-----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, FYQkZRzziGHfUPiwipnc/dKHTq51bf48iK+qvL/OSuCtgU010tH+HJ9q5s9T5AC7 K4xP0pSP/NEr4RWiUnFDwg== 0000950005-00-000481.txt : 20000411 0000950005-00-000481.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950005-00-000481 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCB FINANCIAL CORP CENTRAL INDEX KEY: 0000902789 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 680300300 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-15479 FILM NUMBER: 583027 BUSINESS ADDRESS: STREET 1: 1248 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4154592265 MAIL ADDRESS: STREET 1: 1248 FIFTH AVENUE CITY: SAN RAFAEL STATE: CA ZIP: 94901 10KSB 1 FORM 10KSB ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from ____________ to ____________ . Commission file number: 033-76832 MCB FINANCIAL CORPORATION (Name of small business issuer in its charter) California 68-0300300 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1248 Fifth Avenue, San Rafael, California 94901 (415) 459-2265 (Address and telephone number of principal executive offices) Securities registered under Section 12(b) of the Exchange Act: Common Stock, No Par Value (Title of class) Securities registered under Section 12(g) of the Exchange Act: Common Stock, No Par Value Preferred Stock Purchase Rights (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]. Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not 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-KSB or any amendment to this Form 10-KSB. [ ]. The issuer's revenues for its most recent fiscal year were $16,014,000. At March 20, 2000, the aggregate market value of the voting stock held by non-affiliates of the issuer was approximately $11,612,000. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the issuer were deemed to be shares of Common Stock held by affiliates. At March 20, 2000, the issuer had outstanding 2,030,181 shares of Common Stock, no par value, which is the issuer's only class of common stock. Documents Incorporated by Reference: The information required to be furnished pursuant to Part III of this Form 10-KSB will be set forth in, and incorporated by reference from, the registrant's definitive proxy statement for the annual meeting of stockholders to be held May 17, 2000, which definitive proxy statement will be filed by the issuer with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 1999. ================================================================================ TABLE OF CONTENTS Page ---- PART I Item 1. Description of Business............................................ 1 MCB Financial Corporation.......................................... 1 Metro Commerce Bank................................................ 1 Competition........................................................ 2 Insurance.......................................................... 2 Employees.......................................................... 3 Supervision and Regulation......................................... 3 Item 2. Description of Property............................................ 9 Item 3. Legal Proceedings.................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders................ 9 PART II Item 5. Market for Common Equity and Related Stockholder Matters........... 10 Item 6. Management's Discussion and Analysis............................... 10 Item 7. Financial Statements............................................... 22 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure........................................... 46 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.................. 46 Item 10. Executive Compensation............................................. 46 Item 11. Security Ownership of Certain Beneficial Owners and Management..... 46 Item 12. Certain Relationships and Related Transactions..................... 46 Item 13. Exhibits and Reports on Form 8-K................................... 46 PART I Item 1. Description of Business MCB Financial Corporation MCB Financial Corporation (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The Company was incorporated under the laws of the State of California on January 20, 1993. On October 1, 1993, the Company began operations as a bank holding company with Metro Commerce Bank (the "Bank") as its wholly-owned subsidiary. The Company's only significant asset is its investment in the Bank. The principal business and activity of the Company is to serve as the bank holding company for the Bank and its principal source of income is dividends paid by the Bank. Metro Commerce Bank The Bank is a California state-chartered commercial bank that is a member of the Federal Reserve System. The Bank was licensed by the Office of the Comptroller of the Currency ("Comptroller") on June 12, 1989, and commenced operations as a national banking association on December 8, 1989. On July 24, 1998, the Bank converted from a national banking association into a California State bank. The Bank is subject to primary supervision, examination and regulation by the State of California Department of Financial Institutions ("DFI") and the Federal Reserve Board ("FRB"). The Bank is also subject to certain federal laws and regulations, and the Bank is subject to applicable provisions of California law insofar as such provisions do not conflict with or are not preempted by federal banking laws. The deposits of the Bank are insured under the Federal Deposit Insurance Act up to the applicable limits thereof. The Bank is a wholly-owned subsidiary of the Company and presently has no subsidiaries or other affiliates. The Bank is engaged in substantially all of the business operations customarily conducted by independent commercial banks in California. The Bank's banking services include of checking and savings deposits, and the making of commercial, construction, mortgage, real estate, small business administration, home equity and other installment loans and term extensions of credit. The Bank also offers travelers' checks, notary public and other customary bank services to its customers. The Bank is not a credit card issuing bank; however, it offers Visa cards through one of its correspondent banks. The Bank operated began a Small Business Administration ("SBA") Loan Division. The SBA is an agency of the U.S. Government that offers guaranteed loan programs for small businesses which might not otherwise qualify for standard bank credit. The SBA Loan Division offers various business loan programs secured by both residential and commercial real estate and business property. The Bank primarily sells the guaranteed portion of SBA loans in the secondary market to private investors. Loan fundings through this division began during the first quarter of 1995. The Bank does not operate a trust department; however, it has arranged with a correspondent institution to offer trust services to the Bank's customers upon request. The Bank also does not offer international banking services although such services are offered indirectly through correspondent institutions. Currently, the Bank conducts its business operations through its head office located in San Rafael, California, and through its five branch office locations in San Francisco, South San Francisco, Hayward, Petaluma and Upland, California. An application to establish the branch in San Francisco was approved by the Comptroller on December 10, 1997. This office opened January 8, 1998. An application to establish a branch office in Petaluma was approved by the DFI on November 10, 1998 and by the FRB on January 19, 1999. The Petaluma office opened in June 1999. An application to relocate the San Francisco office from 353 Sacramento Street, San Francisco, CA 94111 to 650 Townsend Street, San Francisco, CA 94103 was approved by the DFI on October 5, 1999 and by the FRB on November 5, 1999. The relocated San Francisco office is scheduled to open during the second quarter of 2000. The Bank's primary service area is central Marin County along with the cities of San Francisco, South San Francisco, Hayward, Petaluma and Upland. Most of the Bank's loans and deposits originate from small and medium sized businesses and professionals located within the Bank's primary service areas. The Bank's business has little, if any, emphasis on foreign sources and application of funds. The Bank's business, based upon performance to date, does not appear to be seasonal. The Bank is not dependent upon a single customer or group of related customers for a material portion of its deposits, nor is a material portion of the Bank's loans concentrated within a single industry or group of related industries. Management of the Bank is unaware of any material effect upon the Bank's capital expenditures, earnings or competitive position as a result of federal, state or local environmental regulation. 1 The Bank holds no patents, licenses (other than licenses obtained from bank regulatory authorities), franchises or concessions. Competition The banking business in California is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area. The Bank competes for deposits and loans principally with other commercial banks and also with non-bank financial intermediaries, including savings and loan associations, credit unions, thrift and loans, mortgage companies, money market and mutual funds, finance and insurance companies and other financial and non-financial institutions. In addition, other entities (both governmental and private industry) seeking to raise capital through the issuance and sale of debt or equity securities and instruments provide competition for the Bank in the acquisition of deposits. Among the advantages certain of these institutions have over the Bank are their ability to finance wide-ranging and effective advertising campaigns and to allocate their investment resources to regions of highest yield and demand. Many of the major commercial banks operating in the Bank's service area offer certain services (such as international banking and trust services) which are not offered directly by the Bank. In addition, by virtue of their greater total capitalization, such banks have substantially higher lending limits than does the Bank (legal lending limits to each customer are restricted to a percentage of a bank's capital, the exact percentage depending on the nature of the particular loan transaction involved). From the time the Bank commenced its operations, officers and employees of the Bank have continually engaged in marketing activities, including the evaluation and development of new services, involvement in community service groups, and direct marketing in order to retain and improve the Bank's competitive position in its service areas. Insurance The Company and the Bank maintain insurance at levels deemed adequate by its Board of Directors to protect against certain business risks, operational losses, and property damage. In accordance with rulings promulgated by the DFI and pursuant to the Company's and the Bank's Articles of Incorporation and certain contractual obligations, the officers and directors are entitled to indemnification, under certain circumstances, for certain expenses, liabilities and losses including, but not limited to, costs of defense, settlements and judgments rendered against them. However, indemnification is not authorized when a supervisory action results in a final order assessing civil money penalties or when a supervisory action requires affirmative action in the form of payments by an individual to the Bank. The Company and the Bank maintain directors and officers liability insurance to cover certain costs of indemnification. Employees Except for its officers, the Company has no full-time or part-time employees. It is anticipated that the Company will rely on its officers and will utilize the employees of the Bank until it becomes actively engaged in additional business activities. The Company reimburses the Bank a fair and reasonable amount for all services furnished to it. As of December 31, 1999, the Bank had a total of 58 full-time equivalent employees. The management of the Bank believes that its employee relations are satisfactory. SUPERVISION AND REGULATION Bank Holding Company Regulation The Company is a bank holding company registered under the BHC Act and is subject to the supervision of the FRB. As a bank holding company, the Company must obtain the approval of the FRB before it may acquire 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 of shares, the Company would own or control more than 5% of the voting shares of such bank. With certain limited exceptions, the Company is prohibited from engaging in or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities, unless the FRB determines that such activities are so closely related to banking as to be a proper incident thereof. The FRB has the authority to examine the Company periodically. In 1997, the FRB adopted a policy for risk-focused supervision of small bank holding companies that do not engage in significant non-banking activities. Under this policy, examinations focus on whether the Company has systems in place to manage the risks inherent in its business. In analyzing risk, the FRB looks at the financial condition of the Company and the Bank, management, compliance with laws and regulations, inter-company transactions and any new or contemplated activities. 2 The Company and any subsidiary which it may acquire or organize in the future are deemed to be affiliates of the Bank within the meaning set forth in the Federal Reserve Act and are subject to the Federal Reserve Act. This means, for example, that there are limitations on loans by the Bank to affiliates, on investments by the Bank in any affiliate's stock and on the Bank's taking any affiliate's stock as collateral for loans to any borrower. All affiliate transactions must satisfy certain limitations and otherwise be on terms and conditions that are consistent with safe and sound banking practices. In this regard, the Bank generally may not purchase from any affiliate a low-quality asset (as that term is defined in the Federal Reserve Act). Also, transactions by the Bank with an affiliate must be on substantially the same terms as would be available for non-affiliates. The Company and the Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. The Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. For example, the Bank generally may not extend credit on the condition that the customer obtain some additional service from the Bank or the Company, or refrain from obtaining such service from a competitor. Dividends Payable by the Company Holders of Common Stock of the Company are entitled to receive dividends as and when declared by the Company's Board of Directors out of funds legally available therefor under the laws of the State of California. A California corporation such as the Company may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. In the event sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if, after giving effect to the distribution, the corporation's assets equal at least 125 percent of its liabilities and certain other conditions are met. Since the 125 percent ratio translates into a minimum capital ratio of 20 percent, most bank holding companies, including the Company based on its current capital ratios, are unable to meet this last test and so must have sufficient retained earnings to fund the proposed distribution. The FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, banks and their holding companies may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items such as sales of buildings or other large assets in order to generate profits to enable payment of future dividends. Further, the FRB's position that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company's ability to pay dividends. Financial Services Modernization Legislation On November 12, 1999, President Clinton signed into law the Gramm- Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Generally, the Financial Services Modernization Act: * Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; 3 * Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; * Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; * Provides an enhanced framework for protecting the privacy of consumer information; * Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; * Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and * Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order for the Company to take advantage of the ability to affiliate with other financial services providers, the Company must become a "Financial Holding Company" as permitted under an amendment to the BHCA. To become a Financial Holding Company, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must also determine that each insured depository institution subsidiary of the Company has at least a "satisfactory" CRA rating. The Company currently meets the requirements to make an election to become a Financial Holding Company. The Company's management has not determined at this time whether it will seek an election to become a Financial Holding Company. The Company is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Company and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Company desires to utilize any of its expanded powers provided in the Financial Services Modernization Act. The Financial Services Modernization Act provides that designated federal regulatory agencies, including the FDIC, the FRB, the OCC and the Securities and Exchange Commission, are to publish regulations to implement certain provisions of the Act. In February 2000 these agencies cooperated in the release of proposed rules that would establish minimum requirements to be followed by financial institutions for protecting the privacy of financial information provided by consumers. The FDIC's proposed rule, which would establish privacy standards to be followed by state nonmember bank such as the Banks, would require a financial institution to (i) provide notice to customers about its privacy policies and practices, (ii) describe the conditions under which the institution may disclose nonpublic personal information about consumers to nonaffiliated third parties, and (iii) provide a method for consumers to prevent the financial institution from disclosing that information to nonaffiliated third parties by "opting out" of that disclosure. The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation. A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well-managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities. The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, HBC, HBEB and HBSV will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, the bank must be well-capitalized, and the bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. 4 The Company and the Banks do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Banks face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Banks. Bank Regulation The Bank is subject to regulation, supervision and regular examination by the DFI and FRB. The deposits of the Bank are insured up to the maximum legal limits by the Bank Insurance Fund ("BIF"), which is managed by the Federal Deposit Insurance Corporation ("FDIC"), and the Bank is therefore subject to applicable provisions of the Federal Deposit Insurance Act. The regulations of these agencies affect most aspects of the Bank's business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the Bank's activities and various other requirements. Supervision and Examination Federal law mandates frequent examinations of all banks, with the costs of examinations to be assessed against the bank being examined. In the case of the Bank, its primary Federal regulator is the FRB. The Federal banking regulatory agencies have substantial enforcement powers over the depository institutions that they regulate. Civil and criminal penalties may be imposed on such institutions and persons associated with those institutions for violations of laws or regulation. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") places limits on brokered deposits and extends the limits to any bank that is not "well capitalized" or is notified that it is in "troubled condition." A well-capitalized institution (which generally includes an institution that is considered well capitalized for purposes of the prompt corrective action regulations discussed below) may still accept brokered deposits without restriction, unless it has been informed by its appropriate Federal regulatory agency that it is in "troubled condition." All other insured depository institutions are prohibited from accepting brokered deposits unless a waiver is obtained from the FDIC. If a waiver is obtained, the interest paid on such deposits may not exceed the rate paid for deposits in the bank's normal market area, or the national rate as determined in the FDIC's regulation. Risk-Based Deposit Insurance Assessments FDICIA required the FDIC to develop and implement a system to account for risks attributable to different categories and concentrations of assets and liabilities in assessing deposit insurance premiums. The FDIC adopted a risk-assessment system effective January 1, 1994. Under this system, each bank's deposit insurance premium assessment is calculated based on information relevant to evaluating the risk posed by the institution. California Law The activities of the Bank are also regulated by state law. State law, for example, regulates certain loans to any officer of the Bank, directly or indirectly, or to any related corporation in which such officer is a stockholder, director, officer or employee. Subject to certain limitations, California law permits California state-chartered banks to invest in the stock and equity securities of other corporations, to engage directly in or invest directly in subsidiaries which conduct real estate related activities (including property management and real estate appraisal), and to participate in management consulting and data processing services for third parties. FDICIA limits the powers, including investment authority and subsidiaries, of state banks to those activities that are either permitted to national banks, or activities that the FDIC finds do not pose a significant risk to the deposit insurance fund. In November 1998, the FDIC announced it would make it easier for well run state banks to engage in real estate and securities underwriting, if permitted by state law. State banks are now required to file notice of intention to engage in such activities. Capital Standards The FRB and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital 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 recorded 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. Treasury securities, to 100% for assets with high credit 5 risk, such as commercial loans. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to 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 must be 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 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. See Notes to Consolidated Financial Statements for the capital ratios of the Company and the Bank at December 31, 1999. Dividends Payable by the Bank to the Company The Bank is a legal entity which is separate and distinct from the Company. Aside from raising capital on its own, the exercise of stock options or borrowing funds for operating capital, it is anticipated that the Company may receive additional income through dividends paid by the Bank. Subject to the regulatory restrictions described below, future cash dividends by the Bank will depend upon management's assessment of future capital requirements, contractual restrictions and other factors. The power of the Board of Directors of the Bank to declare a cash dividend is subject to California law, which restricts the amount available for cash dividends to the lesser of the retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the California Commissioner of Financial Institutions, in an amount not exceeding the greatest of (1) the retained earnings of the bank; (2) the net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. See the Notes to Consolidated Financial Statements for the amount of funds the Bank had available for the payment of dividends at December 31, 1999. Under the Federal Deposit Insurance Act, bank regulators also have authority to prohibit a bank from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of the bank in question and other factors, that such regulators could assert that the payment of dividends or other payments might, under certain circumstances, be an unsafe or unsound practice, even if technically permissible. Prompt Corrective Action and Other Enforcement Mechanisms Federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 1999, the Company and the Bank exceeded the required ratios for classification as "well capitalized". An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Impact of Monetary Policies Banking is a business which depends in large part on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise a major portion of the Bank's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Bank and the Company are subject to the influence of domestic and foreign economic conditions, including recession, unemployment and inflation. 6 The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions and intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. Environmental Regulation Federal, state and local regulations regarding the discharge of materials into the environment may have an impact on both the Company and the Bank. Under federal law, liability for environmental damage and the cost of cleanup may be imposed upon any person or entity who owns or operates contaminated property. State law provisions, which were modeled after Federal law, impose substantially similar requirements. Both federal and state laws were amended in 1996 to provide generally that a lender who is not actively involved in operating the contaminated property will not be liable to clean up the property, even if the lender has a security interest in the property or becomes an owner of the property through foreclosure. The Economic Growth Act includes protection for lenders from liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 by adding a new section which specifies the actions a lender may take with respect to lending and foreclosure activities without incurring environmental clean-up liability or responsibility. Under the new section typical contractual provisions regarding environmental issues in the loan documentation and due diligence inspections conducted in connection with lending transactions will not lead to lender liability for clean-up, and a lender may foreclose on contaminated property, so long as the lender merely maintains the property and moves to divest it at the earliest possible time. Under California law, a lender generally will not be liable to the State for the cost associated with cleaning up contaminated property unless the lender realized some benefit from the property, failed to divest the property promptly, caused or contributed to the release of the hazardous materials, or made the loan primarily for investment purposes. This amendment to California law became effective with respect to judicial proceedings filed and orders issued after January 1, 1997. The extent of the protection provided by both the federal and state lender protection statutes will depend on the interpretation of those statutes by administrative agencies and courts, and the Bank cannot predict whether it will be adequately protected for the types of loans made by the Bank. In addition, the Company and the Bank remain subject to the risk that a borrower's financial position will be impaired by liability under the environmental laws and that property securing a loan made by the Bank may be environmentally impaired and therefore not provide adequate security for the Bank. California law provides some protection against the second risk by establishing certain additional, alternative remedies for a lender in circumstances where the property securing a loan is later found to be environmentally impaired, permitting the lender to pursue remedies against the borrower other than foreclosure under the deed of trust. The Bank attempts to protect its position against the remaining environmental risks by performing prudent due diligence. Environmental questionnaires and information on use of toxic substances are requested as part of the Bank's underwriting procedures. The Bank makes lending decisions based upon its evaluation of the collateral, the net worth of the borrower and the borrower's capacity for unforeseen business interruptions or risks. Public Interest Laws, Consumer and Lending Laws In addition to the other laws and regulations discussed herein, the Bank is subject to certain consumer and public interest laws and regulations that are designed to protect customers in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act and the Community Reinvestment Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. The Bank must comply with the applicable provisions of these laws and regulations as part of its ongoing customer relations. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers and the loss of certain contractual rights. 7 Americans with Disabilities Act The Americans With Disabilities Act ("ADA"), in conjunction with similar California legislation, has increased the cost of doing business for banks. The legislation requires employers with 15 or more employees and all businesses operating "commercial facilities" or "public accommodations" to accommodate disabled employees and customers. The ADA has two major objectives: (1) to prevent discrimination against disabled job applicants, job candidates and employees, and (2) to provide disabled persons with ready access to commercial facilities and public accommodations. Commercial facilities, such as the Bank, must ensure that all new facilities are accessible to disabled persons, and in some instances may be required to adapt existing facilities to make them accessible. New and Pending Legislation Certain legislative and regulatory proposals that could affect the Company, the Bank and the banking business in general are pending or may be introduced, before the United States Congress, the California State Legislature, and Federal, state and local government agencies. ATM Fees. Legislation has been proposed in the past in the Congress and the California legislature and measures are currently being proposed in local jurisdictions to regulate the amount of ATM fees that operators of ATMs may charge, and to further regulate the disclosure of such fees. If the collection of interchange fees by the operator of an ATM were prohibited, as some of these bills have proposed, the Bank's income from its ATM network would be severely reduced. Management believes that the possible reduction in ATM income would not have a material impact on the Company's consolidated financial statements. Expansion in Credit Union Membership. In 1999 a broad rule was adopted by the National Credit Union Administration ("NCUA") relaxing the limits on credit union membership. The NCUA will now approve credit unions with memberships of more than 300,000 residents with proof that they function as a community. The effect is to substantially expand the limits on credit union membership and to make credit unions, as tax exempt entities serving credit needs of large communities, more competitive to banks. Litigation attacking the new rule is pending. The Office of Thrift Supervision ("OTS") Expansion of Charters to Insurance Industry. In recent years the OTS granted a number of charters for insurance companies to operate a thrift or savings and loan subsidiary. These new charters to the insurance industry are expected to result in yet more competition for banks. It is not known to what extent the pending proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationship of financial institutions. It is likely, however, that many of these proposals would subject the Company and the Bank to increased regulation, disclosure and reporting requirements and would increase competition to the Bank and its cost of doing business. In addition to pending legislative changes, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such legislation or regulations will be enacted or the effect that such legislation or regulations may have on the Bank's business. Item 2. Description of Property Currently, the Company does not own or lease any property. The Company is not actively engaged in any business activities outside of the activities of the Bank. Therefore, the Bank's property is not significantly used by the Company. The Company will continue to utilize the premises of the Bank until it becomes actively engaged in additional business activities. The Company currently reimburses the Bank for a fair and reasonable amount for all services furnished to it. The Bank leases the land and the buildings at which its office facilities are located. The Bank has six full-service banking offices. The head office of the Bank is located at 1248 Fifth Avenue, San Rafael, California and consists of approximately 10,000 square feet of office space. The Bank occupies the premises for its head office under a lease which will expire in June 2014, with two five-year options to renew. The Bank's five branch offices in San Francisco, South San Francisco, Hayward, Upland and Petaluma, California occupy approximately 2,015, 12,300, 14,000, 5,000 and 4,635 square feet, respectively, under leases that expire at various dates through the year 2009. In the second quarter of 2000, the Company expects to relocate its San Francisco branch office. The Bank's lease for the new San Francisco location is scheduled to commence June 1, 2000. The lease covers 3,570 square feet and expires in 2010. The Bank believes that its existing facilities are adequate for its current needs and anticipated growth. 8 Item 3. Legal Proceedings The Company is not a party to any pending legal proceeding and is unaware of any proceeding being contemplated against it by any governmental authority. There are various legal actions pending against the Company and the Bank arising from the normal course of business. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material effect on the financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Common Equity and Related Stockholder Matters. During most of 1999, the Company's common stock traded on the OTC Bulletin Board under the symbol MCBF. On December 28, 1999, the Company's common stock began trading on the American Stock Exchange under the symbol MCB. The Company's stock transfer agent is U.S. Stock Transfer Corporation. There were approximately 700 shareholders as of December 31, 1999. The following high and low stock prices reflect inter-dealer prices which may not include retail markups, markdowns, or commissions. Prices are adjusted to reflect stock dividends and stock splits. 1998 Cash Dividend 1999 Cash Dividend High Low Declared High Low Declared ------ ----- -------- ------ ----- -------- First quarter $10.32 $7.62 $ 9.05 $7.14 Second quarter 12.70 10.08 7.98 6.55 Third quarter 11.75 7.38 9.25 6.67 $0.01 Fourth quarter 9.52 7.74 11.75 8.50 0.01 Item 6. Management's Discussion and Analysis. The following discussion presents information pertaining to the financial condition and results of operations of the Company that may not otherwise be apparent from the financial statements and related notes. This discussion should be read in conjunction with the financial statements and notes found in Item 7 of this report as well as other information presented throughout this report. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances. This document may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those indicated. For a discussion of factors that could cause actual results to differ, please see the discussion contained herein and in the Company's publicly available Securities and Exchange Commission filings and press releases. 9 OVERVIEW Earnings Summary. The Company reported net income of $2,333,000, or $1.12 per share basic and $1.07 per share diluted, for 1999 compared to net income of $1,621,000, or $0.75 per share basic and $0.70 per share diluted, in 1998 and net income of 1,350,000, or $0.64 per share basic and $0.61 per share diluted, in 1997. Return on average assets for 1999 was 1.30% compared to 1.03% in 1998 and 0.97% in 1997. Return on average equity for 1999 was 17.12% compared to 12.61% in 1998 and 12.22% in 1997. FINANCIAL CONDITION Summary. Assets increased by 15.7% during 1999 versus 21.2% and 6.4% in 1998 and 1997, respectively. The increase in assets during 1999 resulted primarily from growth in existing operations, largely due to the continuation of favorable economic conditions in the Company's market areas. Loans. Loans held for investment increased by $26.5 million, or 24.1% in 1999, as compared to an increase of $22.8 million, or 26.1%, during 1998. Strong demand for commercial real estate and construction loans resulted in the loan growth for 1999. In the normal practice of extending credit, the Bank accepts real estate collateral on loans that have primary sources of repayment from commercial operations. Loans secured by real estate totaled $113.9 million, or 82.5% of all loans, at December 31, 1999 versus $92.6 million, or 83.3% of all loans, a year earlier. Due to the Bank's limited marketing area, its real estate collateral is primarily concentrated in the San Francisco Bay Area and Southern California. Management believes that its prudent underwriting standards for real estate secured lending provide an adequate safeguard against changing real estate prices. The Bank focuses its portfolio lending on commercial, commercial real estate, and construction loans. These loans generally carry a higher level of risk than conventional real estate loans, and accordingly, yields on these loans are typically higher than those on other loans. The performance of commercial and construction loans is generally dependent upon future cash flows from business operations (including the sale of products, merchandise and services) and the successful completion or operation of large real estate projects. Risks attributable to such loans can be significantly increased, often to a greater extent than on other loans, by regional economic factors, real estate prices, the demand for commercial and retail office space, and the demand for products and services of industries which are concentrated within the Bank's loan portfolio. As of December 31, 1999, the two largest industry concentrations within the loan portfolio were real estate and related services at 28.6% and the business/personal service industry at 20.5% of the portfolio. Because credit concentrations increase portfolio risk, the Bank places significant emphasis on the purpose of each loan and the related sources of repayment. Nonperforming Assets. The Company carefully monitors the quality of its loan portfolio and the factors that affect it, including regional economic conditions, employment stability, and real estate values. The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection. As of December 31, 1999 the Company had nonperforming assets in the amount of $1,747,000, of which $1,707,000 represented two nonaccrual loans. Had these nonaccrual loans performed under their contractual terms approximately $66,000 in additional interest income would have been recognized during 1999. Also, as of December 31, 1999, the Company had one loan 90 days or more past due and still accruing in the amount of $40,000. This loan is well secured and in the process of collection. The following table sets forth the balance of nonperforming assets as of the dates indicated (dollar amounts in thousands): 10 Nonperforming Assets December 31, December 31, 1998 1999 ------ ------ Nonaccrual loans $ 563 $1,707 Loans 90 days or more past due and still accruing 404 40 Other real estate owned ------ ------ $ 967 $1,747 ====== ====== As a percent of total loans 0.87% 1.27% As a percent of total assets 0.57% 0.89% Allowance for Possible Credit Losses. The Company maintains an allowance for possible credit losses (the "APCL") which is reduced by credit losses and increased by credit recoveries and provisions to the APCL charged against operations. Provisions to the APCL and the total of the APCL are based, among other factors, upon the Company's credit loss experience, the performance of loans within the portfolio, evaluation of loan collateral value, and the prospects or worth of respective borrowers and guarantors. In determining the adequacy of its APCL, the Company segments its loan portfolio into pools of homogeneous loans that share similar risk factors. Each pool is given a risk assessment factor that largely reflects the expected future losses from each category. These risk assessment factors change as economic conditions shift and actual loan losses are recorded. The APCL totaled $1,492,000, or 1.08% of total loans, as of December 31, 1999 versus $1,117,000 or 1.01% of total loans, a year earlier. In both periods, the APCL was determined to be an adequate allowance against foreseeable future losses. Note 3 to the consolidated financial statements provides a summary of the activity in the APCL for the three years ended December 31, 1999. 11 The following table summarizes, for the periods indicated, loan balances at the end of each period and average balances during the period, changes in the allowance for possible credit losses arising from credit losses, recoveries of credits losses previously incurred, additions to the allowance for possible credit losses charged to operating expense, and certain ratios relating to the allowance for possible credit losses: Analysis of the Allowance for Possible Credit Losses
1998 1999 -------- -------- (Dollars in thousands) Allowance for loan losses: Beginning balance $ 1,007 $ 1,117 -------- -------- Provision for loan losses 153 365 Charge-offs: Commercial 53 62 Consumer -------- -------- Total charge-offs 53 62 -------- -------- Recoveries: Commercial 9 72 Consumer 1 -------- -------- Total recoveries 10 72 -------- -------- Net charge-offs (recoveries) 43 (10) -------- -------- Ending balance $ 1,117 $ 1,492 ======== ======== Loans outstanding at December 31 $111,075 $137,966 Average loans outstanding during period ended December 31 $100,130 $125,035 Ratios: Allowance to loans at end of period 1.01% 1.08% Net charge-offs (recoveries) to average loans during period 0.04% -0.01% Net charge-offs (recoveries) to allowance at beginning of period 4.27% -0.90%
The following table sets forth the allocation of the allowance for possible credit losses as of the dates indicated: Allocation of the Allowance for Possible Credit Losses 1998 1999 -------------------------- -------------------------- Percent of Percent of Loans Loans Allowance in Each Allowance in Each for Possible Category to for Possible Category to Credit Losses Total Loans Credit Losses Total Loans ------------- ----------- ------------- ----------- (Dollars in thousands) Commercial $ 641 42.79% $ 904 47.87% Real Estate 245 53.27 260 48.98 Consumer 38 3.94 30 3.15 Not Allocated 193 N/A 298 N/A ------ ------ ------ ------ Total $1,117 100.00% $1,492 100.00% ====== ====== ====== ====== The allowance is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories. The allocation of the allowance as shown above should not be interpreted as an indication that 12 charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. In addition to the most recent analysis of individual loans and pools of loans, management's methodology also places emphasis on historical loss data, delinquency and nonaccrual trends by loan classification category and expected loan maturity. This analysis, management believes, identifies potential losses within the loan portfolio and therefore results in allocation of a large portion of the allowance to specific loan categories. Investments. Total investment securities decreased by $5,960,000, or 14.2% in 1999, as compared to an increase of $6,522,000, or 18.3% in 1998. In 1999, investment securities held to maturity decreased $4.1 million due to calls of the Company's callable bonds. Investment securities available for sale decreased $1.9 million as the Company used the proceeds on sales and maturities to fund loan growth during the year. At December 31, 1999, $2.0 million, or 5.5% of the Company's investment securities were invested in callable government agency debentures compared to $6.1 million, or 14.4% at December 31, 1998. These securities offer above market yields, but may be called if interest rates fall below certain levels. If these securities are called, the Company may not be able to reinvest the proceeds to obtain the same yield. Deposits. Total deposits increased by $24.9 million, or 16.1%, during 1999 as compared to an increase of $28.8 million, or 22.8%, during 1998. The increase in 1999 was primarily the result of growth in existing operations, largely due to improved economic conditions in the Company's market areas. The Company's cost of funds declined to 2.73% during 1999 from 3.23% during 1998 as the Company's rates paid on deposits in 1999 decreased from the rates paid in 1998 in response to the decline in overall interest rates year over year. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated (dollar amounts in thousands):
For the Years Ended December 31, ------------------------------------------------------------ 1997 1998 1999 ------------------ ------------------ ------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------- ------- -------- ------- -------- ------- Noninterest-bearing demand deposits $ 27,019 $ 31,371 $ 40,290 Interest-bearing transaction deposits (includes money market deposit accounts) 78,521 4.10% 88,255 3.93% 98,954 3.42% Savings deposits 1,928 1.93% 1,845 1.92% 2,259 1.90% Time deposits, $100,000 and over 10,214 5.42% 12,493 5.31% 13,477 4.85% Other time deposits 8,080 5.13% 8,194 5.06% 8,816 4.41% -------- -------- -------- Total interest-bearing 98,743 4.28% 110,787 4.14% 123,506 3.62% -------- -------- -------- Total deposits $125,762 3.36% $142,158 3.23% $163,796 2.73% ======== ======== ========
RESULTS OF OPERATIONS Net Interest Income / Net Interest Margin. Net interest income increased by $1,921,000, or 22.4%, during 1999 to reach $10.5 million. This compares to net interest income of $8.6 million in 1998 and $7.2 million in 1997. The increase in 1999 was primarily due to the growth in average loans, largely due to the continuation of favorable economic conditions in the Company's market areas. 13 The following table sets forth average assets, liabilities, and shareholders' equity; the amount of interest income or interest expense; the average yield or rate for each category of interest-bearing assets and interest-bearing liabilities; and the net interest margin for the periods indicated (dollar amounts in thousands):
For the Years Ended December 31, -------------------------------------------------------------------------------- 1997 1998 1999 ------------------------ ------------------------ ------------------------ Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- ------ ----- -------- ------ ----- -------- ------- ----- ASSETS Federal funds sold $ 6,613 $ 356 5.38% $ 9,005 $ 473 5.25% $ 10,775 $ 544 5.05% Interest-bearing deposits with banks 348 21 6.03% 286 17 5.94% 286 15 5.24% Investment securities 38,797 2,485 6.41% 36,431 2,156 5.93% 31,475 1,732 5.51% Mortgage loans 66 5 7.58% Loans 82,893 8,633 10.41% 100,130 10,559 10.55% 125,035 12,735 10.19% -------------------------------------------------------------------------------- Total Earning Assets 128,717 11,500 8.94% 145,852 13,205 9.06% 167,571 15,026 8.97% Total Non-earning Assets 9,958 10,894 12,127 -------- -------- -------- Total Assets $138,675 $156,746 $179,698 ======== ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 27,019 $ 31,371 $ 40,290 Interest-bearing transaction accounts 78,521 3,219 4.10% 88,255 3,472 3.93% 98,954 3,388 3.42% Time deposits, $100,000 or more 10,214 554 5.42% 12,493 664 5.31% 13,477 653 4.85% Savings and other time 10,009 452 4.52% 10,039 450 4.48% 11,075 432 3.90% -------------------------------------------------------------------------------- Total interest-bearing deposits 98,744 4,225 4.28% 110,787 4,586 4.14% 123,506 4,473 3.62% -------------------------------------------------------------------------------- Other borrowings 591 28 4.74% 495 24 4.85% 793 37 4.67% -------------------------------------------------------------------------------- Total interest-bearing liabilities 99,335 4,253 4.28% 111,282 4,610 4.14% 124,299 4,510 3.63% Other liabilities 1,278 1,243 1,483 Shareholders' equity 11,043 12,850 13,626 Total Liabilities -------- -------- -------- and Shareholders' Equity $138,675 $156,746 $179,698 ======== ======== ======== ------ ------- ------- Net interest income $7,247 $8,595 $10,516 ====== ======= ======= Net interest margin 5.63% 5.89% 6.28%
14 The Company's net interest margin (net interest income divided by average earning assets) increased to 6.28% during 1999. This compared to 5.89% in 1998 and 5.63% in 1997. The increases were primarily attributable to growth in average loans as a percentage of earning assets. The increase in average loans was largely due to the continuation of favorable economic conditions in the Company's market areas. The following table presents the dollar amount of changes in interest earned and interest paid for each major category of interest-earning asset and interest-bearing liability and the amount of change attributable to average balances (volume) fluctuations and average rate fluctuations. The variance attributable to both balance and rate fluctuations is allocated to a combined rate/volume variance (dollar amounts in thousands):
1998 Compared to 1997 1999 Compared to 1998 Increase (decrease) due to Increase (decrease) due to ----------------------------------------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ----------------------------------------------------------------------- Interest Income: Federal funds sold $ 129 $ (9) $ (3) $ 117 $ 93 $(18) $ (4) $ 71 Interest-bearing deposits with banks (4) 0 0 (4) 0 (2) 0 (2) Investment securities (152) (188) 11 (329) (292) (153) 21 (424) Mortgage loans held for sale (5) (5) 5 (5) Loans 1,788 114 24 1,926 2,626 (360) (90) 2,176 ----------------------------------------------------------------------- Total Interest Income 1,756 (88) 37 1,705 2,427 (533) (73) 1,821 ----------------------------------------------------------------------- Interest Expense: Interest-bearing transaction accounts 403 (133) (17) 253 421 (450) (55) (84) Time deposits, $100,000 or more 124 (11) (3) 110 52 (58) (5) (11) Savings and other time 1 (3) 0 (2) 46 (58) (6) (18) Other borrowings (5) 1 0 (4) 15 (1) (1) 13 ----------------------------------------------------------------------- Total Interest Expense 523 (146) (20) 357 534 (567) (67) (100) ----------------------------------------------------------------------- Net Interest Income $1,233 $ 58 $ 57 $1,348 $1,893 $ 34 $ (6) $1,921 =======================================================================
Provision for Possible Credit Losses. The Company provided $365,000 to the APCL during 1999 compared to $153,000 in 1998 and $120,000 in 1997. The provisions during these periods were recorded primarily due to growth in the loan portfolio. Net credit recoveries were $10,000 in 1999, compared to net credit losses of $43,000 in 1998 and $57,000 in 1997. 15 Noninterest Income. The following table summarizes noninterest income for the years 1997, 1998 and 1999 and expresses these amounts as a percentage of average assets (dollar amounts in thousands): Years Ended December 31, ----------------------------- Components of Noninterest Income 1997 1998 1999 - -------------------------------- ------- ------- ------- Gain on sale of mortgage loans $ 13 Gain on sale of SBA loans 133 $ 151 $ 87 Service fees on deposit accounts 494 522 610 Loan servicing fees 34 45 53 Gain on sale of investment securities 53 13 Other income 165 238 225 ------- ------- ------- Total $ 839 $ 1,009 $ 988 ======= ======= ======= As a Percentage of Average Assets - --------------------------------- Gain on sale of mortgage loans 0.01% Gain on sale of SBA loans 0.10% 0.10% 0.05% Service fees on deposit accounts 0.36% 0.33% 0.34% Loan servicing fees 0.02% 0.03% 0.03% Gain on sale of investment securities 0.03% 0.01% Other income 0.12% 0.15% 0.12% ------ ------ ------ Total 0.61% 0.64% 0.55% ====== ====== ====== 16 Noninterest Expenses. The following table summarizes noninterest expenses and the associated ratios to average assets for the years 1997, 1998 and 1999 (dollar amounts in thousands): Years Ended December 31, --------------------------- Components of Noninterest Expense 1997 1998 1999 - --------------------------------- ------- ------- ------- Salaries and employee benefits $ 3,011 $ 3,646 $ 4,069 Occupancy expense 774 864 983 Furniture and equipment expense 322 414 414 Professional services 365 310 300 Supplies 212 294 272 Promotional 202 361 293 Data processing 354 323 369 Regulatory assessments 61 58 41 Other 372 433 428 ------- ------- ------- Total $ 5,673 $ 6,703 $ 7,169 ======= ======= ======= Average full-time equivalent staff 49 55 56 As a Percentage of Average Assets - --------------------------------- Salaries and employee benefits 2.17% 2.32% 2.26% Occupancy expense 0.56% 0.55% 0.55% Furniture and equipment expense 0.23% 0.26% 0.23% Professional services 0.26% 0.20% 0.17% Supplies 0.15% 0.19% 0.15% Promotional 0.15% 0.23% 0.16% Data processing 0.26% 0.21% 0.20% Regulatory assessments 0.04% 0.04% 0.02% Other 0.27% 0.28% 0.24% ------- ------- ------- Total 4.09% 4.28% 3.99% ======= ======= ======= Noninterest expense increased to $7.2 million during 1999 compared to $6.7 million during 1998. In June, 1999, the Company opened a branch office in Petaluma which contributed to the increase in noninterest expense during 1999. Year 2000 Data Processing Issues The Company and the Bank previously recognized the material nature of the business issues surrounding computer processing of dates into and beyond the Year 2000 and began taking corrective action as required pursuant to the interagency statements issued by the Federal Financial Institution Examination Council. Management believes the Company has completed all of the activities within their control to ensure that systems are Year 2000 compliant. The Company and the Bank have not experienced any material disruptions due to the start of the Year 2000 of the internal computer systems or software applications nor have they experienced any problems with the computer systems or software applications of their third party vendors, suppliers or service providers. The Company will continue to monitor these third parties to determine the impact, if any, on the business of the Company and the actions the Company must take, if any, in the event of non-compliance by any of these third parties. Based upon the Company's assessment of compliance by third parties, there does not appear to be any material business risk posed by any such non-compliance. 17 Although the Company's Year 2000 rollover did not present any material business disruption, there are some remaining Year 2000 related risks. Management believes that appropriate actions have been taken to address these remaining Year 2000 issues and contingency plans are in place to minimize the financial impact to the Company. Management, however, cannot be certain that Year 2000 issues affecting customers, suppliers or service providers of the Company will not have a material adverse impact on the Company. Income Taxes. The Company's effective tax rate was 41.2% in 1999 compared to 41.0% in 1998 and 41.1% in 1997. Note 6 to the consolidated financial statements provides a reconciliation of the statutory tax rates to the effective tax rate for each period. Liquidity and Asset/Liability Management. Liquidity is the Company's ability to absorb fluctuations in deposits while simultaneously providing for the credit needs of its borrowers. The objective in liquidity management is to balance the sources and uses of funds. Primary sources of liquidity include payments of principal and interest on loans and investments, proceeds from the sale or maturity of loans and investments, growth in deposits, and increases in other borrowings. The Company holds overnight federal funds as a cushion for temporary liquidity needs. During 1999, federal funds sold averaged $10.8 million, or 6.0% of total assets. In addition to its federal funds, the Company maintains various lines of credit with correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank. As of December 31, 1999, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $40.6 million, or 20.7% of total assets. This represented the total amount of liquid assets available for sale and/or available to secure the Company's lines of credit. Several methods are used to measure liquidity. One method is to measure the balance between loans and deposits (gross loans divided by total deposits). In general, the closer this ratio is to 100%, the more reliant an institution becomes on its illiquid loan portfolio to absorb temporary fluctuations in deposit levels. As of December 31, 1999, the loan-to-deposit ratio was 76.7% compared to 71.7% a year earlier. Another frequently used method is the relationship between short-term liquid assets (federal funds sold and investments maturing within one year) and short-term liabilities (total deposits and other borrowings) as measured by the liquidity ratio. As of December 31, 1999, this ratio was 15.2% as compared 3.1% a year earlier. As of December 31, 1999 the Company had no material commitments that were expected to adversely impact liquidity. Net interest income and the net interest margin are largely dependent on the Company's ability to closely match interest-earning assets with interest-bearing liabilities. As interest rates change, the Company must constantly balance maturing and repricing liabilities with maturing and repricing assets. This process is called asset/liability management and is commonly measured by the maturity/repricing gap. The maturity/repricing gap is the dollar difference between maturing or repricing assets and maturing or repricing liabilities at different intervals of time. The following table sets forth rate sensitive interest-earning assets and interest-bearing liabilities as of December 31, 1999, the interest rate sensitivity gap (i.e. interest sensitive assets minus interest sensitive 18 liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (interest sensitive assets divided by interest sensitive liabilities) and the cumulative interest rate sensitivity gap ratio. For the purposes of the following table, an asset or liability is considered rate sensitive within a specified period when it matures or can be repriced within that period pursuant to its original contractual terms (dollar amounts in thousands):
December 31, 1999 Over 90 Over 180 After One After 90 days days to days to Year to Five or less 180 days 365 days Five Years Years Total --------- --------- --------- --------- --------- --------- Earning Assets (Rate Sensitive): Federal funds sold $ 10,400 $ 10,400 Interest-bearing deposits with other banks 90 $ 196 286 Investment securities 16,852 2,001 $ 13,082 $ 5,069 37,004 Loans, gross of allowance for possible losses 71,539 $ 3,658 967 44,944 16,989 138,097 --------- --------- --------- --------- --------- --------- Total 98,881 3,658 3,164 58,026 22,058 185,787 --------- --------- --------- --------- --------- --------- Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 49,796 62,946 112,742 Time deposits, $100,000 or more 5,719 3,229 4,766 757 14,471 Savings and other time deposits 3,783 1,292 3,501 2,984 11,560 Other borrowings 750 750 --------- --------- --------- --------- --------- --------- Total 10,252 4,521 58,063 66,687 139,523 --------- --------- --------- --------- --------- --------- Period GAP $ 88,629 $ (863) $ (54,899) $ (8,661) $ 22,058 ========= ========= ========= ========= ========= Cumulative GAP $ 88,629 $ 87,766 $ 32,867 $ 24,206 $ 46,264 ========= ========= ========= ========= ========= Interest Sensitivity GAP Ratio 89.63% (23.59%) (1735.11%) (14.93%) 100.00% ========= ========= ========= ========= ========= Cumulative Interest Sensitivity 89.63% 85.59% 31.09% 14.78% 24.90% ========= ========= ========= ========= =========
The Company classifies its interest-bearing transaction accounts and savings accounts into the over 180 days to 365 days time period as well as the after one year to five years time period. This is done to adjust for the relative insensitivity of these accounts to changes in interest rates. Although rates on these accounts can be contractually reset at the Company's discretion, historically these accounts have not demonstrated strong correlations to changes in the prime rate. Generally, a positive gap at one year indicates that net interest income and the net interest margin will increase if interest rates rise in the future. A negative gap at one year indicates that net interest income and the net interest margin will decrease if interest rates rise in the future. The Company neither currently utilizes financial derivatives to hedge its asset/liability position nor has any plans to employ such strategies in the near future. The maturities and weighted average yields of investment securities are presented in the following table: Maturities of Investment Securities at December 31, 1999 (At amortized cost)
After 1 Year After 5 Years Within 1 Year Within 5 Years Within 10 Years Total ---------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury and other U.S. government agencies $16,853 5.26% $13,132 5.31% $5,069 5.58% $35,054 5.32% Corporate securities 1,950 6.32% 1,950 6.32% ---------------------------------------------------------------------- Total $16,853 5.26% $15,082 5.44% $5,069 5.58% $37,004 5.38% =====================================================================
19 Time Certificates, $100,000 and Over The following table sets forth the time remaining to maturity of the Company's time deposits in amounts of $100,000 or more (dollar amounts in thousands): Time remaining to maturity December 31, 1999 ----------------- Three months or less $ 5,719 After three months to six months 3,229 After six months to one year 4,766 After twelve months 757 -------- Total $ 14,471 ======== Maturities of Loans at December 31, 1999 Time remaining to maturity Fixed rate Adjustable rate Total ---------- --------------- -------- One year or less $ 7,268 $ 35,248 $ 42,516 After one year to five years 43,025 12,483 55,508 After five years 16,989 23,084 40,073 -------- -------- -------- Total $ 67,282 $ 70,815 $138,097 ======== ======== ======== As of December 31, 1999, the percentage of loans held for investment with fixed and floating interest rates was 49% and 51%, respectively. The following table provides typical terms of maturity ranges offered by the Company for each loan category indicated: Loan Category Typical Term in Years --------------------- Commercial Loans 1 to 3 Real Estate Loans: Commercial 5 Construction 1 Land 1 Home Equity 5 Loans to Consumers and Individuals 1 to 5 Capital Resources. The principal source of capital for the Company is and will continue to be the retention of operating profits. Total shareholders' equity was $14.4 million as of December 31, 1999 compared to $13.1 million a year earlier. Shareholder Rights Plan In January, 1999 the Company adopted a shareholder rights plan designed to maximize the long-term value of the Company and to protect the Company's shareholders from improper takeover tactics and takeover bids that are not fair to all shareholders. 20 In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on February 8, 1999. The rights, which are not immediately exercisable, entitle the holders to purchase one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $37.00 upon the occurrence of certain triggering events. In the event of an acquisition not approved by the Board of Directors, each right enables its holder (other than the acquirer) to purchase the Preferred Stock at 50% of the market value. Further, in the event the Company is acquired in an unwanted merger or business combination, each right enables the holder to purchase shares of the acquiring entity at a similar discount. Under certain circumstances, the rights may be exchanged for common shares of the Company. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. The rights can be exercised and separate rights certificates distributed only if any of the following events occur: acquisition by a person of 10% or more of the Company's common shares; a tender offer for 10% or more of the Company's common shares; or ownership of 10% or more of the Company's common shares by a shareholder whose actions are likely to have a material adverse impact on the Company or shareholder interests. The rights will initially trade automatically with the common shares. The rights are not deemed by the Board of Directors to be presently exercisable. Stock Repurchase Plan In February, 1999 the Board of Directors authorized the Company to repurchase an additional $2,000,000 of the Company's common stock in addition to the $1,000,000 authorized pursuant to the repurchase programs announced in 1994 and 1998. The 1994 repurchase program was completed in 1998 and the 1998 repurchase program was completed in February, 1999. The 1999 repurchase program authorizes the Company to repurchase shares in open market and private transactions during the next five years. As of December 31, 1999, 84,638 shares had been repurchased under the 1999 repurchase program for a total purchase price of $691,973. Cash Dividends During the third quarter of 1999 the Company began the payment of a regular cash dividend of $0.01 per share. The regular cash dividends will be paid quarterly. Risk Based Capital Regulatory authorities have established minimum capital adequacy guidelines requiring that qualifying capital be 8% of risk-based assets, of which at least 4% must be tier 1 capital (primarily shareholders' equity). As of December 31, 1999 the Company's qualifying capital was 10.9%, of which the tier 1 capital ratio was 9.9%. In addition, the Company, under the guidelines established for adequately capitalized institutions, must also maintain a minimum leverage ratio (tier 1 capital divided by total assets) of 4%. As of December 31, 1999, the Company's leverage ratio was 7.4%. 21 Item 7. Financial Statements. Consolidated Balance Sheets December 31, 1998 and 1999
Dollar amounts in thousands 1998 1999 --------- --------- Assets Cash and due from banks $ 8,804 $ 6,556 Federal funds sold 3,200 10,400 --------- --------- Total cash and cash equivalents 12,004 16,956 Interest-bearing deposits with banks 286 286 Investment securities available for sale at fair value 36,023 34,118 Investment securities held to maturity; fair values of $6,081 in 1998 and $1,979 in 1999 6,055 2,000 Loans held for investment (net of allowance for possible credit losses of $1,117 in 1998 and $1,492 in 1999) 109,958 136,474 Premises and equipment - net 2,431 2,791 Accrued interest receivable 1,152 1,077 Deferred income taxes 547 1,068 Other assets 1,040 1,349 --------- --------- Total assets $ 169,496 $ 196,119 ========= ========= Liabilities and Shareholders' Equity Liabilities: Deposits: Noninterest-bearing $ 38,788 $ 41,011 Interest-bearing: Transaction accounts 92,491 112,742 Time certificates, $100,000 and over 12,622 14,471 Savings and other time deposits 11,003 11,560 --------- --------- Total interest-bearing deposits 116,116 138,773 --------- --------- Total deposits 154,904 179,784 Other borrowings 356 750 Accrued interest payable and other liabilities 1,154 1,188 --------- --------- Total liabilities 156,414 181,722 --------- --------- Shareholders' equity: Preferred stock, no par value: authorized 20,000,000 shares; none issued or outstanding Common stock, no par value: authorized 20,000,000 shares; issued 2,094,031 shares in 1998 and 2,078,501 shares in 1999 outstanding 2,088,466 shares in 1998 and 2,078,501 shares in 1999 9,578 10,068 Accumluated other comprehensive income 191 (518) Retained earnings 3,313 4,847 --------- --------- Total shareholders' equity 13,082 14,397 --------- --------- Total liabilities and shareholders' equity $ 169,496 $ 196,119 ========= =========
See notes to consolidated financial statements. 22 Consolidated Statements of Operations Years ended December 31, 1997, 1998 and 1999 In thousands, except per share amounts 1997 1998 1999 Interest Income: Loans, including fees $ 8,638 $10,559 $12,735 Federal funds sold 356 473 544 Investment securities 2,506 2,173 1,747 ------- ------- ------- Total interest income 11,500 13,205 15,026 ------- ------- ------- Interest Expense: Interest-bearing transaction, savings and other time deposits 3,671 3,922 3,820 Time certificates, $100,000 and over 554 664 653 Other interest 28 24 37 ------- ------- ------- Total interest expense 4,253 4,610 4,510 ------- ------- ------- Net Interest Income 7,247 8,595 10,516 Provision for Possible Credit Losses 120 153 365 ------- ------- ------- Net Interest Income After Provision for Possible Credit Losses 7,127 8,442 10,151 Other Income: Gain on sale of loans 146 151 87 Service fees on deposit accounts 494 522 610 Loan servicing fees 34 45 53 Gain on sale of investment securities 53 13 Other 165 238 225 ------- ------- ------- Total other income 839 1,009 988 ------- ------- ------- Other Expenses: Salaries and employee benefits 3,011 3,646 4,069 Occupancy expense 774 864 983 Furniture and equipment expense 322 414 414 Professional services 365 310 300 Supplies 212 294 272 Promotional expenses 202 361 293 Data processing fees 354 323 369 Regulatory assessments 61 58 41 Other 372 433 428 ------- ------- ------- Total other expenses 5,673 6,703 7,169 ------- ------- ------- Income Before Income Taxes 2,293 2,748 3,970 Income Tax Provision 943 1,127 1,637 ------- ------- ------- Net Income $ 1,350 $ 1,621 $ 2,333 ======= ======= ======= Basic Earnings Per Share $ 0.64 $ 0.75 $ 1.12 ======= ======= ======= Diluted Earnings Per Share $ 0.61 $ 0.70 $ 1.07 ======= ======= ======= See notes to consolidated financial statements. 23 Consolidated Statements of Comprehensive Income Years ended December 31, 1997, 1998 and 1999 In thousands 1997 1998 1999 Net Income $1,350 $1,621 $2,333 Other comprehensive income: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax 46 159 (717) Less: reclassification adjustment for gains included in net income, net of tax ($22 in 1998 and $5 in 1999) 31 8 ------ ------ ------ Other comprehensive income (loss) 46 190 (709) ------ ------ ------ Comprehensive income $1,396 $1,811 $1,624 ====== ====== ====== See notes to consolidated financial statements. 24 Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1997, 1998 and 1999
Accumulated Retained Common Stock Other Earnings -------------------- Comprehensive (Accumulated Dollar amounts in thousands Shares Amount Income (Loss) Deficit) Total - ---------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 1,885,319 $ 9,398 $ (45) $ 832 $10,185 Net income 1,350 1,350 Other comprehensive income, net of taxes 46 46 Dividends on common stock (5%) Cash payment (2) (2) Stock issued 95,428 591 (591) Common stock issued upon exercise of stock options 73,968 321 321 Tax benefit of stock options exercised 67 67 - ---------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 2,054,715 10,310 1 1,656 11,967 Net income 1,621 1,621 Other comprehensive income, net of taxes 190 190 Common stock issued upon exercise of stock options 26,457 115 115 Tax benefit of stock options exercised 36 36 Purchases of common stock (92,156) (847) (847) - ---------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 1,989,016 9,578 191 3,313 13,082 Net income 2,333 2,333 Other comprehensive income, net of taxes (709) (709) Dividends on common stock (5%) Cash payment (2) (2) Stock issued 98,427 867 (867) Cash Dividends (40) (40) Common stock issued upon exercise of stock options 77,831 363 363 Tax benefit of stock options exercised 110 110 Purchases of common stock (86,773) (740) (740) - ---------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 2,078,501 $10,068 $(518) $4,847 $14,397 ==========================================================================================================
See notes to consolidated financial statements. 25 Consolidated Statements of Cash Flows Years ended December 31, 1997, 1998 and 1999
Dollar Amounts In Thousands 1997 1998 1999 Cash Flows From Operating Activities: Net income $ 1,350 $ 1,621 $ 2,333 Adjustments to reconcile net income to net cash provided by operating activities: Settlement of mortgage loans sold 648 Provision for possible credit losses 120 153 365 Depreciation and amortization 318 479 463 Gain on sale of investment securities (53) (13) Change in deferred tax provision 28 (32) (17) Effect of change in: Accrued interest receivable (67) (82) 75 Other assets (199) 124 (309) Accrued interest payable and other liabilities 90 96 161 -------- -------- -------- Net cash provided by operating activities 2,288 2,306 3,058 -------- -------- -------- Cash Flows From Investing Activities: Held to maturity securities: Calls 7,500 21,250 4,055 Purchases (7,000) (2,055) Available for sale securities: Maturities 5,127 3,046 4,272 Calls 4,000 1,000 Purchases (10,012) (30,642) (26,760) Sales 1,206 23,164 Decrease in interest-bearing deposits with banks 98 Net (increase) in loans held for investment (7,178) (22,932) (26,881) Purchases of premises and equipment, net (641) (278) (811) -------- -------- -------- Net cash used by investing activities (8,106) (29,405) (22,961) -------- -------- -------- Cash Flows From Financing Activities: Net increase in noninterest-bearing demand deposits 2,885 9,637 2,223 Net increase in interest-bearing transaction, savings and other time deposits 3,389 19,135 22,657 Net increase (decrease) in other borrowings 303 (394) 394 Cash dividends paid (40) Cash payment for fractional shares resulting from stock dividend (2) (2) Proceeds from the exercise of stock options 321 115 362 Purchases of common stock (847) (739) -------- -------- -------- Net cash provided by financing activities 6,896 27,646 24,855 -------- -------- -------- Net Increase in Cash and Cash Equivalents 1,078 547 4,952 -------- -------- -------- Cash and Cash Equivalents: Beginning of year 10,379 11,457 12,004 -------- -------- -------- End of year $ 11,457 $ 12,004 $ 16,956 ======== ======== ======== Cash Paid During the Year for: Interest on deposits and other borrowings $ 4,217 $ 4,648 $ 4,522 ======== ======== ======== Income taxes $ 1,111 $ 976 $ 1,666 ======== ======== ======== Noncash Investing and Financing Activities: Stock dividends paid on common stock $ 591 $ 867 ======== ========
See notes to consolidated financial statements. 26 MCB FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of MCB Financial Corporation (the "Company" on a consolidated basis) and its wholly owned subsidiary, Metro Commerce Bank (the "Bank"), conform to generally accepted accounting principles and general practice in the banking industry. The Company was incorporated in California on January 20, 1993 for the purpose of becoming a bank holding company registered under the Bank Holding Company Act of 1956. The following is a summary of the significant accounting policies and reporting methods used by the Company: Nature of Operations The Company operates five branches in the San Francisco Bay Area and one branch in Upland, California. The Company's primary source of revenue is providing loans to small and middle-market businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Consolidation The accompanying consolidated financial statements include the Company and its wholly owned subsidiary, the Bank. All intercompany amounts are eliminated in consolidation. Cash and Due from Banks Cash and due from banks include balances with the Federal Reserve Bank. The Company is required by federal regulations to maintain certain minimum average balances with the Federal Reserve, based primarily on the Company's average daily deposit balances. At December 31, 1999, the Company had required balances and compensating balances with the Federal Reserve of $274,000. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Investment Securities The Company classifies its qualifying investments as trading, available for sale or held to maturity. Management has reviewed the securities portfolio and classified securities as either held to maturity or available for sale. The Company's policy of classifying investments as held to maturity is based upon its ability and management's intent to hold such securities to maturity. 27 Securities expected to be held to maturity are carried at amortized historical cost. All other securities are classified as available for sale and are carried at fair value. Fair value is determined based upon quoted market prices . Unrealized gains and losses on securities available for sale are included in shareholders' equity on an after-tax basis. Gains and losses on dispositions of investment securities are included in noninterest income and are determined using the specific identification method. Loans Loans which are held for investment are stated at the principal amount outstanding, net of deferred loan origination fees and costs and the allowance for possible credit losses. Interest income is recognized using methods which approximate a level yield on principal amounts outstanding. The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection. Loan origination fees, net of certain related direct loan origination costs, are deferred and amortized as yield adjustments over the contractual lives of the underlying loans. Sale and Servicing of Small Business Administration ("SBA") Loans The Company originates loans to customers under SBA programs that generally provide for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of the majority of the loans to an investor and retains the unguaranteed portion and servicing rights in its own portfolio. Funding for the SBA programs depend on annual appropriations by the U.S. Congress. Gains on these sales are earned through the sale of the guaranteed portion of the loan for an amount in excess of the adjusted carrying value of the portion of the loan sold. The Company allocates the carrying value of such loans between the portion sold, the portion retained and a value assigned to the right to service the loan. The difference between the adjusted carrying value of the portion retained and the face amount of the portion retained is amortized to interest income over the life of the related loan using a method which approximates the interest method. Allowance for Possible Credit Losses The allowance for possible credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio and commitments to extend credit. The allowance is based upon management's continuing assessment of various factors affecting the collectibility of loans and commitments to extend credit, including current and projected economic conditions, past credit experience, the value of the underlying collateral, and such other factors as in management's judgment deserve current recognition in estimating potential credit losses. Loans deemed uncollectible are charged-off and deducted from the allowance, while subsequent recoveries are credited to the allowance. A loan is considered impaired when management determines that it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impaired loans are carried at the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent, if less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount). An impairment is recognized by adjusting an allocation of the existing allowance for credit losses. 28 Premises and Equipment Premises and equipment consist of leasehold improvements, furniture and equipment, and automobiles which are stated at cost, less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, primarily from three to thirty years. Leasehold improvements are amortized over the terms of the lease or their estimated useful lives, whichever is shorter. Stock-based Compensation The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Income Taxes The Company and its subsidiary file consolidated income tax returns. The Company provides a deferred tax expense or benefit equal to the net change in deferred tax assets and liabilities during the year. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Stock Splits and Stock Dividends In February 1998, the Company's outstanding shares of common stock were split four-for-three. In August 1998, outstanding shares of common stock were split three-for-two. In September 1999, outstanding shares of common stock were increased due to the payment of a 5% stock dividend. All shares and per share amounts reported have been restated to reflect the splits and dividends. Comprehensive Income The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is equal to net income plus the change in "other comprehensive income," as defined by SFAS No. 130. This statement requires the Company to report income and (loss) from non-owner sources. The only component of other comprehensive income currently applicable to the Company is the net unrealized gain or loss on available for sale investments. SFAS No. 130 requires that an entity: (a) classify items of other comprehensive income by their nature in a financial statement, and (b) report the accumulated balance of other comprehensive income separately from common stock and retained earnings in the equity section of the balance sheet. Net Income Per Common Share Net income per common share is stated in accordance with SFAS No. 128, "Earnings per Share." Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares plus common equivalent shares outstanding including dilutive stock options. 29 Segment Information The Company operates as a single business segment - commercial banking. Derivatives and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Initial application of SFAS No. 133 would be as of the beginning of an entity's fiscal quarter. On that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. The Company has no derivative or hedged instruments and therefore the implementation of this statement is not expected to have a material impact on the Company's financial position or results of operations. Reclassifications Certain 1997 and 1998 amounts were reclassified to conform to the 1999 presentation. 30 2. INVESTMENT SECURITIES The amortized cost and approximate market value of investment securities at December 31 were as follows (dollar amounts in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value 1999: Held to maturity securities: U.S. Government agencies $ 2,000 $ (21) $ 1,979 $ 2,000 ------- ------- ------- ------- ------- Total held to maturity 2,000 (21) 1,979 2,000 ------- ------- ------- ------- ------- Available for sale securities: U.S. Treasury 21,920 (320) 21,600 21,600 U.S. Government agencies 11,134 (537) 10,597 10,597 Corporate securities 1,950 (29) 1,921 1,921 ------- ------- ------- ------- ------- Total available for sale 35,004 (886) 34,118 34,118 ------- ------- ------- ------- ------- Total investment securities $37,004 $ $ (907) $36,097 $36,118 ======= ======= ======= ======= ======= Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value ------- ------- ------- ------- ------- 1998 Held to maturity securities: U.S. Government agencies $ 6,055 $ 26 $ 6,081 $ 6,055 ------- ------- ------- ------- ------- Total held to maturity 6,055 26 6,081 6,055 Available for sale securities: U.S. Treasury 15,206 214 $ (6) 15,414 15,414 U.S. Government agencies 17,247 137 (60) 17,324 17,324 Mortgage-backed securities 1,172 5 1,177 1,177 Coporate securities 1,971 36 2,007 2,007 Municipal bonds 100 1 101 101 ------- ------- ------- ------- ------- Total available for sale 35,696 393 (66) 36,023 36,023 ------- ------- ------- ------- ------- Total investment securities $41,751 $ 419 $ (66) $42,104 $42,078 ======= ======= ======= ======= =======
31 The following table shows the amortized cost and approximate fair value of investment securities by contractual maturity at December 31, 1999 (dollar amounts in thousands): Held to Maturity Available for Sale ------------------- ------------------- Amortized Fair Amortized Fair Cost Value Cost Value Within one year $16,853 $16,844 After one but within five years $ 2,000 $ 1,979 13,082 12,594 Over five years 5,069 4,680 ------- ------- ------- ------- Total $ 2,000 $ 1,979 $35,004 $34,118 ======= ======= ======= ======= The Bank carries its Federal Reserve Bank stock and Federal Home Loan Bank stock as other assets. These securities are not covered by the provisions of SFAS No. 115 and are recorded at historical cost. The total carrying value at December 31, 1998 and 1999 was $709,000 and $791,000, respectively. The mortgage-backed securities held at December 31, 1998 were issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The Bank has purchased U.S. government agency securities totaling $2,000,000 that contain certain issuer call option features. These securities have a weighted average yield of 6.21% and may be called if interest rates fall below certain levels. If these securities are called the Company may not be able to reinvest the proceeds to obtain the same weighted average yield. Securities with an amortized cost of approximately $3,345,000 as of December 31, 1998, and $8,062,000 as of December 31, 1999, were pledged to secure other borrowings. In 1999, proceeds from the sale of investment securities available for sale totaled $23,164,000. Realized net gains on these sales totaled $13,000. In 1998, proceeds from sale of investment securities available for sale totaled $1,206,000, and the realized net gains totaled $53,000. No sales of investment securities occurred during 1997. 32 3. LOANS AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES Loans at December 31, consisted of the following (dollar amounts in thousands): 1998 1999 Commercial $ 22,504 $ 23,413 Real estate: Commercial 72,605 83,737 Construction 9,619 23,546 Land 2,592 4,440 Home equity 1,703 1,289 Loans to consumers and individuals 2,085 1,672 --------- --------- Total 111,109 138,097 Deferred loan fees (33) (131) Allowance for possible credit losses (1,117) (1,492) --------- --------- Total $ 109,958 $ 136,474 ========= ========= The Company is principally engaged in commercial banking in the San Francisco Bay Area of California and the Greater Los Angeles Area. The Company primarily grants commercial loans, the majority of which are secured by commercial properties. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic sector of Northern California, including the real estate markets of the San Francisco Bay Area. Approximately 51% of the Company's loans have interest rates that are variable and tied to the prime rate, whereas the remaining are fixed rate loans. Following is a schedule of the activity in the allowance for possible credit losses on loans for the years ended December 31 (dollar amounts in thousands): 1997 1998 1999 Balances, January 1 $ 944 $ 1,007 $ 1,117 Provision for possible credit losses 120 153 365 Loans charged-off (108) (53) (62) Recoveries 51 10 72 ------- ------- ------- Total $ 1,007 $ 1,117 $ 1,492 ======= ======= ======= At December 31, 1998 and 1999, the Company had nonperforming loans in the amounts of $967,000 and $1,747,000, respectively. Interest income foregone on nonperforming loans totaled $6,000, $34,000, and $66,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Interest income recognized on the nonperforming loans approximated $3,000, $68,000, and $89,000 for the years ended December 31, 1997, 1998 and 1999, respectively. For the years ended December 31, 1998 and 1999, the average recorded investment in nonperforming loans was approximately $968,000 and $1,621,000, respectively. At December 31, 1999, the nonperforming loans included two nonaccrual loans totaling $1,707,000 and one loan 90 days or more past due and still accruing totaling $40,000. These loans are well secured and in the process of collection. 33 At December 31, 1998 and 1999, the Company had loans identified as impaired, in the aggregate amounts of $967,000 and $1,747,000, respectively. The Company provided no specific allowance for possible credit losses at December 31, 1998 and 1999 for these impaired loans since they were adequately collateralized. 4. PREMISES AND EQUIPMENT The components of premises and equipment at December 31, are as follows (dollar amounts in thousands): 1998 1999 Leasehold improvements $ 2,074 $ 2,494 Furniture and equipment 2,293 2,574 Automobiles 196 274 Construction in progress 1 ------- ------- Total 4,564 5,342 Less accumulated depreciation and amortization (2,133) (2,551) ------- ------- Premises and equipment, net $ 2,431 $ 2,791 ======= ======= The amount of depreciation and amortization was $451,000 in 1999, $433,000 in 1998 and $333,000 in 1997. 5. DEPOSITS The aggregate amount of short-term jumbo CD's, each with a minimum denomination of $100,000, was approximately $11,922,000 and $13,714,000 in 1998 and 1999, respectively. At December 31, 1999, the scheduled maturities of CDs are as follows: 2000 $ 22,290 2001 938 2002 281 2003 100 2004 110 -------- Total $ 23,718 ======== 34 6. INCOME TAXES The components of the provision (benefit) for income taxes for the years ended December 31 are as follows (dollar amounts in thousands): 1997 1998 1999 Current payable (benefit): Federal $ 672 $ 867 $ 1,245 State 243 292 409 ------- ------- ------- Total current payable (benefit) 915 1,159 1,654 Deferred: Federal 17 (37) (15) State 11 5 (2) ------- ------- ------- Total deferred 28 (32) (17) ------- ------- ------- Total $ 943 $ 1,127 $ 1,637 ======= ======= ======= A reconciliation of the statutory federal income tax rates with the Company's effective income tax rates is as follows: 1997 1998 1999 Statutory federal tax rate 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit 7.1 7.1 7.1 Municipal interest (0.1) (0.1) (0.2) Other 0.1 0.3 ------- ------- ------- Effective tax rate 41.1% 41.0% 41.2% ======= ======= ======= 35 Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows (dollar amounts in thousands): December 31 ----------------- 1998 1999 Deferred tax assets: Net operating loss carryforwards $ 294 $ 259 Reserves not currently deductible 397 542 Unrealized loss on securities available for sale 368 State income taxes 72 108 Other 102 15 ------ ------ Total 865 1,292 Deferred tax liabilities: Tax over book depreciation 182 223 Unrealized gain on securities available for sale 136 ------ ------ Total 318 223 ------ ------ Net deferred tax asset $ 547 $1,069 ====== ====== The Company has acquired net operating loss carryforwards ("NOL") in connection with the acquisition of the Bank of Hayward in 1994. The utilization of NOLs acquired through acquisition is limited by certain state and federal tax laws. The Company has determined that the annual limitation on its ability to utilize NOLs is $78,130 for the fifteen-year period. The following table presents the NOLs (after limitation) at December 31, 1999, by expiration date: Expiration Date Federal Amount State Amount December 31, 2004 $ 276 December 31, 2005 126 December 31, 2006 11 December 31, 2007 180 December 31, 2008 78 December 31, 2009 $ 283 The Company reduced its 1999 federal and state current tax liability by approximately $27,000 and $9,000 respectively by utilizing $78,130 in net operating loss carryforwards. 36 7. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has made loans and advances under lines of credit to directors and their related interests. All such loans and advances were made under terms that are consistent with the Company's normal lending policies. At December 31, 1999, loans outstanding to related parties were $3,394,000 and loan commitments to related parties amounted to $3,874,000. 8. STOCK OPTION PLAN 1989 Stock Option Plan Under the Company's 1989 Stock Option Plan (the "1989 Plan"), a total of 499,284 stock options were authorized for grant. The 1989 Plan terminated according to its terms in December 1999. Options granted pursuant to the 1989 Plan generally had lives of 10 years from the date of grant, subject to earlier expiration in certain cases, such as termination of the grantee's employment. 1999 Stock Option Plan On May 19, 1999, the Company's shareholders approved the MCB Financial Corporation 1999 Stock Option Plan (the "Plan"). The Plan was designed to replace the 1989 Plan which terminated in December 1999. The Plan authorizes the Company to grant options that qualify as incentive stock options ("ISO") under the Internal Revenue Code of 1986 and nonqualified stock options ("NQSO") to officers and employees of the Company. Nonemployee directors are eligible to receive only NQSOs. The Plan has set aside 415,485 authorized, but unissued, shares of the Company's common stock for grant at not less than the fair market value of the Company's common stock on the date the option is granted. The term of the options may not exceed 10 years from the date of grant, and the options generally vest over a four year period. 37 The following is a summary of changes in options outstanding: Weighted Number Average of Exercise Shares Price -------- ----- Outstanding at January 1, 1997 (292,259 exercisable at a weighted average price of $4.12) 346,242 $4.09 Granted (weighted average fair value of $2.96) 22,317 6.82 Exercised (78,862) 4.07 Canceled (4,627) 4.75 -------- ----- Outstanding at December 31, 1997 (234,817 exercisable at a weighted average price of $4.18) 285,070 4.30 Granted (weighted average fair value of $4.39) 10,762 9.72 Exercised (27,779) 4.17 -------- ----- Outstanding at December 31, 1998 (227,533 exercisable at a weighted average price of $4.26) 268,053 4.52 Granted (weighted average fair value of $3.96) 87,147 7.59 Exercised (80,797) 4.48 Canceled (7,560) 7.27 -------- ----- Outstanding at December 31, 1999 266,843 $5.46 ======== ===== Additional information regarding options outstanding as of December 31, 1999 is as follows:
Options Outstanding Options Exercisable - --------------------------------------------------------------- ---------------------------- Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (Yrs.) Exercise Price Exercisable Exercise Price - ----------------- ----------- ----------- -------------- ----------- -------------- $ 3.24 -- $ 3.98 127,031 3.3 $ 3.85 123,327 $ 3.86 4.10 -- 6.79 40,850 4.1 4.72 34,968 4.54 7.27 -- 7.62 88,200 9.1 7.60 18,480 7.59 9.05 -- 11.50 10,762 8.6 9.73 4,305 9.73 -------- -------- $ 3.24 -- $11.50 266,843 5.6 $ 5.46 181,080 $ 4.51 ======== ========
At December 31, 1999, 383,985 options were available for future grants under the Plan. The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. 38 Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 36 months following full vesting; stock volatility, 42% in 1999, 34% in 1998 and 25% in 1997; risk free interest rates, 6.3% in 1999, 4.7% in 1998 and 6.5% in 1997; dividend yield of 0.48% in 1999 and no dividend yield during 1998 and 1997. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1995 - 1999 awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been as follows (dollar amounts in thousands, except per share amounts): Years Ended December 31, 1997 1998 1999 ------ ------ ------ Net Income: As reported $1,350 $1,621 $2,333 Pro forma 1,329 1,594 2,266 Basic earnings per share: As reported $ 0.64 $ 0.75 $ 1.12 Pro forma 0.63 0.74 1.09 Diluted earnings per share: As reported $ 0.61 $ 0.70 $ 1.07 Pro forma 0.60 0.70 1.04 9. COMMITMENTS AND CONTINGENCIES The Bank leases its premises under noncancelable operating leases expiring through June 30, 2014. Future minimum lease commitments are $713,000 in 2000, $542,000 in 2001, $539,000 in 2002, $551,000 in 2003, $511,000 in 2004, and $3,380,000, thereafter. Rental expense for premises under operating leases included in occupancy expense was $676,000, $583,000 and $506,000 in 1999, 1998 and 1997, respectively. There are various legal actions pending against the Company and the Bank arising from the normal course of business. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material effect on the financial position or results of operations of the Company. 39 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is a party to various financial instruments with on-balance sheet and off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Financial instruments include commitments to extend credit, standby letters-of-credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters-of-credit and financial guarantees is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Bank controls the credit risk of these transactions through credit approvals, credit limits and monitoring procedures. 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 amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include marketable securities, accounts receivable, inventory, property, plant and equipment. Standby letters-of-credit and financial guarantees are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most guarantees extend for less than five years and expire in decreasing amounts. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The following table summarizes these financial instruments and other commitments and contingent liabilities at December 31 (dollar amounts in thousands): 1998 1999 Financial instruments whose credit risk is represented by contract amounts: Commitments to extend credit - loans $ 26,612 $ 33,750 Standby letters-of-credit and financial guarantees 621 495 -------- -------- Total $ 27,233 $ 34,245 ======== ======== 40 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments have been determined using the available market information and appropriate valuation methodologies consistent with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Dollar amounts in thousands December 31, 1999 --------------------- Carrying Estimated Amount Fair Value Financial assets: Cash and due from banks $ 6,556 $ 6,556 Federal funds sold 10,400 10,400 Interest-bearing deposits with banks 286 286 Available for sale securities 34,118 34,118 Held to maturity securities 2,000 1,979 Loans, net 136,474 135,489 Financial liabilities: Noninterest-bearing deposits 41,011 41,011 Interest-bearing deposits 138,773 138,718 Other borrowings 750 750 December 31, 1998 --------------------- Carrying Estimated Amount Fair Value Financial assets: Cash and due from banks $ 8,804 $ 8,804 Federal funds sold 3,200 3,200 Interest-bearing deposits with banks 286 286 Available for sale securities 36,023 36,023 Held to maturity securities 6,055 6,081 Loans, net 109,958 109,029 Financial liabilities: Noninterest-bearing deposits 38,788 38,788 Interest-bearing deposits 116,116 116,326 Other borrowings 356 356 The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Short-Term Financial Assets - This category includes cash and due from banks, federal funds sold and interest-bearing deposits with banks. Because of their relatively short maturities, the fair value of these financial instruments is considered to be equal to book value. Available-For-Sale and Held-To-Maturity Securities - Fair value is quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. 41 Loans - The fair value of floating rate loans is deemed to approximate book value. The fair value of all other performing loans is determined by discounting expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition to the above, the allowance for credit losses is considered a reasonable adjustment for credit risk relating to the entire credit portfolio, including obligations to extent credit and other off-balance-sheet transactions. Deposits - The fair value of demand, savings and money market deposits is equal to the amount payable on demand at the reporting date. For other types of deposits with fixed maturities, fair value is estimated by discounting contractual cash flows at interest rates currently being offered on deposits with similar characteristics and maturities. A fair value for the deposits base is not practicable. Other Borrowings - The fair value of the other borrowings is determined by discounting contractual cash flows at current market interest rates for similar instruments. Off-Balance-Sheet Financial Instruments - The Company has not estimated the fair value of off-balance-sheet commitments to extend credit, standby letters of credit and financial guarantees. Because of the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is practicable to provide a meaningful estimate of fair value. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1999. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. Management does not intend to dispose of a significant portion of its financial instruments. 12. REGULATORY MATTERS The Company and Bank are subject to various regulations issued by Federal banking agencies, including minimum capital requirements. Failure to meet minimum regulatory capital requirements could result in regulators requiring prompt corrective action to be taken which could have a material effect on the financial statements. As of December 31, 1999, both the Company and Bank exceeded the capital adequacy requirements for a well capitalized institution. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital ( (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital (as defined) to average assets (as defined). 42 As of December 31, 1999 and 1998, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, tier 1 risk-based, and tier 1 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. The Company and Bank's actual capital amounts and ratios are also presented below (dollar amounts in thousands):
For Capital Required to be Actual Adequacy Purposes Well Capitalized - ------------------------------------------------------------------------------------------------- 1999 Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------- Total Capital (to risk weighted assets) Company $ 16,190 10.9% $ 11,865 8.0% n/a Bank 15,419 10.4% 11,863 8.0% $14,829 10.0% Tier 1 Capital (to risk weighted assets) Company 14,698 9.9% 5,932 4.0% n/a Bank 13,927 9.4% 5,932 4.0% 8,897 6.0% Tier 1 Capital (to average assets) Company 14,698 7.4% 7,976 4.0% n/a Bank 13,927 7.0% 7,976 4.0% 9,970 5.0% For Capital Required to be Actual Adequacy Purposes Well Capitalized - ------------------------------------------------------------------------------------------------- 1998 Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------- Total Capital (to risk weighted assets) Company $ 13,728 11.1% $ 9,918 8.0% n/a Bank 13,359 10.8% 9,911 8.0% $12,388 10.0% Tier 1 Capital (to risk weighted assets) Company 12,611 10.2% 4,959 4.0% n/a Bank 12,242 9.9% 4,955 4.0% 7,433 6.0% Tier 1 Capital (to average assets) Company 12,611 7.3% 6,870 4.0% n/a Bank 12,242 7.1% 6,866 4.0% 8,583 5.0%
Management believes, as of December 31, 1999, that the Bank meets all capital requirements to which it is subject. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 1999, the Bank had available $4,032,000 for the payment of dividends. The Bank paid $500,000 in dividends during 1998, and $750,000 in dividends to the Company during 1999. 43 The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Company is prohibited from borrowing from the Bank unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Bank are limited to 10% of the Bank's shareholders' equity on a per affiliate basis. There were no such extensions of credit by the Bank in 1998 and 1999. 13. EMPLOYEE BENEFIT PLANS In 1999, the Company established an Employee Stock Ownership Plan (ESOP) to provide an ownership interest in the Company and retirement benefits to substantially all full-time employees. The amount of the annual contributions is at the discretion of the Board of Directors. The Company contributed $90,000 in 1999. During 1999, the ESOP purchased 6,000 shares of Company stock in the open market. The Company has a Deferred Compensation Plan for Executives. Participation in the Plan is limited to a select group of management and other employees as determined by the Board of Directors. Under the terms of the Plan, participants may defer a portion of their cash compensation and receive minimum 50% matching contributions from the Company, which vest over the employee's remaining years of employment to retirement. The Company has guaranteed participants a certain minimum return on their contributions and on the Company's matching contributions. Contributions made by the Company for the years ended December 31, 1999, 1998 and 1997 were $43,000, $39,000, and $12,000, respectively. The Company also has a defined contribution plan covering all eligible salaried employees. Employees may, up to prescribed limits, contribute to the plan. The Company may also elect to make discretionary contributions to the plan based on the Company's earnings. No contributions were made by the Company in 1999, 1998 or 1997. 14. EARNINGS PER SHARE The following table reconciles the numerators and the denominators of the basic and diluted per share computations in accordance with SFAS No. 128 (in thousands, except per share amounts):
Year Ended December 31, --------------------------------------------------------------------------------------------------------- 1997 1998 1999 --------------------------------------------------------------------------------------------------------- Income Shares Per Share Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------- ----------- ------ --------- ----------- ------ --------- ----------- ------ Basic EPS Income available to $ 1,350 2,114 $ 0.64 $ 1,621 2,158 $ 0.75 $ 2,333 2,075 $ 1.12 common shareholders Effect of Dilutive Securities Stock options 96 146 107 --------------------------------------------------------------------------------------------------------- Diluted EPS Income available to common shareholders plus assumed conversions $ 1,350 2,210 $ 0.61 $ 1,621 2,304 $ 0.70 $ 2,333 2,182 $ 1.07 =========================================================================================================
44 15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION The condensed financial information for MCB Financial Corporation (parent company only) at December 31, 1998 and 1999, and the results of its operations and cash flows for the years then ended, is summarized as follows (dollar amounts in thousands): 1998 1999 Financial Condition: Assets: Cash and due from banks $ 264 $ 702 Investment in the Bank 12,713 13,625 Other 105 70 -------- -------- Total $ 13,082 $ 14,397 ======== ======== Liabilities and shareholders' equity: Shareholders' equity: Common stock $ 9,578 $ 10,068 Unrealized gain (loss) on investment securities available for sale - net 191 (518) Retained earnings 3,313 4,847 -------- -------- Total shareholders' equity 13,082 14,397 -------- -------- Total $ 13,082 $ 14,397 ======== ======== 1998 1999 Results of Operations: Dividend income from Bank $ 500 $ 750 Income - interest from loans 5 Income - interest from investments 26 28 Income - miscellaneous 1 Expenses - general and administrative 140 102 -------- -------- Income (loss) before equity in net income of the Bank 392 676 Equity in undistributed net income of the Bank 1,176 1,620 -------- -------- Income before income tax provision 1,568 2,296 Income tax benefit 53 37 -------- -------- Net income $ 1,621 $ 2,333 ======== ======== 45 1998 1999 Cash Flows: Cash flows from operating activities: Net income $ 1,621 $ 2,333 Reconciliation to cash used in operating activities: (Increase) in equity in undistributed net income of Bank (1,675) (2,371) Amortization 11 Decrease in other assets 29 53 Decrease in accrued interest payable and other liabilities (1) -------- -------- Cash (used in) provided by operating activities (15) 15 Cash flows from investing activities: Dividend received from Bank 500 750 Net (increase) decrease in loans held for investment (92) 92 -------- -------- Cash provided by investing activities 408 842 Cash flows from financing activities: Cash dividends paid (40) Cash payment for fractional shares resulting from stock dividend (2) Proceeds from the exercise of stock options 115 362 Purchases of common stock (847) (739) -------- -------- Cash used in financing activities (732) (419) Net (decrease) increase in cash and equivalents (339) 438 Cash and equivalents: Beginning of period 603 264 -------- -------- End of period $ 264 $ 702 ======== ======== 46 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of MCB Financial Corporation: We have audited the accompanying consolidated balance sheets of MCB Financial Corporation and subsidiary (the "Company") as of December 31, 1998 and 1999, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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. 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, such consolidated financial statements present fairly, in all material respects, the financial position of MCB Financial Corporation and its subsidiary as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP San Francisco, California January 14, 2000 47 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. The information required to be furnished pursuant to this item will be set forth under the captions "Election of Directors" and "Executive Officers" in the registrant's proxy statement (the "Proxy Statement") to be furnished to stockholders in connection with the solicitation of proxies by The Company's Board of Directors for use at the 2000 Annual Meeting of Shareholders to be held on May 17, 2000, and is incorporated herein by reference. Item 10. Executive Compensation The information required to be furnished pursuant to this item will be set forth under the caption "Executive Compensation of The Company and Metro Commerce" of the Proxy Statement, and is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required to be furnished pursuant to this item will be set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" of the Proxy Statement, and is incorporated herein by reference. Item 12. Certain Relationships and Related Transactions. The information required to be furnished pursuant to this item will be set forth under the caption "Certain Relationships and Related Transactions Regarding The Company and Metro Commerce" of the Proxy Statement, and is incorporated herein by reference. 48 Item 13. Exhibits and Reports on Form 8-K. (a) List of Exhibits: Exhibits: (2) -- Plan of acquisition, reorganization (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (3)(a) -- Articles of incorporation (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (3)(b) -- By-laws (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (4) -- Rights Agreement (incorporated by reference from the registrant's Form 8-A12G filed with the SEC on January 25, 1999). (10)(a)(1) -- Stock Option Plan (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (10)(a)(2) -- Deferred Compensation Plan for Executives (incorporated by reference to Exhibit (10)(a)(2) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(a)(3) -- 1999 Stock Option Plan (incorporated by reference to Exhibit A of registrant's Proxy Statement on Schedule 14A filed with the SEC on April 27, 1999). (10)(a)(4) -- Employee Stock Ownership Plan (10)(b) -- Leases (10)(b)(1) -- San Rafael Office Lease (incorporated by reference to Exhibit (10)(b)(1) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(b)(2) -- South San Francisco Office Lease (incorporated by reference to Exhibit (10)(b)(2) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(b)(3) -- Hayward Office Lease (incorporated by reference to Exhibit (10)(b)(3) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(b)(4) -- Upland Office Lease (incorporated by reference to Exhibit (10)(b)(4) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(b)(5) -- San Francisco Office Lease (353 Sacramento Street) (incorporated by reference to Exhibit (10)(b)(5) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1997). (10)(b)(6) -- Petaluma Office Lease (incorporated by reference to Exhibit (10)(b)(6) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1998). (10)(b)(7) -- San Franciso Office Lease (650 Townsend Street) (11) -- Statement re: computation of per share earnings (the information required to be furnished pursuant to this exhibit is contained in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements) (21) -- Subsidiaries of the small business issuer (the information required to be furnished pursuant to this exhibit is contained in the Notes to Consolidated Financial Statements) (27) -- Financial Data Schedule (b) Reports on Form 8-K. The Company filed the following Current Reports on Form 8-K: None 49 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, on the 24th day of March, 2000. By /s/ Charles O. Hall ------------------------------------- Charles O. Hall President and Chief Executive Officer (Principal Executive Officer); Director By /s/ Patrick E. Phelan ------------------------------------- Patrick E. Phelan Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) 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 indicated on the 24th day of March, 2000. Name Title - ---- ----- /s/ John Cavallucci Chairman; Director - --------------------------- John Cavallucci /s/ Charles O. Hall Director - --------------------------- Charles O. Hall /s/ Timothy J. Jorstad Director - --------------------------- Timothy J. Jorstad /s/ Catherine H. Munson Director - --------------------------- Catherine H. Munson /s/ Gary T. Ragghianti Vice Chairman; Director - --------------------------- Gary T. Ragghianti /s/ Michael J. Smith Director - --------------------------- Michael J. Smith /s/ Edward P. Tarrant Director - --------------------------- Edward P. Tarrant /s/ Randall J. Verrue Director - --------------------------- Randall J. Verrue 51 EX-10.A.4 2 EMPLOYEE STOCK OWNERSHIP PLAN Exhibit 10(a)(4) MCB FINANCIAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN Effective: January 1, 1999 Table of Contents Page ---- ARTICLE I - PURPOSE 1 1.1 Exclusive Benefit 1 1.2 No Rights of Employment Granted 1 ARTICLE II - DEFINITIONS 2.1 Accrued Benefit 2 2.2 Administrative Committee 2 2.3 Affiliated Employer 2 2.4 Beneficiary 2 2.5 Board 3 2.6 Cash-Out 3 2.7 Code 3 2.8 Compensation 3 2.9 Employee 4 2.10 Employer 4 2.11 Employer Account 4 2.12 ERISA 4 2.13 Exempt Loan 4 2.14 Fair Market Value 5 2.15 Family Member 5 2.16 Forfeiture 5 2.17 Highly Compensated Employee 5 2.18 Hour of Service 7 2.19 Leave of Absence 8 2.20 Net Profits 8 2.21 Normal Retirement Age 9 2.22 One Year Break in Service 9 2.23 Participant 10 2.24 Plan 10 2.25 Plan Administrator 10 2.27 Qualified Election Period 10 2.28 Qualified Participant 10 2.29 Qualifying Employer Security 11 2.30 Retirement 11 2.31 Service 11 2.32 Termination Date 12 2.33 Total and Permanent Disability 12 2.34 Total Service for Vesting 13 2.35 Trust 13 2.36 Trust Fund 13 2.37 Unallocated Stock Account 13 2.38 Year of Service for Accrual of Benefits 13 2.39 Year of Service for Participation 13 2.40 Year of Service for Vesting 14 ARTICLE III - ELIGIBILITY TO PARTICIPATE 14 3.1 Initial Entry 14 3.2 Resumption of Participation 14 ARTICLE IV - CONTRIBUTIONS TO THE TRUST 15 4.1 Amount of Contributions to Participants 15 4.2 Manner of Allocation 16 4.3 Permissible Types of Employer Contributions 17 4.4 Interim Allocation to Unallocated Stock Account 17 4.5 General Accounting 18 4.6 Additional Provisions 18 ARTICLE V - ADMINISTRATION OF ACCOUNTS 18 5.1 Investments 18 5.2 Invest in Single Fund and Reasonable Rules 19 5.3 Valuation of Assets and Allocation of Changes 19 5.4 Limitations on Allocations to Each Participant 20 (a) Defined Contribution Plan Limitations 20 (b) Defined Benefit Plan Limitations 21 (c) Social Security Retirement Age Limitations 22 (d) Combination Defined Benefit and Defined Contribution Plan Limitations 23 (e) Allocation Limitation - More Than One Defined Contribution Plan 24 5.5 Designation of Beneficiary 26 5.6 Participant Voting and Exercise of Stock Rights 26 ARTICLE VI - VESTING 27 6.1 Employer Account Vesting on Death, Retirement, or Total Permanent Disability 27 6.2 Employer Account Vesting on Termination 28 6.3 Restoration of Forfeitures 28 ARTICLE VII - DISTRIBUTION OF BENEFITS 29 7.1 Method of Distribution of Accounts 29 7.2 Time of Distribution 30 7.3 Segregation if Installment Distribution 33 7.4 Non-segregation if Installment Distribution 33 7.5 Distribution After Death of Participant 33 7.6 Distribution After Death of Beneficiary 34 7.7 Rollover Contributions and Distributions 34 7.8 Suspense Account for Terminated Participants 35 7.9 Unable to Locate Participant or Beneficiary 36 7.10 Repayment of Cash-Out 37 7.11 Options of Participants to Sell Stock 37 7.12 Right of First Refusal 39 7.13 Distribution of Dividends 39 7.14 Diversification of Investments 40 7.15 Qualified Domestic Relations Orders 41 ARTICLE VIII - DUTIES AND AUTHORITY OF TRUSTEE 41 8.1 Receive Payments 41 8.2 Evaluate Assets 42 8.3 Segregation of Accounts 42 8.4 Tax Returns and Reports 42 8.5 Powers 42 8.6 Expenses 45 8.7 Litigation 45 8.8 Written Instructions 46 8.9 Appointment of Investment Manager 46 8.10 Removal and Resignation of the Trustee 46 8.11 Loans from Disqualified Persons 46 ARTICLE IX - DUTIES AND AUTHORITY OF TRUSTEE OF ADMINISTRATIVE COMMITTEE 48 9.1 Appointment 48 9.2 No Discrimination 49 9.3 Majority Action 49 9.4 Powers 49 9.5 Filing Reports 50 9.6 Records and Information 50 9.7 Information to Participants 50 9.8 Compensation of Members 50 9.9 Review of Participant's Claims 51 9.10 Exercise of Stock Rights 51 ARTICLE X - MODIFICATIONS FOR TOP HEAVY PLANS 52 10.1 Application of Article 52 10.2 Definitions 52 (a) Top Heavy Plans 52 (b) Top Heavy Group 52 (c) Key Employee 53 (d) Amounts Included for Computation Purposes 54 (e) Non-Key Employee 54 (f) Top Heavy Accrual 55 10.3 Accelerated Vesting 55 10.4 Minimum Contributions 56 10.5 Limitation on Compensation Taken into Account Under Plan 57 10.6 Modification of Defined Benefit and Defined Contribution Plan Fraction 57 ARTICLE XI - AMENDMENT AND TERMINATION 58 11.1 Rights to Suspend or Terminate Plan 58 11.2 Successor Corporation 58 11.3 Amendment 58 11.4 One Hundred Percent (100%) Vesting on Termination of Plan 59 11.5 Plan Merger or Consolidation 59 ARTICLE XII - MISCELLANEOUS 59 12.1 Laws of California to Apply 59 12.2 Participant Cannot Transfer or Assign Benefits 60 12.3 Right to Perform Alternative Acts 60 12.4 Reversion of Contributions Under Certain Circumstances 60 12.5 Plan Administrator Agent for Service of Process 61 12.6 Filing Tax Returns and Reports 61 12.7 Indemnification 61 12.8 Number and Gender 62 12.9 Military Service 62 ARTICLE XIII - EXEMPT LOANS 63 13.1 Use of Proceeds 63 13.2 Interest Rate 63 13.3 Non-recourse 63 13.4 Limitations on Payment 64 13.5 Forfeiture of Qualifying Employer Securities 64 13.6 Limitation on Future Obligation 64 ARTICLE XIV - LIMITATIONS ON MATCHING CONTRIBUTIONS 65 14.1 Percentage Limitation on Matching Contributions 65 14.2 Basic Limitation 67 14.3 Alternative Limitation 67 14.4 Multiple Use Limitation 68 14.5 Correction of Average Contribution Percentage Test 69 14.6 Calculation of Income 69 14.7 Deadline for Distribution 70 14.8 Treatment as Annual Additions 70 14.9 Compliance with Treasury Regulations 70 MCB FINANCIAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN This Stock Bonus Employee Stock Ownership Plan and Trust Agreement (Plan) is made by and between MCB Financial Corporation a California corporation, having its principal place of business at 1248 Fifth Avenue, San Rafael, California 94901, herein called "Employer" and Charles 0. Hall, Timothy J. Jorstad and Gary T. Ragghianti, herein called "Trustees." Whereas, Employer desires to establish and maintain an employee stock ownership plan for the benefit of its Employees who shall qualify as participants (Participants) hereunder; Therefore, effective January 1, 1999, Employer hereby establishes an employee stock ownership plan and creates a related trust (Trust) for the purpose of carrying out such Plan and Trust on the following terms: ARTICLE I - PURPOSE 1.1 Exclusive Benefit. This Plan has been executed for the exclusive benefit of the Participants hereunder and their Beneficiaries. This Plan shall be interpreted in a manner consistent with this intent and with the intention of the Employer that this Plan and its related Trust satisfy Internal Revenue Code (Code) Section 401 and Code Section 501. This Plan is created for the sole purpose of enabling employees of the Employer to share in its growth. This Plan and Trust are intended to constitute a stock bonus employee stock ownership plan, within the meaning of Code Section 4975(e)(7), which will invest primarily in Employer stock. Under no circumstances shall the Trust Fund ever revert to or be used or enjoyed by the Employer, except as provided in the Reversion of Contributions Under Certain Circumstances section below. 1.2 No Rights of Employment Granted. The establishment of this Plan shall not be considered as giving any employee the right to be retained in the service of the Employer. ARTICLE II - DEFINITIONS The following capitalized words and phrases as used in this Plan and Trust Document shall have the meanings set forth below. 2.1 Accrued Benefit. The "Accrued Benefit" is the amount credited to the Employer Account of a Participant. 2.2 Administrative Committee. The "Administrative Committee" or "Committee" shall refer to the Administrative Committee, as defined in the Duties and Authority of Administrative Committee Article, below. 1 2.3 Affiliated Employer. "Affiliated Employer" shall mean the Employer and any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; an organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). 2.4 Beneficiary. A "Beneficiary" is any person, estate or trust who by operation of law, or under the terms of the Plan, or otherwise, is entitled to receive any Accrued Benefit of a Participant under the Plan. A "Designated Beneficiary" is any individual designated or determined in accordance with the Designation of Beneficiary section below, except that it shall not include any person who becomes a Beneficiary by virtue of the laws of inheritance or intestate succession. 2.5 Board. "Board" or "Board of Directors" shall mean the governing board of MCB Financial Corporation. 2.6 Cash-Out. A "Cash-Out" may be involuntary or voluntary. An involuntary Cash-Out is a distribution of Accrued Benefit to a former Participant which meets the following requirements: (i) the former Participant's entire non-forfeitable Accrued Benefit is distributed to him; (ii) the present value of the non-forfeitable Accrued Benefit of the Participant at the time of distribution does not exceed Five Thousand Dollars ($5,000), regardless of whether it had exceed Five Thousand Dollars ($5,000) at any time in the past, and (iii) the distribution is made on account of the Employee's termination of participation in the Plan. A voluntary Cash-Out is a distribution of Accrued Benefits to a former Participant which meets the following requirements: (i) the former Participant has voluntarily elected to receive the distribution; and (ii) the distribution is made on account of the Employee's termination of participation in the Plan. 2.7 Code. "Code" refers to the Internal Revenue Code of 1986, as amended. 2.8 Compensation. "Compensation" refers to all Compensation paid during the Plan Year under consideration as W-2 income by the Employer to an Employee, excluding director's fees and amounts deferred pursuant to Code Section 401(k)(2), or Code Section 403(b), or contributed to any welfare benefit plans maintained by the Employer through a reduction in the Employee's compensation which, pursuant to Code Section 125, are not included in the gross income of the Employee for the taxable year in which such amounts are contributed. It excludes all contributions by the Employer to the Plan and to any other retirement or deferred compensation plan maintained by the Employer and excludes amounts in 2 excess of One Hundred Fifty Thousand Dollars ($150,000) for the Plan Year or such other amount as may be prescribed by law in accordance with Code Section 401(a)(17). 2.9 Employee. An "Employee" is an individual who is employed by the Employer or who is on a Leave of Absence, and shall include leased Employees within the meaning of Code Section 414(n)(2). Directors acting solely in that capacity and independent contractors shall not be Employees. 2.10 Employer. The "Employer" shall mean MCB Financial Corporation and any Affiliated Employer to which the Board elects to extend coverage under this Plan and Trust pursuant to resolutions of the Board. 2.11 Employer Account. The "Employer Account" is the separate account maintained for each Participant to which all Employer contributions shall be allocated and to which Forfeitures shall be reallocated. If necessary or appropriate, the Employer Account shall be further segregated into subaccounts for Employer basic contributions and Employer matching contributions. 2.12 ERISA. "ERISA" refers to the Employee Retirement Income Security Act of 1974, as amended. 2.13 Exempt Loan. "Exempt Loan" shall mean a loan to the Plan by a disqualified person (as defined in Code Section 4975(e)(2)) or a loan to the Plan which is guaranteed by a disqualified person. Such loan includes a direct loan of cash, a purchase-money transaction, and an assumption of the obligation by the Plan. The Exempt Loan must satisfy the provisions of Treasury Regulation Section 54.4975-7(b). 2.14 Fair Market Value. "Fair Market Value" shall mean the closing price (or, if there is no closing price, then the closing bid price) of Qualifying Employer Securities as reported on the Composite Tape, or if not reported thereon, then such price as reported in the trading reports of the principal securities exchange in the United States on which such Qualifying Employer Securities are listed, or if the Qualifying Employer Securities are not listed on a securities exchange in the United States, the mean between the dealer closing "bid" and "ask" prices on the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System (NASDAQ), or NASDAQ's successor, or if not reported on NASDAQ, the Fair Market Value of the Qualifying Employer Securities as determined by a qualified independent appraiser meeting requirements similar to those contained in Treasury regulations under Code Section 170(a)(1) and Department of Labor Regulations under ERISA Section 3(18). 3 2.15 Family Member. A "Family Member" includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. 2.16 Forfeiture. "Forfeiture" refers to the amount of non-vested Accrued Benefits in a Participant's Employer Account which are reallocated to the Employer Accounts of other Participants. 2.17 Highly Compensated Employee. A "Highly Compensated Employee" means a highly compensated active Employee and a highly compensated former Employee. A highly compensated active Employee for a determination year includes any Employee who performs service for the Employer during the determination year and who: (i) was a five percent (5%) owner (as defined in Code Section 416(i)(1)) of the Employer at any time during the determination year or the look-back year, or (ii) for the look-back year had compensation from the Employer in excess of Eighty Thousand Dollars ($80,000) (as adjusted pursuant to Code Section 415(d)) and, if the Employer elects for such look-back year, was in the top-paid group of Employees for the look-back year. An Employee is in the top-paid group of Employees for any year if such Employee is in the group consisting of the top twenty percent (20%) of the Employees when ranked on the basis of compensation (as defined in Code Section 414(q)(4)) paid during such year. For purposes of determining the number of Employees in the top-paid group, the following Employees shall be excluded: (i) Employees who have not completed six (6) months of service; (ii) Employees who normally work less than seventeen and one-half (17.5) hours per week; (iii) Employees who normally work during not more than six (6) months during any year; (iv)Employees who have not attained age twenty-one (21); and (v) except to the extent provided in Treasury Regulations, Employees who are included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the Employer. For this purpose, the determination year shall be the Plan Year unless the Employer elects a calendar year. The look-back year shall be the twelve (12) month period immediately preceding the determination year, or, if elected by the Employer, the calendar year ending with or within the applicable determination year (or, in the case of a determination year that is shorter than twelve (12) months, the calendar year ending with or within the twelve (12) month period ending with the end of the applicable determination year), or, if elected, the calendar year immediately preceding the calendar year determination year. A highly compensated former Employee for a Plan Year includes any Employee who separated from service (or was deemed to have separated) prior to such Plan Year, performs no services for the Employer during such Plan Year, and was a highly compensated active Employee for either the Plan Year during which the separation occurred (or was deemed to have occurred) or any Plan Year ending on or after the Employee's fifty-fifth (55th) birthday. 4 The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group and the compensation that is considered, will be made in accordance with Code Section 414(q) and the regulations promulgated thereunder. 2.18 Hour of Service. "Hour of Service" means: (a) Each hour for which an Employee is directly or indirectly compensated or entitled to Compensation from the Employer for the performance of duties during the applicable computation period; (b) Each hour for which an Employee is directly or indirectly compensated or entitled to Compensation from the Employer(irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, disability, lay-off, military duty or leave of absence) during the applicable computation period; and (c) Each hour for which back pay is awarded or agreed to by the Employer, without regard to mitigation of damages. Hours of Service will be credited for employment with other members of an affiliated service group (under Code Section 414(m)), a controlled group of corporations (under Code Section 414(b)), or a group of trades or businesses under common control (under Code Section 414(c)) of which the Employer is a member or any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). Hours of Service will also be credited for any individual considered an Employee for purposes of this Plan under Code Section 414(n). Notwithstanding subparagraph (b) above, no more than five hundred one (501) Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period), and an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a Plan maintained by the Employer solely for the purpose of complying with applicable worker's compensation, unemployment compensation or disability insurance laws. In addition, Hours of Service are not required to be credited hereunder for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. The provisions of Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations are incorporated herein by reference. For purposes of this Hour of Service section, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly or indirectly through a trust, fund or insurer to which the Employer contributes or pays premiums. 5 2.19 Leave of Absence. A "Leave of Absence" shall refer to that period during which the Participant is absent without Compensation and for which the Administrative Committee, in its sole discretion, has determined him to be on a "Leave of Absence" instead of having terminated his employment. (However, such discretion of the Administrative Committee shall be exercised in a nondiscriminatory manner.) In all events, a Leave of Absence by reason of service in the armed forces of the United States shall end no later than the time at which a Participant's reemployment rights as a member of the armed forces cease to be protected by law and a Leave of Absence for any other reason shall end after six (6) months, except that if the Participant resumes employment with the Employer prior thereto, the Leave of Absence shall end on such date of resumption of employment. The date that the Leave of Absence ends shall be deemed the Termination Date if the Participant does not resume employment with the Employer. In determining a Year of Service for Accrual of Benefits, all such Leaves of Absence shall be considered to be periods when the Employee is a Participant. 2.20 Net Profits. The "Net Profits" mean the Employer's Net Profits for the taxable year of the Employer (coinciding with or within which the plan year ends) as calculated at the end of the taxable year, in accordance with the Employer's regular accounting practices, before state and federal income taxes and without reduction by reason of the Employer's contributions under the Plan and any other Plan maintained by the Employer and described in Code Section 401 (a) and Section 403 (a). The "Net Profits" shall also mean the Employer's accumulated Net Profits for all years prior to the taxable year of the Employer, described in the preceding paragraph of this section. Such accumulated Net Profits shall be calculated in accordance with the Employer's regular accounting practices, before state and federal income taxes which would be refunded (as a result of contributions to the Plan), without reduction by reason of the Employer's contributions, made for the current Plan Year, under the Plan and any other Plan maintained by the Employer and described in Code Section 401 (a) or Section 403(a). 2.21 Normal Retirement Age. The "Normal Retirement Age" is attained on or next following the later of: (a) the date a Participant attains age sixty-five (65); or (b) the fifth (5th) anniversary of the Participant's becoming a Participant in the Plan. 2.22 One Year Break in Service. A "One Year Break in Service" means a Plan Year in which the Participant has not completed more than five hundred (500) Hours of Service. However, in determining a One Year Break in Service for a Plan Year in which, or following which, a maternity or paternity absence (as defined below) occurs, the following shall apply: the Hours of Service which normally would have been credited but for the maternity or paternity absence (or eight (8) Hours of Service per day if the Administrative Committee is unable to determine the Hours of Service which normally would have been credited) shall be credited to the Plan Year in which such absence begins, if the Employee would incur a One Year Break in Service if the hours were not so credited; in all other cases the Hours of Service shall be credited to the following Plan Year. The total Hours of Service credited under a maternity or paternity absence shall not exceed five hundred one (501) hours. A "maternity or paternity absence" is one in which the Employee is absent from work because of: (i) the pregnancy of the Employee, (ii) the birth of a child of the Employee, (iii) the placement of a child with the Employee in connection with the adoption of such child by the Employee, or (iv) the caring for such child immediately following such birth or placement. 6 As a condition of an Employee being credited with Hours of Service pursuant to this paragraph, the Administrative Committee can require that the Employee timely furnish such information as is reasonably necessary to establish that the absence from work was for a cause stated in subparagraphs (i)-(iv) and the number of days attributable to such cause. 2.23 Participant. A "Participant" shall refer to every Employee or former Employee who has met the applicable participation requirements of Article III. 2.24 Plan. "Plan" refers to this Stock Bonus Employee Stock Ownership Plan and Trust Agreement, which shall be known as the MCB Financial Corporation Employee Stock Ownership Plan. 2.25 Plan Administrator. The "Plan Administrator" shall be the Administrative Committee designated in a resolution adopted by the Board of Directors, pursuant to Article IX, who shall accept the designation in writing. 2.26 Plan Year. A "Plan Year" is the period from the first day of January to the last day of December, annually. 2.27 Qualified Election Period. "Qualified Election Period" shall mean the period of six (6) Plan Years beginning with the later of (i) the Plan Year after the Plan Year in which the Participant attains age fifty-five (55); or, (ii) the Plan Year after the Plan Year in which the Participant first becomes a Qualified Participant. 2.28 Qualified Participant. "Qualified Participant" shall mean a Participant who has attained age fifty-five (55) and who has completed at least ten (10) years of participation in the Plan. 2.29 Qualifying Employer Security. "Qualifying Employer Security" shall mean Common Stock of the Employer which meets the requirements of Code Section 409(1). 2.30 Retirement. "Retirement" refers to the termination of employment of an Employee who has attained at least the Normal Retirement Age. The Employee may work beyond Normal Retirement Age, in which case Employer contributions and Forfeitures shall continue to be allocated to the Employer Account of the Employee. 7 2.31 Service. "Service" means: (a) The period (measured in years and days) for which an Employee is directly or indirectly compensated or entitled to Compensation from the Employer for the performance of duties during the applicable computation period; (b) The period for which an Employee is directly or indirectly compensated or entitled to Compensation from the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, disability, lay-off, military duty or leave of absence) during the applicable computation period; and (c) Each period after the effective date of this Plan for which an Employee was directly or indirectly paid or entitled to be paid by the Employer. Service will be credited for employment with other members of an affiliated service group (under Code Section 414(m)), a controlled group of corporations (under Code Section 414(b)), or a group of trades or businesses under common control (under Code Section 414(c)) of which the Employer is a member or any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o) for the period of such affiliation or common control. Service with a predecessor employer, however, will not be recognized for purposes of eligibility, vesting or benefit accrual unless specifically required by the Code or ERISA or unless the Plan is amended by the Board to provide for such recognition. Notwithstanding subparagraph (b), above, no more than five hundred one (501) Hours of Service is required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period), and for which an Employee is directly or indirectly paid, or entitled to payment, if such payment is made or due under a plan maintained by the Employer solely for the purpose of complying with applicable worker's compensation, unemployment compensation or disability insurance laws. The provisions of Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations are incorporated herein by reference. 2.32 Termination Date. The "Termination Date" shall be the date on which the earliest of the following events occurs: (a) A Participant's Retirement, (b) A Participant's termination of employment as a result of total and permanent disability; (c) A Participant's death, or (d) A Participant's termination of employment for any other reason. 8 2.33 Total and Permanent Disability. "Total and Permanent Disability" shall refer to the Participant suffering from a physical or mental condition which, based upon appropriate medical reports and examinations, results in the inability to perform his usual duties for the Employer resulting in termination of service with the Employer, and which qualifies as Total and Permanent Disability under the federal Social Security Act. 2.34 Total Service for Vesting. "Total Service for Vesting" shall mean the sum of each separate Year of Service for Vesting credited to the Participant; however, if the Participant incurs at least five (5) consecutive One Year Breaks in Service, his Years of Service for Vesting rendered after such break in service shall only be counted for purposes of determining his vested benefits accruing after such break in service, not for determining his -vested benefits accruing before such break. 2.35 Trust. "Trust" means the Trust created under this Employee Stock Ownership Plan and Trust Agreement. 2.36 Trust Fund. The "Trust Fund" consists of the Employer contributions held by the Plan and any income or appreciation thereon. 2.37 Unallocated Stock Account. The Account used to hold Qualifying Employer Securities acquired with loan proceeds pursuant to the "Loans from Disqualified Persons" section below. 2.38 Year of Service for Accrual of Benefits. A "Year of Service for Accrual of Benefits" means a Plan Year during which the Employee had not less than one thousand (1,000) Hours of Service as a Participant. If the Participant entered the Plan other than on the first (1st) day of the Plan Year, all Hours of Service rendered by the Participant during that Plan Year, whether or not rendered as a Participant, shall be treated as if they were Hours of Service as a Participant. 2.39 Year of Service for Participation. A "Year of Service for Participation" means the Plan Year which includes the Employees date of hire provided the Employee was credited with not less than one thousand (1,000) Hours of Service during such Plan Year. If the Employee does not have one thousand (1,000) Hours of Service for such Plan Year, a Year of Service for Participation shall be the earliest Plan Year in which the Employee is credited with one thousand (1,000) Hours of Service. 9 In case the Employee completes at least one (1) Year of Service for Participation and then has at least a One Year Break in Service, a Year of Service for Participation following such break in service shall begin on the first day following the One Year Break in Service on which his employment resumes. If the Employee does not perform one thousand (1,000) Hours of Service during the Plan Year which includes such day, a Year of Service for Participation shall be the earliest Plan Year in which the Employee has one thousand (1,000) Hours of Service. 2.40 Year of Service for Vesting. A "Year of Service for Vesting" shall mean a Plan Year, after the effective date of this Plan, during which the Employee had not less than one thousand (1,000) Hours of Service after attaining age eighteen (18). ARTICLE III - ELIGIBILITY TO PARTICIPATE 3.1 Initial Entry. Every Employee who has attained the age of twenty-one (21) and completed one (1) Year of Service for Participation shall participate in the Plan on the first (1st) day of the Plan Year in which such eligibility requirements are met. All Participants shall be required to furnish such information to the Administrative Committee as it may reasonably request for the proper administration of the Plan. Service with a predecessor employer shall not be recognized for eligibility or determining an Employee's Plan entry date. 3.2 Resumption of Participation. A Participant who is reemployed by the Employer without having incurred a One Year Break in Service shall be a Participant as of the first (1st) day of the month following the date of his reemployment. If an Employee incurs at least a One Year Break in Service, his active participation in the Plan shall be suspended until he completes a Year of Service for Participation following such One Year Break in Service. Upon completing a Year of Service for Participation after such One Year Break in Service, measured from his re-employment commencement date, the Participant will be readmitted to active participation in the Plan as of the first day of the Plan Year in which the Participant completes such Year of Service for Participation. The Committee may adjust the above service requirement, as necessary, to make the Plan available to a newly-acquired Employee group, provided that the adjustment (1) is not more restrictive than the above requirement, and (2) does not discriminate in favor of Highly Compensated Employees. ARTICLE IV - CONTRIBUTIONS TO THE TRUST 4.1 Amount of Contributions to Participants. Subject to the rights of the Employer under Article XI, and the limitations of Article XIV on Employer matching contributions, the Employer may make discretionary contributions to the Trust beginning with the first Plan Year ending on or after the effective date of the Plan. The amount of all contributions shall be discretionary with the Employer and shall be paid to the Trustee on or before the time required by law for filing the Employer's federal income tax return (including extensions) for the year with respect to which the contribution is made. However, no Employer contributions may be made in any Plan Year to the extent that they would be directly allocated to the suspense account created pursuant to the Limitation on Allocations to Each Participant section 10 below, or the maximum amount deductible from Employer's income for such year under Code section 404(a)(3) or 404(a)(9) would be exceeded, whichever is applicable, unless such excess contribution is necessary to make payments on an Exempt Loan. Notwithstanding any other provision contained herein, the Employer shall make a contribution each year in an amount not less than the amount required to make any payment due during such year under any Exempt Loan. Discretionary Employer contributions shall include: (a) Discretionary basic contributions in an amount decided upon and fixed (in dollar amount or by formula) by Employer and declared to all Participants, (b) Discretionary matching contributions in an amount decided upon and fixed (in dollar amount or by formula) by Employer and declared to all Participants who are making elective contributions under any cash or deferred arrangement (within the meaning of Code section 401(k)) sponsored by the employer, and (c) Such other discretionary contributions as the Employer shall deem necessary to comply with the Contribution Percentage requirements of Code section 401(m)(2) for a Plan Year. The Employer may designate all or any part of a discretionary contribution as a contribution to the matching contribution portion of the Plan that shall be used for Code section 401(m) purposes. Any discretionary contributions designated as a contribution to the matching contribution portion of the Plan shall satisfy the requirements for qualified nonelective contributions treated as matching contributions under Code section 401(m)(4)(C). Such contributions shall be allocated as of the last day of that Plan Year to any or all Participants on that date, other than Participants who are Highly Compensated Employees, in accordance with the average of their respective Actual Contribution Percentage for that Plan Year. 4.2 Manner of Allocation. (a) All discretionary basic contributions by the Employer for any Plan Year, reduced by Forfeitures, of such contributions if any, during such year, shall be allocated as of the last day of such year to the Employer Account of each individual Participant, who is an Employee on the last day of such Plan Year, and who has a Year of Service for Accrual of Benefits for the Plan Year, in the same proportion that each such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. Employees who terminate employment before the last day of the Plan Year on account of death or Retirement shall receive an allocation regardless only if they have a Year of Service for Accrual of Benefits for such Plan Year. Employees who terminate employment before the last day of the Plan Year on account of Total and Permanent Disability shall receive an allocation only if they have a Year of Service for Accrual of Benefits for such Plan Year. (b) All discretionary matching contributions by the Employer for any Plan Year, reduced by Forfeitures of such contributions, if any, during such year, shall be allocated as of the last day of such year to the Employer Account of each individual Participant in the same proportion that each such Participant's elective deferral contributions for the Plan Year 11 to the cash or deferred arrangement maintained by the Employer, bears to the total elective deferral contributions for the Plan Year to the cash or deferred arrangement maintained by the Employer made by all such Participants. (c) If allocation of Employer contributions in accordance with section (a) above will result in an allocation of more than one-third (1/3) of the total contributions for a Plan Year to the accounts of Highly Compensated Employees, then such amounts may be reallocated so that it will be allocated to the Participants who are not Highly Compensated Employees. Notwithstanding anything to the contrary contained in this Manner of Allocation section, no Qualifying Employer Securities may be allocated to the Employer Account of any Participant who sold such Qualifying Employer Securities to the Plan, any person who is a member of the family of such person (within the meaning of Code section 267(c)(4)), or any person who owns more than twenty-five percent (25%) in value of any class of outstanding Qualifying Employer Securities (after the application of Code section 318(a)). 4.3 Permissible Types of Employer Contributions. Payments on account of the contributions due from the Employer for any year may be made in cash or in kind, specifically including Qualifying Employer Securities; except that assets may not be contributed if such contribution violates the prohibited transaction rules of Code Section 4975, or the corresponding rules under ERISA Section 406, if applicable. 4.4 Interim Allocation to Unallocated Stock Account. Qualifying Employer Securities purchased with an Exempt Loan when initially acquired by the Trustees shall be credited to the Unallocated Stock Account. The balance in the Unallocated Stock Account shall be released in accordance with Section 8.11 and the Qualifying Employer Securities so released shall be allocated as of the last day of each Plan Year in accordance with Manner of Allocation section above. 4.5 General Accounting. The Committee shall establish accounting procedures for the purpose of making the allocations to Participant's Accounts provided for in this Article IV. The Committee shall maintain adequate records of the aggregate cost basis of Qualifying Employer Securities allocated to each Participant's Employer Account. The Committee shall also keep separate records of financed shares and discretionary contributions (and any earnings thereon) made for the purpose of enabling the Trust to repay any Exempt Loan. From time to time, the Committee may modify the accounting procedures for the purposes of achieving equitable and nondiscriminatory allocations among the accounts of Participants in accordance with the general concepts of the Plan, the provisions of this Article IV and the requirements of the Code and ERISA. 4.6 Additional Provisions. Employer contributions shall not be made for any Plan Year in amounts which cannot be allocated to Participant's accounts by reason of the allocation limitations described in Article V or in amounts which are not deductible under Code Section 404(a). Any Employer Contributions which are not deductible under Code Section 404(a) may be returned to the Employer by the Trustees (upon the direction of the Employer) within one (1) year after the disallowance of the deduction or after it is determined that the deduction is not available. In the event that Employer Contributions are paid to the Trust by reason of a mistake of fact, such Employer Contributions may be returned to the Employer by the Trustees (upon the direction of the Employer) within one (1) year after the payment to the Trust. 12 ARTICLE V - ADMINISTRATION OF ACCOUNTS 5.1 Investments. The amounts allocated to the Employer Accounts shall be invested by the Trustees as directed in accordance with Article VIII, primarily in Qualifying Employer Securities. 5.2 Invest in Single Fund and Reasonable Rules. The Trustees may cause all contributions paid to it by the Employer and the income therefrom, without distinction between principal and income, to be held and administered as a single fund, and the Trustees shall not be required to invest separately any share of any Participant except as provided in the Non-segregation if Installment Distribution section below. The Trustees may adopt reasonable rules for the administration of such common fund and for the determination of the proportionate interest of each Participant in the fund. 5.3 Valuation of Assets and Allocation of Changes. The assets of the Trust Fund will be valued as of the close of the last day of each Plan Year at their Fair Market Value in accordance with the Fair Market Value definition in Article II and the Employer Account of each Participant (or Employer Accounts if the Participant has Accrued Benefits for service incurred both prior and subsequent to a One Year Break in Service), including any Employer Account held in suspense, shall be adjusted for any net appreciation or net depreciation in the assets of the Plan and any net income or net loss of the Trust for such year, with each account being credited or charged in the ratio that the amount of the account (as of the close of the last day of the Plan Year) bears to the total (as of the close of the last day of the Plan Year) of all remaining non-segregated accounts. For the purpose of such adjustment of accounts, any contribution made by the Employer with respect to that Plan Year shall be considered as having been made immediately after such evaluation and adjustment. In making the adjustments required by this section the value of any amounts segregated in accordance with the Non-segregation if Installment Distribution section below, shall not be considered in determining the amount of net appreciation, depreciation, gain or loss to be allocated to such account. The amount of any net appreciation, depreciation, gain or loss with respect to such cash value or segregated account shall be allocated to the individual account with respect to which it arose. In addition to the evaluations required by the first sentence of this section, the Trust Fund may be evaluated at such other times during the Plan Year as the Administrative Committee deems appropriate using the method set forth in the Fair Market Value definition in Article II.For purposes of all computations required by this section, the accrual method of accounting shall be used to value the Trust Fund and the assets thereof at their fair market value as of each valuation date. Qualifying Employer Securities shall be accounted for as provided in Treasury Regulation Section 1.402W-1(b)(20), as amended, or any regulation or statute of similar import. 5.4 Limitations on Allocations to Each Participant. (a) Defined Contribution Plan Limitations. Notwithstanding any other provision of this Plan the maximum annual addition for any Plan Year which can be made to any individual Participant's Employer and Participant accounts, taken together, is the lesser of Thirty Thousand Dollars ($30,000) (or, if greater, one-fourth (1/4) of the defined benefit dollar limitation set forth in Code Section 415(b)(1) as in effect for the Plan Year) or twenty-five percent (25%) of 13 the Participant's Compensation. In addition the increased limitations provided in Code Section 415(c)(6) shall apply if appropriate. For purposes of Subsections 5.4(a), (b), and (c) the annual addition is the sum of the following amounts allocated to the accounts of the individual Participant for the Plan Year of the Trust (which shall be the limitation year for purposes of Code Section 415) under this and all other defined contribution type plans maintained by the Employer: (i) Employer contributions; (ii) Forfeitures (if applicable); (iii) Participant contributions; (iv) Amounts allocated to an individual medical account (as defined in Code Section 415(1)(2)) that is part of a defined benefit plan maintained by the Employer; and (v) Amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, that are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer. If Subsections 5.4(a), (b), and (c) limit the amount which can be allocated to the Employer Account of any Participant for a Plan Year, the excess amount which cannot be allocated for the Plan Year shall be held in the suspense account to be allocated on the last day of each succeeding Plan Year until the funds in the suspense account have been completely reallocated. No further Employer contributions may be made to the Plan until the suspense account has been completely reallocated. Any Participant contributions which exceed the limitations of Subsections 5.4(a), (b), and (c) shall be returned to the Participant. No investment gains and losses or other income shall be allocated to the suspense account. (b) Defined Benefit Plan Limitations. As to any defined benefit plan maintained by the Employer for any Plan Year the annual benefit cannot exceed the lesser of: (i) Ninety Thousand Dollars ($90,000) (or such other figure as determined in accordance with the cost of living adjustment procedure of Code Section 415(d), but only for the year in which such adjustment is effective), or (ii) One hundred percent (100%) of the Participant's average annual compensation for the Participant's three highest paid consecutive Plan Years; however, benefits of up to Ten Thousand Dollars ($10,000) during a Plan Year can be paid without regard to the one hundred percent (100%) limitation if the total retirement benefits payable to an Employee under all defined benefit plans (as defined in Code Section 414(j)) maintained by the Employer for the present and any prior Plan Year do not 14 exceed Ten Thousand Dollars ($10,000) and the Employer has not at any time maintained a defined contribution plan (as defined in Code Section 414(i)) in which the Employee was a Participant. If the Participant has less than ten (10) years of participation in the Plan (as defined in Code Section 415(b)(5)), the applicable limitation in Paragraph (b)(i) of this Section shall be reduced by multiplying such limitation by a fraction. The numerator of such fraction shall be the number of years, or part thereof, of participation in the defined benefit plan maintained by the Employer; the denominator shall be ten (10) years. For purposes of this Subsection 5.4(b), the "annual benefit" means a benefit payable annually in the form of a straight life annuity with no ancillary or incidental benefits and with no Employee or Rollover Contributions. To the extent that ancillary benefits are provided, the limits set forth in Subparagraphs; (a) and (b) of the first paragraph of this Section will be reduced actuarially, using an interest rate assumption equal to the greater of five percent (5%) or the interest rate specified in the Plan to reflect such ancillary benefits. (c) Social Security Retirement Age Limitations. "Social Security Retirement Age" means the age used as the Retirement age under Section 216(l) of the Social Security Act, which is presently age sixty-five (65) for a person born before 1939, age sixty-six (66) for a person born between 1939 and 1954, and age sixty-seven (67) for a person born after 1954. If distribution of retirement benefits begins before the Social Security Retirement Age, the Ninety Thousand Dollar ($90,000) limitation as described in Subsection 5.4(b) shall be reduced actuarially on the following basis: (i) If the Social Security Retirement Age is sixty-five (65) and distribution of benefits begins after the Participant has attained age sixty-two (62) but before the Social Security Retirement Age, the reduction shall be five-ninths (5/9) of one percent (1%) per month for each month by which the first distribution precedes the Social Security Retirement Age; (ii) If the Social Security Retirement Age exceeds sixty-five (65) and the distribution of benefits begins after the Participant has attained age sixty-two (62), the reduction shall be the sum of (A) and (B), where (A) Is five-ninths (5/9) of one percent (1%) per month for each of the first thirty-six (36) months; and (B) Is five-twelfths (5/12) of one percent (1%) per month for each additional month (up to twenty-four (24) months) by which benefits commence before the month of the Participant's Social Security Retirement Age; 15 (iii) If the distribution of benefits begins before the Participant has attained age sixty-two (62), the limitation will be the actuarial equivalent of what it would have been if the first distribution had been made when the Participant had attained age sixty-two (62); the assumed interest rate for such calculation shall be five percent (5%). For purposes of this Subsection 5.4(b) the "average annual Compensation for a Participant's three (3) highest paid consecutive years" shall mean the Participant's greatest aggregate Compensation during the period of three (3) consecutive Plan Years in which the individual was an active Participant in the Plan. (d) Combination Defined Benefit and Defined Contribution Plan Limitations. For years beginning before January 1, 2000, if the Employer maintains one (1) or more defined benefit plans in addition to this Plan (and any other defined contribution plans) the limitation of this Subsection 5.4(c) shall apply in addition to those of Subsections 5.4(a) and 5.4(b). The limitation of this Subsection 5.4(c) is that the sum of the defined benefit plan fraction and the defined contribution plan fraction for any Plan Year may not exceed 1.0. The "defined benefit plan fraction" is a fraction: (i) The numerator of which is the projected annual benefit of the Participant under the Plan, (determined as of the close of the Plan Year); and (ii) The denominator of which (determined as of the close of the Plan Year) is the lesser of (A) the maximum dollar limitation, for such year as stated in Paragraph 5.4(b)(i), multiplied by 1.25, or (B) the percentage of compensation limitation which may be taken into account pursuant to Paragraph 5.4(b)(ii) multiplied by 1.4. The "defined contribution plan fraction" for any year is a fraction: (i) The numerator of which is the sum of the annual additions (as defined in Code Section 415(c)(2)) to the Participant's account as of the close of the Plan Year; and (ii) The denominator of which is the sum, for all years of an Employee's service with the Employer, of the lesser for each year of (A) the maximum dollar limitation as stated in the first paragraph of Subsection 5.4(a) for such year multiplied by 1.25 or (B) the percentage of Compensation amount in effect as stated in the first paragraph of Subsection 5.4(a) for such year multiplied by 1.40. With respect to each Participant, for Years of Service ending prior to January 1, 1983, the amount taken into account in the denominator of the defined contribution plan fraction, as set forth above, may, at the election of the Plan Administrator, be an amount equal to the denominator of the defined contribution plan fraction for the Plan Year ending in 1982, as determined under the law immediately prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982, multiplied by the transition fraction described in Code Section 415(e)(6). 16 (e) Allocation Limitation- More Than One Defined Contribution Plan. If the Employer contributes to more than one (1) defined contribution plan and as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's Compensation or other limited facts and circumstances which the Internal Revenue Service finds to be applicable, an amount which would otherwise be allocated would result in the Annual Addition limitation being exceeded with respect to any Participant, the excess amount shall be eliminated as follows: (i) Any nondeductible Employee voluntary contributions under any other defined contribution plan, to the extent they would reduce the excess amount will be returned to the Participant. (ii) Any unmatched Employee salary deferrals under a cash or deferred arrangement within the meaning of Code Section 401(k), to the extent they would reduce the excess amount will be returned to the Participant. To the extent necessary to further reduce the excess amount, all salary deferrals under a cash or deferred arrangement within the meaning of Code Section 401(k), whether or not there was a corresponding matching contribution, will be returned to the Participant. (iii) If the sum of the Annual Additions to a Participant's Accounts, in all plans, considered as one (1), would exceed said limitations, and in the event that the return to a Participant of the Participant's contributions under the preceding paragraphs should still fail to alleviate such excess amount, then the amount of such excess shall be reallocated in the profit sharing plan of the Employer then in the defined contribution pension plan (or if more than one (1) defined contribution pension plan, in the order selected by the Employer). The otherwise permissible Annual Additions for any Participant under this Plan may also be further reduced to the extent necessary as determined by the Employer, to prevent disqualification of benefits payable to Participants who also may be participating in another tax-qualified pension, profit sharing, savings or stock bonus plan of the Employer. The Employer shall advise affected Participants of any additional limitations on their Annual Additions required by the foregoing. Any excess amounts attributed to this Plan shall be returned to the Employer or be held in a Code Section 415 limitation suspense Account. 5.5 Designation of Beneficiary. Each Participant may designate from time to time in writing one or more Beneficiaries, who will receive the Participant's vested Accrued Benefit in the event of the Participant's death. If the Participant dies without having made a Beneficiary designation, the Trustees shall distribute such benefits in the following order of priority to the deceased Participant's: 17 (a) Spouse, (b) Lineal descendants, (c) Parents, or (d) Estate. However, in the event of the death of a married Participant, the surviving spouse must be the sole Beneficiary unless the surviving spouse has consented in writing to a different election, has acknowledged the effect of such election, and the consent and acknowledgment are witnessed by a member of the Administrative Committee or a notary public. The consent of spouse shall not be necessary if it is established to the satisfaction of the Administrative Committee that there is no spouse, the spouse cannot reasonably be located, or for such other reasons as the regulations may prescribe. The consent of a spouse as reason for not requiring such consent shall be applicable only to that spouse. If the spouse of a Participant becomes locatable or if a Participant remarries, it shall be the duty of the Participant to bring that fact to the attention of the Administrative Committee. If the Participant so notifies the Administrative Committee, the Administrative Committee shall then, if applicable, proceed to make available to such spouse the consent of spouse procedures described in this Section. 5.6 Participant Voting and Exercise of Stock Rights. (a) Each Participant shall be entitled to direct the Trustees as to the manner in which any Qualifying Employer Securities which are a registration-type class of securities (as defined in Code Section 409(e)(4) which are allocated to the Employer Account of the Participant are to be voted and as to the manner in which other rights with respect to such Qualifying Employer Securities are to be exercised. With respect to any class of Qualifying Employer Securities which is not a registration-type class of securities (as defined in Code Section 409(e)(4)), a Participant shall be entitled to direct the Trustees as to the manner in which voting rights will be exercised with respect to any corporate matter which involves the voting of such shares allocated to the Participant's account with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transactions as may be prescribed in Treasury regulations. (b) The Trustees shall notify Participants at least thirty (30) days (or a lesser period if thirty (30) days if impossible or impractical) prior to the voting or other exercise of rights referred to in paragraph (a) of this section. The notice shall include all proxy solicitations and other materials distributed to other shareholders holding any of the shares of stock described in this Plan as Qualifying Employer Securities. (c) The Trustees shall vote any shares and exercise any other rights with respect to applicable Qualifying Employer Securities in the manner instructed by the Participant. The Trustees shall vote any shares and exercise any other rights with respect to Qualifying Employer Securities as to which it receives no such instructions (either because the Participant does not timely give such instructions, or because the shares have not yet been allocated to the Employer Accounts, or if because the Trustees are not required to be directed) as the Trustees in their sole discretion, but acting in a fiduciary capacity, deems in the best interests of the Participants and their Beneficiaries. 18 ARTICLE VI - VESTING 6.1 Employer Account Vesting on Death, Retirement, or Total Permanent Disability. If a Participant's employment is terminated for death, on or after Normal Retirement Age, or due to Total and Permanent Disability, one hundred percent (100%) of the Accrued Benefit in his Employer Account, shall vest in the Participant (or in his Beneficiary, as the case may be) and shall be distributed or set aside in accordance with the provisions of Article VII. 6.2 Employer Account Vesting on Termination. If a Participant's employment is terminated except for death, Total and Permanent Disability, or on or after Normal Retirement Age the following percentages of the Accrued Benefit in the Employer Account of the Participant shall vest in the Participant and shall be distributed to or set aside for him in accordance with the provisions of Article VII: Years of Service Vested Percentage ---------------- ----------------- Less than 3 0% 3 40% 4 70% 5 100% The Accrued Benefit of a Participant which is not vested as above provided shall be retained by the Trustees for allocation as a Forfeiture, in accordance with the provisions of Manner of Allocation section above, Suspense Account for Terminated Participants and Unable to Locate Participant or Beneficiary sections below. 6.3 Restoration of Forfeitures. If a Participant is less than one hundred percent (100%) vested and he receives a distribution from the Plan and forfeits part of his Accrued Benefit, and then, if the Participant resumes employment with the Employer before the occurrence of five (5) consecutive One Year Breaks in Service, until such time as there is a fifth (5th) consecutive One Year Break in Service, the Participant's vested portion of the balance in his account at any time shall be equal to an amount ("X") determined by the formula X = P(AB + D) - D, where "P" is the vested percentage of the Participant at such time, "AB" is the balance in the Participant's account at such time and "D" is the amount distributed as a severance of employment benefit and not previously repaid by the Participant. Notwithstanding the preceding paragraph, if the Participant returns to employment prior to the time he incurs five (5) consecutive One Year Breaks in Service, he shall have the right to repay to the Plan the full amount of the benefits previously distributed to him, provided that such repayment is made prior to the earlier of: (i) Five (5) years after the first date on which the Participant is reemployed, or (ii) The date the Participant incurs five (5) consecutive One Year Breaks in Service following the date of the previous distribution. If an Employee is deemed to receive a distribution pursuant to the Time of Distribution section below), and the Participant resumes employment covered under the Plan before the date the Employee incurs five (5) consecutive One Year Breaks in Service, upon the reemployment of such Employee, the balance of the Employer Account of the Employee will be restored to the amount on the date of such deemed distribution. If the Participant's forfeited accrued benefit is restored pursuant to this Section 6.3, the restoration shall be made first out of Forfeitures, if any, and then by additional Employer contributions. 19 ARTICLE VII - DISTRIBUTION OF BENEFITS 7.1 Method of Distribution of Accounts. (a) If a Participant's vested Accrued Benefit at the Termination Date does not exceed Five Thousand Dollars ($5,000), the entire amount of such vested Accrued Benefit shall be distributed in the form of an involuntary Cash-Out. For all Accrued Benefits that exceed Five Thousand Dollars ($5,000), the Participant shall elect to receive his distribution in one of the following forms: (a) a voluntary Cash-Out, or (b) an installment distribution consisting of approximately equal annual installments (subject to the limitations of Time of Distribution section) over a term certain. (b) The Participant shall elect to receive his distribution of benefits in the form of: (a) Cash, or (b) Qualifying Employer Securities except to the extent that the Participant's Employer Account consists of cash or fractional shares of Qualifying Employer Securities or other assets, the Fair Market Value of which shall be distributed in cash. (c) Distributions shall be made by the Trustee(s) according to the directions of the Committee. The Committee shall have the authority to direct the distributions according to the terms and conditions of the Plan. A Participant or Beneficiary shall have the right to file a claim for benefits in accordance with the Plan. Distributions shall be made in cash, in kind, or in a combination of both. All methods of distribution to a Participant or Beneficiary shall be of equal value as of the date payments are to commence. (d) The Company retains the power and discretion, pursuant to Code Section 411(d)(6)(c), to amend the distribution forms and options in a nondiscriminatory fashion. 7.2 Time of Distribution. (a) After the Participant has attained the Normal Retirement Age, has died, or has terminated his employment due to Total and Permanent Disability, then the first installment or Cash-Out, as the case may be, will be made as soon as administratively feasible after the end of the Plan Year in which the Participant completes a One Year Break in Service. If the Participant is zero percent (0%) vested in his Accrued Benefit, his account balance will be deemed to have been distributed to him in the form of a Cash-Out. However, in all events such distributions shall begin no later than sixty (60) days after the end of the Plan Year in which occurs the latest of the following: (i) The date on which the Participant attains the Normal Retirement Age; 20 (ii) The tenth (10th) anniversary of the year in which the Participant commenced participation in the Plan; (iii) The Termination Date. (b) Distribution to a Participant who terminates other than due to death, Retirement or Disability, shall commence as soon as administratively feasible after the end of the Plan Year in which the Participant completes a One Year Break in Service. (c) Distributions shall commence no later than: (i) April 1 of the calendar year following the calendar year in which the Participant attains age seventy and one-half (70-1 / 2); or (ii) In the case of a Participant other than a Participant who is a five percent (5%) owner with respect to the Plan Year ending in the calendar year in which the Participant attains age seventy and one-half (70-1/2), April 1 of the calendar year following the calendar year in which the Participant retires. (d) If distributions are made in installments rather than a Cash-Out, then (i) the installments must be over a period of ten (10) years or less or (ii) the amount of the installment to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Participant's entire interest by the life expectancy of the Participant or the joint and last survivor expectancy of the Participant and his designated Beneficiary. Life expectancy and joint and last survivor expectancy are computed by the use of the return multiples contained in Treasury Regulations Section 1.72-9, or, in the case of payments under a contract issued by an insurance company, by use of the life expectancy tables of the insurance company. For purposes of this computation, a Participant's life expectancy may be recalculated no more frequently than annually, but the life expectancy of a nonspouse Beneficiary may not be recalculated. If the Participant's spouse is not the designated Beneficiary, the method of distribution selected must assure that at least fifty percent (50%) of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (e) If the Participant elects to receive his distribution in Cash, the Trustees will sell the Qualifying Employer Securities allocated to the Participant's account and to which the Participant would be entitled to a distribution and distribute the cash proceeds of such sale to the Participant. If such Qualifying Employer Securities are not sold within a time which would allow the cash distribution to take place as required by this Time of Distribution section, the Participant will have the right to change his or her distribution election to receive Qualifying Employer Securities or defer the distribution until such time as the Trustees complete the sale of such Qualifying Employer Securities or otherwise have sufficient cash to make the distribution. (f) If the Participant dies after distributions to him have begun but before his entire Accrued Benefit has been distributed to him, the remaining portion of his Accrued Benefit shall be distributed from the Plan at least as rapidly as under the method of distribution previously established for him, if such method is irrevocable at the time of his death. 21 (g) If the Participant dies before distribution of hisinterest commences, then distributions of the Participant's remaining Accrued Benefit must be completed by the end of the fifth (5th) calendar year following the year of his death. However, installment distributions to a designated Beneficiary which begin not later than the end of the calendar year following the death of the Participant shall be treated as complying with this five (5) year distribution requirement (even though the installment payments are not completed within five (5) years of the Participant's death) if the distributions are made at a rate which is not longer than that calculated (in the manner described in paragraph (c) of this Section) to provide payment of all the Participant's Accrued Benefit during the anticipated life expectancy of the designated Beneficiary. Provided that if the designated Beneficiary is the surviving spouse of the deceased Participant, the distributions can begin as long after the Participant's death as the date on which the deceased Participant would have attained the age of seventy and one-half (70-1/2); if the surviving spouse dies before distributions to the surviving spouse have begun, the Plan may make distributions at such times as described in this Section as it would have if the surviving spouse had been a deceased Participant. (h) For purposes of this section, any amount paid to a child of a Participant will be treated as if it had been paid to the surviving spouse of the Participant if such remaining amount becomes payable to the surviving spouse when the child reaches the age of majority. 7.3 Segregation if Installment Distribution. The Administrative Committee may determine that the Employer Account of a Participant who is no longer an Employee shall be segregated and set aside, in which event the Administrative Committee shall direct the Trustees to segregate the vested portion (as defined in Article VI) of the entire balance of the Participant's Employer Account and to deposit such portion in a separate interest bearing account at a bank or savings and loan association, and said account shall cease to participate in the income or net loss or appreciation or depreciation of the Trust Fund, as of the beginning of the Plan Year in which such segregation occurs, and instead will be credited with the full amount of interest earned thereon. 7.4 Non-segrggation if Installment Distribution. In the event the Administrative Committee does not segregate (as provided in Section Segregation if Installment Distribution above) the Employer Account of a Participant, said account shall continue to be treated, without interruption, in the same manner as when the Participant was an Employee, in which case the installment distributions shall be adjusted upward or downward to reflect appreciation or depreciation, or income or loss in the account balance. 7.5 Distribution After Death of Participant. In the event of the death of a Participant after installment payments have begun, but prior to completion of such payments, the full amount of such unpaid benefits shall continue to be paid in the form of the previously established installments except that the Beneficiary may request that the remaining Accrued Benefit be paid in a lump sum. 22 In the event of the death of the Participant prior to the start of any payments of his Accrued Benefit, distributions shall be made in the form and at the time or times selected by the Beneficiary pursuant to Sections 7.1 and 7.2. 7.6 Distribution After Death of Beneficiary. In the event of the death of a Beneficiary (or a contingent Beneficiary, if applicable) prior to the completion of payment of benefits due the Beneficiary from the Plan, the full amount of such unpaid benefits shall at once vest in and become the property of the estate of said Beneficiary. In determining the amount of such unpaid benefits, no adjustment shall be made by reason of any net income, or net loss. of the Trust, or any net appreciation or net depreciation by the Trust's assets subsequent to the beginning of the Plan Year in which such final distribution occurs. 7.7 Rollover Contributions and Distributions. Rollovers from other qualified plans into the Plan will not be permitted. The Administrative Committee may, in its sole discretion, but only with the prior written consent of the Participant, transfer part or all of the funds credited to his Employer Account to a retirement plan, as described in Code Section 401(a) or Section 403(a) as to which the individual is a Participant at the time of such distribution. The Committee shall provide to each Participant, Beneficiary or Alternate Payee who receives an eligible rollover distribution (as defined in Code Section 402(f), at the time such distribution is made, a written explanation of the: (a) Provisions under which the distribution will not be subject to tax if timely transferred to an eligible retirement plan; and, if applicable, (b) Provisions regarding the availability of capital gains and ten-year averaging or five-year averaging tax treatment of the distribution. For distributions made on or after January 1, 1993, notwithstanding any provisions of the Plan to the contrary that would otherwise limit a distributee's election under this Subsection, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (a) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion 23 of any distribution that is not Includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Qualifying Employer Securities). (b) An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) A distributee includes a Participant or former Participant. In addition, the Participant's surviving spouse, and the Participant's or former Participant's spouse or former spouse who is an Alternate Payee under a Qualified Domestic Relations Order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (d) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 7.8 Suspense Account for Terminated Participants. If a Participant has terminated his employment but his Employer Account is not one hundred percent (100%) vested and he has not had a One Year Break in Service subsequent to his termination, all funds in his Employer Account shall be held in suspense until the happening of the soonest of the following: (i) the Participant returning to employment with the Employer, or (ii) the occurrence of a One Year Break in Service with respect to the Participant, or (iii) the Participant attaining Normal Retirement Age, or (iv) the Participant receives a Cash Out. At such time the Participant's Employer Account shall cease to be held in suspense. If a Participant has returned to employment prior to incurring a One Year Break in Service, his Employer Account which has been held in suspense shall be restored to his credit, less any Cash-Out which is not repaid in accordance with Section 7.10. If a One Year Break in Service occurs, the non-vested portion of the Employer Account held in suspense will be forfeited and reallocated in accordance with the Manner of Allocation section above for the Plan Year in which such Forfeiture occurs; the vested portion shall be distributed in accordance with the provisions of Article VII. In the case of a Participant attaining Normal Retirement Age while his Employer Account is being held in suspense, the entire vested amount will be distributed and the non-vested portion shall be forfeited in accordance with the provisions of this Article VII. Such account shall share in any appreciation, depreciation, or net income or loss as if it were not in suspense, except that an account which is in suspense shall have no Forfeitures allocated to it for a Plan Year in which the Employee does not have a Year of Service for Accrual of Benefits. Notwithstanding anything contained in this Suspense Account for Terminated Participants section to the contrary, upon the payment of a Participant's vested Accrued Benefit through a Cash-Out, the non-vested portion of such Participant's Accrued Benefit shall be forfeited and shall be reallocated for the Plan Year in which a One Year Break in Service occurs in accordance with the Manner of Allocation section above. 24 7.9 Unable to Locate Participant or Beneficiary. If the Participant or Beneficiary to whom benefits are to be distributed cannot be located, and reasonable efforts have been made to locate the Participant or Beneficiary, including the sending of notification by certified or registered mail to his last known address, the Administrative Committee may direct the Trustees to take any of the following actions: (i) Distribute the benefits in question to an interest bearing savings account established in the name of the Participant or Beneficiary; or, if the benefits are payable to a Participant (as reasonably determined by the Administrative Committee) the Administrative Committee may instruct the Trustees to distribute the funds to the Participant by placing them in a savings account in the Participant's name or by purchasing U.S. Savings Bonds in the Participant's name and holding them for the Participant; (ii) If the Administrative Committee has taken the reasonable efforts, as described in the preceding sentence, to locate the Participant, the Administrative Committee may allocate the Participant's Accrued Benefits to a segregated account in the manner described in Section 7.3, as if an installment distribution were being made; however, such funds shall be held in the segregated account for distribution to the Participant when located; (iii) The Participant's Accrued Benefits may be forfeited and reallocated pursuant to the Manner of Allocation section above; if the Participant subsequently returns, such Forfeiture shall be restored pursuant to Section 6.5 and the restoration shall be made first out of Forfeitures, if any, and then by additional Employer contributions. 7.10 Repayment of Cash-Out. If a Participant receives a Cash-Out distribution from the Plan as a result of ceasing to be an Employee, and is less than one hundred percent (100%) vested in his Accrued Benefit at such time, Participant shall have the right to repay to the Plan the Cash-Out distribution received from the Plan, prior to the sooner of (i) five (5) years from the individual again becoming an Employee, or the completion of five (5) consecutive One Year Breaks in Service following the date of distribution of the Cash-Out to the Participant. If the Participant makes such payment within the time specified in the preceding sentence, any non-vested portion of his Cash-Out distribution which was forfeited pursuant to Section 7.8 will be restored to his credit. The permissible sources of restoration of the forfeited portion of a Cash-Out distribution are: income or gains from Plan investments, Forfeitures and Employer contribution. However, except with respect to the forfeited portion of a Cash-Out distribution, only amounts held in suspense pursuant to Section 7.8 shall be used to satisfy such restoration. 7.11 Options of Participants to Sell Stock. (a) If the Qualifying Employer Securities are not readily tradable on an established securities market, and if the Employer is not a bank or financial institution prohibited by applicable federal or local law from redeeming its stock, a Participant or Beneficiary shall have the option to sell to the Employer all Qualifying Employer Securities which have been distributed to Participant or Beneficiary, at a price determined pursuant to a fair valuation formula which is calculated to provide the fair market value of such securities as of the valuation date immediately preceding the date of the exercise of this "put" option, during the sixty (60) day period immediately following the date on which Qualifying Employer Securities are distributed and for a sixty (60) day period beginning on the later of: 25 (i) the first day of the Plan Year immediately following the distribution of Qualifying Employer Securities to the Participant; or (ii) the first day following the expiration of the first sixty (60) day option period. (b) The put option required by Section 7.11(a) shall provide that if a Participant or Beneficiary exercises the put option, the Employer, (or the Plan, if the Plan so elects), shall repurchase the Qualifying Employer Securities in one of the following methods: (i) Payment of the fair market value of the Qualifying Employer Securities, determined as of the valuation date immediately preceding the date of the exercise of the put option, may be made in substantially equal payments not less frequently than annually, over a period not exceeding five years. The first installment shall be paid not later than thirty (30) days after the Participant exercises the put option. The Employer will pay a reasonable rate of interest and provide adequate security on amounts not paid after thirty (30) days. (ii) The Employer may pay the Participant or Beneficiary an amount equal to the fair market value, determined as of the valuation date immediately preceding the date of the exercise of the put option, of the Qualifying Employer Securities repurchased no later than thirty (30) days after the date the put option is exercised. (c) The Trust shall have the option, but in no event the responsibility, to assume the rights and obligations of the Employer at the time the put option required by Section 7.11 (a) is exercised. 7.12 Right of First Refusal. All shares of Qualifying Employer Securities distributed by the Trustee, except those which are publicly traded, shall be subject to a "right of first refusal." Such right shall provide that, prior to any subsequent transfer, the shares must first be offered by written offer to the Employer, unless the Employer is a bank or financial institution prohibited from redeeming its stock by applicable federal or local law, and Trust in any order of priority. In the event that the proposed transfer constitutes a gift or such other transfer at less than fair market value, the Plan Administrator shall so advise the Trustees and the price per share shall be determined by the Trustee under the Fair Market Value definition in Article II as of the last day of the Plan Year, or in the case of a transaction between the Plan and a disqualified person as defined in Code Section 4975(e)(2), as of the date of the transaction. In the event of a proposed purchase by a prospective bona fide purchaser, the offer to the Trust shall be at the greater of fair market value, as determined above by the Trustees or at the price offered by the prospective bona fide purchaser. The Employer or Trust, as the case may be, may accept the offer at any time during a period not exceeding fourteen (14) days after the security holder gives written notice to the Trustees that an offer by a third party to purchase the Qualifying Employer Securities has been received or that a transfer of any sort is to occur. 7.13 Distribution of Dividends. On or before the thirtieth (30th) day after the close of each Plan Year the Administrative Committee shall direct the Trustees as to whether any or all of the cash dividends received on any Qualifying Employer Securities, if any, owned 26 by the Plan shall be:(i) retained by the Plan and allocated pursuant to the Valuation of Assets and Allocation of Changes section; (ii) distributed to each Participant; or (iii) used to make payments on an Exempt Loan. In the event the Administrative Committee elects to cause the cash dividends to be distributed to Participants, each Participant shall receive, no later than ninety (90) days after the close of the Plan Year in which the dividend is paid, the pro rata share, computed in accordance with the provisions of Section 5.3, of such cash dividend (excluding earnings thereon). 7.14 Diversification of Investments. (a) Notwithstanding Sections 5.01 and Article VIII, each Qualified Participant shall be permitted to direct the Plan as to the investment of twenty-five percent (25%) of the value of the Participant's account balance attributable-to Qualifying Employer Securities which were acquired by the Plan after December 31, 1986, within ninety (90) days after the last day of each Plan Year during the Participant's Qualified Election Period. Within ninety (90) days after the close of the last Plan Year in the Participant's Qualified Election Period, a Qualified Participant may direct the Plan as to the investment of fifty percent (50%) of the value of such account balance. (b) The Participant's direction shall be provided to the Administrative Committee in writing; shall be effective no later than one hundred eighty (180) days after the close of the Plan Year to which the direction applies; and shall specify which, if any, of the options set forth in Section 7.14(c) the Participant selects. (c) At the election of the Qualified Participant, the Plan shall distribute in cash or stock the portion of the Participant's account that is covered by the election within ninety (90) days after the last day of the period during which the election can be made. This Section shall apply notwithstanding any other provision of the Plan other than such provisions as require the consent of the Participant and the Participant's spouse. (d) In lieu of distribution under this Section, the Qualified Participant who has the right to receive a distribution may direct the Plan to transfer the portion of the Participant's account that is covered by the election to another qualified plan of the Employer which accepts such transfers, provided that such Plan permits Employee-directed investment and does not invest in Qualifying Employer Securities to a substantial degree. Such transfer shall be made no later than ninety (90) days after the last day of the period during which the election can be made. 7.15 Qualified Domestic Relations Orders. Notwithstanding any other provisions of Article VII, any Accrued Benefit of a Participant may be apportioned between the Participant and the alternate payee (as defined in Code Section 414(p)(8)) either through separate accounts or by providing the alternate payee a percentage of the Participant's account. The Committee may direct distributions to an alternate payee pursuant to a Qualified Domestic Relations Order as defined in Code Section 414(p)(1)(A) prior to the date on which the Participant attains the earliest Retirement Age, provided that the Committee has properly notified the affected Participant and each alternate payee of the order and has determined that the order is a Qualified Domestic Relations Order as defined in Code Section 414(p)(1)(A). The alternate payee shall be paid a separate account or a percentage of the Participant's account, computed as of the valuation date described in the Valuation of Assets and Allocations of Changes section of the Plan, in a lump sum payment notwithstanding the value of such lump sum payment unless the domestic relations order specifies a different manner of payment permitted by the Plan. The alternate payee shall not be required to consent to such lump sum payment. The Committee shall adopt reasonable procedures to determine the qualified status of Qualified Domestic Relations Orders and to administer the distributions thereunder. In no event will a Qualified Domestic Relations Order which provides that a former spouse is to be treated as the current spouse of a Participant be considered a Qualified Domestic Relations Order under this Plan, notwithstanding that such Qualified Domestic Relations Order is a Qualified Domestic Relations Order as defined in Code Section 414(p)(1)(A). 27 ARTICLE VIII - DUTIES AND AUTHORITY OF TRUSTEE 8.1 Receive Payments. The Trustees shall receive from the Employer the payments made by it on account of its contributions under the Plan but the Trustees shall have no duty to compute any amount due from the Employer or to collect the same. 8.2 Evaluate Assets. The Trustees shall evaluate the assets of the Trust Fund as of the dose of the last day of each Plan Year at their Fair Market Value and the Administrative Committee or its agent will allocate the sums contributed by the Employer plus the net income or minus the net loss of the Trust Fund and plus the net appreciation or minus the net depredation in the Trust assets to separate bookkeeping accounts in the names of the respective Participants under the Plan in accordance with the provisions of the Fair market Value definition in Article II and Valuation of Assets and Allocations of Changes sections of the Plan. 8.3 Segregation of Accounts. When directed in writing by the Administrative Committee, the Trustees shall segregate the accounts of terminated Participants in accordance with the provisions of Section 7.3, and make payments out of the Trust Fund from time to time to the Participants or their Beneficiaries, such payments to be made in the manner and in the amounts as may be specified in the written instructions of the Administrative Committee. 8.4 Tax Returns and Reports. If the Trustees are a corporate fiduciary, then such Trustees shall prepare or cause to have prepared and filed, all tax returns, reports, and related documents, except as otherwise specifically provided in this Plan or unless the Administrative Committee, in writing, relieves the Trustees of such obligation, in part or entirely, in which case the Administrative Committee, or the person or persons it designates, shall be responsible for filing the tax returns, reports, and related filings, as provided by the Administrative Committee. The Trustees shall be entitled to rely on the accuracy of any written statement from the Administrative Committee or from an officer of the Employer as to those matters provided i n Article IX. 8.5 Powers. The Trustees are authorized and empowered to: (a) Invest and reinvest the Trust Fund, without distinction between principal and income, in Qualifying Employer Securities, bank accounts, certificates of deposit, Common Stocks, preferred stocks, bonds, notes, debentures, mortgages, U.S. retirement plan bonds, and in other property, real or personal, so long as the incidents of ownership of such property are within the jurisdiction of the United States, and so long as such investments do not violate applicable law; (b) Purchase and hold Qualifying Employer Securities in a value up to one hundred percent (100%) of the total value of the Trust Fund, and borrow funds and pledge as collateral therefor the Qualifying Employer Securities so acquired; the Trustees shall have the duty to invest primarily in Qualifying Employer Securities; (c) Purchase, sell, exchange, convey, transfer, or otherwise realize the value of any property held by it, specifically including the purchase and sale of Qualifying Employer Securities from or to the Employer or a disqualified person (as defined in Code Section 4975(e)(2)) or a party in interest (as defined in ERISA Section 3(14)) if such purchase or sale is for adequate consideration and no commission is charged with respect thereto; 28 (d) Convert any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any warrants, conversion privileges, subscription rights, or other options and to make any payment incidental thereto; to consent to or otherwise participate in corporate reorganizations or other changes affecting corporate securities and to delegate discretionary powers to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities or other properties held in the Trust Fund; (e) Make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any other instruments that may be necessary or appropriate to carry out the powers herein granted; (f) Register any investments held in the Trust Fund in its own name or in the name of a nominee or nominees and to hold any investment in bearer form, but the books and records of the Trustees shall at all times show that all such investments are part of the Trust Fund; (g) Invest all or a part of the Trust Fund in deposits which bear a reasonable rate of interest in a bank or similar financial institution, even though such institution is a Trustee or other fiduciary, as defined in Code Section 4975(e)(3); (h) Invest in a common or collective trust fund or pooled investment fund maintained by a bank or trust company or a pooled investment fund of an insurance company qualified to do business in a State even though such bank, trust company or insurance company is a disqualified person, as defined in Code Section 4975(e)(2); (i) Take whatever actions are necessary to ensure that Qualifying Employer Securities consisting of stock are distributed in the manner prescribed in Section 7.1; such actions may include, but are not limited to, purchasing or exchanging such stock from the Trust, even though it has already been allocated to the Employer Accounts of Participants and purchasing or exchanging such stock as described in subparagraph (c) of this Section; (j) Purchase Qualifying Employer Securities from persons, including "disqualified persons" as that term is defined in Code Section 4975(e)(2), so long as the purchase price does not exceed the Fair Market Value of such securities and so long as the terms of the purchase are fair and reasonable; (k) Perform all such acts, although not specifically mentioned herein, as the Trustees may deem necessary to administer the Trust Fund and to carry out the purpose of the Trust; and (1) Borrow, or loan, except as prohibited by Code Section 4975(c) without reference to Code Section 4975(d), sums as the Trustees deems desirable, and for that purpose, to mortgage or pledge all or part of the Trust Fund; and borrow from "disqualified persons" (as that term is defined in Code Section 4975(e)(2)) in such amounts as permitted by Section 8.11, for the purpose of purchasing Qualifying Employer Securities. 29 8.6 Expenses. All brokerage costs, transfer taxes and similar expenses incurred in connection with the investment and reinvestment of the Trust Fund and all taxes of any kind whatsoever which may be levied or assessed under existing or future laws upon or in respect of the Trust Fund, and any interest which may be payable on money borrowed by the Trustees for the purpose of the Trust (however, such funds may not be borrowed for the purpose of purchasing Qualifying Employer Securities), shall be paid from the Trust Fund, and, until paid, shall constitute a charge upon the Trust Fund. All other administrative expenses incurred by the Trustees in the performance of its duties, including such compensation to the Trustees as may be agreed upon from time to time between the Employer and the Trustees (in accordance with the Trustees' standard schedule of fees in effect from time to time during the time it administers this Trust, if applicable) and all proper charges and disbursements of the Trustees, shall be paid by the Employer, but until paid shall constitute a charge upon the Trust Fund. If the Employer advises the Trustees in writing of its determination to make no further contribution to this Trust, the expenses of the Trustees shall thereafter be charged against and paid out of the Trust Fund and a lien for the payment thereof shall be impressed upon the assets of the Trust to be charged proportionately against the amount standing to the credit of each Participant. However, no person who is a disqualified person (as defined in Code Section 4975(e)(2)) and who received full-time pay from the Employer, may receive compensation from the Trust, except for reimbursement of expenses properly and actually incurred. The Trustees may inspect the records of the Employer whenever such inspection may be reasonably necessary in order to determine any fact pertinent to the performance of its duties as the Trustees. The Trustees, however, shall not be required to make such inspection, but may, in good faith, rely on any statement of the Employer or any of its officers. 8.7 Litigation. The Trustees shall not be required to participate in any litigation either for the collection of moneys or other property due the Trust Fund, or in defense of any claim against the Trust Fund unless the Trustees shall have been indemnified to its satisfaction against all expenses and liability to which the Trustees might become subject. 8.8 Written Instructions. When any act of the Trustees is based upon instructions of the Employer or the Administrative Committee, the Trustees may rely upon instructions in writing, signed by an officer of the Employer, or upon written instructions from the Administrative Committee, as appropriate. 8.9 Appointment of Investment Manager. The Trustees, with the written concurrence of the Administrative Committee, may appoint an Investment Manager (as defined in ERISA Section 3(38)), who shall have responsibility for investment of the Trust Fund. The Investment Manager shall have the investment powers granted the Trustees in Section 8.5 except to the extent the Investment Manager's powers are specifically limited by an agreement between the Trustee and Investment Manager. 30 8.10 Removal and Resignation of the Trustee. The Employer may at any time remove any Trustee acting hereunder or appoint a corporation and/or an individual or individuals to be successor Trustee hereunder in the place of any removed or resigning Trustee. Any Trustee may at any time resign by giving written notice to the Employer, which resignation shall take effect on the date therein specified and which shall not be less than thirty (30) days from the date of notice unless the Employer shall agree to an earlier date. 8.11 Loans from Disqualified Persons. The Trustees shall have the power to borrow funds either in the form of cash, a purchase money transaction, or the assumption of an obligation, from "disqualified persons" (as that term is defined in Code Section 4975(e)(2)), or guaranteed by disqualified persons, for the purpose of purchasing Qualifying Employer Securities or to repay amounts which were borrowed for the purpose of purchasing such securities, only if the following conditions are met: (a) Such loan must provide for periodic payments over a definitely ascertainable term; (b) The only assets given as collateral for such loan may be, in the case of a loan to purchase Qualifying Employer Securities, those Qualifying Employer Securities purchased with the proceeds of the loan, and in the case of a loan to refinance a prior loan used to acquire Qualifying Employer Securities, the Qualifying Employer Securities acquired with such prior loan; (c) The only Plan assets available upon default to persons who loaned funds or who are entitled to payments under a loan from a disqualified person are: (i) Qualifying Employer Securities given pursuant to paragraph (b) above; (ii) Contributions made to the Plan, other than contributions of Qualifying Employer Securities, that are made for the purpose of meeting the Plan's obligations under the loan; and (iii) Earnings attributable to amounts described in (i) and (ii) of this sentence; (d) Amounts paid during a Plan Year in repayment of such loan may not exceed amounts contributed (during the current and prior Plan Years) to the Plan for the purpose of meeting the Plan's obligations under the loan, less total prior payments on the loan; (e) Amounts contributed to the Plan for the purpose of meeting loan obligations shall, prior to making payments under such loan, be segregated from the other amounts held by the Plan and all earnings thereon shall be allocated to such segregated account; 31 (f) Upon default, Plan assets shall be transferred to the lender, in an amount which is necessary to make payments which are currently due under the payment schedule of the loan, without acceleration of future amounts due thereon; (g) Interest charged under the loan must be reasonable after considering all relevant factors such as the loan's amount and duration, the amount of security provided the lender (including any guarantee), the credit standing of the Plan and prevailing interest rates; (h) Qualifying Employer Securities which are pledged as collateral for such loan must be released from encumbrance at the end of each Plan Year in an amount equal to the number of currently encumbered securities multiplied by a fraction, the numerator of which is the total payment of principal and interest made during the Plan Year, and the denominator of which is the total payment of principal and interest made during the Plan Year plus the total payment of principal and interest due under the loan for all future Plan Years. (If the interest rate under the loan is variable the above calculation must be made using the interest rate which is applicable as of the end of the Plan Year in which such calculation is made.) Securities of different classes must be released from encumbrance in equal percentages; (i) All Qualifying Employer Securities acquired with the proceeds of a loan from a "disqualified person", whether they are pledged as collateral for such loan or not, shall be held in suspense in the Unallocated Stock Account and shall be removed from such account and be allocated to the Employer Accounts of Participants at the end of each Plan Year to the extent paragraph (h) of this Section 8.11 provides for the release of encumbered securities. Income earned from securities held in suspense shall be deemed to be the income of the Plan and shall not be held in suspense unless such income has been pledged as collateral for the loan. Should a portion of a Participant's Employer Account be forfeited, Qualifying Employer Securities held in suspense for such Participant pursuant to this paragraph may only be forfeited after all other assets in the Participant's Employer Account are forfeited. ARTICLE IX - DUTIES AND AUTHORITY OF ADMINISTRATIVE COMMITTEE 9.1 Appointment. This Plan shall be administered by the Administrative Committee as Plan Administrator. The Board of Directors of the Employer shall appoint the Administrative Committee, which shall consist of at least two (2) persons who shall signify in writing their acceptance of such appointment. Any member of the Administrative Committee may resign upon giving written notice to the board of directors of the Employer. Each appointee shall hold office at the pleasure of the Board Of Directors. Vacancies arising in the Administrative Committee from death, resignation, removal or otherwise, shall be filled by the Board Of Directors, but the Administrative Committee may act notwithstanding the existence of vacancies so long as there is at least one member of the Administrative Committee who is a director. At any time the Board Of Directors of the Employer may adopt a resolution abolishing the Administrative Committee and reserving all of the duties of the Administrative Committee to the Board of Directors. Such resolution shall be effective as soon as it is communicated in writing to both the Administrative Committee and Trustees, or at any such subsequent effective date as is provided in the resolution. Whenever such a resolution is effective as to the Plan or in the event an Administrative Committee is not appointed, the term Plan Administrator or Board of Directors shall be deemed to replace the term "Administrative Committee." Such a resolution may be rescinded by the board of directors and shall be effective as soon as it is communicated in writing to the Trustees, or shall be effective at such later date as is provided in the resolution. 9.2 No Discrimination. The Administrative Committee shall not take any action nor direct the Trustees to take any action that would result in benefiting one Participant or group of Participants at the expense of another, or discriminating between Participants similarly situated, or applying different rules to substantially similar sets of facts. 32 9.3 Majority Action. The Administrative Committee shall act by a majority (or by all members if there be only one or two members) of the number of members constituting the Administrative Committee at the time of such action, and such action may be taken either by vote at a meeting or in writing without a meeting. 9.4 Powers. Except as otherwise provided in the Plan, the Administrative Committee shall have control of the administration of the Plan, with all powers necessary to enable it to carry out its duties in that respect. Not in limitation, but in amplification of the foregoing, the Administrative Committee shall have power to interpret or construe the Plan and to determine all questions that may arise hereunder as to the status and rights of Participants and others hereunder. The Administrative Committee may inspect the records of the Employer or Trustees whenever such inspection may be reasonably necessary in order to determine any fact pertinent to the performance of the duties of the Administrative Committee. The Administrative Committee, however, shall not be required to make such inspection but may, in good faith, rely on any statement of the Trustees or Employer or any of its officers or Employees. 9.5 Filing Reports. The Administrative Committee shall furnish, or shall see that the Employer furnishes, a summary of this Plan to all Employees, as required by applicable Federal law. The Administrative Committee shall furnish to the Trustees the names of all Employees who become eligible as Participants, and the Administrative Committee shall notify each Employee of his eligibility. 9.6 Records and Information. The Administrative Committee shall keep a complete record of all its proceedings and all data necessary for the administration of the Plan. 9.7 Information to Participants. The Administrative Committee shall direct the maintenance of separate accounts of the Participants. It shall give each Participant, at least once every year, information as to the balance of his Employer Account. 9.8 Compensation of Members. The members of the Administrative Committee shall serve without compensation for their services as such, but shall be reimbursed by the Employer for all necessary expenses incurred in the discharge of their duties. If the Employer advises the Administrative Committee in writing of its determination to make no further contributions to the Plan, the expenses of the Administrative Committee shall thereafter be charged against and paid out of the Trust Fund and a lien for the payment thereof shall be impressed upon the assets of the Trust to be charged proportionately against the amount standing to the credit of each Participant. 33 9.9 Review of Participant's Claims. In case the claim of any Participant or Beneficiary for benefits under the Plan is denied, the Administrative Committee shall provide adequate notice in writing to such claimant, setting forth the specific reasons for such denial. The notice shall be written in a -manner calculated to be understood by the claimant. The Administrative Committee shall afford a Participant or Beneficiary, whose claim for benefits has been denied, sixty (60) days from the date notice of such denial is delivered or mailed in which to appeal the decision in writing to the Administrative Committee. If the Participant or Beneficiary appeals the decision in writing within sixty (60) days, the Administrative Committee shall review the written comments and any submissions of the Participant or Beneficiary and render its decision regarding the appeal, all within sixty (60) days of such appeal. 9.10 Exercise of Stock Rights. In the event that Qualifying Employer Securities held by the Plan include voting stock, or stock or other securities with any rights other than voting rights, the Administrative Committee shall name, as a Designated Fiduciary, one of its members, or such other person as may consent thereto, to exercise on behalf of Participants, voting or other stock or equity rights with respect to the stock contributed to the Plan. The Designated Fiduciary shall notify each Participant to whose account any Qualifying Employer Security has been allocated at least thirty (30) days prior to any occasion on which such voting or other rights may be exercised. Such notification shall include all information distributed to shareholders or holders of such other equities by the Employer regarding the exercise of such voting or other rights. Such notification shall contain a procedure under which each of such Participants shall be able to direct the Designated Fiduciary in the exercise of the voting, or other rights. The Designated Fiduciary shall be bound by the instructions of each Participant; if a Participant gives no instructions to the Designated Fiduciary, the Designated Fiduciary shall not vote such Participant's stock or exercise such rights but shall so notify the trustees to vote such stock or exercise such rights. ARTICLE X - MODIFICATIONS FOR TOP HEAVY PLANS 10.1 Application of Article. The provisions in this Article X shall take precedence over any other provisions in the Plan with which they conflict. 10.2 Definitions. (a) Top Heavy Plans. This Plan shall constitute a Top Heavy Plan for a Plan Year if, as of the last day of the preceding Plan Year (or in the case of the Plan Year in which occurs the effective date of this Plan, the last day of such Plan Year): (i) the aggregate of the Employer Accounts of Key Employees exceeds sixty percent (60%) of the aggregate of the Employer Accounts of all Employees under the Plan all valued as of the last day of the preceding Plan Year (or in the case of the Plan Year in which occurs the effective date of this Plan, the last day of such Plan Year); or (ii) if the Plan is part of a Top Heavy Group. 34 (b) Top Heavy Group. This Plan shall be deemed to be a part of a Top Heavy Group if the Plans which make up the group of which this Plan is considered a part are such that, when aggregated, the sum of: (i) The present value of the cumulative accrued benefits of Key Employees under all defined benefit plans in the group; and (ii) The cumulative accrued benefits in the Plan accounts of Key Employees under all defined contribution plans in the group, exceeds sixty percent (60%) of the sum of such amounts for all Employees who participate in the Plans of such group. The group of Plans of which this Plan shall be considered a part includes: (i) All Plans of the Employer in which a Key Employee participates; (ii) All Plans which enable a Plan in which a Key Employee participates to meet the qualification requirements of Code Section 401(a)(4) or Code Section 410; and (iii) All Plans which the Employer, in its discretion, decides to include, provided that the inclusion of such Plan or Plans would not prevent the group of Plans from meeting the qualification requirements of Code Section 401(a)(4) and Code Section 410. (c) Key Employee. "Key Employee" means an Employee or former Employee (or his Beneficiaries) who, at any time during the Plan Year or any of the preceding four (4) Plan Years, is any of the following: (i) An officer of the Employer if such individual's annual Compensation exceeded fifty percent (50%) of the dollar limitation under Code Section 415(b)(1)(A). (ii) One of the ten (10) Employees owning (or considered as owning within the meaning of Code Section 318) the largest interests in the Employer if such individual's Compensation exceeded one hundred percent (100%) of the dollar limitation under Code Section 415(c)(1)(A). (iii) A "five percent owner" (5%) of the Employer. "Five percent owner" (5%) means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer. (iv) A "one percent owner"(1%) of the Employer receiving annual Compensation from the Employer of more than One Hundred Fifty Thousand Dollars ($150,000). "One percent (1%) owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer. 35 In determining percentage ownership hereunder, Employers that would otherwise be aggregated under Code Section 414(b), (c), (m) and (o) shall be treated as separate Employers. However, in determining whether an individual receives compensation of more than One Hundred Fifty Thousand Dollars ($150,000) compensation from each Employer required to be aggregated under Code Section 414(b), (c), (m) and (o) shall be taken into account. (d) Amounts Included for Computation Purposes. In determining, for the purposes of this Section 10.2, the amount of an Employee's accrued benefits and account balances, there shall be included therein the present value of all distributions made within a five (5) year period ending on the date such determination is made, including distributions from terminated Plans required to be considered pursuant to Section 10.2(b). Furthermore, the accrued benefits and account balances of any Employee who is not a Key Employee for the Plan Year in question, but was a Key Employee in any previous Plan Year, shall not be taken into consideration in making any of the computations required in this Section 10.2. The accrued benefit of any individual who has not performed any service for the Employer within the five year period ending on the date such determination is made shall not be taken into account for purposes of Section 10.2. Except to the extent provided in regulations of the Secretary of the Treasury, any rollover contributions (or similar transfers) made to the Plan after December 31, 1983 shall not be taken into consideration in making any of the computations required by this Section 10.2. (e) Non-Key Employee. A "Non-Key Employee" shall mean any Employee who is not a Key Employee. (f) Top Heavy Accrual. Solely for the purpose of determining if the Plan, or any other Plan included in a Top Heavy Group of which this Plan is a part, is top-heavy, the accrued benefit of a Participant other than a Key Employee shall be determined under: (i) The method, if any, that uniformly applies for accrual purposes under all Plans maintained by the Employer or by other members of an affiliated service group (under Code Section 414(m)), a controlled group of corporations (under Code Section 414(b)), a group of trades or businesses under common control (under Code Section 414(c)) of which the Employer is a member and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o), or (ii) If there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C). 36 10.3 Accelerated Vesting. Unless the Plan provides for full and immediate vesting of Employer Accounts upon participation, then for any Plan Year in which this Plan is deemed to be a Top Heavy Plan, the vesting schedule contained in Section 6.2 shall be modified as follows: Total Years for Vesting (excluding Years of Service prior to effective Vested date of this Plan) Percentage ------------------ ---------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100% Should this Plan not be deemed to be a Top Heavy Plan after previously being so categorized, the vesting schedule contained in Section 6.2 shall again be effective except that the vested percentage attained by Participants shall not be reduced thereby and Participants with three (3) or more Years of Service for Vesting shall have the right to select the vesting schedule under which their vested Accrued Benefit will be determined. 10.4 Minimum Contributions. For any Plan Year in which this Plan is determined to be a Top-Heavy Plan, either: (i) a minimum Employer contribution shall be made, pursuant to this Plan or another defined contribution plan maintained by the Employer, to the account of each non-Key Employee (except those who are separated from service with the Employer at the end of the Plan Year); or (ii) a minimum non-integrated benefit must be provided to each non-Key Employee (except those who are separated from service with the Employer at the end of the Plan Year), pursuant to a defined benefit plan maintained by the Employer. For the purposes of the first sentence of this Section 10.4, the minimum Employer contribution provided to each non-Key Employee (except those who are separated from service with the Employer at the end of the Plan Year) shall be equal to three percent (3%) of such non-Key Employee's Compensation. If, however, the Employer contribution, under this and any other defined contribution plan required to be included in the Top-Heavy Group and maintained by the Employer, for any Key Employee for such Plan Year is less than three percent (3%) of such Key Employee's total Compensation not in excess of Two Hundred Thousand Dollars ($200,000) (for Plan Years beginning before 1989), then, the Employer contribution to each Participant (except those who are separated from service with the Employer at the end of the Plan Year) shall equal the amount which results from multiplying such Participant's Compensation times the highest contribution rate of any Key Employee covered by the Plan and shall include amounts elected to be deferred by the Key Employee pursuant to an Code Section 401(k) provision. For the purposes of the first sentence of this Section 10.4, the minimum non-integrated benefit provided by the Employer to each non-Key Employee (except those who are separated from service with the Employer at the end of the Plan 37 Year) is an amount, which when expressed as an annual retirement benefit, shall be no less than two percent (2%) of such non-Key Employee's average annual Compensation for his five (5) highest consecutive years of service, multiplied by the Employee's years of service with the Employer, not to exceed ten (10) years. For the purposes of the preceding sentence, years of service with the Employer shall not include years of service completed during any Plan Year which begins before January 1, 1984, or years of service completed during a Plan Year for which the Man is not a Top-Heavy Plan. For the purposes of this Section 10.4, the minimum benefit provided above shall be computed in the form of a single life annuity, with no ancillary benefits, beginning at Normal Retirement Age. For the purposes of this Article X, "Compensation" shall have the same meaning as it does throughout the Plan; provided that it shall include such additional compensation as is required to meet the requirements of Code Section 415(c)(3). The minimum allocation required pursuant to this section shall be made even though, under other Plan provisions, a participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because of such participant's failure to complete a Year of Service. 10.5 Limitation on Compensation Taken into Account Under Plan. For any Plan Year prior to Plan Years beginning before January 1, 1989, in which this Plan is deemed to be a Top Heavy Plan the definition of Compensation contained in Section 2.5 shall exclude amounts in excess of one hundred fifty thousand dollars ($150,000). 10.6 Modification of Defined Benefit and Defined Contribution Plan Fraction. For any Plan Year in which the Plan is deemed to be a Top Heavy Plan, the denominators of the defined benefit plan fraction and the defined contribution plan fraction contained in Section 5.4(c) (if such Section is included in this Plan) shall be deemed to be modified by substituting 1.0 for 1.25. Notwithstanding the above, if this Plan would not be deemed to be a Top Heavy Plan if ninety percent (90%) were substituted for sixty percent (60%) in Section 10.2 and if the Employer provides benefits and/or makes contributions to the Employer Accounts of non-Key Employees who participate in defined benefit and/or defined contribution plans maintained by the Employer, in amounts at least equal to that which would be required by Section 10.4 after substituting four percent (4%) for three percent (3%) in the second paragraph thereof, and by substituting three percent (3%) for two percent (2%) in the third paragraph thereof, then the reduction in the defined benefit plan fraction and the defined contribution plan fraction as set forth in the preceding sentence, shall not be made. ARTICLE XI - AMENDMENT AND TERMINATION 11.1 Rights to Suspend or Terminate Plan. It is the present intention of the Employer to maintain this Plan throughout its corporate existence. Nevertheless, the Employer reserves the right, at any time, to discontinue or terminate the Plan, to terminate the Employer's liability to make further contributions to this Plan, to suspend contributions for a fixed or indeterminate period of time. In any event, the liability of the Employer to make contributions to this Plan shall automatically terminate upon its legal dissolution or termination, upon its adjudication as a bankrupt, upon the making of a general assignment for the benefit of creditors, or upon its merger or consolidation with any other corporation or corporations. 38 11.2 Successor Corporation. In the event of the termination of the liability of the Employer to make further contributions to this Plan, the Employer's liability may be assumed by any other corporation or organization which employs a substantial number of the Participants of this Plan. Such assumption of liability shall be expressed in an agreement between such other corporation or organization and the Trustees under which such other corporation or organization assumes the liabilities of this Trust with respect to the Participants employed by it. 11.3 Amendment. To provide for contingencies which may require the clarification, modification, or amendment of this Plan, the Employer reserves the right to amend this Plan at any time. The Employer, however, shall not have the right to amend this Plan in any way which would deprive any Participant of the right to receive his Accrued Benefits under the Plan, or which would alter the basic purpose of the Plan, or which would give the Employer any rights in the Trust Fund. Each Participant having at least three Years of Service for Vesting at the time of the adoption of any amendment changing any vesting schedule under the Plan shall have the right to elect at any time, but no later than 60 days after the later of: (a) the date the amendment is adopted; (b) the date on which the amendment is effective; or (c) the date on which the Participant is given written notice the amendment, to have his vested percentage computed under the Plan without regard to such amendment. 11.4 One Hundred Percent (100%) Vesting on Termination of Plan. Upon termination or partial termination of the Plan and Trust by formal action of the Employer or for any other reason, or if Employer contributions to the Plan and Trust are permanently discontinued for any reason, each Participant directly affected by such action shall be one hundred percent (100%) vested in the amount allocated to the accounts of each such Participant, and payment to such Participant shall be made in cash as soon as practicable after liquidation of the assets of the Trust. 11.5 Plan Merger or Consolidation. In the case of any merger or consolidation with, or transfer of any assets or liabilities to, any other Plan' each Participant in this Plan must be entitled to receive (if the surviving Plan is then terminated) a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if this Plan had terminated). ARTICLE XII - MISCELLANEOUS 12.1 Laws of California to Apply. The Plan provisions of this document shall be construed according to the laws of the State of California, to the extent Federal laws do not control. The situs of the Trust will be in the State of California. Its validity, construction, and all rights under the Plan and Trust shall be governed by ERISA and, to the extent not preempted, by the laws of California. If any provisions of the Agreement are invalid or unenforceable, the remaining provisions thereof shall continue to be fully effective. 39 12.2 Participant Cannot Transfer or Assign Benefits. None of the benefits, payments, proceeds, claims, or rights of any Participant hereunder shall be subject to any claim of any creditor of the Participant, nor shall any Participant have any right to transfer, assign, encumber, or otherwise alienate, any of the benefits or proceeds which a Participant may expect to receive, contingently or otherwise under this Plan. Notwithstanding any other provisions of this Section 12.2, the Trustees may make distributions pursuant to a qualified domestic relations order (as defined in Code Section 414(p)), provided that the Plan Administrator has properly notified the Participant and any alternate payee of the order and has determined that the order is a qualified domestic relations order. The Plan Administrator shall adopt reasonable procedures to determine the qualified status of such orders and to administer distributions thereunder. Notwithstanding any restrictions on the time of distribution which would otherwise apply under this Plan, distributions with respect to a qualified domestic relations order may be made at any time required by the order. 12.3 Right to Perform Alternative Acts. In the event it becomes impossible for the Employer, the Administrative Committee or the Trustees to perform any act required by this Plan, then the Employer, the Administrative Committee or the Trustees may perform such alternative act which most clearly carries out the intent and purpose of this Plan. 12.4 Reversion of Contributions Under Certain Circumstances. If this Plan is not initially approved and qualified by the Internal Revenue Service as meeting the requirements of Code Section 401 and Code Section 501, the Employer may, at its election, either: (a) Cause the Trustees to return to the Employer any amounts previously contributed by the Employer to the Trust and the Participants, if any amounts have been contributed by them, and immediately terminate the Plan; or (b) Effect such amendments to the Plan as are necessary to obtain the approval and qualification of the Plan by the Internal Revenue Service. All contributions made pursuant to Article IV are conditioned on deductibility of such contributions under Code Section 404. To the extent that the deduction under Code Section 404 for any year is disallowed, the contribution shall be returned to the Employer within one (1) year after disallowance of the deduction. If a contribution is made by an Employer by a mistake of fact, the contribution may be returned to the Employer within one (1) year after the payment of the contribution. Notwithstanding the above, earnings attributable to amounts described in paragraphs two and three of this Section 12.4 shall not be returned to the Employer; losses attributable to such amounts shall reduce the amount returned. 12.5 Plan Administrator Agent for Service of Process. The Plan Administrator is designated agent to receive service of legal process on behalf of the Plan. 40 12.6 Filing Tax Returns and Reports. If the Trustees are not a corporate fiduciary, the Plan Administrator shall prepare, or cause to have prepared, all tax returns, reports, and related documents, except as otherwise specifically provided in this Plan or unless the Administrative Committee provides to the contrary in the manner prescribed in Section 8.4. 12.7 Indemnification. The Employer agrees to indemnify all Employees who serve as members of the Administrative Committee or who serve as Trustee against all liability arising in connection with their duties under the Plan, except that this indemnification shall not include acts of embezzlement, or diversion of Trust Funds by the Employee, nor shall it include acts of gross negligence. The Employer shall indemnify and hold harmless the Trustees, its officers, Employees, agents, successors and assigns against all liabilities, demands, claims, actions, losses, taxes, expenses (including reasonable attorney's fees), both direct and indirect, arising out of (1) acts or omissions to act with respect to the Plan by persons unrelated to the Trustees ("unrelated persons"), (2) the Trustee's action or inaction with respect to the Plan resulting from reliance on the actions or inaction of unrelated persons, including directions to invest or otherwise deal with Plan assets, or (3) any violation by an unrelated persons of the provisions of ERISA or the regulations thereunder. The foregoing indemnity shall not apply if the actions or omissions of the Trustees result from the Trustees' willful misconduct or gross negligence. 12.8 Number and Gender. When appropriate the singular as used in this Plan shall include the plural and vice versa; and the masculine shall include the feminine. 12.9 Military Service. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and Service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Internal Revenue Code. Therefore, as of the effective date of this Plan or such later date as may be applicable to this Plan under Section 8(h)(2) of the Uniformed Services Employment And Reemployment Rights Act of 1994 (USERRA), an Employee, who was absent from the Employee's position of employment by reason of service in the uniformed services and who is reemployed, as these terms are used in USERRA, shall be treated as not having incurred a break in service with the Employer maintaining the Plan by reason of such person's period or periods of service in the uniformed services. Each period served by a person in the uniformed services shall, upon reemployment under USERRA, be deemed to constitute service with the Employer maintaining the Plan for the purpose of determining the nonforfeitability of the person's Accrued Benefit and for the purpose of determining the accrual of benefits under the Plan, all to the extent required by and as provided under USERRA. ARTICLE XIII - EXEMPT LOANS 13.1 Use of Proceeds. The proceeds of an Exempt Loan must be used within a reasonable time after their receipt by the Plan only for any or all of the following purposes: 41 (a) To acquire Qualifying Employer Securities; (b) To repay such Exempt Loan; (c) To repay a prior Exempt Loan. If the proceeds of a loan are used to repay an Exempt Loan, the new loan must constitute an Exempt Loan. 13.2 Interest Rate. The interest rate of any loan to the Plan, including an Exempt Loan, must not be in excess of a reasonable rate of interest. All other factors will be considered in determining a reasonable rate of interest, including the amount and duration of the loan, the security and guaranty (if any) involved, the credit standing of the Plan and the guarantor (if any), and the interest rate prevailing for comparable loans, including a variable interest rate if reasonable. 13.3 Non-recourse. An Exempt Loan must be without recourse against the Plan. The only assets of the Plan that may be given as collateral on an Exempt Loan are Qualifying Employer Securities which were either: (i) acquired with the proceeds of the Exempt Loan; or (ii) were used as collateral on a prior Exempt Loan repaid with the proceeds of the current Exempt Loan. No person entitled to payment under the Exempt Loan shall have any right to assets of the Plan other than: (a) Collateral given for the Exempt Loan; (b) Contributions (other than contributions of Qualifying Employer Securities) that are made under the Plan to meet the obligations of the Exempt Loan; and (c) Earnings attributable to such collateral and the investment of such contributions 13.4 Limitations on Payments. Payments made with respect to an Exempt Loan by the Plan during a Plan Year must not exceed an amount equal to the sum of such contributions and earnings received during or prior to the Plan Year less such payments in prior Plan Years. Such contributions and earnings shall be accounted for separately by the Employer in the books of account of the Plan until the Exempt Loan is repaid. 13.5 Forfeiture of Qualifying Employer Securities. All Qualifying Employer Securities acquired with the proceeds of a loan from a "disqualified person", whether they are pledged as collateral for such loan or not, shall be held in a suspense account and shall be removed from such account 42 and be allocated to the Employer Accounts of Participants at the end of each Plan Year to the extent paragraph (h) of Section 8.11 provides for the release of encumbered securities. Income earned from securities held in suspense shall be deemed to be the income of the Plan and shall not be held in suspense unless such income has been pledged as collateral for the loan. Should a portion of a Participant's Employer Account be forfeited, Qualifying Employer Securities held in suspense for such Participant pursuant to this paragraph may only be forfeited after all other assets in the Participant's Employer Account are forfeited. If interests in more than one class of Qualifying Employer Securities have been allocated to the Participant's Employer Account, the Participant must be treated as forfeiting the same proportion of each such class of Qualifying Employer Securities. 13.6 Limitation on Future Obligation. The Plan shall not obligate itself to acquire Qualifying Employer Securities from a particular security holder at an indefinite time determined upon the happening of an event such as the death of the security holder. However, this shall not prevent the Plan from providing for the issuance of options in accordance with Treasury Regulation Sections 54.4975-7(b)(10), (11), and (12). In the event of default upon an Exempt Loan, the value of Plan assets transferred in satisfaction of the Exempt Loan may not exceed the amount of default. If the lender is a disqualified person (as defined in Code Section 4975(e)(2)), the Exempt Loan must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the Exempt Loan. For purposes of this Section 13.6, the making of a guaranty does not make a person a lender. ARTICLE XIV - LIMITATIONS ON MATCHING CONTRIBUTIONS 14.1. Percentage Limitation on Matching Contributions. Notwithstanding anything in the Plan to the contrary, for each Plan Year, the Average Contribution Percentage of Participants must satisfy either the basic limitation or the alternative limitation stated in this Article. For purposes of this Article: (a) "Actual Deferral Percentage" shall mean the ratio (calculated to the nearest one-hundredth of one percent) for a Plan Year of a Participant's elective deferral contributions determined in accordance with rules under any cash or deferred arrangement maintained by the Employer. (b) Average Actual Deferral Percentage shall mean the average (expressed as a percentage) of the Actual Deferral Percentages of the Participants in a group determined in accordance with rules under any cash or deferred arrangement maintained by the Employer. (c) "Average Contribution Percentage(s)" shall mean the average of the Contribution Percentages of the eligible Participants in a group. (d) "Contribution Percentage" shall mean the ratio for a Plan Year of a Participant's Matching Contributions and any other contributions the Employer elects to take into account in computing the Contribution Percentage to the Participant's Compensation for the Plan Year. The Contribution Percentage of a Participant who has no Matching Contributions made on his or her behalf and for whom the Employer elects to take no other contributions into account shall be zero (0). A Participant's Contribution Percentage shall be computed according to the following rules: 43 (i) Matching Contributions made on the Participant's behalf shall be taken into account for a Plan Year only if those Matching Contributions are allocated to the Participant's Account during that Plan Year and paid to the Trust no later than the end of the twelfth (12th) month following the end of the Plan Year. (ii) As to a Highly Compensated Employee who is eligible to participate in two (2) or more plans of an Employer to which Matching Contributions are made (other than an employee stock ownership plan as defined in Code section 4975(e)(7)), all such contributions made on behalf of that Highly Compensated Employee must be aggregated for purposes of determining that Highly Compensated Employee's Contribution Percentage. (iii) If the Employer maintains two (2) or more plans that are subject to the requirements of Code section 401(m), and those plans are considered as one (1) plan for purposes of Code section 401(a)(4) or section 410(b), all those plans shall be aggregated and treated as one (1) plan for purposes of determining the Contribution Percentage of a Participant. (e) "Excess Aggregate Contributions" shall mean, as to any Plan Year, the excess of: (i) The aggregate amount of the Matching Contributions allocated to a Highly Compensated Employee for a Plan Year, over (ii) The maximum amount of such contributions that may be allocated to the Highly Compensated Employee without violating the limitations stated in Article 5 and this Article. The maximum amount that may be allocated to a Highly Compensated Employee shall be determined by ranking Highly Compensated Employees by Contribution Percentage in descending order and then reducing the Matching Contributions from the Accounts of the Highly Compensated Employees starting with the highest Contribution Percentage to the extent required to: (a) Enable the Plan to satisfy the limitations stated in Article 5 and this Article, or (b) Cause that Highly Compensated Employee's Contribution Percentage to equal the Contribution Percentage of the Highly Compensated Employee with the next highest Contribution Percentage. This process shall be repeated until the Plan satisfies the limitations stated in Article 5 and this Article. In no event shall the amount of Excess Aggregate Contributions exceed the amount of Matching Contributions made on behalf of a Highly Compensated Employee for a Plan Year. 44 (f) "Matching Contribution" shall mean any contribution to the Plan designated as such by the Employer which matches, in whole or in part, elective deferral contributions made on behalf of an Employee under any cash or deferred arrangement maintained by the Employer. 14.2. Basic Limitation. The Average Contribution Percentage of Highly Compensated Employees who are eligible to participate in the Plan (whether or not those Employees elect to make elective deferrals under any cash or deferred arrangement maintained by the Employer) shall not exceed for the Plan Year the Average Contribution Percentage of Nonhighly-Compensated Employees who are eligible to participate in the Plan (whether or not those Employees elect to make elective deferrals under any cash or deferred arrangement maintained by the Employer) for the Plan Year multiplied by 1.25. 14.3. Alternative Limitation. The Average Contribution Percentage of Highly Compensated Employees who are eligible to participate in the Plan (whether or not those Employees elect to make elective deferrals under any cash or deferred arrangement maintained by the Employer) shall not exceed the Average Contribution Percentage of Nonhighly Compensated Employees who are eligible to participate in the Plan (whether or not those Employees elect to make elective deferrals under any cash or deferred arrangement maintained by the Employer) for the Plan Year multiplied by 2.0, provided that the Average Contribution Percentage of Highly Compensated Employees shall not exceed the Average Actual Deferral Percentage of Nonhighly Compensated Employees by more than two (2) percentage points. 14.4. Multiple Use Limitation. If both the Average Actual Deferral percentage test and the Average Contribution Percentage test do not satisfy the basic limitation stated above, and if one or more Highly Compensated Employees are eligible to have Salary Deferral Contributions made on their behalf in any cash or deferred arrangement maintained by the Employer and to have Matching Contributions made on their behalf under this Plan, then the sum of the Actual Deferral Percentages of Highly Compensated Employees plus the sum of the Contribution Percentages of Highly Compensated Employees shall not exceed the greater of: (a) The sum of: (i) 1.25 times the greater of the Actual Deferral Percentages or Contribution Percentages of Nonhighly-Compensated Employees, plus (ii) Two (2) percentage points plus the lesser of the Actual Deferral Percentages or Contribution Percentages of Nonhighly Compensated Employees; or (b) The sum of: (i) 1.25 times the lesser of the Actual Deferral Percentages or Contribution Percentages of Nonhighly-Compensated Employees, plus (ii) Two (2) percentage points plus the greater of the Actual Deferral Percentages or Contribution Percentages of Nonhighly Compensated Employees. If the multiple use limitation stated above is exceeded, the Administrative Committee shall determine the maximum percentage to be used in place of the calculated percentage for all Highly Compensated Employees that would reduce either or both the Actual Deferral Percentage or Contribution Percentage for the Highly Compensated Employees to satisfy the multiple use limitation. Any excess shall be handled in the same manner that Excess Contributions or Excess Aggregate Contributions are handled. 45 14.5. Correction of Average Contribution Percentage Test. The Administrator shall determine the Excess Aggregate Contributions in accordance with paragraph 14.1 and either (a) Cause those amounts, along with the income or loss attributable to those amounts, to be forfeited, if not vested under the terms of the Plan, or, if vested, distributed no later than the last day of the Plan Year; (b) Contribute an additional discretionary Matching Contribution on behalf of each Participant who is a Nonhighly Compensated Employee so that the limitations in this Article 14 are met; (c) Cause the Excess Aggregate Contribution amounts, along with the income or loss attributable to those amounts, to be reallocated to the accounts of Nonhighly Compensated Employees having the lowest Contribution Percentage for the Plan Year so that the limitations in this Article 14 are met; or (d) Use any combination of (a), (b) and (c) to satisfy the limitations in this Article 14. Any forfeiture or distribution shall be made on the basis of the respective portion of the amount of Excess Aggregate Contributions attributable to each Highly Compensated Employee whose Matching Contributions Account received an allocation for the preceding Plan Year. 14.6. Calculation of Income. The income or loss allocable to Excess Aggregate Contributions shall be calculated in accordance with the method used by the Plan for allocating income to Participants' Accounts generally. That method shall be reasonable, not violate Code section 401(a)(4), be applied consistently to the Accounts of all Participants, and be used for corrective distributions under the Plan. The income or loss allocable to Excess Aggregate Contributions shall not include the income or loss for the period between the end of the taxable year and the date of distribution. 14.7. Deadline for Distribution. Excess Aggregate Contributions and income allocable to those Excess Year for which those Excess Aggregate Contributions were made. Excess Aggregate Contributions shall be distributed from the Participant's Matching Contribution Account. 14.8. Treatment as Annual Additions. Excess Aggregate Contributions shall be treated as Annual Additions under Article 5. 14.9. Compliance with Treasury Regulations. The Plan shall satisfy the requirements of Code section 401(m)(2) and the regulations under that section; those requirements are hereby incorporated by reference. 46 IN WITNESS WHEREOF, the parties have executed this agreement this 18th day of November, 1999. WITNESS EMPLOYER - ------- -------- MCB FINANCIAL CORPORATION Nancy Boatright /s/ Charles 0. Hall --------------------------------------- President WITNESS TRUSTEE - ------- ------- /s/ Charles 0. Hall --------------------------------------- /s/ Timothy J.. Jorstad --------------------------------------- /s/ Gary T. Ragghianti --------------------------------------- 47 EX-10.B.7 3 TRIPLE NET LEASE Exhibit 10(b)(7) METRO COMMERCE BANK TRIPLE NET LEASE 650 TOWNSEND STREET SAN FRANCISCO, CA TABLE OF CONTENTS 1. SALIENT LEASE TERMS 1 2. DEFINITIONS 3 3. PREMISES 10 4. TERM 12 5. PRE-TERM POSSESSION 14 6. DELAY IN DELIVERY OF POSSESSION 15 7. MINIMUM RENT 15 8. ADDITIONAL RENT 15 9. ACCORD AND SATISFACTION 18 10. SECURITY DEPOSIT 18 11. USE 19 12. COMPLIANCE WITH LAWS AND REGULATIONS 20 13. SERVICE AND EQUIPMENT 27 14. WASTE 29 15. ALTERATIONS 29 16. PROPERTY INSURANCE 31 17. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION 32 18. LIABILITY INSURANCE 34 19. INSURANCE POLICY REQUIREMENTS 34 20. LESSEE INSURANCE DEFAULT 35 21. FORFEITURE OF PROPERTY AND LESSOR'S LIEN 35 22. MAINTENANCE AND REPAIRS 35 23. DESTRUCTION 37 24. CONDEMNATION 38 25. ASSIGNMENT AND SUBLETTING 40 26. ABANDONMENT 44 27. ENTRY BY LESSOR 44 28. SIGNS 44 29. DEFAULT 45 30. REMEDIES UPON DEFAULT 45 31. BANKRUPTCY 48 32. SURRENDER OF LEASE 51 33. LESSOR'S EXCULPATION 51 34. ATTORNEYS' FEES 52 35. NOTICES 52 36. SUBORDINATION 53 37. ESTOPPEL CERTIFICATES. 54 38. WAIVER 54 39. HOLDING OVER 55 40. SUCCESSORS AND ASSIGNS 55 41. TIME 55 42. EFFECT OF LESSOR'S CONVEYANCE 55 43. COMMON AREAS 55 44. TRANSFER OF SECURITY 56 45. LATE CHARGES 56 46. CORPORATE AUTHORITY 56 47. MORTGAGEE PROTECTION 56 48. MISCELLANEOUS PROVISIONS 57 49. WAIVER OF CALIFORNIA CODE SECTIONS 59 50. SHUTTLE SERVICE 60 THIS LEASE is dated for reference purposes only this 17th day of December, 1999. 1. SALIENT LEASE TERMS 1.1 Rent Payment: ZORO, LLC 650 Townsend Street San Francisco, CA 94103 Attn.: Building Management Office Fax No.: (415) 487-4056 1.2 Parties and Notice Lessor: ZORO, LLC, Address: a California limited liability company 650 Townsend Street San Francisco, CA 94103 Attn.: Building Management Office Fax No.: (415) 487-4056 Lessee: METRO COMMERCE BANK, a California Corporation (if more than one party, then the obligations hereunder shall be joint and several.) Until commencement of the Term: METRO COMMERCE BANK 1248 Fifth Avenue San Rafael, CA 94901 After commencement of the Term, Notices shall be sent to Lessee at the Leased Premises. (Section 35.1) 1.3 Premises: (A) Name and Location of Complex: Townsend Center 650 Townsend Street San Francisco, CA 94103 (B) Leased Premises: Ground Floor- (a portion of the ground floor space with entry to lobby) Usable Area: 2,975 square feet Rentable Area: 3,570 square feet 1.4 Term: (A) Estimated Delivery Date: January 1, 2000 (B) Initial Term: Ten (10) years from Commencement Date (C) Renewal Term; Number: Two (2) successive five (5) year terms (Section 4.1) 1 1.5 Rent: (A) Minimum Rent: Annual Rental Monthly Rental ------------- -------------- Years 1-5 $107,100 $ 8,925.00 Years 6-10 $140,625 $11,718.75 First and Second Renewal Terms at Fair Market Rental (Section 7.1) (B) Advance Rent: Eight Thousand Nine Hundred Twenty-Five Dollars ($8,925) (Section 7.2) (C) ATM Rent in addition to Minimum Rent: Years During Term Annual Rent Monthly Rent ----------------- ----------- ------------ Years 1-5 $12,000 $1,000 Years 6-10 $15,000 $1,250 First Renewal Term $20,000 $1,667 Second Renewal Term $25,000 $2,083 1.6 Security Deposit: Twenty Thousand Six Hundred Forty-Three and 75/xx Dollars ($20,643.75) (Section 10.1) 1.7 Use: Retail, banking, and office use (Section 11.1) 1.8 Initial Pro Rata 0.53% (3,570/672,788 rsf) Percent: (Section 2.1) (Section 16.3) 1.9 Base Operating (A) Base Operating Cost Year: 2000 Cost for the (B) Base Tax Year: 1999-2000 Complex: (Section 8.2) (Section 16.3) 1.10 Real Estate Cushman & Wakefield of California, Inc. and Brokers: Polatnick Properties (Lessor's Brokers) Grubb & Ellis (Lessee's Broker) (Section 48.14) 2 1.11 Rentable Area of 672,788 square feet Building at Commencement: 1.12 Parking Two (2) stalls 1.13 Contents: This Lease consists of. Pages 1 through 61 Sections 1 through 50 Addenda (if any) Exhibits: A - Legal Description of Complex B - Plan of the Complex C - Floor Plan of the Leased Premises D - Work Letter Agreement E - Acknowledgment of Commencement F - Rules and Regulations G - Building Standards H - Janitorial Specifications I - Subordination Agreement J - Letter of Credit Terms K - Sign Exhibit L - Estoppel Certificate 2. DEFINITIONS 2.1 The terms defined in this Article 2 shall, for all purposes of this Lease and all agreements supplemental hereto, have the meanings herein specified unless expressly stated otherwise. "Alterations" Means any alterations, additions, improvements or installations performed by Lessee after the Commencement Date. "Atrium" means the central Atrium on floors 2 through 6 of the Building so identified on Exhibits B and C, if applicable. "Base Building Work" is defined in the Work Letter Agreement, attached hereto as Exhibit D. "Base 0perating Cost" means the sum of the costs for Base Operating Costs and Taxes for the years specified in Section 1.9 hereof. "BOMA" means the standards of measurement adopted by the Building Owners and Managers Association, American National Standard, ANSI/BOMA 2.65.1 - 1996 ("BOMA") as modified by Lessor for uniform use in the Complex. "Building" shall mean the structure which contains the Leased Premises. "Building Standards" shall mean Lessor's standard specifications for construction in the Building as set forth in Exhibit G, attached hereto, and as may be established by Lessor from time to time. 3 "Commencement Date" shall mean the earlier of the following dates: (i) The day upon which Lessee opens for business in the Leased Premises; or (ii) The date upon which the Tenant Improvements, including the Lessee's Work (as herein defined), have been substantially completed as determined by Lessor's project architect; or (iii) Ninety (90) days following the Delivery Date (as herein defined). "Common Areas" shall mean all areas and facilities outside the Leased Premises within the exterior boundaries of the Complex of which the Leased Premises form a part, that are provided and designated by Lessor from time to time for the general use and convenience of Lessee and of other tenants of Lessor having the common use of such areas, and their respective authorized representatives and invitees. Common Areas include, without limitation, corridors, stairways, elevator shafts, janitor rooms, driveways, parking areas, and landscaped areas all as generally described on Exhibit B, attached hereto. Exhibit B is tentative and Lessor reserves the right to make alterations thereto from time to time. Other areas may be designated by Lessor from time to time as for the exclusive use of certain lessees and shall cease being Common Areas. "Complex" is the real property of which the Leased Premises forms a part, including, but not limited to, the Building, parking facility and landscaping, which property is described with particularity in Exhibit A, attached hereto and made a part hereof by reference. "Delivery Date" shall mean the earlier of the following dates: (i) the date upon which Lessee takes possession of the Leased Premises (provided possession shall not mean Lessee's possession of and entry to the Leased Premises for the purpose set forth in Section 5. 1), or (ii) the date upon which Lessor's Work with respect to the Leased Premises has been substantially completed in accordance with Exhibit D; provided, however, in the event completion of Lessor's Work is delayed by Lessee's Work or other acts of Lessee or its agents ("Lessee Delay") any such Lessee Delay shall thereupon effect a postponement of the date at which Lessor is obliged to deliver the Leased Premises to Lessee by the number of days of Lessee Delay. However, the Delivery Date and the Commencement Date as would otherwise be established had Lessee Delay not occurred shall not be postponed by the number of days of Lessee Delay. "Force Majeur" shall mean event(s) beyond the reasonable control of the obligated party such as, for example only, strikes, riots, governmental act or failure to act, shortage of materials, weather and other such matters over which the party does not have reasonable control (except matters resulting from financial insufficiency). "Lease Year" means any calendar year, or portion thereof, following the commencement hereof, the whole or any part of which period is included within the Term. "Leased Premises" shall mean the portion of space leased to Lessee hereunder. "Lessee's Work" shall mean the work of improvement to the Leased Premises to be performed by Lessee in accordance with the Work Letter Agreement. "Lessor's Work" shall mean the work to be performed by Lessor in accordance with the Work Letter Agreement. 4 "Lines" shall mean domestic water, chilled water and waste pipes and lines, exhaust pipes and vents, communications, computer, audio and video, security and electrical (other than electrical wiring within the Leased Premises terminating at or connected to Building check meters), cables, wires, lines, duct work, sensors, switching equipment, control boxes, risers and related improvements at the Complex, Building or the Leased Premises. "Major Vertical Penetrations" shall mean stairs, elevator shafts, flues, pipe shafts, vertical ducts, and the like, and their enclosing walls, which serve more than one floor of the Building, but shall not include stairs, dumbwaiters, lifts, and the like, exclusively serving a lessee occupying space on more than one floor. "Occupied Floor Area" means that portion of the Rentable Area of the Complex which is leased and occupied. "Operating Costs" means the total amounts paid or payable, whether by Lessor or others on behalf of Lessor, in connection with the ownership, maintenance, repair, replacement and operations of the Complex (including, without limitation, all areas and facilities within the exterior boundaries of the Complex) as determined in a manner consistent with generally accepted accounting principles ("GAAP"). Operating Costs shall include, but not be limited to, the aggregate of the amount paid for all electricity and fuel used in heating and air conditioning of the Building; the amount paid or payable for all electricity furnished by Lessor to the Complex exclusive of electricity furnished to Lessee and other lessees for usable areas of the Complex; the cost of periodic relamping and reballasting of Building Standard lighting fixtures; the amount paid or payable for all hot and cold water (other than that chargeable to lessees by reason of their extraordinary consumption of water); the amount paid or payable for all labor and/or wages and other payments including cost to Lessor of workers' compensation and disability insurance, payroll taxes, welfare and fringe benefits made to janitors, caretakers, and other employees, contractors and subcontractors of Lessor (including wages of the Building manager) involved in the operation, maintenance and repair of the Complex; painting for exterior walls of the buildings in the Complex; managerial and administrative expenses; the total charges of any independent contractors employed in the repair, care, operation, maintenance, and cleaning of the Complex; the amount paid or payable for all supplies occasioned by everyday wear and tear; the costs of VAC (as defined in Section 13.1) of the Complex, (except to the extent paid by Lessee, or other lessees, for VAC provided to the Leased Premises, or other leased premises, in respect of VAC provided outside the Climate Control Hours defined in Section 13.1), window and exterior wall cleaning, telephone and utility costs; the cost of accounting services necessary to compute the rents and charges payable by lessees and keep the books of the Complex; fees for management, legal, accounting, inspection and consulting services; the cost of operating, repairing and maintaining and replacing the Building escalators and elevators and the utility systems, including Lines, of the Complex including the cost of inspection and service contracts; the cost of porters, guards and other protection services; the cost of establishing and maintaining the Building's directory board; payments for general maintenance and repairs to the plant and equipment supplying climate control; the cost of supplying all services pursuant to Article 13 hereof to the extent such services are not paid by individual lessees; amortization of the costs, including repair and replacement, of all maintenance and cleaning equipment and master utility meters and of the costs incurred for repairing or replacing all other fixtures, equipment and facilities serving or comprising the Complex which by their nature require periodic or substantial repair or replacement, and which are not charged fully in the year in which they are incurred, at rates on the various items determined from time to time by Lessor in accordance with GAAP; the cost of operating the parking facility in the Complex and the cost of parking fees and rents paid to the owner of another parcel for use of certain parking spaces therein (collectively "Parking Costs") net of parking fees and rents collected by Lessor in connection herewith provided, however, Lessor shall not be 5 obligated to credit any sums received in excess of the actual Parking Costs; the cost and expenses for insurance for which Lessor is responsible hereunder or which Lessor reasonably deems necessary in connection with the operation of the Complex (including, without limitation, self-insurance and the payment of deductible amounts under insurance policies); community association dues or assessments and property owners' association dues and assessments which may be imposed upon Lessor by virtue of any recorded instrument affecting title to the Complex; and costs of complying with all governmental regulations, rules, laws, ordinances and codes enacted after the Delivery Date, including Environmental Laws as such term is defined in Article 12. In addition, Operating Costs shall include any Real Estate Taxes as defined in Paragraph 2.1 hereof Operating Costs shall also include, without limitation, the repair and replacement, resurfacing and repaving of any paved areas, curbs, gutters or other surfaces or areas within the Complex, the repair and replacement of any equipment or facilities located within or serving the Complex, and the cost of any capital repairs, replacements or improvements made by Lessor to the Complex ("Capital Costs"). However, certain Capital Costs (the "Restricted Capital Costs") shall be includable in Operating Costs each year only to the extent of that fraction allocable to the year in question calculated by amortizing such Restricted Capital Costs over the reasonably useful life of the improvement resulting therefrom, as determined by Lessor, with interest on the unamortized balance at the higher of (i) ten percent (10%) per annum; or (ii) the interest rate as may have been paid by Lessor for the funds borrowed for the purpose of performing the work for which the Restricted Capital Costs have been expended, but in no event to exceed the highest rate permissible by law. The Restricted Capital Costs subject to such amortization procedure are the following: (X) those costs for capital improvements to the Complex of a type which do not normally recur more frequently than every five (5) years in the normal course of operation and maintenance of facilities such as the Complex (specifically excluding painting of all or a portion of the Complex); (y) costs incurred for the purpose of reducing other operating expenses or utility costs, from which Lessee can expect a reduction in the amounts it would otherwise expend, or reimburse Lessor, and (z) expenditures by Lessor that are required by governmental law, ordinance, regulation or mandate, including, without limitation, any Environmental Laws (as such term is defined in Article 12), which were not applicable to the Complex at the time of the original construction. Operating Costs shall not include legal or accounting expenses incurred expressly for negotiating a lease with a particular lessee, or as a result of a default of a specific lessee, which negotiation or default does not affect the operation of the Complex. "Proportionate Share" or "Pro Rata Percent" shall be that fraction (converted to a percentage) the numerator of which is the Rentable Area of the Leased Premises and the denominator of which is the number of square feet of Rentable Area of all floors (or leased premises if the Complex is on a single floor) rentable to lessees in the Complex. Lessee's Proportionate Share as of the commencement of the Term hereof is specified in Section 1.8. Said Proportionate Share shall be recalculated as may be required effective as at the commencement of any period to which the calculation is applicable in this Lease. Notwithstanding the preceding provisions of this Section, Lessee's Proportionate Share as to certain expenses may be calculated differently to yield a higher percentage share for Lessee as to certain expenses in the event Lessor permits other lessees in the Complex to directly incur such expenses rather than have Lessor incur the expense in common for the Complex (such as, by way of illustration, wherein a lessee performs its own janitorial services). In such case Lessee's Proportionate Share of the applicable expense shall be calculated as having as its denominator the Rentable Area of all floors (or leased premises if the Complex is on a single floor) rentable to lessees in the Complex less the Rentable Area of lessees who have incurred such expense directly. Furthermore, in the event Lessee consumes extraordinary amounts of any provided utility or other service as determined in Lessor's good faith judgment, Lessee's Proportionate Share for such utility or service may, at Lessor's election, be based on usage as opposed to Rentable Area, that is, Lessee's Proportionate Share of such a utility or service would be calculated as having as its denominator the total usage of such utility or service in the Complex (or Building as the case may be), and having as its numerator Lessee's usage of such utility or service, as determined by Lessor in its sole good faith judgment. In any case in which Lessee, with Lessor's consent, incurs such expenses directly, Lessee's Proportionate Share will be calculated specially so that expenses of 6 the same character which are incurred by Lessor for the benefit of other lessees in the Complex shall not be prorated to Lessee. If repairs are required for systems exclusively serving the Leased Premises (whether within or outside of said Leased Premises), Lessee shall pay one hundred percent (100%) of such repair costs. Nothing herein shall imply that Lessor will permit Lessee or any other lessee of the Complex to incur any Common Area Costs or Operating Costs. Any such permission shall be in the sole discretion of the Lessor, which Lessor may grant or withhold in its arbitrary judgment. "Quadrant." Floors 2-6 of the Building are centered around the central Atrium with Rentable Area being approximately divided into four unequal parts known as "Quadrant(s)" and commonly carrying identifying letters as follows: Quadrant A: Southeast of Atrium Quadrant B: Northeast of Atrium Quadrant C: Northwest of Atrium Quadrant D: Southwest of Atrium "R/U Ratio" (an abbreviation for Rentable/Usable Ratio) shall mean that fraction the numerator of which is Rentable Area and the denominator of which is Usable Area. "Real Estate Taxes" or "Taxes" shall mean and include all general and special taxes, assessments, fees of every kind and nature, duties and levies, charged and levied upon or assessed by any governmental authority against the Complex including the land, the Building, any other improvements situated on the land other than the Building, the various estates in the land and the Building, any Tenant Improvements, fixtures, installations, additions and equipment, whether owned by Lessor or Lessee; except that it shall exclude any taxes of the kind covered by Section 8.1 hereof to the extent Lessor is reimbursed therefor by any lessee in the Building. Real Estate Taxes shall also include the reasonable cost to Lessor of contesting the amount, validity, or the applicability of any Taxes mentioned in this section provided Tenant receives a ratable credit for any refund obtained through such a contest. Further included in the definition of Taxes herein shall be general and special assessments, license fees, commercial rental tax, levy, penalty or tax (other than inheritance or estate taxes) imposed by any authority having the direct or indirect power to tax, as against any legal or equitable interest of Lessor in the Leased Premises or in the Complex or on the act of entering into this Lease or, as against Lessor's right to rent or Other income therefrom, or as against Lessor's business of leasing the Leased Premises or the Complex, any tax, fee, or charge with respect to the possession, leasing, transfer of interest, operation, management, maintenance, alteration, repair, use, or occupancy by Lessee, of the Leased Premises or any portion thereof or the Complex, or any tax imposed in substitution, partially or totally, for any tax previously included within the definition of Taxes herein, or any additional tax, the nature of which may or may not have been previously included within the definition of Taxes. Further, if at any time during the Term of this Lease the method of taxation or assessment of real estate or the income therefrom prevailing at the time of execution hereof shall be, or has been altered so as to cause the whole or any part of the Taxes now or hereafter levied, assessed or imposed on real estate to be levied, assessed or imposed upon Lessor, wholly or partially, as a capital levy, business tax, fee, permit or other charge, or on or measured by the Rents received therefrom, then such new or altered taxes, regardless of their nature, which are attributable to the land, the Building or to other improvements on the land shall be deemed to be included within the term Real Estate Taxes for purposes of this Section, whether in substitution for, or in addition to any other Real Estate Taxes, save and except that such shall not be deemed to include any enhancement of said tax attributable to other income of Lessor. With respect to any general or special assessments which may be levied upon or against the Leased Premises, the Complex, or the underlying realty, or which may be evidenced by improvement or other bonds, and may be paid in annual 7 or semi-annual installments, only the amount of such installment, prorated for any partial year, and statutory interest shall be included within the computation of Taxes for which Lessee is responsible hereunder. Notwithstanding anything to the contrary contained herein, Taxes shall not include any interest and penalties due to Landlord's failure to pay Taxes before delinquency due date. "Rent," "rent" or "rental" means Minimum Rent (as defined in Section 7.1 herein) and all other sums required to be paid by Lessee pursuant to the terms of this Lease. "Rentable Area." The Rentable Area means the Rentable Area determined by BOMA, subject to such adjustments as Lessor may incorporate from time to time. The Rentable Area of a floor shall mean all areas available or held for the exclusive use and occupancy of occupants or future occupants of the Complex, calculated in accordance with BOMA. No deductions shall be made for columns and projections necessary to the Building. The Rentable Area of that portion of a lessee's premises located on a floor shall be computed by multiplying the Usable Area of such premises by the R/U Ratio. The Rentable Area of the Building is the aggregate of the Rentable Area on all floors. "Structural" as herein used shall mean any portion of the Leased Premises or Complex which provides bearing support to any other integral member of the Complex such as, by limitation, the roof structure (trusses, joists, beams), posts, load bearing walls, foundations, girders, floor joists, footings, and other load bearing members constructed by Lessor. "Tenant Improvements" shall mean the Lessee's Work in accordance with the Work Letter Agreement and all subsequent Alterations (as defined in Section 15.2 herein) to the Leased Premises made by Lessee. "Term" shall mean the term of the lease as specified in Article 4 hereof, including any partial month at the commencement of the Term. "Usable Area." The Usable Area of any individual leased premises shall be the number of square feet calculated in accordance with BOMA, subject to such adjustments as Lessor may incorporate from time to time; provided, however, that the term Usable Area shall include toilet rooms in each Quadrant if such toilet rooms are for the exclusive use of a lessee occupying such Quadrant. The Usable Area of a floor shall be equal to the sum of all Usable Areas on that floor. "Work Letter Agreement." That certain Agreement for performance of improvements to the Premises, Building or Complex set forth in Exhibit D, attached hereto and made a part herein by reference. 3. PREMISES 3.1 Demising Clause. Lessor hereby leases to Lessee, and Lessee hires from Lessor a portion of the Complex as hereinafter defined. 3.2 Description. The Complex, as defined in Section 2.1, is described generally in Section 1.3(A) hereof. The premises leased herein are described in Section 1.3(B) and delineated on Exhibit C, which is attached hereto and made a part hereof by reference, consisting of the approximate amount of square footage as specified in Section 1.3(B) hereof. The term "Building" shall refer to the Building in which the Leased Premises are located. The portion leased herein to Lessee is hereinafter referred to as the "Leased Premises." Lessee acknowledges that Lessor may change the shape, size, location, number and extent of the improvements to any portion of the Complex without consent of Lessee and without 8 affecting Lessee's obligations hereunder provided such changes do not materially and adversely affect Tenant's access to the Leased Premises. Lessor reserves the area beneath and above the Leased Premises, as well as the exterior thereof, together with the right to install, maintain, use, repair and replace Lines, pipes, ducts, conduits, wires, and structural elements leading through the Leased Premises serving other parts of the Complex, including, but not limited to, vertical risers, so long as such items are concealed by walls, flooring or ceilings. Such reservation in no way affects the maintenance obligations imposed herein, nor shall such reservation alter the parties' responsibilities and obligations set forth in this Lease regarding Hazardous Materials (as defined in Section 12.3(a) below). 3.3 ATM. Lessee may install, at Lessee's sole cost and expense, an Automated Teller Machine ("ATM") in a location mutually agreeable to Lessor and Lessee. The size and signage of the ATM will be subject to Lessor's approval. If the ATM is located on a wall that is a perimeter wall of the Leased Premises as shown on Exhibit C, the ATM Rent reflected on Section 1.5 shall not apply. 3.4 Covenants, Conditions and Restrictions. The parties agree that this Lease is subject to the effect of: (a) any covenants, conditions, restrictions, easements, mortgages or deeds of trust, ground leases, rights of way of record, and any other matters or documents of record; (b) any zoning laws of the city, county and state where the Complex is situated; and (c) general and special taxes not delinquent. Lessee agrees that as to its leasehold estate, Lessee and all persons in possession or holding under Lessee will conform to and will not violate the terms of any covenants, conditions or restrictions of record which may now or hereafter encumber the property (hereinafter the "Restrictions"). This Lease is subordinate to the Restrictions and any amendments or modifications thereto. 3.5 Right of First Offer. (a) Commencing twelve (12) months after the Commencement Date, Lessee shall have a continuing right of "First Offer" to lease any increment of space adjacent to the Leased Premises which becomes "available for lease" during the term subject to the provisions of this Section 3.5. An increment of space shall not be deemed "available for lease" if the lessee under an expiring lease of such space desires to renew or extend its lease of such space pursuant to the exercise of a right or option to do so pursuant to the terms of such party's lease. (b) Lessor shall give Lessee written notice ("Lessor's Right of First Offer Notice") of each increment of space which becomes available for lease within thirty (30) days of availability. Lessor's Right of First Offer Notice shall identify the First Offer space, the availability date, and the applicable Rent. If Lessee elects to lease the First Offer space, Lessee shall notify Lessor in writing within ten (10) days after Lessee's receipt of Lessor's Right of First Offer Notice. If Lessee does not exercise its right to lease the First Offer Space, Lessor shall be released of any further obligation to offer that particular First Offer Space to Lessee unless the space subsequently becomes available for lease. (c) Upon Lessee's election to lease a First Offer Space, Lessor and Lessee shall promptly enter into an amendment of this Lease, adding the First Offer Space to the Leased Premises herein on all terms and conditions of this Lease except that (i) the term of the lease of such First Offer Space shall commence upon the ..availability date and shall continue coextensively with the remaining Term of this Lease; (ii) the Rent shall be the Rent stated in Lessor's Right of First Offer Notice, subject to adjustment as provided in the Lease; and (iii) Lessee shall take the First Offer Space in its then "as-is" condition and Lessor shall have no obligation to pay for any improvements. 9 (d) Notwithstanding the foregoing provision of this Section 3.5, Lessee shall have no right of First Offer if (i) an Event of Default shall have occurred and be continuing under this Lease; (ii) Lessee is not in occupancy of the entire original Leased Premises; or (iii) Lessee does not intend to occupy the First Offer Space. Tenant's right of First Offer shall not be applicable during the last two (2) years of the Term unless and until Lessee shall validly exercise its renewal option, in which case Lessee's right of First Offer shall terminate two (2) years prior to the expiration of the next succeeding renewal term. 4. TERM 4.1 Commencement Date. The Term of this Lease shall commence on the Commencement Date defined in Section2-1 and shall be for the Term specified in Section 1.4(B) hereof, plus any partial month at the commencement of the Term. 4.2 Acknowledgment of Commencement. After delivery of the Leased Premises to Lessee, Lessee shall execute a written acknowledgment of the date of commencement in the form attached hereto as Exhibit E, and by this reference it shall be incorporated herein. 4.3 Renewal Term. (a) Manner of Exercise. Lessee shall have the right and option to extend the Term of this Lease for two (2) additional period(s) of five years (such period being referred to as a "Renewal Term") as specified in Section 1.4(c), provided that no uncured event of default exists as of the date that Tenant exercises its option to extend. Lessee may exercise the option, if at all, by written notice to Lessor delivered no later than twelve (12) months prior to the date which represents the expiration of the then current term ("Expiration Date"), (the "Outside Exercise Date"). Unless all of the above conditions precedent have been satisfied, Lessee's exercise of any option shall be of no force or effect and the Renewal Term shall lapse. If all of the above conditions precedent are satisfied, then the term of this Lease shall be extended for the Renewal Term, and all of the terms, conditions and provisions of this Lease shall continue in full force and effect throughout the Renewal Term, except that the Minimum Rent to be paid by Lessee for the Renewal Term shall be 100% of the Fair Market Rental (as defined below) value of the Leased Premises as of the Expiration Date, but in no event shall the Minimum Rent for the Renewal Term be less than the Minimum Rent payable in the last month of the Term of this Lease prior to the Expiration Date. (b) Fair Market Rental. If Lessee exercises the right to extend the Term then the Minimum Rent shall be adjusted to equal the Fair Market Rental for the Leased Premises as of the date of the commencement of the Renewal Term, pursuant to the procedures hereinafter set forth. The term "Fair Market Rental" means the Minimum Rent chargeable for the Leased Premises based upon the following factors applicable to the Leased Premises or any comparable premises: (i) Rental rates being charged for comparable premises in the same geographical location. (ii) The relative locations of the comparable premises. (iii) Improvements, or allowances provided for improvements, or to be provided. (iv) Rental adjustments, if any, or rental concessions. 10 (v) Services and utilities provided or to be provided. (vi) Use limitations or restrictions. (vii) Any other relevant Lease terms or conditions. The Fair Market Rental evaluation may include provision for further rent adjustments during the Renewal Term in question if such adjustments are commonly required in the market place for similar types of leases. (c) Determination of Fair Market Rental. Upon exercise of the right to extend the Term, and included within the Notice of Exercise, Lessee shall notify Lessor of its opinion of Fair Market Rental as above defined for the Renewal Term. If Lessor disagrees with Lessee's opinion of the Fair Market Rental, it shall * so notify Lessee ("Lessor's Value Notice") within thirty (30) days after receipt of Lessee's Notice of Exercise. If the parties are unable to resolve their differences within ten (10) days thereafter or if separated by more than ten percent (10%), either party may apply for Arbitration as provided below. If the values are within ten percent (100/6), they shall be averaged. If neither party applies for Arbitration within ten (10) days after receipt by Lessee of Lessor's Value Notice, Lessee shall be bound to the Fair Market Rental stated in Lessor's Value Notice. Should either party elect to arbitrate, and if the arbitration is not concluded before the commencement of the Renewal Term, Lessee shall pay Minimum Rent to Lessor in an amount equal to the Fair Market Rental set forth in Lessor's Value Notice, until the Fair Market Rental is determined in accordance with the arbitration provisions hereof ("Arbitration"). If the Fair Market Rental as determined by Arbitration differs from that stated in Lessor's Value Notice, then any adjustment required to correct the amount previously paid by Lessee shall be made by payment by the appropriate party within thirty (30) days after the determination of Fair Market Rental by Arbitration has been concluded, as provided herein. Lessee shall be obligated to make payment during the entire Renewal Term of the Minimum Rent determined in accordance with the Arbitration procedures hereunder. (d) Arbitration. In the event either party seeks Arbitration of Fair Market Rental under the provisions hereof for the Renewal Term, the other party shall be bound to submit the matter for determination by Arbitration. The Arbitration shall be conducted and determined in the County where the Leased Premises are located. (e) Demand for Arbitration. A party demanding Arbitration hereunder shall make its demand in writing ("Demand Notice") within ten (10) days after service of Lessor's Value Notice. (f) Within ten (10) days after service of a Demand Notice, Lessor shall provide Lessee with the names of three (3) appraisers. Each appraiser shall be a member of the American Institute of Real Estate Appraisers (or its successor), or real estate professionals qualified by appropriate training and experience and having at least ten (10) years experience dealing with commercial office leasing in the San Francisco South of Market and Financial districts ("Appraiser Notice"). Within ten (10) days after service of the Appraiser Notice, Lessee shall notify Lessor of Lessee's selection of one of the appraisers designated in the Appraiser Notice and that Appraiser shall serve as the Arbitrator. (g) Decision of the Arbitrator. The Arbitrator so selected shall, within ninety (90) days after his appointment, state in writing his determination as to whether Lessor's valuation, or Lessee's valuation of Fair Market Rental, most closely approximates his own. The Arbitrator may not state his own opinion of Fair Market Rental, but is strictly limited to the selection of Lessor's Fair Market Rental evaluation as stated in Lessor's Value Notice or 11 Lessee's Fair Market Rental evaluation as stated in the Notice of Exercise. The Arbitrator shall have the right to consult experts and competent authorities with factual information or evidence pertaining to a determination of Fair Market Rental, but any such consultation shall be made in the presence of both parties with full right to cross examine. The Arbitrator shall have no right to propose a middle ground or any modification of either of the proposed valuations, and shall have no power to modify the provisions of this Lease. The valuation so chosen as most closely approximating that of the Arbitrator shall constitute the decision of the Arbitrator and shall be final and binding upon the parties, absent fraud or gross error. The Arbitrator shall render a decision and award in writing, with counterpart copies to each party and judgment thereon may be entered in any court of competent jurisdiction. (h) Successor Arbitrator; Fees and Expenses. In the event of failure, refusal, or inability of the Arbitrator to act in a timely manner, a successor shall be appointed in the same manner as such Arbitrator was first chosen hereunder. The fees and expenses of the Arbitrator and any administrative hearing fee, if any, shall be divided equally between the parties. Each party shall bear its own attorneys' fees and other expenses including fees for witnesses in presenting evidence to the Arbitrator. 5. PRE-TERM POSSESSION 5.1 Pre-Term Possession. (a) Conditions of Entry In the event the Leased Premises are to be constructed or remodeled by Lessor, Lessor may notify Lessee when the Leased Premises are ready for Lessee's fixturing or Lessee's Work, which may be prior to substantial completion of the Leased Premises by Lessor. Lessee may thereupon enter the Leased Premises for such purposes at its own risk, to make such improvements as Lessee shall have the right to make, to install fixtures, supplies, inventory and other property. Lessee agrees that it shall not in any way interfere with the progress of Lessor's Work by such entry. Should such entry prove an impediment to the progress of Lessor's Work, in Lessor's judgment, Lessor may demand that Lessee forthwith vacate the Leased Premises until such time as Lessor's work is complete, and Lessee shall immediately comply with this demand. In the event Lessor requires that Lessee vacate, the ninety (90) day time period specified in Section 2.1, "Commencement Date", (iii), shall be extended for the number of days Tenant has been required to vacate the Leased Premises. (b) Lease Terms Apply. During the course of any pre-term possession, whether such pre-term period arises because of an obligation of construction on the part of Lessor, or otherwise, all terms and conditions of this Lease, except for rent and Commencement Date, shall apply, particularly with reference to indemnity by Lessee of Lessor under Article 17 herein for all occurrences within or about the Leased Premises. 6. DELAY IN DELIVERY OF POSSESSION 6.1 Delay. If Lessor, for any reason whatsoever, cannot deliver possession of the Leased Premises to Lessee at the Estimated Delivery Date, this Lease shall not be void or voidable, nor shall Lessor be liable for any loss or damage resulting therefrom, but in that event, there shall be no accrual of Rent for the period between the Estimated Delivery Date and the Commencement Date. In the event Lessor cannot deliver the Leased Premises to Lessee within three (3) months beyond the Estimated Delivery Date, then Lessee may elect to terminate this Lease by written notice to Lessor within ten (10) days thereafter. In the event Lessor, after diligent and good faith efforts, cannot deliver the Leased Premises to Lessee within six (6) months beyond the Estimated Delivery Date, then Lessor may elect to terminate this Lease by written notice to Lessee within 12 ten (10) days thereafter. In the event the Leased Premises are not delivered within three (3) years from the date of execution, this Lease shall automatically terminate. 7. MINIMUM RENT 7.1 Payment. Lessee shall pay to Lessor at the address specified in Section 1. 1, or at such other place as Lessor may otherwise designate, as "Minimum Rent" for the Leased Premises the amount specified in Section 1.5(A) hereof, payable in advance on the first day of each month during the Term. If the Term commences on other than the first day of a calendar month, the rent for the first partial month shall be prorated accordingly. All payments of Minimum Rent (including sums defined as rent in Section 2.1) shall be in lawful money of the United States, and payable without deduction, setoff, offset, counterclaim,. recoupment, notice or demand. 7.2 Advance Rent. The amount specified in Section 1.5(B) hereof is paid herewith to Lessor upon execution of this Lease as advance rent, receipt of which is hereby acknowledged, provided, however, that such amount shall be held by Lessor as a "Security Deposit" pursuant to Section 10.1 hereof until it is applied by Lessor to the first Minimum Rent due hereunder. 7.3 Late Payment. If during any twelve (12) month period Lessee fails on more than one occasion to make any payment of Minimum Rent to Lessor on the date when it is due, then Lessor may, by giving written notice to Lessee, require that. Lessee pay the Minimum Rent to Lessor quarterly in advance. 8. ADDITIONAL RENT 8.1 Personal Property, Gross Receipts, Leasing Taxes. This Section 8.1 is intended to deal with impositions or taxes directly attributed to Lessee or this transaction, as distinct from taxes attributable to the Complex which are to be allocated among various lessees and others and which are included in Operating Costs. In addition to the Minimum Rent and additional charges to be paid by Lessee hereunder, Lessee shall reimburse Lessor upon demand for any and all taxes required to be paid by Lessor (excluding state, local or federal personal and corporate income taxes measured by the income of Lessor from all sources, and estate and inheritance taxes) whether or not now customary or within the contemplation of the parties hereto: (a) Upon, measured by, or reasonably attributable to the cost or value of Lessee's equipment, furniture, fixtures and other personal property located in the Leased Premises or by the cost or value of any Tenant Improvements made in or to the Leased Premises by or for Lessee, regardless of whether title to such improvements shall be in Lessee or Lessor; (b) Upon or with respect to the possession, leasing, operation, management, maintenance, Alteration, repair, use or occupancy by Lessee of the Leased Premises or any portion thereof to the extent such taxes are not included as Real Estate Taxes as defined in Section 2. 1; (c) Upon this transaction or any document to which Lessee is a party creating or transferring an interest or an estate in the Leased Premises; and (d) In connection with any testing, investigation, abatement, remediation, removal, transportation and/or disposal of any Hazardous Materials by Lessee (or by Lessor, pursuant to any provision of this Lease granting to Lessor the right to do any of the foregoing and to bill Lessee therefor). 13 For purposes of this Section 8.1, the term "taxes" shall include, but not be limited to, any fees, charges, fines, penalties and costs (including, without limitation, permit, approval or licensing fees, charges or costs), excepting interest and penalties for failure of Landlord to pay Taxes in a timely manner. In the event that it shall not be lawful for Lessee so to reimburse Lessor, the Minimum Rent payable to Lessor under this Lease shall be increased to net Lessor (i.e., after payment of the Taxes for which Lessor may not receive reimbursement from Lessee) the amount of Minimum Rent plus reimbursement for Taxes which would have been receivable by Lessor if such tax had not been imposed. All Taxes payable by Lessee under this Section shall be deemed to be, and shall be paid as, additional Rent. 8.2 Operating Costs. (a) During each calendar year or part thereof, Lessee shall pay to Lessor as additional Rent, in accordance with Section 8.3 hereof, Lessee's Proportionate Share of all Operating Costs for such calendar year. During each tax year (July 1 through June 30) or part thereof, Lessee shall pay to Lessor as additional Rent, in accordance with Section 8.3 hereof, Lessee's Proportionate Share of all Real Estate Taxes for such tax year. (b) In addition, Lessee shall pay to Lessor, as additional Rent, in accordance with Section 8.3 hereof, one hundred percent (100%) of the electricity and other separately metered utility charges for the Leased Premises (including utilities for the VAC system). (c) If any Lease Year of less than twelve (12) months is included within the Term, the amount payable by Lessee for such period shall be prorated on a per them basis (utilizing a three hundred sixty (360) day year). (d) Lessor shall exercise good faith efforts to equitably allocate those Operating Costs that are incurred for the direct benefit of specific types of lessees or users in the Complex to and among those specific lessees and/or users ("Cost Pools"). Such Cost Pools may include, but shall not be limited to, the office, and showroom space, the second floor Atrium, the concourse level, and any retail space lessees of the Complex. Lessor's determination of such allocations shall be made in a manner consistent with the terms and conditions of this Section 8.2(c) and shall be subject to reconciliation per Section 8.3(c). Lessee acknowledges that the allocation of Operating Costs among Cost Pools does not affect all Operating Costs and is limited to specific items which Lessor determines, in good faith, should be shared among the lessees and/or users of a certain Cost Pool. 8.3 Method of Payment. Any additional Rent payable by Lessee under Sections 8.1 and 8.2 hereof shall be paid as follows, unless otherwise provided: (a) During the Term, Lessee shall pay to Lessor monthly in advance with its payment of Minimum Rent, one-twelfth (1/12) of the amount of such additional Rent as estimated by Lessor in advance, in good faith, to be due from Lessee. (b) Annually, as soon as is reasonably possible after the expiration of each Lease Year, Lessor shall prepare in good faith and deliver to Lessee a comparative statement, which statement shall be conclusive between the parties hereto, setting forth: (i) the Operating Costs for such Lease Year; and (ii) the amount of additional Rent as determined in accordance with the provisions of this Article 8. 14 (c) If the aggregate amount of such estimated additional Rent payments made by Lessee in any Lease Year should be less than the additional Rent due for such year, then Lessee shall pay to Lessor as additional Rent within fifteen (15) days of written demand the amount of such deficiency. If the aggregate amount of such additional Rent payments made by Lessee in any Lease Year of the Term should be greater than the additional Rent due for such year, then should Lessee not be otherwise in default hereunder, the amount of such excess will be applied by Lessor to the next succeeding installments of such additional Rent due hereunder; and if there is any such excess for the last year of the Term, the amount thereof will be refunded by Lessor to Lessee, provided Lessee is not otherwise in default under the terms of this Lease. 9. ACCORD AND SATISFACTION 9.1 Acceptance of Payment. No payment by Lessee or receipt by Lessor of a lesser amount of Minimum Rent or any other sum due hereunder, shall be deemed to be other than on account of the earliest due rent or payment, nor shall any endorsement or statement on any check or any letter accompanying any such check or payment be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such rent or payment or pursue any other remedy available in this Lease, at law or in equity. Lessor may accept any partial payment from Lessee without invalidation of any contractual notice required to be given herein ( to the extent such contractual notice is required) and without invalidation of any notice required to be given pursuant to California Code of Civil Procedure section 1161, et seq., or of any successor statute thereto. 10. SECURITY DEPOSIT 10.1 Lessee shall pay Lessor upon execution hereof the sum specified in Section 1.6. This sum is designated as a Security Deposit and shall remain the sole and separate property of Lessor until actually repaid to lessee (or at Lessor's option the last assignee, if any, of Lessee's interest hereunder), said sum not being earned by Lessee until all conditions precedent for its payment to Lessee have been fulfilled. As this sum both in equity and at law is Lessor's separate property, Lessor shall not be required to: (i) keep said deposit separate from its general accounts; or (ii) pay interest or other increment for its use. If Lessee fails to pay rent or other charges when due hereunder, or otherwise defaults with respect to any provision of this Lease, including and not limited to Lessee's obligation to restore or clean the Leased Premises following vacation thereof, Lessee, at Lessor's election, shall be deemed to have earned the right to repayment of the Security Deposit, or those portions thereof used or applied by Lessor for the payment of any rent or other charges in default, or for the payment of any other sum to which Lessor may become obligated by reason of lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. Lessor may retain such portion of the Security Deposit as it reasonably deems necessary to restore or clean the Leased Premises following vacation by Lessee. The Security Deposit is not to be characterized as rent until and unless so applied in respect of a default by Lessee. In the event a portion or all of the Security Deposit is paid pursuant to a Letter of Credit, the terms specified in Exhibit J, attached hereto, shall apply. 10.2 If Lessor elects to use or apply all or any portion of the Security Deposit as provided in Section 10.1, Lessee shall within ten (10) days after written demand therfor pay to Lessor in cash, an amount equal to that portion of the Security Deposit used or applied by Lessor, and Lessee's failure to so do shall be a material breach of this Lease. The ten (10) day notice specified in the preceding sentence shall insofar as not prohibited by law, constitute full satisfaction of notice of default provisions required by law or ordinance. 15 11. USE 11.1 Permitted Use. The Leased Premises may be used and occupied only for the purposes specified in Section 1.7 hereof, and for no other purpose or purposes. Lessee shall promptly comply with all laws, ordinances, orders and regulations affecting the Leased Premises, their cleanliness, safety, occupation and use. 11.2 Safes, Heavy Equipment. Lessee shall not place a load upon any floor of the Leased Premises which exceeds fifty (50) pounds per square foot live load. without the express written consent of Lessor. Lessor reserves the right to prescribe the weight and position of all safes and heavy installations which Lessee wishes to place in the Leased Premises so as properly to distribute the weight thereof, or to require plans prepared by a qualified structural engineer at Lessee's sole cost and expense for such heavy objects. Notwithstanding the foregoing, Lessor shall have no liability for any damage caused by the installation of such heavy equipment or safes. 11.3 Machinery. Business machines and mechanical equipment belonging to Lessee which cause noise and/or vibration that may be transmitted to the structure of the Building or to any other leased space to such a degree as to be objectionable to Lessor or to any lessees in the Complex shall be placed and maintained by the party possessing the machines or equipment, at such party's expense, in settings of cork, rubber or spring type noise and/or vibration eliminators, and Lessee shall take such other measures as needed to eliminate vibration and/or noise. If the noise or vibrations cannot be eliminated, Lessee must remove such equipment within ten (10) days following written notice from Lessor. 11.4 Hazardous Activities. Lessee shall not engage in any activities or permit to be kept, used, or sold in or about the Leased Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall, at its sole cost and expense, comply with any and all requirements, pertaining to the Leased Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Building and appurtenances. 11.5 Tenant Exclusive. Provided (i) Lessee is not in default under this Lease, (ii) Lessee has not failed on two (2) or more occasions to observe or perform any provision of this Lease during any twelve (12) month period, (iii) Lessee is doing business as a retail, full service, direct deposit bank, and (iv) this Lease has not been terminated and is still in effect, Lessor agrees not to enter into a lease with any other lessee for space on the Lobby Level (First Floor Townsend Street Frontage) for use as a retail, full service, direct deposit bank. Notwithstanding anything to the contrary contained herein, the provisions of this Section 11.5 shall not prevent Lessor from leasing or using space anywhere in the Complex (including the Lobby Level) for (A) one or more ATM's or financial services machines or (B) for a financial services or bank business provided such business is not a retail, full service, direct deposit bank. 12. COMPLIANCE WITH LAWS AND REGULATIONS 12.1 Lessee's Obligations. Except with respect to the Common Areas, Lessee, shall, at its sole cost and expense, comply with all of the requirements of all municipal, state and federal authorities now in force, or which may hereafter be in force, pertaining to the Leased Premises, and shall faithfully observe in the use of the Leased Premises all municipal ordinances and state and federal statutes and regulations now in force or which may hereafter be in force, including, without limitation, Environmental Laws (as hereinafter defined), and the Americans with Disabilities Act, 42 U.S.C. ss.ss. 12101-12213 (and any rules, regulations, restrictions, guidelines, requirements or publications promulgated or published pursuant thereto, collectively herein referred to as the "ADA"), whether or not any of the foregoing were foreseeable or unforeseeable at the time of the execution of this Lease. The judgment of any court of competent jurisdiction, or the admission of Lessee in any action or proceeding against Lessee, whether Lessor be a party thereto or not, that any such requirement, ordinance, statute or regulation pertaining to the Leased 16 Premises has been violated, shall be conclusive of that fact as between Lessor and Lessee. Within five (5) business days after receipt of notice or actual knowledge of any violation or alleged violation by Lessee of any Environmental Law(s), and/or the ADA pertaining to the Complex, any governmental or regulatory proceedings, investigations, sanctions and/or actions threatened or commenced with respect to any such violation or alleged violation, and any claim made or commenced with respect to such violation or alleged violation, Lessee shall notify Lessor thereof and provide Lessor with copies of any written notices or information in Lessee's possession. Lessee shall make, at Lessee's sole cost and expense, any and all Alterations, improvements or non-structural changes that are required by laws, statutes, ordinances and governmental regulations or requirements as a result of Lessee's specific use of the Leased Premises or any Alterations, additions or improvements made by Lessee. If any. alterations, improvements or structural changes are required to be made to the Building in general or are applicable to substantially all lessees in the Building without regard to Lessee's specific use of the Leased Premises or any Alterations, additions or improvements made by Lessee, then Lessor shall make such alterations, additions or improvements and the costs thereof shall be included within Operating Costs pursuant to Section 2.1. 12.2 Condition of Leased Premises. Subject to Lessor's Work, if any, as referred to in Exhibit D to this Lease, Lessee hereby accepts the Leased Premises in the condition existing as of the date of occupancy, subject to all applicable zoning, municipal, county and state laws, ordinances, rules, regulations, orders, restrictions of record, and requirements in effect during the Term or any part of the Term hereof regulating the Leased Premises, and, except as otherwise provided in this Lease, without representation, warranty or covenant by Lessor, express or implied, as to the condition, habitability or safety of the Leased Premises, the suitability or fitness thereof for their intended purposes, or any other matter. Lessor covenants that the Lessor's Work pursuant to Exhibit D shall be in material compliance with applicable local and state building codes and ordinances in such manner that any violations or conditions of non-compliance will not result in the inability of Lessee to be issued a building permit for Lessee's Work pursuant to Exhibit D ("Code Compliance"). As of the date of execution of this Lease, Lessor has not received any notices for items that remain uncured with respect to the following: (i) notices from any governmental or quasi-governmental agency alleging any violation of any applicable laws (including ADA and Environmental Laws), rules, ordinances, regulations, and other applicable requirements pertaining to the Complex or any portion thereof; (ii) any notices of any claims made or threatened regarding noncompliance with the ADA or any Environmental Laws; or (iii) any notices of any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA or any Environmental Laws as to any portion of the Complex. 12.3 Hazardous Materials. (a) Hazardous Materials Defined. As used herein, the term "Hazardous Materials" shall mean any wastes, materials or substances (whether in the form of liquids, solids or gases, and whether or not air-borne), which are or are deemed to be pollutants or contaminants, or which are or are deemed to be hazardous, toxic, ignitable, reactive, corrosive, dangerous, harmful or injurious, or which present a risk, to public health or to the environment, or which are or may become regulated by or under the authority of any applicable local, state or federal laws, judgments, ordinances, orders, rules, regulations, codes or other governmental restrictions, guidelines or requirements, any amendments or successor(s) thereto, replacements thereof or publications promulgated pursuant thereto (collectively "Environmental Laws"), including, without limitation, any waste, material or substance which is: (i) defined as "hazardous waste," "extremely hazardous waste," or "restricted hazardous waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140, of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law); 17 (ii) defined as a "hazardous substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act); (iii) defined as a "hazardous material," "hazardous substance," or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 Hazardous Materials Release Response Plans and Inventory); (iv) defined as a "hazardous substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances); (v) defined as a "waste" or "hazardous substance" under Section 13050 of the California Water Code, Division 7, Chapter 2 (Porter-Cologne Water Quality Control Act); (vi) listed as a chemical known to the State of California to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, Division 20, Chapter 6.6 (Safe Drinking Water and Toxic Enforcement Act of 1986); (vii) defined as a "hazardous substance" or "pollutant or contaminant" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.ss.9601 et seq.; (viii) listed as an "extremely hazardous substance," "hazardous chemical," or "toxic chemical" pursuant to the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.ss.11001 et seq.; (ix) listed as a "hazardous substance" in the United States Department of Transportation Table, 49 C.F.R. 172.101 and amendments thereto, or by the Environmental Protection Agency (or any successor agency) in 40 C.F.R. Part 302 and amendments thereto; (x) defined, listed or designated by regulations promulgated pursuant to any Environmental Law; or (xi) any of the following: pesticide; flammable explosive; petroleum, including crude oil or any fraction thereof; asbestos or asbestos-containing material; polychlorinated biphenyl; radioactive material; or urea formaldehyde. In addition to the foregoing, the term Environmental Laws shall be deemed to include, without limitation, local, state and federal laws, judgments, ordinances, orders, rules, regulations, codes and other governmental restrictions, guidelines and requirements, any amendments and successors thereto, replacements thereof and publications promulgated pursuant thereto, which deal with, or otherwise in any manner relate to, air or water quality, air emissions, soil or ground conditions or other environmental matters of any kind. (b) Use, etc. of Hazardous Materials. Lessee agrees that during the Term, there shall be no use, presence, disposal, storage, generation, leakage, treatment, manufacture, import, handling, processing, release or threatened release of Hazardous Materials caused by Lessee on, from or under the Leased Premises except to the extent that, and in accordance with such conditions as, Lessor may have previously approved in writing. The use, presence, disposal, storage, generation, leakage, treatment, manufacture, import, handling, processing, release or threatened release of Hazardous Materials by Lessee are 18 sometimes hereinafter individually or collectively referred to as "Hazardous Use." It is further Agreed that Lessee shall be entitled to use and store only those Hazardous Materials which are necessary for Lessee's business, provided that such usage and storage is in full compliance with Environmental Laws, and all judicial and administrative decisions pertaining thereto. Lessee shall not be entitled to install any tanks under, on or about the Leased Premises for the storage of Hazardous Materials without the express written consent of Lessor, which may be given or withheld in Lessor's sole arbitrary judgment. (c) Hazardous Materials Report; When Required . Lessee shall submit to Lessor a written report with respect to Hazardous Materials ("Report") in the form prescribed in subparagraph (d) below on the following dates: (d) Hazardous Materials Report, Contents. The Report shall contain, without limitation, the following information: (i) Whether on the date of the Report and (if applicable) during the period since the last Report there has been any Hazardous Use on, from or under the Leased Premises. (ii) If there was such Hazardous Use, the exact identity of the Hazardous Materials, the dates upon which such materials were brought upon the Leased Premises, the dates upon which the Hazardous Materials were removed therefrom, and the quantity, location, use and purpose thereof. (iii) If there was such Hazardous Use, any governmental permits maintained by Lessee with respect to such Hazardous Materials, the issuing agency, original date of issue, renewal dates (if any) and expiration date. Copies of any such permits and applications therefor shall be attached. (iv) If there was such Hazardous Use, any governmental reporting or inspection requirements with respect to such Hazardous Materials, the governmental agency to which reports are made and/or which conducts inspections, and the dates of all such reports and/or inspections (if applicable) since the last Report. Copies of any such reports shall be attached. (v) Any liability insurance carried by Lessee with respect to Hazardous Materials, the insurer, policy number, date of issue, coverage amounts, and date of expiration. Copies of any such policies or certificates of coverage shall be attached. (vi) Any notices of violation of Environmental Laws at the Leased Premises, written or oral, received by Lessee from any governmental agency since the last Report, the date, name of agency, and description of violation. Copies of any such written notices shall be attached. (vii) Any knowledge, information or communication which Lessee has acquired or received relating to: (x) any enforcement, cleanup, removal or other governmental or regulatory action threatened or commenced against Lessee with respect to the Leased Premises pursuant to any Environmental Laws; (y) any claim made or threatened by any person or entity against Lessee or the Leased Premises on account of any alleged loss or injury claimed to result from any alleged Hazardous Use on or about the Leased Premises; or (z) any report, notice or complaint made to or filed with any governmental agency concerning any Hazardous Use on or about the Leased Premises. The Report shall be accompanied by copies of any such claim, report, complaint, notice, warning or other communication that is in the possession of or is available to Lessee. 19 (e) Release of Hazardous Materials: Notification and Cleanup. If at any time during the Term Lessee knows or believes that any release of any Hazardous Materials has come or will come to be located upon, about or beneath the Leased Premises, then Lessee shall immediately, either prior to the release or following the discovery thereof by Lessee, give verbal and follow-up written notice of that condition to Lessor. Lessee covenants to investigate, clean up and otherwise remediate any release of Hazardous Materials caused by Lessee (or Lessee's agents, contractors, employees and representatives), at Lessee's cost and expense; such investigation, clean-up and remediation shall be performed only after Lessee has obtained Lessor's written consent, which shall not be unreasonably withheld; provided, however, that Lessee shall be entitled to respond immediately to an emergency without first obtaining Lessor's written consent. Whenever the term "Lessee" is used in this Section 12 with respect to a use or release of Hazardous Materials, such term shall include Lessee's agents, contractors, employees and representatives. All clean-up and remediation shall be done in compliance with Environmental Laws and to the reasonable satisfaction of Lessor. Notwithstanding the foregoing, whether or not such work is prompted by the foregoing notice from Lessee or is undertaken by Lessor for any other reason whatsoever, Lessor shall have the right, but not the obligation, in Lessor's sole and absolute discretion, exercisable by written notice to Lessee at any time, to undertake within or outside the Leased Premises all or any portion of any investigation, clean-up or remediation with respect to Hazardous Materials for which Lessee is responsible (or, once having undertaken any of such work, to cease same, in which case Lessee shall perform the work), all at Lessee's cost and expense, which shall be paid by Lessee as additional rent within twenty (20) days after receipt of written request therefor by Lessor (and which Lessor may require to be paid prior to commencement of any work by Lessor). No such work by Lessor shall create any liability on the part of Lessor to Lessee or any other party in connection with such Hazardous Materials or constitute an admission by Lessor of any responsibility with respect to such Hazardous Materials. Lessee shall not enter into any settlement agreement, consent decree or other compromise with respect to any claims relating to any Hazardous Materials in any way connected to the Leased Premises without first: (i) notifying Lessor of Lessee's intention to do so and affording Lessor the opportunity to participate in any such proceedings; and (ii) obtaining Lessor's reasonable written consent. (f) Inspection and Testing by Lessor. Lessor shall have the right at all times during the Term to: (i) upon reasonable prior notice inspect the Leased Premises, as well as Lessee's books and records; and (ii) conduct tests and investigations to determine whether Lessee is in compliance with the provisions of this Section. Except in case of emergency, Lessor shall give reasonable notice to Lessee before conducting any inspections, tests, or investigations. The cost of all such inspections, tests and investigations shall be borne by Lessee, if Lessor reasonably believes them to be necessary. Neither any action nor inaction on the part of Lessor pursuant to this Section 12.3(f) shall be deemed in any -way to release Lessee from, or in any way modify or alter, Lessee's responsibilities, obligations, and/or liabilities incurred pursuant to Section 12.3 hereof. 12.4 Indemnity. Lessee shall indemnify, hold harmless, and, at Lessor's option (with such attorneys as Lessor may approve in advance and in writing), defend Lessor and Lessor's officers, directors, shareholders, trustees, partners, employees, contractors, agents and mortgagees or other lien holders, from and against any and all claims, demands, expenses, actions, judgments, damages (whether consequential, direct or indirect, known or unknown, foreseen or unforeseen), penalties, fines, liabilities, losses of every kind and nature (including, without limitation, property damage, diminution in value of Lessor's interest in the Leased Premises or the Complex, damages for the loss or restriction on use of any space or amenity within the Leased Premises or the Complex, damages arising from any adverse impact on marketing space in the Complex, sums paid in settlement of claims and any costs and expenses associated with injury, illness or death to or of any person), suits, administrative proceedings, costs and fees, including, but not limited to, attorneys' and consultants' fees and expenses, and the costs of cleanup, remediation, removal and restoration (all of the foregoing being hereinafter sometimes collectively referred to as "Losses"), arising from or related to any violation by Lessee of 20 any of the requirements, ordinances, statutes, regulations or other laws referred to in this Article, including, without limitation, Environmental Laws, any breach of the provisions of this Article, or any Hazardous Use on, about or from the Leased Premises caused by the acts or omissions of Lessee, its agents, employees and contractors, including without limitation any Hazardous Use or release of Hazardous Materials, after the Delivery Date until the expiration of the Term. 12.5 Release and Assumption of Risk. (a) Lessee, for itself, and its officers, directors, shareholders, partners, agents, contractors, attorneys, brokers, servants, employees, sublessees, lessees, invitees, concessionaires, licensees and representatives (hereinafter referred to as "Releasors"), hereby waives, releases, acquits and forever discharges Lessor and its officers, directors, trustees, shareholders, partners, agents, contractors, attorneys, brokers, servants, employees, lessees, invitees, licensees and representatives (hereinafter referred to as "Releasees") of and from any and all Losses, which are in any way connected with, based upon, related to or arising out of (i) any Hazardous Use or Hazardous Materials on or about the Leased Premises or the Complex, (ii) any violation by or relating to the Leased Premises or the Complex (or the ownership, use, condition, occupancy or operation thereof), or by the Releasors or any other persons or entities, of any Environmental or Wetlands Laws affecting the Leased Premises or the Complex, or (iii) any investigation, inquiry, order, hearing, action or other proceeding by or before any governmental agency or any court in connection with any of the matters referred to in clauses (i) or (ii) above (collectively, the "Released Matters"), except to the extent caused by the gross negligence or willful misconduct of the Releasees. Releasors hereby expressly assume any and all risk of Losses based on or arising out of or pertaining to the Released Matters. (b) Lessee agrees, represents and warrants that the Released Matters are not limited to matters which are known, disclosed or foreseeable, and Lessee waives any and all rights and benefits which are conferred upon Lessee by virtue of the provisions of Section 1542 of the California Civil Code, which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. (c) Lessee agrees, represents and warrants that it is familiar with, has read, understands, and has consulted legal counsel of its choosing with respect to California Civil Code Section 1542 and Lessee realizes and acknowledges that factual matters now unknown to it may have given, or may hereinafter give, rise to Losses which are presently unknown, unanticipated and unsuspected. Lessee further agrees, represents and warrants that the provisions of this Section 12.5 have been negotiated and agreed upon in light of that realization and that Lessee nevertheless hereby intends to release, discharge and acquit the Releasees from any such unknown Losses which are in any way related to this Lease or the Complex. 12.6 Indoor Air Quality. To prevent the generation, growth or deposit of any mold, mildew, bacillus, virus, pollen or other microorganism (collectively, "Biologicals") and the deposit, release or circulation of any indoor contaminants, including, but not limited to, emissions from paint, carpet and drapery treatments, cleaning, maintenance and construction materials and supplies, pesticides, pressed wood products, insulation, tobacco and other materials and products (collectively with Biologicals, "Contaminants"), that could adversely affect the health, safety or welfare of any tenant, employee, or other occupant of the Complex or their invitees (each, an "Occupant"), Lessee shall, at Lessee's sole cost and expense, at all times during the Term: (i) maintain, operate and repair the HVAC system servicing the Leased Premises (to 21 the extent that Lessee is otherwise obligated to perform such maintenance, operation and repair pursuant to this Lease) in a manner consistent with preventing or minimizing the generation, growth, circulation, release or deposit of any Contaminants; (ii) maintain the humidity level and the air exchange rate within the Leased Premises (to the extent that Lessee has control thereof) at a level recommended to prevent or minimize the growth of any Biologicals and the circulation of any other Contaminants; (iii) maintain, operate and repair the Leased Premises in such a manner to prevent or minimize the accumulation of stagnant water and moisture in planters, kitchen appliances and vessels, carpeting, insulation, water coolers and any other locations where stagnant water and moisture could accumulate; and (iv) otherwise maintain, operate and repair the Leased Premises to prevent the generation, growth, deposit, release or circulation of any Contaminants. If any governmental entity alleges to Lessee that health, safety or welfare has been or could be adversely affected by any such Contaminants, Lessee shall ' notify Lessor in writing within one (1) business day of the time the allegation is made. Lessor may then elect to engage the services of an industrial hygiene testing laboratory (or alternatively or concurrently require Lessee to do the same) to determine whether the cause of any alleged adverse health effect is or could be attributable to any Contaminants present within the Leased Premises. Lessee shall be responsible for all such testing costs and for any consequential damages and costs (including, without limitation, any third-party claims, loss of rental, remediation, removal and/or abatement costs, and increases in insurance premiums) resulting from Lessee's failure to comply in whole or in part with the terms of this Section 12.7. The indemnity set forth in Section 12.5 above shall apply to Lessee's failure to comply with any of the terms of this Section. 13. SERVICE AND EQUIPMENT 13.1 Climate Control. Lessor shall provide as part of Operating Costs ventilating and air conditioning ("VAC") to the Leased Premises from 8:00 a.m. to 6:00 p.m., Monday through Friday and 8:00 a.m. to 1:00 p.m. Saturday (the "Climate Control Hours") provided that Lessor shall have no responsibility or liability for failure to supply VAC service when making repairs, alterations or improvements or when prevented from so doing by strikes or any cause beyond Lessor's reasonable control or as provided in Section 13.6. Any VAC provided to the Leased Premises at Lessee's request after the Climate Control Hours shall be at Lessee's sole cost and expense in accordance with rate schedules promulgated by Lessor from time to time. Lessee acknowledges that Lessor has installed in the Building a system for the purpose of climate control. Initially, the use of fans to circulate outside air or in conjunction with the climate control equipment outside of the Climate Control Hours shall be charged at Twenty-Four Dollars ($24) per hour for each additional fan, and the use of chillers outside of the Climate Control Hours shall be charged at One Hundred Fifty Dollars ($150) per hour, each prorated among those lessees requiring such additional hours of climate control. Any use of the Leased Premises which exceeds the Building design load standards may require changes or alterations in the system or ducts through which the climate control system operates. Any changes or alterations so occasioned, if such changes can be accommodated by Lessor's equipment, shall be made by Lessee at its cost and expense but only with the written consent of Lessor first had and obtained, and in accordance with drawings and specifications and by a contractor first approved in writing by Lessor. If Lessee's use of the Leased Premises exceeds the Building design load standards, such excess use may necessitate the re-balancing of the climate control equipment in the Leased Premises. In such event, the same will be performed by Lessor at Lessee's expense. Any charges to be paid by Lessee hereunder shall be due within ten (10) days of receipt of an invoice from Lessor, which invoice may precede Lessor's expenditure for the benefit of Lessee. 13.2 Elevator Service. Subject to Section 13.6, Lessor shall provide reasonable elevator service (which may be with or without operator at Lessor's option) on a twenty-four (24) hour basis, three hundred sixty-five (365) days per year. 22 13.3 Cleaning Public Areas. Lessor shall maintain and keep clean the street level lobbies, sidewalks, truck dock, public corridors and other public portions of the Building. 13.4 Refuse Disposal. Lessee shall pay Lessor, within ten (10) days of being billed therefor, for the removal from the Leased Premises and the Building of such refuse and rubbish of Lessee as shall exceed that ordinarily accumulated daily in the routine of business office occupancy. 13.5 Janitorial Service. Lessor shall provide cleaning and janitorial service in and about the Complex and Leased Premises in accordance with Exhibit H, attached hereto. To the extent that Lessee shall require cleaning and/or janitorial service in excess of that set forth in Exhibit H (hereinafter referred to as "Special Cleaning Service") Lessor may, upon reasonable advance notice from Lessee, elect to furnish such Special Cleaning Service and Lessee agrees to pay Lessor, within ten (10) days of being billed therefor, Lessor's reasonable charge for providing such additional service. If Lessor does not elect to provide said Special Cleaning Service, Lessee may perform or provide for said Special Cleaning Service, at Lessee's sole cost and expense. 13.6 Interruptions. Lessor does not warrant that any of the services referred to above or any other services and/or utilities which Lessor may supply or are supplied will be free from interruption and/or the need for maintenance and repairs or replacement. Lessee acknowledges that any one or more such services may be suspended or reduced by reason of repairs, alterations or improvements necessary to be made, by strikes or accidents, by any cause beyond the reasonable control of Lessor, or by orders or regulations of any federal, state, county or municipal authority. In addition, Lessor shall have no liability for damages arising from, and Lessor does not warrant that Lessee's use of any Lines will be free from: (i) any eavesdropping or wire-tapping by unauthorized parties; (ii) any failure of any Lines to satisfy Lessee's requirements; or (iii) any shortages, failures, variations, interruptions, disconnections, loss or damage caused by installation, maintenance, replacement, use or removal of Lines by or for other occupants of the Complex, by any failure of the environmental conditions or the power supply for the Building to conform to any requirements for the Lines or any associated equipment or any other problems associated with any Lines by any other cause. Any such interruption or suspension of services shall not be deemed an eviction or disturbance of Lessee's use and possession of the Leased Premises or any part thereof, nor render Lessor liable to Lessee for damages by abatement of Rent or otherwise, nor relieve Lessee of performance of Lessee's obligations under this Lease. 13.7 Electrical Service. Lessee, at its own cost and expense, shall install a meter or check meter to monitor all electricity used by Lessee in the Leased Premises. Lessee shall pay all electricity charges applicable to the Leased Premises. 13.8 Building Upgrade Work. Lessor has advised Lessee that Lessor may make certain upgrades and improvements to the Common Areas and central systems of the Complex ("Building Upgrade Work"). Lessee acknowledges that the performance of the Building Upgrade Work may result in noise, dust and other temporary inconveniences or interruptions to the conduct of normal business activity in the Building. Lessor will utilize reasonable measures to reduce noise levels associated with the performance of the Building Upgrade Work; provided, however, the Building Upgrade Work shall in no event constitute a constructive eviction or serve as a basis for any abatement or reduction in rent. 23 14. WASTE 14.1 Waste or Nuisance. Lessee shall not commit, or suffer to be committed, any waste upon the Leased Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other lessee or occupant of the Complex in which the Leased Premises are located. 15. ALTERATIONS 15.1 Consent of Lessor; Ownership. Lessee shall not make, or suffer to be made, any Alterations to the Leased Premises, the Building, or the Complex, and/or Lines, systems and facilities therein, or any part thereof, without the written consent of Lessor first had and obtained. Any additions to or Alterations of the Leased Premises (except trade fixtures) shall, immediately upon being made, constitute a part of the realty and Lessor's property, and shall, at the expiration or earlier termination of this Lease, remain upon the Leased Premises without compensation to Lessee. Attached hereto as Exhibit K is a list of Tenant's trade fixtures. Lessee shall have the right to remove its trade fixtures placed upon the Leased Premises provided that Lessee restores the Leased Premises as indicated below. Any and all costs incurred by Lessor, whether in complying with laws, governmental requirements or otherwise, as a result of any Alterations, or as a result of request by Lessee for increased Lines or other utility capacity above that presently existing shall be paid by Lessee within ten (10) days after demand therefor by Lessor. 15.2 Lessee Alterations. Any alterations, additions, improvements or installations performed by Lessee (collectively "Alteration" or "Alterations") shall be subject to strict conformity with the following requirements: (a) All Alterations shall be at the sole cost and expense of Lessee; (b) Prior to commencement of any work of Alteration, Lessee shall submit detailed plans and specifications, including working drawings (hereinafter referred to as "Plans"), of the proposed Alterations, which shall be subject to the consent of Lessor in accordance with the terms of Section 15.1 above; (c) Following approval of the Plans by Lessor, Lessee shall give Lessor at least ten (10) days' prior written notice of commencement of work in the Leased Premises so that Lessor may post notices of non-responsibility in or upon the Leased Premises as provided by law; (d) No Alterations shall be commenced without Lessee having previously obtained all appropriate permits and approvals required by and of governmental agencies; (e) All Alterations shall be performed in a skillful and workmanlike manner, consistent with the Building Standards set forth as Exhibit G, and pursued with diligence in accordance with the Plans previously approved by Lessor and in full accord with all applicable laws and ordinances. All material, equipment, and articles incorporated in the Alterations are to be new and of recent manufacture and of the most suitable grade for the purpose intended. Lessee's contractor shall maintain all of the insurance reasonably required by Lessor, including, without limitation, commercial general liability, workers' compensation, builder's risk and course of construction insurance. The limits of such insurance shall be the same as those specified in Article 18; (f) Lessee must obtain the prior written approval from Lessor for Lessee's contractor before the commencement of the work. Lessor may require that Lessee use subcontractors designated by Lessor as to specified portions of the work; 24 (g) As a condition of approval of the Alterations, Lessor may require performance and labor and materialmen's payment bonds issued by a surety approved by Lessor, in a sum equal to the cost of the Alterations guarantying the completion of the Alterations free and clear of all liens and other charges in accordance with the Plans. Such bonds shall name Lessor as beneficiary; (h) The Alterations must be performed in a manner such that they will not interfere with the quiet enjoyment of the other lessees in the Complex; (i) Lessor shall have the right to condition any approval of the Alterations upon (i) submission by Lessee of a Report with respect to Hazardous Materials, and/or (ii) the performance by Lessee at Lessee's cost and expense of such investigation, clean-up and remediation with respect to Hazardous Materials as Lessor may request, in Lessor's sole and absolute discretion; provided, however, that Lessor shall have the right, but not the obligation, to undertake all or any portion of such investigation, clean-up or remediation at Lessee's cost and expense in accordance with the provisions of Section 12.3(e) above. Lessee acknowledges and agrees that Lessor shall have the right, in its sole and absolute discretion, to disapprove the making of any such Alterations based upon the results of any investigation with respect to Hazardous Materials, and the impact of such Alterations on the presence of Hazardous Materials. 15.3 Liens. Lessee shall keep the Leased Premises and the Complex in which the Leased Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Lessee. In the event a mechanic's or other lien is filed against the Leased Premises or the Complex of which the Leased Premises form a part as a result of a claim arising through Lessee, Lessor may demand that Lessee furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to at least one hundred fifty percent (150%) of the amount of the contested lien claim or demand, indemnifying Lessor against liability for the same and holding the Leased Premises free from the effect of such lien or claim. Such bond must be posted within ten (10) days following notice from Lessor. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in any action to foreclose such lien if Lessor shall decide it is to its best interest to do so. Lessor may pay the claim prior to the enforcement thereof, in which event Lessee shall reimburse Lessor in full, including attorneys' fees, for any such expense, as additional rent, with the next due rental. 15.4 Restoration. Lessee shall, at Lessee's sole cost and expense, return the Leased Premises to Lessor at the expiration or earlier termination of this Lease in good and sanitary order, condition and repair, free of rubble and debris, broom clean, reasonable wear and tear excepted. In addition, within thirty (30) days after request of Lessee, Lessor shall notify Lessee as to whether Lessor considers any such Alterations to be specialized and non-reusable areas, such as classrooms, manufacturing areas and storage racks, and whether Lessor desires such specialized and non-reusable areas of the Leased Premises restored to its condition prior to the making of such permitted Alterations. In the event Lessor requires restoration, Lessor shall, at least three (3) months prior to Lease expiration, provide Lessee with an estimate of the costs to so restore the Leased Premises ("Restoration Costs") and Lessee shall pay to Lessor, as additional Rent, the entire amount of the Restoration Costs no later than ten (10) days prior to Lease expiration. The foregoing restoration of the Leased Premises shall be performed after the Lease expiration. All damage to the Leased Premises caused by the removal of such trade fixtures and other personal property that Lessee is permitted to remove under the terms of this Lease and/or such restoration shall be repaired by Lessee at its sole cost and expense prior to termination. Lessee's obligations under this Section 15.4 shall apply to the parking garage, roof and other areas of the Complex impacted by Lessee's use and/or occupancy of the Complex or any part thereof. 25 16. PROPERTY INSURANCE 16.1 Lessor's Insurance. Lessor shall, to the extent available, procure and maintain at all times during the Term an "All Risk" or "Special Form" policy or policies of insurance covering loss or damage to the Building and the Complex in an amount sufficient to exceed minimum coinsurance requirements of such policy (exclusive of Lessee's trade fixtures, inventory, personal property, Tenant Improvements and equipment), providing protection against all perils included within the classification of fire and extended coverage, vandalism coverage and malicious mischief, sprinkler leakage, water damage, and special extended coverage on Building. Additionally, Lessor may (but shall not be required to) carry: (i) bodily injury and property damage liability insurance and/or excess liability coverage insurance; (ii) earthquake and/or flood damage insurance; or (iii) rental income insurance at Its election or if required by its lender from time to time during the Term; or (iv) any other insurance as Lessor or its lender reasonably deem appropriate, in such amounts and with such limits as Lessor or its lender may deem appropriate. The costs of all such insurance shall be included in Operating Costs. 16.2 Use of Premises. No use shall be made or permitted to be made by Lessee on the Leased Premises, nor acts done, which will increase the existing rate of insurance upon the Building in which the Leased Premises are located or upon any other Building the Complex or cause the cancellation of any insurance policy covering the Building, or any part thereof, nor shall Lessee sell, or permit to be kept, used or sold, in or about the Leased Premises, any article which may be prohibited by the standard form of "All Risk" fire insurance policies. Lessee shall, at its sole cost and expense, comply with any and all requirements pertaining to the Leased Premises, of any insurance organization or company, necessary for the maintenance of reasonable property damage and commercial general liability insurance, covering the Leased Premises, the Building, or the Complex. 16.3 Increase in Premiums. Lessee agrees to pay to Lessor, as additional Rent, any increase in premiums on policies which may be carried by Lessor on the Leased Premises, the Building or the Complex, or any blanket policies which include the Building or Complex, covering damage thereto and loss of Rent caused by fire and other perils above the rates for the least hazardous type of occupancy for office use. Lessee further agrees to pay Lessor, as additional Rent, any increases in such premiums resulting from the nature of Lessee's occupancy or any act or omission of Lessee. All payments of additional Rent by Lessee to Lessor pursuant to this Section 16.3 shall be made within ten (10) days after receipt by Lessee of Lessor's billing therefor. 16.4 Personal Property Insurance. Lessee shall maintain in full force and effect on all of its fixtures, furniture, equipment and other business personal property in the Leased Premises a policy or policies providing protection against any peril included within the classification "All Risk" to the extent of at least ninety percent (90%) of their replacement cost, or that percentage of the replacement cost required to negate the effect of a coinsurance provision, whichever is greater. No such policy shall have a deductible in a greater amount than One Thousand Dollars ($1,000). Lessee shall also insure in the same manner the physical value of all its Tenant Improvements and Alterations in the Leased Premises including the Lessee's Work. During the Term, the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures, equipment, and Tenant Improvements so insured. Lessor shall have no interest in said insurance, and will sign all documents necessary or proper in connection with the settlement of any claim or loss by .Lessee. Lessee shall also maintain insurance for all plate glass upon the Leased Premises. All insurance specified in this Section 16.4 to be maintained by Lessee shall be maintained by Lessee at its sole cost. 17 INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION 17.1 Waiver of Subrogation. Lessor and Lessee release each other, and their respective authorized representatives, from any claims for damage to the Leased Premises and the Building and other improvements in which the Leased Premises are located, and to the furniture, fixtures, and other business personal property, Lessee's improvements and Alterations of either Lessor or Lessee, in 26 or on the Leased Premises and the Building and other improvements in which the Leased Premises are located, including loss of income, that are caused by or result from risks insured or required under the terms of this Lease to be insured against under any property insurance policies carried or to be carried by either of the parties. 17.2 Form of Policy. Each party shall cause each such insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against either party in connection with any damage covered by such policy. Neither party shall be liable to the other for any damage caused by any peril included within the classification "All Risk" which is insured against under any property insurance policy carried under the terms of this Lease. 17.3 Indemnity. Lessee, as a material part of the consideration to be rendered to Lessor, shall indemnify, defend, protect and hold harmless Lessor against all actions, claims, demands, damages, liabilities, losses, penalties, or expenses of any kind which may be brought or imposed upon Lessor or which Lessor may pay or incur by reason of injury to person or property or business, from whatever cause, all or in any way connected with the acts ' and omissions of Lessee, and the condition or use of the Leased Premises, or the improvements or personal property therein or thereon, including without limitation any liability or injury to the person or property or business of Lessee, its agents, officers, employees or invitees. Lessee agrees to indemnify, defend and protect Lessor and hold it harmless from any and all liability, loss, cost or obligation on account of, or arising out of, any such injury or loss however occurring, including breach of the provisions of this Lease and the negligence of the parties hereto. Nothing contained herein shall obligate Lessee to indemnify Lessor against its own negligence or willful acts, for which Lessor shall indemnify Lessee. 17.4 Defense of Claims. In the event any action, suit or proceeding is brought against Lessor by reason of any such occurrence, Lessee, upon Lessor's request, will at Lessee's expense resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel designated either by Lessee or by the insurer whose policy covers the occurrence and in either case approved by Lessor. The obligations of Lessee under this Section arising by reason of any occurrence taking place during the Term shall survive any termination of this Lease. 17.5 Waiver of Claims. Lessee, as a material part of the consideration to be rendered to Lessor, hereby waives all claims against Lessor for damages or injury, as described below, from any cause arising at any time, including breach of the provisions of this Lease and the negligence of the parties hereto: (a) damages to goods, wares, merchandise and loss of business in, upon or about the Leased Premises; and (b) (notwithstanding anything to the contrary contained in this Lease, including, without limitation, the definition of Operating Costs in Section 2.1, which includes "policing") damages to goods, wares, merchandise and loss of business, in, upon or about the Leased Premises or the Complex, and injury to Lessee, its agents, employees invitees or third persons in, upon or about the Leased Premises or the Complex, where such damage or injury results from Lessor's failure to police or provide security for the Complex or Lessor's negligence in connection therewith. Lessee expressly acknowledges and agrees that the provisions of Section 12.5(b) above apply fully with respect to the matters waived pursuant to this Section 17.5, and, for such purpose, the term Released Matters, as used in Section 12.5(b), shall be deemed to include the matters waived pursuant to this Section 17.5. 27 17.6 References. Wherever in this Article the term Lessor or Lessee is used and such party is to receive the benefit of a provision contained in this Article, such term shall refer not only to that party but also to its officers, directors, shareholders, employees, contractors, partners, agents and mortgagees or other lien holders. 18. LIABILITY INSURANCE 18.1 Lessee's Insurance. Lessee shall, at Lessee's expense, obtain and keep in force during the Term, a commercial general liability insurance policy insuring Lessee against the risks of, bodily injury and property damage, personal injury, contractual liability, completed operations, products liability, host liquor liability, owned and non-owned automobile liability arising out of the ownership, use, occupancy or maintenance of the Leased Premises and all areas appurtenant thereto. Such insurance shall be a combined single limit policy in an amount not less than One Million Dollars ($1,000,000) per occurrence with a Two Million Dollar ($2,000,000) annual aggregate; and an umbrella policy of Three Million Dollars ($3,000,000) for any one occurrence. Lessor and any lender or other party in interest designated by Lessor shall be named as additional insured(s). The policy shall contain cross liability endorsements and shall insure performance by Lessee of the indemnity provisions of this Lease; shall be primary, not contributing with, and not in excess of coverage which Lessor may carry; shall state that Lessor is entitled to recovery for the negligence of Lessee even though Lessor is named as an additional insured; shall provide for severability of interest; shall provide that an act or omission of one of the insured or additional insureds which would void or otherwise reduce coverage shall not void or reduce coverages as to the other insured or additional insured; and shall afford coverage after the Term (by separate policy or extension if necessary) for all claims based on acts, omissions, injury or damage which occurred or arose (or the onset of which occurred or arose) in whole or in part during the Term. The limits of said insurance shall not limit any liability of Lessee hereunder. Not more frequently than every three (3) years, if, in the reasonable opinion of Lessor, the amount of liability insurance required hereunder is not adequate, Lessee shall promptly increase said insurance coverage as required by Lessor. 18.2 Workers' Compensation Insurance. Lessee shall carry Workers' Compensation insurance as required by law, including an employers' liability endorsement. 18.3 Rent Loss/Business Interruption Insurance. Lessee shall carry Rental Loss/Business Interruption insurance covering rental loss or business interruptions resulting from those risks referred to in Section 18.1 in an amount equal to all Rent payable under this Lease for a period of twelve (12) months at the then current rate of charges. 19. INSURANCE POLICY REQUIREMENTS 19.1 General Requirements. All insurance policies required to be carried by Lessee (except Lessee's business personal property insurance) hereunder shall conform to the following requirements: (a) The insurer in each case shall carry a designation in "Best's Insurance Reports" as issued from time to time throughout the Term as follows: policyholders' rating of A; financial rating of not less than VII; (b) The insurer shall be qualified to do business in the state in which the Leased Premises are located; (c) The policy shall be in a form and include such endorsements as are acceptable to Lessor; (d) Certificates of insurance shall be delivered to Lessor at commencement of the Term and certificates of renewal at least thirty (30) days prior to the expiration of each policy; (e) Each policy shall require that Lessor be notified in writing by the insurer at least thirty (30) days prior to any cancellation or expiration of such policy, or any reduction in the amounts of insurance carried. 20. LESSEE INSURANCE DEFAULT 20.1 Rights of Lessor. In the event that Lessee falls to obtain any insurance required of it under the terms of this Lease, Lessor may, at its option, but is not obligated to, obtain such insurance on behalf of Lessee and bill Lessee, as additional rent, for the cost thereof. Payment shall be due within ten (10) days of receipt of the billing therefor by Lessee. 28 21. FORFEITURE OF PROPERTY AND LESSOR'S LIEN 21.1 Removal of Personal Property. Lessee agrees that as of the date of termination of this Lease or repossession of the Leased Premises by Lessor, by way of default or otherwise, it shall remove all personal property to which it has the right to ownership pursuant to the terms of this Lease. Any and all such property of Lessee not removed by such date shall, at the option of Lessor, irrevocably become the sole property of Lessor. Lessee waives all rights to notice and all common law and statutory claims and causes of action which it may have against Lessor subsequent to such date as regards the storage, destruction, damage, loss of use and ownership of the personal property affected by the terms of this Article. Lessee acknowledges Lessor's need to relet the Leased Premises upon termination of this Lease or repossession of the Leased Premises and understands that the forfeitures and waivers provided herein are necessary to aid said reletting, and to prevent Lessor incurring a loss for inability to deliver the Leased Premises to a prospective lessee. 22. MAINTENANCE AND REPAIRS 22.1 Lessor's Obligations. Subject to the other provisions of this Lease imposing obligations in this respect upon Lessee, Lessor shall repair, replace and maintain in commercially reasonable condition the external and Structural parts of the Complex which do not comprise a part of the Leased Premises and are not leased to others, janitor and equipment closets and shafts within the Leased Premises designated by Lessor for use by it in connection with the operation and maintenance of the Complex, and all Common Areas. Lessor shall maintain and repair equipment, Lines, facilities or systems of the Building or Complex which are outside of the Leased Premises or which do not exclusively serve the Leased Premises. Lessor shall perform such repairs, replacements and maintenance with reasonable dispatch, in a good and workmanlike manner; but Lessor shall not be liable for any damages, direct, indirect or consequential, or for damages for personal discomfort, illness or inconvenience of Lessee by reason of failure of equipment, Lines, facilities or systems or reasonable delays in the performance of such repairs, replacements and maintenance, unless caused by the negligence of Lessor, its servants, agents, or employees. The cost for such repairs, maintenance and replacement shall be included in Operating Costs in accordance with Section 2.1 hereof. 22.2 Negligence of Lessee. If the Building, the elevators, escalators, boilers, engines, pipes or apparatus used for the purpose of climate control of the Building or operating the elevators, or escalators, or if the water pipes, drainage pipes, electric lighting or other equipment, Lines, systems and/or facilities of the Building or the Complex, or the roof or the outside walls of the Building, fall into a state of disrepair or become damaged or destroyed through the negligence, carelessness or misuse of Lessee, its agents, employees or anyone permitted by it to be in the Complex, or through it in any way, the cost of the necessary repairs, replacements or Alterations shall be borne by Lessee who shall pay the same to Lessor as additional charges within ten (10) days of demand by Lessor. 22.3 Lessee's Obligations. Lessee shall repair the Leased Premises, including without limiting the generality of the foregoing, all interior partitions and walls, fixtures, Leasehold Improvements and Alterations in the Leased Premises and all electrical and telephone outlets and conduits, fixtures and shelving, and special mechanical and electrical equipment which equipment is not a normal part of the Leased Premises installed by or for Lessee, reasonable wear and tear, damage with respect to which Lessor has an obligation to repair as provided in Section 22.1 and Section 23.2 hereof only excepted. Prior to commencement of any repairs, Lessee shall give Lessor at least ten (10) days' prior written notice thereof so that Lessor may post notices of non-responsibility in or upon the Leased Premises as provided by law. Lessee must obtain the prior written approval from Lessor for Lessee's contractor before the commencement of the repair. Lessor may require that Lessee use a specific contractor for certain types of repairs. Lessor may enter and view the state of repair and Lessee will repair in a good and workmanlike manner 29 according to notice in writing. Notwithstanding the foregoing, Lessee shall not make any repairs to the equipment, Lines, facilities or systems of the Building or Complex which are outside of the Leased Premises or which do not exclusively serve the Leased Premises. 22.4 Cleaning. Lessee agrees at the end of each business day to leave the Leased Premises in a reasonably clean condition for the purpose of the performance of Lessor's cleaning services referred to herein. Lessee shall maintain the appearance of the Leased Premises in a manner consistent with the character, use and appearance of the Complex. Lessor shall follow Lessee's security guidelines with respect to janitorial services, or, at Lessor's option, Lessor shall require Lessee to be responsible for its own janitorial service. 22.5 Waiver. Lessee waives all rights it may have under law to make repairs at Lessor's expense. 22.6 Acceptance. Except as to the construction obligations of Lessor for the Lessor's Work, if any, stated in Exhibit D to this Lease, Lessee shall accept the Leased Premises in "as is" condition as of the date of execution of this Lease by Lessee, and Lessee acknowledges that the Leased Premises in such condition are in good and sanitary order, condition and repair. Lessee acknowledges that generally there shall be no floor/ceiling coring or penetrations due to the post tension floor slab structural system of the Building. However, Lessor agrees that Lessee may undertake corings for installation of its vault subject to prior written approval by Lessor of the location, size and type of corings. 23. DESTRUCTION 23.1 Rights of Termination. In the event the Leased Premises suffers (a) an Uninsured Property Loss (as hereinafter defined) or (b) a property loss which cannot be repaired within one hundred twenty (120) days from the date of destruction under the laws and regulations of state, federal, county or municipal authorities, or other authorities with jurisdiction, Lessor may terminate this Lease as at the date of the damage upon written notice to Lessee following the property loss. For purposes of this Lease, the term "Uninsured Property Loss" shall mean any loss arising from a peril not covered by the standard form of an "All Risk" or "Special Form" property insurance policy. 23.2 Repairs. In the event of a property loss which may be repaired within one hundred twenty (120) days from the date of the damage, or, in the alternative, in the event Lessor does not elect to terminate this Lease under the terms of Section 23.1 above, then this Lease shall continue in full force and effect and Lessor shall forthwith undertake to make such repairs to reconstitute the Leased Premises to as near the condition as existed prior to the property loss as practicable but not including any construction originally performed by Lessee (including Lessee's Work) or subsequently undertaken by Lessee, but shall include solely property constructed by Lessor (including Lessor's Work) prior to the commencement of the Term. Notwithstanding anything to the contrary contained herein, in the event of a property loss which is not repaired by Lessor within two hundred ten (210) days from the date of damage, Lessee should have the right to terminate this Lease by written notice to Lessor within thirty (30) days after the aforesaid 210-day period but in no event later than Lessor's completion of repairs. Such partial destruction shall in no way annul or void this Lease except that Lessee shall be entitled to a proportionate reduction of Minimum Rent following the property loss and until the time the Leased Premises are restored. Such reduction shall be pro rata based upon the number of usable square feet of the Leased Premises damaged and not occupied. Lessor's obligations to restore shall in no way include any construction originally performed by Lessee or subsequently undertaken by Lessee, but shall include solely that property constructed by Lessor prior to commencement of the Term, 30 23.3 Repair Costs. The cost of any repairs to be made by Lessor, pursuant to Section 23.2 of this Lease, shall be paid by Lessor utilizing available insurance proceeds. Lessee shall reimburse Lessor upon completion of the repairs for any deductible for which no insurance proceeds will be obtained under Lessor's insurance policy to the extent such deductible is not reimbursed as an Operating Cost, or if other premises are also repaired, a pro rata share based on total costs of repair equitably apportioned to the Leased Premises. Lessee shall, however, not be responsible to pay any deductible or its share of any deductible to the extent that Lessee's payment would be in excess of Ten Thousand Dollars ($10,000) if Lessee's consent has not been received by Lessor, unless such denial of consent by Lessee is unreasonable in the reasonable judgment of Lessor's insurance consultant. 23.4 Waiver. Lessee hereby waives all statutory or common law rights of termination in respect to any partial destruction or property loss which Lessor is obligated to repair or may elect to repair under the terms of this Article. Further, in event of a property loss occurring during the last two (2) years of the original Term hereof or of any extension, Lessor need not undertake any repairs and may cancel this Lease unless Lessee has the right under the terms of this Lease to extend the Term for an additional period of at least five (5) years and does so within thirty (30) days of the date of the property loss. 23.5 Lessor's Election. In the event that the Complex or Building in which the Leased Premises are situated be destroyed to the extent of not less than (i) thirty-three and one-third percent (33-1/3%) of the replacement cost thereof in the event of an insured property loss, or (ii) more than Five Hundred Thousand Dollars ($500,000) in replacement construction costs in the case of an Uninsured Property Loss, Lessor may elect to terminate this Lease, whether the Leased Premises be injured or not, in the same manner as in Section 23.1 above. At all events, a total destruction of the Complex of which the Leased Premises form a part, or the Leased Premises itself, shall terminate this Lease. 24. CONDEMNATION 24.1 Definitions. (a) "Condemnation" means (i) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor (as defined below) and/or (ii) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. (b) "Date of Taking" means the date the Condemnor has the right to possession of the property being condemned. (c) "Award" means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. (d) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation. 24.2 Total Taking. If the Leased Premises are totally taken by Condemnation, this Lease shall terminate on the Date of Taking. 24.3 Partial Taking; Common Areas. 31 (a) If any portion of the Leased Premises is taken by Condemnation, this Lease shall remain in effect, except that Lessee can elect to terminate this Lease if thirty-three and one-third percent (33-1/3%) or more of the total number of square feet in the Leased Premises is taken. (b) If any part of the Common Areas of the Complex is taken by Condemnation and as a consequence thereof, the Complex is not in compliance with applicable governmental codes and requirements, then Lessor shall have the election to terminate this Lease pursuant to this Section. (c) If fifty percent (50%) or more of the Building in which the Leased Premises are located is taken, Lessor shall have the election to terminate this Lease in the manner prescribed herein. 24.4 Termination or Abatement. If either party elects to terminate this Lease under the provisions of Section 24.3 (such party is hereinafter referred to as the "Terminating Party"), it must terminate by giving notice to the other party (the "Nonterminating Party") within thirty (30) days after the nature and extent of the taking have been finally determined (the "Decision Period"). The Terminating Party shall notify the Nonterminating Party of the date of termination, which date shall not be earlier than sixty (60) days after the Terminating Party has notified the Nonterminating Party of its election to terminate nor later than the Date of Taking. If Notice of Termination is not given within the Decision Period, the Lease shall continue in full force and effect except that Minimum Rent shall be reduced by subtracting therefrom an amount calculated by multiplying the Minimum Rent in effect prior to the taking by a fraction the numerator of which is the number of square feet taken from the Leased Premises and the denominator of which is the number of square feet in the Leased Premises prior to the taking. 24.5 Restoration. If there is a partial taking of the Leased Premises and this Lease remains in full force and effect pursuant to this Article, Lessor, at its cost, shall accomplish all necessary restoration so that the Leased Premises is returned as near as practical to its condition immediately prior to the date of the taking, but in no event shall Lessor be obligated to expend more for such restoration than the extent of funds actually paid to Lessor by the Condemnor. 24.6 Award. Any award arising from the Condemnation or the settlement thereof shall belong to and be paid to Lessor except that Lessee shall receive from the award compensation for the following if specified in the award by the Condemnor, so long as it does not reduce Lessor's award in respect of the real property: Lessee's trade fixtures, tangible personal property, loss of business and relocation expenses. At all events, Lessor shall be solely entitled to all award in respect of the real property, including the bonus value of the leasehold. Lessee shall not be entitled to any award until Lessor has received the above sum in full. 25. ASSIGNMENT AND SUBLETTING 25.1 Lease is Personal. The purpose of this Lease is to transfer possession of the Leased Premises to Lessee for Lessee's personal use in return for certain benefits, including rent, to be transferred to the Lessor. Lessee's right to assign or sublet as stated in this Article is subsidiary and incidental to the underlying purpose of this Lease. Lessee acknowledges and agrees that it has entered into this Lease in order to acquire the Leased Premises for its own personal use and not for the purpose of obtaining the right to convey the leasehold to others. 25.2 "Transfer of the Leased Premises" Defined. The terms "Transfer of the Leased Premises" or "Transfer" as used herein shall include any assignment of all or any part of this Lease (including assignment by operation of law), subletting of all or any part of the Leased Premises or transfer of possession, or granting of the right of possession or contingent right of possession of all 32 or any portion of the Leased Premises including, without limitation, license, concession, mortgage, devise, hypothecation, agency, franchise or management agreement, or suffering any other person (the agents and servants of Lessee excepted) to occupy or use the Leased Premises or any portion thereof. If Lessee is a corporation which is not deemed a public corporation, or is an unincorporated association or partnership, or Lessee consists of more than one party, the transfer, assignment or hypothecation of any stock or interest in such corporation, association, partnership or ownership interest, in the aggregate in excess of twenty-five percent (25%), shall be deemed a Transfer of the Leased Premises. Lessor acknowledges that Lessee is a public corporation and is not subject to the preceding sentence. 25.3 No Transfer Without Consent. Lessee shall not suffer a Transfer of the Leased Premises or any interest therein, or any part thereof, or any right or privilege appurtenant thereto without the prior written consent of Lessor, and a consent to one Transfer of the Leased Premises shall not be deemed to be a consent to any subsequent Transfer of the Leased Premises. Any Transfer of the Leased Premises without such consent shall (i) be voidable, and (ii) terminate this Lease, in either case, at the option of Lessor. 25.4 When Consent Granted. (a) The consent of Lessor to a Transfer may not be unreasonably withheld, provided that it is agreed to be reasonable for Lessor to consider any of the following reasons, which list is not exclusive, in electing to consent or to deny consent: (i) Financial strength of the proposed Transferee is not at least equal to that of Lessee at the time of execution of this Lease; (ii) A proposed Transferee which is in good standing with regulatory agencies. (iii) A proposed Transferee whose impact on the common facilities or the other occupants of the Complex would be disadvantageous to the operation and management of the Complex including increasing the cost of operation and management; (iv) A proposed Transferee whose use presents a risk of violation of Article 12; (v) A proposed Transferee whose occupancy will require a variation in the terms of this Lease (for example, a variation in the use clause); (vi) That there be no uncured notices of default under the terms of this Lease; or (vii) A proposed Transferee who is or is likely to be, or whose business is or is likely to be, subject to compliance with additional laws or other governmental requirements beyond those to which Lessee or Lessee's business is subject. (b) Notwithstanding the foregoing, Lessee shall have the right, without the consent of Lessor, but upon prior written notice to Lessor, to assign this Lease to a company incorporated or to be incorporated by Lessee, provided that Lessee owns or beneficially controls all the issued and outstanding shares of capital stock of the company; further provided, however, that in the event that at any time following such assignment, Lessee wishes to sell, mortgage, devise, hypothecate or in any other manner whatsoever transfer any portion of the ownership or beneficial control of the issued and outstanding shares in the capital stock of such company, such transaction shall be deemed to constitute a Transfer and shall be subject to all of the provisions of this Article 25 with respect to a Transfer of the Leased Premises including, by specific reference, the provisions of Section 25.8. 33 25.5 Procedure for Obtaining Consent. (a) Lessor need not commence its review of any proposed Transfer, or respond to any request by Lessee with respect to such, unless and until it has received from Lessee adequate descriptive information concerning the Transferee, the business to be conducted by the Transferee, the Transferee's financial capacity, and such other information as may reasonably be required in order to form a prudent judgment as to the acceptability of the proposed Transfer, including, without limitation, the following: (i) Reasonable financial information concerning the proposed Transferee including the past two years' audited annual Balance Sheets and Profit and Loss statements certified correct by a Certified Public Accountant; (ii) Banking references of the proposed Transferee; (iii) A resume of the business background and experience of the proposed Transferee; (iv) At least five (5) business references for the proposed Transferee; (v) An executed copy of the instrument by which Lessee proposes to effectuate the Transfer; (vi) A certified statement, including the calculation, of the amount of unamortized cost of Lessee's Tenant Improvements to the Leased Premises. (b) Lessee shall reimburse Lessor as additional rent for Lessor's reasonable costs and attorneys' fees incurred in conjunction with the processing and documentation of any proposed Transfer of the Leased Premises, whether or not consent is granted. 25.6 Recapture. (a) Except as provided in Section 25.6(c), by written notice to Lessee (the "Termination Notice") within twenty (20) business days following submission to Lessor by Lessee of the information specified in Section 25.5, Lessor: (i) may terminate this Lease in the event of an assignment of this Lease or sublet of the entire Leased Premises; or (ii) if such proposed subletting will result in more than fifty percent (50%) of the entire Leased Premises being sublet (in the aggregate with any previous subleases), terminate this Lease as to all or any portion of the Leased Premises. Any termination pursuant to clause (ii) above shall be subject to the rights of any sublessees under any existing subleases provided Lessor has previously consented to the sublease in accordance with the terms of this Lease. In the event Lessor elects to terminate this Lease as to that portion of the Leased Premises to be sublet, an amendment to this Lease shall be executed whereby the description of the Leased Premises is restated and Lessee's obligations for rent and other charges are reduced in proportion to the reduction in Rentable Area of the Leased Premises caused thereby. (b) In the event that Lessor terminates this Lease or terminates this Lease as to a portion thereof, Lessor may, if it elects, enter into a new lease covering the Leased Premises or a portion thereof with the intended Transferee on such terms as Lessor and such Transferee may agree or enter into a new lease covering the Leased Premises with any other party; in such event, Lessee shall 34 not be entitled to any portion of the profit if any which Lessor may realize on account of such termination and reletting. From and after the date of such termination of this Lease, the parties shall have no further obligations to each other under this Lease except for matters occurring or obligations arising prior to the date of such termination. (c) Notwithstanding the provisions of Section 25.6(a), in the event the Transfer is a part of the sale of Lessee's entire business by way of the sale of substantially all of the Lessee's assets or Lessee's capital stock, and Lessor approves the Transfer, Lessor, upon reasonable prior notice and supporting documentation, agrees to waive its recapture rights specified in Section 25.6(a) and 25.6(b); however, all other provisions of Section 25 shall be applicable to such a Transfer including the provisions of Section 25.8. 25.7 Reasonable Restriction. The restrictions on Transfer described in this Article 25 are acknowledged by Lessee to be reasonable for all purposes, including, without limitation, the provisions of California Civil Code (the "Code") Section 1951.4(b)(2). Lessee expressly waives any rights which it might otherwise be deemed to possess pursuant to applicable law, including, without limitation, Section 1997.040 of the Code, to limit any remedy of Lessor pursuant to Section 1951.2 or 1951.4 of the Code by means of proof that enforcement of a restriction on use of the Leased Premises would be unreasonable. 25.8 Effect of Transfer. If Lessor consents to a Transfer (or if a Transfer occurs without Lessor's consent in accordance with Section 25.4(b)), the following conditions shall apply: (a) Each and every covenant, condition or obligation imposed upon Lessee by this Lease and each and every right, remedy or benefit afforded Lessor by this Lease shall not be impaired or diminished as a result of such Transfer. (b) Lessee shall pay to Lessor, on a monthly basis, seventy percent (70%) of the excess of any sums of money, or other economic consideration received by Lessee from the Transferee in such month (whether or not for a period longer than one month), including higher rent, bonuses, key money, or the like over the aggregate, of: (i) the Amortized Portion, as defined below, of the reasonable expenses actually paid by Lessee to unrelated third parties for brokerage commissions, tenant improvements to the Leased Premises, or design fees incurred as a direct consequence of the Transfer; and (ii) the total sums which Lessee pays Lessor under this Lease in such month, or the prorated portion thereof if the Leased Premises transferred is less than the entire Leased Premises. The amount so derived shall be paid with Lessee's payment of Minimum Rent. The term "Amortized Portion" is that portion of the applicable expenses derived by dividing such expenses by the number of months in the original term of the Transfer transaction. (c) No Transfer, whether or not consent of Lessor is required hereunder, shall relieve Lessee of its primary obligation to pay the rent and to perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any proposed Transferee shall not be deemed to be a waiver by Lessor of any provision of this Lease or to be a consent to any Transfer of the Leased Premises. (d) If Lessor consents to a sublease, such sublease shall not extend beyond the expiration of the Term. (e) No Transfer shall be valid and no Transferee shall take possession of the Leased Premises or any part thereof unless, within ten (10) days after the execution of the documentary evidence thereof, Lessee shall deliver to Lessor a duly executed duplicate original of the Transfer instrument in form satisfactory to Lessor which provides that: (i) the Transferee assumes Lessee's obligations for the payment of rent and for the full and faithful observance and 35 performance of the covenants, terms and conditions contained herein; (ii) such Transferee will, at Lessor's election, attorn directly to Lessor in the event Lessee's Lease is terminated for any reason on the terms set forth in the instrument of transfer; and (iii) such instrument of transfer contains such other assurances as Lessor reasonably deems necessary. 26. ABANDONMENT 26.1 Lessee to Occupy. Lessee shall not abandon the Leased Premises at any time during the Term, and if Lessee shall abandon, vacate or surrender the Leased Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and remaining on the Leased Premises thereafter shall, at the option of Lessor, be deemed abandoned. 27. ENTRY BY LESSOR 27.1 Rights of Lessor. Lessee shall permit Lessor and Lessor's agents to enter the Leased Premises at all reasonable times, and upon reasonable prior notice except in the case of an emergency, for the purpose of inspecting the same or for the purpose of maintaining the Building and the Lines, systems and facilities therein, or for the purpose of making repairs, replacements, alterations or additions to any portion of the Building and the Lines, systems and facilities therein, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required, or for the purpose of posting notices of non-responsibility for alterations, additions or repairs, or for the purpose of placing upon the Building any usual or ordinary "for sale" signs, without any rebate of Rent and without any liability to Lessee for any loss of occupation or quiet enjoyment of the Leased Premises thereby occasioned, and shall permit Lessor, at any time within ninety (90) days prior to the expiration of this Lease, to place upon the Leased Premises any usual or ordinary "to let" or "to lease" signs. This Section in no way affects the maintenance obligations of the parties hereto. 28. SIGNS 28.1 Lessee shall not place on the Leased Premises or on the Complex, any exterior signs or advertisements nor any interior signs or advertisements that are visible from the exterior of the Leased Premises including the Atrium, without Lessor's prior written consent, which Lessor reserves the right to withhold for any aesthetic reason in its sole judgment. Lessee's name shall be included on the Building directory in the main lobby of the Building and in applicable Common Areas, in accordance with Lessor's Sign Program. The cost of installation and regular maintenance of any such signs approved by Lessor shall be at the sole expense of Lessee. At the termination of this Lease, or any extension thereof, Lessee shall remove all its signs, and all damage caused by such removal shall be repaired at Lessee's expense. Notwithstanding the foregoing, Lessor approves Lessee's installation of those signs depicted in Exhibit K, as well as one flag/flagpole sign above Lessee's door, subject to Lessor's approval of size and design. Further, subject to governmental approval and Landlord's approval (which shall not be unreasonably withheld) as to design, color, and placement, Lessee may install an exterior sign immediately above Tenant's Townsend Street entrance with the approximate dimensions of six (6) feet wide by two (2) feet in height. 29. DEFAULT 29.1 Definition. The occurrence of any of the following shall constitute a material default and breach of this Lease by Lessee: 36 (a) Any failure by Lessee to pay the rent or to make any other payment required to be made by Lessee hereunder within three (3) days' of due date; (b) The abandonment of the Leased Premises by Lessee in violation of Section 26.1 hereof; (c) Any failure by Lessee to provide executed documents as and when required under the provisions of Section 36.2 and/or Article 37; (d) A failure by Lessee to observe and perform any other provision of this Lease to be observed or performed by Lessee, where such failure continues for thirty (30) days after written notice thereof by Lessor to Lessee; provided, however, that if the nature of the default is such that the same cannot reasonably be cured within the thirty (30) day period allowed, Lessee shall not be deemed to be in default if Lessee shall, within such thirty (30) day period, commence to cure and thereafter diligently prosecute the same to completion; (e) Either: (i) the appointment of a receiver (except a receiver appointed at the instance or request of Lessor) to take possession of all or substantially all of the assets of Lessee; (ii) a general assignment by Lessee for the benefit of creditors; or (iii) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee. In such event, Lessor may, at its option, declare this Lease terminated and forfeited by Lessee, and Lessor shall be entitled to immediate possession of the Leased Premises. Upon such notice of termination, this Lease shall terminate immediately and automatically by its own limitation; (f) Any two (2) failures by Lessee to observe or perform any provision of this Lease during any twelve (12) month period of the Term, as such may be extended, shall constitute, at the option of Lessor, a separate and noncurable default. 30. REMEDIES UPON DEFAULT 30.1 Termination and Damages. In the event of any default by Lessee, then in addition to any other remedies available to Lessor herein or at law or in equity, Lessor shall have the immediate option to terminate this Lease and all rights of Lessee hereunder by giving written notice of such intention to terminate. In the event that Lessor shall elect to so terminate this Lease, then Lessor may recover from Lessee: (a) The Worth at the Time of Award, as defined below, of any unpaid rent which had been earned at the time of such termination; plus (b) 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 Lessee proves could have been reasonably avoided; plus (c) 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 Lessee proves could be reasonably avoided; plus (d) Any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of events would be likely to result therefrom; and 37 (e) At Lessor's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the applicable law in the state in which the Leased Premises are located. 30.2 Definition. As used in subsections 30.1 (a) and (b) above, the "Worth at the Time of Award" is computed by allowing interest at the rate of ten percent (10%) per annum. As used in subsection 30.1(c) above, the "Worth at the Time of Award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank for the region in which the Complex is located at the time of award plus one percent (1%). 30.3 Personal Property. (a) In the event of any default by Lessee, Lessor shall also have the right, with or without terminating this Lease, to reenter the Leased Premises and remove all persons and property from the Leased Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Lessee. (b) In the event of default and Tenant's vacating of the Leased Premises, all of Lessee's fixtures, furniture, equipment, improvements, additions, Alterations and other personal property shall, at the option of Lessor, remain upon the Leased Premises and in that event, and continuing during the length of such default, Lessor shall have the sole right to take exclusive possession of such property and to use it, rent or charge free, until all defaults are cured or, at Lessor's option, at any time during the Term, to require Lessee to forthwith remove such property. 30.4 Recovery of Rent; Reletting. (a) In the event of the vacation or abandonment of the Leased Premises by Lessee or in the event that Lessor shall elect to reenter as provided in Section 30.3 above, or shall take possession of the Leased Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Lessor does not elect to terminate this Lease as provided in Section 30.1 above, this Lease shall continue in effect for so long as Lessor does not terminate Lessee's right to possession, and Lessor may enforce all its rights and remedies under this Lease, including, without limitation, Lessor's right from, time to time, without terminating this Lease, to either recover all rental as it becomes due or relet the Leased Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Lessor, in its sole discretion, may deem advisable, with the right to make Alterations and repairs to the Leased Premises. Acts of maintenance or preservation or efforts to relet the Leased Premises or the appointment of a receiver upon initiation of Lessor or other legal proceeding granting Lessor or its agent possession to protect Lessor's interest under this Lease shall not constitute a termination of Lessee's right to possession. (b) In the event that Lessor shall elect to so relet, then rentals received by Lessor from such reletting shall be applied: first, to the payment of any indebtedness other than rent due hereunder from Lessee to Lessor; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Leased Premises; fourth, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Lessor and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied by the payment of rent hereunder, be less than the rent payable during that month by Lessee hereunder, then Lessee shall pay such deficiency to Lessor immediately upon demand therefor by Lessor. Such deficiency shall be calculated and paid monthly. Lessee shall also pay to Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. 38 (c) No reentry or taking possession of the Leased Premises or any other action under this Section shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Lessee or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Lessor because of any default by Lessee, Lessor may at any time after such reletting elect to terminate this Lease for any such default. (d) Lessor has the remedy described in California Civil Code Section 1951.4 (Lessor may continue Lease in effect after Lessee's breach and abandonment and recover rent as it becomes due, if Lessee has right to sublet or assign, subject only to reasonable limitations). 30.5 No Waiver. Efforts by Lessor to mitigate the damages caused by Lessee's default in this Lease shall not constitute a waiver of Lessor's right to recover damages hereunder, nor shall Lessor have any obligation to mitigate damages hereunder. 30.6 Curing Defaults. Should Lessee fall to repair, maintain, keep clean, and/or service the Leased Premises, or any part or contents thereof at any time or times, or perform any other obligations imposed by this Lease or otherwise, then after having given Lessee reasonable notice of the failure or failures and a reasonable opportunity which in no case shall exceed thirty (30) days, to remedy the failure, Lessor may enter upon the Leased Premises and perform or contract for the performance of the repair, maintenance, or other Lessee obligation, and Lessee shall pay Lessor for all direct and indirect costs incurred in connection therewith within thirty (30) days of receiving a bill therefor from Lessor. 30.7 No Right to Cure. Notwithstanding anything to the contrary set forth in Section 29.1 above, Lessee shall be deemed to have committed a material default and breach of this Lease, without any right on Lessee's part to cure such default and breach, upon the failure by Lessee to observe and perform the provisions of any one or more of the following Sections (or indicated portions thereof) of this Lease: 15.1 (first sentence), 25.3, 27.1, 36.2, 37.1, and 37.2. 30.8 Cumulative Remedies. The various rights, options, election powers, and remedies of Lessor contained in this Article and elsewhere in this Lease shall be construed as cumulative and no one of them exclusive of any others or of any legal or equitable remedy which Lessor might otherwise have in the event of breach or default, and the exercise of one right or remedy by Lessor shall not in any way impair its right to any other right or remedy. 39 31. BANKRUPTCY 31.1 Bankruptcy Events. If at any time during the Term there shall be filed by or against Lessee in any court pursuant to any statute either of the United States or of any state, commonwealth, district or territory thereof a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Lessee's property or estate, or if a receiver or trustee takes possession of any of the assets of Lessee, or if the leasehold interest herein passes to a receiver, or if Lessee makes an assignment for the benefit of creditors or petitions for or enters into an arrangement (any of which are referred to herein as a "Bankruptcy Event"), then the following provisions shall apply: (a) Upon the occurrence of a Bankruptcy Event, or if Lessee takes advantage of any insolvency laws of any state, district, commonwealth or territory of the United States, then in any such event Lessor at its option and sole discretion may terminate this Lease at any time by written notice to Lessee (subject, however, to applicable provisions of the applicable bankruptcy federal or state statutes or any insolvency laws during the pendency of any action thereunder involving Lessee as the subject debtor). If this Lease is terminated under this Article: (i) Lessee agrees to immediately surrender and vacate the Leased Premises, waives all statutory or other notice to quit, and agrees that Lessor's obligations under this Lease shall cease from such termination date; and (ii) Lessor may recover possession by process of law or in any other lawful manner. Furthermore, if this Lease terminates under this Section (a), Lessor shall, subject to the Bankruptcy Code, have all rights and remedies against Lessee as provided in this Lease and at law for a default of Lessee in the payment of Minimum Rent, Percentage Rent, if any, and/or additional Rent. Lessee hereby acknowledges that it shall have abandoned all of its personal property remaining in the Leased Premises after Lessee surrenders possession of the Leased Premises, and Lessee hereby authorizes Lessor to dispose of such personal property in any manner Lessor deems appropriate without accounting to governs or shall govern the proceedings in which such damages are to be proved limits or shall limit the amount of such claim capable of so being proved, in which case Lessor shall be entitled to prove as and for liquidated damages an amount equal to that allowed by or under any such statute. When calculating damages hereunder, Lessor shall be entitled to recover the amount of any "free rent" or other concessions extended by Lessor and received by Lessee prior to the premature expiration of this Lease, it being agreed by Lessee that such "free rent" and concessions were contingent upon Lessee fulfilling its obligations for the entire term of this Lease. The provisions of this paragraph shall be without prejudice to (i) Lessor's right to prove in full damages for Minimum Rent, Percentage Rent, if any, and additional Rent accrued prior to the termination of this Lease, but not paid, and (ii) any rights given to Lessor by any pertinent statute to prove any amounts allowed thereby. In making any such computation, the then cash rental value of the Leased Premises shall be deemed prima facie to be the rental realized upon any reletting, if such reletting can be accomplished by Lessor within a reasonable time after such termination of this Lease, and the then present cash value of the future rents hereunder reserved to Lessor for the unexpired portion of the Lease Term hereby demised shall be deemed to be such sum, if invested at the then current passbook account rate offered by Wells Fargo Bank, N.A. at its main office in San Francisco, as will produce the future rent over the period of time in question. Lessor and Lessee further agree that in making any computation of damages for Lessee holding over after the termination of this Lease, Lessor may claim damages based on the Minimum Rent, Percentage Rent, if any, and additional Rent provided herein for the period of such hold over, it being agreed that the Minimum Rent, Percentage Rent, if any, and additional Rent constitutes the fair rental value of the Leased Premises during the hold over period. (i) Notwithstanding subsection (h) of this Article 31, Lessor specifically reserves any and all remedies available to Lessor in Article 30 hereof or at law or in equity in respect of a Bankruptcy Event to the extent such remedies are permitted by law. 40 32. SURRENDER OF LEASE 32.1 No Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work as a merger, and shall, at the option of Lessor, terminate all or any existing subleases or subtenancies, or may, at the option of Lessor, operate as an assignment to it of any or all such subleases or subtenancies. 33. LESSOR'S EXCULPATION 33.1 Limited Liability. In the event of default, breach, or violation by Lessor (which term includes Lessor's partners, co-venturers, co-tenants, officers directors, trustees, employees, agents, representatives, successors or assigns) of any of Lessor's obligations under this Lease, Lessor's liability to Lessee shall be limited to its ownership interest in the Leased Premises (or its interest in the Complex, if applicable) or the proceeds of a public sale of such interest pursuant to foreclosure of a judgment against Lessor. Lessor may, at its option, and among its other alternatives, relieve itself of all liability under this Lease by conveying the Leased Premises to Lessee. Notwithstanding any such conveyance, Lessee's leasehold and ownership interest shall not merge. 33.2 No Recourse. Lessor (as defined in Section 33.1) shall not be personally liable for any deficiency beyond its interest in the Leased Premises. All personal liability of all trustees, their employees, agents or representatives, is expressly waived by Lessee. 34. ATTORNEYS' FEES 34.1 Actions, Proceedings, etc. Lessee hereby agrees to pay, as additional rent, all attorneys' fees and disbursements, and all other court costs or expenses of legal proceedings or other legal services which Lessor may incur or pay out by reason of, or in connection with: (a) Any appearance by Lessor (or any officer, partner, or employee of Lessor) as a witness or otherwise in any action or proceeding whatsoever involving or affecting Lessee or this Lease except as otherwise covered by Section 34.3; (b) Any assignment, sublease, or leasehold mortgage proposed or granted by Lessee (whether or not permitted under this Lease), and all negotiations with respect thereto; and (c) Any Alteration of the Leased Premises by Lessee, and all negotiations with respect thereto. 34.2 Survival. Lessee's obligations under this Section shall survive the expiration or any other termination of this Lease. This Section is intended to supplement (and not to limit) other provisions of this Lease pertaining to indemnities and/or attorneys' fees. 34.3 Attorneys' Fees. If there is any legal action or proceeding (including arbitration other than the Arbitration of Fair Market Rental described in Section 4.3) between Lessor and Lessee arising out of any default by Lessee or Lessor in the observance or performance of any obligation under this Lease or to enforce this Lease or to protect or establish any right or remedy under this Lease, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees and disbursements, incurred by such prevailing party in such action or proceeding and in any appeal in connection therewith. If such prevailing party recovers a judgment in any such action or proceeding (including arbitration) or appeal thereon, such costs, expenses and attorneys' fees and disbursements shall be included in and as a part of such judgment. 41 35. NOTICES 35.1 Writing. All Notices (as defined below), demands and requests required or permitted to be given or made under any provision of this Lease shall be in writing and shall be given or made by (i) personal service, or (ii) by telephone facsimile upon which date and time are imprinted in the course of transmission to the number indicated in Section 1.2, or (iii) by mailing same by registered or certified mail, return receipt requested, postage prepaid, or (iv) by reputable courier which provides written evidence of delivery, addressed to the respective party at the address set forth in Section 1.2 of this Lease or at such other address as the party may from time to time designate, by a written Notice, as defined below, sent to the other in the manner aforesaid. 35.2 Effective Date. Any such Notice, demand or request ("Notice") shall be deemed given or made on the third day after the date so mailed. Notwithstanding the foregoing, Notice given by personal delivery to the party at its address as aforesaid shall be deemed given on the day on which delivery is made. Notice given by a reputable courier service which provides written evidence of delivery shall be deemed given on the business day immediately following deposit with the courier service. 35.3 Authorization to Receive. Each person and/or entity whose signature is affixed to this Lease as Lessee or as guarantor of Lessee's obligations ("Obligor") designates such other Obligor its agent for the purpose of receiving any Notice pertaining to this Lease or service of process in the event of any litigation or dispute arising from any obligation imposed by this Lease. 36. SUBORDINATION 36.1 Priority of Encumbrances. This Lease shall be subject and subordinate at all times to any and all ground leases and the lien of any and all mortgages and deeds of trust securing any amount or amounts whatsoever which may now exist or hereafter be placed on or against or encumbering the Building or on or against or encumbering Lessor's interest or estate therein ("Superior Leases and Mortgages"), all without the necessity of having further instruments executed by Lessee to effect such subordination; provided however; (i) with respect to that certain deed of trust encumbering the Building of record as of the date of this Lease in favor of Wells Fargo Bank (the "Bank"), Lessor covenants to use commercially reasonable efforts (without any requirement to pay any fees to said lender or to initiate litigation) to cause the Bank to execute and deliver on or before the Delivery Date a non-disturbance agreement in the form attached hereto as Exhibit I, attached hereto, in favor of Lessee; and (ii) with respect to any Superior Leases and Mortgages encumbering the Building after the date of this Lease, Lessee shall execute a subordination agreement in the form of Exhibit I, provided that the subordination of this Lease shall be conditioned upon such Lessor's mortgagee executing a non-disturbance agreement in favor of Lessee on the current form used by such lender. In the event of a foreclosure of any such mortgage or deed of trust or of any other action or proceeding for the enforcement thereof, or of any sale thereunder or in the event of a termination of any such ground lease, this Lease shall not be terminated or extinguished, nor shall the rights and possession of Lessee hereunder be disturbed, if no default then exists under this Lease, and Lessee shall attorn to the person who acquires Lessor's interest hereunder through any such mortgage or deed of trust. 36.2 Execution of Documents. Lessee agrees to execute any commercially reasonable documents required to effectuate such subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, and failing to do so within ten (10) business days after written 42 demand, does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to do so. It is understood by all parties that Lessee's failure to execute the subordination documents referred to above may cause Lessor serious financial damage by causing the failure of a financing or sale transaction. 36.3 Attornment. Lessee shall attorn to any purchaser at any foreclosure sale, or to any grantee or Transferee designated in any Deed given in lieu of foreclosure. 37. ESTOPPEL CERTIFICATES 37.1 Execution by Lessee. Within ten (10) business days of request therefor by Lessor, Lessee shall execute a written statement ("Estoppel Certificate") acknowledging the commencement and termination dates of this Lease, that it is in full force and effect, has not been modified (or if it has, stating such modifications) and providing any other pertinent information as Lessor or its agents might reasonably request. Failure to comply with this Article shall be a material breach of this Lease by Lessee giving Lessor all rights and remedies under Article 30 hereof, as well as a right to damages caused by the loss of a loan or sale which may result from such failure by Lessee. A copy of the Estoppel Certificate required by Lessor's lender and required to be executed by Lessee is attached hereto as Exhibit L. 37.2 Financing, Sale or Transfer. If Lessor desires to finance, refinance, sell, ground lease or otherwise transfer the Leased Premises, or any part thereof, or the Building, Lessee hereby agrees, within ten (10) business days of request therefor by Lessor, to deliver to any lender or to any prospective buyer, ground lessor or other Transferee designated by Lessor such financial statements of Lessee, its Guarantor and its parent company, if any, as may be reasonably required by such party. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor in confidence and shall be used only for the purposes herein set forth. 38. WAIVER 38.1 Effect of Waiver. The waiver by Lessor of any breach of any Lease provision shall not be deemed to be a waiver of such Lease provision or any subsequent breach of the same or any other term, covenant or condition therein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any provision of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 39. HOLDING OVER 39.1 Month-to-Month Tenancy on Acceptance. If Lessee should remain in possession of the Leased Premises after the expiration of the Term and without executing a new Lease, then, upon acceptance of rent by Lessor, such holding over shall be construed as a tenancy from month-to-month, subject to all the conditions, provisions and obligations of this Lease as existed during the last month of the Term hereof, so far as applicable to a month-to-month tenancy, except that the Minimum Rent shall be equal to one hundred fifty percent (150%) of the Minimum Rent payable immediately prior to the expiration or sooner termination of the Lease. 43 40. SUCCESSORS AND ASSIGNS 40.1 Binding Effect. The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 41. TIME 41.1 Time of the Essence. Time is of the essence of this Lease with respect to each and every article, section and subsection hereof. 42. EFFECT OF LESSOR'S CONVEYANCE 42.1 Release of Lessor. If, during the Term, Lessor shall sell its interest in the Building or Complex of which the Leased Premises form a part, or the Leased Premises, then from and after the effective date of the sale or conveyance, Lessor shall be released and discharged from any and all obligations and responsibilities under this Lease, except those already accrued. 43. COMMON AREAS 43.1 Lessor shall, in Lessor's sole discretion, maintain the Common Areas (subject to reimbursement pursuant to Article 8 hereof), establish and enforce reasonable rules and regulations concerning such areas, close any of the Common Areas to whatever extent required in the opinion of Lessor's counsel to prevent a dedication of any of the Common Areas or the accrual of any rights of any person or of the public to the Common Areas, close temporarily any of the Common Areas for maintenance purposes and make changes to the Common Areas including, without limitation, changes in the location of driveways, corridors, entrances, exits, vehicular parking spaces, parking area, the designation of areas for the exclusive use of others, the direction of the flow of traffic or construction of additional buildings thereupon. Lessor may provide security for the Common Areas but is not obligated to do so. 44. TRANSFER OF SECURITY 44.1 Transfer to Purchaser. If any security be given by Lessee to secure the faithful performance of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and/or deliver the security, as such, to the purchaser of the reversion, in the event that the reversion be sold, and thereupon Lessor shall be discharged from any further liability in reference thereto. 45. LATE CHARGES 45.1 Late Payment by Lessee. Lessee acknowledges that late payment by Lessee to Lessor of rent or any other payment due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any encumbrance and note secured by any encumbrance covering the Leased Premises. Therefore, if any installment of rent, or any other payment due hereunder from Lessee is not received by Lessor within five (5) days of due date, Lessee shall pay to Lessor an additional sum of five percent (5%) of such rent or other charge as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the cost that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee default with respect to the overdue amount, or prevent Lessor from exercising any other rights or remedies available. to Lessor. 44 46. CORPORATE AUTHORITY 46.1 Authorization to Execute. Lessee represents and warrants that each individual executing this Lease is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the Bylaws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Further, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor a certified copy of a resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 47. MORTGAGEE PROTECTION 47.1 Notice and Right to Cure Default. Lessee agrees to give any mortgagee(s) and/or trust deed holders, by registered mail, a copy of any notice of default served upon Lessor, provided that prior to such notice Lessee has been notified, in writing (by way of Notice of Assignment of Rents and Leases, or otherwise), of the address of such mortgagees and/or trust deed holders. Lessee further agrees that if Lessor shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary if, within such thirty (30) days, any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. 48. MISCELLANEOUS PROVISIONS 48.1 Captions. The captions of this Lease are for convenience only and are not a part of this Lease and do not in any way limit or amplify the terms and provisions of this Lease. 48.2 Number and Gender. Whenever the singular number is used in this Lease and when required by the context, the same shall include the plural, the plural shall include the singular, and the masculine gender shall include the feminine and neuter genders, and the word "person" shall include corporation, firm or association. If there be more than one Lessee, the obligations imposed under this Lease upon Lessee shall be joint and several. 48.3 Modifications. This instrument contains all of the agreements, conditions and representations made between the parties to this Lease and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties to this Lease. 48.4 Payments. Except as otherwise expressly stated, each payment required to be made by Lessee shall be in addition to and not in substitution for other payments to be made by Lessee. 48.5 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. 48.6 No Offer. The preparation and submission of a draft of this Lease by either party to the other shall not constitute an offer, nor shall either party be bound to any terms of this Lease or the entirety of the Lease itself until both parties have fully executed a final document and an original signature document has been received by both parties. Until such time as described in the previous sentence, either party is free to terminate negotiations with no obligation to the other. 45 48.7 Disputed Sums. Under the terms of this Lease numerous charges are and may be due from Lessee to Lessor including, without limitation, Operating Costs, Real Estate Taxes and other items of a similar nature including advances made by Lessor in respect of Lessee's default at Lessor's option. In the event that at any time during the Term there is a bona fide dispute between the parties as to the amount due for any of such charges claimed by Lessor to be due, the amount demanded by Lessor shall be paid by Lessee until the resolution of the dispute between the parties or by litigation. Failure by Lessee to pay the disputed sums until resolution shall constitute a default under the terms of the Lease. 48.8 Lessee's Remedies. Notwithstanding anything to the contrary contained in this Lease, if any provision of this Lease expressly or impliedly obligates Lessor not to unreasonably withhold its consent or approval, an action for declaratory judgment or specific performance will be Lessee's sole right and remedy in any dispute as to whether Lessor has breached such obligation. 48.9 Light, Air and View. No diminution of light, air, or view by any structure which may hereafter be erected (whether or not by Lessor) shall entitle Lessee to any reduction of Rent, result in any liability of Lessor to Lessee, or in any other way affect this Lease or Lessee's obligations hereunder. 48.10 Public Transportation Information. Lessee shall establish and maintain during the Term hereof a program to encourage maximum use of public transportation by personnel of Lessee employed on the Leased Premises, including, without limitation, the distribution to such employees of written materials explaining the convenience and availability of public transportation facilities adjacent or proximate to the Complex, staggering working hours of employees, and encouraging use of such facilities, all at Lessee's sole reasonable cost and expense. Lessee shall comply with all requirements of any local transportation management ordinance. 48.11 Rules and Regulations. Lessee agrees to comply with all reasonable rules and regulations adopted and promulgated by Lessor and applicable to all tenants in the Complex for the lawful, orderly, clean, safe, aesthetic, quiet, and beneficial use, operation, maintenance, management, and enjoyment of the Complex. Lessor shall have no liability for violation by any other lessee in the Complex of any rules or regulations, nor shall such violation or waiver thereof excuse Lessee from compliance. The initial rules and regulations concerning the Complex are attached hereto as Exhibit F. Lessor reserves the right to make additional rules affecting the Complex throughout the Term hereof. All delivery and dispatch of supplies, fixtures, equipment and furniture shall be by means and during hours established by Lessor. Lessee shall not at any time park its trucks or other delivery vehicles in the Common Areas, except in such parts thereof as from time to time designated by Lessor. 48.12 Joint and Several Liability. Should Lessee consist of more than one person or entity, they shall be jointly and severally liable on this Lease. 48.13 Survival of Obligations. All obligations of Lessee which may accrue or arise during the Term or as a result of any act or omission of Lessee during said Term shall, to the extent they have not been fully performed, satisfied or discharged, survive the expiration or termination of this Lease. 48.14 Real Estate Brokers. Lessor and Lessee each represents and warrants to the other party that it has not authorized or employed, or acted by implication to authorize or employ, any real estate broker or salesman to act for it in connection with this Lease other than the real estate brokers specified in Section 1.10. Lessor shall pay the commission due Lessor's broker 46 and Lessee's broker pursuant to a separate agreement between Lessor and Lessor's broker. Lessor and Lessee shall each indemnify, defend and hold the other party harmless from and against any and all claims by any real estate broker or salesman whom the indemnifying party authorized or employed, or acted by implication to authorize or employ, to act for the indemnifying party in connection with this Lease. 48.15 Nonliability of Lessor for Approvals. Except as may otherwise be expressly stated by a provision of this Lease, and only to the extent so stated, the consent or approval, whether express or implied, or the act, failure to act or failure to object, by Lessor in connection with any plan, specification, drawing, proposal, request, act, omission, notice or communication (collectively "Act") by or for, or prepared by or for, Lessee, shall not create any responsibility or liability on the part of Lessor, and shall not constitute a representation by Lessor, with respect to the completeness, sufficiency, efficacy, propriety, quality or legality of such Act. 48.16 Interest On Past Due Amounts. If any sum due Lessor from Lessee is not received by Lessor within five (5) calendar days after the date such sum is due and payable, such sum shall bear interest from the due date until paid by Lessee at the rate of two percent (2%) above the Prime Rate (as herein defined), not to exceed the maximum rate of interest allowed by law in the state where the Leased Premises are located, and such interest shall be deemed to be additional rent. "Prime Rate" means the Prime Rate of interest as quoted in the Wall Street journal on the date such sum was due and payable. 48.17 Counterparts. This Lease may be executed in one or more counterparts, each of which shall be deemed an original, and all taken together shall constitute one and the same instrument. 49. WAIVER OF CALIFORNIA CODE SECTIONS 49.1 Waiver by Lessee. In this Lease, numerous provisions have been negotiated by the parties, some of which provisions are covered by statute. Whenever a provision of this Lease and a provision of any statute or other law cover the same matter, the provisions of this Lease shall control. Therefore, Lessee waives (for itself and all persons claiming under Lessee) the provisions of Civil Code Sections 1932(2) and 1933(4) with respect to the destruction of the Leased Premises; Civil Code Sections 1941 and 1942 with respect to Lessor's repair duties and Lessee's right to repair; Civil Code Section 1995.310, granting to a tenant all remedies provided by law for breach of contract (including, without limitation, the right to contract damages and the right to terminate the lease) in the event that the Lessor unreasonably withholds consent to a transfer in violation of the Lessee's rights under tKe lease; Code of Civil Procedure Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Leased Premises by Condemnation as herein defined; and any right of redemption or reinstatement of Lessee under any present or future case law or statutory provision (including Code of Civil Procedure Sections 473 and 1179 and Civil Code Section 3275) in the event Lessee is dispossessed from the Leased Premises for any reason. This waiver applies to future statutes enacted in addition to or in substitution for the statutes specified herein. 50. SHUTTLE SERVICE 50.1 Lessor presently maintains for the benefit of Lessee's employees at the Leased Premises, a van shuttle service which shall operate Monday through Friday from 7:00 a.m. to 7:00 p.m. with not less than one van vehicle operating throughout the day and two vehicles operating during peak commute hours of 7:00 a.m. to 9:00 a.m. Monday through Friday and 5:00 p.m. to 7:00 p.m. Monday through Friday. The shuttle will serve the major transportation centers of San Francisco, i.e., the Transbay Terminal, BART, the nearest Municipal Railway stop, the Ferry Building and CalTrain Terminal. Lessor may terminate the shuttle service if the City of San Francisco is, in Lessor's reasonable judgment, then 47 providing adequate public transportation to the area of the Building and no longer requires that Lessor provide such shuttle service. At Lessee's option, Lessee's employees may use the shuttle service subject to a reasonable fee to be mutually agreed upon between Lessor and Lessee. 50.2 Parking. Lessee may lease on a monthly basis up to the number of parking spaces described in Section 1.12 in the parking facility of the Complex. Said parking spaces shall be on a non-exclusive, non-reserved basis. Lessee shall pay a parking fee for each parking space which Lessee leases at the same monthly rates as are established from time to time by Lessor or the owner or operator of the parking facility. The use by Lessee, its employees or other users of such parking space shall be subject to the rules and regulations established from time to time by Lessor, or the owner or operator of the parking facility. If Lessee has not leased the number of parking spaces to which it is entitled within three (3) months after the Commencement Date, or if at any time thereafter, Lessee releases any parking spaces or if parking spaces to which Lessee is entitled under this Section 50.2 exceeds the parking spaces actually leased by Lessee, Lessee shall have no further right or entitlement to such parking spaces and Lessor may permit others to use or lease such parking spaces on a long or short term basis. If Lessor or the owner or operator of the parking facility changes the parking arrangements in the parking facility, then Lessee's rights under this Section 50.2 shall be subject to modification to reflect such change, so long as Lessee is not disproportionately prejudiced by such changes as compared to other lessees of the Building. 50.3 Retail Parking. Lessee's customers would be guided to Lessor's designated temporary parking on the roof of the Building. Lessee may purchase for the use of its customers a validation stamp from the garage vendor. Lessor would work with Lessee to obtain "green zone" parking in front of the Townsend Street retail area. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day and year first written above. LESSOR: LESSEE: ZORO LLC METRO COMMERCE BANK, a California limited liability company a California corporation /s/ Martin Zankel /s/ Raymon L Hanssen - ---------------------------------- ---------------------------------- Its Managing Member Its Executive Vice President 48 EXHIBIT A LEGAL DESCRIPTION The land referred to herein is situated in the State of California, County of San Francisco, City of San Francisco, and is described as follows: PARCEL ONE: ALL OF LOT 9, Assessor's Block 3783, as shown on that certain Map entitled, "Parcel Map of a portion of 100 Vara Block No. 412, also being a portion of Assessor's Block No. 3783 which Map was filed for record in the Office of the Recorder of the City and County of San Francisco, State of California, on November 29, 1988 in Book 38 of Parcel Maps, at Page 36. PARCEL TWO: Non-exclusive easements as set forth in that certain Grant of Easement with Covenants and Restrictions affecting land dated as of December 29, 1988 by and between Bay West Showplace Investors, a California Limited Partnership, and Portman/Bay West Apparel Partners, a California Partnership, recorded on December 30, 1988 in Book E775 at Page 1598, Series No. E296406 in the Official Records. APN: Lot 009, Block 3783 COMMON KNOWN AS: 650 Townsend Street SAN FRANCISCO, CA EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 6,556 286 10,400 0 34,118 2,000 1,979 137,966 1,492 196,119 179,784 750 1,188 0 0 0 10,068 4,329 196,119 12,735 1,747 544 15,026 4,473 4,510 10,516 365 13 7,169 3,970 3,970 0 0 2,333 1.12 1.07 8.97 1,707 40 0 0 1,117 62 72 1,492 1,194 0 298
-----END PRIVACY-ENHANCED MESSAGE-----