the demand of any shareholder made at the meeting and before the voting begins. Cumulative voting to elect directors shall not be permitted. Section 12. Proxies. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. All proxies must be in writing and must be signed by the shareholder confirming the proxy or his or her attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the California Corporations Code. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. Section 13. Voting by Joint Holders or Proxies. Shares or proxies standing in the names of two or more persons shall be voted or represented in accordance with the provisions of Section 704 of the California Corporations Code, so that, if only one of such persons is present in person or by proxy, that person shall have the right to vote all such shares, and all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum. Section 14. Inspectors of Election. In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the Chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed -4- at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions in any way arising in connection with the right to vote; count and tabulate all votes or consents; determine when the polls shall close; determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III Directors; Management Section 15. Powers. Subject to any provisions of the Articles of Incorporation, of the Bylaws and of law limiting the powers of the Board of Directors or reserving powers to the shareholders, the Board of Directors shall, directly or by delegation, manage the business and affairs of the corporation and exercise all corporate powers permitted by law. Section 16. Number and Qualification of Directors The authorized number of directors shall be not less than six (6) nor more than eleven (11), until changed by amendment of the Articles of Incorporation or, if not prohibited by the Articles, by an amendment of this bylaw adopted by the shareholders. The exact number of directors within said range is fixed at ten (10) and may be reduced or increased within said range by a resolution duly adopted by the Board of Directors. Directors need not be shareholders of the corporation. No reduction of the authorized number of directors shall have the effect of removing any director before his or her term of office expires." Nomination for election of members of the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the corporation not less than 21 days nor more than 60 days prior to any meeting of shareholders called for the election of directors; provided however, that if less than 21 days' notice of the meeting is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of the corporation not later than the close of business on the tenth day following the day on which the notice of meeting was mailed; provided further, that if notice of such meeting is sent by third class mail as permitted by Section 6 of these Bylaws, no notice of intention to make nominations shall be required. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in the discretion -5- of the Chairman of the meeting, be disregarded and upon the Chairman's instructions, the inspectors of election can disregard all votes cast for each such nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which directors are to be elected. Section 17. Election and Term of Office. The Board of Directors is classified into three (3) classes, the members of each class to serve for a term of three (3) years. At the 2004 annual meeting of shareholders, nominees elected as directors will be classified according to the recommendations of the Board of Directors. The directors will be divided, with respect to the time for which each will hold office, into three classes, as nearly equal in number of directors as practicable. The term of office of the first class ("Class A") will expire at the 2005 annual meeting of shareholders, the term of the second class ("Class B") will expire at the 2006 annual meeting of shareholders, and the term of office of the third class ("Class C") will expire at the 2007 annual meeting of shareholders. At subsequent annual meetings of shareholders, the number of directors to be elected will equal the number of directors with terms expiring at that annual meeting. At each subsequent annual meeting the directors elected will be elected for a term of three (3) years. The Board of Directors shall increase or decrease the number of directors in one or more classes as may be appropriate whenever it increases or decreases the number of directors to constitute the full Board of Directors in order to ensure that the three classes shall be as nearly equal in number of directors as practicable. A director will hold office until the annual meeting for the year in which his or her term expires and until his or her successor is be elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors, no matter how created, may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy shall hold office for a term that will coincide with the term of the class to which that director will have been elected. Section 18. Removal of Directors. A director may be removed from office by the Board of Directors if he or she is declared of unsound mind by an order of court or convicted of a felony. Any or all of the directors may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; however, unless the entire Board of Directors is removed, an individual director shall not be removed if the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director at an election at which the same total number of votes were cast, or, if such action is taken by written consent, all shares entitled to vote were voted, and the entire number of directors authorized at the time of the director's most recent election were then being elected. A director may also be removed from office by the Superior Court of the county in which the principal office is located, at the suit of shareholders holding at least ten percent (10%) of the number of outstanding shares of any class, in case of fraudulent or dishonest -6- acts or gross abuse of authority or discretion with reference to the corporation, in the manner provided by law. Section 17. Vacancies. A vacancy or vacancies on the Board of Directors shall exist on the death, resignation, or removal of any director, or if the authorized number of directors is increased or the shareholders fail to elect the full authorized number of directors. Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the remaining directors although less than a quorum, or by a sole remaining director, and each director elected in this manner shall hold office until his or her successor is elected at an annual or special shareholders' meeting. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the Chairman of the Board of Directors, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 18. Place of Meetings. Regular and special meetings of the Board of Directors shall be held at any place within the State of California that is designated by resolution of the Board or, either before or after the meeting, consented to in writing by all the Board members. If the place of a regular or special meeting is not fixed by resolution or written consents of the Board, it shall be held at the corporation's principal office. Section 19. Organizational Meetings. Immediately following each annual shareholders' meeting, the Board of Directors shall hold a regular meeting to organize, elect officers, and transact other business. Notice of this meeting shall not be required. Section 20. Other Regular Meetings. Other regular meetings of the Board of Directors shall be held at least once each calendar month at such time and place as the Board of Directors by resolution shall determine. Notice of these regular meetings shall not be required. Section 21. Special Meetings. Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board of Directors, or the President, or any Vice President, or the Secretary, or any two directors. Special meetings of the Board shall be held upon four days' notice by mail or 48 hours' notice delivered personally or by telephone, including a voice messaging system or other technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States Mails, postage prepaid. Any other written notice, including facsimile, telegram or electronic mail message, shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the -7- recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone, including a voice messaging system or other system or technology designed to record or communicate messages, or wireless, to the recipient, including the recipient's designated voice mailbox or address on such system, or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Section 22. Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn a meeting under Section 26 of these Bylaws. Every act done or decision made by a majority of the directors present at a meeting at which a quorum is present shall be regarded as the act of the Board of Directors, unless the vote of a greater number is required by law, the Articles of Incorporation, or these Bylaws, and subject to the provisions of Section 310 and Section 317(e) of the California Corporations Code. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by a majority of the required quorum for such meeting. Section 23. Contents of Notice and Waiver of Notice. Neither the business to be transacted at, nor the purpose of, any regular or special Board meeting need be specified in the notice or waiver of notice of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to said director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 24. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Section 25. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place are fixed at the meeting being adjourned, except that if the meeting is adjourned for more than 24 hours such notice shall be given prior to the adjourned meeting to the directors who were not present at the time of the adjournment. Section 26. Telephone Participation. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meetings can hear one another. Such participation constitutes presence in person at such meeting. Section 27. Action Without Meeting. The Board of Directors may take any action without a meeting that may be required or permitted to be taken by the Board at a meeting, if all members of the Board individually or collectively consent in writing to the action. The written consent or consents shall be filed in the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same effect as a unanimous vote of directors. Section 28. Fees and Compensation. Directors and members of committees shall receive neither compensation for their services nor reimbursement for their expenses unless these -8- payments are fixed by resolution of the Board. This Section shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise, and receiving compensation for those services. ARTICLE IV. Officers Section 29. Officers. The officers of the corporation shall be a President, a Chief Financial Officer and a Secretary. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and a Vice Chairman of the Board (each of whom shall be chosen from the Board of Directors), one or more Vice Presidents, one or more Cashiers, one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Cashiers and/or Financial Officers, and any other officers who may be appointed under Section 33 of these Bylaws. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity unless authorized to do so generally or in the specific instance by the Board of Directors. Any officer of the corporation may be excluded by resolution of the Board of Directors or by a provision of these Bylaws from participation, other than in the capacity of a director, in major policy making functions of the corporation. Upon direction by the Board of Directors, any officer or employee of the corporation so designated shall give bond of suitable amount with security to be approved by the Board of Directors, conditioned on the honest and faithful discharge of his or her duties as such officer or employee. At the discretion of the Board, such bonds may be schedule or blanket form and the premiums shall be paid by the corporation. The amount of such bonds, the form of coverage, and the name of the company providing the surety therefore shall be reviewed annually by the Board of Directors. Action shall be taken by the Board at that time approving the amount of the bond to be provided by each officer and employee of the corporation for the ensuing year. Section 30. Election. The officers of the corporation, except those appointed under Section 33 of these Bylaws, shall be chosen annually by the Board of Directors, and each shall hold his or her office until he or she resigns or is removed or otherwise disqualified to serve, or his or her successor is elected and qualified. Section 31. Subordinate Officers. The Board of Directors may elect or appoint, and may authorize the President or the Chief Executive Officer to appoint, any other officers that the business of the corporation may require, each of whom shall hold office for the period, have the authority, and perform the duties specified in the Bylaws or by the Board of Directors. Section 32. Removal and Resignation. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed with or without cause either by the Board of Directors at any time or, except for an officer chosen by the Board, by any officer on whom the power of removal may be conferred by the Board. -9- Any officer may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the corporation, but such notice shall not prejudice the rights, if any, of the corporation under any contract of employment to which the officer is a party. An officer's resignation shall take effect when it is received or at any later time specified in the resignation. Unless the resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. Section 33. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in the Bylaws for regular election or appointment to the office. Section 34. Chairman of the Board. The Board of Directors may appoint one of its members to be the Chairman to serve at the pleasure of the Board of Directors. If appointed, the Chairman shall preside at all meetings of the Board of Directors and of the shareholders of the corporation and shall supervise the carrying out of the policies adopted or approved by the Board of Directors; shall have general executive powers, as well as the specific powers conferred by these Bylaws; and, shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned by the Board of Directors. Section 35. President. The President shall be the corporation's chief executive officer and shall, subject to the control of the Board of Directors, have general supervision, direction, and control over the corporation's business and officers. In the absence of the Chairman, the President shall preside at any meeting of the Board of Directors or the shareholders of the corporation. The President shall have general executive powers, shall be ex officio a member of all the standing committees except the Audit Committee, and shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the Office of President, or imposed by these Bylaws. The President shall also have and may exercise such further powers and duties as from time to time may be conferred, or assigned by the Board of Directors. Section 36. Vice Presidents. If the President is absent or is unable or refuses to act, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions on, the President. Each Vice President shall have any other duties that are prescribed for said Vice President by the Board of Directors or the Bylaws. Section 37. Secretary. The Secretary shall keep or cause to be kept and shall make available at the principal office and any other place that the Board of Directors specifies, a book of minutes of all directors' and shareholders' meetings. The minutes of each meeting shall state the time and place that it was held; whether it was regular or special; if a special meeting, how it was authorized; the notice given; the names of those present or represented at shareholders' meetings; and the proceedings of the meetings. A similar minute book shall be kept for each committee of the Board. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the shareholders' names and addresses, the number and classes of shares held by each, the number -10- and date of each certificate issued for these shares, and the number and date of cancellation of each certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all directors' and shareholders' meetings required to be given under these Bylaws or by law, shall keep the corporate seal in safe custody, and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or these Bylaws. The Secretary shall be deemed not to be an executive officer of the corporation and the Secretary shall be excluded from participation, other than in the capacity of director if the Secretary is also a director, in major policy making functions of the corporation. Section 38. Chief Financial Officer. The Chief Financial Officer shall be the corporation's chief financial officer and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares and shall file or cause to be filed all regulatory reports required pursuant to law or regulation. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with the depositories designated by the Board of Directors. The Chief Financial Officer shall disburse the corporation's funds as ordered by the Board of Directors; shall render to the President and directors, whenever they request it, an account of all his transactions as Chief Financial Officer and of the corporation's financial condition; and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or Bylaws. If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond in the amount and with the surety or sureties specified by the Board for faithful performance of the duties of that person's office and for restoration to the corporation of all its books, papers, vouchers, money, and other property of every kind in that person's possession or under that person's control on that person's death, resignation, retirement, or removal from office. ARTICLE V. General Corporate Matters Section 39. Record Date and Closing of Stock Books. The Board of Directors may fix a time in the future as a record date for determining shareholders entitled to notice of and to vote at any shareholders' meeting; to receive any dividend, distribution, or allotment of rights; or to exercise rights in respect of any other lawful action, including change, conversion, or exchange of shares. The record date shall not, however, be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. If a record date is fixed for a particular meeting or event, only shareholders of record on that date are entitled to -11- notice and to vote and to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. Section 40. Corporate Records and Inspection by Shareholders. Books and records of account and minutes of the proceedings of the shareholders, Board, and committees of the Board shall be kept available at the principal office for inspection by the shareholders to the extent required by Section 1601 of the California Corporations Code. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and make extracts. Section 41. Checks, Drafts, Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes, and all mortgages, or other evidences of indebtedness, issued in the name of or payable to the corporation, and all assignments and endorsements of the foregoing, shall be signed or endorsed by the person or persons and in the manner specified by the Board of Directors. Section 42. Corporate Contracts and Instruments; How Executed. Except as otherwise provided in the Bylaws, officers, agents, or employees must be authorized by the Board of Directors to enter into any contract or execute any instrument in the corporation's name and on its behalf. This authority may be general or confined to specific instances. Section 43. Stock Certificates. One or more certificates for shares for the corporation's capital stock shall be issued to each shareholder for any of such shareholder's shares that are fully paid. The corporate seal or its facsimile may be fixed on certificates. All certificates shall be signed by the Chairman of the Board, President, Chief Financial Officer and Secretary, or Assistant Secretary. Any or all of the signatures on the certificate may be facsimile signatures. -12- Section 44. Lost Certificates. No new share certificate that replaces an old one shall be issued unless the old one is surrendered and canceled at the same time; provided, however, that if any share certificate is lost, stolen, mutilated or destroyed, the Board of Directors may authorize issuance of a new certificate replacing the old one on any terms and conditions, including reasonable arrangement for indemnification of the corporation, that the Board may specify. Prior to the due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California. Section 45. Reports to Shareholders. The requirement for the annual report to shareholders referred to in Section 1501(a) of the California Corporations Code is hereby expressly waived so long as there are less than 100 holders of record of the corporation's shares. The Board of Directors shall cause to be sent to the shareholders such annual or other periodic reports as the Board considers appropriate or as otherwise required by law. If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements referred to in Section 1501(a) for such year. Section 46. Indemnity of Officers, Directors, etc. The corporation shall indemnify its "agents", as defined in Section 317 of the California Corporations Code, to the full extent permitted by said Section, as amended from time to time, or as permitted by any successor statute to said Section. Section 47. Fiscal Year. The fiscal year of this corporation shall begin on the first day of January and end on the 31st day of December of each year. Section 48. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions in the California Corporations Code shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular includes the plural, the plural includes the singular and the term "person" includes both a corporation and a natural person. ARTICLE VI. Amendments Section 49. Amendments by Shareholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote. Section 50. Amendment by Directors. Subject to the right of shareholders under the preceding Section 51, new bylaws may be adopted, or these Bylaws may be amended, or -13- repealed by the Board of Directors, except that only the shareholders can adopt a by-law or amendment thereto which specifies or changes the number of directors on a fixed-number Board of Directors or the minimum or maximum number of directors on a variable-number Board of Directors, or which changes from a fixed-number Board of Directors to a variable-number Board of Directors or vice versa. -14- CERTIFICATE OF SECRETARY I, the undersigned, certify that: 1. I am the duly elected and acting Secretary of North Bay Bancorp, a California corporation; and 2. The foregoing Amended and Restated Bylaws, consisting of fourteen (14) pages, are the Bylaws of this corporation as duly adopted by Resolutions of the Board of Directors of the Company dated March 29, 2004. The amendments to Sections 11, 17, and 18 were approved at the 2003 Annual Meeting of Shareholders on May 8, 2003. IN WITNESS WHEREOF, I have subscribed my name and affixed the seal of this corporation on March 29, 2004. ----------------------------- Wyman G. Smith Corporate Secretary -15- EX-10.4 4 p18310_ex10-4.txt LEASE [Graphic Omitted] STANDARD MULTI-TENANT OFFICE LEASE - GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only May 9, 2003, is made by and between Fairfield West Partners, LLC ("Lessor") and Solano Bank ("Lessee"), (collectively the "Parties", or individually a "Party"). 1.2(a) Premises: That certain portion of the Project (as defined below), known as Suite Numbers(s). First, floor(s), consisting of approximately 3,078 rentable square feet and approximately _______ useable square feet("Premises"). The Premises are located at: 1411 Oliver Road, in the City of Fairfield, County of Solano, State of California, with zip code 94534. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, the exterior walls, the area above the dropped ceilings, or the utility raceways of the building containing the Premises ("Building") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Project." The Project consists of approximately 38,606 rentable square feet. (See also Paragraph 2) 1.2(b) Parking: _____________ unreserved and _____________ reserved vehicle parking spaces at a monthly cost of $_____________ per unreserved space and $________ per reserved space. (See Paragraph 2.6) 1.3 Term: Ten (10) years and Zero months ("Original Term") commencing July, 1, 2003 ("Commencement Date") and ending June 30, 2013 ("Expiration Date"). (See also Paragraph 3) 1.4 Early Possession: __________________________ ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: $7,695.00 per month ("Base Rent)", payable on the First day of each month commencing July 1, 2003. (See also Paragraph 4) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Lessee's Share of Operating Expense Increase: seven point nine percent (7.9%) ("Lessee's Share"). Lessee's Share has been calculated by dividing the approximate rentable square footage of the Premises by the total approximate square footage of the rentable space contained in the Project and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Project. 1.7 Base Rent and Other Monies Paid Upon Execution: (a) Base Rent: $7,695.00 for the period July 1, 2003 to July 31, 2003. (b) Security Deposit: $7,695.00 ("Security Deposit"). (See also Paragraph 5) (c) Parking: $_____________ for the period _____________. (d) Other: $_____________ for _____________. (e) Total Due Upon Execution of this Lease: $15,390.00. 1.8 Agreed Use: Financial Services. (See also Paragraph 6) 1.9 Base Year; Insuring Party. The Base Year is 2003. Lessor is the "Insuring Party". (See also Paragraphs 4.2 and 8) 1.10 Real Estate Brokers: (See also Paragraph 15) (a) Representation: The following real estate brokers (the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [X] Premier Commercial, Inc. represents Lessor exclusively ("Lessor's Broker"); [_] ____________________________________________________ represents Lessee exclusively ("Lessee's Broker"); or /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials EXHIBIT 10.4 Page 1 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E [_] ____________________________________________________ represents both Lessor and Lessee ("Dual Agency"). (b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of _____________ or _____________ % of the total Base Rent for the brokerage services rendered by the Brokers). 1.11 Guarantor. The obligations of the Lessee under this Lease shall be guaranteed by _______________________________________ ("Guarantor"). (See also Paragraph 37) 1.12 Business Hours for the Building:: 7:00 a.m. to 6:00 p.m., Mondays through Fridays (except Building Holidays) and 9:00 a.m. to 1:00 p.m. on Saturdays (except Building Holidays). "Building Holidays" shall mean the dates of observation of New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and None. 1.13 Lessor Supplied Services. Notwithstanding the provisions of Paragraph 11.1, Lessor is NOT obligated to provide the following: [_] Janitorial services [_] Electricity [_] Other (specify): ____________________________________________________ 1.14 Attachments. Attached hereto are the following, all of which constitute a part of this Lease: [X] an Addendum consisting of Paragraphs 51 through 52; [X] a plot plan depicting the Premises; [X] a current set of the Rules and Regulations; [_] a Work Letter; [_] a janitorial schedule; [_] other (specifiy): __________________________________________________________ 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Lessee is advised to verify the actual size prior to executing this Lease. 2.2 Condition. Lessor shall deliver the Premises to Lessee in a clean condition on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), and all other items which the Lessor is obligated to construct pursuant to the Work Letter attached hereto, if any, other than those constructed by Lessee, shall be in good operating condition on said date. 2.3 Compliance. Lessor warrants that the improvements comprising the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee's use (see Paragraph 50), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning and other Applicable Requirements are appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Premises ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the cost of such Capital Expenditure as follows: Lessor shall advance the funds necessary for such Capital Expenditure but Lessee shall be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying Lessee's share of the cost of such Capital Expenditure (the percentage specified in Paragraph 1.6 by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance of Lessee's share at a rate that is commercially reasonable in the judgment of Lessor's accountants. Lessee may, however, prepay its obligation at any time. Provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to nonvoluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 Acknowledgements. Lessee acknowledges that: (a) Lessee has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 2 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date, Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 2.6 Vehicle Parking. So long as Lessee is not in default, and subject to the Rules and Regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use the number of parking spaces specified in Paragraph 1.2(b) at the rental rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. (a) If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (b) The monthly rent per parking space specified in Paragraph 1.2(b) is subject to change upon 30 days prior written notice to Lessee. The rent for the parking is payable one month in advance prior to the first day of each calendar month. 2.7 Common Areas - Definition. The term " Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Premises that are provided and designated by the Lessor from time to time for the general nonexclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including, but not limited to, common entrances, lobbies, corridors, stairwells, public restrooms, elevators, parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to adopt, modify, amend and enforce reasonable rules and regulations ("Rules and Regulations") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. The Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the noncompliance with said Rules and Regulations by other tenants of the Project. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Project to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee's Share of the Operating Expense Increase) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, as the same may be extended under the terms of any Work Letter executed by Parties, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee's right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent"). 4.2 Operating Expense Increase. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share of the amount by which all Operating Expenses for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Operating Expense Increase", in accordance with the following provisions: (a) "Base Year" is as specified in Paragraph 1.9. (b) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent to the Base Year; provided, however, Lessee shall have no obligation to pay a share of the Operating Expense Increase applicable to the first 12 months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the first /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 3 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E twelve (12) months). Lessee's Share of the Operating Expense Increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (c) "Operating Expenses" include all costs incurred by Lessor relating to the ownership and operation of the Project, calculated as if the Project was at least 95% occupied, including, but not limited to, the following: (i) The operation, repair, and maintenance in neat, clean, safe, good order and condition, but not the replacement (see subparagraph (g)), of the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, communication systems and other equipment used in common by, or for the benefit of, lessees or occupants of the Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services, pest control services, and the costs of any environmental inspections; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the insurance policies maintained by Lessor pursuant to paragraph 8 and any deductible portion of an insured loss concerning the Building or the Common Areas; (v) The amount of the Real Property Taxes payable by Lessor pursuant to paragraph 10; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services not separately metered; (vii) Labor, salaries, and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Project and accounting and management fees attributable to the operation of the Project; (viii) The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2.3 provided; however, that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee's Share of 1/144th of the cost of such Capital Expenditure in any given month; (ix) Replacement of equipment or improvements that have a useful life for accounting purposes of 5 years or less. (d) Any item of Operating Expense that is specifically attributable to the Premises, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Premises, Building, or other building. However, any such item that is not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Project. (e) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(c) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (f) Lessee's Share of Operating Expense Increase shall be payable by Lessee within 10 days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly during each Comparison Year of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within 60 days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Share of the actual Operating Expense Increase incurred during such year. If Lessee's payments under this paragraph (f) during said Comparison Year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expense Increase next falling due. If Lessee's payments under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense Increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. (g) Operating Expenses shall not include the costs of replacement for equipment or capital components such as the roof, foundations, exterior walls or a Common Area capital improvement, such as the parking lot paving, elevators, fences that have a useful life for accounting purposes of 5 years or more unless it is of the type described in paragraph 4.2(c) (viii), in which case their cost shall be included as above provided. (h) Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. 4.3 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States on or before the day on which it is due, without offset or deduction (except as specifically permitted in this Lease). Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge. Payments will be applied first to accrued late charges and attorney's fees, second to accrued interest, then to Base Rent and Operating Expense Increase, and any remaining amount to any other outstanding charges or costs. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor, deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 4 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements of the Building, will not adversely affect the mechanical, electrical, HVAC, and other systems of the Building, and/or will not affect the exterior appearance of the Building. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in the Agreed Use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, byproducts or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use such as ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project not caused or contributed to by Lessee). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee's occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee's occupancy, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1e) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 5 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any improvements with the Premises. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, fire alarm and/or smoke detection systems, fire hydrants, and the Common Areas. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions. The term "Utility Installations" refers to all floor and window coverings, air lines, vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, and plumbing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). (b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof, ceilings, floors or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed $2000. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as built plans and specifications. For work which costs an amount in excess of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. Insurance; Indemnity. 8.1 Insurance Premiums. The cost of the premiums for the insurance policies maintained by Lessor pursuant to paragraph 8 are included as Operating Expenses (see paragraph 4.2 (c)(iv)). Said costs shall include increases in the premiums resulting from additional coverage related to requirements of the holder of a mortgage or deed of trust covering the Premises, Building and/or Project, increased valuation of the Premises, Building and/or Project, and/or a general premium rate increase. Said costs shall not, however, include any premium increases resulting from the nature of the occupancy of any other tenant of the Building. If the Project was not insured for the entirety of the Base Year, then the base premium shall be the lowest annual premium reasonably obtainable for the required insurance as of the Start Date, assuming the most nominal use possible of the Building and/or Project. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $2,000,000 procured under Paragraph 8.2(b). 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor . Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 6 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E (a) Building and Improvements. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Building and/or Project. The amount of such insurance shall be equal to the full replacement cost of the Building and/or Project, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence. (b) Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days ("Rental Value insurance"). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property; Business Interruption Insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "Premises Total Destruction" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises which requires repair, remediation, or restoration. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 7 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 Abatement of Rent; Lessee's Remedies. (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 Definitions. As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project or any portion thereof or a change in the improvements thereon. 10.2 Payment of Taxes. Except as otherwise provided in Paragraph 10.3, Lessor shall pay the Real Property Taxes applicable to the Project, and said payments shall be included in the calculation of Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.3 Additional Improvements. Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 8 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities and Services. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use in connection with an office, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. Lessor shall also provide janitorial services to the Premises and Common Areas 5 times per week, excluding Building Holidays, or pursuant to the attached janitorial schedule, if any. Lessor shall not, however, be required to provide janitorial services to kitchens or storage areas included within the Premises. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If a service is deleted by Paragraph 1.13 and such service is not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges for such jointly metered service. 11.3 Hours of Service. Said services and utilities shall be provided during times set forth in Paragraph 1.12. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security and trash services, over standard office usage for the Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buyout or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36) (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. (g) Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2) 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 9 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 10 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for nonscheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to nonscheduled payments. The interest ("Interest") charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 Breach by Lessor. (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion. (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month's Base Rent or the Security Deposit, reserving Lessee's right to seek reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the rentable floor area of the Premises, or more than 25% of Lessee's Reserved Parking Spaces, if any, are taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. Brokerage Fees. 15.1 Additional Commission. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires from Lessor any rights to the Premises or other premises owned by Lessor and located within the Project, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of the Brokers in effect at the time of the execution of this Lease. 15.2 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker for the limited purpose of collecting any brokerage fee owed. 15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. Estoppel Certificates. (a) Each Party (as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 11 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Days. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Project, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor's partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees) of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Disclosures Regarding The Nature of a Real Estate Agency Relationship. (a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows: (i) Lessor's Agent. A Lessor's agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor's agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (ii) Lessee's Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (iii) Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lesser or the Lessee. b. Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advise is desired, consult a competent professional. (b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to any breach of duty, error or omission relating to this Lease shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. (c) Buyer and Seller agree to identify to Brokers as "Confidential" any communication or information given Brokers that is considered by such Party to be confidential. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 12 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lender ") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the nondisturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically become a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor's obligations hereunder, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month's rent, or (d) be liable for the return of any security deposit paid to any prior lessor. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. Attorneys' Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation). 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last 6 months of the term hereof place on the Premises any ordinary "For Lease" signs. In addition, Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. Signs. Lessee shall not place any sign upon the Project without Lessor's prior written consent. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request. 37. Guarantor. 37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association. 37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 13 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. Options. If Lessee is granted an Option, as defined below, then the following provisions shall apply. 39.1 Definition. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease. 40. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. In the event, however, that Lessor should elect to provide security services, then the cost thereof shall be an Operating Expense. 41. Reservations. (a) Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessor may also: change the name, address or title of the Building or Project upon at least 90 days prior written notice; provide and install, at Lessee's expense, Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; grant to any lessee the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly given herein; and to place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the Building or the Project or on pole signs in the Common Areas. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. (b) Lessor also reserves the right to move Lessee to other space of comparable size in the Building or Project. Lessor must provide at least 45 prior written notice of such move, and the new space must contain improvements of comparable quality to those contained within the Premises. Lessor shall pay the reasonable out of pocket costs that Lessee incurs with regard to such relocation, including the expenses of moving and necessary stationary revision costs. In no event, however, shall Lessor be required to pay an amount in excess of two months Base Rent. Lessee may not be relocated more than once during the term of this Lease. (c) Lessee shall not: (i) use a representation (photographic or otherwise) of the Building or Project or their name(s) in connection with Lessee's business; or (ii) suffer or permit anyone, except in emergency, to go upon the roof of the Building. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 43. Authority. (a) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within 30 days after request, deliver to the other party satisfactory evidence of such authority. (b) If this Lease is executed by more than one person or entity as "Lessee", each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document. 44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 45. Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 46. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable nonmonetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 47. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 48. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT. 49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [_] is [X] is not attached to this Lease. 50. Americans with Disabilities Act. In the event that as a result of Lessee's use, or intended use, of the Premises the Americans with Disabilities Act or any similar law requires modifications or the construction or installation of improvements in or to the Premises, Building, Project and/or Common Areas, the Parties agree that such modifications, construction or improvements shall be made at: [X] Lessor's expense [_] Lessee's expense. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 14 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING AND SIZE OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Fairfield, Ca. Executed at: Vacaville, CA on: 6/16/03 on: 6/10/03 By LESSOR: By LESSEE: Fairfield West Partners, LLC Solano Band ____________________________ ____________________________ By: /s/ Ronald Waslohn By: /s/ John Nerland Name Printed: Ronald Waslohn Name Printed: John Nerland Title: Managing Member Title: President & CEO By: /s/ ?????????? By: Name Printed: ?????????? Name Printed: Title: ?????????? Title: Address: 1300 Oliver Rd. #300 Address: Fairfield, Ca. 94534 ____________________________ ____________________________ Telephone / Facsimile Telephone / Facsimile Federal ID No. _____________ Federal ID No. _____________ LESSOR'S LESSEE'S BROKER: BROKER: Premier Commercial, Inc. Attn: Mr. Ron Waslohn Attn: Address: 1300 Oliver Rd. Suite 300 Address: Fairfield, CA 94534 (707) 436-7300 / (707) 421-9958 ____________________________ Telephone / Facsimile No. Telephone / Facsimile No. These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. (C)Copyright 1999-By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 15 of 15 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E [Graphic Omitted] RENT ADJUSTMENT(S) STANDARD LEASE ADDENDUM Dated May 9, 2003 By and Between (Lessor) Fairfield West Partners, LLC (Lessee) Solano Bank Address of Premises: 1411 Oliver Road, Fairfield, CA 94534 Paragraph 51 A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. Cost of Living Adjustment(s) (COLA) a. On (Fill in COLA Dates): July 1, 2004, July 1, 2005, July 1, 2006, July 1, 2007 _________________________________________________________ the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [_] CPI W (Urban Wage Earners and Clerical Workers) or [X] CPI U (All Urban Consumers), for (Fill in Urban Area): Oakland/San Francisco/San Jose Metropolitan Area, All Items (1982-1984 = 100), herein referred to as "CPI". b. In no event, however, shall the adjustment in rent exceed 3% annually. c. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [_] (Fill in Other "Base Month"): _________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment. d. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties. [_] II. Market Rental Value Adjustment(s) (MRV) a. On (Fill in MRV Adjustment Date(s): ________________________________ ________________________________________________________________________________ the Base Rent shall be adjusted to the "Market Rental Value" of the property as follows: /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials RENT ADJUSTMENT(S) Page 1 of 2 (C) 2000 - American Industrial Real Estate Association FORM RA-3-8/00E REVISED 1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached within thirty days, then: (a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or (b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions: (i) Within 15 days thereafter, Lessor and Lessee shall each select an [_] appraiser or [_] broker ("Consultant" - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator. (ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties. (iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties. (iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV. 2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment. b. Upon the establishment of each New Market Rental Value: 1) the new MRV will become the new "Base Rent" for the purpose of calculating any further Adjustments, and 2) the first month of each Market Rental Value term shall become the new 'Base Month' for the purpose of calculating any further Adjustments. [_] III. Fixed Rental Adjustment(s) (FRA) The Base Rent shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be: __________________________________ $ ___________________________ __________________________________ $ ___________________________ __________________________________ $ ___________________________ __________________________________ $ ___________________________ B. NOTICE: Unless specified otherwise herein, notice of any such adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease. C. BROKER'S FEE: The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease. NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 S. Flower Street, Suite 600, Los Angeles, Calif. 90017 /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials RENT ADJUSTMENT(S) Page 2 of 2 (C) 2000 - American Industrial Real Estate Association FORM RA-3-8/00E REVISED [Graphic Omitted] OPTION(S) TO EXTEND STANDARD LEASE ADDENDUM Dated May 9, 2003 By and Between (Lessor) Fairfield West Partners, LLC (Lessee) Solano Bank Address of Premises: 1411 Oliver Road, Fairfield, CA 94534 Paragraph 52 A. OPTION(S) TO EXTEND: Lessor hereby grants to Lessee the option to extend the term of this Lease for Three (3) additional Sixty (60) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least 3 but not more than 6 months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively. (ii) The provisions of paragraph 39, including those relating to Lessee's Default set forth in paragraph 39.4 of this Lease, are conditions of this Option. (iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply. (iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting. (v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. Cost of Living Adjustment(s) (COLA) a. On (Fill in COLA Dates): ___________________________________________ ________________________________________________________________________________ the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [_] CPI W (Urban Wage Earners and Clerical Workers) or [X] CPI U (All Urban Consumers), for (Fill in Urban Area): Oakland/San Francisco/San Jose Metropolitan Area ________________________ All Items (1982-1984 = 100), herein referred to as "CPI". b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [_] (Fill in Other "Base Month"): ______________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment. c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 1 of 3 (C) 2000 - American Industrial Real Estate Association FORM OE-3-8/00E index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties. [_] II. Market Rental Value Adjustment(s) (MRV) a. On (Fill in MRV Adjustment Date(s)) ________________________________ ________________________________________________________________________________ the Base Rent shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then: (a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or (b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions: (i) Within 15 days thereafter, Lessor and Lessee shall each select an [_] appraiser or [_] broker ("Consultant" - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator. (ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties. (iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties. (iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV. 2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment. b. Upon the establishment of each New Market Rental Value: 1) the new MRV will become the new "Base Rent" for the purpose of calculating any further Adjustments, and 2) the first month of each Market Rental Value term shall become the new "Base Month" for the purpose of calculating any further Adjustments. [_] III. Fixed Rental Adjustment(s) (FRA) The Base Rent shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be: __________________________________ $ ___________________________ __________________________________ $ ___________________________ __________________________________ $ ___________________________ __________________________________ $ ___________________________ B. NOTICE: Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease. C. BROKER'S FEE: The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 2 of 3 (C) 2000 - American Industrial Real Estate Association FORM OE-3-8/00E NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 S. Flower Street, Suite 600, Los Angeles, Calif. 90017 /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 3 of 3 (C) 2000 - American Industrial Real Estate Association FORM OE-3-8/00E RULES AND REGULATIONS FOR STANDARD OFFICE LEASE [Graphic Omitted] Dated: May 9, 2003 By and Between Fairfield West Partners, LLC & Solano Bank GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety and reputation of the Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Project. 4. Lessee shall not keep animals or birds within the Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the Premises or Project. 9. Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and Building Holidays, and on other days between the hours of 6:00 P.M. and 7:00 A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 1 of 2 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. /s/ ??????? /s/ ??????? - ----------- ----------- /s/ ??????? - ----------- ----------- Initials Initials Page 2 of 2 (C) 1999 - American Industrial Real Estate Association FORM OFG-1-9/99E ADDENDUM TO STANDARD MULTI-TENANT OFFICE LEASE - GROSS (1411 Oliver Road, Fairfield, California) This Addendum (the "Addendum") is attached to and made part of that certain Standard Multi-Tenant Office Lease - Gross (the "Lease") by and between Solano Bank ("Lessee") and Fairfield West Partners, LLC, a California limited liability company ("Lessor") regarding the lease of certain office space located at 1411 Oliver Road, Fairfield, California as more particularly described in the Lease. To the extent the terms of this Addendum are inconsistent with any provision of the Lease, the terms of this Addendum shall control. Unless otherwise defined in this Addendum, all capitalized terms used in this Addendum shall have the same meaning as such capitalized terms have in the Lease. 1. Relationship with Ground Lease. The parties hereto acknowledge that the Lease is in fact a sublease. Donald E. Haslett and Alma D. Haslett, as Trustees of The Haslett Family Trust under Declaration of Trust dated January 22, 1997 (collectively, "Owner"), and Lessor entered into that certain Ground Lease dated as of November 1, 2002 (the "Ground Lease") whereby Lessor leased the real property where the Project shall be located from Owner. 2. Owner's Consent! Recognition Agreement. By executing this Addendum where indicated below, Owner hereby consents to the Lease between Lessor and Lessee of which this Addendum is a part, and agrees for the benefit of Lessee to the following terms and conditions: a. Owner hereby represents and warrants to Lessee (i) the Ground Lease is the entire agreement between Owner and Lessor with regard to the Project/Premises, (ii) the Ground Lease is in full force and effect, (iii) there are no defaults or outstanding uncured notices of default under the terms of the Ground Lease, and (iv) a true and correct copy of the Ground Lease is attached hereto as Exhibit A to this Addendum. b. If the Ground Lease is terminated for any reason whatsoever, Owner hereby agrees to recognize the Lease as a direct lease agreement between Owner and Lessee which shall govern all terms and conditions of Lessee's occupancy of the Premises (including without limitation Lessee's rights to any options to extend the term of the Lease and any exclusivity rights) and Owner shall assume all obligations of Lessor under the Lease. If Owner assumes the obligations of Lessor under the Lease as described in the previous sentence, Owner shall credit against Lessee's rent obligation any amount of rent actually paid by Lessee to Lessor pursuant to the terms of the Lease. c. Owner hereby agrees to recognize Lessee's right under Section 52 of the Lease to extend the term of the Lease for three (3) additional periods of sixty (60) months each. In the event Lessee exercises the extension rights and the Ground Lease terminates prior to the fully extended term of the Lease, Owner shall recognize 1 the Lease as a direct lease agreement between Owner and Lessee which shall govern all terms and conditions of Lessee's occupancy of the Premises and Owner shall assume all obligations of Lessor under the Lease. 3. Lessor Representations. Lessor hereby represents and warrants to Lessee that: (i) the Ground Lease is the entire agreement between Owner and Lessor with regard to the Project/Premises, (ii) the Ground Lease is in full force and effect, (iii) there are no defaults or outstanding uncured notices of default under the terms of the Ground Lease, and (iv) a true and correct copy of the Ground Lease is attached hereto as Exhibit A to this Addendum. 4. Lessor Covenants. Lessor agrees to comply with or perform all obligations of tenant under the Ground Lease. Lessor shall indemnify, defend, and hold harmless Lessee from and against any and all claims arising from any breach or default in the performance of any obligation on Lessor's part to be performed under the Ground Lease. Lessor shall not modify the Ground Lease in any way that would adversely affect the Lessee without obtaining Lessee's prior written consent. 5. Owner's Approval of Alterations To Construction of Premises. As required by Section 16 of the Ground Lease, Owner hereby consents to the construction of the Premises and approves of the plans and specifications for the Premises which are attached hereto as Exhibit B to this Addendum. 6. Option(s) to Extend Term. Section 52(A) is hereby modified to provide that Lessee shall have three (3) options to extend the term of the Lease for sixty (60) months each. The term of the Ground Lease is for fifteen (15) years with one option to extend the term thereof for an additional ten (10) years. In the event Lessee exercises its third option to extend the term of the Lease beyond fifteen years, the Lessor shall be obligated to exercise its right under the Ground Lease to extend the term thereof for an additional ten (10) years. Section 52(A)(iv) is modified by (i) inserting the following at the beginning thereof, "Except as provided below," and (ii) adding the following sentence at the end thereof, "Notwithstanding the foregoing, in the event the Lease is assigned or sublet to a Permitted Assignee such Permitted Assignee shall be permitted to exercise any Option(s) granted hereunder". Section 52(A)(I)(a) is hereby modified to provide that the COLA dates shall be "July 1, 2013 and each July 1st of all remaining years of the term of the Lease as may be extended pursuant to this Section 52." Section 52(A)(I)(b) is hereby modified to provide that in no event shall the adjustment of Base Rent for any lease year exceed three percent (3%) over the prior lease year. On any Third Year Adjustment Date (as defined in Section 51 (A)(I)(b) of the Lease) during the Lease Term, as may be extended, the Base Rent shall be calculated pursuant to Section 52(A)(I)(b) and the three percent (3%) cap referenced in the preceding sentence shall not apply. However, any increase on a Third Year Adjustment Date shall be limited so that the Base Rent shall not increase for any three year period by more than nine percent (9%) in the aggregate. 2 7. Parking. Section 1.2(b) is hereby revised to read in its entirety, "Lessor shall provide 4 parking spaces in front of the Building which shall be marked that they are for 20 minute parking." 8. Signage. Lessee shall have the right to install personal signage on the exterior of the Building (provided that such signage complies with all Applicable Requirements). The Lessor shall have the right to reasonably approve the size, location and style of such exterior signage. Lessee shall also have the right to place signage on the floor of the Building where the Premises are located and on any lobby directory for the Building. Lessor's approval of signage shall not be unreasonably withheld, conditioned or delayed. 9. Early Possession. Section 3.2 of the Lease is hereby amended to read in its entirety as follows, "If Lessee totally or partially occupies the Premises prior to the Commencement Date, Lessee's obligation to pay Base Rent, Lessee's Share of Operating Expense Increase and Real Property Taxes shall be abated for the period of such early possession. All other terms of this Lease shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date." 10. Adjustments Due to Change in Square Footage of Premises. The parties originally contemplated the Premises would be approximately 3,000 square feet at a rental rate of $2.50 per square foot. The parties acknowledge that the actual square footage of the Premises shall be approximately 3,078 rentable square feet. Due to the change in square footage of the Premises the following amendments to the lease are required: (i) Section 12(a) is revised to provide that the square footage of the Premises is 3,078 square feet, (ii) Section 1.5 is revised to provide that the Base Rent is $7,695 per month, (iii) Section 1.6 is revised to provide that Lessee's Share of Operating Expenses Increases is 7.97%, (iv) Section 1.7(a) is revised to change the Base Rent referenced therein to $7,695, (v) Section 1.7(b) is revised to provide that the Security Deposit shall be $7,695. 11. Exclusivity. Lessor shall not during the term of the Lease, or any extension thereof, permit any other space on the Property (as defined below) to be used for the operation of a retail/commercial bank, savings and loan, or credit union (collectively, "Exclusive Uses"). Financial advisory services, including without limitation, accountant and stock brokerage services are not deemed to be Exclusive Uses for purposes of this Lease. Lessor warrants that no existing lease for space on the Property conflicts with the Exclusive Uses, that all future leases, renewals thereof and renewals of existing leases will prohibit such uses, and that Lessor will take all necessary action to stop any offending use. For purposes of this paragraph the term "Property" shall mean the real property upon which the Premises are located which real property is common known as 1411 Oliver Road, Fairfield, California (APN No.s 0150-110-040 and 01 50-1 10-050). 12. Approval Contingency. The obligations of Lessee under this Lease are expressly contingent upon Lessee obtaining such approvals, authorizations, licenses, 3 consents and exemptions (collectively, "Permits") as are required to be issued by all governmental authorities in order for Lessee to operate a branch banking facility at the Premises. Lessee shall use its best efforts to obtain such Permits. In the event that despite the exercise of such efforts Lessee is unable to obtain the Permits within thirty (30) days after the date this Lease is fully executed by Lessor and Lessee, then Lessee may either (a) elect to terminate the Lease, whereupon this Lease shall terminate and neither Lessee nor Lessor shall have any further obligations or liabilities to the other, or (b) waive the contingency set forth in this Section. Lessee's failure to give written notice to Lessor of Lessee's election to terminate the Lease pursuant to this Section within such thirty (30) day period shall be deemed a waiver of the contingency set forth in this Section. 13. Use. The agreed use provided in Section 1.8 shall be revised to read, "Financial Services, including without limitation, the operation of a retail/commercial bank." Section 6.1 of the Lease is hereby modified to insert the word "condition" in the third sentence of the section after the phrase, "not unreasonably withhold". 14. Common Areas -- Changes. Lessor's ability to change the nature and extent of the Common Areas under Section 2.10 of the Lease is hereby limited so that such changes shall not (i) materially and adversely affect Lessee's continued ability to operate its business from the Premises in accordance with all rights under the Lease (except for temporary disruption to Lessee's business caused by construction activity), or (ii) create an obstruction of access to or from the Premises or view to or from the Premises. 5. Operating Expense Increase. Lessee is obligated to pay Lessee's Share of the Operating Expense Increase as provided in Section 4.2 of the Lease. Notwithstanding the foregoing, the parties agree that with respect to Lessee's obligations, the Operating Expense Increase for any given year shall not exceed an amount equal to the Operating Expense Increase for the prior Comparison Year as increased by six percent (6%). The cap on increases of Operating Expense Increases between Comparison Years provided in this paragraph shall not apply to the extent that any increases in Operation Expense Increase are due to increases in Real Property Taxes or the cost of insurance premises for the insurance policies maintained by Lessor pursuant to Section 8. 16. Operating Expense Exclusions. Operating Expenses (as defined in Section 4.2(c)) shall not include the following: (i) Interest, principal, depreciation, attorney fees, costs of environmental investigations or reports, points, fees, and other lender costs and closing costs on any mortgage or mortgages, ground lease payments, or other debt instrument encumbering the Building or the Project (including the land on which the Building is situated); (ii) Marketing costs, including leasing commissions, attorney's fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with 4 present or prospective tenants and other occupants of the Building; (iii) Real estate broker's leasing commissions; (iv) Costs, including permit, license, construction and inspection costs incurred with respect to the installation of other tenant's or occupant's improvements made for tenants or other occupants in the Building or Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants, prospective tenants or other occupants in the Building or Project; (v) Costs of any items (including, but not limited to, costs incurred by Lessor for the repair of damage to the Building) to the extent Lessor receives reimbursement from insurance proceeds or from a third party; (vi) Expenses in connection with services or other benefits which are not offered to Lessee or for which Lessee is charged for directly but which are provided to another tenant or occupant of the Building or Project without charge; (vii) Costs, including attorney's fees and costs, incurred by Lessor relating to disputes with ground lessors, lenders, brokers, tenants or prospective tenants; (viii) Lessor's genera] corporate overhead, general and administrative expenses and costs of operation of the business of Lessor as contrasted with operation of the Project, including within this exclusion, costs related to the sale financing, or refinancing of the Project or any part thereof or interest therein; (ix) Advertising or promotional expenditures; (x) Costs arising from defects in the shell of the Building or improvements installed by Lessor; (xi) Cost for acquisition of sculpture, paintings or other objects of art which would result in the Lessee being charged in an amount greater than $2,000; (xii) Costs, fees, and compensation paid to Lessor, or to Lessor's subsidiaries or affiliates, for services in or to the Building or Project to the extent that they exceed the charges for comparable services rendered by an unaffiliated third party of comparable skill, competence, stature, and reputation; (xiii) Cost incurred in connection with upgrading the Building or Project to comply with Applicable Requirements in effect with respect to the Project prior to the date of this Lease; (xiv) Wages, salaries, and other compensation paid to any executive employee of Lessor or Lessor's property manager above the grade of building manager for the 5 Building or Project or paid to any off-site personnel; (xv) Charitable or political contributions made by Lessor; and (xvi) Entertainment, dining, or travel expenses for any purpose. 17. Audit Rights. Lessor shall keep at its principal office full and accurate books of account, records, receipts, and other pertinent data reflecting the Operating Expenses (the "Business Records"). For a period of three (3) months after receipt of each annual statement showing Operating Expenses (the "Expenses Statement"), Lessee shall be entitled, upon thirty (30) days prior written notice and during normal business hours, at Lessor's principal office or such other place as Lessor shall designate, to inspect and examine those Business Records of Lessor relating to the determination of Operating Expenses for the immediately preceding Lease Year. Failure of Lessee to request such inspection within such three (3) month period shall render such Expenses Statement conclusive and binding on Lessee. If, after inspection and examination of such Business Records, Lessee disputes the amounts of the Operating Expenses charged by Lessor, Lessee may, by written notice to Lessor, request an independent audit of such Business Records. The independent audit of the Business Records shall be conducted by a certified public accountant ("CPA") acceptable to both Lessor and Lessee. If, within thirty (30) days after Lessor's receipt of Lessee's notice requesting an audit, Lessor and Lessee are unable to agree on the CPA to conduct such audit, then Lessor may designate a nationally recognized accounting firm not then employed by Lessor or Lessee to conduct such audit. The audit shall be limited to the determination of the amount of Operating Expenses for the subject Lease Year. If the audit discloses that the amount of Operating Expenses billed to Lessee was incorrect, the appropriate party shall pay to the other party the deficiency or overpayment, as applicable within thirty (30) days of conclusion of the audit. All costs and expenses of the audit shall be paid by Lessee unless the audit shows that Lessor overstated Operating Expenses for the subject Lease Year by more than five percent (5%), in which case Lessor shall pay all costs and expenses of the audit. Lessee and the CPA shall keep any information gained from such audit confidential and shall not disclose it to any other party. The exercise by Lessee of the audit rights hereunder shall not relieve Lessee of its obligation to timely pay all sums due hereunder, including, without limitation, the disputed Operating Expenses. 18. Security Deposit. Section 5 of the Lease shall be modified by deleting the fourth sentence thereof in their entirety. 19. Section 6.2. Section 6.2 of the Lease is hereby modified as follows: (i) the phrase ", or any third party" is deleted from the end of Section 62(c), (ii) the phrase "or any third party" is deleted from the third line down in Section 6.2(d), (iii) the word "gross" is deleted from the third line down in Section 6.2(e), (iv) Section 6.2(f) is modified by inserting the phrase, "or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees" after the phrase "prior to Lessee's occupancy" in the second line down thereof and (v) the following language should be 6 added to the end of Section 6.2(g), "In the event of any investigation of the Premises due to the occurrence of a Hazardous Substance Condition, Lessor shall promptly provide Lessee with a copy of any and all reports generated in connection with such investigation or remediation of same ("Environmental Reports"). If Lessor elects to give Lessee a termination notice pursuant to this Section, a copy of all Environmental Reports must be provided to Lessee with the termination notice." 20. Section 6.3. The first sentence of Section 6.3 is hereby amended to delete the following language, "and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises". 21. Section 6.4. The first sentence of Section 6.4 is hereby deleted in its entirety and replaced with the following in lieu thereof, "Lessee shall permit Lessor and/or Lessor's authorized representatives to enter the Premises at any time in the case of emergency, and otherwise at reasonable times for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease during usual business hours and upon reasonable advance notice provided that an officer of the Lessee will be present during any such entry. Any entry onto the Premises conducted pursuant to this Section shall be conducted in a manner which will not unreasonably interfere with the operation of the Lessee's business. In the event of any entry onto the Premises in the case of an emergency, Lessor's representative shall be permitted to enter the Premises for the limited purpose of admitting fire, police, or other public safety offices onto the Premises. Lessor's representatives shall be permitted to remain on the Premises in the event of an emergency while public safety officials are on the Premises." 22. Section 7.4(b). Section 7.4(b) of the Lease is deleted in its entirety and replaced with the following language in lieu thereof, "Upon the expiration or termination of this Lease, Lessee shall have no obligation to remove any of the interior improvements to the Premises, including all Lessee Owned Alterations or Utility Installations, provided, however, that Lessee shall, at Lessee's sole cost and expense remove its Trade Fixtures (including safes, vaults, and automated teller machines) and repair the damage occasioned by such removal." 23. Section 7.4(c). Section 7.4(c) of the Lease is hereby modified by deleting the phrase,", or any third party" from the third to last sentence of the section. 24. Section 8.3(a). Section 8.3(a) is hereby amended to delete the phrase "unless required by a Lender" from the fourth sentence thereof. 25. Section 8.8. Section 8.8 is hereby modified to add the following language at the beginning thereof, "Except for Lessor's gross negligence or willful misconduct,". 26. Section 9.3. The first sentence of Section 9.3 is hereby revised to read as follows, "If a Premise's Partial Damage that is not an Insured Loss occurs as the result of a grossly negligent or willful act of Lessor, Lessor shall be required to repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease 7 shall continue in Full force and effect. If a Premise's Partial Damage that is not an Insured Loss occurs as a result of Lessee's negligence, willful acts or omissions, Lessee shall make the repairs at Lessee's expense. In all other circumstances, if a Premise's Partial Damage that is not an Insured Loss occurs, Lessor may either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage." 27. Section 9.4. Section 9.4 is hereby amended by adding the following language to the end thereof, "In the event the damage or destruction was caused by the gross negligence or willful misconduct of Lessor, Lessee shall have the right to recover Lessee's damages from Lessor, except as provided in Section 8.6." 28. Section 9.5. Section 9.5 is hereby amended to provide that in the event Lessee exercises its option to extend the lease term, Lessee shall have no obligation to provide Lessor with any shortage in insurance proceeds (or adequate assurance thereof) under any circumstances. 29. Section 9.6(b). Section 9.6(b) is hereby amended by modifying the last sentence thereof to read in its entirety, ""Commence" shall mean the beginning of the actual work on the Premises.". 30. Section 12.1(a)Section 12.1(a) of the Lease is hereby deleted in its entirely and replaced with the following in lieu thereof, "Except as otherwise provided herein, Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Lessee may assign or sublet its rights under this Lease without Lessor's written consent (i) to any financial institution regulated by state and/or federal agencies, or (ii) to a parent or subsidiary of Lessee (collectively, "Permitted Assignees") provided the Permitted Assignee has a Net Worth equal or greater than the Net Worth of Lessee." 31. Section 12.1(b). Section 12.1(b) is hereby amended to provide in its entirety as follows, "A change in control of Lessee shall not constitute an assignment requiring Lessor's consent." 32. Section 12.1(c). Section 1 2. 1(c) shall is hereby revised to add the following at the end of the last sentence thereof, "and reported by Lessee on its periodic regulatory call report or other public filing of Lessee's Financing Statements (as defined below)." Additionally, Section 12.1(c) is hereby revised by deleting the phrase, "as it was represented" in the third line down. 33. Section 12.1(d). Section 12.1(d) is hereby revised so that the first sentence thereof begins, "An assignment or subletting, other than to a Permitted Assignee, 8 without consent shall ...". 34. Section 12.2(g). Section 12.2(g) is hereby modified to provide in its entirety as follows, "Except as provided below, Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. Notwithstanding the foregoing, in the event of an assignment or subletting to a Permitted Transferee, such Permitted Transferee shall have the right to exercise any and all Option(s) granted to the original Lessee by this Lease." 35. Section 13.1(c). Section 13.1(c) is hereby revised to change the reference in the last line thereof from "10 days following written notice to Lessee" to "15 days following written notice to Lessee." 36. Section 13.6(b). Section 13.6(b) is hereby amended to revise the reference to "one month's Base Rent" in the second to last line down to "two (2) month's Base Rent". 37. Section 16(c). Section 16(c) is hereby amended to read in its entirety as follows, "If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee shall deliver to any potential lender or purchaser designated by Lessor such publicly available financial statements as contained in annual and quarterly reports filed by Lessee or its parent with the Securities and Exchange Commission (the "Financial Statements") as may be reasonably required by such lender or purchaser, including but not limited to Lessee's Financial Statements for the past 3 years. All such Financial Statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth." 38. Section 26. Section 26 is hereby amended to modify the reference to "150%" therein to "125%". 39. Section 31. Section 31 is hereby amended to modify the phrase "Lessor shall be entitled to" in the last sentence to "either party hereto shall be entitled to". 40. Section 32 The first sentence of Section 32 is hereby deleted in its entirety and replaced with the following language in lieu thereof, "Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable time upon reasonable advance notice provided that an officer of the Lessee will be present during any such entry for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alternations, repairs, improvements or additions to the Premises as Lessor may deem necessary provided that the same shall be done in a manner that does not unreasonably interfere with the conduct of Lessee's business on the Premises. in the event of any entry onto the Premises in the case of an emergency, Lessor's representative shall be permitted to enter the Premises for the limited purpose of admitting fire, police, or other public safety officials onto the Premises. Lessor's representatives shall be permitted to remain on the Premises in the event of an emergency while public safety officials are on the Premises." 9 41. Section 36. Section 36 of the Lease is hereby amended by inserting the word "conditioned," after the word "withheld" in the first sentence of the Section. 42. Section 39.2. Section 39.2 is hereby deleted in its entirety. 43. Section 41(b). Section 41(b) is hereby deleted in its entirety. 44. Section 46. Section 46 is hereby modified by deleting the second sentence thereof in its entirety. 45. General Rules. General Rule number 6 is hereby deleted in its entirety. In no event shall the rules and regulations of Lessor, or any modifications or amendments thereto, be inconsistent with the provisions of this Lease. In the event of conflict between such rules and regulations and the provisions of this Lease, the provisions of this Lease shall prevail. 46. Delivery of Premises and Substantial Completion. Pursuant to the terms of the Lease, Lessor is required to deliver possession of the Premises to the Lessee in Substantially Completed Condition on or before the Commencement Date. The Premises shall be deemed to be Substantially Completed when (i) the shell of the Building/Premises has been completed in accordance with the plans and specifications attached hereto as Exhibit B-1 and a certificate of occupancy has been issued for the Building. The definition of "Substantially Completed" shall also define the terms "Substantial Completion", "Substantially Complete" and "Substantially Completed Condition". Following Substantial Completion and before Lessee takes possession of the Premises, Lessor and Lessee shall inspect the Premises and jointly prepare a list of agreed items of construction remaining to be completed. Lessor shall complete the items set forth in the punch list as soon as reasonably possible. 47. Construction of Tenant Improvements; Payment of Tenant Improvement Allowance. Lessor shall permit Lessee, or its representative or contractor, to take Early Possession of the Premises as soon as possible in order to expedite the construction of Lessee's improvements to the Premises. During any such "Early Possession" of the Premises, neither Lessee nor Lessee's representatives or contractor shall interfere with or delay the completion of the shell of the Building/Premises by Lessor. Lessee shall be fully responsible for the construction of Lessee's improvements to the Premises. Lessor hereby approves of the plans and specifications of Lessee's improvements to the Premises set forth on Exhibit B-2 attached hereto (the "Lessee Improvements"). Lessee shall utilize a contractor of its choice, subject to Lessor's prior written consent (which shall not be unreasonably withheld, conditioned or delayed), for the construction of the Lessee Improvements. The contractor Lessee selects for the construction of the Lessee Improvements ("Lessee's Contractor") shall be considered Lessee's agent within the provisions of Section 8.7 of the Lease, and Lessee shall indemnify Lessor for any and all damages incurred by Lessor as a result of any actions and/or inactions of Lessee's Contractor. Within ten (10) days following the completion of the Lessee Improvements, 10 Lessor shall reimburse Lessee for all costs and expenses Lessee incurred in association with the design and construction of the Lessee Improvements. Lessor's reimbursement obligation for the Lessee Improvements shall in no event exceed Ninety-One Thousand Nine Hundred Fifty Dollars ($91,950.00). 48. Traffic Mitigation Fee Representation. In consideration of the Lessee entering into the Lease, Lessor hereby represents and warrants to Lessee that, to Lessor's best knowledge, no traffic mitigation fees will be imposed by any governmental agency upon the Project or Premises in connection with Lessee's particular use of the Premises, or otherwise. 49. Rent Adjustment(s). Section 51(A)(I)(a) is hereby modified to provide that the COLA Dates shall be, "June 1, 2004, June 1, 2005, June 1, 2006, June 1, 2007, June 1,2008, June 1,2009, June 1, 2010, June 1, 2011, and June 1, 2012." Section 51 (A)(l)(b) is hereby modified to add the following after the first sentence thereof, "On the third anniversary of the Commencement Date and every third year thereafter (collectively, a "Third Year Adjustment Date") for the remainder of the Lease Term, as may be extended, the Base Rent shall be calculated pursuant to Section 51 (A)(I)(c) below and the three percent (3%) cap referenced in the preceding sentence shall not apply. However, any increase on a Third Year Adjustment Date shall be limited so that the Base Rent shall not increase for any three year period by more than nine percent (9%) in the aggregate." IN WITNESS WHEREOF, the parties have executed this Addendum as of the dates indicated below. LESSOR: Fairfield West Partners, LLC, a California limited liability company By: /s/ Steve Spencer ----------------------------------- Name: Steve Spencer Ronald [ILLEGIBLE] --------------------------------- Ronald [ILLEGIBLE] Title: [ILLEGIBLE] Managing Member --------------------------------- 6/17/03 Date: 6/17/03 --------------------------------- LESSEE: Solano Bank, a California corporation By: /s/ John Nerland ----------------------------------- Name: John Nerland --------------------------------- Title: President and CEO --------------------------------- Date: 6/10/03 --------------------------------- 11 CONSENT OF OWNER Without waiving its rights under the above referenced Ground Lease to approve further assignments or subletting, the undersigned, collectively as lessor under the Ground Lease, hereby consents to the above Lease and agrees to be bound by the terms and conditions of Sections 2 and 5 of this Addendum, to the extent applicable to the undersigned. OWNER: The Haslett Family Trust under Declaration of Trust dated January 22, 1997 By: -------------------------------- Donald E. Haslett, Trustee By: -------------------------------- Alma D. Haslett, Trustee 12 EXHIBIT A GROUND LEASE 13 EXHIBIT B-1 PLANS AND SPECIFICATION FOR BUILDING/PREMISES 14 EX-10.6 5 p18310_ex10-6.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 1st day of March, 2004 by and between North Bay Bancorp, a California corporation (the "Company"), and Terry L. Robinson (the "Employee"). BACKGROUND WHEREAS, the Employee is currently employed by the Company and has served as the Company's President & Chief Executive Officer since the Company's inception. WHEREAS, the Employee possesses valuable knowledge and skills that have contributed to the operation of the Company and its subsidiary banks; WHEREAS, the Company desires to continue Employee's employment and the Employee is willing to continue to be employed by the Company; WHEREAS, the Company and the Employee desire to enter into this Agreement upon the terms and subject to the conditions hereinafter set forth in place and instead of that certain Employment Agreement entered into between The Vintage Bank and Employee as of March 1, 1999. NOW, THEREFORE, in consideration of the premises, agreements and mutual covenants set forth herein, the parties hereto hereby agree as follows: 1. Employment 1.1 General. The Company hereby employs the Employee as President and Chief Executive Officer on the terms and subject to the conditions contained in this Agreement, and the Employee hereby accepts such employment on the terms and subject to the conditions contained in this Agreement. 1.2 Duties of Employee. During the Term of this Agreement, the Employee shall diligently perform all duties and responsibilities reasonably accorded to and expected of the President and Chief Executive Officer of the Company and as may be assigned to him by the Board of Directors of the Company (the "Board of Directors"), and shall exercise such power and authority as may from time to time be delegated to him thereby. The Employee shall devote his full business time and attention to the business and affairs of the Company as necessary to perform his duties and responsibilities hereunder, render such services to the best of his ability and use his best efforts to promote the interests of the Company. The Employee shall faithfully adhere to, execute and fulfill all policies established by the Company. 1.3 Place of Performance. Except for required travel for the Company's business, the Employee shall perform his duties and responsibilities from the offices of the Company and its subsidiaries. 2. Term. Subject to the provisions of Section 4 of this Agreement, the parties acknowledge that the term of Employee's employment, under this Agreement shall commenc on March 1, 2004 (the "Effective Date") and continue hereunder until the third anniversary of the Effective Date (the "Initial Term"). Unless the Employee shall have notified the Company, or the Company shall have notified the Employee, not less than sixty days prior to the expiration of the Initial Term of such party's election not to continue the Term of this Agreement, upon expiration of the Initial Term, the Employee's employment hereunder shall continue until the fourth anniversary of the Effective Date and thereafter shall continue on a year-to-year basis unless either party notifies the other, not less than sixty days prior to expiration of the then current Renewal Term, of such party's election not to continue the Term of this Agreement (each such additional one-year period, a "Renewal Term"; the Initial Term and any Renewal Term are collectively referred to hereinafter as the "Term"). The election by the Company not to continue the Term of Employee's employment for a Renewal Term shall not be deemed a termination without cause pursuant to Section 4.1(b) hereof. 3. Compensation. 3.1 Salary. During the Term of the Employee's employment hereunder, the Employee shall receive an annual salary of two hundred twelve thousand dollars ($212,000.00) payable at such times and in such manner as the Company's normal payroll schedule may from time to time provide. Employee's annual salary shall be subject to annual adjustment as may be determined by the Board of Directors in its sole and absolute discretion. 3.2 Incentive Compensation. The Employee shall be eligible to receive as additional compensation each year during his employment hereunder, as determined by the Board of Directors or an applicable committee thereof, in accordance with the terms of an incentive compensation plan adopted annually by the Board of Directors. Such additional compensation (if any) to be paid at a time or times and in a manner consistent with the Company's normal practices for the payment of bonuses, or as the Board of Directors or applicable committee may otherwise determine. 3.3 Benefits. During his employment hereunder, the Employee shall be entitled to participate in all plans adopted for the general benefit of the Company's management employees, including medical plans and 401(k) plan, to the extent that the Employee is and remains eligible to participate therein and subject to the eligibility provisions of such plans in effect from time to time. In the event Employee's employment hereunder is terminated and the Employee is entitled to compensation pursuant to Section 4.4(d), the Employee shall be entitled to continue to participate in the Company's medical plan until the earlier of (a) expiration of the applicable payment period set forth in Section 4.4(d)(i) or (ii) or (b) the date Employee obtains new employment. 2 3.4 Paid Time Off. During each calendar year of his employment hereunder, the Employee shall be entitled to paid time off in accordance with the Company's paid time off policy set forth in the Company's Employee Handbook as in effect from time to time. Notwithstanding anything contained in the foregoing, Employee shall take not less than five (5) consecutive days of paid time off during each calendar year during the Term of this Agreement. Employee may be absent from his employment for paid time off only at such time as the Board of Directors shall determine from time to time. 3.5 Withholding. Notwithstanding any provision in this Agreement to the contrary, all payments required to be made by the Company to the Employee hereunder or otherwise arising out of, related or incidental to or in connection with the Employee's employment hereunder shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 3.6 Reimbursement of Expenses. Subject to the Company's reimbursement policies in effect from time to time, the Company agrees to reimburse the Employee for all reasonable business travel and other out-of-pocket expenses incurred by the Employee in the discharge of his duties hereunder, including travel, entertainment, parking, tolls, business meetings, professional dues, and the dues associated with maintaining membership at Silverado Country Club & Resort.. All reimbursable expenses shall be appropriately documented in reasonable detail by the Employee upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy, as well as applicable federal and state record keeping requirements. 3.7 Automobile. The Company will pay to Employee an automobile allowance in the amount of seven hundred fifty dollars ($750) per month. The Employee shall be responsible for insurance and maintenance costs associated with such automobile's operation. The Company will reimburse the Employee for mileage. Employee shall procure and maintain an automobile liability insurance policy on the automobile, with coverage including Employee for at least a minimum of $300,000 for bodily injury or death to any one person in any one accident, and $100,000 for property damage in any one accident. The Employer shall be named as an additional insured and Employee shall provide Employer copies of policies evidencing insurance and Employer's inclusion as an additional insured. 4. Termination 4.1 By Company. (a) With Cause. Notwithstanding any provision in this Agreement to the contrary, the Employee's employment hereunder may be terminated by the Company at any time for "Cause," and such termination shall be effective immediately upon written notice to the Employee. For purposes of this Agreement, "Cause" for the 3 termination of the Employee's employment hereunder shall be deemed to exist if, in the reasonable judgment of the Board of Directors: (a) the Employee commits fraud, theft or embezzlement against the Company, or any subsidiary or affiliate thereof; (b) the Employee commits a felony or a crime involving moral turpitude; (c) the Employee compromises trade secrets or other proprietary information of the Company, or any subsidiary or affiliate thereof; (d) the Employee breaches any non-solicitation agreement with the Company, or any subsidiary or affiliate thereof; (e) the Employee breaches any of the terms of this Agreement (other than those referenced in clauses (c) and (d) of this Section 4.1(a)) and fails to cure such breach within ten (10) days after the receipt of written notice of such breach from the Company; (f) the Employee engages in any grossly negligent act or willful misconduct that causes, or could be reasonably expected to cause, harm to the business, operations or reputation of the Company, or any subsidiary or affiliate thereof; or (g) the Company, or any subsidiary or affiliate thereof, is ordered to terminate this Agreement by any governmental regulatory agency with supervisory authority over the Company, or any subsidiary or affiliate thereof. (b) Without Cause. The Company may at any time, in its sole and absolute discretion, terminate the employment of the Employee hereunder without Cause, or otherwise without any cause, reason or justification, provided that the Company provides to the Employee written notice (the "Termination Notice") of such termination. In the event of any such termination by the Company, the Employee's employment with the Company shall cease and terminate on the date specified in the Termination Notice. (c) For Disability of the Employee. If, as a result of incapacity due to physical or mental illness or injury, the Employee shall have been unable to perform the essential functions of his position, with or without reasonable accommodation, on a full-time basis for a period of sixty (60) consecutive days, or for a total of ninety days in any twelve-month period (a "Disability"), then thirty (30) days after written notice to the Employee (which notice may be given before or after the end of the aforementioned periods, but which shall not be effective earlier than the last day of the applicable period), the Company may terminate the Employee's employment hereunder if the Employee is unable to resume his full-time duties at the conclusion of such notice period. 4.2 Death of the Employee. This Agreement shall immediately cease and terminate upon the death of Employee. 4.3 Termination by Employee. The Employee may terminate his employment under this Agreement upon not less than ninety (90) prior written notice to the Company. Upon learning that the Employee is terminating his employment under this Agreement, the Company may, in its sole discretion but subject to its other obligations under this Agreement, relieve Employee of his duties under this Employment Agreement, and assign Employee other reasonable duties and responsibilities to be performed until the termination becomes effective. 4 4.4 Compensation Upon Early Termination. (a) As a Result of Death, Cause or Resignation. If the Employee's employment under this Agreement is terminated prior to the scheduled expiration of the Term by reason of his death, termination by the Company for Cause or resignation by the Employee, the Employee shall be entitled to be paid solely (i) the Employee's salary then in effect through the effective date of termination, (ii) any accrued vacation due pursuant to Section 3.4, (iii) any amounts due pursuant to Section 3.6, (iv) those benefits, if any, that have vested by operation of state or federal law or under any written term of a plan ("Vested Benefits"), and (v) health care coverage continuation rights under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA Rights"), and the Company shall have no further liability or other obligation of any kind whatsoever to the Employee. In the case of termination as a result of the death of Employee, any amounts due pursuant to this Section 4.4(a) shall be paid to the Employee's estate, heirs (at law), devisees, legatees or other proper and legally entitled descendants, or the personal representative, executor, administrator or other proper legal representative on behalf of such descendants. (b) By the Company other than for Cause. Except as otherwise expressly provided in Section 4.4(d), if, prior to the scheduled expiration of the Term, the Company terminates the Employee's employment without Cause, the Employee shall be entitled to receive and be paid solely (i) the Employee's salary then in effect until the expiration of six months following the effective date of the termination of Employee's employment payable over such period at the Company's regular and customary intervals for the payment of salaries as in effect from time to time ("Severance Pay"), (ii) any accrued vacation due pursuant to Section 3.4, (iii) any amounts due pursuant to Section 3.6, (iv) any Vested Benefits, and (v) any COBRA Rights, and the Company shall have no further liability or other obligation of any kind whatsoever to the Employee. The payment of Severance Pay shall constitute liquidated damages in lieu of any and all claims by the Employee against the Company, shall be in full and complete satisfaction of any and all rights which the Employee may enjoy hereunder, and shall constitute consideration for a full and unconditional release of any and all liability of the Company or any of its shareholders, benefit plans, affiliate companies, subsidiaries, and the directors, officers, employees, trustees and agents of such entities and their successors or assigns, arising out of this Agreement or out of the employment relationship between the Employee and the Company (in the form of Exhibit A, hereafter the "Release"). Payment of the Severance Pay is expressly conditioned upon receipt by the Company of the Release executed by the Employee. (c) Disability. For the sixty (60) day period following onset of the Employee's Disability, Employee shall be entitled to receive and be paid solely (i) the Employee's salary then in effect until the expiration of said sixty (60) day period payable over such period of time at the Company's regular and customary intervals for the payment of salaries as in effect from time to time, (ii) any accrued vacation due pursuant to Section 3.4, (iii) any amounts due pursuant to Section 3.6, (iv) any Vested Benefits, and (v) any COBRA rights. Following expiration of the sixty (60) day period, the Employee shall be entitled to receive and be paid solely a salary at a rate commensurate 5 with the benefit Employee is eligible to receive under any disability policy maintained by the Company for a period of one hundred twenty (120) days or until Employee's benefits under any disability policy maintained by the Company for the Employee commences, whichever period is shorter, payable over such period of time at the Company's regular and customary intervals for the payment of salaries as in effect from time to time, and the Company shall have no further liability or other obligation of any kind whatsoever to the Employee. (d) Change in Control. Notwithstanding anything contained in the foregoing, if within one year of the effective date of a Change in Control (as defined below) (i) Employee's employment under this Agreement is terminated by the Company, its assignee or successor, without Cause (including, for purposes of this Section 4.1(d), an election by the Company not to continue to Term of Employee's employment) or (ii) Employee terminates his employment under this Agreement on account of (y) Employee's position, responsibilities or working conditions being substantially diminished or (z) a material reduction in the Employee's compensation or benefits, the Employee shall be entitled to receive and be paid, in lieu of compensation payable pursuant to Section 4.4(b), an amount equal to three (3) times (a) the Employee's annual salary then in effect plus (b) the average of the incentive compensation paid to the Employee for the two most recently completed fiscal years of the Company. Said amount shall be payable to the Employee for a period of thirty six (36) months following the effective date of the termination of the Employee's employment (the "Date of Termination"). Said amount shall be payable for such period at the Company's regular and customary intervals for the payment of salaries as in effect from time to time. In addition, the Employee shall be entitled to receive and be paid (v) any accrued vacation due pursuant to Section 3.4, (w) any amounts due pursuant to Section 3.6, (x) any Vested Benefits, (y) any COBRA rights, and (z) prorated incentive compensation for the current fiscal year of the Company. (e) Change in Control Defined. "Change in Control" means in any transaction or related series of transactions: (a) the acquisition (other than solely from the Company), by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than the Company or any subsidiary, affiliate (within the meaning of Rule 144 under the Securities Act of 1933, as amended) or employee benefit plan of the Company, of beneficial ownership (within the meaning of Rule 13(d)(3) promulgated under the Exchange Act) of more than 30% of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Voting Securities"); (b) a reorganization, merger, consolidation, share exchange or recapitalization of the Company (a "Business Combination"), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities; or (c) a complete liquidation or dissolution of the Company, or a sale of all or substantially all of the Company's assets. 6 (f) Tax Gross-Up Payment. In the event the compensation payable to the Employee pursuant to and by reason of Section 4.4(d) hereof and otherwise payable by the Company to the Employee by reason of a Change in Control (including without limitation, accelerated vesting of stock options and other compensation payable outside of this Agreement (together the "Total Benefits"), but determined without regard to any additional payments required under this Section 4.4(f)) constitute excess parachute payments within the meaning of Section 280G of the Internal Revenue Code (the "Code") and the Employee will be subject to the excise tax imposed by Section 4999 of the Code, then the aggregate compensation payable to the Employee pursuant to and by reason of Section 4.4(d) shall be increased by an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee, after deduction of any excise tax on the Total Benefits and any federal, state and local income tax, excise taxes and FICA Medicare withholding taxes upon the Gross-Up Payment shall be equal to the Total Benefits. The Gross-Up Payment shall be calculated, and all assumptions to be utilized in performing such calculation, shall be made by the Company's independent auditors (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within fifteen (15) business days after the Date of Termination (defined in Section 4(d)(i)). The calculation of the Gross-Up Payment by the Accounting Firm shall be binding upon the Company and Employee unless with ten (10) business days of receiving the calculations from the Accounting Firm either party objects to the calculation by serving upon the other party a written notice of objection (which shall contain specific details supporting the objection). In the event of a timely objection to the calculation, the Company and Employee shall meet and in good faith attempt to resolve the objection. If the parties fail to resolve the objection with ten (10) business days of receipt of the objection, either party may initiate arbitration, and the dispute shall be resolved by arbitration, pursuant to Section 11 hereof. All reasonable fees and expenses of the Accounting Firm shall be borne solely by the Company. The Gross-Up Payment shall be added to the aggregate compensation payable to the Employee pursuant to and by reason of Section 4.4(d) and be payable over the applicable payment period set forth in Section 4.4(d)(i) or (ii), subject to withholding pursuant to Section 3.5 hereof. 4.5 Expiration of the Term. If not sooner terminated, Employee's employment hereunder shall terminate on the expiration of the Initial Term or the Renewal Term, as applicable. Not less than 45 days prior to the scheduled expiration of Employee's employment hereunder, the parties agree to commence discussions with respect to the possible extension of the Term of this Agreement, possible execution of a new employment agreement or other possible continuation of the Employee's employment (it being understood and agreed that no such discussion shall imply any current or future obligation or commitment to enter into any such agreement or extension or any other expressed or implied arrangement for the continued employment of the Employee following the expiration of the Initial Term or any other termination of the Employee's employment hereunder). 5. Agreement Not to Solicit Customers. The Employee agrees that, during the Term of his employment with the Company or any entity owned by or affiliated with 7 the Company (whether pursuant to this Agreement or otherwise), and for two (2) years following the termination thereof whether or not for any reason whatsoever, he will not, either directly or indirectly, use any Confidential Information (defined in Section 7) in connection with calling on, soliciting, or taking away as a client, customer or prospective client or customer, or attempting to call on, soliciting, or taking away as a client, customer or prospective client or customer, any person or entity that was a client, customer or prospective client or customer of the Company, or any subsidiary or affiliate thereof. For purposes of this agreement "prospective client or customer" shall include any person or entity with whom the Company has had contact for the purpose of soliciting business within the six months prior to the termination of employment or whom the Company intended to contact for the purpose of soliciting business within six months after termination of employment, of which contact or intended contact the Employee had knowledge while employed by the Company. 6. Agreement Not to Solicit Employees. The Employee agrees that during the Term of his employment with the Company or any entity owned by or affiliated with the Company (whether pursuant to this Agreement or otherwise), and for two (2) years following the termination thereof whether or not for any reason whatsoever, he will not, either directly or indirectly, on his own behalf or in the service or on behalf of others, solicit or divert, attempt to solicit or divert or induce or attempt to induce to discontinue employment with the Company, or any subsidiary or affiliate thereof, any person employed by the Company, or any subsidiary or affiliate thereof, whether or not such employee is a full time employee or a temporary employee of the Company, or any subsidiary or affiliate thereof and whether or not such employment is for a determined period or is at will. 7. Ownership and Non-Disclosure and Non-Use of Confidential Information. 7.1 Confidential Information. As used in this Agreement, "Confidential Information" shall mean all customer deposit, loan, sales and marketing information, business and/or strategic plans, customer account records, proprietary receipts and/or processing techniques, information regarding vendors and products, training and operations memoranda and similar information, personnel records, pricing information, financial information and trade secrets concerning or relating to the business, accounts, customers, employees and affairs of the Company, or any subsidiary or affiliate thereof, obtained by or furnished, disclosed or disseminated to the Employee, or obtained, assembled or compiled by the Employee or under his supervision during the course of his employment by the Company, and all physical embodiments of the foregoing, all of which are hereby agreed to be the property of and confidential to the Company, but Confidential Information shall not include any of the foregoing to the extent that the Employee can show that the same is or becomes publicly known through no action, omission, fault or breach of this Agreement by the Employee. 7.2 Ownership. The Employee acknowledges and agrees that all Confidential Information, and all physical embodiments thereof, are confidential to and 8 shall be and remain the sole and exclusive property of the Company. The Employee agrees that upon request by the Company, and in any event upon termination of the Employee's employment with the Company whether or not for any reason whatsoever, the Employee shall deliver to the Company all property belonging to the Company, or any of its subsidiaries or affiliates, including, without limitation, all Confidential Information (and all embodiments thereof), then in his custody, control or possession. 7.3 Non-Disclosure and Non-Use. The Employee agrees that he will not, either during the Term of his employment hereunder or at any time thereafter, use, disclose or make available any Confidential Information to any person or entity, nor shall he use, disclose, make available or cause to be used, disclosed or made available, or permit or allow, either on his own behalf or on behalf of others, any use or disclosure of such Confidential Information other than in the proper performance of the Employee's duties hereunder. 8. Reasonableness of Restrictions. In the event that any provision relating to time period set forth in Section 5, 6, or 7 shall be held by a court of competent jurisdiction to exceed the maximum time period that the court deems reasonable and enforceable, the time period which the court finds to be reasonable and enforceable shall be deemed to become, and thereafter shall be, the maximum time period of such restriction as to such jurisdiction. 9. Enforceability. Any provision of this Agreement which is held by a court of competent jurisdiction to be invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, but shall be enforced to the maximum extent permitted by law, and any such holding of invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10. Injunction. The Employee represents that his experience and capabilities are such that the provisions of Sections 5, 6, and 7 will not prevent him from earning his livelihood, and acknowledges that a breach by the Employee of any of the covenants contained therein will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Employee recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in Section 5, 6, and/or 7 of this Agreement by the Employee or any of his affiliates, associates, partners or agents, either directly or indirectly, without any requirement to post bond or other security and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. 11. Arbitration. Subject to the provisions of Section 10 hereof regarding the remedy of injunctive relief, any dispute (whether based on contract, tort, or statutory duty or prohibition) arising out of or in connection with this Agreement shall be submitted to 9 binding arbitration, in accordance with the Commercial Arbitration Rules of the American Arbitration Association (as modified by this Agreement) by one arbitrator, designated in accordance with those rules. No one who has ever had any business, financial, family, or social relationship with any party to this Agreement shall serve as an arbitrator unless the related party informs the other party of the relationship and the other party consents in writing to the use of that arbitrator. The party demanding arbitration shall submit a written claim to the other party, setting out the basis of the claim. A prearbitration hearing shall be held within twenty (20) business days after the arbitrator's selection. The arbitration shall be held within ninety (90) calendar days after the prearbitration hearing. The arbitrator shall establish any deadlines to accomplish this goal. The arbitration shall take place in Napa, California, at a time and place selected by the arbitrator. Each party shall be entitled to discovery of essential documents and witnesses, as determined by the arbitrator. No less than thirty (30) calendar days before the arbitration, a party may serve a document request calling for any document that would be discoverable in a state civil proceeding. The served with this request shall deliver the requested documents and any objections within ten (10) calendar days. The arbitrator may resolve any dispute over the exchange of documents. Each party may take no more than three (3) depositions, unless additional depositions are allowed by the arbitrator for good cause. All depositions must be completed as of fifteen (15) calendar days before the arbitration hearing unless the parties otherwise agree. The arbitrator may resolve any dispute over the depositions as they would be resolved in a state civil proceeding. Any motion may be heard by the arbitrator on three (3) days notice unless the parties otherwise agree. The arbitrator shall apply California law. The parties agree that all information supplied by any party shall be deemed to be confidential information, and the arbitrator and other participants in the dispute shall protect such information from disclosure to the same extent as confidential information under Section 7 of this Agreement. The arbitrator shall have the following powers: (a) To issue subpenas for the attendance of witnesses and subpenas duces tecum for the production of books, records, documents, and other evidence; (b) To order depositions to be used as evidence; (c) Consistent with the discovery procedures enumerated above, to enforce the rights, remedies, procedures, duties, liabilities, and obligations of discovery as if the arbitration were a civil action before a California superior court; 10 (d) To conduct a hearing on the arbitration issues and related legal and discovery issues; (e) To administer oaths to parties and witnesses; (f) To award damages and remedies which would be available in a civil action before a California superior court; (g) To award expenses and fees of arbitration as the arbitrator deems proper; and (h) To order such other relief as the arbitrator deems proper. Within fifteen (15) calendar days after completion of the arbitration, the arbitrator shall submit a tentative decision in writing specifying the reasoning for the decision and any calculations necessary to explain the award. Each party shall have fifteen (15) calendar days in which to submit written comments to the tentative decision. Within ten (10) calendar days after the deadline for written comments, the arbitrator shall announce the final award. Any party may enter the final award as a judgment in any court of competent jurisdiction. The Company shall pay the arbitrator's expenses and fees, all meeting room charges, and any other expenses that would not have been incurred if the case were litigated in the judicial forum having jurisdiction over it. Unless otherwise ordered by the arbitrator, each party shall pay its own attorney fees, witness fees and other expenses incurred by the party for his or its own benefit. The arbitrator may award the prevailing party his or its expenses and fees of arbitration, including reasonable attorney fees and costs, including witness fees, in such proportion as the arbitrator decides. 12. No Prior Agreements. The Employee represents and warrants that he is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect his ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions in any manner similar to those contained in Sections 5, 6, and/or 7 hereof. The Employee further represents and warrants that his employment with the Company will not require him to disclose or use any confidential information belonging to prior employers or other persons or entities. 13. Assignment. The Employee shall not delegate his employment obligations pursuant to this Agreement to any other person. This Agreement may be assigned by the Company without the Employee's consent. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company and to the Company's present or future parents, subsidiaries, divisions and affiliates. 14. Employer's Authority. The relationship between the parties hereto is that of employer and employee. The Employee agrees to observe and comply with the 11 rules and regulations of the Company, as adopted by the Company from time to time with respect to the performance of the duties of the Employee. The Employee acknowledges that he has no authority to enter into any material long term contracts or other obligations that are binding upon the Company unless such contracts or obligations relate to approved budgeted expenditures or are otherwise authorized by the Board of Directors. The Company shall have the power to direct, control and supervise the duties to be performed by the Employee, the manner of performing said duties, and the time of performing said duties. 15. Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any of the conflicts of laws provisions thereof that would compel the application of the substantive laws of any other jurisdiction. The Company and the Employee each hereby irrevocably submit to the jurisdiction of the state or federal courts located in the State of California in connection with any suit, action or other proceeding arising out of or relating to this Agreement and hereby agree not to assert, by way of motion, as a defense, or otherwise in any such suit, action or proceeding that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced by such courts. 16. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, understandings and arrangements, both oral and written, between the parties hereto with respect to such subject matter. 17. Notices. All notices, requests, demands and other communications under this Agreement will be in writing and will be deemed to have been duly given (a) on the date of the service if served personally on the party to whom notice is to be given, (b) on the date of transmission if transmitted by facsimile with confirmation of receipt, (c) on the date of receipt if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid or by overnight courier service (i.e., Federal Express or equivalent) and unless either party should notify the other of a change of address properly addressed as follows, or (d) otherwise on the date of receipt when the intended recipient has acknowledged receipt: (i) If to the Employee: Terry L. Robinson 54 Seabreeze Court Napa, CA 94558 12 (ii) If to the Company: North Bay Bancorp 1500 Soscol Avenue P.O. Box 2200 Napa, California 94559 Attention: Chairman of the Board Facsimile: (707) 257-8025 18. Binding Effect. The obligations of the Employee under this Agreement shall continue after the expiration of this Agreement and the termination of his employment with the Company for any reason, shall be binding upon his heirs, executors, personal representatives, legal representatives and assigns and shall inure to the benefit of any successor and assigns of the Company. 19. Severability. The invalidity of any one or more of the words, phrases, sentences, clauses, sections or subsections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses, sections or subsections contained in this Agreement or any part thereof shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, section or sections or subsection or subsections had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity. 20. Section Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 21. No Third Party Beneficiary. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person other than the parties hereto and their respective heirs, personal representative, legal representative, successors and assigns, any rights or remedies under or by reason of this Agreement. 22. Amendment; Modification; Waiver. No amendment, modification or waiver of the terms of this Agreement shall be valid unless made in writing and duly executed by the Company and the Employee. No delay or failure at any time on the part of the Company in exercising any right, power or privilege under this Agreement, or in enforcing any provision of this Agreement, shall impair any such right, power or privilege, or be construed as a waiver of any default or as any acquiescence therein, or shall affect the right of the Company thereafter to enforce each and every provision of this Agreement in accordance with its terms. The waiver by either party hereto of a 13 breach or violation of any term or provision of this Agreement shall neither operate nor be construed as a waiver of any subsequent breach or violation. THE EMPLOYEE ACKNOWLEDGES THAT HE HAS READ AND UNDERSTANDS THE FOREGOING PROVISIONSAND THAT SUCH PROVISIONS ARE REASONABLE AND ENFORCEABLE. IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused this Agreement to be executed as of the day and year first above written. EMPLOYEE ________________________________ Terry L. Robinson COMPANY By: ____________________________ David B. Gaw Chairman of the Board 14 EXHIBIT A GENERAL RELEASE 1. I have been offered by North Bay Bancorp the sum of six (6) months severance (less all customary federal, state and local taxes) (the "Severance Payment") for and in consideration of the execution of this General Release (the "Release"). 2. I acknowledge that I am not otherwise entitled to receive the Severance Payment referenced in paragraph 1 above. 3. I understand that my execution of this Release is voluntary, and that if I do not accept this Severance Payment, I will not lose any other rights that I may have under other policies or programs of the North Bay Bancorp. 4. I accept the Severance Payment. 5. In consideration for the Severance Payment, I unconditionally release North Bay Bancorp and any of its shareholders, benefit plans, affiliate companies, subsidiaries, and the directors, officers, employees, trustees and agents of such entities and their successors or assigns (collectively hereinafter, the "Company") from any and all claims arising out of the employment relationship between the Company and me or the termination of my employment with the Company. I agree that this Release is meant to be as general as possible and covers all claims of any nature whether or not I know the claims exist at this time, including but not limited to contract claims, tort claims, and claims under any state, federal, or local law. Without limiting the general nature of this Release, I specifically release the Company from any and all claims under federal or state civil rights and discrimination laws, including but not limited to Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities in Employment Act, and the Equal Pay Act. 6. However, nothing in this Release prohibits me from filing a charge of discrimination or cooperating in any proceeding before the California Department of Fair Employment and Housing ("CDFEH") or the Equal Employment Opportunity Commission ("EEOC"). This Release only constitutes a waiver by me of my right to file a suit against the Company on the claims set forth in paragraph 5 and a waiver by me of any right to receive compensation based on claims, if any, brought by the CDFEH or the EEOC. 7. In further consideration for the Severance Payment, I agree and warrant that all Company files, papers and property that have been in my possession, custody or control during my employment have been returned to the Company and will not 15 be copied or removed from the premises. I further agree that I will not disclose the terms of this Release except to my attorney and/or tax consultant, or as required by law. I also agree that I am still bound by certain provisions of the Employment Agreement that I signed on March 1, 2004 according to the terms thereof. 8. I understand I have a seven consecutive calendar day period to revoke my assent to this Release beginning with today's date. If I choose to rescind this Release, I will notify the Chairman of the Board of the Company, both verbally and confirmed in writing within seven days. With the exception of the provisions of paragraph 7, this Release will not be effective or enforceable until the foregoing revocation period has expired. 9. The amounts provided under this Release are not offered in connection with any specific exit incentives or other employment termination program. 10. I agree not to disparage the Company, its officers, employees or agents of the Company either within the Company or externally in any way. 11. I warrant that I have not assigned any right or claim released in this Release. 12. This Release is binding on my heirs and assigns. 13. In executing this Release, I am not relying on any representations made to me by the Company. 14. I expressly assume any risk that the facts and law concerning this Release may be other than as presently known to me. 15. This Release constitutes the sole and entire agreement I have with the Company and supersedes any and all understandings and agreements made prior to the date of this Release. 16. This Release shall be governed in all respects by the laws of the State of California. No action involving this Release or my employment by the Company may be brought except in state or federal courts located in the State of California. I HAVE READ AND UNDERSTAND THIS RELEASE AND AGREE TO ALL ITS TERMS. ____________________________________________ Signature ____________________ ____________________________________________ Date Print Name 16 EX-10.11 6 p18310_ex10-11.txt LEASE AGREEMENT JAMES DITMER & NORTH BAY BANCORP [LOGO] STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS AIR COMMERCIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only January 5, 2004, is made by and between James N. Ditmer, d.b.a. as Cordelia Edison Partners ("Lessor") and North Bay Bancorp, a California corporation ("Lessee"), (collectively the "Parties", or individually a "Party"). 1.2(a) Premises: That certain portion of the Project (as defined below), including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 499 Edison Court, Suite A-1 located in the City of Fairfield, County of Solano. State of California, with zip code 94533, as outlined on Exhibit A attached hereto ("Premises") and generally described as (describe briefly the nature of the Premises): an approximately +3,460 square foot warehouse unit improved with plus/minus 520 square feet of office space within a larger concrete tilt-up building. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to any utility raceways of the building containing the Premises (" Building")and to the Common Areas (as defined in Paragraph 2.7 below), but shall not have any rights to the roof, or exterior walls of the Building or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Project" (See also Paragraph 2) 1.2(b) Parking: Three (3) unreserved vehicle parking spaces; and -0- reserved vehicle parking spaces (Reserved Parking Spaces"). (See also Paragraph 2.6) 1.3 Term: 3 years and 1 months ("Original Term") commencing Upon mutual lease execution and delivery on or about January 19, 2004 ("Commencement Date") and ending on or about February 18, 2007 ("Expiration Date"). (See also Paragraph 3) 1.4 Early Possession: January 19, 2004-February 18, 2004 ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: $1,900.00 per month ("Base Rent"), payable on the first day of each month commencing February 19, 2004. (See also Paragraph 4) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Lessee's Share of Common Area Operating Expenses : Eleven percent ( 11%) ("Lessee's Share"). 1.7 Base Rent and Other Monies Paid Upon Execution : (a) Base Rent: $1,900.00 for the period February 19,2004 - March 18, 2004 (b) Common Area Operating Expenses : $ See Addendum I, Paragraph #51 & 52. (c) Security Deposit: $2,000.00 ("Security Deposit"). (See also Paragraph 5) (d) ***deleted*** (e) Total Due Upon Execution of this Lease : $ 3,900.000. 1.8 Agreed Use: storage of files, furniture and other related office items. (See also Paragraph 6) 1.9 Insuring Party. Lessor is the "Insuring Party". (See also Paragraph 8) 1.10 Real Estate Brokers : (See also Paragraph 15) (a) Representation: The following real estate brokers (the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [ ]________________________ represents Lessor exclusively ( "Lessor's Broker" ); [ ]______________________ represents Lessee exclusively ("Lessee's Broker" ); or [X] Colliers International, a California general partnership represents both Lessor and Lessee ( "Dual Agency"). (b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of ____ or 5 % of the total Base Rent for the brokerage services rendered by the Brokers). 1.11 ***deleted*** 1.12 Attachments. Attached hereto are the following, all of which constitute a part of this Lease: an Addendum consisting of Paragraphs 50 through 57; and Exhibits A through ***deleted***, all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. NOTE: Lessee is advised to verify the actual size prior to executing this Lease. 2.2 Condition. Lessor shall deliver that portion of the Premises contained within the Building (" Unit") to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs (" Start Date"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (" HVAC"), loading doors, sump pumps, if any, and all other such elements in the Unit, other than those constructed by Lessee, shall be in good operating condition on said date, that the structural elements of the roof, bearing walls and EXHIBIT 10.11 [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 1 of 12 (c)1998 American Industrial Real Estate Association FORM MTG-2-11/98E REVISED foundation of the Unit shall be free of material defects. If a non-compliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor's expense. The warranty periods shall be as follows: (i) one (1) year as to the HVAC systems, and (ii) 90 days as to the remaining systems and other elements of the Unit. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee's sole cost and expense (except for the repairs to the fire sprinkler systems, roof, foundations, and/or bearing walls - see Paragraph 7). 2.3 Compliance. Lessor warrants that to the best of its knowledge the improvements on the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances in effect on the Start Date ( "Applicable Requirements" ). Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee's use (see Paragraph 49), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning are appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Unit, Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building ( "Capital Expenditure" ), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for the portion of such costs reasonably attributable to the Premises pursuant to the formula set out in Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not have any right to terminate this Lease. 2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Lessor. In addition: (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) Lessee shall not service or store any vehicles in the Common Areas. (c) If Lessee permits or allows any of the prohibited activities described in this Paragraph2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.7 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Unit that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations ("Rules and Regulations" ) for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and shall use its best efforts to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areasfor maintenance purposes so long as reasonable access tothe Premises remains available; (c) To designate other land outside the boundaries of the Project to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect the Expiration Date. [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 2 of 12 (c)1998American Industrial Real Estate Association FORM MTG-2-11/98E REVISED 3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or change the Expiration Date. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of the delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within 4 months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ( "Rent"). 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6) of all Common Area Operating Expenses that exceed the amount of Common Area Operating Expenses for the base year (2004) only, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Project, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, but not the replacement (see subparagraph (e)), of the following: (aa) The Common Areas and Common Area improvements, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators, roofs, and roof drainage systems. (bb) Exterior signs and any tenant directories. (cc) Any fire sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas and any utilities not separately metered. (iii) Trash disposal, pest control services, property management, security services, owner's association dues and fees, the cost to repaint the exterior of any structures and the cost of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas and Common Area equipment. (v) Any increase above the Base Real Property Taxes (as defined in Paragraph 10). (vi) Any "Insurance Cost Increase" (as defined in Paragraph 8). (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. viii) The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2.3 provided; however, that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee's Share of 1/144th of the cost of such Capital Expenditure in any given month. (ix) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Unit, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Unit, Building, or other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Project. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses is payable monthly on the same day as the Base Rent is due hereunder. The amount of such payments shall be based on Lessor's estimate of the annual Common Area Operating Expenses. Within 60 days after written request (but not more than once each year) Lessor shall deliver to Lessee a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments during such year exceed Lessee's Share, Lessor shall credit the amount of such over-payment against Lessee's future payments. If Lessee's payments during such year were less than Lessee's Share, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement. (e) When capital components such as the roof, foundations, exterior walls or Common Area capital improvements, such as the parking lot paving, elevators, fences, etc. requires replacement rather than repari or maintenance, Lessor shall, at Lessor's expense, be responsible for such replacement. Such expenses and/or costs are not Common Area Operating Expenses. 4.3 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any statement or invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future Rent be paid by cashier's check. Payments will be applied first to accrued late charges and attorney's fees, second to accrued interest, then to Base Rent and Common Area Operating Expenses, and any remaining amount to any other outstanding charges or costs. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. ***deleted***. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets, animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the Building or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Project. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in the Agreed Use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 3 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project not caused or contributed to by Lessee). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which suffered as a direct result of Hazardous Substances on the Premises prior to Lessee taking possession or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee taking possession, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to such Requirements, without regard to whether said Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises. 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance condition (see Paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of written request therefor. 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations (intended for Lessee's exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels, (iii) clarifiers, and (iv) any other equipment, if reasonably required by Lessor. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) Failure to Perform. If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof. (d) Replacement. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance at a rate that is commercially reasonable in the judgement of [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 4 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED Lessor's accountants. Lessee may, however, prepay its obligation at any time. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions. The term "Utility Installations" refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). (b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month's Base Rent in the aggregate or a sum equal to one month's Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. Insurance; Indemnity. 8.1 Payment of Premium Increases. (a) As used herein, the term "Insurance Cost Increase" is defined as any increase in the actual cost of the insurance applicable to the Building and/or the Project and required to be carried by Lessor, pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), ( "Required Insurance"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. Insurance Cost Increase shall include, but not be limited to, requirements of the holder of a mortgage or deed of trust covering the Premises, Building and/or Project, increased valuation of the Premises, Building and/or Project, and/or a general premium rate increase. The term Insurance Cost Increase shall not, however, include any premium increases resulting from the nature of the occupancy of any other tenant of the Building. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "Base Premium." The Base Premium shall be the annual premium applicable to the 12 month period immediately preceding the Start Date. If, however, the Project was not insured for the entirety of such 12 month period, then the Base Premium shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the Start Date, assuming the most nominal use possible of the Building. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $2,000,000 procured under Paragraph 8.2(b). (b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Start Date or Expiration Date. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization's "Additional Insured-Managers or Lessors of Premises" Endorsement and coverage shall also be extended to include damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full insurable replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence. [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 5 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED (b) Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days ( "Rental Value insurance"). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property; Business Interruption Insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least A-, VI, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 8.9 Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee's failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee's Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. Notwithstanding the foregoing, Premises Partial Damage shall not include damage to windows, doors, and/or other similar items which Lessee has the responsibility to repair or replace pursuant to the provisions of Paragraph 7.1. (b) "Premises Total Destruction" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises which requires repair, remediation, or restoration. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance overage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 6 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED which is 10 days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 Abatement of Rent; Lessee's Remedies. (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 Definitions. (a) "Real Property Taxes." As used herein, the term " Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project, (ii) a change in the improvements thereon, and/or (iii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease. (b) "Base Real Property Taxes." As used herein, the term "Base Real Property Taxes" shall be the amount of Real Property Taxes, which are assessed against the Premises, Building, Project or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.2 Payment of Taxes. Except as otherwise provided in Paragraph 10.3, Lessor shall pay the Real Property Taxes applicable to the Project, and said payments shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request or by reason of any alterations or improvements to the Premises made by Lessor subsequent to the execution of this Lease by the Parties. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at any time in Lessor's sole judgment, Lessor determines that Lessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Lessee is generating such a large volume of trash as to require an increase in the size of the trash receptacle and/or an increase in the number of times per month that it is emptied, then Lessor may increase Lessee's Base Rent by an amount equal to such increased costs. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. Notwithstanding the foregoing, Lessee may assign this Lease or sublease the Premises without the Lessor's consent to (i) any financial institution regulated by state and/or federal agencies, or (ii) any parent or subsidiary of Lessee (collectively, "Permitted Assignee"). (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. A change in control occurs when there is a transfer of more than 50% ***deleted*** of the voting control of Lessee and Lessee's Net Worth, as compared to Lessee's Net Worth at the time of the execution of this Lease, is reduced by more than 25%. Notwithstanding the foregoing, a change in control shall not be considered to have occurred by reason of this transfer, on a cumulative basis, or more than 50% of the voting control of the Lessee on account of trading in the stock of Lessee in the ordinary course of business. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting ***deleted*** requiring Lessor's consent hereunder, where such consent has not been obtained shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall : (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 7 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting where such consent is required hereunder shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36) (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. (g) Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2) 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee's then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41, (viii) material data safety sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 8 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" , shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest (" Interest") charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 Breach by Lessor. (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion. (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month's Base Rent or the Security Deposit, reserving Lessee's right to reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation" ), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the Unit, or more than 25% of Lessee's Reserved Parking Spaces, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. Brokerage Fees. 15.1 Additional Commission. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires from Lessor any rights to the Premises or other premises owned by Lessor and located within the Project, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of the Brokers in effect at the time of the execution of this Lease. 15.2 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker for the limited purpose of collecting any brokerage fee owed. 15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. Estoppel Certificates. (a) Each Party (as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting Party" ) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee shall deliver to any potential lender or purchaser designated by Lessor such publicly available financial statements as contained in annual and quarterly reports filed by Lessee with the Securities and Exchange Commission (the "Financial Statements") as may be reasonably required by such lender or purchaser, including but not limited to Lessee's Financial Statements for the past three (3) years. All such Financial Statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes set forth. ***deleted*** 17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 9 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED with regard to the potential duties and liabilities of Lessor pertaining to Hazardous substances as outlined in Paragraph 6.2 above. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Days. Unless otherwise specifically indicated to the contrary, the word " days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor's partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Disclosures Regarding The Nature of a Real Estate Agency Relationship. (a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows: (i) Lessor's Agent. A Lessor's agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor's agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor : a. Diligent exercise of reasonable skills and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (ii) Lessee's Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor : a. Diligent exercise of reasonable skills and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (iii) Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. b. Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional. (b) Brokers have no responsibility with respect to anydefault or breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys' fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. (c) Buyer and Seller agree to identify to Brokers as "Confidential" any communication or information given Brokers that is considered by such Party to be confidential. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 10 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Devise to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor's obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month's rent, or (d) be liable for the return of any security deposit paid to any prior lessor. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement" ) from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. Attorneys' Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, " Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation). 32. Lessor's Access; Showing Premises; Repairs. Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect on Lessee's use of the Premises. All such activities shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. Signs. Lessor may place on the Premises ordinary "For Sale" signs at any time and ordinary "For Lease" signs during the last 6 months of the term hereof. Except for ordinary "For Sublease" signs which may be placed only on the Premises, Lessee shall not place any sign upon the Project without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request. 37. Guarantor. 37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the AIR Commercial Real Estate Association,. 37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. Options. If Lessee is granted an option, as defined below, then the following provisions shall apply. 39.1 Definition. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease. 40. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 11 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED 41. Reservations. Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, and (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid "under protest" within 6 months shall be deemed to have waived its right to protest such payment. 43. Authority. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority. 44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 45. Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 46. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 47. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 48. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT. 49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [X] is not attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TOTHE LEGALAND TAXCONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Fairfield California Executed at: NAPA, CA -------------------------- ------------------------------- On: 1-22-2004 On: 1/21/2004 -------------------------- ------------------------------- By LESSOR: By LESSEE: James N. Ditmer d.b.a. Cordelia Edison North Bay Bancorp, a California Partners corporation - --------------------------------------- ------------------------------- By: /s/ James N. Ditmer By: /s/ Terry L. Robinson -------------------------- ------------------------------- Name Printed: James N. Ditmer Name Printed: Terry L. Robinson -------------------------- ------------------------------- Title: Title: President/CEO -------------------------- ------------------------------- By: By: -------------------------- ------------------------------- Name Printed: Name Printed: -------------------------- ------------------------------- Title: Title: -------------------------- ------------------------------- Address: 2534 Derby Drive Address: 1190 Airport Road, -------------------------- ------------------------------- San Ramon, California Suite 101, P.O. Box 2200 -------------------------- ------------------------------- 94583 Napa, California 94558 -------------------------- ------------------------------- Telephone: (925) 327-1754 Telephone:(707) 252-5024 -------------------------- ------------------------------- Facsimile: (925) 327-1777 Facsimile:(707) 252-5025 -------------------------- ------------------------------- Federal ID No. Federal ID No. -------------------------- ------------------------------- These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AIR COMMERCIAL REAL ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. (c)Copyright 1998 By AIR Commercial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. [ILLEGIBLE] - ---------------- ---------------- [ILLEGIBLE] - ---------------- ---------------- Initials Initials Page 12 of 12 (c)1998-American Industrial Real Estate Association FORM MTG-2-11/98E REVISED ADDENDUM I TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS This Addendum I to Standard Industrial/Commercial Multi-Tenant Lease - Gross (the "Addendum I") is attached to, made a part of, and incorporated into that certain Standard Industrial/Commercial Multi-Tenant Lease - Gross (the "Standard Lease") dated January 5, 2004 by and between James N. Ditmer, d.b.a. Cordelia Edison Partners ("Lessor"), as Lessor, and North Bay Bancorp, a California corporation ("Lessee"), as Lessee, covering the premises located at 499 Edison Court, Suite A-1, City of Fairfield, County of Solano, State of California. If any portion of the Standard Lease should conflict with the terms of this Addendum I, the terms of this Addendum I shall control. Defined terms not otherwise defined in this Addendum I shall have the meanings ascribed to such terms in the Standard Lease. All references to the "Lease" in the Standard Lease or in this Addendum I shall mean, collectively, the Standard Lease as modified by this Addendum I. 50. Rent: Months Monthly Rent Schedule, Industrial Gross ------ --------------------------------------- 01-12 $1,900.00 13-24 $1,957.00 25-36 $2,015.00 51. Lessor's Obligations: Lessor shall be responsible for the following costs and obligations: o Base year real estate taxes; o Base year property insurance; and o Base year common area maintenance, included in common area maintenance; landscaping, fencing, lighting, driveways, parking lot, roof and wall maintenance. 52. Lessee's Obligations: Lessee shall be responsible for the following pro-rata costs and obligations: o Any increase over base year (2004) property taxes, property insurance and CAM charges. 53. Lessor's Improvements: Lessor, at Lessor's sole cost and expense, shall provide the following improvements prior to lease commencement: o Frame in the wall; and o install carpet in the downstairs office. 54. Lessee's Improvements: Any work performed by Lessee shall be subject to Lessor's prior approval, which shall not be unreasonably withheld. 55. Condition of Premises: Prior to Occupancy, Lessor shall deliver the Premises in broom clean condition with all structural, mechanical, electrical, HVAC, fire sprinklers, warehouse lights, and plumbing systems In good working order and operating condition. 56. Lessor's Right of Entry: Notwithstanding any provision within the Lease to the contrary, Lessor's only right of entry onto the Premises during the lease term is limited to the rights contained in this Section. Lessee shall permit Lessor and/or Lessor's authorized representatives to enter the Premises at any time in the case of emergency, and otherwise at reasonable times for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with the Lease during usual business hours and upon reasonable advance notice provided that an officer of the Lessee will be present during such entry. Any entry onto the Premises conducted pursuant to this section shall be conducted in a manner which will not unreasonably interfere with the operation of Lessee's business. In the event of any entry onto the Premises in the case of an emergency, Lessor's representative shall be permitted to enter the Premises for the limited purpose of admitting fire, police, or other public safety officials onto the Premises. Lessor's representatives shall be permitted to remain on the premises in the event of an emergency while public safety officials are on the Premises. -------------- [ILLEGIBLE] -------------- Initials Page 1 of 3 57. Dual Agency: Lessee and Lessor understand, acknowledge and consent to Colliers International acting in the capacity of a dual agent in this transaction. Lessor shall be responsible for paying the real estate commission per the Lease Agreement. LESSOR: LESSEE: James N. Pitmer, d.b.a. North Bay Bancorp, a California Cordelia Edison Partners corporation By: /s/ James N. Ditmer By: /s/ Terry Robinson -------------------------------- ------------------------------ James N. Ditmer-Owner Terry Robinson-President/CEO Date: 1-22-2004 Date: 1/22/2004 -------------- [ILLEGIBLE] -------------- Initials Page 2 of 3 EXHIBIT A 499 Edison Court, Suite A-1 [FLOOR PLAN] Page 3 of 3 -------------- [ILLEGIBLE] -------------- Initials EX-13 7 p18310_ex13.txt NORTH BAY BANCORP 2003 AR TO SHAREHOLDERS. FORWARD LOOKING STATEMENT This annual report contains forward-looking statements with respect to the financial condition, results of operation and business of North Bay Bancorp and its subsidiaries. These include, but are not limited to, statements that relate to or are dependent on estimates or assumptions relating to the prospects of loan growth, credit quality and certain operating efficiencies resulting from the operations of The Vintage Bank and Solano Bank. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressure among financial services companies increases significantly; (2) changes in the interest rate environment reduce interest margins; (3) general economic conditions, internationally, nationally or in the State of California are less favorable than expected; (4) legislation or regulatory requirements or changes adversely affect the business in which the combined organization will be engaged; and (5) other risks detailed in the North Bay Bancorp reports filed with the Securities and Exchange Commission. 1 - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- To Our Shareholders Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure about Market Risk Description of Operations Market Information Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Consolidated Notes to Financial Statements Report of Independent Auditors Directors Corporate Information 2 - -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- As we grow into the physical infrastructure put in place this and prior years, we anticipate our profitability will continue to improve. Our 2003 results reflect the solid foundation laid in prior years and new initiatives implemented to stimulate future growth. Our sales teams continued to do an exceptional job of developing new business relationships and expanding existing ones, while our lending teams significantly increased loan production capacity and maintained exceptionally high credit quality. Highlights for the year include the following: o Net interest income increased 10% to $19.3 million. o Pre-tax income rose 15% to $6.6 million. o Net income increased 18% to $4.4 million. o Earnings per share increased 15% to $1.79. o Total loans grew 29% to $306.7 million. o Solano Bank was solidly profitable by year-end and continues to build momentum. o The Vintage Bank generated excellent loan growth and continues to gain market share. o Asset quality remained exemplary with zero non-performing assets at year end. We took numerous actions to expand and improve our franchise in 2003 including opening a new Vintage Bank Gateway office, located in the growing industrial area south of downtown Napa; we occupied new administrative offices in and near the Gateway branch and relocated Solano Bank's Fairfield office to a much more dynamic location. While the investment for these expansions increased costs in 2003, we are confident they will provide solid contributions to earnings in the future. In addition to the start-up costs for our franchise expansion, two unusual items impacted 2003 earnings. First, we incurred abnormally high legal fees in the first half of the year due to litigation with our former data processing provider. We also incurred significant professional fees related to tax and technology-related consulting. With our expansion efforts during the past few years now beginning to contribute to profitability, excluding any unusual events, we anticipate our operating costs will level out. Our net interest margin dropped more than we had anticipated in 2003 to 4.99% from 5.31% in 2002, as declining interest rates impacted yields on loans and investments more than the cost of funds. Fourth quarter margin increased to 5.14% from 4.94% in the fourth quarter of 2002. More than 25% of our deposits are in non-interest bearing accounts, and an additional 50% of deposits are in money market and NOW accounts which are our second most efficient funding source. While interest rates have remained relatively stable in the first part of 2004, competition for deposits is increasing in our markets, which could further impact margins this year. Over the course of last year, we recognized that in order to reach our profit targets and continue to generate record results, we needed to be diligent in controlling discretionary expenses and staffing levels. Consequently, our number of full time equivalent employees was below budget and discretionary spending was kept to a minimum. Our efficiency ratio for the year reflected the unusual items referred to above and rose to 69.00% from 67.71% in 2002. The cost control efforts, however, generated solid improvement in our efficiency ratio in the fourth quarter, dropping to 59.43% from 65.24% in the fourth quarter of 2002. In June 2003, we took further steps to improve our management processes to bring more structure and accountability to our operations and to facilitate communications as we grow. With some professional assistance, we developed an organizational model that more logically groups functions within departments and accommodates future growth. These changes are producing sound results and we anticipate further benefits from them in 2004. We have also decided to simplify and streamline our corporate structure by combining our three Boards of directors into a single Board. The charters of The Vintage Bank and Solano Bank will be combined, 3 conditional on obtaining regulatory approval. The Board of Directors of North Bay will be expanded from 9 members to 16 with new seats filled by members of the Boards of The Vintage Bank and Solano Bank. We believe these changes will greatly enhance the efficiency of our management team in directing the operations of both banks and the holding company by saving costs and freeing senior management to devote more time and attention to customers and prospects. These structural changes will not affect the day-to-day operations of our banks and should be transparent to our customers and employees. As we grow into the physical infrastructure put in place this and prior years, we anticipate our profitability will continue to improve. Our staffing levels and branch footprint now have more than adequate capacity to accommodate our growth plans for the next few years and take advantage of the opportunities in our markets. Our strategy and vision remain on course. We continue to seek opportunities for expansion in contiguous markets while gaining market share in our existing markets. We are committed to being the premier financial services provider in markets we serve, to skillfully use technology to competitive advantage and to generate financial returns that exceed industry peers. I am grateful to our employees for their hard work, to the directors of North Bay, The Vintage Bank and Solano Bank for their dedication, to our customers for their continuing partnership, and to our shareholders for entrusting us with their capital. We successfully met the challenges of 2003 and now are looking forward to a fast-paced and prosperous year in 2004. Sincerely, Terry Robinson President and CEO 4 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- The following table presents a summary of selected consolidated data for North Bay Bancorp and subsidiaries (the Company) for the five years ended December 31, 2003. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto appearing elsewhere in the annual report:
(In 000's except share data) 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- STATEMENTS OF OPERATIONS DATA: Interest income $ 22,251 $ 21,179 $ 20,307 $ 16,700 $ 13,688 Interest expense 2,995 3,691 5,887 5,612 4,364 ---------- ---------- ---------- ---------- ---------- Net interest income 19,256 17,488 14,420 11,088 9,324 Provision for loan losses 238 576 447 385 240 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 19,018 16,912 13,973 10,703 9,084 Noninterest income 3,847 3,111 2,691 2,140 1,777 Noninterest expense 16,315 14,316 11,955 8,583 6,496 Provision for income taxes 2,179 1,999 1,687 1,647 1,650 ---------- ---------- ---------- ---------- ---------- Net Income $ 4,371 $ 3,708 $ 3,022 $ 2,613 $ 2,715 ========== ========== ========== ========== ========== BASIC PER SHARE DATA: (1) Earnings per share $ 1.83 $ 1.60 $ 1.33 $ 1.23 $ 1.40 Average shares outstanding 2,382,093 2,313,461 2,264,170 2,123,830 1,943,490 DILUTED PER SHARE DATA: (1) Earnings per share $ 1.79 $ 1.56 $ 1.32 $ 1.21 $ 1.36 Average shares outstanding 2,439,604 2,371,214 2,288,948 2,159,636 1,989,457 BALANCE SHEET DATA: Total assets $ 459,482 $ 416,458 $ 326,806 $ 247,469 $ 197,106 Net loans 303,139 234,337 183,548 150,008 120,166 Total deposits 406,445 367,803 292,441 216,638 172,380 Shareholders' equity 39,441 35,343 29,980 26,636 18,090
(1) All per share amounts have been adjusted to reflect the 5% stock dividends declared January 28, 1999, January 8, 2000, January 29, 2001, January 28, 2002, January 27, 2003 and January 26, 2004. 5 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENT - -------------------------------------------------------------------------------- This Annual Report contains statements relating to future results of the Company that are considered to be "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, loan loss reserve adequacy, simulation of changes in interest rates and litigation results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company's markets, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties. These forward-looking statements speak only as of the date on which these statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which these statement is made or to reflect the occurrence of unanticipated events. Moreover, wherever phrases such as or similar to "in Managements opinion", or "Management considers" are used, these statements are as of and based upon knowledge of Management, at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risk and uncertainties noted above with respect to forward-looking statements. These financial statements should be read in conjunction with the financial statements and the notes included herein. OVERVIEW - -------------------------------------------------------------------------------- North Bay Bancorp, organized November 1, 1999, is the holding company for The Vintage Bank and Solano Bank (Banks), which are wholly owned subsidiaries. The consolidated entity (the Company) reported net income of $4,371,000 or $1.79 per diluted share, in 2003 compared with $3,708,000 or $1.56 per diluted share, in 2002 and $3,022,000 or $1.32 per diluted share, in 2001, equating to a return on average assets of 1.00%, .99% and 1.00% for years 2003, 2002 and 2001, respectively. The return on average equity was 11.70% in 2003 compared with 11.36% and 10.61% in 2002 and 2001, respectively. As of December 31, 2003, total assets were $459,482,000 compared with total assets of $416,458,000 and $326,806,000 at year end 2002 and 2001, respectively, representing a 10% increase in 2003 and a 27% increase in 2002. Deposits increased 11% in 2003 compared with a 26% increase in 2002. Loans, net of the allowance for loan losses, increased 29% in 2003 compared with a 28% increase in 2002. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - -------------------------------------------------------------------------------- The Company's accounting policies are integral to understanding the results reported. The most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments. 6 Allowance for Loan Losses. The allowance for loan losses represents management's best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged-off, net of recoveries. We evaluate our allowance for loan loss on a monthly basis. We believe that the allowance for loan loss is a "critical accounting estimate" because it is based upon management's assessment of various factors affecting the collectibility of the loans, including current and projected economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and commitments. We determine the appropriate level of the allowance for loan losses, primarily on an analysis of the various components of the loan portfolio, including all significant credits on an individual basis. We segment the loan portfolios into as many components as practical. Each component would normally have similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. Management has an established methodology for calculating the level of the allowance for loan losses. We analyze the following components of the portfolio and provide for them in the allowance for loan losses: Specific allowances defined as: o Management assessment of all loans classified as substandard or worse, with an outstanding balance of $100,000. o A specific allowance is provided for any amount by which the loan's collateral fair value is insufficient to cover the loan; or discounting estimated further cash flows, or by observing the loan's market price if it is of a kind for which there is a secondary market. General allowance defined as: o An allowance for all loans outstanding within the portfolio and not contained in the specific reserve Judgmental allowance defined as: o National and local economic trends and conditions o Trends in volume of loans o Changes in underwriting standards and/or lending personnel o Concentrations of credit within the portfolio No assurance can be given that the company will not sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio will not require an increase in the allowance. Prevailing factors in association with the methodology may include improvement or deterioration of individual commitments or pools of similar loans, or loan concentrations. Available for Sale Securities. SFAS 115 requires that Available for Sale securities be carried at fair value. We believe this is a "critical accounting estimate" in that the fair value of a security is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Adjustments to the Available for Sale securities fair value impact the consolidated financial statements by increasing or decreasing assets and stockholders' equity. Deferred Tax Assets. Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. 7 SUMMARY OF EARNINGS - -------------------------------------------------------------------------------- Net Interest Income Net interest income before provision for loan losses was $19,256,000, $17,488,000 and $14,420,000 in 2003, 2002 and 2001, respectively, representing increases of 10% in 2003 and 21% in 2002. The following table sets forth average daily balances of assets, liabilities, and shareholders' equity during 2003, 2002 and 2001, along with total interest income earned and expense paid, and the average yields earned or rates paid thereon and the net interest margin for the years ended December 31, 2003, 2002 and 2001.
(In 000's) December 31, 2003 December 31, 2002 December 31, 2001 ---------------------------- ----------------------------- ------------------------------ Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/ Balance Expense Yield Balance Expense Yield Balance Expense Yield -------- ------- ----- -------- ------- ----- -------- ------- ------ ASSETS Loans (1) $277,220 $18,782 6.78% $212,735 $16,602 7.80% $174,050 $15,319 8.80% Investment securities: Taxable 78,457 2,535 3.23% 78,186 3,490 4.46% 57,501 3,395 5.90% Non-taxable (2) 16,948 958 5.65% 14,002 868 6.20% 13,797 739 5.36% -------- ------- -------- ------- -------- ------- Total loans and investment 372,625 22,275 5.98% 304,923 20,960 6.87% 245,348 19,453 7.93% securities Due from banks, time 100 2 2.00% 100 5 5.59% 100 7 6.86% Federal funds sold 18,104 207 1.14% 28,138 418 1.49% 26,577 1,012 3.81% -------- ------- -------- ------- -------- ------- Total earning assets 390,829 22,484 5.75% 333,161 21,383 6.42% 272,025 20,472 7.53% -------- ------- -------- ------- -------- ------- Cash and due from banks 28,216 20,376 17,124 Allowance for loan losses (3,403) (3,031) (2,507) Premises and equipment, net 11,125 10,484 8,006 Accrued interest receivable and other assets 12,157 11,951 6,928 -------- -------- -------- Total assets $438,924 $372,941 $301,576 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing demand $176,724 916 0.52% $136,134 1,118 0.82% $105,485 2,164 2.05% Savings 32,678 107 0.33% 25,798 228 0.88% 19,381 234 1.21% Time 77,198 1,430 1.85% 77,112 2,006 2.60% 72,291 3,318 4.59% -------- ------- -------- ------- -------- ------- Total deposits 286,600 2,453 0.86% 239,044 3,352 1.40% 197,157 5,716 2.90% Borrowings 10,750 542 5.04% 6,468 339 5.25% 2,212 171 7.72% Total interest bearing liabilities 297,350 2,995 1.01% 245,512 3,691 1.50% 199,369 5,887 2.95% -------- ------- -------- ------- -------- ------- Noninterest bearing demand 100,342 91,763 71,798 Accrued interest payable and other liabilities 3,876 3,039 1,919 Shareholders' equity 37,356 32,627 28,490 -------- -------- -------- Total liabilities and shareholders' equity $438,924 $372,941 $301,576 ======== ======== ======== Net interest income $19,489 $17,692 $14,585 Net interest income to average earning assets (Net interest margin (3)) 4.99% 5.31% 5.36%
(1) Loan interest income includes loan fee income of $1,119 in 2003, $1,167 in 2002 and $1,053 in 2001. (2) Average yields shown are taxable-equivalent. On a non-taxable basis, 2003 interest income was $725 with an average yield of 4.28%, 2002 interest income was $663 with an average yield of 4.74%; and in 2001 non-taxable interest income was $575 and the average yield was 4.16%. (3) Net interest margin is calculated by dividing net interest income by the average balance of total earning assets for the applicable year. 8 The following table sets forth a summary of the changes in interest earned and interest paid in December 31, 2003 over 2002, December 31, 2002 over 2001 and December 31, 2001 over 2000 resulting from changes in assets and liabilities volumes and rates. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.
(In 000's) 2003 over 2002 2002 over 2001 2001 over 2000 ------------------------ ----------------------- ------------------------ Volume Rate Total Volume Rate Total Volume Rate Total ------------------------ ----------------------- ------------------------ Increase (decrease) in Interest and fee income Loans $5,032 ($2,852) $2,180 $3,402 ($2,119) $1,283 $3,016 ($624) $2,392 Time deposits with other financial institutions 0 (3) (3) 0 (2) (2) 0 2 2 Investment securities: Taxable 12 (967) (955) 1,218 (1,123) 95 1,194 (371) 823 Non-taxable (1) 183 (93) 90 11 118 129 (12) (105) (117) Federal funds sold (149) (62) (211) 60 (654) (594) 1,087 (596) 491 ------ ------- ------ ------ ----- ------ ------ ----- ------ Total interest and fee income 5,078 (3,977) 1,101 4,691 (3,780) 911 5,285 (1,694) 3,591 Increase (decrease) in Interest expense Deposits: Interest bearing Transaction accounts 333 (535) (202) 627 (1,673) (1,046) 960 (452) 508 Savings 61 (182) (121) 79 (85) (6) 63 (128) (65) Time deposits 2 (578) (576) 220 (1,532) (1,312) 440 (543) (103) ------ ------- ------ ------ ----- ------ ------ ----- ------ Total deposits 396 (1,295) (899) 926 (3,290) (2,364) 1,463 (1,123) 340 Borrowings 224 (21) 203 328 (160) 168 (88) 23 (65) ------ ------- ------ ------ ----- ------ ------ ----- ------ Total interest expense 620 (1,316) (696) 1,254 (3,450) (2,196) 1,375 (1,100) 275 ------ ------- ------ ------ ----- ------ ------ ----- ------ Net Interest income $4,458 ($2,661) $1,797 $3,437 ($330) $3,107 $3,910 ($594) $3,316 ====== ======= ====== ====== ===== ====== ====== ===== ======
(1) The interest earned is taxable-equivalent. On a non-taxable basis 2003 income interest was $62 more than 2002; 2002 interest income was $88 more than in 2001; and 2001 interest income was $100 less than in 2000. Net interest income is impacted by changes in the volume and mix of earning assets and interest-bearing liabilities and changes in interest rates. The increase in net interest income in 2002 compared with 2001 was primarily the result of volume increases in loans. The net interest margin (defined as net interest income divided by average earning assets) decreased significantly in 2003 to 4.99% from 5.31% in 2002. The decrease in the net interest margin is primarily the result of a lower average yields on earning assets, partially offset by lower expenses on deposits. The impact of declining general interest rates during the first half of 2003 to unprecedented low levels resulted in a significant narrowing of the margin, as reductions in rates paid on deposits and other borrowings could not adequately offset the reduction in yields on earning assets. Also, investment portfolio yield reductions were intensified by the impact of having mortgage-backed securities purchased at a premium in the portfolio; the premium is amortized over the estimated average life of a particular security. Higher than anticipated prepayments on the underlying mortgages resulted in significant reductions in the yield on these investments. Despite these factors, the Company continues to enjoy a net interest margin higher than peer institutions of comparable size due to its low cost of funds. Taxable-equivalent interest income (defined as interest income adjusted for the tax benefit of holding tax exempt securities and loans) increased $1,101,000 or 5%, in 2003 compared with 2002. Increases in the volume of earning assets accounted for increasing interest income by $5,078,000, offset by a decrease of $3,977,000 attributable to lower rates. An increase in taxable-equivalent interest income of $911,000 or 7% in 2002 compared with 2001 consisted of a $4,491,000 increase due to growth of earning assets offset by a decrease of $3,779,000 attributable to lower rates on earning assets. Interest paid on interest-bearing liabilities decreased $696,000 in 2003 compared with 2002. Increases in the volume of deposits and other borrowings increased interest paid by $620,000 offset by a $1,316,000 9 decrease attributable to a decline in rates. Interest paid on interest-bearing liabilities decreased $2,196,000 in 2002 compared with 2001; the effect of volume increases accounted for $1,254,000 offset by a decrease of $3,450,000 attributable to lower rates. Provision and Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb probable losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statement as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of the probable losses inherent in the portfolio. The Company's written lending policies, along with applicable laws and regulations governing the extension of credit, require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limits, ongoing credit reviews both internal and external along with approval policies prior to funding of any loan. The Company manages and controls credit risk through diversification, close monitoring of any portfolio concentrations, loan limits to individuals and reviewing historical losses incurred by the Company. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. Management has established a monitoring system for any concentration within the portfolio. The existing portfolio consists of commercial loans to businesses, both commercial and residential real estate loans and consumer products. The portfolio contains variable rate loans as well as loans with rates fixed for up to ten years. Fixed rate loans primarily are associated with real estate lending. As of December 31, 2003, net loans increased $69 million, from year-end 2002, a 29% increase. On an average balance basis the Company's loan portfolio increased $64 million, or 30% over the average balance in 2002. In 2002, average balances increased from the prior year by $39 million, or 22%. The increases in 2003 and 2002 were due to strong loan demand for commercial real estate loans along with an aggressive calling program. Management recognizes that the estimation of probable losses in the portfolio is not a science and therefore the current Allowance for Loan Losses is not expected to be equal to the result of the assessment. It is expected, however, that the assessment will demonstrate that the actual reserve is adequate for coverage of probable loan losses in the existing portfolio. To the extent that the current allowance is deemed insufficient to cover the estimate of unidentified losses, Management will record an additional provision for loan loss. If the allowance is greater than appears to be required at that point in time, the provision expense may be adjusted accordingly. Assessment of the Adequacy of the Allowance for Loan Losses and the Allocation Process The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio and, to a lesser extent, the Company's unfunded loan commitments. These assessments include periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment or if they become delinquent on a frequent basis. Re-grading of problem loans will occur at least monthly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by regulatory examiners. The Company evaluates individual loans that meet its criteria (loans over $100,000 and graded substandard or lower) to determine if impaired and to establish a specific allowance as necessary. The Company establishes percentage allowance requirements for all other loans, according to their classification as determined by the Company's internal grading system. These loans are identified through the following categories: 10 Watch - These loans are not classified, but they contain potentially unsatisfactory characteristics. Special Mention - These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification to substandard. Substandard - These are loans inadequately protected by current sound worth, paying capacity of the borrower or pledged collateral. Substandard loans normally have one or more well-defined weaknesses that could jeopardize the repayment of the debt. Doubtful - The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, writing down the loan and recognizing the loss is deferred until its more exact status may be determined. The above, along with specific allocations for concentrations in real estate are taken into consideration when evaluating the Company's allowance for loan losses. As of December 31, 2003 the allowance for loan losses of $3,524,000 representing 1.15% of loans outstanding, as compared with an allowance balance of $3,290,000 at December 31, 2002, representing 1.38% of loans outstanding. During 2003, 2002 and 2001, $238,000, $576,000 and $447,000, respectively, was charged to expense for the provision of loan losses. Non-performing Loans The Company's policy is to place loans on nonaccrual status when, for any reason, principal or interest is past due for ninety days or more unless they are both well secured and in the process of collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. As of December 31, 2003 and 2002 there were no nonaccrual loans, loans that were past due ninety days or more, or trouble debt restructurings. Historical Loan Loss & Recovery Experience The following table provides a summary of the Banks' loan loss experience for the years ended December 31, 2003, 2002, 2001, 2000 and 1999.
(In 000's) December 31, ------------ 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- Average loans for the period $ 277,220 $ 212,735 $ 174,050 $ 141,076 $ 110,609 Loans outstanding at end of period 306,663 237,627 186,265 152,276 122,152 Allowance for Loan Losses Balance, beginning of period $ 3,290 $ 2,717 $ 2,268 $ 1,987 $ 1,752 Less loans charged off: Real estate loans 0 0 0 0 13 Commercial loans 0 0 0 99 0 Installment loans 12 10 4 6 12 --------- --------- --------- --------- --------- Total loans charged off 12 10 4 105 25 Recoveries: Real estate loans 0 0 0 0 0 Commercial loans 0 0 0 1 7 Installment loans 8 7 6 0 13 --------- --------- --------- --------- --------- Total recoveries 8 7 6 1 20 Net loans charged off (recovered) 4 3 (2) 104 5 Provision for loan losses 238 576 447 385 240 --------- --------- --------- --------- --------- Balance, end of period $ 3,524 $ 3,290 $ 2,717 $ 2,268 $ 1,987 ========= ========= ========= ========= ========= Net loans charged off (recovered) to average loans by types: Real estate loans 0.00% 0.00% 0.00% 0.00% .001% Commercial loans 0.00% 0.00% 0.00% .069% (.006%) Installment loans .01% .01% (.001%) .004% .001% Net losses (recoveries) to average loans outstanding .001% .001% (.001%) .074% .004%
11 The following tables, in thousands, summarize the allocation of the allowance for loan losses among loan types at December 31, 2003, 2002, 2001, 2000 and 1999.
December 31, 2003 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 45,991 $ 801 15.0% Commercial loans secured by real estate 33,519 186 10.9% Installment loans 28,860 158 9.4% Real estate loans 163,088 2,018 53.2% Construction loans 35,205 361 11.5% -------- -------- ---- Total loans outstanding 306,663 Less allowance for loan losses 3,524 $ 3,524 100.0% -------- Total loans, net $303,139 ======== December 31, 2002 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 46,061 $ 587 19.4% Commercial loans secured by real estate 16,991 294 7.2% Installment loans 24,102 272 10.1% Real estate loans 131,167 1,688 55.2% Construction loans 19,306 449 8.1% -------- -------- ---- Total loans outstanding 237,627 Less allowance for loan losses 3,290 $ 3,290 100.0% -------- Total loans, net $234,337 ======== December 31, 2001 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 29,730 $ 632 16.0% Commercial loans secured by real estate 7,930 71 4.3% Installment loans 20,301 259 10.9% Real estate loans 106,851 1,588 57.3% Construction loans 21,453 167 11.5% -------- -------- ---- Total loans outstanding 186,265 Less allowance for loan losses 2,717 $ 2,717 100.0% -------- Total loans, net $183,548 ======== 12 December 31, 2000 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 28,600 $ 703 18.8% Commercial loans secured by real estate 5,115 61 3.4% Installment loans 23,432 193 15.4% Real estate loans 86,886 1,195 57.0% Construction loans 8,243 116 5.4% -------- -------- ---- Total loans outstanding 152,276 Less allowance for loan losses 2,268 $ 2,268 100.0% -------- Total loans, net $150,008 ======== December 31, 1999 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 21,463 $ 350 17.6% Commercial loans secured by real estate 13,011 212 10.6% Installment loans 20,869 338 17.1% Real estate loans 58,368 950 47.8% Construction loans 8,441 137 6.9% -------- -------- ---- Total loans outstanding 122,152 Less allowance for loan losses 1,987 $ 1,987 100.0% -------- Total loans, net $120,165 ========
The increase in the loan loss reserve is due primarily to overall growth in the loan portfolio and related inherent risk of loss. Net loans charged off were a modest $4,000 within the portfolio for The Vintage Bank in 2003 compared with net charge offs of $3,000 in 2002. Solano Bank has sustained no losses since opening for business July 2000. Based on the current conditions of the loan portfolio, Management believes that the $3,524,000 allowance for loan losses at December 31, 2003 is adequate to absorb potential losses inherent in the Banks' loan portfolios. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. Noninterest Income Details of noninterest income are as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Service charge on deposit accounts $1,645 $1,321 $1,186 Gains (losses) on securities transactions 637 399 325 Other 1,565 1,391 1,180 ------ ------ ------ Total $3,847 $3,111 $2,691 ====== ====== ====== Noninterest income for year 2003 increased $736,000, or 24%, compared with 2002. Increases during 2002 compared with 2001 were $420,000, or 16%. Most noninterest income derives from service charges on deposit accounts. Service charge income increased proportionately more than growth in deposits because 13 of improved collection efforts and implementation of an overdraft privilege program that commenced on September 15, 2003. Service charges increased approximately $200,000 in the fourth quarter of 2003 compared with the previous quarter. Gains on securities transactions in all three years resulted primarily from selling securities with less than one year to maturity to provide funding for loans or to reinvest in securities with a longer duration and higher effective yield to maturity. In an overall environment of falling general interest rates, as has characterized the market for the past several years, net gain will normally result. Noninterest Expense Details of noninterest expense are as follows: (In 000's) 2003 2002 2001 ------- ------- ------- Salaries & benefits $8,795 $7,893 $6,349 Occupancy 1,289 916 855 Equipment 1,453 1,614 1,451 Other 4,778 3,893 3,300 ------- ------- ------- Total $16,315 $14,316 $11,955 ======= ======= ======= Salaries and benefits expense increased 11% and 24% in 2003 and 2002, respectively, from the previous year. The increases were primarily due to increases in the number of full-time equivalent employees, which has increased from approximately 132 at year-end 2000 to 151 at year-end 2003. The increase was primarily the result of staffing for new branches throughout the Company. The 41% increase in occupancy expense during 2003 compared with 2002 was primarily in rent and depreciation associated with opening a new branch, along with new executive offices and an administration center during the first quarter of 2003. Equipment expense decreased in 2003 compared with 2002. During 2002 the Company had additional depreciation expense resulting from accelerated depreciation on the host banking system, which was replaced in July 2002. Also, the Company reversed approximately $168,000 in accrual maintenance fees during 2003 as the result of settling litigation with a former software supplier. 14 The key components of other expenses are as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Professional services $1,387 $830 $755 Business promotion 554 525 379 ATM expenses 250 261 222 Stationery & supplies 380 318 274 Insurance 224 188 111 Other 1,983 1,771 1,559 ------ ------ ------ Total $4,778 $3,893 $3,300 ====== ====== ====== Professional services increased 67% in 2003 compared with the prior year; 2002 expenses were 10% higher than 2001. The increase in 2003 was primarily due to increases in legal fees associated with litigation with our former host system provider and outsourced information technology and tax consulting services. The 10% increase in 2002 compared with 2001 was due to NASDAQ listing fees, fees associated with the trust preferred offering and consulting fees associated with revised benefits plans, new corporate governance legislation and changes in regulatory requirements. Business promotion expense increased 6% in 2003 compared with 2002; the increase was primarily the result of increased marketing expenditures. ATM expense decreased in 2003 compared with 2002, primarily the result of a major card replacement project during 2002. The 18% increase in ATM expenses when comparing 2002 to 2001 was primarily due to increases in the number of ATM's the Company operates and the card replacement project in 2002. Stationery and supplies expense increased 19% and 16% in 2003 and 2002, respectively, reflecting overall volume increases and costs associated with the system conversion and opening new branches. Insurance expenses increased 19% and 69% in 2003 and 2002, respectively; these increases are consistent with increases in volumes and number of locations, as well as increases in workers' compensation costs. Other expenses increased 12% and 14% in 2003 and 2002, respectively, primarily due to increased expenses for telephone, postage, courier services, conferences and other miscellaneous expenses. Provision for Income Taxes The Company reported a provision for income taxes of $2,179,000, $1,999,000 and $1,687,0000 for years 2003, 2002 and 2001, respectively. These provisions reflect accrual for taxes at the applicable rates for Federal and California State income taxes based upon reported pre-tax income, and adjusted for the beneficial effect of the Company's investment in qualified municipal securities and life insurance products. The Company has not been subject to an alternative minimum tax (AMT). Return on Equity and Assets The following sets forth key ratios for the periods ending December 31, 2003, 2002 and 2001. 2003 2002 2001 ------ ------ ------ Net income as a percentage of average assets 1.00% .99% 1.00% Net income as a percentage of average equity 11.70% 11.36% 10.61% Average equity as a percentage of average assets 8.50% 8.75% 9.45% Dividends declared per share as a percentage of net Income per share 11.17% 12.20% 13.70% 15 BALANCE SHEET - -------------------------------------------------------------------------------- Total assets as of December 31, 2003 were $459,482,000 compared with $416,458,000 and $326,806,000, as of year-end 2002 and 2001, respectively, representing a 10% increase in 2003 and a 27% increase in 2002. Total deposits grew $38,642,000 to $406,445,000 in 2003, representing an 11% increase, compared with a 26% increase in 2002. Total loans, net of allowance for loan losses, grew $68,802,000 to $303,139,000 in 2003, representing a 29% increase compared with a 28% increase in 2002. Investment securities decreased $15,088,000 from year-end 2002 to $92,006,000 in 2003, a 14% decrease, compared with an increase of 24% during 2002. Trust Preferred Securities On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of 90 day Libor plus 3.45% and had an initial interest rate of 5.34% and the rate as of December 31, 2003 was 4.62%; the Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debentures, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. Off Balance Sheet Arrangement The Company does not have off-balance sheet arrangements, as defined by Regulation SK. The Company does have loan commitments and letters of credit. For additional information please see footnote eight to the Consolidated Financial Statements. Borrowings There were no short-term borrowings at December 31, 2003 or December 31, 2002. Short-term borrowings consist primarily of federal funds purchased and borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Banks maintain collateralized lines of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2003, the lines provided for maximum borrowings of approximately $116 million; the Company also has available unused lines of credit totaling $17.5 million for Federal funds transactions at December 31, 2003. At December 31, 2003 and 2002, there were no outstanding borrowings. Contractual Obligations The Company has entered into non-cancelable contracts for leased premises, data processing and other service agreements. The Company has no capital leases. The following table summarizes our significant contractual obligation and commitments as of December 31, 2003:
(In 000's) Less than One to Four to Total one year three years five years Thereafter ------- --------- ------------ ---------- ------------ Trust preferred securities $10,000 $0 $0 $0 $10,000 Operating leases 4,079 703 1,210 784 1,382 Other obligations 102 80 22 0 0 ------- ---- ------ ---- ------- Total $14,181 $783 $1,232 $784 $11,382 ======= ==== ====== ==== =======
16 Time Deposits The following table sets forth the maturity of time certificates of deposit of $100,000 or more at December 31, 2003, 2002 and 2001.
(In 000's) 2003 2002 2001 ---- ---- ---- 3 months or less $17,584 49.8% $24,661 62.5% $19,260 50.4% Over 3 months through 6 months 6,122 17.4% 6,182 15.7% 8,243 21.6% Over 6 months through 12 months 3,822 10.8% 3,887 9.9% 6,302 16.5% Over 12 months 7,762 22.00% 4,695 11.9% 4,419 11.5% ------- ------ ------- ----- ------- ----- $35,290 100% $39,425 100% $38,224 100% ======= ====== ======= ===== ======= =====
Liquidity and Capital Adequacy The Company's liquidity is determined by the level of assets (such as cash, federal funds sold and unpledged marketable securities together with other funding sources) that are readily convertible to cash and cash equivalents and other funding sources to meet customer withdrawal and borrowing needs. The Company's liquidity position is reviewed by management on a regular basis to verify that it is adequate to meet projected loan funding and potential withdrawal of deposits. The Company has a comprehensive Asset/Liability Management and Liquidity Policy that it uses to determine adequate liquidity. Securities classified as "Held-to-Maturity" are reported at amortized cost, and "Available-for-Sale" securities are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. As of December 31, 2003, the Company had no securities carried as "Held-to-Maturity". "Available-for-Sale" securities had a fair value of $90,655,000 with an unrealized gain, net of income taxes, of $608,000 reflected as a component of accumulated other comprehensive income in the shareholders' equity section of the Balance Sheet. The Company owns equity securities carried at a cost of $1,351,000. The Company also has available funding from other sources such as the Federal Home Loan Bank and federal fund lines of credit. As of December 31, 2003, the Company had approximately $133.5 million available from these sources for borrowing. The Company relies on these funding sources to assist in funding loans when loan demand outpaces deposit growth. At year-end 2003, liquid assets (defined as cash, Federal funds sold, deposits in other financial institutions and securities categorized as available-for-sale) represented 28% of total assets, as compared with 38% as of year-end 2002. The level of liquid assets at December 31, 2003 exceeds the liquidity required by the Company's liquidity policy. Management expects to be able to meet the liquidity needs of the Company during 2004 primarily through balancing loan growth with corresponding increases in deposits. The Company did occasionally rely on borrowings from FHLB and on the federal funds lines during 2003. The Company's capital ratios remained relatively steady during 2003 compared with 2002 levels. As of December 31, 2003, the Company's total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio were 13.5%, 12.6% and 10.6%, respectively. These compare with ratios of 14.9%, 13.9% and 10.9% as of December 31, 2002. In January, 2004, the Company declared a 5% stock dividend and a $.20 per share cash dividend for shareholders of record as of March 12, 2004. The stock dividend will affect the Company's capital and its capital ratios only to the extent that cash is distributed in lieu of fractional shares. Accordingly, the stock dividend will not materially impact the Company's overall capital. The cash dividend will total approximately $460,000, equating to a reduction in the Company's leverage ratio of approximately .01%. 17 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - -------------------------------------------------------------------------------- Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. Although the Company manages other risks, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be principally a market risk. The Company relies on loan reviews, prudent underwriting standards and an adequate allowance for loan losses to mitigate credit risk. Other types of market risks, such as foreign currency exchange rate risk, do not arise in the normal course of the Company's business activities. The majority of the Company's interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available-for-sale, deposit liabilities, short-term borrowings and long-term debt. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. The Company manages interest rate risk through its Audit Committee which serves as the Asset Liability Committee (ALCO). The ALCO manages the balance sheet to maintain the forecasted impact on net interest income and present value of equity within acceptable ranges despite unforeseeable changes in interest rates. The ALCO monitors these risks on a quarterly basis using both a traditional gap analysis and simulation analysis. The Company utilizes a simulation model as its primary tool for interest rate risk. This model considers the effects of lags and different ranges of interest rate changes among various classes of earning assets and interest-bearing liabilities following a 1% or 2% change in the Fed Funds rate, and produces a more accurate projection of the impact changing interest rates will have on the Company. Readers are referred to management's "Forward Looking Statement" in connection with this information. Interest Rate Sensitivity The following table sets forth the repricing opportunities for rate-sensitive assets and rate-sensitive liabilities at December 31, 2003. Rate sensitivity analysis usually excludes noninterest-bearing demand deposits. Including these deposits, which totaled $103,401,000, would result in a significant shift in the gap position. Rate-sensitive assets and rate-sensitive liabilities are classified by the earliest possible repricing date or maturity, whichever comes first.
(In 000's) 3 Months Over 3 Mos. Over 1 Yr. Over 5 or Less To 1 Yr. To 5 Yrs. Years Total --------- ------- -------- -------- -------- Interest rate-sensitive assets: Loans, gross $ 58,340 $ 43,028 $146,251 $ 59,044 $306,663 Interest-bearing deposits in other banks 0 100 0 0 100 Investment securities 1,001 439 36,798 53,768 92,006 Federal funds sold 9,195 0 0 0 9,195 --------- ------- -------- -------- -------- Total 68,536 43,567 183,049 112,812 407,964 Interest rate-sensitive liabilities: Interest-bearing demand Deposits 194,046 0 0 0 194,046 Time deposits >$100,000 17,584 9,944 7,762 0 35,290 Other time deposits 17,720 13,894 5,494 0 37,108 Savings deposits 36,599 0 0 0 36,599 Long-term borrowings 10,000 0 0 0 10,000 --------- ------- -------- -------- -------- Total $275,949 $ 23,838 $ 13,256 $ 0 $313,043 Interest rate sensitivity gap ($207,413) $ 19,729 $169,793 $112,812 $ 94,921 ========= ========= ======== ======= ======== Cumulative interest rate sensitivity gap ($207,413) ($187,684) ($17,891) $94,921 ========= ========= ======== ======= Ratio of interest rate sensitivity to earning assets (50.84%) 4.84% 41.62% 27.65%
18 This table indicates that the Company has a "negative" GAP for three months into the future and a "positive" GAP beyond. The implication is that during the negative GAP "horizon" Company earnings will increase in a falling interest rate environment, as there are more rate sensitive liabilities subject to repricing downward than rate sensitive assets; conversely, earnings would decline in a rising rate environment. During a positive GAP "horizon" earnings would decrease in a falling interest rate environment, as there would be more rate sensitive assets subject to repricing downwards than rate sensitive liabilities. This traditional analysis does not recognize or assume any "lag" in interest rate changes on earning assets and interest-bearing liabilities, and it assumes that all earning assets and interest-bearing liabilities reprice to the same absolute degree regardless of the mix of earning assets and interest-bearing liabilities. The following table, utilizing a simulation model to measure interest rate risk, shows the approximate pre-tax dollar and percentage change in forecasted net interest income over a 12-month period. The simulation analysis uses an income simulation approach to measure the change in interest income and expense under rate shock conditions. The model considers the three major factors of (a) volume differences, (b) repricing differences and (c) timing in its income simulation. The model begins by disseminating data into appropriate repricing buckets based on internally supplied algorithms (or overridden by calibration). Next, each major asset and liability type is assigned a "multiplier" or beta to simulate how much that particular balance sheet category type will reprice when interest rates change. The model uses eight asset and liability multipliers consisting of bank-specific or default multipliers. The remaining step is to simulate the timing effect of assets and liabilities by modeling a month-by-month simulation to estimate the change in interest income and expense over the next 12-month period. 19 (In 000's) December 31, 2003 --------------------------------------------- Dollar change in Percent change in Change in interest rates: net interest income net interest income 100 basis points decline $261 1.36% 100 basis points rise ($460) (2.39%) 200 basis points rise ($931) (4.83%) (In 000's) December 31, 2002 --------------------------------------------- Dollar change in Percent change in Change in interest rates: net interest income net interest income 100 basis points decline $186 1.06% 100 basis points rise ($277) (1.58%) 200 basis points rise ($552) (3.16%) As illustrated in the above tables, the Company is currently liability sensitive. The implication of this is that the Company's earnings will increase in a falling interest rate environment, as there are more rate sensitive liabilities subject to reprice downward than rate sensitive assets; conversely, earnings would decrease in a rising rate environment. Therefore, an increase in market rates could adversely affect net interest income. In contrast, a decrease in market rates may improve net interest income. It should be noted that the tools used to manage interest rate risk do not take into account future management actions that may be undertaken, should a change occur in actual market interest rates during the year. Also, certain assumptions are required to perform modeling simulations that may have significant impact on the results. These include assumptions about composition or mix of the balance sheet, level of interest rates, balance changes of deposit products that do not have stated maturities and assumptions of industry standards and future expected pricing behaviors. The results indicated by the model could vary significantly due to external factor such as changes in the prepayment assumptions, competition or early withdrawal of deposits. DESCRIPTION OF OPERATIONS - -------------------------------------------------------------------------------- North Bay Bancorp is a California corporation organized November 1, 1999 and is registered with the Board of Governors of the Federal Reserve System as a financial holding company under the Bank Holding Company Act of 1956, as amended. The Vintage Bank is a wholly-owned subsidiary of the Bancorp, organized as a state chartered Bank in 1984; Solano Bank is also a wholly-owned subsidiary of the Bancorp, organized as a state chartered Bank in 2000. The Vintage Bank engages in the commercial banking business in Napa County from its main banking office located at 1500 Soscol Avenue, Napa, California. The Vintage Bank has four other business locations, one located in the Brown's Valley Shopping Center at 3271 Brown's Valley Road, Napa, California, 3626 Bel Aire Plaza, Napa, California, 1065 Main Street in St. Helena, California and one at 1190 Airport Road, Napa, California which opened in March 2003. The Vintage Bank also has a remote ATM at 6498 Washington Street, Yountville, California. Solano Bank also engages in the commercial banking business in Solano County from its main banking office located at 403 Davis Street, Vacaville, California. Solano Bank has three other business locations, one located at 1411 Oliver Road, Fairfield, California, one at 1395 E. Second Street, Benicia, California and one located at 976 Admiral Callahan Lane, Vallejo, California. Solano Bank also has a remote ATM at 1100 Texas Street, Fairfield, California. The Banks conduct commercial banking business, offering a full range of commercial banking services to individuals, businesses and agricultural communities of Napa and Solano Counties. The Banks emphasize their retail commercial banking operations and accept checking and savings deposits, issues drafts, sells traveler's checks and provide other customary banking services. SECURITIES OF THE HOLDING COMPANY - -------------------------------------------------------------------------------- The Company's outstanding securities consist of one class, Common Stock, of which there were 2,290,174 shares outstanding at March 12, 2004, held by 1,001 shareholders of record. The stock is listed on the Nasdaq National Market System under the symbol NBAN effective September 3, 2002. Prior to the Nasdaq listing, the stock traded over-the-counter and was quoted on the OTC "Bulletin Board". 20 The following table (adjusted for the 2003 and 2004 stock dividends) summarizes the common stock high and low prices based upon transactions of which the Company is aware: Quarter ended High Low March 31, 2002 $24.94 $17.28 June 30, 2002 24.94 21.54 September 30, 2002 26.08 20.05 December 31, 2002 24.04 21.54 March 31, 2003 28.81 24.29 June 30, 2003 27.62 24.19 September 30, 2003 26.59 23.81 December 31, 2003 29.40 24.38 There may be other transactions of which the Company is not aware and, accordingly, they are not reflected in the range of actual sales prices stated. Further, quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions. Additionally, since trading in the Company's common stock is limited, the range of prices stated are not necessarily representative of prices that would result from a more active market. The Company paid cash dividends of $0.20 per share in each of the years 2004, 2003 and 2002. The holders of common stock of the Company are entitled to receive cash dividends when and as declared by the Board of Directors out of funds legally available. Federal Reserve Board regulations prohibit cash dividends, except under limited circumstances, if the distribution would result in a withdrawal of capital or exceed the Company's net profits then on hand after deducting its losses and bad debts. Furthermore, cash dividends cannot be paid without the prior written approval of the Federal Reserve Board if the total of all dividends declared in one year exceeds the total of net profits for that year plus the preceding two calendar years, less any required transfers to surplus under state or federal law. The shareholders' right to receive dividends is also subject to the restrictions set forth in the California General Corporation Law. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (1) The corporation's assets equal at least 1.25 times its liabilities; and (2) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 1.25 times its current liabilities. As of December 31, 2003, the Company had retained earnings of $9,623,000 eligible for dividends. 21 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, 2003 and 2002
(In 000's except share data) 2003 2002 -------- -------- ASSETS CASH AND DUE FROM BANKS $ 28,756 $ 23,785 FEDERAL FUNDS SOLD 9,195 28,525 -------- -------- Cash and cash equivalents 37,951 52,310 TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS 100 100 INVESTMENT SECURITIES: Held-to-maturity 0 1,272 Available-for-sale 90,655 104,473 Equity securities 1,351 1,349 -------- -------- Total investment securities 92,006 107,094 LOANS, net of allowance for loan losses of $3,524 in 2003 and $3,290 in 2002 303,139 234,337 LOANS HELD FOR SALE 3,095 0 BANK PREMISES AND EQUIPMENT, net 10,909 10,800 INTEREST RECEIVABLE AND OTHER ASSETS 12,282 11,817 -------- -------- Total assets $459,482 $416,458 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Non-interest bearing $103,401 $104,142 Interest-bearing 303,044 263,661 -------- -------- Total deposits 406,445 367,803 TRUST PREFERRED SECURITIES 10,000 10,000 INTEREST PAYABLE AND OTHER LIABILITIES 3,596 3,312 -------- -------- Total liabilities 420,041 381,115 SHAREHOLDERS' EQUITY: Preferred stock, no par value - Authorized 500,000 shares; Issued and outstanding - None Common stock, no par value - Authorized 10,000,000 shares; Issued and outstanding - 2,285,646 shares in 2003 and 2,130,288 shares in 2002 29,210 25,387 Retained earnings 9,623 8,612 Accumulated other comprehensive income 608 1,344 -------- -------- Total shareholders' equity 39,441 35,343 Total liabilities and shareholders' equity $459,482 $416,458 ======== ========
The accompanying notes are an integral part of these statements. 22 - -------------------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENTS - -------------------------------------------------------------------------------- For the Years Ended December 31, 2003, 2002 and 2001
(In 000's except share data) 2003 2002 2001 ------- ------- ------- INTEREST INCOME: Interest and fees on loans $18,782 $16,602 $15,319 Interest on federal funds sold 207 418 1,012 Interest on investment securities - taxable 2,535 3,490 3,395 Interest on investment securities - tax exempt 725 664 574 Interest on time deposits with other financial institutions 2 5 7 ------- ------- ------- Total interest income 22,251 21,179 20,307 ------- ------- ------- INTEREST EXPENSE: Interest on interest-bearing transaction deposits 916 1,118 2,164 Interest on time and savings deposits 1,537 2,234 3,552 Interest on long-term debt 531 339 168 Interest on short-term borrowings 11 0 3 ------- ------- ------- Total interest expense 2,995 3,691 5,887 ------- ------- ------- Net interest income 19,256 17,488 14,420 PROVISION FOR LOAN LOSSES 238 576 447 ------- ------- ------- Net interest income after provision for loan losses 19,018 16,912 13,973 NONINTEREST INCOME: Service charges on deposit accounts 1,645 1,321 1,186 Gain on securities transactions, net 637 399 325 Other 1,565 1,391 1,180 ------- ------- ------- Total noninterest income 3,847 3,111 2,691 ------- ------- ------- NONINTEREST EXPENSE: Salaries and related benefits 8,795 7,893 6,349 Occupancy 1,289 916 855 Equipment 1,453 1,614 1,451 Other 4,778 3,893 3,300 ------- ------- ------- Total noninterest expense 16,315 14,316 11,955 ------- ------- ------- Income before provision for income taxes 6,550 5,707 4,709 PROVISION FOR INCOME TAXES 2,179 1,999 1,687 ------- ------- ------- NET INCOME $ 4,371 $ 3,708 $ 3,022 ======= ======= ======= BASIC EARNINGS PER SHARE: $ 1.83 $ 1.60 $ 1.33 DILUTED EARNINGS PER SHARE: $ 1.79 $ 1.56 $ 1.32
The accompanying notes are an integral part of these statements. 23 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES - -------------------------------------------------------------------------------- IN SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME For the Years Ended December 31, 2003, 2002 and 2001
(In 000's except share data) Accumulated Other Total Common Shares Common Retained Comprehensive Shareholders' Comprehensive Outstanding Stock Earnings Income (Loss) Equity Income ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2000 1,850,445 $ 19,802 $ 6,753 $ 82 $ 26,637 Stock dividend 92,307 1,938 (1,950) (12) Cash dividend (371) (371) Comprehensive income: Net income 3,022 3,022 $3,022 Other comprehensive loss, net of tax: Change in net unrealized loss on available-for-sale securities, net of tax of $335 and reclassification adjustment 471 471 471 --------- $3,493 ========= Comprehensive income Stock options exercised, including a tax benefit of $36 18,150 233 233 ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2001 1,960,902 21,973 7,454 553 29,980 Stock dividend 97,408 2,143 (2,158) (15) Cash dividend (392) (392) Comprehensive income: Net income 3,708 3,708 3,708 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax of $562 and reclassification adjustment 791 791 791 --------- Comprehensive income $4,499 ========= Stock options exercised, including a tax benefit of $362 71,978 1,271 1,271 ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2002 2,130,288 25,387 8,612 1,344 35,343 Stock dividend 106,295 2,918 (2,933) (15) Cash dividend (427) (427) Comprehensive income: Net income 4,371 4,371 $4,371 Other comprehensive loss, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax of $523 and reclassification adjustment (736) (736) (736) --------- $3,635 ========= Comprehensive income Stock options exercised, including a tax benefit of $261 49,063 905 905 ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2003 2,285,646 $ 29,210 $ 9,623 $ 608 $ 39,441 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. 24 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the Years Ended December 31, 2003, 2002 and 2001
(In 000's) 2003 2002 2001 --------- --------- --------- Cash Flows From Operating Activities: Net income $ 4,371 $ 3,708 $ 3,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,569 1,441 1,352 Provision for loan losses 238 576 447 Proceeds from sale of loans-held-for sale 280,225 0 0 Purchase of loans-held-for sale (283,320) 0 0 Amortization of deferred loan fees (665) (514) (471) Amortization of investment securities premiums, net 1,079 938 121 Provision for deferred income taxes (56) (398) (308) Losses on sale or retirement of capital assets 0 1 0 Gain on securities transactions (637) (399) (325) Changes in: Interest receivable and other assets 114 (1,582) (3,265) Interest payable and other liabilities 543 1,135 1,150 --------- --------- --------- Net cash provided by operating activities 3,461 4,906 1,723 --------- --------- --------- Cash Flows From Investing Activities: Investment securities held to maturity: Proceeds from maturities and principal payments 1,272 42 39 Investment securities available for sale: Proceeds from maturities and principal payments 36,783 40,368 25,981 Proceeds from sales and recoveries 34,626 21,380 12,228 Purchases (59,290) (81,842) (63,745) Equity securities: Proceeds from sales 56 10 31 Purchases (58) (120) (40) Net increase in loans (68,375) (50,851) (33,516) Sale and disposition of capital assets 0 1 42 Capital expenditures (1,678) (2,914) (5,481) --------- --------- --------- Net cash used in investing activities (56,664) (73,926) (64,461) --------- --------- --------- Cash Flows From Financing Activities: Net increase in deposits 38,642 75,362 75,803 Proceeds from issuance of trust preferred securities 0 10,000 0 Repayment of long-term borrowings 0 (1,846) (923) Stock options exercised 644 909 196 Dividends (442) (406) (383) --------- --------- --------- Net cash provided by financing activities 38,844 84,019 74,693 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (14,359) 14,999 11,955 Cash and cash equivalents at beginning of year 52,310 37,311 25,356 --------- --------- --------- Cash and cash equivalents at end of year $ 37,951 $ 52,310 $ 37,311 ========= ========= ========= Supplemental Disclosures of Cash Flow Information: Interest paid $ 3,084 $ 3,755 $ 5,622 Income taxes paid $ 1,345 $ 2,290 $ 1,448 Retirement of fixed assets $ 0 $ 0 $ 139
The accompanying notes are an integral part of these statements. 25 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- December 31, 2003, 2002 and 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES North Bay Bancorp (Bancorp) is a registered financial holding company headquartered in Napa, California, established on November 1, 1999. Bancorp's principal line of business is serving as a holding company for The Vintage Bank and Solano Bank (the Banks), both California state chartered banks. The Banks operate five offices in the California county of Napa and four offices in the California county of Solano. The Banks offer a full range of commercial banking services to individuals and the business and agricultural communities. Most of the Banks' customers are retail customers and small to medium-sized businesses. The consolidated financial statements of Bancorp and subsidiaries (collectively the Company) are prepared in conformity with accounting principles generally accepted in the United States of America. The more significant accounting and reporting policies are discussed below. Principles of consolidation The consolidated financial statements include the accounts of Bancorp, North Bay Statutory Trust I, the Banks and the Real Estate Investment Trust. All material intercompany transactions and accounts have been eliminated in consolidation. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, 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 period. For the Company, the most significant accounting estimate is the allowance for loans losses. See "Allowance for loan losses" below. Actual results could differ from those estimates Investment securities Investments in debt and equity securities are classified as "held-to-maturity" or "available-for-sale". Investments classified as held-to-maturity are those that the Company has the ability and intent to hold until maturity and are reported at cost, adjusted for the amortization or accretion of premiums or discounts. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses net of related tax, if any, reported as other comprehensive income and are included in shareholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Loans Loans are stated at the principal amount outstanding net of unearned income. Nonrefundable loan origination fees and loan origination costs are deferred and amortized into income over the contractual life of the loan. The majority of the Company's interest income is accrued on a simple interest basis. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Restructured loans are loans on which concessions in terms have been granted because of the borrowers' financial difficulties. Interest is generally accrued on such loans in accordance with the new terms. 26 The Banks define a loan as impaired when it is probable the Banks will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate or based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Loans held-for-sale Loans originated or purchased and considered held for sale are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Allowance for loan losses The Banks maintain an allowance for loan losses at a level considered adequate to provide for probable losses inherent in the existing loan portfolio. The allowance is increased by provisions for loan losses and reduced by net charge-offs. The allowance for loan losses is based on estimates, and ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The Banks make credit reviews of the loan portfolio and consider current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. Other real estate owned Other real estate owned represents real estate acquired through foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Bank premises and equipment Premises, leasehold improvements, furniture, fixtures and equipment are carried at cost net of accumulated depreciation and amortization, which are calculated on a straight-line basis over the estimated useful life of the property or the term of the lease (if less). Premises are depreciated over 40 years, furniture and fixtures are depreciated over five to 15 years, and equipment is generally depreciated over three to five years. Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Statements of cash flows The Company defines cash, due from banks, and federal funds sold as cash and cash equivalents for the statements of cash flows. Stock-based compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25 and related interpretations). Under this method, compensation expense is recognized for awards of options to purchase 27 shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", permits companies to continue using the intrinsic-value method to account for stock option plans or adopt a fair value based method. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method and the pro forma disclosures required by SFAS 123 using the fair value method are: (In 000's except share data) 2003 2002 2001 -------- ------- ------- Net income as reported $ 4,371 $ 3,708 $ 3,022 Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 268 235 294 -------- ------- ------- Net income pro forma $ 4,103 $ 3,473 $ 2,728 ======== ======= ======= Earnings per share: As reported: Basic $ 1.83 $ 1.60 $ 1.33 Diluted $ 1.79 $ 1.56 $ 1.32 Pro forma: Basic $ 1.72 $ 1.50 $ 1.27 Diluted $ 1.68 $ 1.46 $ 1.25 Earnings per common share Basic Earnings per Share is computed by dividing net income by the weighted average common shares outstanding. Diluted EPS is computed by dividing net income by weighted average common shares outstanding including the dilutive effects of potential common shares (e.g. stock options). Comprehensive income For the Company, comprehensive income includes net income reported on the income statement and changes in the fair value of its available-for-sale investments reported as accumulated other comprehensive income. Derivative instruments Derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities are required to be recognized as either assets or liabilities in the statements of financial position and measures those instruments at fair value. The Company does not currently utilize derivative instruments in its operations and does not engage in hedging activities. Accounting and reporting changes Financial Accounting Standards Board (FASB) Interpretation No. 46, (as revised), Consolidation of Variable Interest Entities. This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: 1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, or 2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity's activities through voting or similar rights, b) the obligation to absorb the expected losses of the entity if they occur, or c) the right to receive the expected residual returns of the entity if they occur. The Interpretation requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties involved. In accordance with the FASB Interpretation No. 46, as revised, the Company will deconsolidate North Bay Statutory Trust I in the first quarter of 2004. FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. 28 Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of the Statement on July 1, 2003. The Company did not enter into any financial instruments within the scope of the Statement during June 2003. However, as a result of adopting the Statement on July 1, 2003 for existing financial instruments entered into on or before May 31, 2003, the trust preferred securities (floating rate subordinated debenture) of $10 million were reclassified as liabilities on July 1, 2003. 29 (2) INVESTMENT SECURITIES The amortized cost and estimated fair value of investments in debt and equity securities are summarized in the following tables. Included in the tables are equity securities that do not have readily determinable fair values because ownership is restricted and they lack a market. These securities are carried at cost and consist of Federal Reserve and Federal Home Loan Bank stock. The amortized cost and estimated fair value of investment securities at December 31, 2003 are as follows: (In 000's) Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------- ------ ------ --------- Available-for-sale: Securities of the U.S. Treasury and other government agencies $35,942 $91 $108 $35,925 Corporate debt securities 1,221 7 0 1,228 Mortgage-backed securities 32,977 380 149 33,208 Municipal securities 19,474 859 39 20,294 ------- ------ ---- ------- Total available-for-sale 89,614 1,337 296 90,655 Equity securities 1,351 0 0 1,351 ------- ------ ---- ------- Total investments $90,965 $1,337 $296 $92,006 ======= ====== ==== ======= There were no unrealized losses greater than 12 months. The unrealized losses were due to changes in market rates and not attributed to credit quality. The amortized cost and estimated fair value of investment securities at December 31, 2002 are as follows: (In 000's) Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------- -------- -------- ---------- Held-to-maturity: Municipal securities $ 1,272 $ 0 $ 0 $ 1,272 -------- -------- -------- -------- Available-for-sale: Securities of the U.S. Treasury and other government agencies 34,089 642 0 34,731 Corporate debt securities 11,524 239 0 11,763 Mortgage-backed securities 44,226 735 27 44,934 Municipal securities 12,334 711 0 13,045 -------- -------- -------- -------- Total available-for-sale 102,173 2,327 27 104,473 Equity securities 1,349 0 0 1,349 -------- -------- -------- -------- Total investments $104,794 $ 2,327 $ 27 $107,094 ======== ======== ======== ======== There were no unrealized losses greater than 12 months. The unrealized losses were due to changes in market rates and not attributed to credit quality. 30 The following table shows the amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2003: (In 000's) Available-for-Sale Amortized Estimated Cost Fair Value ------- ------- Within one year $1,428 $1,440 After one but within five years 36,465 36,792 After five but within ten years 10,767 11,187 Over ten years 7,977 8,028 Mortgage-backed securities 32,977 33,208 ------- ------- Total $89,614 $90,655 ======= ======= The following table provides a summary of the maturities and weighted average yields of investment securities as of December 31, 2003.
(In 000's) After One After Five In One Year Through Through After or Less Five Years Ten Years Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------- ------ ------- ------ ------- ------ ------ ----- ------ ----- Available-for-sale securities: Securities of the U.S. Treasury and other government agencies $0 0.00% $28,908 3.23% $0 0.00% $7,017 1.82% $35,925 2.95% Mortgage-backed securities (1) 0 0.00% 6 8.84% 1,686 6.47% 31,516 4.16% 33,208 4.28% Municipal securities (2) 439 5.78% 7,884 4.41% 11,187 5.26% 784 7.11% 20,294 5.01% Corporate debt securities 1,001 1.52% 0 0.00% 0 0.00% 227 6.22% 1,228 2.39% ------ ---- ------- ---- ------- ---- ------- ---- ------- ---- Total $1,440 2.82% $36,798 3.48% $12,873 5.42% $39,544 3.82% $90,655 3.89% Equity securities: Equity stocks (3) $0 0.00% $0 0.00% $0 0.00% $1,351 5.80% $1,351 5.80% ------ ---- ------- ---- ------- ---- ------- ---- ------- ---- $0 0.00% $0 0.00% $0 0.00% $1,351 5.80% $1,351 5.80%
(1) The maturity of mortgage-backed securities is based on contractual maturity. The average expected life is approximately five years. (2) Yields shown are taxable-equivalent. (3) Consists of Federal Reserve Bank and Federal Home Loan Bank Stock As of December 31, 2003 and 2002, securities carried at $2,740,000 and $2,081,000, respectively, were pledged to secure public deposits as required by law. Total proceeds from the sale of securities available-for-sale during 2003, 2002 and 2001 were $34,626,000, $21,380,000 and $12,228,000, respectively. Gross gains of $637,000, $399,000 and $325,000 were realized on those sales in 2003, 2002 and 2001, respectively. 31 (3) LOANS AND ALLOWANCE FOR LOAN LOSSES At December 31, 2003 and 2002, the loan portfolio consisted of the following, net of deferred loan fees of $1,248,000 and $1,348,000, respectively: (In 000's) 2003 2002 -------- -------- Real estate loans $163,088 $131,167 Installment loans 28,860 24,102 Construction loans 35,205 19,306 Commercial loans secured by real estate 33,519 16,991 Commercial loans 45,991 46,061 -------- -------- 306,663 237,627 Less allowance for loan losses 3,524 3,290 -------- -------- Total $303,139 $234,337 ======== ======== There were no loans on nonaccrual status at December 31, 2003 or December 31, 2002. There was no interest foregone during 2003, 2002 or 2001. As of December 31, 2003 and 2002, there were no loans 90 days or more past due but still accruing interest. There were no restructured loans during 2003 or 2002. Changes in the allowance for loan losses are as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Balance, beginning of year $3,290 $2,717 $2,268 Provision for loan losses 238 576 447 Loans charged off (12) (10) (4) Recoveries of loans previously charged off 8 7 6 ------ ------ ------ Balance, end of year $3,524 $3,290 $2,717 ====== ====== ====== As of December 31, 2003, 2002 and 2001 there were no impaired loans. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, in which case payments received are recorded as reductions of principal. 32 (4) PREMISES AND EQUIPMENT Premises and equipment at December 31, 2003 and 2002 consisted of the following: (In 000's) Accumulated Depreciation Net Book Cost & Amortization Value ------- -------------- -------- 2003 Land $2,800 $0 $2,800 Premises 5,080 944 4,136 Furniture, fixtures and equipment 7,803 4,888 2,915 Leasehold improvements 1,707 649 1,058 ------- ------ ------- Total $17,390 $6,481 $10,909 ======= ====== ======= 2002 Land $2,800 $0 $2,800 Premises 5,027 786 4,241 Furniture, fixtures and equipment 6,635 3,670 2,965 Leasehold improvements 1,250 456 794 ------- ------ ------- Total $15,712 $4,912 $10,800 ======= ====== ======= Depreciation and amortization expense, included in occupancy expense and equipment expense, was $1,569,000, $1,441,000 and $1,352,000 in 2003, 2002 and 2001, respectively. (5) COMMITMENTS AND CONTINGENCIES The Company leases premises for their various offices. Total rent on such leases was $662,000, $374,000 and $321,000 in 2003, 2002 and 2001, respectively, and is included in occupancy and equipment expenses. The total commitments under non-cancelable operating leases are as follows: (In 000's) Year Total ---- ----- 2004 $703 2005 654 2006 556 2007 446 2008 338 Thereafter 1,382 ------ Total $4,079 ====== (6) TIME DEPOSITS AND INTEREST ON TIME DEPOSITS Time certificates of deposit in denominations of $100,000 or greater were $35,290,000 and $39,425,000 at December 31, 2003 and 2002, respectively. Interest expense on these deposits was $757,000, $893,000 and $1,010,000 for 2003, 2002 and 2001, respectively. At December 31, 2003, the scheduled maturities of total time deposits are as follows: (In 000's) Year Total ---- ------- 2004 $59,142 2005 6,251 2006 2,755 2007 2,156 2008 2,094 ------- Total $72,398 ======= 33 (7) BORROWINGS There were no short-term borrowings at December 31, 2003 or December 31, 2002. Short-term borrowings consist primarily of federal funds purchased and borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Company maintains collateralized lines of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2003, these lines provided for maximum borrowings of approximately $116 million; the Company also has available unused lines of credit totaling $17.5 million for federal funds transactions at December 31, 2003. On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of the 90 day LIBOR plus 3.45% which changes quarterly. The rate at December 31, 2003 was 4.62%. The Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debenture, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. (8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Banks make commitments to extend credit in the normal course of business to meet the financing needs of their customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Banks are exposed to credit loss, in the event of non-performance by the borrower, in the contract amount of the commitment. The Banks use the same credit policies in making commitments as they do for on-balance-sheet instruments and evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks, are based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, plant and equipment and real property. The Banks also issue standby letters of credit, which are conditional commitments to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support construction bonds, private borrowing arrangements and similar transactions. Most of these guarantees are short-term commitments expiring in decreasing amounts through 2003 and are not expected to be drawn upon. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold collateral as deemed necessary, as described above. The contract amounts of commitments not reflected on the Balance Sheet at December 31, 2003 and 2002 were as follows: (In 000's) Contractual Amounts ---------------------- 2003 2002 ------- ------- Loan commitments $86,984 $83,835 Standby letters of credit $1,108 $729 34 The Banks issue both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. At December 31, 2003 there was $369,000 issued in financial standby letters of credit and the Banks carried no liability. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. At December 31, 2003 there were $739,000 issued in performance standby letters of credit and the Banks carried no liability. The terms of the guarantees will expire primarily in 2004 with 1% expiring in 2007 and 27% expiring in 2008. The Banks have experienced no draws on these letters of credit, and do not expect to in the future; however, should a triggering event occur, the Banks either have collateral in excess of the letter of credit or imbedded agreements of recourse from the customer. (9) CONCENTRATIONS OF CREDIT RISKS The majority of the Banks' loan activity is with customers located in California, primarily in the counties of Napa and Solano. Although the Banks' have a diversified loan portfolio, a large portion of their loans are for commercial property, and many of the Banks' loans are secured by real estate in Napa and Solano County. Approximately 84% of the loans are secured by real estate. This concentration is presented below: (In 000's) December 31, 2003 Construction/land development: ----------------- Land development $7,181 Residential 7,212 Commercial 20,812 Real estate 163,088 Commercial loans secured by real estate 33,519 Installment loans secured by real estate 24,884 -------- Total $256,696 ======== (10) INCOME TAXES The provision (benefit) for federal and state income taxes for the years ended December 31, 2003, 2002 and 2001 consisted of: (In 000's) 2003 2002 2001 ------ ------ ------ Current Federal $1,521 $1,712 $1,471 State 602 685 524 ------ ------ ------ 2,123 2,397 1,995 Deferred Federal 70 (297) (324) State (14) (101) 16 ------ ------ ------ 56 (398) (308) ------ ------ ------ Total $2,179 $1,999 $1,687 ====== ====== ====== 35 Deferred tax assets and liabilities result from differences in the timing of the recognition of certain income and expense items for tax and financial accounting purposes. The sources of these differences and the amount of each are as follows as of December 31, 2003 and 2002: (In 000's) 2003 2002 ------ ------ Deferred tax assets: Allowance for loan losses $1,398 $1,300 Deferred compensation 512 372 State income tax 213 191 Depreciation 0 68 Other 0 33 ------ ------ $2,123 $1,964 ------ ------ Deferred tax liabilities: Unrealized gain on securities $ 433 $ 956 Accumulated accretion 162 147 Depreciation 139 0 Other 61 0 ------ ------ $ 795 $1,103 ------ ------ Net deferred tax asset $1,328 $ 861 ====== ====== The Company believes that a valuation allowance is not needed to reduce the deferred tax assets as it is more likely than not that the deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. The total tax differs from the federal statutory rate of 34% because of the following:
(In 000's) 2003 2002 2001 -------------- ---------------- ----------------- Amount Rate Amount Rate Amount Rate ------ ----- ------ ------ ------ ----- Tax provision at statutory rate $2,227 34.0% $1,940 34.0% $1,601 34.0% Interest on obligations of states and political subdivisions exempt from federal taxation (233) (3.5%) (191) (3.3%) (161) (3.4%) State franchise taxes 382 5.8% 385 6.7% 319 6.8% Life insurance policies (115) (1.8%) (133) (2.3%) (101) (2.2%) Other, net (82) (1.2%) (2) (.1%) 29 .6% ------ ----- ------ ------ ------ ----- Total $2,179 33.3% $1,999 35.0% $1,687 35.8% ====== ====== ====== ====== ====== =====
(11) DIVIDEND RESTRICTIONS The Company is regulated by the Board of Governors of the Federal Reserve System. Federal Reserve Board regulations prohibit cash dividends, except under limited circumstances, if the distribution would result in a withdrawal of capital or exceed the Bancorp's net profits then on hand after deducting its losses and bad debts. Furthermore, cash dividends cannot be paid without the prior written approval of the Federal Reserve Board if the total of all dividends declared in one year exceeds the total of net profits for that year, plus the preceding two calendar years, and less any required transfers to surplus under state or federal law. The shareholders of North Bay Bancorp are entitled to receive dividends when and as declared by its Board of Directors out of funds legally available, subject to the restrictions set forth in the California General Corporation Law. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: 1) the corporation's assets equal at least 1.25 times its liabilities; and 2) the corporation's current assets equal at least its current liabilities or, if the 36 average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 1.25 times its current liabilities. One of the primary sources of income for the Company, on a stand-alone basis, is the management fees charged to Banks. The availability of dividends from the Banks is limited by various statutes and regulations. California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earning or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank is unable to pay cash dividends due to insufficient retained earnings or net income for its last three fiscal years, cash dividends may be paid under certain circumstances with the prior approval of the California Department of Financial Institutions (the "DFI"). (12) SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE The Company declared 5% stock dividends on January 29, 2001, January 28, 2002, January 27, 2003 and January 26, 2004. As a result of the stock dividends, the number of common shares outstanding and per share data was adjusted retroactively for all periods presented in the following tables. In 2001 the effect of 8,092 outstanding options have been excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. There were no shares considered anti-dilutive in 2002 or 2003. The following table reconciles the numerator and denominator of the Basic and Diluted earnings per share computations: (In 000's except share data) Weighted Average Per-Share Net Income Shares Amount ---------- ------ ------ For the year ended 2003 ----------------------- Basic earnings per share $4,371 2,382,093 $1.83 Stock options 57,511 Diluted earnings per share 2,439,604 $1.79 For the year ended 2002 ----------------------- Basic earnings per share $3,708 2,313,461 $1.60 Stock options 57,753 Diluted earnings per share 2,371,214 $1.56 For the year ended 2001 ----------------------- Basic earnings per share $3,022 2,264,170 $1.33 Stock options 24,778 Diluted earnings per share 2,288,948 $1.32 (13) OTHER NONINTEREST INCOME AND EXPENSE The components of Other Noninterest Income for the years ended December 31, 2003, 2002 and 2001 were as follows: (In 000's) 2003 2002 2001 ------ ------ ------ ATM surcharge $279 $294 $249 Increase of cash value on insurance policies 338 393 296 Merchant services income 293 280 265 Commission on sale of non- deposit products 214 204 158 Commission on sale of mortgage products 232 0 0 Other 209 220 212 ------ ------ ------ Total $1,565 $1,391 $1,180 ====== ====== ====== 37 The components of Other Noninterest Expense for the years ended December 31, 2003, 2002 and 2001 were as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Professional services $1,387 $830 $755 Business promotions 554 525 379 ATM expenses 250 261 222 Stationary & supplies 380 318 274 Insurance 224 188 111 Other 1,983 1,771 1,559 ------ ------ ------ Total $4,778 $3,893 $3,300 ====== ====== ====== (14) STOCK OPTION PLAN The Company has a stock option plan under which it may grant up to 871,790 options. The Company has granted 723,570 options through December 31, 2003. The option exercise price equals the stock's market price on the date of grant. The options become exercisable over four or five years and expire in five or more years. The equity compensation plans have been approved by the security holders. A summary of the status of the Company's stock option plan at December 31, 2003, 2002 and 2001 and stock option activity during the years then ended is presented in the table below:
2003 2002 2001 Weighted Weighted Weighted Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 301,939 $17.50 366,836 $15.71 312,642 $15.05 Granted 86,741 $25.05 32,524 $23.18 76,114 $16.65 Exercised (51,930) $11.74 (79,356) $10.91 (21,383) $ 9.22 Cancelled (18,276) $15.86 (18,065) $17.79 (537) $ 5.96 Outstanding at end of year 318,474 $20.80 301,939 $17.50 366,836 $15.71 Exercisable at end of year 120,377 $18.44 107,372 $16.41 114,013 $13.71 Weighted-average fair value of options granted during the year $6.16 $6.94 $6.23
The following table summarizes information about stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ------------------- ------------------- Range Number Weighted-Average Weighted- Number Weighted- of Outstanding at Contractual Average Exercisable at Average Exercise Prices 12/31/03 (Life in years) Exercise Price 12/31/03 Exercise Price - ----------------- -------------- ---------------- -------------- ---------------- -------------- $16.42 to $19.58 93,807 1.03 $18.68 61,006 $18.57 $16.41 to $18.10 105,402 2.20 $17.37 51,815 $17.52 $23.13 to $28.31 119,265 4.25 $25.51 7,556 $23.60 ------- ------- 318,474 120,377 ======= =======
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 used for grants in 2003, 2002 and 2001, 38 respectively: risk-free interest rate of 2.48%, 2.66%, 2.82%, 3.27% 3.37%, 3.46% and 3.55% for options issued in 2003, 4.07% and 3.25% for options issued in 2002 and 4.62% and 3.90% for options issued in 2001; expected dividend yields of ..73%, .80% and 1.01%; expected lives of 5 years and expected volatility of 16.08%, 21.67% and 28.02%. (15) RELATED PARTY TRANSACTIONS In the ordinary course of business, the Banks make loans to directors, officers and principal shareholders on substantially the same terms, including interest rates and collateral, as those for comparable transactions with unaffiliated persons. An analysis of net loans to related parties for the year ended December 31, 2003 is as follows: (In 000's) Balance at beginning of year $5,342 Additions 7,788 Repayments 2,973 ------- Balance at end of year $10,157 ======= Total undisbursed commitments as of December 31, 2002 were $5,329,000. A law firm in which one of the Company's directors and one of its officers are principals serves as the Company's general counsel. During 2003, 2002 and 2001 fees of $196,000, $165,000 and $135,000, respectively, were paid to this firm. (16) RESTRICTIONS The Banks are required to maintain reserves with the Federal Reserve Bank of San Francisco equal to a percentage of its reservable deposits. Reserve balances that were required by the Federal Reserve Bank were $25,000 and $220,000 for December 31, 2003 and 2002, respectively, and are reported in cash and due from banks on the balance sheet. (17) RETIREMENT PLANS The Company has a Profit Sharing and Salary Deferral 401(K) Plan to enable its employees to share in the Company's profits and to defer receipt of a portion of their salaries. Employees can defer up to 15% of their base pay, up to the maximum amount allowed by the Internal Revenue Code. In addition, the Company makes discretionary contributions to the profit sharing account and the 401(K) account, which are determined by the Board of Directors each year. Amounts charged to operating expenses under this plan representing the Company's contribution were $415,000, $263,000 and $223,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company has a Director's Supplemental Retirement Program. The Program contains a non-qualified defined benefit plan. Directors and select officers designated by the Board of Directors of the Company are covered by this plan. The plan is unfunded, however the Company has purchased life insurance on the lives of the participants and expects to use the death benefit of these policies to pay the obligation in event the participants death precedes retirement. Management's intentions are to hold the policies as an investment until the death of the insured. Cash values for these policies at December 31, 2003 were $3,188,000. At December 31, 2003 $387,000 was carried as a liability to fund the benefit. The program provides a death benefit to beneficiaries of a deceased participant. The Company has an Executive Officer Supplemental Retirement Plan. The Executive Supplemental Compensation Agreements entered into with select executive officers of the Company pursuant to the Plan provide for a defined cash benefit payable monthly upon retirement upon reaching age 65 (or upon or after age 62 with a reduced benefit). Benefits under these agreements vest over five year periods at the rate of 20% per year after five years' of service with credit for up to five years of prior service. The plan is unfunded, however the Company has purchased life insurance on the lives of the participants and expects to use the death benefit of these policies to pay the obligation in event the participants death precedes retirement. At December 31, 2003 $314,000 was carried as a liability to fund the benefit. The Plan also provides a life insurance benefit to the designated beneficiary of the participants upon their death pursuant to the Executive Officer Endorsement Method Split Dollar Life Insurance component of the Plan. 39 (18) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 2003 and 2002: (In 000's) 2003 2002 -------------------- --------------------- Carrying Fair Carrying Fair Amounts Value Amounts Value -------- -------- -------- -------- Financial assets: Cash and cash equivalents $37,951 $37,951 $52,310 $52,310 Time deposits with other financial institutions 100 100 100 100 Investment securities 92,006 92,006 107,094 107,094 Loans, net 303,139 305,874 234,337 236,147 Accrued interest receivable 2,051 2,051 2,256 2,256 Financial liabilities: Deposits $406,445 $406,209 $367,803 $367,486 Trust preferred securities 10,000 10,000 10,000 10,000 Accrued interest payable 237 237 319 319 The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents - Cash and cash equivalents are valued at their carrying amounts because of the short-term nature of these instruments. Investment securities - Investment securities are valued at quoted market prices. See Note 2 for further analysis. Loans - Loans with variable interest rates are valued at the current carrying value, because these loans are regularly adjusted to market rates. The fair value of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The fair value of impaired loans is stated net of the related valuation allowance, if any. Accrued interest receivable and payable - The balance approximates its fair value. Deposits, time deposits with other banks - The fair value of demand deposits, savings accounts and interest-bearing transaction accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the contractual cash flows at current rates offered for similar instruments with the same remaining maturities. Borrowings - The balance approximates its fair value due to the short-term nature of these borrowings and the long-term borrowing has variable interest rate. Trust preferred securities - The balance approximates its fair value due to the structure having a variable interest rate. Loan commitments and standby letters of credit - The fair value is estimated using the fees currently charged to enter into similar agreements. 40 (19) COMPREHENSIVE INCOME The changes in the components of other comprehensive income (loss) for the years ended December 31, 2003, 2002 and 2001 are reported as follows:
(In 000's) 2003 2002 2001 ----- ---- ---- Unrealized holding (loss) gain arising during the period, net of tax benefit of $523 for 2003 and tax expense of $562 and $335 for 2002 and 2001, respectively ($363) $1,024 $661 Reclassification adjustment for net realized gains on securities available-for-sale included in net income during the year, net of tax expense of $265, $166 and $135 for 2003, 2002 and 2001, respectively. (373) (233) (190) ----- ---- ---- Other comprehensive (loss) income ($736) $791 $471 ===== ==== ====
(20) REGULATORY MATTERS The Company is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2003, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2003, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 41 The Company's actual capital amounts and ratios are also presented in thousands in the following tables:
(In 000's) To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 2003: Total capital (to risk weighted assets) Consolidated $52,356 13.47% $31,089 >8.00% $38,861 >10.00% The Vintage Bank 34,321 11.07% 24,806 >8.00% 31,007 >10.00% Solano Bank 8,029 10.70% 6,001 >8.00% 7,501 >10.00% Tier I capital (to risk weighted assets) Consolidated 48,833 12.57% 15,544 >4.00% 23,316 >6.00% The Vintage Bank 31,442 10.14% 12,403 >4.00% 18,604 >6.00% Solano Bank 7,385 9.84% 3,001 >4.00% 4,501 >6.00% Tier I capital (to average assets) Consolidated 48,833 10.61% 18,408 >4.00% 23,010 >5.00% The Vintage Bank 31,442 8.66% 14,517 >4.00% 18,146 >5.00% Solano Bank 7,385 8.82% 3,350 >4.00% 4,187 >5.00% (In 000's) To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 2002: Total capital (to risk weighted assets) Consolidated $47,289 14.88% $25,419 >8.00% $31,773 >10.00% The Vintage Bank 28,825 11.03% 20,902 >8.00% 26,128 >10.00% Solano Bank 7,815 14.57% 4,291 >8.00% 5,363 >10.00% Tier I capital (to risk weighted assets) Consolidated 43,999 13.85% 12,709 >4.00% 19,064 >6.00% The Vintage Bank 25,953 9.93% 10,451 >4.00% 15,677 >6.00% Solano Bank 7,397 13.79% 2,145 >4.00% 3,218 >6.00% Tier I capital (to average assets) Consolidated 43,999 10.86% 16,203 >4.00% 20,253 >5.00% The Vintage Bank 25,953 7.52% 13,808 >4.00% 17,260 >5.00% Solano Bank 7,397 12.36% 2,394 >4.00% 2,993 >5.00%
42 (21) FINANCIAL STATEMENTS OF NORTH BAY BANCORP (Parent Company Only) For the Years Ended December 31, 2003, 2002 and 2001 CONDENSED BALANCE SHEETS
(In 000's except share data) Assets 2003 2002 ------- ------- Cash and due from banks $ 2,949 $ 6,921 Available-for-sale investment securities 6,503 2,854 Investment in The Vintage Bank 32,010 27,166 Investment in Solano Bank 7,407 7,567 Investment in North Bay Statutory Trust 1 310 310 Premises and equipment, net 1,761 1,794 Other assets 461 426 ------- ------- Total assets $51,401 $47,038 ======= ======= Liabilities and shareholders' equity Floating rate subordinated debenture (trust preferred securities) $10,310 $10,310 Other liabilities 1,650 1,385 ------- ------- Total liabilities $11,960 $11,695 Shareholders' equity Preferred stock, no par value - Authorized 500,000 shares Issued and outstanding - None Common stock, no par value - Authorized 10,000,000 shares Issued and outstanding - 2,285,646 shares in 2003 and 2,130,288 shares in 2002 29,210 25,387 Retained earnings 9,623 8,612 Accumulated other comprehensive income 608 1,344 ------- ------- Total shareholders' equity 39,441 35,343 Total liabilities and shareholders' equity $51,401 $47,038 ======= =======
43 CONDENSED INCOME STATEMENTS (In 000's)
2003 2002 2001 ------- ------- ------- Income Interest on investment securities $ 123 $ 41 $ 0 Dividends from subsidiaries 0 0 2,500 Service fees from subsidiaries 6,177 5,681 4,754 ------- ------- ------- Total Income 6,300 5,722 7,254 Expenses Interest on borrowings 531 339 168 Salaries and related benefits 4,104 3,836 3,275 Other expenses 3,342 2,910 2,622 ------- ------- ------- Total expenses 7,977 7,085 6,065 Net (loss) income before tax benefit and equity in net income of subsidiaries (1,677) (1,363) 1,189 Tax benefit 642 574 482 ------- ------- ------- Net (loss) income before equity in undistributed net income of subsidiaries (1,035) (789) 1,671 Equity in undistributed net income of subsidiaries 5,406 4,497 1,351 ------- ------- ------- Net Income $ 4,371 $ 3,708 $ 3,022 ======= ======= =======
44 CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001 -------- -------- -------- Cash Flows From Operating Activities: Net income $ 4,371 $ 3,708 $ 3,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 812 737 804 Amortization of investment securities premiums, net 117 5 0 Equity in undistributed net income of subsidiaries (5,406) (4,497) (1,351) Changes in: Interest receivable and other assets (35) (288) 541 Interest payable and other liabilities 533 468 502 -------- -------- -------- Net cash provided by operating activities 392 133 3,518 -------- -------- -------- Cash Flows From Investing Activities: Investment securities available for sale: Proceeds from maturities and principal payments 785 201 0 Purchases (4,573) (3,006) 0 Sale and disposition of capital assets 0 0 4 Capital expenditures (779) (1,340) (519) -------- -------- -------- Net cash used in investing activities (4,567) (4,145) (515) -------- -------- -------- Cash Flows From Financing Activities: Decrease in long-term borrowings, net 0 (1,846) (923) Proceeds from issuance of Trust Preferred Securities 0 10,310 0 Stock options exercised 644 909 196 Dividends (441) (406) (383) -------- -------- -------- Net cash provided by (used in) financing activities 203 8,967 (1,110) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (3,972) 4,955 1,893 Cash and cash equivalents at beginning of year 6,921 1,966 73 -------- -------- -------- Cash and cash equivalents at end of year $ 2,949 $ 6,921 $ 1,966 ======== ======== ========
45 (22) SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following table sets forth the results of operation for the four quarters unaudited of 2003, 2002 and 2001. All per share amounts have been adjusted for the 2001, 2002, 2003 and 2004 stock dividends.
(In 000's except share data) 2003 Quarters Ended December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- Interest income $5,842 $5,554 $5,494 $5,361 Interest expense 667 681 819 828 ------ ------ ------ ------ Net interest income 5,175 4,873 4,675 4,533 Provision for loan losses 103 45 45 45 ------ ------ ------ ------ Net interest income after 5,072 4,828 4,630 4,488 provision for loan losses Noninterest income 925 1,055 1,059 808 Noninterest expense 3,722 4,267 4,311 4,015 ------ ------ ------ ------ Income before provision for 2,275 1,616 1,378 1,281 income taxes Provision for income taxes 975 452 366 386 ------ ------ ------ ------ Net income $1,300 $1,164 $1,012 $ 895 ====== ====== ====== ====== Basic earnings per share: $ .53 $ .47 $ .43 $ .38 Diluted earnings per share: $ .53 $ .47 $ .42 $ .37 2002 Quarters Ended December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- Interest income $5,638 $5,495 $5,173 $4,873 Interest expense 988 1,012 841 850 ------ ------ ------ ------ Net interest income 4,650 4,483 4,332 4,023 Provision for loan losses 144 144 144 144 ------ ------ ------ ------ Net Interest Income after 4,506 4,339 4,188 3,879 provision for loan losses Noninterest income 1,036 731 645 699 Noninterest expense 3,797 3,697 3,455 3,367 ------ ------ ------ ------ Income before provision for 1,745 1,373 1,378 1,211 income taxes Provision for income taxes 619 446 501 433 ------ ------ ------ ------ Net income $1,126 $ 927 $ 877 $ 778 ====== ====== ====== ====== Basic earnings per share: $ .48 $ .40 $ .38 $ .34 Diluted earnings per share: $ .47 $ .39 $ .37 $ .34
46
2001 Quarters Ended December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- Interest income $5,142 $5,324 $5,086 $4,755 Interest expense 1,094 1,482 1,683 1,628 ------ ------ ------ ------ Net interest income 4,048 3,842 3,403 3,127 Provision for loan losses 114 111 111 111 ------ ------ ------ ------ Net Interest Income after 3,934 3,731 3,292 3,016 provision for loan losses Noninterest income 1,032 547 567 545 Noninterest expense 3,463 2,946 2,875 2,671 ------ ------ ------ ------ Income before provision for 1,503 1,332 984 890 income taxes Provision for income taxes 575 414 362 336 ------ ------ ------ ------ Net income $ 928 $ 918 $ 622 $ 554 ====== ====== ====== ====== Basic earnings per share: $ .43 $ .41 $ .28 $ .25 Diluted earnings per share: $ .43 $ .40 $ .28 $ .25
47 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- The Board of Directors North Bay Bancorp: We have audited the accompanying consolidated balance sheets of North Bay Bancorp and subsidiaries as of December 31, 2003 and 2002, and the related consolidated income statements, statements of changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The 2001 consolidated financial statements of North Bay Bancorp were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 19, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Bay Bancorp and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each the years in the two-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP February 19, 2004 48 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of North Bay Bancorp: We have audited the accompanying consolidated balance sheets of North Bay Bancorp (a California Corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of North Bay Bancorp and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. San Francisco, California February 19, 2002 This report is a copy of a previously issued report. The predecessor auditor, Arthur Andersen, has not reissued the report. 49 - -------------------------------------------------------------------------------- DIRECTORS - --------------------------------------------------------------------------------
NORTH BAY BANCORP Thomas N. Gavin Owner, Gavin & Schreiner, New York Life Insurance Agency David B. Gaw, Chairman Attorney with Gaw, Van Male, Smith, Myers & Miroglio A Professional Law Corporation Fred J. Hearn, Jr. Chief Executive Officer Hearn Pacific Corporation dba Hearn Construction Conrad W. Hewitt Retired, Commissioner of California State Department of Financial Institutions Richard S. Long, Vice Chairman Chief Executive Officer Regulus Integrated Solutions, LLC Thomas H. Lowenstein President, North Bay Plywood Thomas F. Malloy Senior Partner, Malloy Imrie & Vasconi Insurance Services LLC Terry L. Robinson President & Chief Executive Officer, North Bay Bancorp James E. Tidgewell Certified Public Accountant, G & J Seiberlich & Co LLP CORPORATE SECRETARY Wyman G. Smith Attorney with Gaw, Van Male, Smith, Myers & Miroglio A Professional Law Corporation
THE VINTAGE BANK SOLANO BANK Lauren Ackerman John Anthony, III James L. Asbury Gary J. Falati Andrew J. Beckstoffer David B. Gaw William L. Kastner Fred J. Hearn, Jr. Thomas H. Lowenstein Connie Klimisch Thomas F. Malloy Michael D. O'Brien Terry L. Robinson Terry L. Robinson Thomas H. Shelton Stephen C. Spencer Stephen T. Silva Robert J. Wood Carolyn D. Sherwood John A. Nerland, President and CEO Glen C. Terry, President & CEO Thomas N. Gavin, Chairman James E. Tidgewell, Chairman Denise C. Suikhonen, Vice Chairman Andrew J. Nicks, M D, Vice Chairman Directors Emeritus Sandi Funseth Houghton Gifford, M D Harlan R. Kurtz Joseph Vallerga 50 - -------------------------------------------------------------------------------- CORPORATE INFORMATION - -------------------------------------------------------------------------------- Corporate Headquarters 1190 Airport Road, Suite 101 Napa, CA 94558 The Vintage Bank Office Locations: Main Office 1500 Soscol Avenue Napa, CA 94559-1314 3271 Browns Valley Road Napa, CA 94558-5499 3626 Bel Aire Plaza Napa, CA 94558-2831 1065 Main Street St. Helena, CA 94574 1190 Airport Road, Suite 100 Napa, CA 94558 Solano Bank Office Locations: Main Office 403 Davis Street Vacaville, CA 95688 1411 Oliver Road Fairfield, CA 94533 1395 E. Second Street Benicia, CA 94510 976 A Admiral Callaghan Lane Vallejo, CA 94591 Shareholder Information: Trading Nasdaq NMS - Symbol NBAN
Transfer Agent Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 1 (800) 368-5948 Notice of Annual Meeting COPIA 500 First Street Napa, CA 94559 May 6, 2004- 7:00 p.m. General Counsel: Wyman G. Smith Gaw, Van Male, Smith, Myers & Miroglio 1000 Main Street, Suite 300 Napa, CA 94559 Corporate Secretary: Wyman G. Smith Market Makers Hoefer & Arnett 353 Sacramento Street, 10th Floor San Francisco, CA 94111 1 (800) 346-5544 Keefe, Bruyette & Woods, Inc. 235 Pine St., Suite 1818 San Francisco, CA 94104 Wedbush Morgan Securities 1300 S. W. Fifth Ave., Suite 2000 Potland, OR 97201 1 (800) 368-5948 For additional copies of this report or Pansy F. Smith copies of the 10-K Report contact: Assistant Corporate Secretary North Bay Bancorp 1190 Airport Road, Suite 101 Napa, CA 94558 (707) 252-5026 Independent Auditors: KPMG LLP Three Embarcadero Center, Suite 2000 San Francisco, CA 94111 Web Site: www.northbaybancorp.com
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 51 EX-23 8 p18310_ex23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF KPMG LLP AS INDEPENDENT AUDITORS FOR NORTH BAY BANCORP CONSENT OF INDEPENDENT AUDITORS To the Audit Committee of the Board of Directors North Bay Bancorp and Subsidiaries: We consent to the incorporation by reference in the registration statements (No's. 333-93537, 333-43972 and 333-90006) on Form S-8 of our report dated February 19, 2004, relating to the consolidated balance sheets of North Bay Bancorp and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated income statements, Statements of changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the two year period ended December 31, 2003, which report appears in the December 31, 2003, annual report on Form 10-K of North Bay Bancorp and Subsidiaries. /s/ KPMG LLP San Francisco, California March 26, 2004 EX-25 9 p18310_ex25.txt POWER OF ATTORNEY EXHIBIT 25 POWER OF ATTORNEY POWER OF ATTORNEY Each person whose signature appears below hereby authorizes Terry L. Robinson or David B. Gaw and either of them, as attorney-in-fact, to sign in his or her behalf, individually and in each capacity stated below, and to file this Annual Report on Form 10- K and all amendments and/or supplements to this file this Annual Report on Form 10- K
Signature Title Date - --------- ----- ---- /s/Thomas N. Gavin - ------------------------------------ Thomas N. Gavin Director March 23, 2004 /s/David B. Gaw Director and March 25, 2004 - ------------------------------------ Chairman of the Board David B. Gaw /s/Fred J. Hearn Jr. - ------------------------------------ Fred J. Hearn Jr. Director March 26, 2004 /s/Conrad W. Hewitt Director March 26, 2004 - ------------------------------------ Conrad W. Hewitt /s/Richard S. Long Director March 25, 2004 - ------------------------------------ Richard S. Long /s/Thomas H. Lowenstein Director March 26, 2004 - ------------------------------------ Thomas H. Lowenstein /s/Thomas F. Malloy Director March 26, 2004 - ------------------------------------ Thomas F. Malloy /s/Terry L. Robinson President, Chief March 25, 2004 - ------------------------------------ Executive Officer and Director Terry L. Robinson (Principal Executive Officer) /s/James E. Tidgewell Director March 26, 2004 - ------------------------------------ James E. Tidgewell /s/Lee-Ann Cimino Sr. Vice President March 25, 2004 - ------------------------------------ Chief Financial Officer Lee-Ann Cimino (Principal Financial Officer)
EX-31.1 10 p18310_ex31-1.txt CERTIFICATE EXHIBIT 31.1 CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SEC RELEASE 33-8238 CERTIFICATION I, Terry L. Robinson, certify that: 1. I have reviewed this Annual Report on Form 10-K of North Bay Bancorp; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Paragraph reserved pursuant to SEC Release 33-8238] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: March 25, 2004 /s/ Terry L. Robinson --------------------- Terry L. Robinson President and Chief Executive Officer (Principal Executive Officer) EX-31.2 11 p18310_ex31-2.txt CERTIFICATE EXHIBIT 31.2 CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SEC RELEASE 33-8238 CERTIFICATION I, Lee-Ann Cimino, certify that: 1. I have reviewed this Annual Report on Form 10-K of North Bay Bancorp; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (e) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (f) [Paragraph reserved pursuant to SEC Release 33-8238] (g) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (h) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: March 25, 2004 /s/ Lee-Ann Cimino --------------------------- Lee-Ann Cimino, Senior Vice President and Chief Financial Officer (Principal Financial Officer) EX-32.1 12 p18310_ex32-1.txt CERTIFICATE EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 The following certification accompanies the issuer's Annual Report on Form 10-K and is not filed, as provided in Release 33-8212. 34-47551 dated March 21, 2003. EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of North Bay Bancorp for the year ended December 31, 2003, I, Terry L. Robinson, President and Chief Executive Officer of North Bay Bancorp, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003 that: (1) such Annual Report on Form 10-K of North Bay Bancorp for the year ended December 31, 2003, 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 such Annual Report on Form 10-K of North Bay Bancorp for the year ended December 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of North Bay Bancorp. Dated: March 25, 2004 /s/ Terry L. Robinson -------------------------------- TERRY L. ROBINSON President and Chief Executive Officer (Principal Executive Officer) EX-32.2 13 p18310_ex32-2.txt CERTIFICATE EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 The following certification accompanies the issuer's Annual Report on Form 10-K and is not filed, as provided in Release 33-8212. 34-47551 dated March 21, 2003. EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of North Bay Bancorp for the year ended December 31, 2003, I, Lee-Ann Cimino, Chief Financial Officer of North Bay Bancorp, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, that: (1) such Annual Report on Form 10-K of North Bay Bancorp for the year ended December 31, 2003, 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 such Annual Report on Form 10-K of North Bay Bancorp for the year ended December 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of North Bay Bancorp. Dated: March25, 2004 /s/ Lee-Ann Cimino ------------------------------ LEE-ANN CIMINO Senior Vice President and Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----