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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HERITAGE COMMERCE CORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
CALIFORNIA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
6712
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
77-0469558
(I.R.S. EMPLOYER IDENTIFICATION NO.)
150 ALMADEN BOULEVARD
SAN JOSE, CA 95113
(408)947-6900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OR
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN ROSSELL
HERITAGE COMMERCE CORP
150 ALMADEN BOULEVARD
SAN JOSE, CA 95113
(408) 947-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registrations statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PER UNIT(1) PRICE REGISTRATION FEE
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Common Stock.................. 425,000 $ $6,000,000 $1,964.02
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</TABLE>
(1) The actual subscription price described herein has not been determined and
is estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
HERITAGE COMMERCE CORP
425,000 SHARES OF COMMON STOCK
$ PER SHARE
(MINIMUM PURCHASE 100 SHARES)
Of the shares of Common Stock offered, Heritage Commerce
Corp ("the Company") is hereby offering for sale (the "Offering") all
shares of the Company's common stock, no par value (the "Common
Stock"), at $ per share. There is no Underwriter for the shares offered
hereby. The Company was recently incorporated as a bank holding company with
Heritage Bank of Commerce (the "Bank") as its only subsidiary. The Offering is
not conditioned on the sale of any minimum number of shares.
Prior to this Offering, there has been a limited trading market for the
Common Stock of the Bank and it is expected that this same market will exist for
the Company. See "TRADING HISTORY AND DIVIDENDS." The Company's Common Stock is
listed on the Over-the-Counter Electronic Bulletin Board under the symbol,
"HTBC." No assurance can be given that an active market will develop as a result
of this Offering. See "RISK FACTORS." The Company intends to apply to the
National Association of Securities Dealers for inclusion of the Common Stock for
quotation on the Nasdaq National Market as of May 1, 1998. No assurance can be
given that the Common Stock will be approved for quotation on the Nasdaq
National Market
THIS OFFERING INVOLVES CERTAIN RISK FACTORS TO PROSPECTIVE
PURCHASERS. SEE "RISK FACTORS" AT PAGE 5 HEREOF.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR HAS ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO PERCENT
PUBLIC AND COMMISSIONS THE COMPANY(1) OF TOTAL
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Per Share................. $ $-- $ %
Total Maximum............. $ $-- $ %
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</TABLE>
(1) After deducting direct Offering expenses payable by the Company estimated at
$150,000.
The shares of Common Stock are offered by the Company, subject to receipt
and acceptance by the Company and subject to the Company's right to reject any
order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made 10 days following the closing date of the
Offering on or about , 1998
The offering commences immediately upon the Company's receipt of all
required regulatory approvals, estimated at , 1998 and shall remain
open for up to 60 days thereafter except as follows: this offering may be
terminated early or may be extended by up to 30 days. Any extension or early
termination of this offering is at the discretion of the Company.
The date of this Prospectus is , 1998.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto contained elsewhere in
this Prospectus. Prospective purchasers are urged to read carefully this entire
Prospectus before making any decision relating to the purchase of the shares
offered hereby. This Prospectus contains forward-looking statements. Heritage
Commerce Corp's actual results could differ materially from those anticipated in
such forward-looking statements as a result of a variety of factors, including
those set forth in the section entitled "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Heritage Commerce Corp (the "Company") was recently incorporated as a
for-profit corporation under the California General Corporation Law for the
principal purpose of engaging in activities permitted for a bank holding
company. The Company was formed by the directors and officers of Heritage Bank
of Commerce (the "Bank") for the purpose of acquiring and managing the Bank. To
complete the acquisition of the Bank, the Company exchanged 3,295,896 common
shares on a share-for-share basis for those outstanding common shares of the
Bank, effective February 17, 1998. The Company is registered with the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board") as a bank
holding company.
The Company acts as a holding company for the Bank and is a legal entity
separate and distinct from the Bank. The operations of the Company are conducted
at the same location and in the same facilities as the operations of the Bank.
The Company does not expect to engage in activities other than the operation of
subsidiary banks in the immediate future. The Company expects to receive
substantially all of its income from fees generated by management services
provided to the Bank and interest income. The Company may also receive income
from dividends made to it by the Bank. However, the Bank has no formal dividend
policy, and dividends are issued solely in the discretion of the Bank's Board of
Directors. There can be no assurance as to when or whether such a dividend will
be paid or the amount thereof. The Bank currently has an accumulated deficit
which precludes the payment of cash dividends to the Company without the consent
of the Commissioner of the Department of Financial Institutions (the
"Commissioner"). See "Supervision and Regulation" for dividend restrictions.
Heritage Bank of Commerce, the Company's only subsidiary, commenced
operations on June 8, 1994. The Bank was organized to address the needs of
small, closely-held businesses and their owners in the community of San Jose,
California and the surrounding cities. Consolidation in the local banking
market, particularly among independent, community banks, left a competitive void
that the founders of the Bank sought to fill with an institution devoted to a
more highly customized service approach. The Bank would offer financial
solutions tailored to the particular needs of its clients, rather than the less
personal approach used by many of the Bank's larger competitors. With an initial
capitalization in excess of $14 million, the Bank invested heavily in technology
to maximize employee efficiency.
As a result, the Bank has, in the intervening three and one-half years,
developed a wide array of products and services for small businesses and their
owners, such as factoring, SBA-guarantied loans, construction loans. light
aircraft financing, and personal computer-based on-line cash management,
together with more common products such as accounts receivable lines of credit
and traditional passbook savings accounts. In addition, the Bank has developed
an expertise in other specialized areas such as deposit services for U.S.
Bankruptcy Trustees. Indeed, the Bank's ability to develop such specialized
expertise has been instrumental in its rapid deposit growth. A second equity
offering to the public in 1996 that raised an additional $6 million provided a
base for continued asset growth and higher lending limits. Recently, the Bank
has expanded its geographic reach with the opening of a branch office in
Fremont, California.
At December 31, 1997, the Bank had total assets of $267,575,000, total
deposits of $242,978,000, total loans of $128,771,000, and total equity of
$22,336,000. As the Company's sole business is the management of the Bank, the
Company's balance sheet will generally mirror the Bank's.
The activities of the Company will be subject to the supervision of the
Federal Reserve Bank ("FRB"). The Company may engage, directly or through
subsidiary corporations, in those activities closely related to banking which
are specifically permitted under the Bank Holding Company Act of 1956, as
amended ("BHCA").
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THE OFFERING
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Securities Offered........................... shares of Common Stock (no par value)
Common Stock Outstanding at December 31, 3,295,896 shares
1997.......................................
Common Stock to be Outstanding After the (maximum) shares (1)
Offering...................................
Use of Proceeds.............................. For general corporate purposes except as required for
capital with which to organize a de novo bank in
Fremont, California. See "USE OF PROCEEDS."
Over-the-Counter Electronic Bulletin Board "HTBC"
Symbol.....................................
Expiration Date.............................. 60 days from the date of this Offering, unless
terminated earlier or extended by the Bank by up to 30
days
Method of Subscription....................... By Subscription Application, subject to the terms
described in this Offering and in the Subscription
Agreement*
Minimum Subscription......................... 100 shares
Minimum to be Sold in the Offering........... This Offering is not conditioned on the sale of any
minimum number of shares
</TABLE>
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(1) Based on 3,295,896 shares of common stock outstanding on 12/31/97. Assumes
sale of all 425,000 shares offered hereby. This offering is not subject to
the sale of any minimum number of shares. Excludes 452,262 shares of common
stock issuable upon exercise of outstanding options to purchase Common Stock
as of 12/31/97. See "Remuneration and Other Transactions with Management"
and Note 8 to the financial statements.
* See STOCK SUBSCRIPTION APPLICATION, Appendix "B" and COMMON STOCK
SUBSCRIPTION AGREEMENT, Appendix "C."
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SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information
for the Company's only subsidiary, Heritage Bank of Commerce, and does not
contain information with regards to the Company since the Company had not been
formed (or capitalized) as of December 31, 1997. This should be read in
conjunction with the Bank's financial statements and notes thereto included as
Appendix "A" to this Prospectus. The audited financial information for the years
ended 1997, 1996, and 1995 as derived from audited financial statements.
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<CAPTION>
YEARS ENDED DECEMBER 31,
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1997 1996 1995 1994 (1)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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INCOME STATEMENT DATA:
Interest income............................... $ 16,251 $ 10,525 $ 6,421 $ 1,244
Interest expense.............................. 4,204 2,646 1,696 214
---------- ---------- ---------- ----------
Net interest income before provision for loan
losses..................................... 12,047 7,879 4,725 1,027
Provision for loan losses..................... 1,060 830 496 76
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses..................................... 10,987 7,049 4,229 951
Non-interest income........................... 590 296 71 18
Non-interest expenses......................... 9,168 5,724 4,098 2,976
---------- ---------- ---------- ----------
Income (loss) before income taxes............. 2,409 1,621 202 (2,007)
Provision for income taxes.................... 844 220 1 1
---------- ---------- ---------- ----------
Net income (loss)............................. $ 1,565 $ 1,401 $ 201 $ (2,008)
========== ========== ========== ==========
PER SHARE DATA (2):
Basic net income (loss) (3)................... $ 0.48 $ 0.48 $ 0.08 $ (0.82)
Diluted net income (loss) (4)................. 0.45 0.46 0.08 (0.82)
Book value (5)................................ 6.78 6.56 6.03 5.56
Average number of shares outstanding during
the year................................... 3,291,689 2,912,263 2,444,912 2,440,147
Average number of shares and equivalents
outstanding during the year................ 3,480,237 3,033,953 2,476,929 2,440,147
Number of shares outstanding at year-end...... 3,295,896 3,103,696 2,125,534 2,112,681
BALANCE SHEET DATA:
Investment securities......................... $ 87,697 $ 75,268 $ 51,449 $ 30,336
Total loans before allowance for loan
losses..................................... 126,485 81,513 41,950 10,455
Allowance for loan losses..................... 2,285 1,402 572 76
Total assets.................................. 267,575 173,303 132,160 59,037
Total deposits................................ 242,978 146,379 118,746 47,082
Total shareholders' equity.................... 22,336 20,524 12,829 11,741
SELECTED PERFORMANCE RATIOS:
Return on average assets (6).................. 0.74% 0.96% 0.22% n/m
Return on average equity...................... 7.38% 8.56% 1.67% n/m
Net interest margin........................... 6.23% 5.99% 5.81% 5.13%
Average net loans after the allowance for loan
losses as a percentage of average
deposits................................... 52% 48% 37% 17%
Average total shareholders' equity as a
percentage of average total assets......... 10% 11% 13% 31%
SELECTED ASSET QUALITY RATIOS (7):
Net loan charge-offs to average loans......... 0.18% -- -- --
Allowance for loan losses to total loans...... 1.77% 1.69% 1.34% 0.73%
CAPITAL RATIOS (8):
Tier 1 risk-based............................. 14.6% 21.4% 22.5% 75.9%
Total risk-based.............................. 15.8% 22.6% 23.6% 76.4%
Leverage...................................... 10.3% 13.9% 13.5% 29.6%
</TABLE>
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(1) Figures for 1994 are for the 207 day period from June 8 (inception) to
December 31, 1994 and includes pre-opening expenses of $1,080,000.
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(2) All share figures are adjusted to reflect (i) a 10% stock dividend paid to
shareholders of record as of February 5, 1996; (ii) a 5% stock dividend
payable to shareholders of record as of February 5, 1997; and (iii) a
3-for-2 stock split payable to shareholders of record as of August 1, 1997,
except number of shares outstanding at year-end, which are only adjusted
retroactively to reflect the 3-for-2 stock split. All prior period per share
amounts have been restated for the implementation of SFAS No. 128, as
described in Note 1 to the financial statements.
(3) Represents net income (loss) divided by the average number of shares of
common stock outstanding for the respective period.
(4) Represents net income (loss) divided by the average number of shares of
common stock and common stock-equivalents outstanding for the respective
period.
(5) Represents shareholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated.
(6) Average balances used in this table and throughout this Prospectus are based
on daily averages.
(7) Non-performing assets consist of non-accrual loans, loans past due 90 days
or more, restructured loans, and other real estate owned. As of the dates
indicated, the Bank had no non-performing assets, accordingly no
non-performing asset to loan ratios are presented.
(8) The Risk-Based and Leverage Capital ratios are defined in Item
1 -- "BUSINESS -- Supervision And Regulation -- Capital Adequacy
Guidelines."
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating an investment in the Company's Common Stock,
prospective investors should consider carefully the following risk factors in
addition to the other information presented in this Prospectus.
Adverse Economic Conditions. Commencing in 1990, and lasting until 1996,
the California economy was affected by an economic downturn. While improvement
has been seen in the Company's service area, should the economic recovery stall
in the Company's Santa Clara Valley market area (the southern portion of the San
Francisco Bay Area), or should economic conditions worsen, the Company's
business could be adversely affected, including the demand for new loans,
refinancing activity, the ability of borrowers to repay outstanding loans and
the value of the property held as collateral for outstanding loans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Loan Portfolio."
The Company's Limited Operating History. At December 31, 1997, the Company
had only recently been incorporated and had yet to transact business, while the
Bank had completed just over three full years of operations. With the exception
of its first, partial year of operation, the Bank to date has been profitable;
however, due to its accumulated deficit, the Bank is restricted from paying cash
dividends. The Company was capitalized with a minimum amount of capital at
incorporation, and, given limitations on the Bank paying cash dividends, the
Company may not be able to obtain additional funds to operate. The Bank has
applied to the Commissioner for authority to pay a dividend to the Company.
Without payment of such a dividend, the Company may not be able to meet its cash
obligations as they come due until completion of this offering. The Company
expects to use a portion of the net proceeds of this offering to fund its
operations. See "TRADING HISTORY AND DIVIDENDS -- Dividends," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"COMPETITION."
Limited Trading Market. While the Company's Common Stock is not subject to
any specific restrictions on transfer, prior to this Offering there has been
only a limited trading market for the Company's Common Stock and no assurance
can be given that an active public market will develop as a result of this
Offering or at any time in the future. See "TRADING HISTORY AND
DIVIDENDS -- Trading History."
Offering Price. The Offering Price has been set by the Company. The
Offering Price does not, however, reflect the price at which the Company's
Common Stock has traded in the past or the price at which it currently trades,
nor does the offering price necessarily reflect the price at which the Company
Common Stock will trade following this Offering.
Dilution. The Offering Price is in excess of the Company's book value per
share. Based upon the Offering Price and the book value per share as of December
31, 1997, the sale of the Common Stock in this Offering will result in an
immediate dilution of $ per share for each of the shares offered hereby
(assuming a fully-subscribed Offering). See "DILUTION." See "DETERMINATION OF
OFFERING PRICE." This Offering is not conditioned on the sale of any minimum
number of shares
Dividends. The ability of the Company to pay cash dividends in the future
will depend on the Company's profitability, growth and capital needs. The
Company expects to receive all of its income from fees generated by management
services provided to the Bank and interest income. The Company may also receive
income from dividends made to it by the Bank. However, the Bank has no formal
dividend policy, and dividends are issued solely at the discretion of the Bank's
Board of Directors. There can be no assurance as to when or whether such a
dividend will be paid or the amount thereof. The Bank currently has an
accumulated deficit which precludes it from paying cash dividends without the
consent of the Commissioner. See "TRADING HISTORY AND DIVIDENDS -- Dividends."
Competition. In California generally, and in the Company's service area
specifically, major banks dominate the commercial banking industry. By virtue of
their larger capital bases, such institutions have substantially greater lending
limits that those of the Company's only subsidiary, the Bank, as well as more
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locations and more products and services. In obtaining deposits and in making
loans, the Bank competes with these larger commercial banks and other financial
institutions, such as savings and loan associations and credit unions, which
offer most services traditionally offered only by banks. In addition, the Bank
competes with other institutions such as money market funds, brokerage firms,
and even retail stores seeking to penetrate the financial services market. Such
competition may have an adverse effect on the Company. See "BUSINESS OF THE
BANK -- Competition."
General Lending Risks. While the Company will only be engaged in the
business of running the day-to-day operations of the Bank, lending risks will
still apply to the transactions made by the Bank. As such, the Company will be
indirectly subject to the same lending risks applicable to the Bank. The Bank is
engaged primarily in commercial, consumer and real estate lending. The risk of
nonpayment of loans is inherent in the lending business. The ability of
borrowers to repay their obligations can be adversely affected by factors beyond
the control of the Bank, including local and general economic and market
conditions. A substantial portion of the Bank's loans are secured by real
estate. These same factors may adversely affect the value of real estate as
collateral. The Bank maintains an allowance for loan losses and periodically
makes additional provisions to the allowance to reflect the level of losses
determined by management to be inherent in the loan portfolio. However, the
level of the allowance and the amount of such provisions are only estimates
based on management's judgment, and there can be no assurance that actual losses
incurred will not exceed the amount of the allowance or require substantial
additional provisions to the allowance.
Dependence on Key Personnel. The Company is dependent upon a limited number
of key management and technical personnel. The Company's future success will
depend in part upon its ability to attract and retain highly qualified
personnel. The Company competes for such personnel with other companies and
other organizations. There can be no assurance that the Company will be
successful in retaining or hiring qualified personnel. The loss of any of the
Company's senior management or sales and marketing personnel, particularly to
competitors, could have a material adverse effect on the Company's business,
financial condition results of operations and cash flows.
Government Regulation and Legislation. The Company and its operations are
subject to extensive state and federal regulation, supervision and legislation,
and the laws that govern the Company and its operations are subject to change
from time to time. From time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between banks and
other financial institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial institutions are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
For example, the legislature periodically considers legislation to repeal the
current statutory restrictions on affiliations between commercial banks and
securities firms. Should major legislative changes occur any impact such changes
might have on the Company or the Bank are impossible to predict.
The Company is subject to the BHCA and to regulation and supervision by the
FRB. The Bank is subject, as a result of the insurance of its deposits, to
supervision and regulation by the Federal Deposit Insurance Corporation
("FDIC"). These regulations are intended primarily for the protection of
depositors and consumers, rather than for the benefit of investors. The Company
and the Bank are subject to changes in federal and state law, as well as changes
in regulation and governmental policies, income tax laws and accounting
principles. The effects of any potential changes could adversely affect the
business and operations of the Company and the Bank in the future.
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 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
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interest rates charged on loans and paid on deposits. Future changes in monetary
policies could have an impact on the Company. See "SUPERVISION AND REGULATION."
The FRB has adopted a policy which requires a bank holding company, such as
the Company, to serve as a source of financial strength to its banking
subsidiaries. The FRB has ordered bank holding companies to contribute cash to
their troubled bank subsidiaries based upon this "source of strength" policy,
which could have the effect of decreasing funds available for distributions to
shareholders. In addition, a bank holding company in certain circumstances could
be required to guaranty the capital plan of an undercapitalized banking
subsidiary. The Bank is not currently undercapitalized, but there is no
guarantee that it will not be undercapitalized in the future.
Monetary Policy. The income of the Company depends entirely on the income
generated from management of the Bank. The income of the Bank depends to a great
extent on interest rate differentials and the resulting net interest margins,
i.e., the difference between the interest rates earned on the Bank's loans,
securities and other interest-earning assets, and the interest rates paid on the
Bank's deposits and other interest-bearing liabilities. These rates are highly
sensitive to many factors which are beyond the Bank's control, including general
economic conditions and the policies of various governmental and regulatory
agencies, in particular, the Federal Reserve Board. See "SUPERVISION AND
REGULATION."
External Factors Affecting Asset Quality. Any factor affecting the Bank's
assets will necessarily affect the Company. The economy in the Bank's primary
market area and the real estate market in particular have suffered from the
effects of a recession in the first half of this decade. Some of the effects of
the recession were declines in property values and decreased demand for goods
and services. In addition, the Bank's primary market area is dependent on the
technology industry which is subject to substantial economic fluctuations. There
can be no assurance that such conditions would not adversely affect the Bank's
borrowers in the event of another recession. The Bank's lending focus includes
loans secured by real estate, government guarantied loans and other commercial
loans secured by real estate and other assets.
In addition to market fluctuations, California is prone to earthquakes,
flooding, and other natural disasters some of which may not be insurable. The
Bank's properties and substantially all of the real and personal property
securing loans in the Bank's portfolio are located in California. The Bank faces
the risk that many of its borrowers may experience uninsured property damage,
sustained interruption of their businesses, or loss of their jobs from
earthquakes, floods or other disasters. As a result, these borrowers may be
unable to repay their loans in accordance with their original terms, and the
allowance for loan losses may not be adequate to cover losses resulting from
such external factors. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Non-Performing Assets."
Possible Volatility of Stock Price. The Company believes that factors such
as announcements of developments related to the Company's business,
announcements by competitors, quarterly fluctuations in the Company's or the
Bank's financial results, and general conditions in the banking industry or
economic conditions in the areas in which the Company or the Bank does business,
and other factors could cause the price of the Company's Common Stock to
fluctuate substantially. In addition, in recent years the stock market in
general and the market for shares of small capitalization stocks in particular
have experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. Such fluctuations could have a
material adverse effect on the market price of the Company's Common Stock.
As this Offering is not underwritten, no transaction will occur that has
the effect of stabilizing or penalty bids. Without these types of bids, there
are limited controls over the volatility of Company Common Stock associated with
this Offering.
Risks Relating to Organizing a De Novo Bank. With the proceeds of this
Offering, the Company intends to organize a de novo bank in Fremont, California.
The Company is in the process of finalizing the necessary applications with the
appropriate state regulatory agencies, however, there are no assurances that the
Company will receive permission to organize a de novo bank. Also, no assurances
are given that the Company will be able to recruit necessary personnel or when
chosen whether they will accept employment with the de novo bank.
7
<PAGE> 10
The Company has attempted to identify and assess all competitors to the de
novo bank and has tailored its marketing to best address this competition.
However, a possibility exists that some unforeseen company or event will impair
the de novo bank's ability to operate successfully which may adversely impact
the Company's financial performance. See "SUPERVISION AND REGULATION."
Year 2000. The inability of computers, software, and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the Year 2000 Compliance
issue. As the year 2000 approaches, such systems may be unable to process
accurately certain date-based information.
The Company's vendors have provided appropriate assurances with regard to
these issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. The Company's bank subsidiary has begun the process of assessing the
credit risk related to its borrowers' Year 2000 Compliance progress, and will
integrate a Year 2000 Compliance element into its credit approval process by
December 31, 1998.
The costs and the date on which the Company plans to complete the Year 2000
modification and testing process are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
Future Capital Needs and Additional Financing. The Company intends to raise
additional equity capital to finance future geographic expansion. In general,
the Company plans to form one or more new subsidiary banks in new markets. No
assurance can be given that the Company will be able to raise the additional
capital needed to support the organization of a new bank.
No Underwriter. This offering is not underwritten. The offering is not
subject to the sale of any minimum number of shares. The Company may terminate
the offering after accepting subscriptions for any number of shares less than
the 425,000 shares offered hereby. Sale of less than 425,000 shares may impair
the Company's ability to charter a de novo bank or to expand into new markets.
8
<PAGE> 11
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements that are based on the
current beliefs of both the Company's and the Bank's management as well as
assumptions made by and information currently available to the Company's and the
Bank's management. All statements other than statements of historical facts
included in this Prospectus, including without limitation, statements under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business of the Company" and
"Business of the Bank" regarding the Company's or the Bank's financial position,
business strategy and plans and objectives of management of the Company and the
Bank for future operations, are forward-looking statements. When used in this
Prospectus, the words "anticipate," "believe," "estimate," "expect" and "intend"
and words or phrases of similar meaning, as they relate to the Company or Bank
management, are intended to identify forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("cautionary
statements") are disclosed under "Risk Factors" and elsewhere in this
Prospectus, including, without limitation, in conjunction with the
forward-looking statements included in this Prospectus. Based upon changing
conditions, if any one or more of these risks or uncertainties materialize, or
if any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the applicable cautionary statements.
USE OF PROCEEDS
The net proceeds from the sale of shares of Common Stock
offered hereby are estimated to be approximately $5,900,000 (maximum). Although
the Company is well-capitalized at present, based upon the rate of growth
evidenced to date and on anticipated growth, and assuming current market
conditions prevail, additional capital is desired to support future growth
prospects. The Company intends to use up to $5,000,000 to capitalize a de novo
bank in Fremont, California, if necessary, with the remaining amount to be used
for general corporate purposes. No assurance can be given that all of any
portion of the 425,000 shares offered hereby will be sold.
The Company anticipates that future growth may take the form of additional
market share in the current market, or it may involve geographic expansion. The
Company's Bank subsidiary recently opened a branch in Fremont, California, in an
effort to expand its market area. The Company expects to charter a de novo bank
in Fremont, California under the holding company structure. Certain risks
relating to the organizing of a de novo bank are discussed in "RISK
FACTORS -- Risks Relating to Organizing a De Novo Bank." See also
"CAPITALIZATION." The Company may engage, directly or through subsidiary
corporations, in those activities closely related to banking which are
specifically permitted under the BHCA.
The amount and timing of such uses of the net proceeds will depend on the
capital needs and financial requirements of the Company and on local loan demand
and expansion opportunities. In the interim, proceeds from the Offering will be
invested in securities issued by the U.S. Treasury. No assurance can be given
that any de novo banks will be established in the future or that, if
established, the resulting impact on the Company's financial condition will be
favorable.
DILUTION
At December 31, 1997, the shareholders' equity, or net book value, of the
Company was $22,336,000, or $ 6.78 per share. Net book value per share
represents the Company's total assets less total liabilities divided by the
total number of shares of Common Stock outstanding, exclusive of shares subject
to currently exercisable options.
9
<PAGE> 12
Net book value dilution per share represents the difference between the
amount per share paid by the purchasers of Common Stock in the Offering and the
pro forma net book value per share of Common Stock immediately after the
completion of the Offering. After giving effect to the sale by the Company of
the shares of Common Stock offered herein at the public offering
price of $ per share, and receipt by the Company of the net proceeds
therefrom, the pro forma net book value of the Company at December 31, 1997,
would have been a maximum of approximately $ ($ per share). This
represents an immediate decrease in book value per share of $ (maximum)
per share to purchasers of shares in the Offering, as illustrated by the
following:
DILUTION IN NET BOOK VALUE PER SHARE TO NEW INVESTORS
<TABLE>
<CAPTION>
ASSUMING
NEW SHARES IN THE
OFFERING (MAXIMUM)
------------------
<S> <C>
Public offering price per share............................. $
Net book value per share at December 31, 1997............... 6.78
Increase per share attributable to new investors in the
Offering
Pro forma net book value per share after the Offering
Dilution in net book value per share to new investors..... ()
</TABLE>
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.............
New Investors.....................
Total...................
</TABLE>
10
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization and capital ratios of the
Company, at December 31, 1997, assuming sale of all shares
offered hereby and as adjusted to give pro forma effect to the Offering:
CAPITALIZATION AND CAPITAL RATIOS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------
AS ADJUSTED FOR THE
ACTUAL OFFERING(1) (MAXIMUM)
------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Preferred Stock............................................. -- --
Common stock, no par value, 30,000,000 shares authorized;
shares outstanding: 3,295,896 at December 31, 1997 and
3,720,896
as adjusted............................................... $23,447 $29,347
Accumulated deficit......................................... (1,529) (1,529)
Net unrealized gain on securities available-for-sale, net of
taxes..................................................... 418 418
------- -------
Total shareholders' equity.................................. $22,336 $28,236
======= =======
Capital ratios for the Company:
Tier 1 risk-based capital................................... 15.8% 19.7%
Total risk-based capital.................................... 14.6% 18.5%
Leverage.................................................... 10.3% 13.1%
</TABLE>
- ---------------
(1) After payment of direct expenses of the Offering, estimated at $150,000.
Note: Table assumes proceeds of offering are invested in U.S. Treasuries, with a
0% risk factor.
Note: Table does not reflect shares of Common Stock subject to outstanding stock
options pursuant to the Company's Stock Option Plan. See "REMUNERATION AND
OTHER TRANSACTIONS WITH MANAGEMENT."
DETERMINATION OF OFFERING PRICE
Prior to this Offering there has been only limited trading in the Company's
Common Stock. See "TRADING HISTORY AND DIVIDENDS -- Trading History." The
Offering Price per share was determined by the Board of Directors of the Company
after analyzing and taking into consideration several factors including, but not
limited to, recent trading prices of the Common Stock, book value per share,
historical results of operations, assessment of the Company's management and
financial condition and market activity of stock for other financial
institutions. The Offering Price has been set by the Company. The Offering Price
does not, however, reflect the price at which the Common Stock has traded in the
past or the price at which it currently trades, nor does the Offering Price
necessarily reflect the price at which the Common Stock will trade following
this Offering.
TRADING HISTORY AND DIVIDENDS
TRADING HISTORY
The Company's Common Stock is traded on the Over the Counter Electronic
Bulletin Board under the symbol "HTBC." Concurrently with this Registration
Statement, the Company will apply with the Nasdaq stock market for inclusion of
the Common Stock for quotation on the Nasdaq National Market. There will only be
a limited market for the Company's Common Stock. The Company's market makers are
Everen Securities, Sutro & Co. Incorporated, Hoeffer and Arnett and Van Kasper &
Company. These market makers have no obligation to make a market for the
Company's Common Stock, and they may discontinue making a
11
<PAGE> 14
market at any time. No assurance can be given that an active trading market will
develop or be sustained for the Common Stock as a result of this Prospectus, or
at any other time in the future.
The information in the following table indicates the high and low "bid"
quotations for the Company's Common Stock since February 17, 1998 and the Bank's
Common Stock before that date for each quarterly period for the last two fiscal
years, and is based upon information provided by the market makers. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, do not reflect actual transactions, and do not include nominal
amounts traded directly by shareholders or through other dealers who are not
market makers.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
First Quarter............................................ $17.00 $15.00
1997
Fourth Quarter........................................... 20.00 16.00
Third Quarter............................................ 14.50 8.67
Second Quarter........................................... 8.50 8.33
First Quarter............................................ 8.67 8.09
1996
Fourth Quarter........................................... 7.93 7.93
No activity
recorded by
Third Quarter............................................ market makers(1)
No activity
recorded by
Second Quarter........................................... market makers(1)
First Quarter............................................ 7.14 6.83
</TABLE>
- ---------------
(1) During the period indicated, the Bank was in the process of completing an
Offering for 825,495 shares at $7.93.
The listed prices reflect (i) a 10 percent stock dividend which was paid on
February 26, 1996 to shareholders of record as of February 5, 1996, (ii) a 5
percent stock dividend which was paid on February 26, 1997 to shareholders of
record as of February 5, 1997, and (iii) a 3 for 2 stock split on August 15,
1997 to shareholders of record as of August 1, 1997. Effective February 17,
1998, the Bank's stock was exchanged on a share for share basis with the stock
of the Company with the shares issued pursuant to this exchange mailed to
shareholders as they surrender their Heritage Bank of Commerce shares. As of
March 31, 1998, the Company had approximately 860 shareholders of record.
According to management's best knowledge, the most recent trade in the
Common Stock prior to the date of this Prospectus occurred on March 12, 1998 for
5,000 shares, at a sales price of $15.00 per share.
DIVIDEND POLICY AND HISTORY
The primary source of funds for payment of dividends by the Company to its
shareholders is the receipt of dividends and management fees from the Bank. The
Company's ability to receive dividends from the Bank is limited by applicable
state and federal law. The power of the Board of Directors of a California state
bank to declare a cash dividend is subject to statutory and regulatory
restrictions which limit the amount available for cash dividends. See
" -- Limitations on Dividends." In addition, the Bank's ability to pay cash
dividends also depends upon the earnings, financial condition and cash needs of
the Bank, as well as general business conditions.
To date, the Bank has paid no cash dividends. Payment of cash dividends in
the future will depend upon the Bank's earnings and financial condition and
other factors deemed relevant by management. However, currently the Bank has a
retained deficit which precludes the Bank from paying cash dividends without the
consent of the Commissioner. Pending completion of this offering, proceeds of
which will flow to the holding company an application to the Commissioner has
been filed, requesting permission for the Bank to pay a
12
<PAGE> 15
dividend to the holding company. If the application is approved, the dividends
paid will not exceed prior year's earnings.
In December 1995, the Bank's Board of Directors declared a 10% stock
dividend payable to shareholders of record as of February 5, 1996. The payable
date of the dividend was February 26, 1996. In accordance with generally
accepted accounting principles, the Bank accounted for the 1996 transaction by
increasing the recorded accumulated deficit and transferred $1,384,000, the fair
value of the additional shares issued, to permanent capital. All tables in this
document which include share price data, show the effect of this stock dividend.
In January, 1997, the Bank's Board of Directors declared a 5% stock
dividend payable to shareholders of record as of February 5, 1997. The payable
date of the dividend was February 26, 1997. In accordance with generally
accepted accounting principles, the Bank accounted for the 1997 transaction by
increasing the recorded accumulated deficit and transferred $1,304,000, the fair
value of the additional shares issued, to permanent capital. All tables in this
document which include share price data, show the effect of this stock dividend.
In August, 1997, the Bank's Board of Directors declared a 3 for 2 stock
split payable to shareholders of record as of August 1, 1997. In accordance with
generally accepted accounting principles, the Bank accounted for the transaction
by restating all share information to reflect the effect of the split. The
payable date of the split was August 15, 1997. All tables in this document which
include share price data, show the effect of this stock split.
LIMITATIONS ON DIVIDENDS
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, such 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% of its liabilities
and certain other conditions are met. Since the 125% ratio translates into a
minimum capital ratio of 20%, most bank holding companies, including the
Company, based on its current capital ratios, are unable to meet this last test.
The legal ability of the Bank to pay dividends will be subject to
restrictions set forth in the California Banking Law and regulations of the
FDIC. No assurance can be given that the Bank will pay dividends at any time.
The California Banking Law provides that a state-licensed bank may not make
a cash distribution to its shareholders in excess of the lesser of the
following: (i) the bank's retained earnings, or (ii) the bank's net income for
its last three fiscal years, less the amount of any distributions made by the
bank to its shareholders during such period. However, a bank, with the prior
approval of the Commissioner, may make a distribution to its shareholders of an
amount not to exceed the greater of (i) a bank's retained earnings, (ii) its net
income for its last fiscal year, or (iii) its net income for the current fiscal
year. In the event that the Commissioner determines that the shareholder's
equity of a bank is inadequate or that the making of a distribution by a bank
would be unsafe or unsound, the Commissioner may order a bank to refrain from
making such a proposed distribution.
The FDIC and the Commissioner have authority to prohibit a bank from
engaging in business practices which are considered to be unsafe or unsound.
Depending upon the financial condition of bank and upon other factors, the FDIC
or Commissioner could assert that payments of dividends or other payments by the
Bank might be such an unsafe or unsound practice.
13
<PAGE> 16
OFFERING AND METHOD OF SUBSCRIPTION
GENERAL
The Prospectus is dated , 1998. The Offering commences
this date and shall remain open for up to 60 days thereafter, except as follows:
this Offering may be terminated early or may be extended by up to 30 days. Any
extension or early termination of this Offering is at the discretion of the
Company.
The Company is offering up to shares of its Common Stock for
a cash price of $ per share. A minimum purchase of 100 shares ($ )
is required. The Company reserves the right to accept individual subscriptions
for fewer than 100 shares, or to reject or cancel any subscription, in whole or
in part, for any reason whatsoever. Under this Offering, except with the express
consent of the Company, the FRB, and the Commissioner, no investor will be
allowed to purchase, directly or indirectly, shares which together with any
shares previously held by the investor, equal or exceed 10% of the Common Stock
of the Company to be outstanding immediately following completion of this
Offering. In addition, under this Offering, except with the express consent of
the Company, no investor will be allowed to purchase in this Offering, directly
or indirectly, shares which together with any shares previously held by the
investor, equal or exceed 5% of the Common Stock of the Company to be
outstanding immediately following completion of this Offering.
This Offering is not underwritten and is not conditioned on the sale of any
minimum number of shares. Only the directors and officers of the Company and
authorized selling agents are authorized to solicit subscriptions for shares.
The directors and officers of the Company intend to solicit by means of personal
and telephone contact with prospective subscribers, and by direct mailing of the
Prospectus. Offers for shares must be preceded or accompanied by this
Prospectus. The persons authorized to solicit subscriptions may be reimbursed
for reasonable expenses, if any, incurred in connection with the selling of
shares.
The Prospectus includes three integral Appendices: Appendix "A," the Bank's
Audited Financial Statements for the years ended December 31, 1997, 1996, and
1995; Appendix "B," the Stock Subscription Application ("Application"); and
Appendix "C," the Common Stock Subscription Agreement ("Agreement"). Triplicate
executable copies of the Application, together with IRS Form W-9 accompany the
Prospectus. The Prospectus and Subscription Agreement are incorporated by
reference in the Application. By signing the latter, the Subscriber attests to
having read the Prospectus in its entirety, including Appendices "A," "B," and
"C," and agrees to be bound by the terms contained in the Application and the
Agreement. The Agreement does not require separate execution.
See Appendices "B" and "C," "STOCK SUBSCRIPTION APPLICATION" and "COMMON
STOCK SUBSCRIPTION AGREEMENT," respectively.
APPLICATION FOR COMMON STOCK
Purchaser shall subscribe to purchase shares hereunder by executing and
delivering an Application to the Company together with a check payable to
"Heritage Commerce Corp" in the amount of the purchase price and a completed IRS
Form W-9 Request for Taxpayer Identification Number and Certification.
The Company shall notify Purchaser in writing as to the extent to which
Purchaser's offer is accepted, not later than one month after receipt of the
Application. To the extent Purchaser's offer is not accepted by the Company, and
concurrently with such rejection, the Company as Impound Agent will return
Purchaser's unaccepted funds together with interest actually earned thereon.
All funds received from Subscribers for the Company's common stock, which
meet the conditions of the Application and of the Agreement, will be deposited
in an interest-bearing account at Heritage Bank of Commerce (the "Impound
Account"). The Impound Account will be maintained in a savings account at
Heritage Bank of Commerce by the Company as Impound Agent, in the manner
provided in the Agreement ("Bank as Impound Agent"). The Impound Account will
bear simple interest at a rate of 3% per annum. Any funds accepted into the
Impound Account are insured by the FDIC up to a maximum of $100,000, however,
the Company's Common Stock is not subject to FDIC insurance.
14
<PAGE> 17
On the last day of the Offering, the Company will conduct a closing at its
premises. Upon the closing, subscription purchase moneys in the Impound Account
(including any interest earned thereon) relating to Applications accepted by the
Company, shall be released to the Company in the amount corresponding to the
shares closed. Applications shall be closed at the earliest date after the
Company, in its discretion, has determined that all of the requirements of the
related Application and Agreement have been met, the subscription has been
accepted and the requisite good funds deposited in the Impound Account (the
"Closing Date").
The Company will mail to Purchaser, within 10 business days after the
applicable closing date, a stock certificate, registered in Purchaser's name or
as directed by Purchaser, representing the respective Shares subscribed, against
delivery of the purchase price and any interest thereon.
If the Company does not accept an Application for any reason then the funds
submitted on account of the purchase price shall be returned to each Subscriber
in the amount of his/her/its subscription, plus any interest actually earned by
the respective subscription amount.
If for any reason whatsoever, the Offering does not close by 60 days from
the date of the Offering (or by 30 days thereafter, if the Company elects to
extend the Offering), the Company will deliver written notice of such to
Purchaser, and will immediately return to Purchaser the amount of his/her/its
deposit, plus any interest actually earned thereon.
See Appendices "B" and "C," "STOCK SUBSCRIPTION APPLICATION" and "COMMON
STOCK SUBSCRIPTION AGREEMENT," respectively.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Bank's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the section entitled "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
COMPARISON OF 1997 VERSUS 1996
Net income for the year ended December 31, 1997 was $1,565,000, or $0.48
per share (basic), compared to $1,401,000 or $0.48 per share (basic) and
$201,000, or $0.08 per share (basic) for the years ended December 31, 1996 and
1995, respectively. This increase was primarily attributable to growth in the
level of earning assets, funded by new deposits at favorable weighted average
rates of interest, as well as to improvements in the Bank's mix of earning
assets in favor of higher yielding assets, such as loans.
Average interest-earning assets for 1997 were up 47% over 1996. The
increase was primarily attributable to growth in loans and, as a result, the
average rate on interest-earning assets increased to 8.40% in 1997, up from
8.00% in 1996. Average interest-bearing deposits for 1997 were up 49% over 1996,
with the increase primarily attributable to growth in savings and money market
accounts. The impact on the Bank's average rate paid on interest-bearing
liabilities, however, was modest, an increase to 3.49% in 1997, up from 3.28% in
1996. As a result, net interest margin improved to 6.23% in 1997 from 5.99% in
1996.
The Bank's loan quality remained high in 1997. As of December 31, 1997,
loans classified by the Bank constituted 2% and 11%, respectively, of total
loans (shareholders' equity) and capital and reserves (allowance for loan
losses), down from 5% and 18%, respectively, as of December 31, 1996. Net loan
charge-offs during 1997 were 0.18% of average loans outstanding; the Bank had no
loan charge-offs in any prior year.
Fee income rose 16% from 1996 to 1997. Many of the Bank's deposit accounts
maintain balances higher than that which is required to offset activity charges
and, as such, are not assessed fees. Other components of non-interest income
such as gain on sale of securities available-for-sale and on sale of SBA loans
rose more dramatically, up 681% and 103%, respectively, from 1996 to 1997.
Return on average equity in 1997 was 7.38%, compared to 8.56% in 1996.
Return on average equity fell in 1997, in spite of the fact that net income
increased on an absolute basis over 1996, due to an increase in average equity
that resulted from the Bank's second offering which occurred in the latter half
of 1996.
Return on average assets in 1997 dropped to 0.74% from 0.96% in 1996. In
1997, average assets grew at a faster rate than net earnings, which were
adversely impacted by higher taxes as the Bank exhausted the remainder of its
operating loss carry forwards in 1996. Return on average assets was 0.22% in
1995.
COMPARISON OF 1996 VERSUS 1995
Net interest income for the year ended December 31, 1996 was $7,879,000, an
increase of $3,154,000 (or 67%) over the $4,725,000 reported for 1995. The
increase occurred primarily as a result of growth that occurred in the Bank's
earning assets, the yield on which was enhanced by an improvement in the net
yield on interest-earning assets during 1996 as compared with 1995. The increase
in net yield on interest earning assets in turn resulted from an improved mix of
assets (in favor of higher yielding assets such as loans) which offset the
effect of interest rate decreases that occurred during the first quarter of
1996. The Bank's average interest-earning assets were $131,511,000 in 1996, up
$50,195,000 (or 62%) from the average of $81,316,000 for 1995. The net interest
margin on interest-earning assets improved during 1996 to 5.99% from 5.81% for
1995.
Non-interest income for the year ended December 31, 1996 was $296,000, up
$225,000 (or 317%) from $71,000 for 1995. This increase was primarily the result
of sales of SBA-guarantied loans and certain investment securities
available-for-sale, which resulted in profits on sale, as well as an increase in
deposit levels, which generate monthly service charges.
16
<PAGE> 19
Non-interest expenses for the year ended December 31, 1996 were $5,724,000,
up $1,626,000 (or 40%) from $4,098,000 for the year ended December 31, 1995.
Growth in the Bank's infrastructure to support loan and deposit growth was
responsible for the increase in non-interest expenses. Salaries and benefits
expense rose 43% from 1995 to 1996, with the increase attributable to growth in
the number of employees. The Bank employed 55 people at December 31, 1996, up 22
from 33 employees at December 31, 1995. Furniture and equipment expenses and
occupancy expenses were similarly affected by the increase in employees. Client
services expenses were up as a result of additional funds on deposit at the
Bank.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
The following table presents the average amounts outstanding for the major
categories of the Bank's interest-earning assets and interest-bearing
liabilities, the average interest rates earned or paid thereon, and the net
yield on average interest-earning assets for the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans, net(1)...................... $ 98,930 $10,376 10.49% $ 61,130 $ 6,138 10.04% $11,509 $ 664 5.77%
Investment securities(2)(3)........ 84,196 5,323 6.32 57,769 3,724 6.45 40,388 2,623 6.49%
Federal funds sold................. 10,233 552 5.39 12,612 663 5.26 29,419 3,134 10.65%
-------- ------- ----- -------- ------- ----- ------- ------ -----
Total interest-earning
assets................... 193,359 $16,251 8.40% 131,511 $10,525 8.00% 81,316 $6,421 7.90%
-------- ------- ----- -------- ------- ----- ------- ------ -----
Cash and due from banks............ 13,961 11,270 7,723
Premises and equipment, net........ 1,756 1,152 985
Other assets....................... 3,586 1,802 1,204
Total assets............... $212,662 $145,736 $91,228
======== ======= ===== ======== ======= ===== ======= ====== =====
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Demand, interest-bearing......... $ 4,988 $ 95 1.91% $ 3,654 $ 68 1.86% $ 2,059 40 1.93%
Savings and money-market......... 80,168 2,401 3.00 60,686 1,772 2.92 40,871 1,332 3.26%
Time deposits, $100,000 and
over........................... 27,314 1,330 4.87 11,220 557 4.96 1,958 102 5.22%
Time deposits, less than
$100,000....................... 7,530 361 4.79 4,962 244 4.92 4,486 221 4.92%
Other borrowings................... 297 17 5.72 85 5 5.88 11 1 6.04%
-------- ------- ----- -------- ------- ----- ------- ------ -----
Total interest-bearing
liabilities.............. 120,297 $ 4,204 3.49% 80,607 $ 2,646 3.28% 49,385 $1,696 3.43%
Demand deposits.................... 69,376 47,696 29,362
Other liabilities.................. 1,782 1,062 433
Total liabilities.......... 191,455 129,351 79,180
Shareholders' equity............... 21,207 16,371 12,048
Total liabilities and
shareholders' equity..... $212,662 $145,736 $91,228
======== ======= ===== ======== ======= ===== ======= ====== =====
Net interest income / margin....... $12,047 6.23% $ 7,879 5.99% $4,725 5.81%
======== ======= ===== ======== ======= ===== ======= ====== =====
</TABLE>
- ---------------
(1) Yields and amounts earned on loans include loan fees of $709,000, $388,000,
and $115,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. The Company had no non-accrual loans for the periods
presented.
(2) Interest income is reflected on an actual basis, not a fully taxable
equivalent basis.
(3) The yield on investment securities does not include a fair value adjustment.
Net interest income for the year ended December 31, 1997 was $12,047,000,
an increase of $4,168,000 (or 53%) over the $7,879,000 reported for 1996. The
increase occurred primarily as a result of growth that occurred in the Bank's
earning assets, the yield on which was enhanced by an improvement in the net
yield on interest-earning assets during 1997 as compared with 1996. The increase
in net yield on interest earning assets in turn resulted from an improved mix of
assets (in favor of higher yielding assets such as loans). The Bank's
17
<PAGE> 20
average interest-earning assets were $193,359,000 in 1997, up $61,848,000 (or
47%) from the average of $131,511,000 for 1996. The net yield on
interest-earning assets improved during 1997 to 6.23% from 5.99% for 1996 and
5.81% for 1995.
The following table sets forth an analysis of the changes in interest
income and interest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
1997 VERSUS 1996 1996 VERSUS 1995
-------------------------------------- --------------------------------------
INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE TO CHANGE IN:
-------------------------------------- --------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
--------- --------- ------------ --------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans, net.................... $3,953 $285 $4,238 $3,194 $(190) $3,004
Investment securities......... 1,672 (72) 1,599 1,121 (20) 1,101
Federal funds sold............ (128) 16 (111) 61 (62) (1)
------ ---- ------ ------ ----- ------
Total interest-earning
assets.............. $5,497 $229 $5,726 $4,376 $(272) $4,104
====== ==== ====== ====== ===== ======
INTEREST-BEARING LIABILITIES:
Demand, interest-bearing...... $ 25 $ 2 $ 27 $ 30 $ (2) $ 28
Savings and money-market...... 583 46 629 590 (150) 440
Time deposits, $100,000 and
over....................... 784 (11) 773 334 2 336
Time deposits, less than
$100,000................... 123 (7) 117 148 (6) 142
Other borrowings.............. 12 -- 12 4 -- 4
------ ---- ------ ------ ----- ------
Total interest-bearing
liabilities......... $1,527 $ 31 $1,558 $1,106 $(156) $ 950
------ ---- ------ ------ ----- ------
Net interest income............. $3,970 $198 $4,168 $3,270 $(116) $3,154
====== ==== ====== ====== ===== ======
</TABLE>
Note: Yields and amounts earned on loans include loan fees of $709,000,
$388,000, and $115,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
The total change is shown in the column designated "Net Change" and is
allocated in the columns to the left, to the portions respectively attributable
to volume changes and rate changes that occurred during the period. Changes due
to both volume and rate have been allocated between the volume and rate
categories in proportion to the relationship of the changes due solely to the
changes in volume and rate, respectively.
PROVISIONS FOR LOAN LOSSES
During 1997, the provision for loan losses was $1,060,000, up $230,000 (or
28%) from $830,000 during 1996. The increase in the provision during 1997
reflected the overall growth in the loan portfolio and the Bank's policy of
making provisions to the allowance for estimated probable losses. The provision
for 1996 was up $334,000 (or 67%) from $496,000 during 1995.
The allowance for loan losses was 1.77%, 1.69%, and 1.34% of total loans at
December 31, 1997, 1996, and 1995, respectively.
18
<PAGE> 21
NON-INTEREST INCOME
The following table sets forth the various components of the Bank's
non-interest income:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
YEARS ENDED --------------------------------------
DECEMBER 31, 1997 VERSUS 1996 1996 VERSUS 1995
-------------------- ----------------- -----------------
1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
---- ---- ---- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Gain on sale of loans held-for sale...... $205 $101 $-- $104 103% $101 --%
Service charges and other fees........... 173 149 59 24 16 90 153
Gain on securities available-for-sale.... 164 21 3 143 681 18 600
Other income............................. 48 25 9 23 92 16 178
---- ---- --- ---- --- ---- ---
Total........................... $590 $296 $71 $294 99% $225 317%
==== ==== === ==== === ==== ===
</TABLE>
Non-interest income for the year ended December 31, 1997 was $590,000, up
$294,000 (or 99%) from $296,000 for 1996. This increase was primarily the result
of gains recognized on the sale of securities available-for-sale (up $143,000),
sales of SBA loans (up $104,000), and an increase in deposit service charges (up
$24,000).
NON-INTEREST EXPENSES
The following table sets forth the various components of the Bank's
non-interest expenses:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------------------------
YEARS ENDED DECEMBER 31, 1997 VERSUS 1996 1996 VERSUS 1995
-------------------------- ----------------- -----------------
1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
------ ------ ------ ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits............... $4,933 $2,942 $2,062 $1,991 68% $880 43%
Client services..................... 1,169 910 491 259 28 419 85
Furniture and equipment............. 542 330 220 212 64 110 50
Advertising and promotion........... 450 260 154 190 73 106 69
Occupancy........................... 440 293 296 147 50 (3) (1)
Professional fees................... 372 224 302 148 66 (78) (26)
Loan origination costs.............. 326 146 39 180 124 107 274
Other............................... 936 619 534 317 51 85 16
------ ------ ------ ------ --- ---- ---
Total...................... $9,168 $5,724 $4,098 $3,444 60% $225 40%
====== ====== ====== ====== === ==== ===
</TABLE>
Non-interest expenses for the year ended December 31, 1997 were $9,168,000,
up $3,444,000 (or 60%) from $5,724,000 for the year ended December 31, 1996. The
increase in non-interest expenses reflects the growth in infrastructure to
support the Bank's loan and deposit growth.
Non-interest expenses consist primarily of salaries and employee benefits
(54%, 51%, and 50% of total non-interest expenses for 1997, 1996, and 1995,
respectively) and client services (13%, 16%, and 12% of total non-interest
expenses for 1997, 1996, and 1995, respectively). The increase in salaries and
benefits expenses was primarily attributable to an increase in the number of
employees. The Bank employed 88 people at December 31, 1997, up 33 from 55
employees at December 31, 1996. Client services expenses include outside data
processing service costs, courier and armored car costs, imprinted check costs,
and other client services costs, all of which are directly related to the amount
of funds on deposit at the Bank. The increase in furniture and equipment
expenses and in occupancy expenses was primarily attributable to an increase in
the number of employees. Advertising expenses increased in 1997 due to broader
advertising coverage and to the Bank's co-sponsorship of a professional auto
racing team.
YEAR 2000
The inability of computers, software, and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance
19
<PAGE> 22
issue. As the year 2000 approaches, such systems may be unable to process
accurately certain date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
modification process of all significant applications is underway and should be
substantially complete by June 30, 1998. The Company plans to complete the
testing process of all significant applications by December 31, 1998.
In addition, the Company has communicated with a vendor with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third-party Year 2000 risks.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
Company's bank subsidiary has begun the process of assessing the credit risk
related to its borrowers' Year 2000 Compliance progress, and will integrate a
Year 2000 Compliance element into its credit approval process by December 31,
1998.
The total cost to the Company of Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing process are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans, and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans.
PROVISION FOR INCOME TAXES
Provision for income taxes was $844,000, $220,000, and $1,000, for the
years ended December 31, 1997, 1996, and 1995, respectively. The Bank's
effective tax rates were 35.0%, 13.6%, and 0.5%, for the years ended December
31, 1997, 1996, and 1995, respectively. The decrease in the effective tax rate
from the statutory tax rate in 1996 and 1995 was due to state income taxes,
change in the income tax valuation allowance, and non-taxable interest income.
The 1995 provision reflected state minimum income taxes due to utilization of
net operating losses.
20
<PAGE> 23
FINANCIAL CONDITION
SECURITIES PORTFOLIO
The following table summarizes the amounts and distribution of the Bank's
investment securities and the weighted average yields as of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------------------
MATURITY
------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
AND AND WITHIN TEN TOTAL AMORTIZED
WITHIN ONE YEAR WITHIN 5 YEARS YEARS AFTER TEN YEARS COST
--------------- --------------- ----------------- ---------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- -------- ------ ------- ------ ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury..................... $ 6,977 6.17% $25,217 6.27% $ 3,026 6.49% $ -- --% $35,220 6.27%
U.S. government agencies.......... 2,002 5.60 2,985 6.28 10,383 6.71 1,000 8.00 16,370 6.57
Municipals -- taxable............. -- -- -- -- -- -- 2,000 6.01 2,000 6.01
Municipals -- tax exempt.......... -- -- -- -- 735 4.67 1,861 4.89 2,596 4.83
Preferred stock................... -- -- 1,525 6.18 -- -- 687 5.46 2,212 5.96
Commercial paper.................. -- -- 1,515 6.43 -- -- 522 7.97 2,036 6.82
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total Available-for-sale.... $ 8,979 6.04% $31,242 6.27% $14,144 6.56% $6,070 6.10% $60,434 6.29%
Securities held-to-maturity:
Municipals -- taxable............. $ 1,765 5.98% $ 5,816 6.36% $ 1,748 6.50% $ 269 6.30% $ 9,598 6.31%
Municipals -- tax exempt.......... 89 4.67 405 5.03 4,957 4.80 1,401 4.98 6,852 4.85
U.S. Government agencies.......... -- -- 1,731 6.94 4,302 7.11 -- -- 6,033 7.06
U.S. Treasury..................... 1,993 6.66 2,054 6.36 -- -- -- -- 4,048 6.51
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total held-to-maturity...... $ 3,847 6.30% $10,006 6.41% 11,007 5.97% 1,670 5.19% $26,531 6.14%
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total securities............ $12,826 6.12% $41,248 6.31% $25,150 6.30% $7,740 5.90% $86,965 6.24%
======= ==== ======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
Note: Yields on tax exempt municipal securities are not on a fully tax
equivalent basis.
As of December 31, 1997, the only securities held by the Bank where the
aggregate book value of the Bank's investment in securities of a single issuer
exceeded 10% of the Bank's shareholders' equity were direct obligations of the
U.S. government or U.S. government agencies.
Securities are pledged to meet requirements imposed as a condition of
deposit by some depositors, such as political subdivisions (public funds) or of
other funds such as bankruptcy trustee deposits. Securities with amortized cost
of $27,470,000 as of December 31, 1997 were pledged to secure public and certain
other deposits as required by law or contract.
LOANS
General. The following table presents the Bank's loans outstanding at year
end by loan type:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
% OF % OF % OF % OF
1997 TOTAL 1996 TOTAL 1995 TOTAL 1994 TOTAL
-------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................................. $ 63,833 50% $44,448 54% $23,456 55% $ 6,538 62%
Real estate -- mortgage.................... 38,446 29 26,070 31 13,345 31 2,550 24
Real estate -- land and construction....... 25,780 20 11,918 14 5,105 12 1,370 13
Consumer................................... 824 1 558 1 735 2 110 1
-------- --- ------- --- ------- --- ------- ---
Total loans........................ $128,883 100% $82,994 100% $42,641 100% 10,568 100%
Deferred loan fees......................... (113) (79) (119) (37)
Allowance for loan losses.................. (2,285) (1,402) (572) (76)
-------- --- ------- --- ------- --- ------- ---
Net loans.................................. $126,485 $81,513 $41,950 $10,455
======== === ======= === ======= === ======= ===
</TABLE>
The Bank's commercial loans are made for the purpose of providing working
capital, financing the purchase of equipment or for other business purposes.
Such loans include loans with maturities ranging from thirty days to one year
and "term loans," with maturities normally ranging from one to twenty-five
years.
21
<PAGE> 24
Short-term business loans are generally intended to finance current transactions
and typically provide for periodic principal payments, with interest payable
monthly. Term loans normally provide for floating interest rates, with monthly
payments of both principal and interest.
The Bank is an active participant in the Small Business Administration
(SBA) and California guarantied lending programs, and has been approved by the
SBA as a lender under the Preferred Loan Program (PLP). The Bank regularly makes
SBA-guarantied loans, the guarantied portion of which is held for possible
resale in the secondary market. In the event of the sale of a guarantied portion
SBA loan, the Bank retains the servicing rights for the sold portion. At
December 31, 1997, 1996, and 1995, $6.0 million, $2.1 million and $77 thousand,
respectively, in SBA loans were serviced by the Bank for others. The Bank
generally considers its SBA loans to be investment loans, but has from time to
time sold the guarantied portion of certain loans.
The Bank's real estate term loans consist primarily of loans made based on
the borrower's cash flow and are secured by deeds of trust on commercial and
residential property to provide a secondary source of repayment. It is the
Bank's policy to restrict real estate term loans to no more than 80% of the
lower of the Bank's appraised value or the purchase price of the property,
depending on the type of property and its utilization. The Bank offers both
fixed and floating rate loans. Maturities on such loans are generally restricted
to between five and seven years (on an amortization ranging from fifteen to
twenty-five years with a balloon payment due at maturity); however, SBA and
certain other real estate loans easily sold in the secondary market may be
granted for longer maturities.
The Bank's real estate land and construction loans are primarily interim
loans made by the Bank to finance the construction of commercial and single
family residential properties. These loans are typically short term. The Bank
utilizes underwriting guidelines to assess the likelihood of repayment from
sources such as sale of the property or permanent mortgage financing prior to
making the construction loan.
Consumer loans are made for the purpose of financing automobiles, various
types of consumer goods, and other personal purposes. Additionally, the Bank
makes equity lines of credit and equity loans available to its clientele.
Consumer loans generally provide for the monthly payment of principal and
interest. Most of the Bank's consumer loans are secured by the personal property
being purchased, or, in the instances of equity loans or lines, real property.
With certain exceptions, the Bank is permitted to make extensions of its
credit to any one borrowing entity up to 15% of the Bank's capital and reserves
for unsecured loans and up to 25% of the Bank's capital and reserves for secured
loans. These lending limits for the Bank were $3.7 million and $6.2 million,
respectively, at December 31, 1997. The Bank sells participations in its loans
when necessary to stay within lending limits. The Bank generally maintains an
"in-house limit" of $3.0 million for unsecured loans, and $5.0 million for
secured loans.
Loan Concentrations. The Bank does not have any concentrations in its loan
portfolio by industry or group of industries, however, 59% and 54% of its net
loans were secured by real property as of December 31, 1997 and 1996,
respectively. All of the Bank's loans are located in California.
22
<PAGE> 25
Loan Portfolio Maturities and Interest Rate Sensitivity. The following
table sets forth the maturity distribution of the Bank's loans at December 31,
1997:
<TABLE>
<CAPTION>
DUE IN OVER ONE YEAR
ONE YEAR OR BUT LESS THAN
LESS FIVE YEARS OVER FIVE YEARS TOTAL
---------------- ------------- --------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................... $27,053 $13,313 $23,736 $ 64,102
Real estate -- mortgage.............. 6,276 17,706 14,297 38,279
Real estate -- land and
construction....................... 24,725 837 -- 25,562
Consumer............................. 158 669 -- 827
------- ------- ------- --------
Total loans................ $58,212 $32,525 $38,033 $128,770
======= ======= ======= ========
Loans with variable interest rates... $57,321 $22,210 $27,866 $107,397
Loans with fixed interest rates...... 891 10,315 10,167 21,373
------- ------- ------- --------
Total...................... $58,212 $32,525 $38,033 $128,770
======= ======= ======= ========
</TABLE>
Note: Total shown is net of deferred loan fees of $113,000 at December 31,
1997.
The table shows the distribution of such loans between those loans with
predetermined (fixed) interest rates and those with variable (floating) interest
rates. Floating rates generally fluctuate with changes in the prime rate as
reflected in the western edition of The Wall Street Journal. As of December 31,
1997, approximately 83% of the Bank's loan portfolio consisted of floating
interest rate loans.
Credit Risk Management. The risk of non-payment of loans is an inherent
feature of the banking business. That risk varies with the type and purpose of
the loan, the collateral that is utilized to secure payment, and ultimately, the
creditworthiness of the borrower. In order to minimize this credit risk, the
Bank requires that all loans be approved by at least the Chief Credit Officer,
the Senior Loan Officer, or the Chief Executive Officer, who individually have
approval authority of $150,000 each, and in combination may approve loans of up
to $600,000. Loans in excess of $600,000 must be approved by the Officers' Loan
Committee. Loans over $1,000,000 must be approved by the Directors' Loan
Committee. The Bank has established an in-house lending limit of $3,000,000 for
unsecured transactions, and $5,000,000, for secured transactions, which is
subject to review or exception from time to time.
The Bank assigns a risk grade consistent with the system recommended by
regulatory agencies to all of its loans. Grades range from "Pass" to "Loss,"
depending on credit quality, with "Pass" representing loans that involve an
acceptable degree of risk. Additionally, the Bank maintains a program for
regularly scheduled reviews of certain new and renewed loans by an outside loan
review consultant. Any loans identified during an external review process that
expose the Bank to increased risk are appropriately downgraded and an increase
in the allowance for loan losses is established for such loans. Further, the
Bank is examined periodically by the FDIC, FRB, and the California Department of
Financial Institutions, at which time a further review of loans is conducted.
Loans that demonstrate a weakness, for which there is a possibility of loss
if the weakness is not corrected, are categorized as "classified." Classified
loans may result from problems specific to a borrower's business or from
economic downturns which affect the borrower's ability to repay or which cause a
decline in the value of the underlying collateral (particularly real estate).
Management believes that it has adequately provided an allowance to provide for
estimated probable losses in the credit portfolio. Significant deterioration in
Northern California real property values or economic downturns could impact
future operating results, liquidity, or capital resources and require additional
provisions to the allowance or cause losses in excess of the allowance.
Non-Performing Assets. At December 31, 1997, 1996 and 1995, the Bank had no
non-accrual loans. During the year ended December 31, 1997 the average balance
of non-accrual loans was $100,000. At December 31, 1997, 1996 and 1995, the Bank
had no assets classified as other real estate owned. The Bank has no troubled
debt restructuring and no loans 90 days past-due and still accruing.
23
<PAGE> 26
For the year ended December 31, 1997, the Bank had forgone interest income
in the amount of $17,000 as a result of non-accrual loans. Through December 31,
1996, the Bank had not foregone any interest income as a result of non-accrual
loans or restructured debt.
As of December 31, 1997, loans classified by the Bank were $2,695,000.
These loans constituted 2% of total loans and 11% of the Bank's shareholders'
equity and allowance for loan losses as of that date. As of December 31, 1996,
loans classified by the Bank were $4,005,000. These loans constituted 5% of
total loans and 18% of the Bank's shareholders' equity and allowance for loan
losses as of that date. As of December 31, 1995, loans classified by the Bank
were $296,804. These loans constituted 1% of total loans and 2% of the Bank's
capital and reserves as of that date. Through December 31, 1997, the Bank has
not made loans to any foreign entities.
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the Bank's loan loss experience as well as
transactions in the allowance for loan losses and certain pertinent ratios for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995 1994
------ ------ ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period.............................. $1,402 $ 572 $ 76 $ --
Charge-offs -- Commercial loans........................... (224) -- -- --
Recoveries -- Commercial loans............................ 47 -- -- --
------ ------ ---- -----
Net charged-offs.......................................... (177) -- -- --
------ ------ ---- -----
Provision for loan losses................................. 1,060 830 496 76
------ ------ ---- -----
Balance, end of period.................................... $2,285 $1,402 $572 $ 76
====== ====== ==== =====
Ratios:
Net charge-offs to average loans outstanding............ 0.18% --% --% --%
Allowance for loan losses to average loans.............. 2.31% 2.29% 1.94% 1.60%
Allowance for loan losses to total loans at end of
period............................................... 1.77% 1.69% 1.34% 0.72%
</TABLE>
The following table summarizes the allocation of the allowance for loan
losses by loan type and the allocation as a percent of loans outstanding in each
loan category at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- ----------------------- -----------------------
ALLOCATION ALLOCATION ALLOCATION ALLOCATION
AS A % OF AS A % OF AS A % OF AS A % OF
LOANS LOANS LOANS LOANS
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
ALLOWANCE IN CATEGORY ALLOWANCE IN CATEGORY ALLOWANCE IN CATEGORY ALLOWANCE IN CATEGORY
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........... $ 821 1.29% $ 512 1.15% $ 267 1.14% $ -- --%
Real estate --
mortgage........... 205 0.53 117 0.45 102 0.76 -- --
Real estate -- land
and construction... 379 1.47 227 1.90 54 1.06 -- --
Consumer............. 7 0.85 6 1.08 6 0.82 -- --
Unallocated.......... 873 540 143 76
------ ---- ------ ---- ------ ---- ------ ----
Total....... $2,285 1.77% $1,402 1.69% $ 572 1.34% $ 76 0.72%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
The Bank maintains an allowance for loan losses to provide for probable
losses in the loan portfolio. Additions to the allowance are made by charges to
operating expenses in the form of a provision for loan losses. All loans that
are judged to be uncollectable are charged against the allowance and any
recoveries are credited to the allowance. Management conducts a critical
evaluation of the loan portfolio monthly. This evaluation includes an assessment
of the following factors: past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any
24
<PAGE> 27
underlying collateral, and current economic conditions. At December 31, 1997,
1996, and 1995 the allowance for loan losses was 1.77%, 1.69%, and 1.34%,
respectively, of gross loans then outstanding.
During 1997, the Bank charged off three loans with principal balance
totaling $224,000, and recovered two of those loans for $48,000, with accrued
interest and costs. Through December 31, 1996, the Bank had no loan charge-offs
and no charge-off recoveries.
In an effort to improve its analysis of risk factors associated with its
loan portfolio, the Bank continues to monitor and to make appropriate changes to
its internal loan policies. These efforts better enable the Bank to assess risk
factors prior to granting new loans and to assess the sufficiency of the
allowance for loan losses. The allowance for loan losses is deemed adequate by
the management for known and currently anticipated future risks inherent in the
loan portfolio. However, the Bank's loan portfolio can be adversely affected if
California economic conditions and the real estate market in the Bank's market
area were to weaken. The effect of such events although uncertain at this time,
could result in an increase in the level of non-performing loans and increased
loan losses which could adversely affect the Bank's future growth and
profitability.
DEPOSITS
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996
--------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand, non-interest bearing..... $ 69,376 --% $ 47,696 --%
Demand, interest bearing......... 4,988 1.91 3,654 1.86
Savings and money market......... 80,168 3.00 60,686 2.92
Time deposits, $100,000 and
over........................... 27,314 4.87 11,220 4.96
Time deposits less than
$100,000....................... 7,530 4.79 4,962 4.92
-------- ---- -------- ----
Total average deposits...... $189,376 2.22% $128,218 2.06%
======== ==== ======== ====
</TABLE>
At December 31, 1997, the Bank had a deposit mix of 26% in money market
accounts, 17% in time deposits, 14% in savings deposits, 3% in NOW accounts, and
40% in non-interest-bearing demand deposits. On the same date, $158,000 of the
Bank's deposits were from public sources. At December 31, 1996, the Bank had a
deposit mix of 24% in money market accounts, 20% in time deposits, 15% in
savings deposits, 3% in NOW accounts, and 38% in non-interest-bearing demand
deposits. On the same date, $200,000 of the Bank's deposits were from public
sources. The Bank's net interest income is enhanced by its percentage of non-
interest bearing deposits.
The Bank's deposits are obtained from a cross-section of the communities it
serves. The Bank's business is not seasonal in nature. The Bank had brokered
deposits totaling approximately $12 million at December 31, 1997. The Bank is
not dependent upon funds from sources outside the United States.
DEPOSIT CONCENTRATION AND DEPOSIT VOLATILITY
The following table indicates the maturity schedule of the Bank's time
deposits of $100,000 or more as of December 31, 1997:
<TABLE>
<CAPTION>
BALANCE % OF TOTAL
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less.................................... $20,836 60%
Over three months through six months.................... 8,741 25
Over six months through twelve months................... 5,235 15
Over twelve months...................................... 136 G1
------- ---
Total.............................................. $34,948 100%
======= ===
</TABLE>
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<PAGE> 28
The Bank focuses primarily on servicing business accounts that are
frequently over $100,000 in average size. Certain types of accounts that the
Bank makes available are typically in excess of $100,000 in average balance per
account, and certain types of business clients whom the Bank serves typically
carry deposits in excess of $100,000 on average. The account activity for some
account types and client types necessitates appropriate liquidity management
practices by the Bank to ensure its ability to fund deposit withdrawals.
LIQUIDITY AND LIABILITY MANAGEMENT
To meet liquidity needs, the Bank maintains a portion of its funds in cash
deposits in other banks, in federal funds sold, and in investment securities. As
of December 31, 1997, the Bank's primary liquidity ratio was 37.6%, comprised of
$48.2 million in investment securities available-for-sale of maturities (or
probable calls) of up to five years, federal funds sold of $27.1 million, and
$16.1 million in cash and due from banks, as a percentage of total deposits of
$243.0 million. As of December 31, 1996, the Bank's primary liquidity ratio was
37.9%, comprised of $42.9 million in investment securities available-for-sale of
maturities (or probable calls) of up to five years, and $12.6 million in cash
and due from banks, as a percentage of total deposits of $146.4 million.
Liquidity was essentially unchanged from 1996 to 1997 as deposit growth was
matched by commensurate growth in liquid assets.
The following table summarizes the Bank's borrowings under its federal
funds purchased and security repurchase arrangements for the periods indicated:
<TABLE>
<CAPTION>
1997 1996
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average balance during the year......................... $ 297 $ 85
Average interest rate during the year................... 5.72% 5.64%
Maximum month-end balance during the year............... $ 300 $5,010
Average rate at December 31............................. -- 6.75%
</TABLE>
The Bank has federal funds purchase lines of $15,000,000 and $2,000,000,
respectively, from its two correspondent banks, and a repurchase arrangement of
$10,000,000 with a commercial brokerage firm. There were no borrowings under
these arrangements as of December 31, 1997.
INTEREST RATE SENSITIVITY
The table below sets forth the interest rate sensitivity of the Bank's
interest earning assets and interest bearing liabilities as of December 31,
1997, using the rate sensitivity gap ratio. For purposes of the following
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<PAGE> 29
table, an asset or liability is considered rate-sensitive within a specified
period when it can be repriced or when it is scheduled to mature within the
specified time frame:
<TABLE>
<CAPTION>
WITHIN DUE IN THREE DUE AFTER
THREE TO TWELVE ONE TO FIVE DUE AFTER NOT RATE-
MONTHS MONTHS YEARS FIVE YEARS SENSITIVE TOTAL
-------- ------------ ----------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Federal funds sold............ $ 27,125 $ -- $ -- $ -- $ 27,125
Securities.................... 3,000 9,844 41,589 33,264 87,697
Total loans................... 99,936 8,242 12,445 8,147 128,770
Other assets.................. 4,473 -- -- -- 4,473
-------- ------- ------- -------- --------- --------
Total interest earning assets... 134,534 18,086 54,034 41,411 248,065
-------- ------- ------- -------- --------- --------
Cash and due from banks......... $ 16,060 16,060
Other assets.................... 3,450 3,450
-------- ------- ------- -------- --------- --------
Total assets.................... $134,534 $18,086 $54,034 $ 41,411 $ 19,510 $267,575
======== ======= ======= ======== ========= ========
INTEREST BEARING LIABILITIES:
Demand, interest-bearing...... $ 6,319 $ -- $ -- $ -- $ 6,319
Savings and money market...... 96,712 -- -- -- 96,712
Time deposits................. 26,050 15,946 214 -- 42,210
-------- ------- ------- -------- --------- --------
Total interest bearing
liabilities................... 129,081 15,946 214 -- 145,241
-------- ------- ------- -------- --------- --------
Non-interest demand deposits.... $ 97,737 97,737
Other liabilities............... 2,261 2,261
Shareholders' equity............ 22,336 22,336
-------- ------- ------- -------- --------- --------
Total liabilities and
shareholders' equity.......... $129,081 $15,946 $ 214 $ 122,334 $267,575
======== ======= ======= ======== ========= ========
Interest rate sensitivity gap... $ 5,453 $ 2,140 $53,820 $ 41,411 $(102,824) --
======== ======= ======= ======== ========= ========
Cumulative interest rate
sensitivity gap............... $ 5,453 $ 7,593 $61,413 $102,824 -- --
Cumulative interest rate
sensitivity gap ratio......... 2.04% 2.84% 22.95% 38.43%
</TABLE>
The careful planning of asset and liability maturities and the matching of
interest rates to correspond with this maturity matching is an integral part of
the active management of an institution's net yield. To the extent maturities of
assets and liabilities do not match in a changing interest rate environment, net
yields may change over time. Even with perfectly matched repricing of assets and
liabilities, risks remain in the form of prepayment of loans or investments or
in the form of delays in the adjustment of rates of interest applying to either
earning assets with floating rates or to interest bearing liabilities. The Bank
has generally been able to control its exposure to changing interest rates by
maintaining primarily floating interest rate loans and a majority of its time
certificates in relatively short maturities.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Bank's interest rate sensitivity position. To supplement
traditional gap analysis, the Bank performs simulation modeling to estimate the
potential effects of changing interest rates. The process allows the Bank to
explore the complex relationships within the gap over time and various interest
rate environments. For additional information on the Bank's simulation model and
the methodology used to estimate the potential effects of changing interest
rates, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK."
The Bank's internal Asset/Liability Committee and the Finance and
Investment Committee of the Board each meet monthly to monitor the Bank's
investments, liquidity needs and to oversee its asset/liability management. The
Bank evaluates the rates offered on its deposit products on a weekly basis.
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<PAGE> 30
CAPITAL RESOURCES
The following table summarizes risk-based capital, risk-weighted assets,
and risk-based capital ratios of the Company:
<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM
-------------------------------------- REGULATORY
1997 1996 1995 1994 REQUIREMENTS
-------- -------- ------- ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Capital components:
Tier 1 Capital............................. $ 21,899 $ 20,273 12,324 12,027
Tier 2 Capital............................. 1,885 1,188 572 76
-------- -------- ------- ------ ---
Total risk-based capital........... $ 23,784 $ 21,461 12,896 12,103
======== ======== ======= ====== ===
Risk-weighted assets......................... 150,418 94,776 54,730 18,851
Average assets............................... 251,767 175,001 122,464 53,731
Capital ratios:
Total risk-based capital........... 15.8% 22.6% 23.6% 76.4% 8.0%
Tier 1 risk-based capital.................. 14.6 21.4 22.5 75.9 4.0
Leverage ratio (1)......................... 10.3 13.9 10.1 22.4 4.0
</TABLE>
- ---------------
(1) Tier 1 capital divided by average assets (excluding goodwill).
At December 31, 1997 and 1996, the Bank's capital exceeded all minimum
regulatory requirements and the Bank was considered to be "well capitalized," as
defined in the regulations issued by the FDIC. The table above presents the
capital ratios of the Bank computed in accordance with applicable regulatory
guidelines and compared to the standards for minimum capital adequacy
requirements under the FDIC's prompt corrective action authority as of December
31, 1997. The risk-based and leverage capital ratios are defined in Item
1 -- "BUSINESS -- Supervision and Regulation -- Capital Adequacy Guidelines."
The Company intends to raise additional equity capital to finance future
geographic expansion. In general, the Company plans to form one or more new
subsidiary banks in new markets. No assurance can be given that the Company will
be able to raise the additional capital needed to support the organization of a
new bank. Management believes that the Company has sufficient cash flows to fund
operations for the next year.
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<PAGE> 31
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on most of the Bank's
assets and liabilities, and the market value of all interest-earning assets,
other than those which have a short term to maturity. Since all of the Company's
interest-bearing assets and liabilities are located at the Bank, all of the
Company's interest rate risk exposure lies at the Bank level, as well. As a
result, all interest rate risk management procedures are performed at the Bank
level. Based upon the nature of the Bank's operations, the Bank is not subject
to foreign exchange or commodity price risk. The Company does not own any
trading assets. As of December 31, 1997, the Company does not use interest rate
derivatives to hedge its interest rate risk.
The Bank's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee (ALCO). Interest rate risk is the potential of
economic losses due to future interest rate changes. These economic losses can
be reflected as a loss of future net interest income and/or a loss of current
fair market values. The objective is to measure the effect on net interest
income and to adjust the balance sheet to minimize the inherent risk while at
the same time maximize income. Management realizes certain risks are inherent,
and that the goal is to identify and accept the risks. Management uses two
methodologies to manage interest rate risk: 1) a standard GAP analysis; and 2)
an interest rate shock simulation model. The Bank has no market risk sensitive
instruments held for trading purposes.
The detail from the Bank's GAP analysis is shown in Item 7, above, and is
not discussed here. The Bank applies a market value (MV) methodology to gauge
its interest rate risk exposure as derived from its simulation model. Generally,
MV is the discounted present value of the difference between incoming cash flows
on interest earning assets and other investments and outgoing cash flows on
interest bearing liabilities. The application of the methodology attempts to
quantify interest rate risk as the change in the MV which would result from a
theoretical 200 basis point (1 basis point equals 0.01%) change in market
interest rates. Both a 200 basis point increase and a 200 basis point decrease
in market rates are considered.
At December 31, 1997, it was estimated that the Company's MV would increase
5.2% in the event of a 200 basis point increase in market interest rates. The
Company's MV at the same date would decrease 6.8% in the event of a 200 basis
point decrease in market interest rates.
Presented below, as of December 31, 1997, is an analysis of the Company's
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts of 200 basis points in market interest rates:
<TABLE>
<CAPTION>
MARKET VALUE AS A % OF
% CHANGE IN PRESENT VALUE OF ASSETS
MARKET ------------------------
CHANGE IN RATES $ CHANGE IN MARKET VALUE VALUE MV RATIO CHANGE (BP)
--------------- ------------------------ ----------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
-200 bp $ 2,296 5.2% 17.3% 86
0 bp -- -- 16.4 --
-200 bp (3,002) (6.8) 15.3 (112)
</TABLE>
Management believes that the MV methodology overcomes three shortcomings of
the typical maturity gap methodology. First, it does not use arbitrary repricing
intervals and accounts for all expected future cash flows. Second, because the
MV method projects cash flows of each financial instrument under different
interest rate environments, it can incorporate the effect of embedded options on
an institutions interest rate risk exposure. Third, it allows interest rates on
different instruments to change by varying amounts in response to a change in
market interest rates, resulting in more accurate estimates of cash flows.
However, as with any method of gauging interest rate risk, there are
certain shortcomings inherent to the MV methodology. The model assumes interest
rate changes are instantaneous parallel shifts in the yield curve. In reality,
rate changes are rarely instantaneous. The use of the simplifying assumption
that short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further,
the model assumes that certain assets and liabilities of similar maturity or
period to repricing will react the same to changes in rates. In reality, certain
types of financial instruments may react in
29
<PAGE> 32
advance of changes in market rates, while the reaction of other types of
financial instruments may lag behind the change in general market rates.
Additionally, the MV methodology does not reflect the full impact of annual and
lifetime restrictions on changes in rates for certain assets, such as adjustable
rate loans. When interest rates change, actual loan prepayments and actual early
withdrawals from certificates may deviate significantly from the assumptions
used in the model. Finally, this methodology does not measure or reflect the
impact that higher rates may have on adjustable-rate loan clients' ability to
service their debt. All of these factors are considered in monitoring the
Company's exposure to interest rate risk.
INFLATION
The impact of inflation on a financial institution can differ significantly
from that exerted on other companies. Banks, as financial intermediaries, have
many assets and liabilities that may move in concert with inflation both as to
interest rates and value. This is especially true for companies, such as the
Bank, with a high percentage of interest rate sensitive assets and liabilities.
It is the Bank's policy to have the majority of its loan portfolio be variable
interest rate loans. A bank can further reduce the impact of inflation if it can
manage its interest rate sensitivity gap. The Bank attempts to structure its mix
of financial instruments and manage its interest rate and sensitivity gap in
order to minimize the potential adverse effects of inflation or other market
forces on its net income and therefore, on its earnings and capital.
Financial institutions are also affected by inflation's impact on
non-interest expenses, such as salaries and occupancy expenses. Although the
Bank actively manages its assets and liabilities to minimize the impact of
changes in interest rates on the Bank's net interest income, the Bank
nevertheless has a ratio of rate sensitive assets to rate sensitive liabilities
which reflects a beneficial impact, in the short term, from a drop in interest
rates, and negative impact when interest rates go up. As such, the management of
the money supply by the Federal Reserve to control the rate of inflation has an
indirect impact on the earnings of the Bank. Also, the changes in interest rates
may have a corresponding impact on the ability of borrowers to repay loans with
the Bank.
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<PAGE> 33
The following "Business of the Company" and "Business of the Bank" sections
contain forward-looking statements that involve risks and uncertainties. The
Company's and the Bank's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the section entitled "Risk Factors" and elsewhere
in this Prospectus.
BUSINESS OF THE COMPANY
GENERAL
The Company was recently incorporated as a for-profit corporation under the
California General Corporation Law for the principal purpose of engaging in
activities permitted for a bank holding company. The Company will act as a
holding company for the Bank and will be a legal entity separate and distinct
from the Bank. The operations of the Company will be conducted at the same
location and in the same facilities as the operations of the Bank. The Company
does not expect to engage in activities other than the operation of subsidiary
banks in the immediate future. The Company expects to receive all of its income
from fees generated by management services provided to the Bank. The Company may
also receive income from dividends made to it by the Bank. However, the Bank has
no formal dividend policy, and dividends are issued solely in the discretion of
the Bank's Board of Directors. There can be no assurance as to when or whether
such a dividend will be paid or the amount thereof. The Bank currently has a
retained deficit which precludes it from paying cash dividends without the
consent of the Commissioner. See "SUPERVISION AND REGULATION -- Limitations on
Dividends."
The activities of the Company will be subject to the supervision of the
FRB. The Company may engage, directly or through subsidiary corporations, in
those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act of 1956, as amended. See "SUPERVISION AND
REGULATION."
BUSINESS AND MARKETING STRATEGY
Management believes that the Company will benefit from its location in the
downtown business district of the City of San Jose much the same as the Bank has
benefited from being in the same location. By virtue of its local ownership,
management, decision making, and subsidiary, the Company hopes to benefit from
the continuing trend in the banking industry towards merger and consolidation.
The Company's, as well as the Bank's, business strategy and promotional
activities emphasize service and responsiveness to local needs. Management
believes that the capital provided by this Offering can allow the Company to
implement its long-term strategy of establishing new de novo banks, branches, or
representative offices in contiguous geographic areas.
MARKET AREA
The Bank's main office is located at 150 Almaden Boulevard, San Jose,
California 95113. The Company uses the same space and facilities for its
operations. In addition to the main office, the Bank has recently opened a
branch office in Fremont, California located at 3077 Stevenson Boulevard. See
"BUSINESS OF THE BANK -- General." Currently, the Company's primary market area
is comprised of Santa Clara and the southern portion of Alameda counties. The
Company serves a secondary market consisting of the South Bay portion of the San
Francisco Bay area, including portions of all counties contiguous to its primary
market area.
EMPLOYEES
As of December 31, 1997, the Company had no employees. The Company has
named three executive officers: John Rossell as President and Chief Executive
Officer, Rebecca Levey as Corporate Secretary, and Daniel A. Northway as Chief
Financial Officer, and additional officers will be appointed as needed. The
Company expects to hire certain employees of the Bank in the future, at which
time those employees will resign from the Bank.
31
<PAGE> 34
LITIGATION
From time to time, the Company will be involved in litigation as an
incident to its business. In the opinion of management, no pending or threatened
litigation is likely to have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
BUSINESS OF THE BANK
GENERAL
Heritage Bank of Commerce commenced operations as a California
state-chartered bank on June 8, 1994. The Bank's deposit accounts are insured
under the Federal Deposit Insurance Act, up to the maximum applicable limits
thereof. The Bank is not a member of the Federal Reserve System. The Bank's main
office is located in the city of San Jose, California.
The Bank offers a range of loans, primarily commercial loans, including
real estate loans, construction loans, SBA loans, inventory and accounts
receivable loans, and equipment loans. The Bank also accepts checking, savings,
and time deposits; NOW and money market deposit accounts; and provides
travelers' checks, safe deposit, and other customary non-deposit banking
services. The Bank issues VISA and MasterCard credit cards through a
correspondent. The Bank has no subsidiaries and does not have a trust
department.
MARKET AREA
The Bank's primary market area is Santa Clara and the southern portion of
Alameda counties. The Bank serves a secondary market consisting of the South Bay
portion of the San Francisco Bay area, including portions of all counties
contiguous to its primary market area. This area is characterized by a high
degree of urbanization and several concentrations of the small industrial
companies and small-to-medium service companies that comprise the Bank's target
market.
BUSINESS STRATEGY
The Bank's primary focus is on small to medium sized businesses, their
owners, operators and employees, operating in the Santa Clara Valley. The Bank's
marketing and sales are confined primarily to personal contacts and referrals in
the community, which are focused primarily on obtaining business from clients
who require an unusual degree of personal service and attention from their bank.
The Bank conducts a traditional banking business, including the acceptance of
demand, savings and time deposits and the making of commercial, real estate, and
consumer loans. Businesses served include manufacturers, distributors,
contractors, professional corporations/partnerships, and service businesses. The
Bank had approximately 2,705 and 2,328 deposit accounts at December 31, 1997 and
December 31, 1996, respectively. In February 1998, the Bank opened a branch
office in Fremont, California.
COMPETITION
The banking and financial services business in California generally, and in
both the Company's and the Bank's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily of
changes in regulation, changes in technology and product delivery systems, and
the accelerating pace of consolidation among financial services providers. While
the Company does not directly compete with any other business, the Bank does
compete for loans, deposits and customers for financial services with other
commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions, and other non-bank financial service providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon local promotional activities,
personal relationships established by officers, directors, and employees with
its customers, and specialized
32
<PAGE> 35
services tailored to meet its customers' needs. In those instances where the
Bank is unable to accommodate a customer's needs, the Bank will seek to have
those services provided in whole or in part by its correspondents. See
"SUPERVISION AND REGULATION."
PREMISES
The Bank's main office is located at 150 Almaden Boulevard, San Jose,
California. The Company also conducts its operations in the same location and
facilities. In addition, the Bank established a branch office at 3077 Stevenson
Blvd., Fremont, California 94538.
The main office is leased under non-cancelable operating leases with a
non-affiliated third party with terms, including renewal options, ranging from
five to fourteen years. The primary operating area consists of approximately
15,700 square feet of space comprising the entire usable ground floor and a
portion of the second floor of a fifteen-story class-A office building in
downtown San Jose. In addition, approximately 1,255 square feet of space is
leased contiguous to the primary operating area for meetings, staff training,
and marketing events. The lease for this additional space commenced January 1,
1997 and expires December 31, 2001.
Since April 21, 1997, the Bank has also leased space at 100 Park Center
Plaza, Suite 430 consisting of approximately 3,277 square feet of space. The
space is in a five-story class-A office building on the same city block as the
Bank's main office; the Bank's SBA department occupies this space. The lease
commenced on April 21, 1997 and will terminate on April 30, 2000.
In February, 1998, the Bank leased space at 3077 Stevenson Blvd., Fremont,
California, consisting of 6,590 square feet of space in a stand-alone office
building. The lease, which commenced February 1, 1998, is for a ten year period
expiring January, 2008.
EMPLOYEES
As of December 31, 1997, the Bank employed a total of 88 full-time
equivalent employees, including 4 executive officers and a total of 24 other
officers. None of the Bank's employees are presently represented by a union or
covered by a collective bargaining agreement. The Bank believes that employee
relations are excellent.
SUPERVISION AND REGULATION
GENERAL
The regulation and supervision of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company stockholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY
The Company is a bank holding company registered under the BHCA, and is
subject to regulation, supervision and examination by the FRB. The BHCA and
other federal laws subject bank holding companies to particular restrictions on
the types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy
of the FRB that bank holding companies should pay cash dividends on common stock
only out of income available over the past year and
33
<PAGE> 36
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to each of its banking subsidiaries and commit resources to
their support. Such support may be required at times when, absent this FRB
policy, a holding company may not be inclined to provide it. As discussed below,
a bank holding company in certain circumstances could be required to guarantee
the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
Activities "Closely Related" to Banking. The BHCA prohibits a bank holding
company, with certain limited exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank or
from engaging in any activities other that those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the FRB, by order or regulation, to be so closely related to
banking or managing or controlling banks, as to be a proper incident thereto.
Some of the activities that have been determined by regulation to be closely
related to banking are making or servicing loans, performing certain data
processing services, acting as an investment or financial advisor to certain
investment trusts and investment companies, and providing securities brokerage
services. Other activities approved by the FRB include consumer financial
counseling, tax planning and tax preparation, futures and options advisory
services, check guaranty services, collection agency and credit bureau services,
and personal property appraisals. In approving acquisitions by bank holding
companies of companies engaged in banking-related activities, the FRB considers
a number of factors, and weighs the expected benefits to the public (such as
greater convenience and increased competition or gains in efficiency) against
the risks of possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices). The FRB is also empowered to differentiate between activities
commenced de novo and activities commenced through acquisition of a going
concern.
Safe and Sound Banking Practices. Banks and bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The FRB's
Regulation Y, for example, generally requires a holding company to give the FRB
prior notice of any redemption or repurchase of its own equity securities, if
the consideration to be paid, together with the consideration paid for any
repurchases or redemptions in the preceding year, is equal to 10% or more of the
company's consolidated net worth. The FRB may oppose the transaction if it
believes that the transaction would constitute an unsafe or unsound practice or
would violate any law or regulation. Depending upon the circumstances, the FRB
could take the position that paying a dividend would constitute an unsafe or
unsound banking practice.
The FRB has broad authority to prohibit activities of bank holding
companies and their non-banking subsidiaries which represent unsafe and unsound
banking practices or which constitute violations of laws or regulations, and can
assess civil money penalties for certain activities conducted on a knowing and
reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1,000,000 for each day the
activity continues.
Anti-Tying Restriction. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The FRB has adopted a system using
risk-based capital guidelines to evaluate the capital adequacy of bank holding
companies. Under the guidelines, specific categories of assets are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights
34
<PAGE> 37
are multiplied by corresponding asset balances to determine a "risk-weighted"
asset base. The guidelines require a minimum total risk-based capital ratio of
8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements).
Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 1997,
the Company's ratio of Tier 1 capital to total risk weighted assets was 14.6%
and its ratio of total capital to total risk-weighted assets was 15.8%. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Capital Resources."
In addition to the risk-based capital guidelines, the FRB uses a leverage
ratio as an additional tool to evaluate the capital adequacy of bank holding
companies. The leverage ratio is a company's Tier 1 capital divided be its
average total consolidated assets. Certain highly-rated bank holding companies
may maintain a minimum leverage ratio of 3.0%, but other bank holding companies
may be required to maintain a leverage ratio of up to 200 basis points above the
regulatory minimum. As of December 31, 1997, the Company's leverage ratio was
10.3%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
FRB guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior FRB approval of
proposed dividends, or might be required to consent to a consolidation or to
divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the FRB before it may acquire
all or substantially all of the assets of any bank, or ownership or control of
any voting shares of any bank, if after such acquisition it would own or
control, directly or indirectly, more than 5% of the voting shares of such bank.
In approving bank acquisitions by bank holding companies, the FRB is required to
consider the financial and managerial resources and future prospects of the bank
holding company and the banks concerned, the convenience and needs of the
communities to be served, and various competitive factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
FRB has been notified and has not objected to the transaction. Under a
rebuttable presumption established by the FRB, the acquisition of 10% or more of
a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as the Company, would,
under the circumstances set forth in the presumption, constitute acquisition of
control of the Company.
In addition, any company is required to obtain the approval of the FRB
under the BHCA before acquiring 25% (5% in the case of an acquirer that is a
bank holding company) or more of the outstanding
35
<PAGE> 38
Common Stock of the Company, or otherwise obtaining control or a "controlling
influence" over the Company.
Exposure to and Management of Risk. The FRB has announced proposals to
examine bank holding companies with respect to their exposure to and management
of different categories of risk. Categories of risk identified by the FRB
include legal risk, operational risk, market risk, credit risk, liquidity risk,
and reputation risk. If adopted, this approach would cause bank regulators to
focus on risk management procedures, rather than simply examining every asset
and transaction. This approach, if adopted, would supplement rather than replace
existing rating systems based on evaluation of an institution's capital, assets,
management, earnings, and liquidity. Although the FDIC has not announced its
intention to adopt this approach to risk evaluation, it is likely that the
different bank regulatory agencies will eventually adopt similar approaches to
this issue. No assurance can be given as to the effect, if any, that this
examination approach would have on the Company.
Limitations on Dividends. Under California law, the holders of common stock
are entitled to receive dividends when and as declared by the Board of
Directors, out of funds legally available therefor. A California corporation
such as the Bank may make a distribution to its shareholder, the Company, 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, such 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 banks and bank holding companies,
including the Bank and the Company, based on their current capital ratios, are
unable to meet this last test and so must have sufficient retained earnings to
fund the proposed distribution.
THE BANK
The Bank is a member of the FDIC, which currently insures the deposits of
each member bank to a maximum of $100,000 per depositor. For this protection,
the bank pays a semi-annual assessment and is subject to the rules and
regulations of the FDIC pertaining to deposit insurance and other matters.
The Bank is a California state-chartered bank, but is not a member of the
Federal Reserve System. State banks are subject to regulation, supervision and
regular examination by the California Department of Financial Institutions. The
regulations of these agencies govern most aspects of the Bank's business,
including reporting requirements, activities, investments, loans, borrowings,
certain check-clearing activities, branching, mergers and acquisitions, reserves
against deposits, and other areas.
Restrictions on Transactions with Affiliates and Insiders. Transactions
between the Bank and its non-banking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
stockholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the DFI may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Limitations on Dividends. The primary source of funds for payment of
dividends by the Company to its shareholders is the receipt of dividends and
management fees from the Bank. The Company's ability to receive
36
<PAGE> 39
dividends from the Bank is limited by applicable state and federal law.
Additionally, the FDIC and the Commissioner have authority to prohibit a bank
from engaging in business practices that are considered to be unsafe or unsound.
Depending upon the financial condition of a bank and upon other factors, the
FDIC or the Commissioner could assert that payments of dividends or other
payments by a bank might be such an unsafe or unsound practice.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its stockholders, including any depository institution holding
company (such as the Company) or any stockholder or creditor thereof.
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." A "well capitalized" bank has a total risk based
capital ratio of 10% or higher; a Tier 1 risk based capital ratio of 6% or
higher; a leverage ratio of 5% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8% or higher, a Tier 1 risk based capital ratio of 4% or
higher; a leverage ratio of 4% or higher (3% or higher if the bank was rated a
CAMEL 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "undercapitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Audit Requirements. All depository institutions are required to have an
annual, full-scope on-site examination. Those depository institutions with
assets greater than $500 million are required to have annual, independent audits
and to prepare all financial statements in accordance with generally accepted
accounting principles. Each institution is required to have an independent audit
committee comprised entirely of outside directors, independent of the
institution's management.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each bank to identify the communities served by the bank's offices and to
identify the types of credit the bank is prepared to extend within such
communities. It also requires the bank's regulators to assess the bank's
performance in meeting the credit needs of its community and to take such
assessment into consideration in reviewing applications for mergers,
acquisitions and other transactions. An unsatisfactory rating may be the basis
for denying such an application. The Bank was rated "excellent" in its most
recent CRA examination.
Potential Enforcement Actions; Supervisory Agreements. The Bank may be
subject to potential enforcement actions by the FRB and the FDIC for unsafe or
unsound practices in conducting its business, or for violations of any law, rule
or regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance of
deposits, the imposition of civil money penalties and removal and prohibition
orders against institution-affiliated parties.
37
<PAGE> 40
INTERSTATE BANKING
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was enacted in
September 1994. Generally, provisions of this Act authorize interstate banking
and interstate branching, subject to certain state options.
O Interstate acquisition of banks became permissible in all states on and
after September 29, 1995; state law cannot vary this rule. However,
states may continue to prohibit acquisition of banks that have been in
existence less than five years and interstate chartering of new banks.
O Interstate mergers of affiliated or unaffiliated banks will be permitted
June 1, 1997, unless a state adopts legislation before June 1, 1997 to
"opt out" of interstate merger authority, provided any limitations do not
discriminate against out-of-state banks. Individual states may enact
legislation to permit interstate mergers earlier than that date.
O Interstate acquisition of branches will be permitted to a bank only if
the law of the state where the branch is located expressly permits
interstate acquisition of a branch without acquiring the entire bank.
O Interstate de novo branching will be permitted to a bank only if a state
adopts legislation to "opt in" to interstate de novo branching authority.
Limitations on Concentrations. An interstate banking application may not be
approved if the applicant and its depository institution affiliates would
control more than 10% of insured deposits nationwide or more than 30% of insured
deposits in the state in which the bank to be acquired is located. These limits
do not apply to mergers solely between affiliates. States may waive the 30% cap
on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market
share of a depository institution and its affiliates are not affected by the
regulation.
Agency Authority. A bank subsidiary of a bank holding company will be
authorized to receive deposits, renew time deposits, close loans, service loans
and receive payments on loans as an agent for a depository institution affiliate
without being deemed a branch of the affiliate. A bank will not be permitted to
engage, as agent for an affiliate, in any activity as agent that it could not
conduct as a principal, or to have an affiliate, as its agent, conduct any
activity that it could not conduct directly, under federal or state law.
Host State Regulation. Out-of-state banks seeking to acquire or establish a
branch will be required to comply with any nondiscriminatory filing requirements
of the host state where the branch is located. The host state may set
notification and reporting requirements for a branch of an out-of-state bank. A
branch of an out-of-state bank will be subject to all of the laws of the host
state regarding intrastate branching, consumer protection, fair lending and
community reinvestment. A branch of a out-of-state bank will not be permitted to
conduct any activities at the branch that are not permissible by a bank
chartered by the host state.
Community Reinvestment Act. Community Reinvestment Act ("CRA") evaluations
will be required for each state in which an interstate bank has a branch.
Interstate banks will be prohibited from using out-of-state branches "primarily
for the purpose of deposit production." Federal banking agencies are required to
adopt regulations by June 1, 1997 to ensure that interstate branches are being
operated with a view to the needs of the host communities.
Foreign Banks. Foreign banks will be able to branch to the same extent as
U.S. domestic banks. Interstate branches acquired by foreign banks will be
subject to the CRA to the extent the acquired branch was subject to the CRA
before the acquisition.
California Law. On September 28, 1995, California enacted state legislation
in accordance with authority under the Riegle-Neal Act. This new state law
permits banks headquartered outside California to acquire or merge with
California banks that have been in existence for at least five years, and
thereby establish one or more California branch offices. An out-of-state bank
may not enter California by acquiring one or more branches of a California bank
or other operations constituting less than the whole bank. The law authorizes
38
<PAGE> 41
waiver of the 30% limit on state-wide market share for deposits as permitted by
the Riegle-Neal Act. This law also authorizes California state-licensed banks to
conduct certain banking activities (including receipt of deposits and loan
payments and conducting loan closings) on an agency basis on behalf of
out-of-state banks and to have out-of-state banks conduct similar agency
activities on their behalf.
Before this new legislation, California law allowed California banks and
bank holding companies to be acquired by banking organizations in other states
on a reciprocal basis (i.e., provided the other state's laws permitted
California banking organizations to acquire banking organizations in that state
on substantially the same terms and conditions applicable to banking
organizations whose operations were principally conducted within that state).
State Bank Sales of Non-Deposit Investment and Insurance Products.
Securities activities of state non-member banks, as well as the activities of
their subsidiaries and affiliates, are governed by guidelines and regulations
issued by the securities and financial institution regulatory agencies. These
agencies have taken the position that bank sales of alternative investment
products, such as mutual funds and annuities, raise substantial bank safety and
soundness concerns involving consumer confusion over the nature of the products
offered, as well as the potential for mismanagement of sales programs which
could expose a bank to liability under the antifraud provisions of federal
securities laws.
Accordingly, the agencies have issued guidelines that require, among other
things, the establishment of a compliance and audit program to monitor a bank's
mutual funds sales activities and its compliance with applicable federal
securities laws; the provision of full disclosures to customers about the risks
of such investments, including the possible loss of the customer's principal
investment; and the conduct of securities activities of bank subsidiaries or
affiliates in separate and distinct locations. In addition, the guidelines
prohibit bank employees involved in deposit-taking activities from selling
investment products or giving investment advice. Banks are also required to
establish a qualitative standard for the selection and marketing of the
investments offered by the bank, and to maintain appropriate documentation
regarding the suitability of investments recommended to bank customers.
California state-licensed banks have authority to engage in the insurance
business as an agent or broker, but not as an insurance underwriter.
Change in Senior Executives or Board Members. Certain banks and bank
holding companies are required to file a notice with their primary regulator
prior to (i) adding or replacing a member of the board of directors, or (ii) the
employment of or a change in the responsibilities of a senior executive officer.
Notice is required if the bank or holding company is failing to meet its minimum
capital standards or is otherwise in a "troubled condition," as defined in FDIC
regulations, has undergone a change in control within the past two years, or has
received its bank charter within the past two years.
Impact of Economic Conditions and Monetary Policies. The earnings and
growth of both the Company and the Bank will be affected by general economic
conditions, both domestic and international, and by the monetary and fiscal
policies of the United States Government and its agencies, particularly the FRB.
One function of the FRB is to regulate the national supply of bank credit in
order to mitigate recessionary and inflationary pressures. Among the instruments
of monetary policy used to implement those objectives are open market
transactions in United States Government securities, changes in the discount
rate on member bank borrowings and changes in reserve requirements held by
depository institutions. The monetary policies of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. However, the effect, if any, of such
policies on the future business and earnings of the Bank cannot be accurately
predicted.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contain a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions
39
<PAGE> 42
with banks. While the list set forth herein 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, and the Fair Housing Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.
Legislation and Proposed Changes. From time to time, legislation is enacted
which has the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in Congress, in
the California legislature and before various bank regulatory agencies.
Typically, the intent of such legislation is to strengthen the banking industry,
even if it may on occasion prove a burden on management's plans. No prediction
can be made as to the likelihood of any major changes or the impact such changes
might have on the Company.
40
<PAGE> 43
MANAGEMENT AND PRINCIPAL SHAREHOLDERS
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of the Record Date pertaining
to beneficial ownership of the Company's common stock (the sole class of stock
outstanding) by persons known to the Company to own five percent or more of the
Company's common stock, current directors of the Company, nominees to be elected
to the Board of Directors, and all directors and officers of the Company as a
group. This information has been obtained from the Company's records, or from
information furnished directly by the individual or entity to the Company.
For purposes of the following table, shares issuable pursuant to stock
options which may be exercised within 60 days of the Record Date are deemed to
be issued and outstanding and have been treated as outstanding in determining
the amount and nature of beneficial ownership and in calculating the percentage
of ownership of those individuals possessing such interest, but not for any
other individuals. Thus, the total number of shares considered to be outstanding
for the purposes of this table may vary depending upon the individual's
particular circumstance.
<TABLE>
<CAPTION>
RELATIONSHIP AMOUNT AND NATURE
WITH OF BENEFICIAL EXERCISABLE PERCENT
NAME OF BENEFICIAL OWNER(1) THE COMPANY OWNERSHIP(2,3) OPTIONS OF CLASS(3)
- --------------------------- ----------------------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Frank G. Bisceglia Director 56,908(4) 15,094 1.7
James R. Blair Director 22,233(5) 11,051 0.9
Arthur C. Carmichael, Jr. Director 36,838(6) 11,639 1.1
William J. Del Biaggio, Jr. Chairman & Director 94,159(7) 15,094 2.8
Anneke Dury Director 18,322(8) 15,094 0.5
Tracey A. Enfantino Director 22,458(9) 11,639 0.7
Glenn A. George Director 65,031(10) 7,064 2.0
Robert P. Gionfriddo Executive Vice President & 100,993(11) 59,306 2.7
Director
P. Michael Hunt Director 35,951(12) 10,678 1.1
Louis ("Lon") O. Normandin Director 69,914(13) 11,639 2.1
Jack L. Peckham Director 115,589(14) 11,639 3.5
Robert W. Peters Director 94,001(15) 15,094 2.8
Humphrey P. Polanen Director 35,538(16) 15,094 1.0
John E. Rossell III President, Chief Executive 70,888(17) 59,306 1.9
Office & Director
Kirk M. Rossmann Director 40,223(18) 11,639 1.2
All directors and executive 932,819(19) 332,797 25.0
officers as a group (18
in number)(19)
</TABLE>
- ---------------
(1) The address for all persons is c/o Heritage Commerce Corp, 150 Almaden
Boulevard, San Jose, California 95113.
(2) Subject to applicable community property laws and shared voting and
investment power with a spouse, the persons listed have sole voting and
investment power with respect to such shares unless otherwise noted. Listed
amounts reflect (i) a 10 percent stock dividend which was paid on February
26, 1996 to shareholders of record as of February 5, 1996, (ii) a 5 percent
stock dividend which was paid on February 26, 1997 to shareholders of
record as of February 5, 1997, and (iii) a 3 for 2 stock split on August
15, 1997 to shareholders of record as of August 1, 1997.
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<PAGE> 44
(3) Includes shares beneficially owned (including options exercisable within 60
days of the Record Date, as shown in the next column), both directly and
indirectly together with associates.
(4) Includes 2,598 shares held as trustee of the Edith Lico Simoni Trust, 2,874
shares as custodian for Thomas J. Bisceglia and 2,874 shares as custodian
for Laura M. Bisceglia under the Uniform Gifts to Minors Act, 30,318 shares
as one of two trustees of the Bisceglia Family Trust, and 3,150 shares held
in a personal Individual Retirement Account.
(5) Includes 8,032 shares held in a personal Individual Retirement Account and
3,150 shares held as trustee for the Blair Family Trust.
(6) Includes 21,657 shares held in a personal Individual Retirement Account,
1,968 shares held as trustee of the Arthur and Jean Carmichael Living
Trust, 787 shares held as trustee for Jennifer M. Carmichael, and 787
shares held as trustee for Arthur C. Carmichael, III.
(7) Includes 39,375 shares held in a personal Individual Retirement Account,
36,225 shares as one of two trustees of the Del Biaggio Family Trust, and
3,465 shares held in the name of Helen N. Del Biaggio, his wife.
(8) Includes 3,228 shares held in a personal Individual Retirement Account.
(9) Includes 9,954 shares held in the Environmental Systems, Inc. of California
Profit Sharing Plan, of which she is one of three trustees.
(10) Includes 47,887 shares held as one of two trustees for the George and
Noelle Trust, 9,450 shares held in a personal Individual Retirement
Account, and 630 shares held by Joseph George Distributor, Inc., of which
he is Chairman of the Board.
(11) Includes 34,650 shares held in a personal Individual Retirement Account and
1890 shares held in the Heritage Bank of Commerce 401K Plan.
(12) Includes 17,875 shares held by the Hunt and Associates Insurance Service,
Inc., Profit Sharing Plan, 865 shares held in the name of Allison L. Hunt,
865 shares held in the name of Jason M. Hunt, 865 shares held in the name
of Michelle L. Hunt, and 4,803 shares held in the Hunt Family Trust.
(13) Includes 58,275 shares as trustee of the Louis and Margaret Normandin
Trust.
(14) Includes 103,950 shares as one of two trustees for the Peckham Revocable
Trust.
(15) Includes 78,907 shares as one of two trustees for the Robert and Carolyn
Peters Trust.
(16) Includes 6,898 shares held in a personal Individual Retirement Account, and
378 shares held by Azieb Nicodimos, his wife.
(17) Includes 11,513 shares held in a personal Individual Retirement Account.
(18) Includes 17,324 shares held in a personal Individual Retirement Account,
and 2,598 shares held as custodian for Ty Rossmann under the Uniform Gifts
to Minor Act.
(19) Included in the total, but not individually listed, are three executive
officers, whose combined beneficial ownership totals 53,773 shares and
exercisable options (which equals approximately two percent of class).
DIRECTORS AND EXECUTIVE OFFICERS
The directors of the Company are the same as the directors of the Bank,
namely: Frank G. Bisceglia, James R. Blair, Arthur C. Carmichael, Jr., William
J. Del Biaggio, Jr., Anneke Dury, Tracey Enfantino, Glenn A. George, Robert P.
Gionfriddo, P. Michael Hunt, Louis O. (Lon) Normandin, Jack L. Peckham, Robert
W. Peters, Humphrey P. Polanen, John E. Rossell, III, and Kirk M. Rossmann. The
following table sets forth the names and certain information, concerning the
directors and executive officers of the Company. The directors are elected
annually by the Company's shareholders and serve until the next Annual Meeting
of Shareholders. Except as may be set forth in any applicable employment
agreement, officers serve at the pleasure of the Board. See "REMUNERATION AND
OTHER TRANSACTIONS WITH MANAGEMENT -- Employment Contracts."
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<PAGE> 45
None of the directors or executive officers of the Company were selected
pursuant to any arrangement or understanding, other than with the directors and
executive officers of the Company, acting within their capacities as such.
DIRECTOR INFORMATION
<TABLE>
<CAPTION>
DIRECTOR OF
DIRECTOR OF THE PRINCIPAL OCCUPATION, BUSINESS
POSITION WITH THE BANK COMPANY EXPERIENCE DURING PAST FIVE YEARS
NAME AGE THE COMPANY SINCE SINCE AND OTHER INFORMATION
---- --- ------------------- ----------- ----------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Frank G. Bisceglia 52 Director 1994 1997 Senior Vice President --
Investments Portfolio Manager at
Paine Webber, an independent,
full service securities firm.
James R. Blair 53 Director 1994 1997 President of Renco Properties,
Inc., a real estate development
company.
Arthur C. Carmichael, Jr. 57 Director 1994 1997 Chairman, Willis Corroon of San
Jose, an insurance brokerage
firm.
William J. Del Biaggio, 57 Chairman and 1994 1997 Chief Executive Officer of MED-
Jr. Director COR Health Information Systems,
Inc., a release of information
and staff outsourcing company,
since 1996; President of Heritage
Beverage Company, a beverage
importer-brokerage firm, since
1994; and from 1991 to 1994,
General Manager of Coors of Santa
Clara Valley.
Anneke Dury 53 Director 1994 1997 Independent financial consultant
for various Santa Clara County
technology companies.
Tracey Enfantino 37 Director 1994 1997 General Manager of Environmental
Systems, Inc., a mechanical
contracting company.
Glenn A. George 67 Director 1994 1997 Chairman of the Board of Joseph
George Distributor, a wine
distribution firm.
Robert P. Gionfriddo 52 Executive Vice 1994 1997 Executive Vice President,
President and Heritage Bank of Commerce since
Director 1994; from 1990 to 1993,
Executive Vice President at
Silicon Valley Bank; and from
1981 to 1990, Executive Vice
President at Comerica Bank-
California [formerly Plaza Bank
of Commerce].
P. Michael Hunt 54 Director 1994 1997 President, Hunt & Associates
Insurance Service, Inc., an
employee benefits, life insurance
and retirement planning firm.
Louis ["Lon"] O. Normandin 63 Director 1994 1997 Owner and President of Normandin
Chrysler-Plymouth Jeep Eagle.
Jack L. Peckham 56 Director 1994 1997 President and CEO of Lightspeed
Semiconductor from December 1997
to present, Vice
President/General Manager of
Atmel Corporation, a
semiconductor manufacturing
company from 1985 to 1997.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
DIRECTOR OF
DIRECTOR OF THE PRINCIPAL OCCUPATION, BUSINESS
POSITION WITH THE BANK COMPANY EXPERIENCE DURING PAST FIVE YEARS
NAME AGE THE COMPANY SINCE SINCE AND OTHER INFORMATION
---- --- ------------------- ----------- ----------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Robert W. Peters 58 Director 1994 1997 Private investor in technology
companies since 1990; and from
1988 to 1990, Vice President of
Cisco Systems, a networking firm.
Humphrey P. Polanen 48 Director 1994 1997 President and CEO, Trustworks
Systems, an internet security
company since February 1998.
General Manager, Network Security
Products Group, Sun Microsystems,
a computer systems company, 1997
to February 1998; General
Manager, Internet Commerce Group,
Sun Microsystems, from 1995 to
1997; and from 1981 to 1995,
Director of Worldwide Business
Development at Tandem Computers.
John E. Rossell III 50 President, Chief 1994 1997 President and CEO of Heritage
Executive Officer & Bank of Commerce since 1994; and
Director from 1992 to 1993, Senior Credit
Officer at Silicon Valley Bank.
Kirk M. Rossmann 50 Director 1994 1997 Chief Executive Officer of B/T
Management Group, LLC since 1996;
and from 1975 to 1996, President
of American Welding Supply, an
industrial and electronic
industrial gas supplier.
</TABLE>
There are no family relationships among any of the Company's Executive
Officers, directors or director nominees.
No director or nominee chosen by the Board of Directors is a director of
any company with a class of securities registered pursuant to section 12 of the
Securities Exchange Act of 1934, as amended, or subject to the requirements of
section 15(d) of such Act or of any company registered as an investment company
under the Investment Company Act of 1940, as amended.
44
<PAGE> 47
REMUNERATION AND OTHER TRANSACTIONS WITH MANAGEMENT
SUMMARY COMPENSATION
The following table sets forth a summary of compensation for services to
the Bank for the Bank's President and Chief Executive Officer, the Bank's
Executive Vice President, and the Bank's Executive Vice President/Chief Credit
Officer who were the only executive officers of the Bank or the Company whose
1997 compensation exceeded $100,000:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION --------------------- -------
--------------------------------------- RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) COMPENSATION(2) AWARDS SARS PAYOUTS COMPENSATION(3)
- --------------------------- ---- --------- --------- --------------- ---------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John E. Rossell............. 1997 $150,000 $37,500 $13,050 -- 3,000 -- --
President and CEO......... 1996 150,000 30,000 8,174 -- -- -- --
1995 150,000 7,500 8,415 -- -- -- --
Robert P. Gionfriddo........ 1997 $127,500 $37,500 $13,392 -- 3,000 -- $20,000
Executive Vice
President............... 1996 125,000 30,000 9,821 -- -- -- 20,000
1995 125,000 7,500 10,967 -- -- -- 20,000
Kenneth A. Corsello......... 1997 $ 95,229 $20,400 $10,326 -- -- -- --
Executive Vice
President............... 1996 86,833 17,060 4,875 -- 3,150 -- --
Chief Credit Officer...... 1995(4) -- -- -- -- 25,988 -- --
</TABLE>
- ---------------
(1) Amounts shown include cash and non-cash compensation earned and received by
executive officers as well as amounts earned but deferred at the election of
those officers.
(2) Amounts include an automobile allowance pursuant to the terms of each
executive officer's employment and payments for unused vacation.
(3) Amounts shown are earnings on LTIP compensation for an amount payable in
1999 or earlier if Mr. Gionfriddo is terminated without cause.
(4) Mr. Corsello's employment with the Bank began November 27, 1995. For the two
and one-half years prior to his employment with the Bank, Mr. Corsello was a
Senior Credit Officer of Cupertino National Bank.
The Bank pays the cost of premiums on life insurance policies insuring all
employees, including executive officers, in amounts approximately two times
their annual salaries. The policies are payable to the officers' designated
beneficiaries. A portion of the premium paid by the Bank is imputed as income
for tax purposes for the executive officers. Such amounts are included in the
compensation table above.
STOCK OPTION PLAN
Effective in the second quarter of 1994, the Board of Directors adopted the
Heritage Bank of Commerce 1994 Tandem Stock Option Plan (Plan). The Plan
authorizes the Bank to grant options that qualify as incentive stock options
(ISO) under the Internal Revenue Code of 1986 and non-qualified stock options
(NSO) to the key employees of the Bank. Non-employee directors are only eligible
to receive NSOs. The Plan was approved at the Bank's first annual meeting of
shareholders in April of 1995.
Originally the Plan had 623,700 shares (adjusted for stock dividends and
splits) authorized for issuance. During 1997, an additional 362,469 shares were
added to the Plan for future grants. At December 31, 1997, 316,289 shares are
available for future grants under the Plan. Shares were granted at prices that
are the higher of $5.77 per share or an amount per share that approximates the
fair market value of the Bank's Common Stock at the time of the grant. In
addition, if an ISO is granted to an officer or key employee of the Bank who at
the time of the grant owns more than ten percent of the Bank's Common Stock, the
exercise price of the options must be not less than the greater of $6.35 per
share or 110 percent of the fair market value of the Bank's Common Stock at the
time the option is granted. All options granted expire ten years from the date
of grant. The exercise price of all options must be paid in full in cash at the
time of such exercise. The Personnel and Planning Committee, a committee
appointed by the Board, administers the Plan.
45
<PAGE> 48
The following tables delineate options granted to executive officers,
Messrs. Rossell, Gionfriddo, and Corsello:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTION GRANTED EXERCISE
TO EMPLOYEES OR GRANT DATE
NAME OPTIONS GRANTED IN FISCAL YEAR BASE PRICE EXPIRATION DATE PRESENT VALUE
---- --------------- --------------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
John E. Rossell.......... 3,000 3.8% $8.67 07/01/07 $11,786.39
President and CEO
Robert Gionfriddo........ 3,000 3.8% $8.67 07/01/07 $11,786.39
Executive Vice
President
Kenneth A. Corsello...... -- -- -- -- --
Executive Vice
President
</TABLE>
Grant date present value is determined according to the option valuation
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS
No. 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 differ significantly from the Bank's stock option
awards. Those models also require subjective assumptions, which greatly affect
the calculated values. The calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 84
months; risk-free interest rate, 5.75%; stock volatility of 30%; and no
dividends during the expected term. For the grants shown in the table above, and
using the assumptions previously described, the present value of an option to
purchase one share is $3.9288 at the date of grant.
AGGREGATED OPTIONS/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
YEAR END YEAR END
--------------- --------------------
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ------------------ ----------------- --------------- --------------------
<S> <C> <C> <C> <C>
John E. Rossell......... -- -- 54,975/34,650 $554,000/$354,000
Robert Gionfriddo....... -- -- 54,975/34,650 $554,000/$354,000
Kenneth A. Corsello..... -- -- 14,248/14,889 $136,000/$140,000
</TABLE>
EMPLOYMENT CONTRACTS
JOHN E. ROSSELL III, the Bank's President and CEO, is employed under the
terms of a written five-year employment contract with the Bank which, among
other terms, provides for the following: combined wages, including deferred
compensation, of $150,000 per year, including an annual review for salary
increase; bonuses based upon the performance of the Bank, awarded in the sole
discretion of the Board of Directors; the grant of options to purchase up to
86,625 shares of the Bank's Common Stock at $5.77 per share; a car allowance;
insurance; and severance compensation and benefits in the event the Bank
terminates Mr. Rossell's employment without cause. In 1997, 3,000 additional
options were granted at a price of $8.67 per share.
ROBERT P. GIONFRIDDO, the Bank's Executive Vice President and Chief
Business Development officer, is employed under the terms of a written
three-year employment contract with the Bank which, among other terms, provides
for the following: Combined wages, including deferred compensation, averaging
$145,000 per year; bonuses based upon the performance of the Bank, awarded in
the sole discretion of the Board of Directors; the grant of options to purchase
up to 86,625 shares of the Bank's Common Stock at $5.77 per share; a car
allowance; insurance; the beneficial use of a proprietary membership in a local
country club; and severance compensation and benefits in the event the Bank
terminates Mr. Gionfriddo's employment without cause. In 1997, 3,000 additional
options were granted at a price of $8.67 per share.
46
<PAGE> 49
At present, the Bank is not a party to any other employment agreements.
401 (K) PLAN
The Board of Directors has established an employee profit sharing plan
(Plan) under Section 401(k) of the Internal Revenue Code. The purpose of the
Plan is to provide all eligible employees with supplemental income upon
retirement and to increase their proprietary interest in the Bank. Eligible
employees may make contributions to the Plan subject to annual limitations of
the Internal Revenue Code. The Bank does not provide any matching contributions
to the Plan. The Plan trustees, consisting of members of Bank management,
administer the Plan.
EMPLOYEE STOCK OWNERSHIP PLAN
During 1997, the Bank initiated an employee stock ownership plan (Stock
Ownership Plan). The Stock Ownership Plan allows the Bank to purchase shares on
the open market and award those shares to certain employees in lieu of paying
cash bonuses. To be eligible to receive an award of shares under the Stock
Ownership Plan, an employee must have worked at least 1,000 hours during the
year and must be employed by the Bank on December 31. Awards under the Stock
Ownership Plan generally vest over four years. During 1997, the Bank contributed
$98,000 to the Stock Ownership Plan with contributions to John E. Rossell, III,
Robert P. Gionfriddo and Kenneth A. Corsello totaling $4,500, $4,350 and $2,857
respectively.
COMPENSATION OF DIRECTORS
SUPPLEMENTARY RETIREMENT PLAN FOR DIRECTORS, INCLUDING TWO EXECUTIVE OFFICERS
In June of 1997, the Bank provided each of its directors, including two
executive officers, with a non qualified, defined contribution retirement and
death benefit plan. The amount of each respective potential annual retirement
benefit is indexed to the financial performance of specific single premium life
insurance policies, owned by the Bank and insuring the life of the respective
director. The Bank books as income any earnings on the policies, however, it
retains only the amount of earnings which would have been earned had it
purchased a one year Treasury Bill in lieu of the insurance policy. The "excess
earnings" of each insurance policy (the amount earned by the policy over and
above the amount determined by the Treasury Bill "hurdle rate" just described),
is credited to a liability reserve account for the benefit of the director. Each
plan participant earns a vested interest in the balance of his or her respective
liability reserve account, at the rate of 12% per annum, beginning with that
individual's first year of service and cumulating for as long as the director
remains in the service of the Bank, or until the director achieves 100% vesting.
The policies corresponding to each of the directors are denominated in one of
two uniform premium amounts. One uniform premium amount is applicable to
policies purchased to insure the lives of directors who are not also executive
officers and the other is applicable to policies purchased to insure the lives
of directors who are also Executive Officers, namely John E. Rossell, III,
President and CEO, and Robert P. Gionfriddo, Executive Vice President. The
benefits which will be realized under the plan are uncertain. The Plan is a
defined contribution plan. Contributions to the plan are indexed to the
performance of the insurance policies, whose performance is unpredictable.
However, as to the directors who are also Executive Officers, it was the
intention of the Board to design a plan which will ultimately provide the
Executive Officer Directors with annual retirement benefits initially equal to
approximately 50% of their respective salaries in the year prior to retirement,
payable for life. The uniform premium amounts for each of the other directors
was set, at the discretion of the Board, at 20% of the premium outlay made for
each Executive Officer Director. As the non-Executive Officer directors are of
widely different ages, these uniform premium amounts did not lend themselves to
any particular targeted benefit amount.
The death benefit for each of the directors is an endorsement to the
executive's beneficiary of 80% of the net-at-risk insurance (death benefit in
excess of cash value), together with any remaining balance in the related
liability reserve account.
47
<PAGE> 50
As the policies did not perform at a rate in excess of the hurdle rate in
1997, the initial year of the Plan, no credit was made to the participant
liability reserve accounts for the year, nor was any obligation incurred on the
part of the Bank for future retirement payments.
DIRECTOR FEES AND DIRECTOR FEE DEFERRAL PLAN
During 1997, the Bank paid $1,250 per month each to two directors for their
services during 1997, for a total of $30,000. In June, 1997, the Board approved
a director compensation program, effective July 1, 1997, that extended the
previous plan to include all non-Executive Officer directors. The plan allocates
fees among participating directors, based on the extent and nature of each
director's committee memberships and/or that director's chairmanship of one of
the various committees of the Board. The total annual cost of the program is
approximately $130,000.
An option of the director compensation program is the deferral of fees
("Deferral Plan"). Under the Deferral Plan, a participating director may defer
up to 100% of his monthly board fees into the Deferral Plan for up to ten years.
Amounts deferred earn interest at the rate of 8% per annum. The director may
elect a distribution schedule of up to ten years with interest accruing (at the
same 8%) on the declining balance.
The Bank has purchased life insurance policies on the lives of directors
who have agreed to participate in the Deferral Plan. It is expected that the
earnings on these policies will offset the cost of the program. In addition, the
Bank will receive death benefit payments upon the death of the director. The
proceeds will permit the Bank to "complete" the deferral program as the director
originally intended if he dies prior to the completion of the deferral program.
The disbursement of deferred fees is accelerated at death and commences one
month after the director dies.
In the event of the director's disability prior to attainment of his
benefit eligibility date, the director may request that the Board permit him to
receive an immediate disability benefit equal to the annualized value of the
director's deferral account.
To date, all but two of the directors have elected to defer their fees.
Through December 31, 1996, the directors were paid no attendance fee or retainer
or other cash compensation for their participation on the Board or its
committees. For the years 1996 and 1997 the Bank accrued expenses of zero and
$70,000, respectively, to account for its obligation to pay deferred fees.
CERTAIN OTHER DIRECTOR AND EXECUTIVE OFFICER TRANSACTIONS
Some of the Company's directors and executive officers and their immediate
families, as well as the companies with which such directors and executive
officers are associated, are customers of, and have conducted banking
transactions with, the Bank in the ordinary course of business and anticipate
conducting such banking transactions with such persons in the future. In the
opinion of management, all loans and commitments to lend included in such
transactions were made in compliance with applicable laws on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons of similar creditworthiness
and did not involve more than a normal risk of collectability or present other
unfavorable features. As of December 31, 1997, 1996, and 1995, the aggregate
indebtedness of all of the Bank's directors and principal officers (including
associated companies) was $2,145,000, $2,565,000, and $2,408,000, respectively,
constituting 9.6%, 12.5%, and 18.8%, respectively, of the Bank's total equity
capital at those dates. During 1997, no individual director's or officer's
indebtedness to the Bank exceeded 10% of the Bank's total equity capital at any
time.
Except as noted above, there were no existing or proposed material
transactions between the Company or the Bank and any of its executive officers,
directors, or beneficial owners of 5% or more of the Common Stock, or the
immediate family or associates of any of the foregoing persons during 1997, and
none are proposed at present.
48
<PAGE> 51
DESCRIPTION OF SECURITIES OF THE COMPANY
GENERAL
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, no par value, of which 3,295,896 shares were issued and
outstanding as of March 31, 1998. In addition, 986,169 shares have been reserved
for issuance pursuant to the Stock Option Plan, of which 675,880 have been
granted, 30,654 have been exercised, and 310,289 remain available for grant as
of March 31, 1998. Along with the common stock, the authorized capital of the
Company includes 10,000,000 shares of Preferred Stock, of which none were issued
and outstanding as of March 31, 1998. As of December 31, 1997, the Company had
approximately 860 shareholders of record.
COMMON STOCK
Each share of Common Stock has the same rights, privileges, and preferences
as every other share of Common Stock, and there are no pre-emptive, conversion
or redemption rights or sinking fund provisions applicable thereto. The shares
outstanding are fully paid, as described below.
Voting Rights. Each holder of the Common Stock is entitled to one vote per
share on any issue requiring a vote at any meeting, except that in connection
with the election of directors, the shares may be voted cumulatively. Cumulative
voting entitles a shareholder the right to vote the number of shares he or she
owns, multiplied by the number of directors to be elected. This total number of
votes may be cast for one candidate or may be distributed on the same principle
among as many candidates as the shareholder may desire.
The Company's Articles of Incorporation may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of a
majority of the outstanding shares. Any amendment is effective only when
accepted for filing and approved by the Commissioner.
Liquidation Rights. Upon liquidation or dissolution of the Company, holders
of the Common Stock are entitled to receive pro rata the net assets remaining
after payment of all creditors of the Company.
No Pre-emptive Rights. Holders of the Common Stock of the Company have no
pre-emptive or other rights to subscribe for additional shares.
Dividend Rights. Each share of the Company's Common Stock participates
equally in dividends on Common Stock, which are payable when, as, and if
declared by the Board of Directors out of funds legally available for that
purpose. See "TRADING HISTORY AND DIVIDENDS -- Dividends."
Transfer Agent. Gemisys serves as the registrar and transfer agent for the
Company's Common Stock.
Acquisition of Control. Both Federal and state law prohibit a person or
company from acquiring 10% or more of the outstanding equity securities of a
bank holding company without prior notice to and approval of the FDIC and
Commissioner, respectively. No corporation may acquire 25% or more of the
outstanding shares of a bank holding company without obtaining the prior
approval of the Board of Governors of the Federal Reserve System under the Bank
Holding Company Act.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock.
The Preferred Stock (or other securities convertible in whole or in part into
Preferred Stock) is available for issuance from time to time for various
purposes as determined by the Company's Board of Directors, including, without
limitation, making future acquisitions, raising additional equity capital and
financing. Subject to certain limits set by the Company's Articles of
Incorporation, the Preferred Stock (or such convertible securities) may be
issued on such terms and conditions, and at such times and in such situations,
as the Board of Directors in its sole discretion determines to be appropriate,
without any further approval or action by the shareholders (unless otherwise
required by laws, rules, regulations or agreements applicable to the Company).
49
<PAGE> 52
The effects of the issuance of the Preferred Stock on the holders of Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable on
the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on the series of Preferred Stock are in arrears; (iii) dilution of the
voting power of Common Stock if the series of Preferred Stock has voting rights,
including a possible "veto" power if the series of Preferred Stock has class
voting rights; (iv) dilution of the equity interest of holders of Common Stock
if the series of Preferred Stock is convertible, and is converted, into Common
Stock; and (v) restrictions on the rights of holders of Common Stock to share in
the Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the holder of the series of Preferred Stock. Holders of
Common Stock have no preemptive rights to purchase or otherwise acquire any
Preferred Stock that may be issued.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
Section 317 of the California Corporation Law ("Section 317") expressly
grants to each California corporation, including the Bank and the Company, the
power to indemnify its directors, officers and agents against certain
liabilities and expenses incurred in the performance of their duties. Rights to
indemnification beyond those provided by Section 317 may be valid to the extent
that such rights are authorized in the corporation's articles of incorporation.
Indemnification may not be made, however, with respect to liability incurred in
connection with any of the specific acts for which the liability of directors
may not be limited as discussed in the previous section.
With respect to all proceedings other than shareholder derivative actions,
Section 317 permits a California corporation to indemnify any of its directors,
officers or other agents only if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. In the case of derivative actions, a
California corporation may indemnify any of its directors, officers or agents
only if such person acted in good faith and in a manner such person believed to
be in the best interests of the corporation and its shareholders. Furthermore,
in derivative actions, no indemnification is permitted (i) with respect to any
matter with respect to which the person to be indemnified has been held liable
to the corporation, unless such indemnification is approved by the court; (ii)
of amounts paid in settling or otherwise disposing of a pending action without
court approval; or (iii) of expenses incurred in defending a pending action
which is settled or otherwise disposed of without court approval. To the extent
that a director, officer or agent of a corporation has been successful on the
merits in defense of any proceeding for which indemnification is permitted by
Section 317, a corporation is obligated by Section 317 to indemnify such person
against expenses actually and reasonably incurred by him in connection with the
proceeding.
FDIC regulations prohibit the indemnification by insured banks and their
holding companies of their directors, officers and other institution-affiliated
persons for that portion of the costs sustained with regard to an administrative
or civil enforcement action commenced by any federal banking agency that results
in a final order or settlement pursuant to which a director, officer or other
party is assessed a civil money penalty, removed from office, prohibited from
participating in the affairs of an insured institution or required to cease and
desist from or to take an affirmative action under the Federal Deposit Insurance
Act. This regulation permits an institution to make an indemnification payment
to, or for the benefit of, a director, officer or other party only if the
institution's Board of Directors, in good faith, determines that the individual
acted in good faith and in a manner that he or she believed to be in the best
interests of the institution and that the payment of indemnification will not
adversely affect the institution's safety and soundness. The director, officer
or other party must agree in writing to reimburse the institution for any
indemnification payments received should the proceeding result in a final order
being instituted against the individual assessing a civil money penalty,
removing the individual from office, or requiring the individual to cease and
desist from certain institutional activity.
50
<PAGE> 53
LEGAL MATTERS
SIGNIFICANT LITIGATION
The Company is not involved in any litigation outside the ordinary scope of
the Company's business.
OTHER LEGAL MATTERS
Certain legal matters in connection with this Offering have been reviewed
for the Company by the firm of McCutchen, Doyle, Brown & Enersen, LLP. Such
review should not be construed as constituting an opinion as to the merits of
this Offering, the accuracy or adequacy of the disclosures contained herein, or
the suitability of this investment for any investors or class of investors by
McCutchen, Doyle, Brown & Enersen, LLP.
EXPERTS
The financial statements as of December 31, 1997 and for the year then
ended included in this prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of the Bank as of December 31, 1996, and for each
of the two-years then ended included in this Prospectus have been audited by
KPMG Peat Marwick LLP, independent certified public accountants.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Company registered with the SEC
under the 1934 Act on March 5, 1998. In accordance with Sections 12, 13, and 14
of the Exchange Act, the Company files certain reports, proxy materials,
information statements and other information with the SEC. Copies of these
statements may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. The Commission maintains an internet web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants which file electronically with the
Commission. From June 1994 to March 1998, the Bank's Common Stock was registered
under the 1934 Act with the FDIC. Copies of the Bank's filings under the 1934
Act for this period can be obtained from the FDIC at Division of Supervision,
Regulation, Distribution and Securities Operations Unit, 550 17th St. N.W.,
Washington, D.C., 20429.
51
<PAGE> 54
HERITAGE COMMERCE CORP
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1997 and 1996............. F-4
Income Statements as of December 31, 1997, 1996 and 1995.... F-5
Statements of Shareholders' Equity as of December 31, 1997,
1996 and 1995............................................. F-6
Statements of Cash Flows as of December 31, 1997, 1996 and
1995...................................................... F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Heritage Bank of Commerce
San Jose, California
We have audited the accompanying balance sheet of Heritage Bank of Commerce
as of December 31, 1997, and the related statements of income, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The balance sheet of
the Bank for the year ended December 31, 1996 and the related statements of
income, shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996 were audited by other auditors whose report,
dated January 10, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such 1997 financial statements present fairly, in all
material respects, the financial position of the Bank as of December 31, 1997,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
January 23, 1998
F-2
<PAGE> 56
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Heritage Bank of Commerce:
We have audited the accompanying balance sheet of Heritage Bank of Commerce
(the Bank) as of December 31, 1996, and the related statements of income,
shareholders' equity, and cash flows for each of the years in the two-year
period then ended. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of Heritage Bank of Commerce as
of December 31, 1996, and the results of its operations and its cash flows for
each of the years in the two-year period then ended in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
January 10, 1997
F-3
<PAGE> 57
HERITAGE BANK OF COMMERCE
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks..................................... $ 16,060,000 $ 12,615,000
Federal funds sold.......................................... 27,125,000 --
------------ ------------
Total cash and cash equivalents................... 43,185,000 12,615,000
Securities available-for-sale, at fair value................ 61,166,000 50,016,000
Securities held-to-maturity, at amortized cost (fair value
of $26,938,000 and $25,454,000, respectively)............. 26,531,000 25,252,000
Loans....................................................... 128,770,000 82,915,000
Allowance for loan losses................................... (2,285,000) (1,402,000)
------------ ------------
Loans, net........................................ 126,485,000 81,513,000
Premises and equipment, net................................. 1,971,000 1,530,000
Accrued interest receivable and other assets................ 3,764,000 2,377,000
Other investments........................................... 4,473,000 --
------------ ------------
Total............................................. $267,575,000 $173,303,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $242,978,000 $146,379,000
Securities sold under agreements to repurchase............ -- 5,010,000
Accrued interest payable and other liabilities............ 2,261,000 1,390,000
------------ ------------
Total liabilities................................. 245,239,000 152,779,000
------------ ------------
Shareholders' equity:
Common Stock, no par value; 10,000,000 shares authorized;
shares issued and outstanding: 3,295,896 in 1997 and
3,130,696 in 1996...................................... 23,447,000 22,093,000
Net unrealized gain on securities available-for-sale, net
of taxes............................................... 418,000 221,000
Accumulated deficit....................................... (1,529,000) (1,790,000)
------------ ------------
Total shareholders' equity........................ 22,336,000 20,524,000
------------ ------------
Total............................................. $267,575,000 $173,303,000
============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 58
HERITAGE BANK OF COMMERCE
INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Interest income:
Loans, including fees.............................. $10,376,000 $ 6,138,000 $3,134,000
Securities, taxable................................ 5,188,000 3,723,000 2,623,000
Securities, tax-exempt............................. 87,000 1,000 --
Federal funds sold................................. 552,000 663,000 664,000
Other investments.................................. 48,000 -- --
----------- ----------- ----------
Total interest income................................ 16,251,000 10,525,000 6,421,000
Interest expense:
Deposits........................................... 4,187,000 2,641,000 1,695,000
Other.............................................. 17,000 5,000 1,000
----------- ----------- ----------
Total interest expense............................... 4,204,000 2,646,000 1,696,000
----------- ----------- ----------
Net interest income before provision for loan
losses............................................. 12,047,000 7,879,000 4,725,000
Provision for loan losses............................ 1,060,000 830,000 496,000
----------- ----------- ----------
Net interest income after provision for loan
losses............................................. 10,987,000 7,049,000 4,229,000
----------- ----------- ----------
Other income:
Gain on sale of loans held for sale................ 205,000 101,000 --
Service charges and other fees..................... 173,000 149,000 59,000
Gain on sales of securities available-for-sale..... 164,000 21,000 3,000
Other income....................................... 48,000 25,000 9,000
----------- ----------- ----------
Total other income................................... 590,000 296,000 71,000
----------- ----------- ----------
Other expenses:
Salaries and employee benefits..................... 4,933,000 2,942,000 2,062,000
Client services.................................... 1,169,000 910,000 491,000
Furniture and equipment............................ 542,000 330,000 220,000
Advertising and promotion.......................... 450,000 260,000 154,000
Occupancy.......................................... 440,000 293,000 296,000
Professional fees.................................. 372,000 224,000 302,000
Loan origination costs............................. 326,000 146,000 39,000
Other.............................................. 936,000 619,000 534,000
----------- ----------- ----------
Total other expenses................................. 9,168,000 5,724,000 4,098,000
----------- ----------- ----------
Net income before income taxes....................... 2,409,000 1,621,000 202,000
Provision for income taxes........................... 844,000 220,000 1,000
----------- ----------- ----------
Net income........................................... $ 1,565,000 $ 1,401,000 $ 201,000
=========== =========== ==========
Earnings per share:
Basic........................................... $ 0.48 $ 0.48 $ 0.08
Diluted......................................... $ 0.45 $ 0.46 $ 0.08
</TABLE>
See notes to financial statements.
F-5
<PAGE> 59
HERITAGE BANK OF COMMERCE
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
COMMON STOCK SECURITIES TOTAL
----------------------- AVAILABLE-FOR-SALE, ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT NET OF TAXES DEFICIT EQUITY
--------- ----------- ------------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.... 2,112,681 $14,085,000 $(336,000)
--------- ----------- --------- ----------- -----------
Stock options exercised..... 12,853 85,000 -- -- 85,000
Net income.................. -- -- -- 201,000 201,000
Net change in unrealized
gain on securities
available for-sale, net of
taxes..................... -- -- 802,000 -- 802,000
--------- ----------- --------- ----------- -----------
BALANCES, DECEMBER 31,
1995...................... 2,125,534 14,170,000 466,000 (1,807,000) 12,829,000
--------- ----------- --------- ----------- -----------
Stock dividend.............. 212,535 1,384,000 -- (1,384,000) --
Stock options exercised..... 6,441 39,000 -- -- 39,000
Common Stock issued pursuant
to secondary offering (net
of issuance costs of
$51,000).................. 786,186 6,500,000 -- -- 6,500,000
Net income.................. -- -- -- 1,401,000 1,401,000
Net change in unrealized
gain on securities
available for-sale, net of
taxes..................... -- -- (245,000) -- (245,000)
--------- ----------- --------- ----------- -----------
BALANCES, DECEMBER 31,
1996...................... 3,130,696 22,093,000 221,000 (1,790,000) 20,524,000
--------- ----------- --------- ----------- -----------
Stock dividend.............. 156,349 1,304,000 -- (1,304,000) --
Fractional shares canceled
due to stock split........ (194) (2,000) -- (2,000)
Stock options exercised..... 9,045 52,000 -- -- 52,000
Net income.................. -- -- -- 1,565,000 1,565,000
Net change in unrealized
gain on securities
available-for-sale, net of
taxes..................... -- -- 197,000 -- 197,000
--------- ----------- --------- ----------- -----------
BALANCES, DECEMBER 31,
1997...................... 3,295,896 $23,447,000 $ 418,000 $(1,529,000) $22,336,000
========= =========== ========= =========== ===========
</TABLE>
See notes to financial statements
F-6
<PAGE> 60
HERITAGE BANK OF COMMERCE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,565,000 $ 1,401,000 $ 201,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 388,000 260,000 193,000
Provision for possible loan losses............. 1,060,000 830,000 496,000
Gain on sales of securities
available-for-sale.......................... (164,000) (21,000) (3,000)
Amortization / accretion of discounts and
premiums on securities...................... 56,000 52,000 170,000
Proceeds from sales of loans held for sale..... 4,198,000 1,724,000 --
Originations of loans held for sale............ (4,626,000) (11,587,000) (4,220,000)
Maturities of loans held for sale.............. 45,000 -- --
Increase in accrued interest receivable and
other assets................................ (1,400,000) (939,000) (681,000)
Increase (decrease) in accrued interest payable
and other liabilities....................... 605,000 (295,000) 371,000
Proceeds from relocation....................... -- 1,100,000 --
------------ ------------ ------------
Net cash provided by (used in) operating
activities..................................... 1,727,000 (7,475,000) (3,473,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans............................ (45,650,000) (30,450,000) (27,771,000)
Purchases of securities available-for-sale....... (49,116,000) (27,611,000) (35,167,000)
Maturities of securities available-for-sale...... 16,588,000 13,683,000 14,268,000
Proceeds from sales of securities
available-for-sale............................. 21,955,000 5,081,000 3,016,000
Purchases of securities held-to-maturity......... (7,659,000) (16,248,000) (6,089,000)
Proceeds from maturities of securities
held-to-maturity............................... 6,388,000 1,000,000 3,494,000
Purchase of corporate-owned life insurance....... (4,473,000) -- --
Purchases of property and equipment.............. (829,000) (887,000) (105,000)
------------ ------------ ------------
Net cash used in investing activities............ (62,796,000) (55,432,000) (48,354,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits......................... 96,599,000 27,633,000 71,664,000
(Repayments) proceeds from sale of securities
under agreements to repurchase................. (5,010,000) 5,010,000 --
Net proceeds from issuance of common stock....... 50,000 6,539,000 85,000
------------ ------------ ------------
Net cash provided by financing activities........ 91,639,000 39,182,000 71,749,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 30,570,000 (23,725,000) 19,922,000
Cash and cash equivalents, beginning of year..... 12,615,000 36,340,000 16,418,000
------------ ------------ ------------
Cash and cash equivalents, end of year........... $ 43,185,000 $ 12,615,000 $ 36,340,000
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 4,477,000 $ 2,610,000 $ 1,660,000
Income taxes................................ $ 1,536,000 $ 218,000 $ 1,000
Supplemental schedule of non-cash investing and
financing activity:
Transfer from accumulated deficit to common
stock due to stock dividend................. $ 1,304,000 $ 1,384,000 $ --
</TABLE>
See notes to financial statements.
F-7
<PAGE> 61
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS
(L) SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Heritage Bank of Commerce (the Bank) is a California state chartered bank
which offers a full range of commercial and personal banking services to
residents and the business/professional community in Santa Clara County,
California, through a facility located in downtown San Jose, California. The
Bank was incorporated on November 23, 1993 as Heritage Bank of Commerce and
commenced operations on June 8, 1994. The accounting and reporting policies of
the Bank conform to generally accepted accounting principles and prevailing
practices within the banking industry.
Use of Estimates
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. The allowance for possible loan losses is a material estimate.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Bank considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents include cash on hand, amounts due from banks, and federal funds
sold. Generally, federal funds are sold and purchased for one-day periods.
Securities
The Bank classifies its securities into two categories, available-for-sale
and held-to-maturity, at the time of purchase. Securities available-for-sale are
measured at fair value with a corresponding recognition of the net unrealized
holding gain or loss as a separate component of shareholders' equity, net of
taxes, until realized. Securities held-to-maturity are measured at amortized
cost, based on the Bank's positive intent and ability to hold the securities to
maturity.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. No such declines have occurred.
Premiums and discounts are amortized, or accreted, over the life of the
related investment security as an adjustment to income using the straight-line
method. Interest income is recognized when earned. Realized gains and losses for
securities classified as available-for-sale are included in earnings and are
derived using the specific identification method for determining the cost of
securities sold.
Loans Held for Sale
The Bank holds for sale the guarantied portion of certain Small Business
Administration (SBA) loans. These loans are carried at the lower of cost or
market, determined in the aggregate.
Gains or losses on loans held for sale are recognized upon completion of
the sale, and are based on the difference between the net sales proceeds and the
relative fair value of the guarantied portion of the loan sold compared to the
relative fair value of the unguarantied portion. A portion of the gain is
deferred and amortized over the life of the loan based on the difference between
the principal retained and the relative value of the unguarantied portion of the
loan.
The servicing assets that result from the sale of SBA loans sold with
servicing rights retained are amortized over the lives of the loans using a
method approximating the interest method.
F-8
<PAGE> 62
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Loans
Loans are stated at the principal amount outstanding. The majority of the
Bank's loans are at variable interest rates. Interest on loans is credited to
income when earned.
Generally, a loan is classified as non-accrual, the accrual of interest is
discontinued, any accrued and unpaid interest is reversed, and the amortization
of deferred loan fees and costs is discontinued, when the payment of principal
or interest is 90 days past due, unless the amount is well secured and in the
process of collection. Any interest or principal payments received on
non-accrual loans are normally applied toward reduction of principal.
Non-accrual loans generally are not returned to performing status until the
obligation is brought current, has performed in accordance with the contract
terms for a reasonable period of time, and the ultimate collectability of the
total contractual principal and interest is no longer in doubt.
Management, considering current information and events, considers a loan to
be impaired when it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the note agreement. When a
loan is considered to be impaired, the amount of impairment is measured based on
the present value of expected future cash flows discounted at the note's
effective interest rate, or the fair value of the collateral if the loan is
secured by real estate.
Non-refundable loan fees and direct origination costs are deferred and
recognized over the expected lives of the related loans using the effective
yield interest method.
Allowance for Loan Losses
The allowance for loan losses is established through a provision charged to
expense. Loans are charged against the allowance when management believes that
the collectability of the principal is doubtful. Recoveries are credited to the
allowance. The allowance for loan losses is a valuation allowance that
management believes will be adequate to absorb losses inherent in existing
loans, based on evaluations of collectability. These evaluations take into
consideration such factors as the composition of the portfolio, overall
portfolio quality, loan concentrations, specific problem loans, and current and
anticipated local economic conditions that may affect a borrower's ability to
repay.
Premises and Equipment
Premises and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the lesser of the lease terms or
estimated useful lives of five to fifteen years.
Other Investments
Other investments consist of cash surrender value of life insurance
policies for certain officers and directors of the Bank.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, effective January 1, 1997. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under this approach, after a transfer of financial assets, an entity
recognizes all financial and servicing assets it controls and liabilities it has
incurred and derecognizes financial assets it no longer controls and liabilities
that have been extinguished. The adoption of this Statement did not have a
significant impact on the Bank's financial position or results of operations.
Long-Lived Assets
The Bank evaluates the recoverability of long-lived assets on an on-going
basis.
F-9
<PAGE> 63
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Income taxes are provided at current rates. Deferred income taxes reflect
the net tax effects of temporary differences between carrying amounts of assets
and liabilities for financial reporting purposes and amounts used for income tax
purposes. A valuation allowance is established to reduce the deferred tax asset
if it is "more likely than not" that the related tax benefits will not be
realized in the future.
Stock-Based Compensation
As allowed for by SFAS No. 123, Accounting for Stock-Based Compensation,
the Bank accounts for stock-based awards to employees using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees.
Earnings Per Share
Earnings per share are computed in compliance with SFAS No. 128, Earnings
Per Share. Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share reflect
potential dilution from outstanding stock options, using the treasury stock
method. For each of the years presented, net income is the same to basic and
diluted earnings per share. Reconciliation of weighted average shares used in
computing earnings per share are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares
outstanding............................. 3,291,689 2,912,263 2,444,912
Dilutive effect of stock options
outstanding, using the treasury stock
method.................................. 188,548 121,690 34,744
--------- --------- ---------
Shares used in computing diluted earnings
per share............................... 3,480,237 3,033,953 2,479,656
</TABLE>
All share numbers have been retroactively restated for stock dividends and
stock splits.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation. These reclassifications had no
impact on shareholders' equity and net income.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income, which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from non-owner sources; and SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
The Bank is required to adopt these statements in 1998 and their adoption will
not impact the Bank's financial position, results of operations or cash flows.
F-10
<PAGE> 64
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SECURITIES
The amortized cost and estimated fair value of securities as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury.................... $35,220,000 $451,000 $ -- $35,671,000
U.S. Government Agencies......... 16,370,000 202,000 -- 16,572,000
Municipals....................... 4,596,000 67,000 -- 4,663,000
Preferred Stock.................. 2,212,000 48,000 -- 2,260,000
Commercial Paper................. 2,036,000 -- (36,000) 2,000,000
----------- -------- -------- -----------
Total securities
available-for-sale............... $60,434,000 $768,000 $(36,000) $61,166,000
=========== ======== ======== ===========
SECURITIES HELD-TO-MATURITY:
Municipals....................... $16,450,000 $255,000 $ -- $16,705,000
U.S. Government Agencies......... 6,033,000 118,000 -- 6,151,000
U.S. Treasury.................... 4,048,000 34,000 -- 4,082,000
----------- -------- -------- -----------
Total securities
held-to-maturity................. $26,531,000 $407,000 $ -- $26,938,000
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated fair value of securities as of December
31, 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury.................... $28,092,000 $193,000 $(12,000) $28,273,000
U.S. Government Agencies......... 16,624,000 75,000 (31,000) 16,668,000
Municipals....................... 2,517,000 26,000 (2,000) 2,541,000
Commercial Paper................. 2,527,000 10,000 (3,000) 2,534,000
----------- -------- -------- -----------
Total securities
available-for-sale............... $49,760,000 $304,000 $(48,000) $50,016,000
=========== ======== ======== ===========
SECURITIES HELD-TO-MATURITY:
Municipals....................... $ 9,616,000 $ 57,000 $(38,000) $ 9,635,000
U.S. Treasury.................... 8,084,000 62,000 -- 8,146,000
U.S. Government Agencies......... 7,552,000 123,000 (2,000) 7,673,000
----------- -------- -------- -----------
Total securities
held-to-maturity................. $25,252,000 $242,000 $(40,000) $25,454,000
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated fair values of securities as of December
31, 1997 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or pre-pay obligations with or without call or pre-payment penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
------------------------------ ----------------------------
AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED FAIR
COST VALUE COST VALUE
------------ --------------- ----------- --------------
<S> <C> <C> <C> <C>
Due within one year......................... $ 8,979,000 $ 8,996,000 $ 3,848,000 $ 3,856,000
Due after one through five years............ 31,241,000 31,583,000 10,006,000 10,138,000
Due after five through ten years............ 14,144,000 14,440,000 11,007,000 11,231,000
Due after ten years......................... 6,070,000 6,147,000 1,670,000 1,713,000
----------- ----------- ----------- -----------
Total............................. $60,434,000 $61,166,000 $26,531,000 $26,938,000
=========== =========== =========== ===========
</TABLE>
Sales of securities available-for-sale resulted in gross realized gains of
$170,000, $21,000, and $6,000 during the years ended December 31, 1997, 1996,
and 1995, respectively.
F-11
<PAGE> 65
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Sales of securities available-for-sale resulted in gross realized losses of
$6,000, nil, and $3,000 during the years ended December 31, 1997, 1996, and
1995, respectively.
Securities with amortized cost of $27,470,000 as of December 31, 1997 were
pledged to secure public and certain other deposits as required by law or
contract.
(3) LOANS
Loans as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Loans held for sale.............................. $ 15,411,000 $15,028,000
Loans held for investment
Commercial..................................... 48,422,000 29,420,000
Real estate -- mortgage........................ 38,446,000 26,070,000
Real estate -- land and construction........... 25,780,000 11,918,000
Consumer....................................... 824,000 558,000
------------ -----------
Total loans...................................... 128,883,000 82,994,000
Deferred loan fees............................... (113,000) (79,000)
------------ -----------
Loans, net....................................... $128,770,000 $82,915,000
============ ===========
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -----
<S> <C> <C> <C>
Balance, beginning of year......................... $1,402 $ 572 $ 76
Actual charge-offs................................. 224 -- --
Less recoveries.................................... 47 -- --
------ ------ ----
Net loans charged-off.............................. 177 -- --
Provision for loan losses.......................... 1,060 830 496
------ ------ ----
Balance, end of year............................... $2,285 $1,402 $572
====== ====== ====
</TABLE>
As of December 31, 1997, 1996, and 1995, the Bank had no loans for which
interest is no longer being accrued, no loans past due 90 days or more, and no
loans considered to be impaired. For the year ended December 31, 1997, the Bank
had foregone $17,000 of interest income as a result of non-accrual loans or
restructured debt. For the years ended December 31, 1996 and 1995, the Bank had
no forgone interest income as a result of non-accrual loans or restructured
debt.
The Bank had no non-accrual loans as of December 31, 1997 or 1996. SBA
loans serviced for others are not included in the accompanying balance sheets.
The unpaid principal balances of these loans as of December 31, 1997 and 1996
were approximately $5,961,000 and $2,105,000, respectively. Concentrations of
credit risk arise when a number of clients are engaged in similar business
activities, or activities in the same geographic region, or have similar
features that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic conditions. Although the Bank has a
diversified loan portfolio, a substantial portion of its clients' ability to
honor contracts is reliant upon the economic stability of Santa Clara County,
California, including the real estate markets of the county. Loans are made on
the basis of a secure repayment source, which generally is based on a detailed
cash flow analysis; collateral is generally a secondary source for loan
qualification.
The Bank makes loans to executive officers, directors, and their affiliates
in the ordinary course of business. These transactions were on substantially the
same terms as those prevailing at the time for comparable transactions with
unrelated parties and do not involve more than normal risk or unfavorable terms
F-12
<PAGE> 66
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
for the Bank. At December 31, 1997 and 1996 the Bank had $2,145,000 and
$2,565,000 in loans outstanding to related parties.
(4) PREMISES AND EQUIPMENT
Premises and equipment as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and equipment............................. $1,812,000 $1,245,000
Leasehold improvements.............................. 644,000 471,000
Software............................................ 361,000 276,000
---------- ----------
2,817,000 1,992,000
Accumulated depreciation and amortization........... (846,000) (462,000)
---------- ----------
Premises and equipment, net......................... $1,971,000 $1,530,000
========== ==========
</TABLE>
(5) DEPOSITS
Deposits as of December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Demand, non-interest bearing.................... $ 97,737,000 $ 55,372,000
Demand, interest bearing........................ 6,319,000 4,153,000
Savings and money market........................ 96,712,000 56,848,000
Time deposits, $100,000 and over................ 34,948,000 22,145,000
Time deposits, less than $100,000............... 7,262,000 7,861,000
------------ ------------
Total deposits.................................. $242,978,000 $146,379,000
============ ============
</TABLE>
At December 31, 1997, the scheduled maturities of time deposits was as
follows:
<TABLE>
<S> <C>
Year 1998....................................... $41,996,000
1999............................................ 167,000
2000............................................ 47,000
-----------
Total time deposits............................. $42,210,000
===========
</TABLE>
(6) BORROWING ARRANGEMENTS
Available Lines of Credit
The Bank has federal funds purchase lines of $15,000,000 and $2,000,000,
respectively, from two correspondent banks, and a repurchase arrangement of
$10,000,000 with a commercial brokerage firm. There were no borrowings under
these arrangements as of December 31, 1997. The repurchase agreement is an
overnight loan, with terms negotiated based on the nature of the securities
offered for repurchase.
Information concerning borrowings under the above arrangements is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Average balance during the year........................ $297,000 $ 85,000
Average interest rate during the year.................. 5.72% 5.64%
Maximum month-end balance during the year.............. $300,000 $5,010,000
Average rate at December 31............................ -- 6.75%
</TABLE>
F-13
<PAGE> 67
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
The provision for income taxes for the years ended December 31, consisted
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ------
<S> <C> <C> <C>
CURRENT:
Federal.......................................... $ 939,000 $ 135,000 $ --
State............................................ 353,000 218,000 1,000
---------- --------- ------
Total current...................................... 1,292,000 353,000 1,000
---------- --------- ------
DEFERRED:
Federal.......................................... (372,000) (104,000) --
State............................................ (76,000) (29,000) --
---------- --------- ------
Total deferred..................................... (448,000) (133,000) --
---------- --------- ------
Provision for income taxes......................... $ 844,000 $ 220,000 $1,000
========== ========= ======
</TABLE>
The effective tax rate differs from the federal statutory rate for the
years ended December 31, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 7.5 7.7 0.3
Change in valuation allowance............................... (8.7) (29.5) (42.0)
Non-taxable interest income................................. (2.3) -- --
Other....................................................... 3.5 0.4 7.2
---- ----- -----
Effective tax rate.......................................... 35.0% 13.6% 0.5%
==== ===== =====
</TABLE>
Net deferred tax asset as of December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for possible loan losses........................ 886,000 429,000
Servicing rights.......................................... 99,000 --
Deferred rent............................................. 89,000 161,000
Accrued compensation...................................... 20,000 --
State taxes............................................... -- 82,000
Other..................................................... 31,000 100,000
---------- ---------
Gross deferred tax asset.................................... 1,125,000 772,000
Valuation allowance......................................... -- (209,000)
---------- ---------
Deferred tax asset.......................................... 1,125,000 563,000
---------- ---------
DEFERRED TAX LIABILITIES:
Securities available-for-sale............................. (314,000) (35,000)
Accrual to cash adjustment................................ (278,000) (346,000)
Depreciation.............................................. (169,000) (84,000)
State income taxes........................................ (97,000) --
---------- ---------
Deferred tax liability...................................... (858,000) (465,000)
---------- ---------
Net deferred tax asset...................................... $ 267,000 $ 98,000
========== =========
</TABLE>
As it is more likely than not that the deferred tax assets would be
realized, the valuation allowance decreased by $209,000, $478,000, and $77,000
during the years ended December 31, 1997, 1996, and 1995, respectively.
F-14
<PAGE> 68
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) SHAREHOLDERS' EQUITY
Common Stock
In December, 1995, the Bank declared a 10% stock dividend payable to
shareholders of record as of February 5, 1996. In January, 1997, the Bank
declared a 5% stock dividend payable to shareholders of record as of February 5,
1997. In July, 1997, the Bank declared a three-for-two stock split for
shareholders of record as of August 1, 1997. All share numbers have been
retroactively restated for stock splits and stock dividends.
Stock Option Plan
The Bank has a stock option plan (the Plan) for directors, officers, and
key employees. The Plan provides for the grant of incentive and non-qualified
stock options. The Plan provides that the option price will be determined by the
Board of Directors at no less than the fair value at the date of grant. Options
granted vest on a schedule determined by the Board of Directors at the time of
grant. Generally, options vest over four years. All options expire no later than
ten years from the date of grant. The Plan had 623,700 shares (adjusted for
stock dividends and splits) originally authorized for issuance. During 1997, an
additional 362,469 shares were added to the Plan for future grants. At December
31, 1997, 316,289 shares are available for future grants under the Plan.
Option activity under the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
BALANCES, JANUARY 1, 1995................................... -- $ --
------- -----
Granted (weighted average fair value of $2.40).............. 576,056 5.80
Exercised................................................... (14,846) 5.77
Cancelled................................................... (34,963) 5.77
------- -----
BALANCES, DECEMBER 31, 1995................................. 526,247 5.80
(149,156 exercisable at a weighted average exercise price of
$5.77)
------- -----
Granted (weighted average fair value of $3.16).............. 65,363 7.63
Exercised................................................... (6,763) 5.77
Cancelled................................................... (10,326) 5.86
------- -----
BALANCES, DECEMBER 31, 1996................................. 574,521 6.01
(275,482 exercisable at a weighted average exercise price of
$5.83)
------- -----
Granted (weighted average fair value of $4.42).............. 80,620 9.70
Exercised................................................... (9,045) 5.80
Cancelled................................................... (6,870) 6.55
------- -----
BALANCES, DECEMBER 31, 1997................................. 639,226 $6.47
------- -----
</TABLE>
Additional information regarding options outstanding under the Plan as of
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YRS.) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$5.77 - 7.27 514,506 6.62 $ 5.84 388,974 $ 5.81
7.28 - 8.77 110,220 9.15 8.33 62,926 8.48
8.78 - 16.00 14,500 9.91 14.76 361 11.70
------- ---- ------ ------- ------
$5.77 - 16.00 639,226 7.13 $ 6.47 452,261 $ 6.19
------- ---- ------ ------- ------
</TABLE>
F-15
<PAGE> 69
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As discussed in Note 1, the Bank continues to account for its stock-based
awards using the intrinsic value method in accordance with APB Opinion 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 option arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Bank adopted
the fair value method as of the beginning of fiscal 1995. Under SFAS No. 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 differ significantly from the Bank's stock option awards.
Those models also require subjective assumptions, which greatly affect the
calculated values. The Bank's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, 84 months; risk-free interest rate, 5.75% for 1997 and 6.60% for 1996 and
1995; stock volatility of 30% in 1997 and 20% in 1996 and 1995; and no dividends
during the expected term. The Bank's calculations are based on a multiple option
valuation approach, and forfeitures are recognized as they occur.
If the computed fair values of the 1997, 1996, and 1995 awards had been
amortized to expense over the vesting periods of the awards, pro forma net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Pro forma net income (loss)............ $1,000,000 $1,093,000 $(155,000)
Pro forma earnings (loss) per share
Basic................................ $ 0.30 $ 0.38 $ (0.06)
Diluted.............................. $ 0.29 $ 0.36 $ (0.06)
</TABLE>
(9) LEASES
The Bank leases its premises under non-cancelable operating leases with
terms, including renewal options, ranging from five to fifteen years. Future
minimum payments under the agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998........................................ $ 537,000
1999........................................ 553,000
2000........................................ 542,000
2001........................................ 556,000
2002........................................ 540,000
Thereafter.................................... 3,905,000
----------
Total............................... $6,633,000
==========
</TABLE>
Rent expense under operating leases was $314,000, $225,000, and $250,000
during the years ended December 31, 1997, 1996, and 1995, respectively.
(10) EMPLOYEE BENEFIT PLANS
The Bank offers a 401(k) savings plan. All salaried employees are eligible
to contribute up to 20% of their pre-tax compensation to the plan through salary
deductions under Section 401(k) of the Internal Revenue Code. The Bank does not
match employee contributions.
During 1997, the Bank initiated an employee stock ownership plan. The plan
allows the Bank to purchase shares on the open market and award those shares to
certain employees in lieu of paying cash bonuses. To be eligible to receive an
award of shares under this plan, an employee must have worked at least 1,000
hours during the year and must be employed by the Bank on December 31. Awards
under this plan generally vest over four years. During 1997, the Bank funded
$98,000 into the plan. The amount funded into this plan was recognized as
salaries and benefits expense in the Bank's financial statements.
F-16
<PAGE> 70
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. However,
considerable judgement is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation techniques
may have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Bank's financial
instruments as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ----------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNTS VALUE AMOUNTS VALUE
------------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 43,185,000 $ 43,185,000 $12,615,000 $12,615,000
Securities.............................. 87,697,000 88,104,000 75,268,000 75,470,000
Loans, net.............................. 126,485,000 126,474,000 81,513,000 81,521,000
------------ ------------ ----------- -----------
LIABILITIES
Demand deposits, non-interest bearing... $ 97,737,000 $ 97,737,000 $55,372,000 $55,372,000
Demand deposits, interest bearing....... 6,319,000... 6,319,000 4,153,000 4,153,000
Savings and money market................ 96,712,000 96,712,000 56,848,000 56,848,000
Time deposits........................... 42,210,000 42,205,000 30,006,000 30,005,000
Securities sold under agreements to
repurchase........................... -- -- 5,010,000 5,010,000
</TABLE>
The following methods and assumptions were used to estimate the fair value
in the table, above:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturities
of these instruments. Securities
The fair value of securities is estimated based on bid market prices. The
fair value of certain municipal securities is not readily available through
market sources other than dealer quotations, so fair value estimates are based
on such dealer quotations.
Loans, net
Loans with similar financial characteristics are grouped together for
purposes of estimating their fair value. Loans are segregated by type such as
commercial, term real estate, residential construction, and consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms.
The fair value of performing, fixed rate loans is calculated by discounting
scheduled future cash flows using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan. The fair value of
variable rate loans is the carrying amount as these loans generally reprice
within 90 days. The fair value calculations are adjusted by the allowance for
possible loan losses.
Deposits
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, and money market accounts, approximates the
amount payable on demand. The carrying amount approximates the fair value of
time deposits with a remaining maturity of less than 90 days. The fair value of
all other time deposits is calculated based on discounting the future cash flows
using rates currently offered by the Bank for time deposits with similar
remaining maturities.
F-17
<PAGE> 71
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Securities Sold Under Agreements to Repurchase
The fair value of securities sold under agreements to repurchase
approximates the carrying amount due to the short maturity.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Bank's entire holdings of a particular financial instrument. Fair
value estimates are based on judgements regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgement and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing financial instruments, as of the
reporting dates, without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, tax ramifications related to the realization
of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
Financial Instruments with Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its clients. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk, in excess of the amounts recognized in the balance sheets.
The Bank's exposure to credit loss in the event of non-performance of the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional 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. Credit
risk is the possibility that a loss may occur because a party to a transaction
failed to perform according to the terms of the contract. The Bank controls the
credit risk of these transactions through credit approvals, limits, and
monitoring procedures. Management does not anticipate any significant losses as
a result of these transactions.
Commitments to extend credit as of December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit.............. $68,611,000 $36,598,000
Standby letters of credit................. 2,370,000 410,000
----------- -----------
$70,981,000 $37,008,000
=========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a client as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since some
of the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Bank evaluates each client'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 borrower. Collateral
held varies but may include cash, marketable securities, accounts receivable,
inventory, property, plant and equipment, income-producing commercial
properties, and/or residential properties. Fair value of these instruments are
not considered material.
F-18
<PAGE> 72
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Standby letters of credit are written conditional commitments issued by the
Bank to guaranty the performance of a client to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to clients. Fair value of these instruments are not
considered material.
(13) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The 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 regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that, as of December 31, 1997, the Bank
meets all capital adequacy guidelines to which it is subject.
The most recent notification from the FDIC 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 I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------- -------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital
(to Risk-Weighted Assets).... $23,784,000 15.8% $12,033,000 $ 8.0% $15,042,000 $ 10%
Tier I Capital
(to Risk-Weighted Assets).... $21,899,000 14.6% $ 6,017,000 $ 4.0% $ 9,025,000 $ 6%
Tier I Capital
(to Average Assets).......... $21,899,000 10.3% $ 8,499,000 $ 4.0% $10,624,000 $ 5%
AS OF DECEMBER 31, 1996
Total Capital
(to Risk-Weighted Assets).... $21,461,000 22.6% $ 7,582,000 $ 8.0% $ 9,478,000 $ 10%
Tier I Capital
(to Risk-Weighted Assets).... $20,273,000 21.4% $ 3,791,000 $ 4.0% $ 5,687,000 $ 6%
Tier I Capital
(to Average Assets).......... $20,273,000 13.9% $ 5,826,000 $ 4.0% $ 7,283,000 $ 5%
</TABLE>
The Bank is required to maintain reserves with the Federal Reserve Bank of
San Francisco. Reserve requirements are based on a percentage of certain
deposits. At December 31, 1997, the Bank maintained reserves of $3,449,000 in
the form of vault cash and balances at the Federal Reserve Bank of San
Francisco, which satisfied the regulatory requirements.
Under California law, the holders of common stock are entitled to receive
dividends when and as declared by the Board of Directors, out of funds legally
available therefor. The California Banking Law provides that a
F-19
<PAGE> 73
HERITAGE BANK OF COMMERCE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
state licensed bank may not make a cash distribution to its shareholders in
excess of the lesser of the following: (i) the bank's retained earnings, or (ii)
the bank's net income for its last three fiscal years, less the amount of any
distributions made by the bank to its shareholders during such period. However,
a bank, with the prior approval of the Commissioner, may make a distribution to
its shareholders of an amount not to exceed the greater of (i) a bank's retained
earnings, (ii) its net income for its last fiscal year, or (iii) its net income
for the current fiscal year. In the event that the Commissioner determines that
the shareholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe or unsound, the Commissioner may order a
bank to refrain from making such a proposed distribution.
(14) OTHER MATTERS (UNAUDITED)
Formation of Bank Holding Company
On December 18, 1997, the shareholders of the Bank met at a special meeting
to approve the formation of a bank holding company by the adoption of a merger
agreement which provided for the merger of a merger subsidiary, a subsidiary of
the newly formed Heritage Commerce Corp, with and into the Bank under the name
and charter of the Bank. By this action, the Bank will become a wholly-owned
subsidiary of Heritage Commerce Corp. Shareholders of the Bank received one
share of Heritage Commerce Corp Common Stock for each share of Bank Common Stock
held. The merger was effective February 17, 1998.
New Branches
On February 9, 1998, the Bank opened a full-service branch in the city of
Fremont, California.
F-20
<PAGE> 74
======================================================
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER BEING MADE HEREBY, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE BANK OR ITS MANAGEMENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SHARES TO WHICH IT RELATES, OR AN OFFER OF SUCH SHARES TO A PERSON IN ANY STATE
OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS TO ANY ITEM SUBSEQUENT TO ITS EFFECTIVE DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 5
Disclosure Regarding Forward-Looking
Statements........................... 9
Use of Proceeds........................ 9
Dilution............................... 9
Capitalization......................... 11
Trading History and Dividends.......... 11
Determination of Offering Price........ 11
Offering and Method of Subscription.... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Quantitative and Qualitative
Disclosures about Market Risks....... 29
Business of the Company................ 31
Business of the Bank................... 32
Supervision and Regulation............. 33
Management and Principal
Shareholders......................... 41
Remuneration and Other Transactions
with Management...................... 45
Compensation of Directors.............. 47
Description of Securities of the
Company.............................. 49
Legal Matters.......................... 51
Experts................................ 51
Available Information.................. 51
Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
======================================================
======================================================
UP TO SHARES
HERITAGE COMMERCE CORP
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
, 1998
======================================================
<PAGE> 75
APPENDIX B
STOCK SUBSCRIPTION APPLICATION -- PAGE 1 OF 2
HERITAGE COMMERCE CORP
BY EXECUTING THIS STOCK SUBSCRIPTION APPLICATION, THE UNDERSIGNED
ACKNOWLEDGES HAVING RECEIVED, READ AND UNDERSTOOD THE HERITAGE COMMERCE CORP
PROSPECTUS DATED , 1998 TOGETHER WITH ALL APPENDICES (THE
"PROSPECTUS"), AND THE UNDERSIGNED AGREES TO THE TERMS OF THE SUBSCRIPTION
AGREEMENT, APPENDIX C TO THE PROSPECTUS, WHICH IS INCORPORATED HEREIN BY
REFERENCE.
The undersigned is aware that the purchase of the Common Stock involves a
high degree of risk.
The undersigned hereby subscribes for and offers to purchase the number of
shares of Common Stock, no par value, of Heritage Commerce Corp ("Common
Stock"), set forth below, upon the terms and conditions specified in the
Prospectus and Subscription Agreement at a purchase price of $ per share.
All subscriptions must be for a minimum of 100 shares. NO FRACTIONAL SHARES WILL
BE ISSUED.
The undersigned acknowledges and agrees that this Application constitutes
an irrevocable offer and may not be withdrawn without the consent of Heritage
Commerce Corp. If any subscription is accepted only in part, any portion of
funds not required for partial subscription will be returned to the subscriber
together with interest actually earned on such portion. If any subscription is
declined, subscription funds will be returned upon declination, with any
interest actually earned thereon.
If this offering of Common Stock by Heritage Commerce Corp is canceled in
its entirety or the Company rejects the Application, this offer to purchase and
subscribe shall become void and any payments received from the subscriber will
be returned in full plus any actual interest earned on the amount returned. All
such refunds will be mailed immediately upon termination of the offering or
rejection of the Application.
SUBSCRIPTIONS MAY BE MADE BY COMPLETING AND SIGNING THIS STOCK SUBSCRIPTION
APPLICATION IN TRIPLICATE AND DELIVERING ALL THREE COPIES TO: HERITAGE COMMERCE
CORP, 150 ALMADEN BOULEVARD, SAN JOSE, CALIFORNIA 95113, BY 5:00 P.M., PACIFIC
STANDARD TIME, WITHIN 90 DAYS OF THE DATE OF THE OFFERING, UNLESS THIS DATE IS
EXTENDED OR SHORTENED BY HERITAGE COMMERCE CORP, IN ITS DISCRETION. THE STOCK
SUBSCRIPTION APPLICATION MUST BE DELIVERFED TOGETHER WITH A COMPLETED FORM W-9
AND THE FULL AMOUNT OF THE PURCHASE PRICE FOR THE SHARES SUBSCRIBED, IN UNITED
STATES DOLLARS, BY CHECK, BANK DRAFT, OR MONEY ORDER, MADE PAYABLE TO "HERITAGE
IMPOUND ACCOUNT".
UPON CLOSING, ALL FUNDS RECEIVED FOR SUBSCRIPTIONS, WHICH ARE ACCEPTED BY
HERITAGE COMMERCE CORP, SHALL BECOME CAPITAL OF HERITAGE COMMERCE CORP TOGETHER
WITH INTEREST THEREON. THESE SECURITIES ARE NOT DEPOSITS AND ARE NOT INSURED BY
THE FDIC.
B-1
<PAGE> 76
HERITAGE COMMERCE CORP
STOCK SUBSCRIPTION APPLICATION -- PAGE 2 OF 2
Name(s) of Subscribers: Date of Subscription
- ------------------------
Number of Shares Amount of Subscription $
- ---------------------------------
Social Security Number or Tax ID Number
Address of Subscriber
Telephone Number: Day: Evening
SHARE REGISTRATION: IF SHARES ARE NOT TO BE PURCHASED WITH AN IRA, SEPP,
KEOGH OR UNDER THE UNIFORM GIFTS TO MINORS ACT, PLEASE CHECK AS APPROPRIATE AND
WRITE OUT THE WAY IN WHICH SHARES ARE TO BE REGISTERED:
[ ] INDIVIDUAL
[ ] JT TEN -- as joint tenants with right of survivorship and not as
tenants in common
[ ] TEN COM -- as tenants in common
[ ] TEN ENT -- as tenants by the entireties
Registration Name
CHECK AS APPROPRIATE AND, IF CHECKED, COMPLETE AS INDICATED:
[ ] Uniform Gifts to Minors Act
(custodian)
Custodian for under Uniform Gifts to Minors Act, State of
- ------------------
(minor) (state)
[ ] IRA, SEPP or Keogh Account #
<TABLE>
<S> <C>
Brokerage Firm Broker
- --------------------------------------- ------------------------------------------------
Broker's Phone # ------------------------------------ Custodian Firm
---------------------------------------
</TABLE>
Mailing Address of Broker or Custodian
- --------------------------------------------------------------------------------
I have read and hereby agree to the terms of this Application and of the
Subscription Agreement (Appendix C of the Prospectus), which is incorporated
herein by reference.
Signature of Subscriber
---------------------------------------------
B-2
<PAGE> 77
APPENDIX C
COMMON STOCK SUBSCRIPTION AGREEMENT
This Common Stock Subscription Agreement (the "Agreement") is entered into
by Heritage Commerce Corp, a California corporation ("the Company"), and each
signatory (the "Purchaser") to a Subscription Application (the "Application"),
which has been accepted by the Company in whole or in part.
SECTION 1. THE TERM OF THE OFFERING
The Prospectus is dated , 1998. The Offering commences this
date and shall remain open for up to 60 days except as follows: At the
discretion of the Company, this Offering may be terminated early at any time, or
may be extended by up to 30 days. Any extension or early termination of this
Offering is at the discretion of the Company.
SECTION 2. AUTHORIZATION AND SALE OF COMMON STOCK
2.1 Authorization. The Company will authorize the issuance of up to
shares of its no par value Common Stock (the "Shares") for sale and
issuance to investors including Purchaser. Subject to the terms and conditions
hereof and to acceptance by the Company, the Company will issue and sell to
Purchaser a portion of the Shares, as hereinafter provided, and Purchaser will
purchase the same from the Company at a purchase price of $ per share.
2.2 Subscription. Purchaser shall subscribe to purchase Shares hereunder
by executing and delivering an Application to the Company together with a check
payable to "Heritage Impound Account," in the amount of the purchase price,
together with a completed IRS Form W-9, Request for Taxpayer Identification
Number and Certification. The Company's address is:
Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
SECTION 3. ACCEPTANCE BY THE COMPANY
3.1 Irrevocable Offer. Purchaser acknowledges that his/her/its execution
of the Application constitutes an irrevocable offer to purchase Shares as herein
indicated and that the Company may accept such offer in whole or in part of may
reject it in its entirety.
3.2 Notice of Acceptance or Rejection. The Company shall notify Purchaser
in writing as to the extent to which Purchaser's offer is accepted, not later
than one month after receipt of the Application. To the extent Purchaser's offer
is not accepted by the Company, concurrently with such declination, the Company
as Impound Agent will return Purchaser's unaccepted funds together with interest
actually earned thereon.
SECTION 4. PAYMENT INTO IMPOUND ACCOUNT; CLOSING
4.1 The Company as Impound Agent. All funds received from Subscribers for
the Company's Shares, which meet the conditions of the Application and of this
Agreement, will be deposited in a Heritage Bank of Commerce Savings Account (the
"Heritage Impound Account"). The Impound Account will be maintained by the Bank
as Impound Agent in the manner provided in this Agreement ("the Bank as Impound
Agent").
4.2 Closing. At the address noted above, the Company will close the
offering at its discretion within 60 days of the date of the offering, unless it
chooses to extend the offering by 30 days, in which case it will close the
offering within 90 days of the date of the offering. On the closing date,
subscription purchase monies in the Impound Account (including any interest
earned thereon) relating to Applications accepted by the Company shall be
released to the Company in full.
4.3 Delivery of stock certificates. The Company will mail to Purchaser,
within 10 business days after closing date, a stock certificate, registered in
Purchaser's name, representing the respective Shares subscribed, against
delivery of the purchase price and any interest thereon.
C-1
<PAGE> 78
SECTION 5. REPRESENTATION AND WARRANTIES OF THE PURCHASER
By signing the Application, the Purchaser represents and warrants to the
Company, with respect to the purchase of the Shares, as follows:
5.1 Investment. Purchaser is acquiring Shares for investment for
Purchaser's own account, not as a nominee or agent except as indicated in the
Application, and not with the view to, or for resale in connection with, any
distribution thereof.
5.2 Limited Public Market. Purchaser understands that only a limited
public market now exists for any Shares to be issued by the Company, and that
the Company has made no assurances that a ready public market will ever exist
for the Shares.
5.3 Access to Data. Purchaser acknowledges receipt of and has read the
Company's Prospectus dated , 1998 to which this Agreement is
appended.
5.4 Tax Consequences. Purchaser has reviewed with his/her/its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. Purchaser is
relying solely on such advisors and not on any statements or representations of
the Company or any of its agents, and understands that Purchaser (and not the
Company) shall be responsible for Purchaser's own tax liability that may arise
as a result of this investment or the transactions contemplated by this
Agreement.
SECTION 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO CLOSE
The Company's obligation to close the purchase and sale of Shares hereunder
shall be subject to the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties made by the Purchaser in Section 3 hereof shall be true and
correct in all respects when made, and shall continue to be true and
correct in all respects on the Closing date.
(b) Minimum Purchase. The Company shall have received and accepted
from Purchaser a subscription to purchase at least 100 Shares.
(c) Good Funds on Deposit. The Company as Impound Agent shall be
holding on deposit funds equal to at least the purchase price of the Shares
to be issued.
(d) Compliance with Securities Laws. The Company and its counsel shall
have determined to their satisfaction, for the benefit of the Company and
not of Purchaser, that the sale of the Shares to each Purchaser complies
with all applicable securities laws.
(e) Approvals and Permits. The Company shall have received any
approval or permit that is deemed necessary or advisable by the Company or
its counsel.
SECTION 7. RETURN OF THE SUBSCRIPTION FUNDS
7.1 Declined Subscription. See 3.2 (Notice of Acceptance or Rejection). If
the Company does not accept an Application for any reason, then the Company
shall, within one business day of its decision to decline, return to the
subscriber the subscription amount, plus any interest actually earned by the
respective subscription amount. Such refunds shall be mailed to the attention of
the subscriber at the address shown on the subscription application.
7.2 Termination of Offering. If for any reason whatsoever, the Offering
does not close by 60 days from the date of the Offering (or by 30 days
thereafter, if the Company elects to extend the Offering), the Company will
deliver written notice of such determination to Purchaser, and will immediately
return to Purchaser the amount of his/her/its deposit plus any interest actually
earned thereon.
7.3 Tax Reporting. In the event that the Impound Account is distributed
pursuant to Section 5b, above, the Company as Impound Agent shall, as to each
Subscriber, file Forms 599 and 1099 with the State of California and the
Internal Revenue Service, respectively.
C-2
<PAGE> 79
SECTION 8. UNPAID CHECKS
In the event that any check received by the Company as Impound Agent is
returned unpaid by the drawee bank, the Company as Impound Agent may return the
check with the related Application and a notice declining the subscription.
SECTION 9. RIGHTS OF THE BANK AS IMPOUND AGENT
9.1 Conflicting Demands. If conflicting demands are made or notices served
upon the Company as Impound Agent with respect to the Impound Account, the
Company as Impound Agent shall be entitled to refuse to comply with any such
claim or demand and to suspend performance of this Agreement so long as such
disagreement shall continue; in so doing the Company as Impound Agent shall not
be or become liable for damages or interest to any person (including but not
limited to Subscribers) for failure to comply with such conflicting or adverse
demands. The Company as Impound Agent shall be entitled to continue so to
refrain and refuse so to act until:
(i) The rights of the adverse claimants have been finally adjudicated
in a court assuming and having jurisdiction of the parties and/or the
money, papers, and property involved in the claim or demand; and/or
(ii) All differences have been settled by mutual agreement and the
Company as Impound Agent has been notified of the settlement in writing,
signed by all of the interested persons.
9.2 Depository. The Bank as Impound Agent shall act as a depository only
and is not responsible or liable in any manner whatever for the sufficiency,
correctness, genuineness or validity of any instrument deposited with it
pursuant to this Agreement, or with respect to the form or execution of any such
instrument, or the identity, authority, or rights of any person executing or
depositing any such instrument.
9.3 Written Notice. No notice, demand or change of instructions shall be
of any effect unless made in a writing signed by all parties to the Application
and mailed or delivered to an authorized officer of the Company as Impound Agent
at its office in San Jose, California.
9.4 Entitlements. The Bank as Impound Agent:
(i) shall be entitled to consult with legal counsel and shall not be
liable for any action taken or omitted by that counsel;.
(ii) shall not, by act, delay, omission or otherwise, be deemed to
have waived any rights or remedies under this Agreement unless such waiver
is in a writing signed by the Company as Impound Agent; a waiver by the
Company as Impound Agent of any right or remedy on any one occasion shall
not be construed as a bar to or waiver of any such right or remedy on any
future occasion.
9.5 Good Faith. The Company as Impound Agent shall not be liable for any
action taken or omitted to be taken in good faith, and shall be liable only for
its own gross negligence or willful misconduct;
9.6 Reliance. The Company as Impound Agent shall be entitled to rely on
any paper, request, certificate, schedule, notice or other document which it in
good faith believes to be genuine and to have been signed or adopted by the
proper party or parties;
9.7 Risk. The Company as Impound Agent shall under no circumstances be
required to risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, if it shall have reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it;
9.8 Duty. The Company as Impound Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement, and the
permissive right of the Company as Impound Agent to do things or omit to do
things as set forth in this Agreement shall not be construed as a duty.
C-3
<PAGE> 80
SECTION 10. MISCELLANEOUS
10.1 Notice. Any notice, report, demand, waiver or consent required or
permitted to this Agreement shall be in writing and shall be given by prepaid
first class mail, addressed as follows:
Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
10.2 Governing Law. Any disputes arising under this Agreement shall be
governed in all respects by the laws of the State of California.
10.3 Survival. The representatives, warranties, covenants and agreements
made herein and in the Subscription Application shall survive the closing of the
transactions contemplated hereby.
10.4 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
10.5 Entire Agreement; Amendment. This Agreement, its attachments and the
other documents, including particularly the Application, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
10.6 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand, messenger or
facsimile, addressed (a) if to a Purchaser, at such Purchaser's address set
forth on the signature page of the Application, or at such other address as such
Purchaser shall have furnished to the Company in writing, or (b) if to the
Company, to its address set forth in Section 11.1 of this Agreement and
addressed to the attention of the President, or at such other address as the
Company shall have furnished to the Purchasers, with copy sent to James M.
Rockett, McCutchen, Doyle, Brown & Enersen, LLP, Three Embarcadero Center, San
Francisco, CA 94111.
10.7 Expenses. The Company and the Purchaser shall each bear its own
expenses incurred on its behalf with respect to this Agreement and the
transactions contemplated hereby.
10.8 Counterparts. The Application may be executed in counterparts, each
of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
10.9 Severability. In the event that any provision of this Agreement or
the Application becomes or is declared by a court of competent jurisdiction to
be illegal, unenforceable or void, this Agreement shall continue in full force
and effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
10.10 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
10.11 Finder's Fee. The Company and each Purchaser agree to indemnify and
hold each other harmless from and liability for any commission or compensation
in the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or such Purchaser or
any of their respective officers, agents, representatives or employees is
responsible in connection with this transaction.
10.12 Form W-9. Purchaser will complete, execute and deliver to Impound
Agent, Form W-9, Request for Taxpayer Identification Number and Certification,
Exhibit A hereto.
C-4
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 -- OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Commissions................................................. 0
Registration Fees........................................... 2,000
Federal Taxes...............................................
State Taxes and Fees........................................
Transfer Agents Fees........................................ 5,000*
Printing and Engraving...................................... 10,000
Legal and Accounting........................................ 100,000
Miscellaneous............................................... 33,000
-------
Total............................................. 150,000
=======
</TABLE>
- ---------------
* estimated
ITEM 14 -- INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation provide that the liability of the
directors of the Company for monetary damages shall be eliminated to the fullest
extent permissible under California law and that the Company is authorized to
provide for the indemnification of agents (as defined in Section 317 of the
California General Corporation Law) of the corporation in excess of that
expressly permitted by such Section 317 for breach of duty to the corporation
and its shareholders to the fullest extent permissible under California law.
Section 317 of the California Corporation Law ("Section 317") expressly
grants to each California corporation, including Heritage Commerce Corp, the
power to indemnify its directors, officers and agents against certain
liabilities and expenses incurred in the performance of their duties. Rights to
indemnification beyond those provided by Section 317 may be valid to the extent
that such rights are authorized in the corporation's articles of incorporation.
Indemnification may not be made, however, with respect to liability incurred in
connection with any of the specific acts for which the liability of directors
may not be limited as discussed in the previous section.
With respect to all proceedings other than shareholder derivative actions,
Section 317 permits a California corporation to indemnify any of its directors,
officers or other agents only if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. In the case of derivative actions, a
California corporation may indemnify any of its directors, officers or agents
only if such person acted in good faith and in a manner such person believed to
be in the best interests of the corporation and its shareholders. Furthermore,
in derivative actions, no indemnification is permitted (i) with respect to any
matter with respect to which the person to be indemnified has been held liable
to the corporation, unless such indemnification is approved by the court; (ii)
of amounts paid in settling or otherwise disposing of a pending action without
court approval; or (iii) of expenses incurred in defending a pending action
which is settled or otherwise disposed of without court approval. To the extent
that a director, officer or agent of a corporation has been successful on the
merits in defense of any proceeding for which indemnification is permitted by
Section 317, a corporation is obligated by Section 317 to indemnify such person
against expenses actually and reasonably incurred by him in connection with the
proceeding.
FDIC regulations prohibit the indemnification by insured banks and their
holding companies of their directors, officers and other institution-affiliated
persons for that portion of the costs sustained with regard to an administrative
or civil enforcement action commenced by any federal banking agency that results
in a final order or settlement pursuant to which a director, officer or other
party is assessed a civil money penalty, removed from office, prohibited from
participating in the affairs of an insured institution or required to cease and
desist from or to take an affirmative action under the Federal Deposit Insurance
Act. This regulation
II-1
<PAGE> 82
permits an institution to make an indemnification payment to, or for the benefit
of, a director, officer or other party only if the institution's Board of
Directors, in good faith, determines that the individual acted in good faith and
in a manner that he or she believed to be in the best interests of the
institution and that the payment of indemnification will not adversely affect
the institution's safety and soundness. The director, officer or other party
must agree in writing to reimburse the institution for any indemnification
payments received should the proceeding result in a final order being instituted
against the individual assessing a civil money penalty, removing the individual
from office, or requiring the individual to cease and desist from certain
institutional activity.
ITEM 15 -- RECENT SALES OF UNREGISTERED SECURITIES
Heritage Commerce Corp is a newly formed holding company of Heritage Bank
of Commerce. Since it is a new company, the Company has never held a public sale
of its shares except pursuant to the registered exchange of its Common Stock for
common stock of the Bank. However, in May 1996, Heritage Bank of Commerce sold
825,000 shares to the public at a price of $7.94. The offering was not
underwritten. The securities sold in that offering were not registered with the
SEC pursuant to an exemption from the Securities and Exchange Act of 1933
Section 3(a)(2). At the time of the offering Heritage Bank of Commerce was
supervised, examined and regulated by the Superintendent of Banks, State of
California, the Federal Deposit Insurance Corporation and the California
Commissioner of Corporations.
ITEM 16 -- EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
3.1 Heritage Commerce Corp Articles of Incorporation:
incorporated herein by reference from Exhibit 4 to Heritage
Commerce Corp's Form 8-A: filed with the Commission on March
5, 1998.
3.2 Heritage Commerce Corp Bylaws: incorporated herein by
reference from Exhibit 4 to Heritage Commerce Corp's Form
8-A: filed with the Commission on March 5, 1998.
5.1 Opinion and Consent of McCutchen, Doyle, Brown & Enersen LLP
regarding legality of the securities being offered.(To be
provided in an amendment.)
10.1 Real Property Leases for properties located at 150 Almaden
Blvd., San Jose and 100 Park Center Plaza, San Jose. This
exhibit is incorporated by reference to the paper filing of
Heritage Commerce Corp's Form 8-A filed with the Commission
on March 5, 1998.
10.2 Real Property Lease for property located at 3077 Stevenson
Blvd., Fremont
10.3 Employment agreement with Mr. Rossell dated June 8, 1994
This exhibit is incorporated by reference to the paper
filing of Heritage Commerce Corp's Form 8-A filed with the
Commission on March 5, 1998.
10.4 Employment agreement with Mr. Gionfriddo dated June 8, 1994
This exhibit is incorporated by reference to the paper
filing of Heritage Commerce Corp's Form 8-A filed with the
Commission on March 5, 1998.
10.5 Amendment No. 2 to Employment Agreement with Mr. Gionfriddo
This exhibit is incorporated by reference to Exhibit number
10.5 of Heritage Commerce Corp's 10-K filed with the
Commission on March 31, 1998.
16.1 Letter Regarding Change in Certifying Accountant This
exhibit is incorporated by reference to Exhibit number 16.1
of Heritage Commerce Corp's 10-K filed with the Commission
on March 31, 1998.
21.1 Subsidiaries of the Registrant This exhibit is incorporated
by reference to Exhibit number 21.1 of Heritage Commerce
Corp's 10-K filed with the Commission on March 31, 1998.
23.1 Consent of McCutchen, Doyle, Brown & Enersen LLP (To be
contained in their opinion to be filed by amendment as
Exhibit 5.1)
23.2 Consent of Deloitte and Touche LLP for the Financial
Information dated 1997.
</TABLE>
II-2
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
23.3 Consent of KPMG Peat Marwick LLP for the Financial
Information dated 1996 and 1995
24.1 A power of attorney is set forth on the signature page of
the registration statement.
</TABLE>
Statements regarding the computation of per share earnings and computation
of ratios can be found within the body of the registration statement located in
Part I of this form.
ITEM 17 -- UNDERTAKINGS
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California.
HERITAGE COMMERCE CORP
DATE: April 16, 1998 By: /s/ JOHN E. ROSSELL
------------------------------------
John E. Rossell
President and Chief Executive
Officer
DATE: April 16, 1998 By: /s/ DANIEL A. NORTHWAY
------------------------------------
Daniel A. Northway
Chief Financial Officer and
Principal Accounting Officer
POWER OF ATTORNEY
We, the undersigned directors of Heritage Commerce Corp, do hereby
severally constitute and appoint John E. Rossell, III, and Daniel A. Northway,
and each of them singly, our true and lawful attorneys and agents, to do any and
all things and acts in our names in the capacities indicated below and to
execute any and all instruments for us and in our names in the capacities
indicated below which said John E. Rossell, III, and Daniel A. Northway, or
either of them, may deem necessary or advisable to enable Heritage Commerce Corp
to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with the offering contemplated by this Registation Statement on Form
S-1, including specifically, but not limited to, power and authority to sign for
us or any of us in our names in the capacities indicated below the Registration
Statement and any and all amendments (including post-effective amendments)
thereto; and we hereby ratify and confirm all that said John E. Rossell, III and
Daniel A. Northway, or either of them, shall do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the dates indicated, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- --------------
<C> <C> <S>
/s/ FRANK BISCEGLIA Director April 16, 1998
- -----------------------------------------------------
Frank Bisceglia
/s/ JAMES BLAIR Director April 16, 1998
- -----------------------------------------------------
James Blair
/s/ ARTHUR CARMICHAEL, JR. Director April 16, 1998
- -----------------------------------------------------
Arthur Carmichael, Jr.
/s/ WILLIAM DEL BIAGGIO, JR. Director April 16, 1998
- -----------------------------------------------------
William Del Biaggio, Jr.
/s/ ANNEKE DURY Director April 16, 1998
- -----------------------------------------------------
Anneke Dury
/s/ TRACEY ENFANTINO Director April 16, 1998
- -----------------------------------------------------
Tracey Enfantino
/s/ GLENN GEORGE Director April 16, 1998
- -----------------------------------------------------
Glenn George
/s/ ROBERT GIONFRIDDO Director April 16, 1998
- -----------------------------------------------------
Robert Gionfriddo
</TABLE>
II-4
<PAGE> 85
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- --------------
<C> <C> <S>
/s/ P. MICHAEL HUNT Director April 16, 1998
- -----------------------------------------------------
P. Michael Hunt
/s/ LON NORMANDIN Director April 16, 1998
- -----------------------------------------------------
Louis O. (Lon) Normandin
/s/ JACK PECKHAM Director April 16, 1998
- -----------------------------------------------------
Jack Peckham
/s/ ROBERT PETERS Director April 16, 1998
- -----------------------------------------------------
Robert Peters
/s/ HUMPHREY POLANEN Director April 16, 1998
- -----------------------------------------------------
Humphrey Polanen
/s/ JOHN E. ROSSELL III Director and Principal Executive April 16, 1998
- ----------------------------------------------------- Officer
John E. Rossell III
/s/ KIRK ROSSMAN Director April 16, 1998
- -----------------------------------------------------
Kirk Rossman
</TABLE>
II-5
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
-------- ------------------------------------------------------------ ------------
<S> <C> <C>
3.1 Heritage Commerce Corp Articles of Incorporation:
incorporated herein by reference from Exhibit 4 to Heritage
Commerce Corp's Form 8-A: filed with the Commission on March
5, 1998.
3.2 Heritage Commerce Corp Bylaws: incorporated herein by
reference from Exhibit 4 to Heritage Commerce Corp's Form
8-A: filed with the Commission on March 5, 1998.
5.1 Opinion and Consent of McCutchen, Doyle, Brown & Enersen LLP
regarding legality of the securities being offered.(To be
provided in an amendment.)
10.1 Real Property Leases for properties located at 150 Almaden
Blvd., San Jose and 100 Park Center Plaza, San Jose. This
exhibit is incorporated by reference to the paper filing of
Heritage Commerce Corp's Form 8-A filed with the Commission
on March 5, 1998.
10.2 Real Property Lease for property located at 3077 Stevenson
Blvd., Fremont
10.3 Employment agreement with Mr. Rossell dated June 8, 1994
This exhibit is incorporated by reference to the paper
filing of Heritage Commerce Corp's Form 8-A filed with the
Commission on March 5, 1998.
10.4 Employment agreement with Mr. Gionfriddo dated June 8, 1994
This exhibit is incorporated by reference to the paper
filing of Heritage Commerce Corp's Form 8-A filed with the
Commission on March 5, 1998.
10.5 Amendment No. 2 to Employment Agreement with Mr. Gionfriddo
This exhibit is incorporated by reference to Exhibit number
10.5 of Heritage Commerce Corp's 10-K filed with the
Commission on March 31, 1998.
16.1 Letter Regarding Change in Certifying Accountant This
exhibit is incorporated by reference to Exhibit number 16.1
of Heritage Commerce Corp's 10-K filed with the Commission
on March 31, 1998.
21.1 Subsidiaries of the Registrant This exhibit is incorporated
by reference to Exhibit number 21.1 of Heritage Commerce
Corp's 10-K filed with the Commission on March 31, 1998.
23.1 Consent of McCutchen, Doyle, Brown & Enersen LLP (To be
contained in their opinion to be filed by amendment as
Exhibit 5.1)
23.2 Consent of Deloitte and Touche LLP for the Financial
Information dated 1997.
23.3 Consent of KPMG Peat Marwick LLP for the Financial
Information dated 1996 and 1995
24.1 A power of attorney is set forth on the signature page of
the registration statement.
</TABLE>
<PAGE> 1
EXHIBIT 10.2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
<S> <C>
BASIC LEASE PROVISIONS.......................................................................1
ARTICLE 1 PREMISES..........................................................................2
Section 1.1 Leased Premises........................................................2
Section 1.2 Acceptance of Premises.................................................2
Section 1.3 Building Use Reservation...............................................2
Section 1.4 Building Name and Address..............................................2
ARTICLE 2 TERM...............................................................................2
Section 2.1 Term...................................................................2
Section 2.2 Commencement Date......................................................2
Section 2.3 Tender of Possession By Landlord.......................................3
Section 2.4 Commencement of Business By Tenant.....................................3
ARTICLE 3 RENT...............................................................................3
Section 3.1 Minimum Rent...........................................................3
Section 3.2 Additional Rent........................................................3
Section 3.3 Cost of Living Adjustment..............................................3
Section 3.4 Place of Payment.......................................................4
Section 3.5 Late Payments..........................................................4
ARTICLE 4 OPERATING EXPENSES.................................................................4
Section 4.1 Definitions............................................................4
Section 4.1.1. Operating Expenses.....................................................4
ARTICLE 6 USE................................................................................6
ARTICLE 7 SIGNS..............................................................................7
ARTICLE 8 LANDLORD SERVICES..................................................................7
Section 8.1 Utilities and Services.................................................7
Section 8.2 Operation and Maintenance of Common Facilities.........................8
Section 8.3 Reimbursement of Landlord's Services...................................8
Section 8.4 Use of Common Facilities...............................................8
ARTICLE 9 PARKING FACILITIES.................................................................8
Section 9.1 Parking Area...........................................................8
Section 9.2 Grant of Non-Exclusive License.........................................8
Section 9.3 Restrictions...........................................................8
ARTICLE 10 PERSONAL PROPERTY TAXES...........................................................9
ARTICLE 11 ALTERATIONS AND EQUIPMENT.........................................................9
ARTICLE 12 LIENS.............................................................................9
ARTICLE 13 MAINTAINING THE PREMISES.........................................................10
Section 13.1 Tenant's Maintenance and Repair.......................................10
Section 13.2 Landlord's Maintenance and Repair.....................................10
Section 13.3 Entry and Inspection..................................................11
Section 13.4 Space Planning and Substitution.......................................11
ARTICLE 14 ASSIGNMENT AND SUBLETTING........................................................11
Section 14.1 Prohibition and Consent...............................................11
Section 14.1.1. Prohibition...........................................................11
Section 14.1.2. Required Information..................................................12
Section 14.1.3. Landlord Options......................................................12
Section 14.2 No Release of Tenant..................................................12
Section 14.3 Transfer Fee..........................................................13
Section 14.4 Lease Not Subject to Levy.............................................13
ARTICLE 15 LIABILITY INSURANCE..............................................................13
ARTICLE 16 CASUALTY RISK....................................................................13
</TABLE>
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<TABLE>
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ARTICLE 17 HOLD HARMLESS..................................................................13
Section 17.1 Indemnity.............................................................13
Section 17.2 Exemption of Landlord from Liability..................................13
ARTICLE 18 SUBROGATION....................................................................14
ARTICLE 19 DAMAGE OR DESTRUCTION..........................................................14
Section 19.1 Property Insurance....................................................14
Section 19.2 Insured or Minor Damage...............................................14
Section 19.3 Partial Destruction of the Building...................................14
Section 19.4 Major Damage..........................................................14
Section 19.5 Damage Near End of Term...............................................14
Section 19.6 Definitions...........................................................14
Section 19.7 Abatement of Rent.....................................................14
Section 19.8 Tenant's Waiver.......................................................15
ARTICLE 20 EMINENT DOMAIN.................................................................15
Section 20.1 Definition of Terms...................................................15
Section 20.2 Total Taking..........................................................15
Section 20.3 Partial Taking........................................................15
Section 20.4 Allocation of Award...................................................15
Section 20.5 Voluntary Sales.......................................................15
ARTICLE 21 OFFSET STATEMENT,
ATTORNMENT AND SUBORDINATION..................................................15
Section 21.1 Offset Statement......................................................15
Section 21.2 Attornment............................................................15
Section 21.3 Subordination.........................................................15
ARTICLE 22 DEFAULT........................................................................16
Section 22.1 Default by Tenant.....................................................16
Section 22.2 Default by Landlord...................................................17
ARTICLE 23 END OF TERM....................................................................17
Section 23.1 Holding Over..........................................................17
Section 23.2 Merger on Termination.................................................18
Section 23.3 Surrender of Premises; Removal of Property............................18
Section 23.4 Remaining Property....................................................18
Section 23.5 Affixed Property......................................................18
ARTICLE 24 PAYMENTS AND NOTICES...........................................................18
ARTICLE 25 BROKER'S COMMISSION............................................................19
ARTICLE 26 RULES AND REGULATIONS..........................................................19
ARTICLE 27 QUIET ENJOYMENT................................................................19
ARTICLE 28 MISCELLANEOUS..................................................................19
Section 28.1 Waiver................................................................19
Section 28.2 Entire Agreement......................................................19
Section 28.3 Relationship of Parties...............................................19
Section 28.4 Delays................................................................20
Section 28.5 Captions and Section Numbers..........................................20
Section 28.6 Joint and Several Liability...........................................20
Section 28.7 Recording.............................................................20
Section 28.8 Floor Area............................................................20
Section 28.9 Execution of Lease - No Option........................................20
Section 28.10 Controlling Law.......................................................20
Section 28.11 Successors............................................................20
Section 28.12 Rule Against Perpetuities.............................................21
Section 28.13 Modification and Amendment and
Financing Conditions..................................................21
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ARTICLE 29 SPECIFIC PERFORMANCE OF LANDLORD'S RIGHTS......................................21
ARTICLE 30 TENANT'S SOLE COSTS............................................................21
ARTICLE 31 ACCORD AND SATISFACTION........................................................21
ARTICLE 32 TIME OF ESSENCE................................................................21
ARTICLE 33 SALE OF PREMISES BY LANDLORD...................................................21
ARTICLE 34 COVENANTS......................................................................21
ARTICLE 35 WARRANTY OF EXECUTION..........................................................21
ARTICLE 36 COUNTERPARTS...................................................................21
ARTICLE 37 CORPORATE AUTHORITY............................................................21
ARTICLE 38 EXHIBITS INCORPORATED HEREIN...................................................22
ARTICLE 39 ATTORNEYS' FEES................................................................22
</TABLE>
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<PAGE> 4
1
THIS LEASE is made this 24th day of October, 1997, between SHAPELL
INDUSTRIES OF NORTHERN CALIFORNIA, a Division of Shapell Industries, Inc., a
Delaware corporation ("Landlord") and HERITAGE BANK OF COMMERCE, a California
corporation ("Tenant").
BASIC LEASE PROVISIONS
1. Tenant's Trade Name: Heritage Bank of Commerce
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2. Address of Premises:
3077 Stevenson Boulevard
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Fremont, CA 94538
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(single occupant building)
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3. Use of Premises: SEE PAGE 1a.
----------------------------------------------------------
---------------------------------------------------------------------------
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4. Estimated Commencement Date: See Page 1a.
----------------------------------------------
5. Lease Term: One Hundred Twenty (120) months
---------------------------------------------------------------
6. Monthly Minimum Rent: See Page 1a.
-----------------------------------------------------
______________________________________ Dollars ($________________)
7. Floor Area of Premises: Approximately 6,5000 square feet
---------------------------------------------------
Floor Area of Building: Approximately 6,5000 square feet
---------------------------------------------------
8. Security Deposit: None
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(Does not include rent)
10. Broker(s): CB Commercial/PRESCO
----------------------------------------------------------------
Party Responsible for Payment of Commission, if any:
Landlord
---------------------------------------------------------------------------
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11. Minimum Comprehensive General Liability Policy: One Million Dollars
($1,000,000)
---------------------------------------------------------------------------
12. Address for Payments and Notices:
TO LANDLORD: SHAPELL INDUSTRIES OF NORTHERN CALIFORNIA,
a Division of Shapell Industries, Inc.
100 North Milpitas Blvd.
P.O. Box 361169
Milpitas, CA 95035
TO TENANT: Heritage Bank of Commerce
Attn: Kenneth B. Silveira, Sr. Vice President
150 Almaden Blvd., Suite 100
San Jose, CA 95113
WITH A COPY TO
THE PREMISES AT: Heritage Bank of Commerce
3077 Stevenson Boulevard
Fremont, CA 94538
The Basic Lease Provisions are an integral part of this Lease. In the event of
any conflict between any Basic Lease Provision and the balance of this Lease,
the latter shall control. The balance of this Lease is attached hereto and
incorporated herein.
<PAGE> 5
1a
ESTIMATED COMMENCEMENT DATE.
The Premises shall be delivered to Tenant upon full execution and
delivery of this Lease by both Landlord and Tenant.
USE OF PREMISES.
Tenant shall initially use the Premises for the purpose of a
full-service community bank serving the banking needs of local businesses and
professionals and for no other use or purpose. Any change in use of the Premises
shall be subject to Landlord's approval which shall not be unreasonably withheld
so long as (i) such use is an office or financial use in keeping with a
first-class office project in Fremont, California, and (ii) such use does not
violate any exclusive use or restrictive covenant of Landlord concerning the
Project.
MONTHLY MINIMUM RENT.
(i) During the first (1st) twelve (12) months following the Commencement
Date (Lease Year 1), Minimum Monthly Rent shall be Thirteen Thousand One Hundred
Eighty and No/100 Dollars ($13,180.00) per month.
(ii) During the next twelve (12) months (Lease Year 2), Minimum Monthly
Rent shall be Thirteen Thousand Seven Hundred Seven and 20/100 Dollars
($13,707.20) per month.
(iii) During the next twelve (12) months (Lease Year 3), Minimum Monthly
Rent shall be Fourteen Thousand Two Hundred Thirty-Four and 40/100 Dollars
($14,234.40) per month.
(iv) During the next twelve (12) months (Lease Year 4), Minimum Monthly
Rent shall be Fourteen Thousand Eight Hundred Twenty-Seven and 50/100 Dollars
($14,827.50) per month.
(v) During the next twelve (12) months (Lease Year 5), Minimum Monthly
Rent shall be Fifteen Thousand Four Hundred Twenty and 60/100 Dollars
($15,420.60) per month.
(vi) During the next twelve (12) months (Lease Year 6), Minimum Monthly
Rent shall be Sixteen Thousand Two Hundred Eleven and 40/100 Dollars
($16,211.40) per month.
(vii) During the next twelve (12) months (Lease Year 7), Minimum Monthly
Rent shall be Seventeen Thousand Two and 20/100 Dollars ($17,002.20) per month.
(viii) During the next twelve (12) months (Lease Year 8), Minimum
Monthly Rent shall be Seventeen Thousand Eight Hundred Fifty-Eight and 90/100
Dollars ($17,858.90) per month.
(ix) During the next twelve (12) months (Lease Year 9), Minimum Monthly
Rent shall be Eighteen Thousand Seven Hundred Fifteen and 60/100 Dollars
($18,715.60) per month.
(x) During the next twelve (12) months (Lease Year 10), Minimum Monthly
Rent shall be Nineteen Thousand Seven Hundred Four and 10/100 Dollars
($19,704.10) per month.
<PAGE> 6
2
1. PREMISES
1.1. LEASED PREMISES: Landlord hereby leases to Tenant and hereby rent
from Landlord those certain premises (the "Premises"), mutually agreed to
contain the floor area set forth in item No. 7 of the Basic Lease Provisions,
located in that certain office building also identified in item No. 2 of the
Basic Lease Provisions (which office building, together with the underlying
real property, is herein called the "Building"), which is located in that
certain office park known as One Fremont Place (the "Project"), in the City of
Fremont, State of California. The plot plan of the Project, including a
footprint of the Building (and Premises) are depicted on Exhibit "A" attached
hereto. The terms "Building" and "Premises" are used interchangeably in this
Lease.
1.2. ACCEPTANCE OF PREMISES: Neither Landlord or any agent of Landlord
has made any representation or warranty with respect to the Project, or with
respect to the Premises or the Building, or the suitability or fitness of
either for the conduct of Tenant's business or for any other purposes, except
as set forth in this Lease. The obligations of Landlord and Tenant to perform
the work and supply the necessary materials and labor to prepare the Premises
for occupancy are set forth in Exhibit "C" attached hereto and incorporated
herein by this reference thereto. Landlord and Tenant shall expend all funds
and do all acts required of them pursuant to Exhibit "C" and shall have the work
for which they are responsible performed promptly and diligently in a
first-class workmanlike manner. In the event that there is not such Exhibit
"C", or that no work is required of Landlord under such Exhibit "C", by taking
possession of the Premises, Tenant accepts the improvements in the condition in
which they may then be, and waives any rights or claim against Landlord arising
out of the conditions of the Premises, including the improvements thereon, the
appurtenances thereto, and the equipment thereof. Nothing contained in this
Section 1.2 shall affect the commencement of the term of this Lease or the
Obligation of Tenant to pay rent hereunder.
1.4. BUILDING NAME AND ADDRESS: Landlord may adopt any name it may select
for the Building and/or the Project, and Landlord reserves the right to change
the name and/or address of the Building and/or the Project at any time.
2. TERM
2.1. TERM: The term of this Lease shall be the number of full calendar
months specified in item No. 5 of the Basic Lease Provisions, plus any partial
month following the Commencement Date if such date is other than the first day
of the month. SEE PAGE 2a.
2.2. COMMENCEMENT DATE: The Commencement Date of the term of this Lease
shall be the earlier of the following two dates: (i) the date Tenant commences
business in the Premises; or (ii) the date which is one hundred twenty (120)
days subsequent to the date the Premises are delivered to Tenant.
<PAGE> 7
2a
CONTINUATION OF:
2. TERM
(CONTINUATION OF 2.1). Immediately following execution and delivery
of this Lease by both parties, Tenant shall apply for and diligently prosecute
obtaining all required Federal and State regulatory approvals to operate a bank
branch from the Premises and shall provide Landlord with written notice of
receipt of such approvals within five (5) days following receipt by Tenant. In
the event, despite Tenant's diligent efforts, such approvals are not granted
within thirty (30) days following execution and delivery of this Lease, Tenant
shall have the right, exercisable within ten (10) days thereafter, to terminate
the Lease upon written notice to Landlord. Tenant acknowledges and agrees that
if it commences any remodelling work in the Premises prior to obtaining such
approvals, and if such approvals are subsequently not obtained and Tenant
terminates the Lease pursuant to this Section, Tenant shall, at Landlord's
request, remove any alterations, and restore the Premises to the condition upon
delivery to Tenant.
<PAGE> 8
3
Within ten (10) days following the Commencement Date, the parties shall execute
a supplement in the form required by Landlord stating the actual Commencement
Date, as well as the date of expiration of the term of this Lease. No failure
of Tenant to execute such supplement shall affect the validity of this Lease or
Landlord's determination of such dates as provided herein.
2.4 COMMENCEMENT OF BUSINESS BY TENANT: Tenant shall proceed diligently
with the installation of such tenant improvements, furnishings, and equipment
as Tenant requires in order to open for business, and shall commence doing
business as early as reasonable. If Tenant fails to commence business in a
reasonable time (not later than one hundred eighty (180) days following
delivery of possession of the Premises and Tenant shall use reasonable efforts
to commence business at the earliest possible date), or ceases to operate,
Landlord, at its option, in addition to all other remedies set forth herein,
may terminate this Lease. Provided, however, so long as Tenant complies with
the time limits set forth in Exhibit "C" with respect to submission of plans
and specifications to Landlord for approval and provided Tenant is diligently
working to complete its construction work in the Premises, Landlord's
termination right shall not occur until one hundred eighty (180) days following
approval by Landlord of Tenant's plans and specifications. Tenant shall not be
entitled to initially commence business in the Premises, or otherwise use or
occupy the Premises for any purpose, including the installation of furniture or
equipment, at any time when Tenant is in default under this Lease or when any
event has occurred which with the giving of notice and/or the passage of time
would give rise to a default.
See Page 3a.
3. RENT
3.1. MINIMUM RENT: Tenant shall pay to Landlord for each calendar month
during the term of this Lease the Minimum Rent specified in item No. 6 of the
Basic Lease Provisions, payable in advance on the first day of each month,
without demand, deduction, abatement, offset or set-off, of any kind, except as
expressly provided herein. The Minimum Rent for any part of a calendar month at
the beginning of the term of this Lease shall be prorated based on a thirty
(30) day month. No Demand, notice or invoice shall be required.
3.2. ADDITIONAL RENT: Tenant agrees to pay as additional rent any and all
monies due and payable by Tenant to Landlord and/or Landlord's agent, including
but not limited to operating expense adjustments in accordance with the
provisions of Article 4.
<PAGE> 9
3a
(ADDITION OF):
2.5. OPTION TO EXTEND
Tenant is hereby given the option to extend the term of this Lease for
two (2) successive periods of five (5) years each commencing at the expiration
of the initial term ("Extended Term(s)") on all the provisions contained in this
Lease except Monthly Minimum Rent which shall be as set forth below.
Tenant may exercise each of said options by giving written notice to
Landlord ("Option Notice") at least nine (9) months before the expiration of the
initial term or first Extended Term, as the case may be.
It is an express condition of the foregoing options to extend, that if
Tenant shall be in default at the time of giving the Option Notice, and/or on
the date when the applicable Extended Term would otherwise commence, the
applicable Option Notice shall be null, void and totally ineffective and in such
case the applicable Extended Term shall not commence and this Lease shall expire
at the end of the initial term or first Extended Term, as the case may be.
Tenant shall have no other option to extend the term except as set forth herein.
In the event Tenant exercises its option to extend for an Extended Term,
Minimum Monthly Rent shall be adjusted effective at the commencement of the
Extended Term to the greater of (i) Minimum Monthly Rent payable during the last
twelve (12) months of the initial term, or first Extended Term, as the case may
be, or (ii) Fair Market Rental Value of the Premises for the Extended Term, as
set forth herein.
The term "Fair Market Rental Value" as used herein is defined to mean
the fair market rent of the Premises according to comparable properties in the
general area. In determining fair market monthly rent it shall be assumed that:
(i) The Premises are in excellent condition and repair and there
shall be no deduction for depreciation, obsolescence or deferred
maintenance.
(ii) The Premises would be ]eased for the period of the option being
exercised by a tenant with the credit standing of Tenant, as the
same exists at that time.
(iii) The Premises would be ]eased on the same terms of this Lease
insofar as the obligations for repair, maintenance, insurance
and real estate taxes existed as of the expiration of the
original term of this Lease.
(iv) The Premises will be used for its highest and best use.
Following receipt by Landlord of the Option Notice for each Extended
Term, and not later than two hundred forty (240) days before the applicable
Extended Term is to commence, Landlord shall notify Tenant of the Fair Market
Rental Value of the Premises for such Extended Term. If the Fair Market Rental
Value of the Premises for such Extended Term is greater than Minimum Monthly
Rent payable during the last twelve (12) months of the initial term, or first
Extended Term, as the case may be, and if Tenant in good faith disagrees with
such determination of Fair Market Rental Value of the Premises, Tenant shall
notify Landlord in writing of such disagreement within twenty (20) days of
receipt of Landlord's determination. The parties shall consult together and work
in good faith to agree on the Fair Market Rental Value of the Premises. If
Landlord and Tenant do not reach an agreement concerning the Fair Market Rental
Value not later than two hundred ten (210) days before the applicable Extended
Term is to commence, then Tenant shall have the right, within thirty (30) days
thereafter, to revoke its Option Notice upon written notice to Landlord. If such
Option Notice is not revoked, the determination of Fair Market Rental Value
shall be referred to arbitration no later than one hundred eighty (180) days
before the applicable Extended Term is to commence.
Each party shall appoint an impartial arbitrator within fifteen (15)
days following referral for arbitration. Each arbitrator shall be a licensed
real estate broker having at least five (5) years experience with commercial
properties similar to the Premises in Fremont, California.
If one (1) party fails to so select an arbitrator, the one (1)
arbitrator retained shall set the Fair Market Rental Value.
If the two (2) arbitrators do not agree within thirty (30) days of their
selection, they shall select a third arbitrator with the same qualifications
referred to above, within fifteen (15) days, and if they cannot agree on a third
arbitrator, the third arbitrator shall be appointed by the presiding judge of
the Superior Court in the County in which the Premises are located. The three
(3) arbitrators shall determine the Fair Market Rental Value within thirty (30)
days of the appointment of the third arbitrator and if they cannot agree upon
the Fair Market Rental value the three values shall be added together and the
total shall be divided by three. If any determination is lower or higher than
ten percent (10%) from the middle value, such higher or lower determination
shall be excluded from the calculations and the two remaining determinations
shall be divided by two or if only one determination remains, such determination
shall be the determination used. Each party shall pay the cost of the arbitrator
appointed by such party and the cost of the third, if necessary, shall be paid
equally. The determination of Fair Market Rental Value of the Premises shall be
completed no later than thirty (30) days prior to the commencement of the
applicable Extended Term. In no event shall the Minimum Monthly Rent set by the
arbitrators be less than Minimum Monthly Rent payable during twelve (12) months
immediately prior to commencement of the applicable Extended Term.
<PAGE> 10
4
3.4. PLACE OF PAYMENT: Tenant agrees to pay the rental and other charges
reserved to Landlord, in lawful money of the United States, at the address
specified in item No. 12 of the Basic Lease Provisions, or at such other place
as may be designated in writing from time to time by Landlord.
3.5 LATE PAYMENTS:
3.5.1. Any installment of Minimum Rent or additional rent due under this
Lease or any other sum payable by Tenant hereunder not actually received by
Landlord with five (5) days of the date when due shall bear interest, to the
extent enforceable by law, at a rate not to exceed the higher of (i) ten
percent (10%) per annum or (ii) five percent (5%) per annum plus the rate
prevailing on the twenty-fifth (25th) day of the month preceding the date of
execution of this Lease established by the Federal Reserve Bank of San
Francisco on advances to member banks under Section 13 or 13(a) of the Federal
Reserve Act as in effect as of such date from the date due and payable until
the same shall have been fully paid; provided, however, that the payment of
such interest shall not excuse or cure any default by Tenant under this Lease.
3.5.2. Tenant hereby acknowledges that the late payment by Tenant to
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs may include, but are not limited to,
administrative, processing and accounting charges, and late charges which may
be imposed on Landlord by the terms of any ground lease, mortgage or trust deed
covering the Premises. Accordingly, if any installment of rent or any other sum
due from Tenant shall not be actually received by Landlord or Landlord's
designee within five (5) days after the date due, then Tenant shall pay to
Landlord, in addition to the interest provided above, a late charge in an
amount equal to ten percent (10%) of such amount due. Provided, however,
Landlord shall not assess the first (1st) such late charge in any twelve (12)
month period until Tenant shall fail to pay rent when due and fails to cure
such default within five (5) days following written notice from Landlord that
such payment is due. The parties agree that such late charge represents a fair
and reasonable estimate of the cost Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount,
nor prevent Landlord from exercising any of the other rights and remedies
granted hereunder, or otherwise available at law or in equity.
3.5.3. Following each third consecutive late payment of rent, Landlord
shall have the option to require that beginning with the first payment of rent
next due and for the following twelve (12) months, rent shall not longer be
paid in monthly installments but shall be payable three (3) months in advance.
4. OPERATING EXPENSES
4.1. DEFINITIONS:
4.1.1. OPERATING EXPENSES:
<PAGE> 11
5
Operating Expenses shall be deemed to mean the Building's proportionate share
(the "Building's Proportionate Share") of the total costs and expenses incurred
in operating, repairing and maintaining the Project Common Area, hereinafter
defined, including, but not limited to, real and personal property taxes and
assessments determined by Landlord to be applicable to the Project Common Area
land, improvements and equipment; gardening and landscaping; costs of public
liability and property damage insurance, and all other insurance maintained by
Landlord on the Project Common Area; cleaning; sweeping; replacements; repairs;
line painting; lighting; sanitary control; removal of snow, ice, trash, rubbish,
garbage, and other refuse; sprinkler system; directional signs, markers,
bumpers; fire protection systems; costs of any public address, loudspeaker or
music system; depreciation of machinery and equipment (if owned) and rental paid
for such machinery and equipment (if rented) used in such maintenance; the cost
of personnel to implement all such services, to direct parking, and to provide
security for the Project Common Area; any parking charges or other costs levied,
assessed or imposed by, or at the direction of, or resulting from, statutes or
regulations, or interpretations thereof, promulgated by any governmental
authority in connection with the use or occupancy of the Project or any parking
facilities servicing the Project; costs of audits; costs of Project Common Area
alterations or improvements required by other governmental authority, such as,
but not limited to, energy conservation devices; and in addition thereto if
Landlord does not retain an independent management company to manage the Project
Common Area, an administrative and overhead expense in an amount equal to
fifteen percent (15%) of costs and expenses incurred in operating, repairing and
maintaining the Project Common Area.
4.1.1.1. "Project Common Area" shall mean all areas, space, equipment,
and special services located within the exterior boundaries of the Project
(excluding the Building and all other buildings in the Project intended to be
leased for office or commercial use) now or at any time hereafter provided or
designated by Landlord for parking, ingress and egress, and/or for the common
and joint use of and benefit of the occupants of the Project, including, but not
limited to, parking areas, access roads, driveways, retaining walls, landscaped
areas, truck serviceways, loading docks, pedestrian malls, courts, stairs, ramps
and sidewalks, comfort and first aid stations, lavatories and washrooms. It is
expressly agreed that the Project Common Area shall exclude that certain parcel
of real property adjacent to the Project, the location of which is indicated on
Exhibit "A" hereto (the "Lloyd's Parcel"). Landlord and the owner of the Lloyd's
Parcel have agreed between themselves that they each shall provide for adequate
upkeep and maintenance of the Project Common Area and the Lloyd's Parcel,
respectively. Notwithstanding the foregoing, if the owner of the Lloyd's Parcel
fails to properly maintain the Lloyd's Parcel, Landlord has reserved and does
reserve the right, at Landlord's sole option and election, to perform such
maintenance, and in such event, the Operating Expenses of the Project Common
Area shall also include such additional maintenance costs incurred by Landlord
in maintaining the common and, parking areas located on the Lloyd's Parcel, and
the Building's Proportionate Share of the Operating Expenses of the Project
Common Area as determined in accordance with this Section 4.1.1 shall be
determined accordingly.
4.1.1.2. The Building's Proportionate Share of the Operating Expenses of
the Project Common Area shall be based upon the ratio of the total number of
square feet, excluding mezzanines, located within the exterior faces of the
exterior walls of the Building, to the total number of square feet, excluding
mezzanines, located within the exterior faces of the exterior walls in all
buildings (including the Building) located in the Project, excluding the square
footage located on the Lloyd's Parcel. Provided, if Landlord exercises its right
to maintain the Lloyd's Parcel as set forth in Section 4.1.1.1., the square
footage of Floor Area of all buildings on the Lloyd's Parcel shall be included
in the denominator for computing the Building's Proportionate Share of the
Operating Expenses of the Project Common Area. The total number of square feet,
excluding mezzanines, located within the exterior faces of the exterior walls of
a such buildings in the Project, shall be determined by Landlord in Landlord's
discretion as of the first day of each calendar year of the term hereof on the
basis of the buildings then located in the Project. Tenant shall pay, during
each calendar year, the Building's Proportionate Share of the Operating Expenses
of the Project Common Area ("Tenant's Pro-Rata Share"). See Page 5a.
4.1.1.3. "Operating Expenses" shall not include depreciation on the
Building of which the Premises are a part or equipment therein, or real estate
brokers' commissions.
4.1.1.4. "Operating Expenses" shall not include loan payments on the
Building or the Project Common Area, except where the Building or the Project
Common Area is, or becomes, subject to a loan or loans which provide for
adjustments in the costs of funds, e.g., where such a loan or loans provide that
the interest rate changes periodically proportionately to an index. In such
case, any increase in the cost of funds (not including principal payments) shall
be an Operating Expense. If any such increase in the cost of funds increases the
total rents and costs to be paid by Tenant more than 3% in any one year, then
Tenant shall have a period of ten (10) days after receipt of notice of such an
Operating Expense adjustment during which to serve Landlord with a notice of
intent to cancel this Lease. Landlord shall have a period of ten (10) days after
actual receipt of such notice of intent to cancel during which to waive such
adjustment to the extent that it exceeds said 3%. If Landlord fails to waive
such increase after the receipt of such notice, then this Lease shall be
terminated effective thirty (30) days after the expiration of said latter ten
(10) day period.
SEE PAGE 5b.
<PAGE> 12
5a
CONTINUATION OF:
4. OPERATING EXPENSES
(CONTINUATION OF 4.1.1.2.) Landlord shall deliver to Tenant annually,
its accounting and determination of the Building's Proportionate Share, as
referenced in Section 4.1.1.2, in reasonable detail sufficient for Tenant to
determine the square footages of all buildings within the Project used by
Landlord in determining the Building's Proportionate Share. If square footage
surveys were performed by or on behalf of Landlord, such surveys shall be
included with such annual statement. Within thirty (30) days following Tenant's
receipt of Landlord's annual statement, Tenant shall have the right, upon
written notice to Landlord, to have a licensed architect measure the square
footage of Floor Area of all buildings within the Project in accordance with
Section 28.8 of this Lease and a copy of such measurements shall be provided to
Landlord. If there is a deviation of more than one percent (1%) from the square
footage used by Landlord, subject to verification by Landlord, the square
footages used in determining the Building's Proportionate Share shall be
appropriately adjusted for such year.
<PAGE> 13
5b
CONTINUATION OF:
4. OPERATING EXPENSES
(CONTINUATION OF 4.1.1.4. - OPERATING EXPENSE EXCLUSIONS).
Operating Expenses shall not include:
(i) Structural repairs or replacements necessary as a result of
deficient workmanship or materials, including repairs or
replacements to the roof, walls, floor slab and foundation
(provided, however the exclusion of the foregoing from
Operating Expenses shall in no event be deemed an obligation of
Landlord to perform any of the foregoing to the Premises, it
being understood that repair and maintenance of the Premises
shall be governed by Section 13 hereof);
(ii) Interest and amortization of Landlord's mortgage;
(iii) Tenant improvements and leasing commissions;
(iv) Costs of improvements necessitated by fire, windstorm or other
casualty or loss;
(v) Cost of repairs occasioned by eminent domain, to the extent an
eminent domain award is received by Landlord for such taking;
(vi) Cost to Landlord for rent concessions or lease buy-outs;
(vii) Cost of improving other Tenants' premises;
(viii) Overhead or profit paid to an affiliate or subsidiary of
Landlord for services to the Project in excess of the
competitive costs of said services;
(ix) Rentals due for any underlying lease related to the land on
which the Project is situated;
(x) All items for which Tenant or any other party compensates
Landlord such that no duplication of payment shall occur;
(xi) Cost of correcting code or legal violations caused solely by
Landlord or existing prior to the commencement of this Lease;
(xii) Costs relating to the construction, renovation or the
preparation of the Premises or the Project for delivery to
Tenant;
(xiii) Legal expenses for disputes with tenants and legal, auditing
and consulting fees other than those legal, auditing and
consulting fees necessarily incurred in connection with the
normal maintenance and operation of the Project;
(xiv) Income, excess profits or franchise taxes or other such taxes
imposed on or measured by the income of Landlord from the
operation of the Project;
(xv) Increase in insurance premiums to the extent any tenant causes
Landlord's existing insurance premiums to increase or requires
Landlord to purchase additional insurance;
(xvi) Any costs representing an amount paid to an entity related to
Landlord which is in excess of the amount which would have been
paid in the absence of such relationship;
(xvii) Any costs incurred in connection with environmental
inspections, the removal or abatement of asbestos or other
hazardous materials or substances from, within, on or beneath
the Project in excess of Ten Thousand Dollars ($10,000.00)
shall be amortized over a ten (10) year period and the yearly
amortized pass-through amount shall not exceed Ten Thousand
Dollars ($10,000.00) per annum; provided, however, to the
extent such inspections, removal or abatement are required due
to conditions in effect as of the date hereof or due to the
actions of Landlord or its tenants (except Tenant), then such
expenses shall not be included in Operating Expenses;
(xviii) Any costs relating to buildings or facilities located upon the
Project which are not used for the operation or maintenance of
the Project and which would not normally be used by customers
of Tenant or other tenants of the Project;
(xix) Management or administrative fees in excess of fifteen percent
(15%) of Operating Expenses;
(xx) Expenses which would be considered capital expenditures under
generally accepted accounting principles in excess of Ten
Thousand Dollars ($10,000.00) in the aggregate per year;
(xxi) Contributions to any "reserve fund" which Landlord may maintain
for the purpose of paying costs associated with any future
repairs, replacements or modifications of the Common Area shall
only be included in Operating Expenses if required by
Landlord's lender.
It is understood and agreed that all Operating Expenses shall be prorated,
such that Tenant is reimbursing Landlord only for the portion of those
Operating Expenses, on a prorated basis, actually attributable to the Term of
the Lease including, but not limited to, real estate tax payments and insurance
payments.
<PAGE> 14
6
4.2. Upon the commencement of the term of this Lease, and at the
commencement of each calendar year thereafter, Landlord shall estimate the
monthly Operating Expenses for such calendar year. Tenant shall pay, together
with Tenant's monthly Minimum Rent, a sum equal to 1/12th of Tenant's Pro-Rata
Share of such estimate. Within three (3) months after the end of each calendar
year, Landlord shall give Tenant a computation of Tenant's Pro-Rata Share of the
actual Operating Expenses for said year. If Tenant's Pro-Rata Share of the
actual Operating Expenses is (a) less than such estimate, Landlord shall credit
any excess paid by Tenant against the next rent due, or if the term of this
Lease or any extension hereof has expired, Landlord shall refund such excess to
Tenant, or (b) more than said estimate, Tenant shall pay the difference to the
Landlord on demand.
See Page 6a.
6. USE
6.1. Tenant shall use and occupy the Premises only for the use and
purpose stated in item No. 3 of the Basic Lease Provisions, and for no other use
or purpose except with the prior written consent of Landlord, which consent may
be given or withheld in Landlord's sole discretion.
6.2. Tenant shall not use or occupy the Premises in violation of, or in
conflict with, any "Governmental Requirement" (defined below) but shall, at
Tenant's expense, promptly comply with a present and future laws, ordinances,
orders, rules, regulations and requirements of all governmental authorities
having jurisdiction over the Premises, or over the cleanliness, safety,
occupancy and use thereof, or of any applicable insurance underwriters (herein
collectively " Governmental Requirement"), whether or not any such Governmental
Requirement is substantial, foreseen or unforeseen, ordinary or extraordinary,
or whether the same shall necessitate structural changes of improvements or
interfere with the use and enjoyment of the Premises. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
obstruct or interfere with the rights of other tenants or occupants of the
Building or any other portion of the Project, or injure or annoy them, or use or
allow the Premises to be used for any improper, immoral, unlawful or
objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance
or commit any waste in, on or about the Premises or any other portion of the
Project. Without limiting the generality of the foregoing, Tenant shall not (i)
obstruct or store anything in the Project Common Area, (ii) place a load upon
any floor of the Premises which exceeds the floor load per square foot which
such floor was designed to carry, or (iii) permit any
<PAGE> 15
6a
CONTINUATION OF:
OPERATING EXPENSES
(CONTINUATION of 4.2.) Tenant shall have the right upon at least fifteen
(15) days prior written notice to audit Landlord's records in order to verify
the accuracy of any charge imposed pursuant to this Lease. Such inspection shall
be conducted at Tenant's expense during regular business hours at Landlord's
office. Such right to audit shall be limited to once per calendar year and shall
cover only the immediately preceding calendar year. If such audit discloses that
the charges actually incurred by Landlord are less than those used by Landlord
in calculating Tenant's Pro Rata Share, then Landlord shall reimburse Tenant for
the amount Tenant paid in excess of Tenant's actual Pro Rata Share. If any such
audit discloses that the charges used by Landlord in calculating Tenant's Pro
Rata Share exceed the actual charges by five percent (5%) or more, then Landlord
shall pay the reasonable costs of such audit. Any information relating to or
concerning the Operating Expenses shall be kept private and confidential by
Tenant and shall not be disclosed by Tenant to any third parties.
ADDITION OF:
4.3. SEPARATELY BILLED OPERATING EXPENSES.
Notwithstanding anything to the contrary contained herein, Landlord and
Tenant acknowledge and agree that for certain Operating Expense items, Landlord
may enter into separate contracts which service exclusively the Building and
immediately adjacent Project Common Area which area is identified as "Tenant's
Building Parcel" on Exhibit "A". Such separate service contracts may include
without limitation, landscaping and maintenance, sweeping and other items for
which Landlord desires separate contracts. At Landlord's option, Landlord may
bill Tenant separately for such separately contracted expenses in which event
shall pay the entirety of such expenses. The resulting cost to Tenant from any
such separate contracts shall be equal to or less than the cost which would
otherwise be incurred. If the cost of such separate contract is more than the
cost which would otherwise be incurred, Landlord shall be responsible for the
difference in cost. In the event Landlord separately contracts for any such
expenses, such expense categories shall not be included in the Operating Expense
calculations for the Building's Proportionate Share of Operating Expenses for
the Project Common Area.
<PAGE> 16
7
objectionable sound or odors to be heard or experienced outside the Premises.
Business machines and mechanical equipment used by Tenant which cause vibration
or noise to such degree as to be reasonably objectionable to Landlord or to any
occupant, shall be placed and maintained by Tenant at its expense in setting of
cork, rubber or spring-type vibration isolators sufficient to eliminate such
vibrations or noise. Tenant shall not do or permit to be done anything which
will invalidate or increase the cost of any insurance policy(ies) covering the
Building, the Project and/or any property located therein and shall comply with
all applicable insurance underwriters rules, orders, regulations and
requirements of the Pacific Fire Rating Bureau or other applicable organization
performing a similar function. Tenant shall promptly upon demand reimburse
Landlord for any additional premium charged for such policy by reason of
Tenant's failure to comply with the provisions of this Article, Notwithstanding
the foregoing, Tenant shall have the right to contest any alleged Governmental
Requirement or legal violation thereof, so long as Landlord's interest in the
Premises, Building and Project are not thereby adversely affected, and Landlord
shall, at Tenant's request, join in such contest if its participation is
necessary, but at no expense to Landlord.
7. SIGNS
7.1. No signs, advertisement, or notice shall be inscribed, painted or
affixed on or to any part of the outside or inside of the Building or anywhere
on the real property of which the Premises are a part, or anywhere else within
the Project, without the prior consent in writing of Landlord, which consent
shall be given or withheld in the Landlord's sole discretion. All signs shall be
installed for Tenant by Landlord, but the cost of installation and maintenance
shall be paid by Tenant. See Page 7a.
8. LANDLORD SERVICES
8.1 Utilities and Services: SEE PAGE 7a.
8.1.1. Tenant will not, without written consent of Landlord, use any
apparatus or device in the Premises, including, but without limitation thereto,
electronic data processing machines, punch card machines, and machines using in
excess of 120 volts, or which will in any way increase the amount of electricity
usually furnished or supplied for the use of the Premises as general office
space; nor shall Tenant connect or permit to be connected any device with
electric current except through existing electrical outlets in the Premises.
Notwithstanding the foregoing, Tenant may utilize equipment requiring 240 volts
if such equipment is customary for the business permitted to be conducted on the
Premises. Utilities are separately metered to the Premises.
8.1.2 Landlord may take into consideration the availability of energy
resources and prudent energy conservation practices, including participation in
any energy conservation association or other arrangements for voluntary cutback,
load shedding and the like. No failure to furnish any such services or utilities
shall entitle Tenant to any damages, release Tenant from the obligation to pay
the full rent
<PAGE> 17
7a
CONTINUATION OF:
7. SIGNS
(CONTINUATION OF 7.1.) Tenant shall have the right to place its
identification sign on the door of the Building and on the exterior of the
Building at Tenant's sole cost and expense, subject to approval by Landlord and
governmental authority. Tenant shall have the right, at its sole cost and
expense, to install its identification sign on the Project monument sign in the
location shown on Exhibit "B". Tenant shall have the exclusive use of such
monument sign. The entire cost and expense of design, fabrication, installation,
maintenance, repair and operation of Tenant's signs shall be borne by Tenant.
Tenant shall be responsible for the maintenance, repair and operation of the
monument sign.
Landlord hereby approves the plans for Tenant's signs attached hereto as
Exhibit "B-1".
CONTINUATION OF:
8. LANDLORD SERVICES
(CONTINUATION OF 8.1. - UTILITIES AND SERVICES) Landlord represents that
the normal and customary utility lines for an office user are available to the
Premises provided. Landlord does not warrant the quantity, quality, amount or
duration of any such utilities to the Premises. Tenant shall pay or cause to be
paid, prior to delinquency, all charges for water, gas, sewer, electricity,
light, heat, air conditioning, power, telephone and other services used,
rendered or supplied in connection with the Building and the Premises,
including hook-up and connection fees, together with any assessments or
surcharges with respect thereto, as well as for the collection, storage and
disposal of rubbish and trash, and shall contract for the same in Tenant's own
name, and shall protect, indemnify and hold Landlord and the Building and the
Premises harmless from any such charges. Tenant shall contract for and pay for
janitorial service to the Building and Premises.
Landlord shall not be obligated to furnish any utilities or services,
nor does Landlord make any warranty or representation as to the quantity,
quality, availability, amount or duration of any such utilities or services.
Landlord shall not be liable for any failure or interruption of any utility
service, unless such failure or interruption is caused by Landlord's gross
negligence or willful acts or if due to Landlord's failure to maintain any
utility lines which are Landlord's responsibility to maintain. No such
interruption or failure shall entitle Tenant to terminate this Lease or to abate
Tenant's obligations hereunder.
<PAGE> 18
8
reserved herein, or constitute or be construed as a constructive or other
eviction of Tenant. Tenant shall comply with all rules and regulations which
Landlord may reasonably establish for the proper function and protection of the
air conditioning, heating, elevator and plumbing systems. Tenant shall cooperate
with any present or future governmental water, energy or other conservation
program, any other Governmental Requirement, and with any conservation practices
established by Landlord. Landlord shall at all reasonable times have free access
to all mechanical installations wherever located, including but not limited to
air conditioning equipment and vents, fans, ventilating and machine rooms and
electrical closets.
8.2. OPERATION AND MAINTENANCE OF COMMON FACILITIES: Landlord shall
operate and maintain during the term of this Lease the Project Common Area (the
"common facilities").
8.3. REIMBURSEMENT OF LANDLORD'S SERVICES: Tenant's Pro-Rata Share of
all services to be provided by Landlord as set forth in this Article 8 shall be
paid by Tenant as provided in Article 4 hereof.
8.4. USE OF COMMON FACILITIES: The use and occupancy by Tenant of the
Premises shall include the use of the common facilities in common with Landlord
and with all others for whose convenience and use the common facilities have
been or may hereafter be provided by Landlord; subject, however, to all rules
and regulations for the use thereof as prescribed from time to time by Landlord.
Landlord shall operate, manage, equip, light, repair, clean and maintain the
common facilities in such manner as Landlord may in its sole discretion
determine to be appropriate. Landlord shall at all times during the term of this
Lease have the sole and exclusive control of all common facilities, and may at
any time, and from time to time, during the term hereof restrain any use or
occupancy thereof. If, in the opinion of Landlord, unauthorized persons are
using any of the common facilities by reason of the presence of Tenant in the
Building, Tenant, upon demand of Landlord, shall restrain such unauthorized use
by appropriate proceedings at Tenant's expense. Nothing herein shall affect the
right of Landlord at any time to remove any unauthorized persons or
obstructions. Nothing contained herein shall be deemed to create liability upon
Landlord for any damage to motor vehicles of visitors or employees or from loss
of property from within such motor vehicles.
Tenant shall, at all times during the Term hereof, have the
non-exclusive right to utilize, in common with other tenants and occupants of
the Project, their employees, customers and invitees, all common areas and
common facilities, subject to reasonable limitations and reasonable changes
thereof by Landlord, so long as such changes do not materially adversely affect
parking and access to the Premises.
8.4.1. Landlord may temporarily close any portion or all of the common
facilities for repairs or alterations, to prevent a dedication thereof or the
accrual of prescriptive rights therein, or for any other reason deemed
sufficient by Landlord.
9. PARKING FACILITIES
9.1. PARKING AREA: As used in this Lease the term "Parking Area" shall
mean that portion of the Project Common Area intended to be used for parking
motor vehicles, together with the incidental and interior roadways, walkways,
curbs and landscaping within the areas used for such parking. Any enlargement
of, or addition to, the Parking Area by Landlord shall be included in the
definition of Parking Area for purposes of this Lease.
9.2. GRANT OF NON-EXCLUSIVE LICENSE: Landlord hereby grants to Tenant,
and to Tenant's patrons, suppliers, employees and invitees, a non-exclusive
license for the parking of motor vehicles in the Parking Area during the term of
this Lease, subject to those rights reserved by Landlord as hereinafter
contained. Landlord reserves the right at any time, and from time to time, to
grant nonexclusive rights and at Landlord's discretion, easements, to other
persons, firms and entities, including but not limited to, other tenants of the
Project, and the patrons, employees, suppliers and invitees thereof, to
promulgate rules and regulations relating to use of the Parking Area, or any
part thereof; to designate specific spaces for the use of any occupant; to make
changes in parking layout from time to time; to add additional property to the
Parking Area; to withdraw property located in the Parking Area from parking use,
provided adequate parking is nonetheless maintained; to establish reasonable
time limits upon parking; to close all or any portion of such Parking Area to
the extent as may, in the sole opinion of Landlord or Landlord's counsel, be
legally sufficient to prevent a dedication thereof or accrual of any right
therein to any person or the public therein; to close temporarily all or any
portion of the Parking Area, and to do and perform any other acts in and to said
area and improvements as Landlord determines to be advisable. See Page 8a.
9.3.RESTRICTIONS: Subject to the foregoing rights reserved by Landlord,
and subject to any restrictions of record governing same from time to time,
Tenant may use parking spaces located on the
<PAGE> 19
8a
CONTINUATION OF:
9. PARKING FACILITIES
(CONTINUATION OF 9.2.--GRANT OF NON-EXCLUSIVE LICENSE (TENANT'S
ALLOCATED PARKING SPACES).
Landlord hereby agrees that subject to the conditions contained below,
Landlord shall designate six (6) parking spaces adjacent to the Premises as
"Tenant's Parking Spaces", in the approximate location identified as "Tenant's
Allocated Parking Spaces" on Exhibit "B", subject, in any event, to governmental
regulations and subject to the express conditions and agreements enumerated in
subparagraphs (i) through (iii) below:
(i) Landlord has advised Tenant that all the parking areas are required,
under the covenants, conditions and restrictions and leases covering the
Project, to be utilized on a non-exclusive basis, and Tenant agrees that use of
the Tenant's Allocated Parking Spaces shall in any event be subject to such
requirement; and
(ii) In the event that any other tenant or occupant in the Project
objects to the designation of such Tenant's Allocated Parking Spaces or if
governmental authority requires removal of same, Landlord may remove such
designation on the Tenant's Allocated Parking Spaces; and
(iii) Tenant acknowledges and agrees that neither Landlord nor any party
managing the Project nor any other person or entity shall be obligated to
enforce any restriction on the Tenant's Allocated Parking Spaces, and that in no
event shall Tenant have any right to enforce any restriction from use by any
party.
Notwithstanding the foregoing, if another tenant objects to Tenant's
assigned parking spaces, Landlord may remove such assigned designation only if
the tenant so complaining has the right to such parking on a non-exclusive basis
and such tenant's lease does not allow Landlord to designate assigned spaces for
Tenant. Landlord agrees that it will not enter into any future leases for the
Project which restrict Landlord's ability to designate specific spaces for the
Premises. Landlord will use commercially reasonable efforts to enforce such
parking restrictions upon Tenant's request, and Tenant will reimburse Landlord
within fifteen (15) days for all costs incurred by Landlord with respect to such
enforcement.
<PAGE> 20
9
Lloyd's Parcel; provided, however, that Landlord, in its sole and absolute
discretion reserves the right to restrict or eliminate use by Tenant of the
parking spaces located on the Lloyd's Parcel, at any time and from time to
time. Landlord may eliminate or restrict Tenant's use of parking on the Lloyd's
Parcel and/or Penney's Premises, only if Landlord is so required to do so by a
contract in existence as of the date hereof. In addition, in the event Landlord
eliminates or restricts the right to utilize parking upon either such area,
such restriction must apply to all tenants within the Project on a
non-discriminatory basis. Furthermore, Tenant acknowledges that Landlord has no
responsibility at all to Tenant as to the Lloyd's Parcel, and Tenant further
acknowledges that any use of any portion of the Lloyd's Parcel by Tenant shall
be at Tenant's risk and without responsibility or liability of Landlord. Tenant
shall indemnify and hold Landlord harmless against any claims, losses or
liabilities of any kind (including reasonable attorneys' fees) resulting from
or related to any use by Tenant of any portion of the Lloyd's Parcel. In
addition, Landlord has reserved a nonexclusive license for the benefit of
tenants and occupants of the Project, for use of parking areas located on the
area indicated as "Penney's" on Exhibit "A" hereto. However, the tenant
occupying the Penney's premises has reserved the right to terminate such
license by giving thirty (30) days prior written notice to Landlord. Landlord
reserves the right, in its sole discretion, to restrict or eliminate any and
all right to park on the Penney's premises at any time and from time to time,
upon giving five (5) days written notice to Tenant of its election.
10. PROPERTY TAXES
10.1 Personal Property Taxes. Tenant shall pay, or cause to be paid
before delinquency, any and all taxes levied or assessed during the term hereof
upon all Tenant's leasehold improvements, equipment, furniture, fixtures and
personal property located in the Premises; except that which has been paid for
by Landlord, and is the standard of the Building. In the event any or all of the
Tenant's leasehold improvements, equipment, furniture, fixtures and personal
property shall be assessed and taxed with other property, Tenant shall pay to
Landlord its share of such taxes within ten (10) days after delivery to Tenant
by Landlord in writing of a statement of the amount of such taxes applicable to
Tenant's property. See Page 9a.
11. ALTERATIONS AND EQUIPMENT
11.1. Tenant shall make no alterations, additions, changes or
improvements to the Premises, without the prior written consent of Landlord,
which may be given or withheld in Landlord's sole discretion, and Landlord may
impose as a condition to such consent such requirements as Landlord in its sole
discretion may deem necessary or desirable, including, without limiting the
generality of the foregoing, requirements as to the manner in which, and the
time or times at which, such work shall be done, and the right to approve the
contractor selected by Tenant to perform such work, and the requirement that
performance and completion bonds be provided by such approved contractor. SEE
PAGE 9a.
11.2. All alterations, decorations, additions and improvements made by
Tenant shall be deemed to have attached to the realty and to have become the
property of Landlord upon the expiration of the term hereof or upon earlier
termination. Tenant shall not remove any of such alterations, decorations,
additions and improvements, except that Landlord may designate by written notice
to Tenant those alterations, decorations, additions and improvements which shall
be removed by Tenant at Tenant's expense at the expiration or earlier
termination of the term of this Lease, and Tenant shall promptly remove the same
and repair any damage to the Premises caused by such removal. SEE PAGE 9a.
11.3. If any alteration, addition, change or improvement shall be
required by law, or by the requirements of any insurance company (as a condition
to the issuance or continuation of insurance coverage) or the Pacific Fire
Rating Bureau or any similar body to be made to the Premises by reason either
(a) of Tenant's failure to maintain the Premises in the manner required hereby,
or (b) of Tenant's use of the Premises, a change in the manner or mode of
Tenant's use of the Premises, or the location of partitions, trade fixtures or
other contents of the Premises, then said alteration, addition, change or
improvement, subject to the provisions of Section 11.1 hereof, shall be promptly
made and paid for by Tenant.
SEE PAGE 9a.
12. LIENS
12.1 Tenant shall keep the Premises free from any liens arising out of
any work performed, materials furnished, or obligations incurred by or for
Tenant. In the event that Tenant shall not, within thirty (30) days following
the imposition of any such lien, cause the same to be released of record by
payment or posting of a proper bond, Landlord shall have, in addition to all
other remedies provided herein and by law, the right to cause the same to be
released by such means as it shall deem proper, including payment of or defense
against the claim giving rise to such lien. All sums paid by Landlord shall
become obligations of Tenant to pay an equivalent amount as additional rent,
which additional rent shall be payable by Tenant on Landlord's demand with
interest at a rate not to exceed the higher of (i) ten percent (10%) per annum,
or (ii) five percent (5%) per annum plus the prevailing rate on the
<PAGE> 21
9a
CONTINUATION OF:
10. PROPERTY TAXES
(ADDITION OF):
10.2 REAL PROPERTY TAXES.
Tenant shall pay or cause to be paid prior to delinquency all Real
Property taxes (as hereinafter defined) applicable to the Premises and the
Building and underlying land.
The term "Real Property Taxes" for the purpose of this Lease shall be
such taxes as hereinbelow described and shall include the following by way of
illustration, but not limitation: (i) any form of real estate taxes or
assessments, general, special, ordinary or extraordinary; (ii) any other such
taxes, charges and assessments which are levied with respect to the buildings
and any improvements, fixtures and equipment and other property of Landlord,
real or personal, located on the Project and the land upon which they are
situated including any payments to any ground lessor in reimbursement of tax
payments made by such lessor; (iii) fees or assessments for any governmental
services to the Project; (iv) service payments in lieu of taxes; (v) dues or
assessments payable to any property owners association due to Landlord's
ownership of Project; (vi) any gross receipts tax and/or any tax which shall be
levied in addition to or in lieu of real estate, possessory interest or personal
property taxes under the Lease; (vii) any fees, expenses or costs incurred by
Landlord in protesting any assessments, levies or the tax rate; and (viii) any
and all taxes payable by Landlord (other than net income tax) whether or not now
customary within the contemplation of the parties hereto: (a) upon, allocable
to, or measured by or on the gross income tax, sales tax or excise tax levied by
the State, any political subdivision thereof, or the Federal Government with
respect to receipt of such rent; or (b) upon or with respect to possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy of the Premises or any portion thereof including any sales, use or
service tax imposed as a result thereof; or (c) upon or measured by Tenant's
gross receipt or payroll or the value of Tenant's equipment, furniture,
fixtures, or other personal property of Tenant or leasehold improvements,
alterations additions, located in the Premises; or (d) upon this transaction or
any document to which Tenant is a party creating or transferring an interest or
an estate in the Premises.
In the event the approximate area marked "Tenant's Building Parcel" on
Exhibit "A" is assessed separately from other parcels, then Tenant shall be
responsible for the payment of such entire tax bill and in such event real
property taxes and assessments on the Project Common Area shall not be included
in Tenant's Pro Rata Share of Operating Expenses.
If however, "Tenant's Building Parcel" is not separately assessed, but
is part of a larger parcel for assessment purposes (hereinafter referred to as
the "Larger Parcel") "Real Property Taxes" applicable to the Premises shall mean
a fractional portion of said Real Property Taxes on the Larger Parcel, the
numerator of which shall be the Floor Area of the Premises and the denominator
of which shall be the Floor Area of all buildings located in the Larger Parcel,
included on the tax bill and in such event, real property taxes and assessments
on the Project Common Area shall be included in Tenant's Pro Rata Share of
Operating Expenses.
Landlord shall periodically estimate the amount of Real Property Taxes
payable pursuant to this Section 10.2. Tenant shall pay to Landlord monthly,
together with the Minimum Rent, one-twelfth (1/12th) of such annual estimate.
When the actual amount of Real Property Taxes payable hereunder by Tenant is
determined, an appropriate lump sum adjustment shall be made between Landlord
and Tenant to be paid by Tenant within ten (10) days after receipt of a
statement therefor; but not earlier than thirty (30) days prior to the
delinquency date of the respective tax bill.
CONTINUATION OF:
11. ALTERATIONS AND EQUIPMENT
(CONTINUATION of 11.1.) Notwithstanding the foregoing, Tenant shall be
permitted to make nonstructural, interior alterations to the Premises which do
not affect the mechanical, electrical or plumbing systems of the Premises and
which cost Ten Thousand Dollars ($10,000.00) or less in the aggregate in any
year without obtaining Landlord's approval. Prior to commencing any such work,
Tenant shall advise Landlord of its intention to perform such work and the date
of commencement. So long as Tenant uses a "Qualified Contractor" as defined in
Exhibit "C", Landlord shall not require performance and completion bonds.
(CONTINUATION of 11.2.) Tenant shall not be required to remove any
alterations which were a part of the Premises on the date the Premises were
delivered to Tenant. The restoration obligations of Tenant shall be deemed the
condition of the Premises on the date of completion of Tenant's Work set forth
in Exhibit "C", subject to specific requirements regarding the ATM, vault and
night-drop depositary box set forth in Sections 11.4., 23.3., and 23.5. hereof.
(ADDITION OF 11.4.) Tenant shall have the right to install a night-drop
depositary box and one (1) automated teller machine ("ATM") on the exterior wall
of the Building in a location reasonably approved by Landlord and otherwise in
accordance with plans and specifications approved by Landlord. Such alterations
shall conform to all applicable laws governing same. Upon expiration or earlier
termination of the Lease, upon Landlord's request such night-drop box and ATM
shall be removed by Tenant and Tenant shall restore the wall of the Building to
match the surrounding area.
<PAGE> 22
10
twenty-fifth (25th) day of the month preceding the date of execution of this
Lease established by the Federal Reserve Bank of San Francisco on advances to
member banks under Section 13 or 13(a) of the Federal Reserve Act as of such
date, from the date due and payable until the same is paid in full but in no
event greater than the maximum lawful rate. Tenant shall give Landlord no less
than fifteen (15) days prior notice in writing before commencing construction
of any kind on the Premises so that Landlord may post and maintain any notices
required or permitted by law or which Landlord shall deem proper or necessary.
13. MAINTAINING THE PREMISES
13.1. TENANT'S MAINTENANCE AND REPAIR:
13.1.2. If Tenant should fail or refuse to commence and complete repairs
promptly and adequately, or to remove any lien, or pay any cost or expense, or
otherwise to perform any act or obligation required of Tenant, Landlord may, but
shall not be obligated to, do the same without further notice to Tenant; Tenant
shall reimburse Landlord, as additional rent, for all costs and expenses of
Landlord thereby incurred within five (5) days after receipt by Tenant from
Landlord of a statement setting forth the amount of such costs and expenses. The
failure by Tenant so to reimburse Landlord within such five (5) day period shall
carry with it the same consequences as failure to pay rent.
13.1.3. Tenant, at its own expense, shall install and maintain fire
extinguishers within the Premises and other fire protective devices as may be
required from time to time by Landlord, by any agency having jurisdiction, or by
the insurance underwriters insuring the Premises.
13.2. LANDLORD'S MAINTENANCE AND REPAIR:
Landlord need not make any improvements or repairs of any kind, and nothing
contained in this Section 13.2 shall limit Landlord's right to reimbursement
from Tenant for the cost of maintenance, repair and replacement as may be
provided elsewhere in this Lease. Nothing in this Section 13.2 shall in any way
limit or affect Landlord's right to receive from Tenant Tenant's Pro Rata Share
of the Operating Costs of the Project Common Area. See Page 10a.
13.2.2. Landlord may make such changes at any time and from time to time
in or to the Budding and the Project and the fixtures and equipment thereof, and
in the size, configuration, shape, location, number and extent of the common
facilities, or any of them, all as Landlord may deem necessary or desirable in
its sole discretion, and no such change shall entitle Tenant to any abatement of
rent or other claim against Landlord; provided, however, such changes or
alterations shall not deprive Tenant of reasonable access to or use of the
Premises.
13.2.3. Except as expressly provided in Articles 19 (Damage or
Destruction) and 20 (Eminent Domain) below, there shall be no abatement of rent
and no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building, including the Premises, or
any other portion of the Project, or in or to the fixtures, appurtenances and
equipment therein; provided, however that in making such repairs, alterations or
improvements, Landlord shall interfere as little as reasonably practicable with
the conduct of Tenant's business in the Premises.
<PAGE> 23
10a
CONTINUATION OF:
13. MAINTAINING THE PREMISES
13.1. TENANT'S MAINTENANCE AND REPAIR:
(REPLACEMENT OF 13.1.1.) Except as provided in Paragraph 13.2 below,
Tenant shall maintain the Building, building service equipment, exterior
surfaces of exterior walls, glass, air conditioning and heating systems,
electrical and mechanical systems, HVAC system and all other improvements
comprising a part of the Premises, or within which the Premises are contained,
in good and clean condition and repair at all times, in a manner fit and
customary for a first-class office building in the Fremont area, and Tenant
shall, at Tenant's sole cost and expense, and subject to compliance with all
other provisions of this Lease, promptly make all required replacements and
repairs thereto, interior or exterior, structural or nonstructural, and ordinary
or extraordinary. Except as specifically set forth in Section 13.2.1, Landlord
shall not be obligated (but shall have the right pursuant to Section 13.1.2) to
repair, replace, maintain or alter the Premises, or the Building or improvements
within which the Premises are located, and Tenant waives all laws, statutes and
ordinances to the contrary. With regard to repairs, Tenant expressly waives any
right pursuant to any law now existing, or which may be effective at any time
during the term hereof, to make repairs at Landlord's expense, including without
limitation, the provisions of Sections 1932(2), 1933(4), 1941 and 1942 of the
California Civil Code, and any provisions amendatory thereof or supplemental
thereto.
Tenant shall, at Tenant's sole cost and expense, pay for and maintain a
roof maintenance contract with a reputable roofing company, providing for an
inspection of the roof and roof components no less frequently than annually and
shall cause to be performed the periodic preventative roof maintenance needed to
keep the roof in good condition and repair. Copies of such contracts, inspection
reports and records of work performed shall be provided to Landlord upon
request.
13.2 LANDLORD'S MAINTENANCE AND REPAIR:
(CONTINUATION OF 13.2.1.) Landlord shall be responsible to make any
repairs to the structure, foundations and footings of the Premises and shall be
responsible for replacement of the roof, if necessary, unless the need therefor
is due to the negligent or willful acts of Tenant or the breach of the Lease by
Tenant, in which event Tenant shall be responsible. Tenant shall provide written
notice to Landlord of the need for any repairs or maintenance which are
Landlord's responsibility.
13.3 HVAC SYSTEM:
Landlord warrants the compressor of the HVAC equipment for a period of
one (1) year from the date the Premises are delivered to Tenant.
At Tenant's sole cost and expense, Tenant shall contract for, pay for
and maintain an HVAC contract with a reputable HVAC service company providing
for an inspection of the HVAC and HVAC components no less frequently than
quarterly and shall cause to be performed, at its expense, the periodic
preventative HVAC maintenance needed to keep the HVAC system in good condition
and repair.
In the event the HVAC system or any major component thereof requires
replacement, the cost of such replacement shall be amortized over the useful
life of the major component and Tenant shall be responsible to pay only such
amortized portion applicable to the Term of the Lease and the remainder shall be
paid by Landlord. Prior to any replacement of such HVAC or component thereof,
both Landlord and Tenant must agree that replacement is necessary using
reasonable discretion and considering the advice of Tenant's HVAC service
company.
<PAGE> 24
11
13.2.4. Tenant expressly waives and releases any and all rights Tenant
may otherwise have to make repairs at Landlord's expense under Section 1942 of
the California Civil Code, the provisions of Section 1932(1) of the California
Civil Code, or the provisions of any other statute or rule of law now or
hereafter in effect.
13.3. ENTRY AND INSPECTION:
13.3.1. Landlord shall at all reasonable times have the right to enter
the Premises to inspect the same, to protect the interest of Landlord, to
exhibit the Premises to prospective or actual purchasers or encumbrance holders
(or, during the last one hundred eighty [180] days of the Lease Term or when an
uncured default exists hereunder, to prospective tenants), to post notices of
nonresponsibility, to alter, improve or repair the Premises or any other portion
of the Building, as otherwise permitted hereunder, all without being deemed
liable for an eviction of Tenant and without abatement of rent, except as
expressly provided elsewhere in this Lease, and may for that purpose erect
scaffolding and other necessary structures where reasonably required by the
character of the work to be performed, provided that the business of Tenant
shall be interfered with as little as is reasonably practicable. If major work
or repairs are required to be performed during normal business hours, Landlord
and Tenant shall agree on a mutually convenient time to minimize disruption to
Tenant's normal business activities. If during the last month of the term hereof
Tenant shall have removed substantially all of Tenant's property and personnel
from the Premises, Landlord may enter the Premises to repair, alter and
redecorate the same, without abatement of rent and without liability to Tenant,
and such acts shall have no effect on this Lease. Tenant hereby waives any claim
for damages or abatement of rent for any injury, inconvenience to or
interference with Tenant's business, loss of occupancy or quiet enjoyment of the
Premises, and any other loss occasioned thereby; provided, however, this
provision shall not excuse Landlord for its negligence or willful misconduct.
Landlord shall not have direct access to any keys to the Premises. Tenant shall
provide to Landlord the name or names of security personnel who can be reached
on an emergency basis to obtain access to the Premises on an emergency basis.
Landlord shall have the right to use any and all means which Landlord may deem
proper to open such doors in an emergency in order to obtain entry to the
Premises, and no such entry to the Premises shall be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or any eviction
of Tenant from the Premises, or any portion thereof. No provision of this Lease
shall be construed as obligating Landlord to perform any repairs, alterations,
or decoration except as otherwise expressly agreed to be performed by Landlord,
or as caused by Landlord's own negligent acts or willful misconduct.
13.3.2. Nothing contained in this Lease shall be deemed to constitute
an actual or constructive eviction nor relieve Tenant of any duty, obligation or
liability of Tenant with respect to making any repair, replacement or
improvement or complying with any law, order or requirement of any government or
other authority. Nothing contained herein shall be deemed or construed to impose
upon Landlord any obligation, responsibility or liability whatsoever to Tenant,
whether for the care, supervision or repair of the Building, or any part
thereof, or any other portion of the Project, or otherwise, except as may be
specifically provided in this Lease.
14. ASSIGNMENT AND SUBLETTING
14.1. PROHIBITION AND CONSENT:
14.1.1. PROHIBITION: Tenant shall not, either voluntarily or by
operation of law, assign, sublet, sell, encumber, mortgage, pledge or otherwise
transfer all or any part of the Premises or Tenant's leasehold estate hereunder,
or permit the Premises to be occupied by anyone other than Tenant or Tenant's
employees, without Landlord's prior written consent in each instance. Any
assignment or subletting which is not in compliance with this Article 14 shall
be void, shall confer no rights upon any third party and, at the option of
Landlord, shall constitute a material default by Tenant under this Lease.
Consent by Landlord to one or more assignments of this Lease or to one or more
sublettings of the Premises shall not operate to prejudice or affect in any way
Landlord's rights hereunder as to any
<PAGE> 25
12
subsequent subletting or assignment, or to exhaust Landlord's rights under this
Article 14. If Tenant is a corporation which, under the then-current guidelines
published by the Commissioner of Corporations of the State of California, is not
deemed a public corporation, or is an unincorporated association or partnership,
the transfer, assignment or hypothecation of any stock or interest in such
corporation, association or partnership in the aggregate in excess of
twenty-five percent (25%) of the amount then outstanding shall be deemed an
assignment within the meaning and provisions of this Section.
14.1.2. REQUIRED INFORMATION: If the Tenant desires at any time to
assign this Lease or to sublet the Premises or any portion thereof, it shall
first notify Landlord of its desire to do so and shall submit in writing to
Landlord (i) the name of the proposed subtenant or assignee; (ii) the nature of
the proposed subtenant's or assignee's business to be carried on in the
Premises; (iii) the terms and provisions of the proposed sublease or assignment;
(iv) such financial information as Landlord may reasonably request concerning
the proposed subtenant or assignee; and (v) such information as Landlord may
reasonably request regarding the business experience of the proposed subtenant
or assignee during the preceding five (5) years.
14.1.3. LANDLORD OPTIONS: At any time within thirty (30) working days
after Landlord's receipt of the information specified in Section 14.1.2 above,
Landlord may by written notice to Tenant elect to (i) consent to the subletting
or assignment and to the subtenant or assignee proposed, subject to the
condition that Tenant pay to Landlord upon receipt fifty percent (50%) of any
and all amounts (a) by which the basic rent and additional rent paid by such
subtenant exceeds the sum of the rent and additional rent to be paid by Tenant
to Landlord for such space under this Lease, or (b) received by Tenant from
such assignee; (ii) refuse to give its consent, specifying in reasonable detail
the reasons therefor; (iii) sublease the Premises or portion thereof so proposed
to be subleased by Tenant or take an assignment of Tenant's leasehold estate
hereunder or such part thereof as shall be specified in said notice upon the
same terms (excluding terms relating to purchase of personal property, the use
of Tenant's name or the continuation of Tenant's business) as those offered to
the proposed subtenant or assignee, as the case may be; or (iv) terminate this
Lease as to the portion of the Premises so proposed to be subleased or assigned
with a proportionate abatement of the rent payable hereunder, effective as of
the effective date of the proposed sublease or assignment. Any recapture, direct
Lease, termination or similar provisions shall not be applicable to a subletting
of less than all of the Premises ("Recapture"). If a permitted Recapture occurs,
Tenant shall be released from all liability thereafter accruing relating to that
portion of the Premises recaptured. Unless Landlord exercises its rights under
clauses (i), (iii) or (iv) above, Landlord shall not unreasonably refuse to give
its consent under clause (ii) above. Landlord may exercise its rights under
clauses (i), (iii) or (iv) above in its sole discretion and for any reason or
reasons deemed sufficient by Landlord without regard to any objective standard
of reasonableness. No assignment or subletting consented to by Landlord shall
impair or diminish any covenant, condition or obligation imposed upon Tenant by
this Lease or any right, remedy or benefit afforded Landlord by this Lease. If
Landlord consents to any assignment or subletting, Tenant may within ninety
(90) days after the date of Landlord's consent, enter into a valid assignment or
sublease of the Premises or portion thereof upon the terms and conditions
described in the information required to be furnished by Tenant to Landlord
pursuant to Section 14.1 above, or upon other terms not more favorable to
Tenant; provided, however, that any material change in such terms shall be
subject to Landlord's consent as provided in this Section 14.1. Failure of
Landlord to exercise any option set forth in clauses (i) through (iv) above
within the thirty (30) day period for Landlord's notice shall be deemed refusal
by Landlord to consent to the proposed subletting or assignment. SEE PAGE 12a.
14.2. NO RELEASE OF TENANT: No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its obligation to pay the rent and
to perform all of the other obligations to be performed by Tenant hereunder.
Each assignee or transferee, other than Landlord, shall assume, as provided
above, all obligations of Tenant under this Lease and shall be and remain liable
jointly and severally with Tenant for the payment of the rent, and for the due
performance of all the terms, covenants, conditions and agreements herein
contained on Tenant's part to be performed for the term of this Lease. No
assignment shall be binding on Landlord unless such assignee or Tenant shall
deliver to Landlord a counterpart of such assignment which contains a covenant
of assumption by the assignee satisfactory in substance and form to Landlord
consistent with the requirements of this Article 14, but the failure or refusal
of the assignee to execute such instrument of assumption shall not release or
discharge the assignee from its liability as set forth above. The acceptance of
any payment due hereunder by Landlord from any other person shall not be deemed
to be a waiver by Landlord of any provision of this Lease or to be a consent to
any assignment or subletting.
<PAGE> 26
12a
CONTINUATION OF:
14. ASSIGNMENT AND SUBLETTING
(CONTINUATION OF 14.1.3. - LANDLORD OPTIONS) Notwithstanding anything to
the contrary contained in this Lease, Tenant shall have the right, without the
prior consent of Landlord, to assign this Lease or sublet the Premises without
any recapture right and without any profit sharing by Landlord to a corporation
which: (i) is Tenant's parent organization; or (ii) is a wholly-owned subsidiary
of Tenant; (iii) a holding company of Tenant or a subsidiary of a holding
company of Tenant (for purposes of this Section 14.1.3 subsidiary means 25% or
more of the stock is owned or controlled by such entity); or (iv) is a
corporation of which Tenant owns in excess of fifty percent (50%) of the
outstanding capital stock; or (v) is a Federally or State chartered bank, or a
parent holding company of a Federally or State chartered bank, which acquires
Tenant or a permitted transferee hereunder, or which acquires the banking
business being conducted upon the Premises, or (vi) as a result of a
consolidation or merger with Tenant or Tenant's parent corporation, shall own
all the capital stock of Tenant or Tenant's parent corporation. Any transfer
pursuant to the above shall be subject to all of the terms, covenants and
conditions of the Lease and such assignee, sublessee or transferee shall
expressly assume the obligations of Tenant under the Lease by a document
reasonably satisfactory to Landlord; the resulting entity pursuant to (vi) above
shall have a net worth equal to or greater than the aggregate net worth of
Tenant as of the date of this Lease.
<PAGE> 27
13
14.3. TRANSFER FEE: If Landlord consents to an assignment, sublease or any
other transfer by Tenant of all or a portion of Tenant's interest under this
Lease, Tenant shall pay, or cause to be paid, in each case a transfer fee of
$250.00 in connection with the processing, documentation and other
administrative costs thereof.
14.4. LEASE NOT SUBJECT TO LEVY: This Lease and the interest of Tenant
hereunder shall not, without Landlord's written consent, be subject to
garnishment or sale under execution in any proceeding or action brought against
or by Tenant.
15. LIABILITY INSURANCE
15.1. Tenant shall, at Tenant's expense, obtain and keep in force during
the term of this Lease a policy of comprehensive public liability insurance for
not less than the amount stated in item No. 11 of the Basic Lease Provisions
insuring Landlord and Tenant against any liability arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Landlord may also require, in its sole discretion, that
Tenant increase the amount of such liability insurance, from time to time,
based upon the reasonable opinion by Landlord's independent insurance advisor
and after taking into consideration such factors as inflation, increased damage
awards, and other factors deemed relevant by Landlord. Any such increase shall
be customary and reasonable in keeping with liability coverage of other
similarly situated tenants. The limit of said insurance shall not, however,
limit the liability of the Tenant hereunder. Tenant may carry said insurance
under a blanket policy; providing, however, that said insurance by Tenant shall
have a Landlord's protective liability endorsement attached thereto, shall
provide that it may not be cancelled or reduced without at least thirty (30)
days prior written notice to Landlord, and shall otherwise be in a form and from
an insurer acceptable to Landlord. Executed copies of such policies of insurance
or certificates thereof shall be delivered to Landlord within ten (10) days
after the Premises are delivered to Tenant and Tenant shall, at least thirty
(30) days prior to the expiration of such policies, furnish Landlord with
renewals or binders. Tenant agrees that if Tenant does not take out and/or
maintain such insurance, Landlord may (but shall not be required to) procure
such insurance on Tenant's behalf and charge Tenant, as additional rent the
premiums plus a twenty-five percent (25%) handling charge.
16. CASUALTY RISK
16.1. Any damage to the Building or the Building equipment in and upon the
Premises resulting from fire, explosion or other casualty shall be insured
against by Tenant as provided in Section 19.1 of this Lease in such amounts as
Landlord shall deem reasonable. Any loss or damage by theft, fire, explosion or
other casualty to the contents of the Premises belonging to Tenant, shall be at
the sole risk of Tenant. Landlord shall not be obligated to carry insurance on
Tenant's property or equipment.
17. HOLD HARMLESS See Page 13a.
17.2. EXEMPTION OF LANDLORD FROM LIABILITY: Except for the gross negligence
or willful misconduct of Landlord, its agents, employees or contractors, or
breach of this Lease by Landlord, Landlord shall not be liable for any injury
or damage which may be sustained to the person, goods, wares, merchandise or
property of Tenant, its employees, invitees or customers, or any other person
in or about the Premises caused by or resulting from fire, steam, electricity,
gas, water or rain, which may leak or flow from or into any part of the
Premises, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures located therein, whether the damage or injury results from conditions
arising upon the Premises or upon the Building, or the common facilities, or
from other sources. Except for the gross negligence or willful misconduct of
Landlord, its agents, employees or contractors, or breach of this Lease by
Landlord, Landlord shall not be liable for any damages arising from any act or
neglect of any other tenant or occupant of the Project.
<PAGE> 28
13a
17.1 INDEMNITY
REPLACEMENT OF:
17.1.1 INDEMNIFICATION BY TENANT (PREMISES)
Except for the willful acts, omissions or negligence of Landlord, Tenant
agrees to indemnify, defend and hold harmless Landlord, its agents and employees
from and against any and all expense, liability and claims for damage to or loss
of property (including Tenant's property) or injury to or death of persons
(including Tenant, its agents, employees, visitors, licensees, or invitees)
directly or indirectly resulting from any cause on or about the Premises, or in
connection with the maintenance or operation of Tenant's business, or Tenant's
occupation or use of the Premises. Tenant shall discharge any judgment or
compromise rendered against or suffered by Landlord as a result of anything
indemnified against hereunder and shall reimburse Landlord for any and all
costs, fees, or expenses incurred or paid by Landlord (including, without
limitation, reasonable attorneys' fees), in connection with the defense of any
action or claim resulting therefrom.
ADDITION OF:
17.1.2. INDEMNIFICATION BY LANDLORD (COMMON AREA)
Except for the willful acts, omissions or negligence of Tenant, Landlord
agrees to indemnify, defend and hold harmless Tenant, its agents and employees
from and against any and all expense, liability and claims for damage to or loss
of property or injury to or death of persons (including Landlord, its agents,
employees, visitors, licensees, or invitees) directly or indirectly resulting
from any cause on or about the Common Area or Project (except the Premises), or
in connection with the maintenance or operation of the Common Area or Project
(except the Premises). Landlord shall discharge any judgment or compromise
rendered against or suffered by Tenant as a result of anything indemnified
against hereunder and shall reimburse Tenant for any and all costs, fees, or
expenses incurred or paid by Tenant (including, without limitation, reasonable
attorneys' fees), in connection with the defense of any action or claim
resulting therefrom.
<PAGE> 29
14
18. SUBROGATION
18.1. Landlord and Tenant hereby mutually waive their respective rights of
recovery against each other for any loss insured by fire, extended coverage and
other property insurance existing for the benefit of the respective parties.
Each party shall obtain any special endorsements, if required by its insurer,
to evidence compliance with the aforementioned waiver.
19. DAMAGE OR DESTRUCTION
19.1. PROPERTY INSURANCE: Landlord shall at all times during the term of
this Lease maintain in effect a policy or policies of insurance covering the
Building providing protection against the perils included from time to time in
the designation "all risk", including the perils of earthquake and flood, as
well as rent insurance. SEE PAGE 14a. Landlord shall maintain during the Lease
Term hazard and casualty insurance, as well as public liability insurance (with
liability limits reasonable and customary for a similar project), upon the
common facilities. Tenant's Pro-Rata Share of all such insurance shall be paid
by Tenant as provided by Article 4 hereof.
19.2. INSURED OR MINOR DAMAGE: If at any time during the term hereof, the
Building of which the Premises are a part is destroyed or damaged and either
(i) such damage is not "substantial" as that term is hereinafter defined, or
(ii) such damage was caused by casualty insured against under Section 19.1, then
Landlord shall diligently repair such damage utilizing insurance proceeds
available for such restoration, and this Lease shall continue in full force and
effect. In determining whether Landlord has proceeded diligently, the
availability of the insurance proceeds shall be a major factor. Landlord shall
not be required to expend funds for restoration of the Premises in excess of
insurance proceeds received for such work. Landlord shall not be required to
restore Tenant's leasehold improvements to the Premises, all of which shall be
Tenant's responsibility.
19.3. PARTIAL DESTRUCTION OF THE BUILDING: SEE PAGE 14a
19.4. MAJOR DAMAGE: Without limiting the provisions of Paragraph 19.3., if
at any time during the term hereof the Building is destroyed or damaged, and if
such damage is "substantial" as that term is hereinafter defined, and such
damage or destruction was caused by a casualty not insured against under Section
19.1, then Landlord may at its option either (a) repair such damage as soon as
reasonably possible utilizing insurance proceeds available for such restoration,
in which event this Lease shall continue in full force and effect, or (b) cancel
and terminate this Lease as of the date of the occurrence of such damage, by
giving written notice of its election to do so within ninety (90) days after the
date of occurrence of such damage. Landlord shall not be required to expend
funds for restoration of the Premises in excess of insurance proceeds received
for such work. Landlord shall not be required to restore Tenant's leasehold
improvements to the Premises, all of which shall be Tenant's responsibility.
19.6. DEFINITIONS:
(a) For the purpose of this Article, "substantial" damage to the
Building shall be deemed to be damage, the estimated cost of repair of which
exceeds one-third (1/3rd) of the then-estimated replacement cost of the
Building, exclusive of foundations.
(b) The determination in good faith by Landlord of the estimated
cost of repair of any damage and/or of the estimated replacement cost of the
Building, shall be conclusive for the purpose of this Article.
19.7. ABATEMENT OF RENT: Subject to Landlord's actual receipt of all
proceeds from any rent insurance, during the period of any repair or
restoration undertaken pursuant to Sections 19.3 and 19.4 above, an abatement
of rent shall be made proportionate to the time during which, and to the extent
which, the Premises or a portion thereof shall have been rendered untenantable;
provided, however, that in the event of a partial destruction or damage to the
Premises which enables Tenant to continue to use all or part thereof, Landlord
agrees in making said repairs or restoration to take such steps as shall be
reasonably necessary to avoid an unreasonable interference with the continued
use of the Premises by Tenant.
<PAGE> 30
14a
CONTINUATION OF:
19. DAMAGE OR DESTRUCTION
(INSERT TO 19.1. - PROPERTY INSURANCE) Landlord shall be required to
carry flood insurance only if the Premises are located in an applicable flood
hazard zone. If the Premises are not now in a flood hazard zone but during the
term of the Lease, the flood hazard zone is expanded to include the Premises,
Landlord shall carry such flood insurance. Tenant shall reimburse Landlord for
its Pro-Rata Share of such property insurance within thirty (30) days following
receipt of an invoice therefor from Landlord. Tenant's Pro-Rata Share of such
property insurance shall be a fraction, the numerator of which is the Floor Area
of the Premises and the denominator of which is the Floor Area included in
Landlord's insurance policy covering the Premises. [ILLEGIBLE] Parcel is not
insured under one policy with the remainder of the Project, the cost to Tenant
shall be equal to or less than the cost that would otherwise be incurred if the
entire Project were billed under one policy. If the cost of such separate
policies is more than one policy covering the entire Project, Landlord shall be
responsible for the difference in cost.
(CONTINUATION OF 19.3. - PARTIAL DESTRUCTION OF THE BUILDING) In the
event that there is any damage to the Premises or any portion of the Building
which renders the Premises substantially unusable by Tenant for Tenant's normal
business purposes, and such damage or destruction cannot reasonably be repaired
within two hundred seventy (270) days from the date of such damage or
destruction (or within one hundred twenty (120) days if the damage occurs within
the last one (1) year of the Lease Term and there exists no further options to
extend or there so exists an option and Tenant elects not to exercise such
option within thirty (30) days of the date of such damage), Landlord or Tenant
may elect to terminate this Lease upon thirty (30) days written notice to the
other, such notice to be sent within thirty (30) days of the date the party
electing to terminate becomes aware of the estimated time to restore or repair
such damage. During the period of any such damage Tenant's obligation to pay
rent and other monetary obligations shall be abated to the extent that the
Premises, or a portion thereof, are reasonably unusable by Tenant for Tenant's
normal business operations.
Notwithstanding the foregoing, Tenant shall have the right to terminate
the Lease only if Tenant can demonstrate to Landlord that it cannot effectively
operate in the remainder of the Premises and only if Landlord is unable to
provide alternative space in the Project reasonably suitable to enable Tenant to
operate its business until restoration is complete.
<PAGE> 31
15
19.8. TENANT'S WAIVER: With respect to any damage or destruction that
Landlord is obligated to repair or may elect to repair under the terms of this
Lease, Tenant hereby waives the provisions of any law, regulation or ordinance
permitting a termination of a lease upon the complete or partial destruction of
the Premises.
20. EMINENT DOMAIN
20.1. DEFINITION OF TERMS: The term "TOTAL TAKING" as used in this
Article means the taking of the entire Premises under the power of eminent
domain or a taking of so much of the Premises as to prevent or substantially
impair the conduct of Tenant's business therein. The term "PARTIAL TAKING" means
the taking of a portion of the Premises which does not constitute a total
taking.
20.2. TOTAL TAKING: If during the term hereof there shall be a total
taking by public authority under the power of eminent domain, then the leasehold
estate of Tenant in and to the Premises shall cease and terminate as of the date
actual physical possession thereof shall be so taken.
20.3. PARTIAL TAKING: If during the term of this Lease there shall be a
partial taking of the Premises, this Lease shall terminate as to the portion of
the Premises taken upon the date upon which actual possession of such portion of
the Premises is taken pursuant to such eminent domain proceedings, but the Lease
shall continue in force and effect as to the remainder of the Premises. The
Minimum Rent payable by Tenant for the balance of the term of this Lease,
including adjustments, if any, shall be abated in the ratio that the square
footage of Floor Area of the Premises taken bears to the Floor Area of the
Premises at the time of such taking. Notwithstanding the foregoing, any taking
of the common facilities, or any portion thereof, shall not result in any
adjustment to rent or any other amounts payable by Tenant to Landlord hereunder,
nor shall Tenant be relieved of any obligation hereunder by virtue of such
taking.
20.4. ALLOCATION OF AWARD: All compensation and damages awarded for the
taking of the Premises, or any portion or portions thereof, shall, except as
otherwise herein provided, belong to and be the sole property of Landlord, and
Tenant shall not have any claim or be entitled to any award for diminution in
value of its leasehold hereunder or for the value of any unexpired term of this
Lease; provided, however Tenant shall be entitled to any award that may be made
for the taking of or injury to or on account of any cost or loss Tenant may
sustain in the removal of Tenant's fixtures, equipment and furnishings, provided
the same does not diminish Landlord's award. See Page 15a.
20.5. VOLUNTARY SALES: A voluntary sale by Landlord to any public body
or agency having power of eminent domain, either under threat of condemnation or
while condemnation proceedings are pending, shall be deemed to be a taking under
the power of eminent domain for the purposes of this Article.
20.6. See Page 15a.
21. OFFSET STATEMENT, ATTORNMENT AND SUBORDINATION
21.1. OFFSET STATEMENT: Tenant shall, at any time and from time to time,
upon not less than twenty (20) days prior written notice from Landlord, execute,
acknowledge and deliver to Landlord a statement in writing substantially in the
form of Exhibit "E" hereto (i) certifying that this Lease is unmodified and in
full force and effect (or, if modified, stating the nature of such modification
and certifying that this Lease, as so modified, is in full force and effect) and
the dates to which the Minimum Rent and other amounts payable hereunder are
paid, and (ii) acknowledging that there are not, to Tenant's knowledge, any
uncured defaults on the part of Landlord hereunder, or specifying such defaults
if any are claimed. Any such statement may be relied upon by any prospective
purchaser, encumbrancer or ground lessor of the real property of which the
Premises are a part. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one month's Minimum Rent has been paid in advance.
21.2. ATTORNMENT: In the event any proceedings are brought for the
foreclosure of, or in the event of the conveyance of deed in lieu of foreclosure
of, or in the event of exercise of the power of sale under, any mortgage and/or
deed of trust made by Landlord covering the Premises, or in the event Landlord
sells, conveys or otherwise transfers its interest in the Premises, Tenant
hereby attorns to, and covenants and agrees to execute an instrument in writing
reasonably satisfactory to the new owner whereby Tenant attorns to such
successor in interest and recognizes such successor as the landlord under this
Lease.
21.3. SUBORDINATION: Tenant agrees that this Lease shall, at the request
of the Landlord, be subordinate to any mortgages or deeds of trust that are or
may hereafter be placed upon the Premises and to any and all advances to be made
thereunder, and to the interest thereon, and all renewals,
<PAGE> 32
15a
CONTINUATION OF:
20. EMINENT DOMAIN
(CONTINUATION OF 20.4. - ALLOCATION OF AWARD) Notwithstanding the
foregoing, Tenant shall have the right to prosecute a separate award from the
condemning authority for its relocation costs, moving costs, its fixtures,
equipment and furnishings, the unamortized value of leasehold improvements made
to the Premises by Tenant and paid for by Tenant, amortized on a straight-line
basis over the initial Term of the Lease, and any other award except the bonus
value of the Lease which shall belong entirely to Landlord.
ADDITION OF:
20.6 TERMINATION OPTION: In the event of a partial taking of the
Premises or the common areas or common facilities, which taking, in Tenant's
good faith and reasonable opinion, substantially and materially interferes with
Tenant's use of the Premises, parking or access to the Premises, Tenant may
terminate the Lease upon written notice to Landlord given within sixty (60) days
of the taking. Notwithstanding the foregoing, Tenant shall have the right to
terminate the Lease (i) for a partial taking of the Premises, only if Tenant can
demonstrate to Landlord that it cannot effectively operate in the remainder of
the Premises, or (ii) for a partial taking of the common areas or common
facilities, only if Landlord is unable to provide alternative parking and access
to the Premises reasonably suitable to enable Tenant to operate its business, it
being acknowledged that parking is a critical factor to Tenant in entering into
this Lease.
<PAGE> 33
16
replacements and extensions thereof, provided the mortgagees or beneficiaries
named in said mortgages or trust deeds shall agree to recognize the interest of
Tenant under this Lease in the event of foreclosure, if Tenant is not then in
default.
22. DEFAULT
22.1. DEFAULT BY TENANT: Should Tenant at any time be in default with
respect to any rental payments or other charges payable by Tenant, and should
such default continue for a period of ten (10) days after written notice from
Landlord to Tenant; or should Tenant be in default in the prompt and full
performance of any other of its promises, covenants or agreements herein
contained and should such default or breach of performance continue for more
than thirty (30) days after written notice thereof from Landlord to Tenant
specifying the particulars of such default or breach of performance; or should
Tenant vacate or abandon the Premises; then Landlord may treat the occurrence of
any one or more of the foregoing events as a breach of this Lease, and in
addition to any or all other rights or remedies of Landlord and by law provided,
it shall be, at the option of Landlord, without further notice or demand of any
kind to Tenant or any other person:
(a) The right of Landlord to declare the term hereof ended and
to reenter the Premises and take possession thereof and remove all
persons therefrom, and Tenant shall have no further claim thereon or
hereunder, or
(b) The right of Landlord without declaring the term of this
Lease ended to reenter the Premises and occupy the whole or any part
thereof for and on account of Tenant and to collect any unpaid rentals
and other charges, which have become payable, or which may thereafter
become payable; or
(c) The right of Landlord, even though it may have reentered the
Premises, to thereafter elect to terminate this Lease and all of the
rights of Tenant in or to the Premises.
Should Landlord have reentered the Premises under the provisions of
subparagraph (b) above, Landlord shall not be deemed to have terminated this
Lease, or the Liability of Tenant to pay any rental or other charges thereafter
accruing, or to have terminated Tenant's liability for damages under any of the
provisions hereof, by any such reentry or by any action, in unlawful detainer or
otherwise, to obtain possession of the Premises, unless Landlord shall have
notified Tenant in writing that it has so elected to terminate this Lease, and
Tenant further covenants that the service by Landlord of any notice pursuant to
the unlawful detainer statutes of the State where the Project is situated and
the surrender of possession pursuant to such notice shall not (unless Landlord
elects to the contrary at the time of or at any time subsequent to the serving
of such notices and such election is evidenced by a written notice to Tenant) be
deemed to be a termination of this Lease. In the event of any entry or taking
possession of the Premises as aforesaid, Landlord shall have the right, but not
the obligation, to remove therefrom all or any part of the personal property
located therein and may place the same in storage at a public warehouse at the
expense and risk of Tenant.
Should Landlord elect to terminate this Lease pursuant to the provisions
of subparagraph (a) or (c) above, Landlord may recover from Tenant as damages,
the following:
(i) The worth at the time of award of any unpaid rental which
had been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which the
unpaid rental which would have been earned after termination until the
time of award exceeds the amount of such rental loss Tenant proves could
have been reasonably avoided, plus
(iii) the worth at the time of award of the amount by which the
unpaid rental for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided, plus
(iv) any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of business
would be likely to result therefrom, including, but not limited to, any
costs or expenses incurred by Landlord in (a) retaking possession of the
Premises, including reasonable attorneys' fees therefor, (b) maintaining
or preserving the Premises after such default (c) preparing the Premises
for reletting to a new tenant, including repairs or alterations to the
Premises for such reletting, (d) leasing commissions, or (e) any other
costs necessary or appropriate to relet the Premises; plus
(v) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by the
laws of the State where the Project is situated.
<PAGE> 34
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As used in subparagraphs (i) and (ii) above, the "worth at the time of
award" is computed by allowing interest at the maximum lawful rate. As used in
subparagraph (iii) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank
situated nearest to the location of the Project at the time of award plus one
percent (1%).
Any reference in this Lease to a default by Tenant shall be deemed to
mean an uncured default pursuant to this Section 22.1. of the Lease.
For all purposes of this Article 22 only, the term "rental" shall be
deemed to be the Minimum Rent and all other sums required to be paid by Tenant
pursuant to the terms of this Lease. All such sums, other than the Minimum
Rent, shall be computed on the basis of the average monthly amount thereof
accruing during the immediately preceding sixty (60) month period, except that
if it becomes necessary to compute such rental before such a sixty (60) month
period has occurred then such rental shall be computed on the basis of the
average monthly amount hereof accruing during such shorter period.
Notwithstanding any other provisions of this Article, Landlord agrees if
the default complained of, other than for the payment of monies, is of such a
nature that the same cannot be rectified or cured within the period requiring
such rectification or curing as specified in the written notice relating
thereto, then such default shall be deemed to be rectified or cured if Tenant
within such period shall have commenced the rectification and curing thereof and
shall continue thereafter with all due diligence to cause such rectification and
curing and does so complete the same with the use of such diligence as
aforesaid.
The remedies given to Landlord in this Article 22 shall be in addition
and supplemental to all other rights or remedies which Landlord may have under
laws then in force.
The waiver by Landlord of any breach of any term, covenant or condition
herein contained shall not be deemed to be a waiver of such term, covenant or
condition or of any subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of rental hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, other than the failure of Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rental. No term,
covenant or condition of this Lease shall be deemed to have been waived by
Landlord unless such waiver be in writing signed by Landlord.
22.2. DEFAULT BY LANDLORD: Landlord shall not be deemed to be in default
in the performance of any obligation required to be performed by it hereunder
unless and until it has failed to perform such obligation within thirty (30)
days after written notice by Tenant to Landlord (and concurrently therewith,
written notice to any mortgagee or beneficiary of any mortgage or deed of trust,
the name and address of which shall have theretofore been furnished to Tenant in
writing) specifying wherein Landlord has failed to perform such obligation;
provided, however, that if the nature of Landlord's obligation is such that more
than thirty (30) days are required for Landlord's performance, then Landlord
shall not be deemed to be in default if Landlord shall commence such performance
within thirty (30) days after such notice by Tenant and thereafter diligently
prosecute the same to completion. Such mortgagee or beneficiary shall have the
same right to cure on behalf of Landlord as is available to Landlord hereunder.
23. END OF TERM
23.1. HOLDING OVER: This Lease shall terminate and become null and void
without further notice upon the expiration of the term hereof, and any holding
over by Tenant after such expiration shall not constitute a renewal or
extension hereof or give Tenant any rights under this Lease, except when in
writing signed by both parties hereto or as otherwise herein provided. If Tenant
shall hold over for any period after the expiration of the term, Landlord may,
at its option, treat Tenant as a tenant at sufferance, commencing on the first
(1st) day following the expiration of this Lease and subject to all of the
terms and conditions herein contained, except that the monthly rental shall be
one hundred twenty-five percent (125%) of the total monthly rental applicable
at the date of expiration. Provided, however, if Landlord and Tenant are
negotiating in good faith for an extension or renewal of the Lease, the monthly
rent shall remain the same as the last year of the Term, during any negotiation
period. At such time that an extension or renewal lease is executed by both
parties, all of its terms and provisions, including rent, shall be retroactive
to the day following expiration of the Lease, unless otherwise expressly agreed.
If negotiations cease, Tenant shall surrender and vacate the Premises within
five (5) days after such cessation, failing which the holdover provisions shall
resume. If Tenant fails to surrender the Premises upon the expiration of this
Lease despite demand to do so by Landlord, Tenant shall indemnify and hold
Landlord harmless from all loss or liability, including without limitation, any
claims made by any succeeding tenant founded on or resulting from such failure
to surrender. Acceptance by Landlord of rent after such expiration or earlier
termination shall not constitute a
<PAGE> 35
18
consent to a holdover hereunder or result in a renewal of this Lease. The
foregoing provisions of this Section are in addition to and do not affect
Landlord's right of re-entry or any other rights of Landlord hereunder or as
otherwise provided by law or in equity.
23.2. MERGER ON TERMINATION: The voluntary or other surrender of this
Lease by Tenant, or a mutual termination thereof, shall not work a merger, and
shall at the option of Landlord terminate any or all existing subleases or
subtenancies affecting the Premises except to the extent that Landlord at its
option expressly elects in writing to treat such surrender or termination as an
assignment to Landlord of such subleases or subtenancies.
23.3. SURRENDER OF PREMISES, REMOVAL OF PROPERTY: Upon the expiration of
the term of this Lease, or upon any earlier termination of this Lease, Tenant
shall quit and surrender possession of the Premises to Landlord in as good
order, condition and repair as when received or as thereafter improved by
Landlord or Tenant, reasonable wear and tear, and repairs which are Landlord's
obligation excepted, and shall, without expense to Landlord, remove or cause to
be removed from the Premises all debris and rubbish, all furniture, equipment,
business and trade fixtures, free-standing cabinet work and other articles of
personal property owned by Tenant or installed or placed by Tenant at its
expense in the Premises, and all similar articles of any other persons claiming
under Tenant unless Landlord exercises its option to have any subleases or
subtenancies assigned to it. Tenant shall repair all damage to the Premises
resulting from such removal, which repair shall include the patching and filling
of holes and repair of structural damage caused by removal of property by
Tenant. In the event that Tenant shall fail to comply with the provisions of
this Section 23.3, Landlord may make such repairs and the cost thereof shall be
additional rent payable by Tenant upon demand. Upon expiration or earlier
termination of this Lease, if requested by Landlord, Tenant shall execute,
acknowledge and deliver to Landlord an instrument in writing releasing and
quitclaiming to Landlord all right, title and interest of Tenant in and to the
Premises by reason of this Lease. Landlord shall have the right to require
Tenant to remove any vault in the Premises and to restore the wall, slab and
floor to match the surrounding area. In no event shall Tenant remove the
vault-door and leave the vault in place.
23.4. REMAINING PROPERTY: Whenever Landlord shall re-enter the Premises
as provided in this Lease, any property not removed by Tenant as provided in
this Lease, shall be considered abandoned and Landlord may retain and use the
same as its own property in every respect, or at its option may remove any or
all of such items and dispose of the same in any manner or store the same in a
public warehouse or elsewhere for the account and at the expense and risk of
Tenant. If Tenant shall fail to pay the cost of storing any such property after
it has been stored for a period of thirty (30) days or more, Landlord at its
option may sell any or all of such property at public or private sale, in such
manner and at such times and places as Landlord, in its sole discretion, may
deem proper, without notice to or demand upon Tenant for the payment of all or
any part of such charges or the removal of any such property. Landlord shall
apply the proceeds of such sale, first, to the cost and expense of such sale,
including reasonable attorneys' fees actually incurred; second, to the payment
of costs of or charges for storing any such property; third, to the payment of
any other sums of money which may then or thereafter be due to Landlord from
Tenant under any of the terms hereof; and fourth, the balance, if any, to
Tenant. Tenant hereby waives all claims for damages that may be caused by
Landlord's re-entering and taking possession of the Premises or removing and
storing the property of Tenant as herein provided, and Tenant shall indemnify
and hold harmless Landlord therefrom, and no such re-entry shall be considered
or construed to be a forcible entry.
23.5. AFFIXED PROPERTY: All fixtures, equipment, alterations,
additions, improvements and/or appurtenances attached to or built into the
Premises prior to or during the term hereof, whether by Landlord at its
expense, or by or at the expense of Tenant, or both, shall be and remain part
of the Premises and shall not be removed by Tenant at the end of the term
hereof unless otherwise expressly provided for in this Lease or unless such
removal is required by Landlord pursuant to the provisions of Article 11
hereof. Landlord shall have the right to require Tenant to remove any vault in
the Premises and to restore the wall, slab and floor to match the surrounding
area. In no event shall Tenant remove the vault-door and leave the vault in
place. Such fixtures, equipment, alterations, additions, improvements and/or
appurtenances shall include, without limitation, floor coverings, drapes,
paneling, molding, built-in cabinets, doors, vaults (exclusive of vault doors),
plumbing, electrical, communications, and lighting systems, silencing equipment,
all fixtures and outlets for the systems mentioned above and for all telephone,
radio, telegraph and television purposes, and any special flooring or ceiling
installations.
24. PAYMENTS AND NOTICES
24.1. All rents and other sums payable by Tenant to Landlord hereunder
shall be paid, without deduction or setoff, in lawful money of the United States
to Landlord at its address set forth in item No. 12 of the Basic Lease
Provisions, or at such other place as Landlord may hereafter designate in
writing. Unless this Lease expressly provides otherwise, such payments shall be
due and payable five (5) days after demand without any deductions or setoffs.
All payments requiring proration shall be prorated on the basis of a thirty (30)
day month and a 360-day year. Any notice, election, demand, consent, approval or
other communication to be given or other document to be delivered by either
party to the other hereunder may be delivered in person to an officer or duly
authorized representative of the other
<PAGE> 36
19
party, or may be deposited in the United States mail, duly registered or
certified, postage prepaid, return receipt requested, and addressed to the other
party at such address set forth in item No. 12 of the Basic Lease Provisions
hereof, or if to Tenant, at such address or, from and after the Commencement
Date, at the Premises (whether or not Tenant has departed from, abandoned or
vacated the Premises). Either party may from time to time, by written notice to
the other, served in the manner herein provided, designate a different
address. If any notice or other document is sent by mail as aforesaid, the same
shall be deemed served or delivered forty-eight (48) hours after the mailing
thereof. If more than one Tenant is named under this Lease, service of any
notice upon any one of said tenants shall be deemed as service upon all of them.
25. BROKER'S COMMISSION
25.1. The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is(are) stated in item No. 10 of the Basic Lease
Provisions, and agree that the party designated in such item shall be solely
responsible for the payment of brokerage commissions to said broker(s), and
that the other party shall have no responsibility therefor unless otherwise
provided in this Lease. Tenant warrants that it has had no dealings with any
other real estate broker or agent in connection with the negotiation of this
Lease, and Tenant agrees to indemnify and hold Landlord harmless form any cost,
expense or liability (including reasonable attorneys' fees) for any
compensation, commissions or charges claimed by any other real estate broker or
agent employed or claiming to represent or to have been employed by Tenant in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease.
26. RULES AND REGULATIONS
26.1. Tenant agrees to comply with and observe such reasonable rules and
regulations as may hereafter be established by Landlord from time to time,
whether with regard to the Project, the common facilities, or otherwise,
provided the same shall apply uniformly to all tenants of the Project.
Tenant's failure to keep and observe said rules and regulations shall
constitute a breach of the terms of this Lease in the same manner as if the
rules and regulations were contained herein as covenants. In the case of any
conflict between said rules and regulations and a provision of this Lease, such
provision of this Lease shall be controlling.
27. QUIET ENJOYMENT
27.1. Landlord covenants that, so long as Tenant is not in default
hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for
the term hereby demised without hindrance or interruption by Landlord or any
other person or persons lawfully or equitably claiming by, through or under
Landlord, subject, nevertheless, to the terms and conditions of this Lease, and
any mortgage and/or deed of trust to which this Lease is subordinate.
28. MISCELLANEOUS
28.1. WAIVER: One or more waivers of a breach of any covenant or condition
by Landlord shall not be construed as a waiver of a subsequent breach of the
same covenant or condition, and the consent or approval by Landlord to or of any
act by Tenant requiring Landlord's consent or approval shall not be deemed to
render unnecessary Landlord's consent or approval to or of any subsequent
similar act by Tenant. No breach by Tenant of a covenant or condition of this
Lease shall be deemed to have been waived by Landlord unless such waiver is in
writing signed by Landlord. The rights and remedies of Landlord under this Lease
shall be cumulative and in addition to any and all other rights and remedies
which Landlord has or may have.
28.2. ENTIRE AGREEMENT: This Lease and the exhibits hereto cover in full
each and every agreement of every kind or nature whatsoever between the parties
hereto concerning the Premises, and all preliminary negotiations and agreements
of whatsoever kind, except those contained herein, are superseded and of no
further force or effect. No person, firm or entity has, or at any time had, any
authority from Landlord to make any representations or promises on behalf of
Landlord, and Tenant expressly agrees that if any such representations or
promises have been made by Landlord or by any other person, firm or entity,
Tenant hereby waives all right to rely thereon. No verbal agreement or implied
covenant shall be held to vary the provisions hereof, any statute, law or custom
to the contrary notwithstanding. No provision of this Lease may be amended or
added to except by an agreement in writing signed by the parties hereto or their
respective successors in interest.
28.3. RELATIONSHIP OF PARTIES: Nothing contained herein shall be deemed or
construed by the parties hereto, nor by any third party, as creating the
relationship of principal and agent or of partnership or of joint venture
between the parties hereto, it being understood and agreed that neither
<PAGE> 37
20
the method of computation of rent, nor any other provision contained herein,
nor any acts of the parties herein, shall be deemed to create any relationship
between the parties hereto other than the relationship of landlord and tenant.
28.4. DELAYS: In the event that either party hereto shall be delayed or
hindered in or prevented from the performance of any work or in performing any
act required hereunder by reason of strikes; lockouts; labor troubles;
inability to procure materials, labor or energy; failure of power, disruption,
reduction, interruption, curtailment or failure of utility, solid waste
disposal or other services; restrictive governmental laws or regulations;
voluntary or involuntary participation, at the request of a governmental agency
or otherwise, in any plan or program involving allocations, priorities,
limitations or restraints regarding water, fuel or other energy, or otherwise;
riots; insurrection; war; fires; floods; earthquakes; storms; droughts; other
acts of God; or any other reason of a similar or dissimilar nature not the
fault of the party delayed in performing work or doing acts required under the
terms of this Lease (excluding financial inability or the unavailability of
financing), then the performance of such work or the doing of such act shall be
excused for the period of the delay, and the period for the performance of any
work or the doing of such act shall be extended for the period equivalent to
the period of such delay. The provisions of this Section 28.4 shall not operate
in any manner to excuse Tenant from prompt payment of Minimum Rent or any other
payments required by the terms of this Lease, or to extend or delay the time
for any such payments in any way. Further, neither reduction of heat, light,
air conditioning, or any other services whatsoever to the Premises or to any
portion of the common facilities because of any similar or dissimilar event
constituting a cause for excusable delay, shall relieve Tenant from the timely
performance of each and all of Tenant's obligations under this Lease.
28.5. CAPTIONS AND SECTION NUMBERS: The captions, section numbers,
article numbers, and index appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe, or describe the
scope or intent of such sections or articles of this Lease nor in any way
affect this Lease.
28.6. JOINT AND SEVERAL LIABILITY: If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several, and the
act of or notice from, or notice or refund to, or the signature of, any one or
more of such persons, with respect to the tenancy of this Lease, including, but
not limited to, any renewal, extension, expiration, termination or modification
of this Lease, shall be binding upon each and all of the persons executing this
Lease as Tenant with the same force and effect as if each and all of them had
so acted or so given or received such notice or refund or so signed.
28.7. RECORDING: Tenant shall not record this Lease without the prior
written consent of Landlord. Each party, upon the request of the other party,
shall execute and acknowledge a "short form" memorandum of this Lease
describing the Premises, identity of the parties, term of the Lease and option
to extend for recording purposes.
28.8. FLOOR AREA: "Floor Area" as used in this Lease means, with respect
to any leaseable area in the Building, the aggregate number of square feet of
floor space of all floor levels therein measured from (i) the outside faces of
all perimeter walls thereof other than any party wall separating such premises
from other leaseable premises, (ii) the centerline of any such party wall,
(iii) the outside face of any interior wall, and (iv) the building and/or lease
line adjacent to any entrance to such premises. No deduction or exclusion from
Floor Area shall be made by reason of columns, ducts, stairs, elevators,
escalators, shafts, or other interior components.
28.9. EXECUTION OF LEASE -- NO OPTION: The submission of this Lease to
Tenant shall be for examination purposes only, and does not and shall not
constitute a reservation of or option for Tenant to lease, or otherwise create
any interest by Tenant in the Premises, any other premises situated in the
Building, or any other portion of the Project. Execution of this Lease by
Tenant and return to Landlord shall not be binding upon Landlord
notwithstanding any time interval, until Landlord has in fact executed and
delivered this Lease to Tenant.
28.10. CONTROLLING LAW: This Lease shall be governed by and construed in
accordance with the laws of the State of California. If any provision of this
Lease or the application thereof to any person or circumstances shall, to any
extent, be invalid or unenforceable, the remainder of this Lease shall not be
affected thereby and each provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
28.11. SUCCESSORS: Subject to the provisions and limitations set forth in
this Lease, including, but not limited to, the provisions and limitations set
forth at Article 14 hereof, all rights and liabilities herein given to, or
imposed upon, the respective parties hereto shall extend to and bind the
several respective heirs, executors, administrators, successors, and assigns of
the parties, and if there shall be more than one Tenant, they shall be bound
jointly and severally by the terms, covenants and agreements herein.
<PAGE> 38
21
28.12. RULE AGAINST PERPETUITIES: If the term of this Lease shall not have
commenced within five (5) years from the date of execution hereof, this Lease
shall become null and void and Landlord and Tenant shall thereupon be released
from any and all obligations with respect hereto except that there shall be an
equitable refund of any unearned advance rental, or security deposit after
deducting any charges or obligations otherwise due and owing. This provision
shall not be deemed to extend the Commencement Date of the term hereof.
28.13. MODIFICATION AND AMENDMENT AND FINANCING CONDITIONS: This Lease
shall not be modified or amended in any respect except by written agreement
executed by both Landlord and Tenant. Landlord intends to obtain interim and/or
long-term financing for the Project or Building and/or portions thereof of which
the Premises are a part. If any lender should require as a condition to
providing financing for the Project, the Building and/or any portions thereof,
any modification of the terms or conditions of this Lease, Tenant agrees to
execute such modification or amendment provided that such modification or
amendment shall not increase the Minimum Rent or Tenant's share of any costs in
addition to Minimum Rent and does not materially interfere with Tenant's use or
occupancy of the Premises and provided such modification and amendment does not
materially increase Tenant's obligations or liability under the Lease. If Tenant
should refuse to execute any modifications so required, within thirty (30) days
after receipt thereof, Landlord shall have the right by notice to Tenant to
cancel this Lease, and upon such cancellation Landlord shall refund any unearned
rental and/or security deposit, and neither party shall have any liability to
the other.
SEE PAGE 21a
29. SPECIFIC PERFORMANCE OF LANDLORD'S RIGHTS: Nothing contained in this
Lease shall be construed as or shall have the effect of abridging the right of
Landlord to obtain specific performance of any and all of the covenants or
obligations of tenant under this Lease.
30. TENANT'S SOLE COSTS: Notwithstanding the fact that certain references
elsewhere in this Lease to acts required to be performed by Tenant hereunder
omit to state that such acts shall be performed at Tenant's sole cost and
expense, unless such provision expressly provides to the contrary, each and
every act to be performed or obligation to be fulfilled by Tenant pursuant to
this Lease shall be performed or fulfilled at Tenant's sole cost and expense.
31. ACCORD AND SATISFACTION: No payment by Tenant or receipt by Landlord of
a lesser amount than the rent and other payments herein stipulated shall be
deemed to be other than on account of the earliest due stipulated amount, nor
shall any endorsement or statement on any check or any letter accompanying any
check or payment be deemed an accord and satisfaction, and Landlord shall accept
such check or payment without prejudice to Landlord's right to recover the
balance or pursue any other remedy in this Lease provided.
32. TIME OF ESSENCE: Time is of the essence with respect to the performance
of every provision of this Lease in which time of performance is a factor.
33. SALE OF PREMISES BY LANDLORD: In the event of any sale of the Building,
Landlord shall be and hereby is entirely freed and released of all liability
under any and all of its covenants and obligations contained in or derived from
this Lease arising out of any act, occurrence or omission occurring after the
consummation of such sale; and the purchaser at such sale or any subsequent sale
shall be deemed, without any further agreement between the parties or the
successors in interest or between the parties and any such purchaser, to have
assumed and agreed to carry out any and all of the covenants and obligations of
the Landlord under this Lease arising out of any act, occurrence or omission
occurring at any time after the consummation of such sale.
34. COVENANTS: This Lease is subject to the terms, covenants and conditions
set forth herein. Tenant covenants as a material part of the consideration of
this Lease to keep each and all of such terms, covenants and conditions, and
this Lease is made upon the condition of said performance by Tenant.
35. WARRANTY OF EXECUTION: If Tenant signs, not as an individual, but on
behalf of any other person, firm or other entity, the person so signing warrants
and represents that he has the authority to execute this Lease on behalf of said
party. Should either party request evidence of such authority, the requested
party agrees to deliver to the requesting party, within five (5) days after
receipt of request, reasonable written documentation or evidence of such
authority.
36. COUNTERPARTS: This Lease may be executed in one or more counterparts,
each of which shall constitute an original and all of which shall be one and the
same agreement.
37. CORPORATE AUTHORITY: If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants
that he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with said corporation's bylaws or a duly adopted
resolution of its board of directors, and that this Lease is binding upon said
corporation, in
<PAGE> 39
21a
CONTINUATION OF:
28. MISCELLANEOUS
(ADDITION OF):
28.14 CONSENT OF PARTIES: With respect to any provision of the Lease
relating to discretionary acts of either party or with consent being required
by either party, all such acts and consent shall be based upon reasonableness
standards.
28.15 Tenant's obligations with respect to the condition of the Premises
shall be subject to reasonable wear and tear excepted.
28.16 Regardless of anything to the contrary set forth in the Lease,
Landlord shall not be entitled to act as Tenant's attorney-in-fact.
28.17 So long as an actual interference has occurred, the waiver of any
remedies relating to a breach of quiet enjoyment or constructive eviction are
deleted.
28.18 COMPLIANCE WITH LAWS: Notwithstanding anything to the contrary set
forth in the Lease, Landlord shall be solely responsible for and shall comply
with all governmental statutes, ordinances, legislation or regulations now in
force or which may hereafter be in force ("Laws") pertaining to the Common
Areas. Tenant shall be solely responsible for and shall comply with all Laws
pertaining to the Premises; provided, however, Tenant shall not be responsible
for compliance with any Laws affecting the Premises if such compliance requires
alterations to the Premises which are Landlord's repair responsibility under
this Lease and are not the result of Tenant's improvements to the Premises or
Tenant's particular use of the Premises. As respects capital improvements that
are not a result of Tenant's specific use of the Premises or alterations made
by Tenant, the cost may be amortized over the useful life, and Tenant shall pay
the annual amortized costs during the Term.
28.19 MATTERS OF RECORD: Landlord represents that as of the date hereof,
there are no matters of record or agreements between Landlord and other parties
affecting the Project which will detrimentally affect Tenant's ability to use
the Premises as contemplated under the Lease.
<PAGE> 40
22
accordance with its terms. If Tenant is a corporation Tenant shall, at
Landlord's request, deliver a certified copy of its board of directors'
resolution authorizing or ratifying such execution.
38. EXHIBITS INCORPORATED HEREIN: All exhibits referred to herein
are hereby incorporated herein in full.
39. ATTORNEYS' FEES: In the event of litigation concerning this
Lease, any judgment shall include an award of attorneys' fees and court costs
to the prevailing party.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the date first above written.
LANDLORD: SHAPELL INDUSTRIES OF
NORTHERN CALIFORNIA, a Division of
Shapell Industries, Inc., a Delaware
corporation
By [SIG]
---------------------------------
Its: President
By [SIG]
---------------------------------
Its: Senior Vice President
TENANT: HERITAGE BANK OF COMMERCE, a California
corporation
By [SIG]
---------------------------------
By [SIG]
---------------------------------
<PAGE> 41
EXHIBIT "A"
THIS PLOT REPRESENTS THE PROPOSED GENERAL LAYOUT OF THE PROJECT AND SHALL
NOT BE DEEMED A REPRESENTATION BY LANDLORD THAT THE PROJECT IS, OR SHALL BE,
CONSTRUCTED AS INDICATED THEREON OR THAT ANY TENANTS OR OCCUPANTS DESIGNATED BY
NAME OR NATURE OF BUSINESS THEREON SHALL CONDUCT BUSINESS IN THE PROJECT DURING
THE TERM OF THIS LEASE.
[DRAWING OF PROJECT]
EXHIBIT "A"
<PAGE> 42
EXHIBIT "B"
LOCATION OF MONUMENT SIGN AND ALLOCATED PARKING SPACES
[DRAWING OF PARKING SPACES]
EXHIBIT "B"
<PAGE> 43
EXHIBIT "B-1"
TENANT'S SIGN PLANS
EXHIBIT "B-1"
<PAGE> 44
EXHIBIT "C"
Construction of the Premises
The Premises shall be delivered to Tenant in good and broom-clean
condition. Landlord represents to Tenant that upon delivery of possession of the
Premises, the HVAC system, mechanical systems of the Premises, roof and
structure shall be in good condition and Landlord warrants such good condition
for a period of ninety (90) days from the date of delivery of possession. Tenant
agrees that (i) Tenant shall accept the Premises in "as is" condition; (ii)
Landlord shall have no responsibility for any work or improvement which may be
required to prepare the Premises for Tenant's use or for any work in remodelling
the Premises; (iii) Tenant, at its sole cost and expense, shall complete any
items of work which may be required upon the Premises and undertake any
remodelling upon the Premises ("Tenant's Work") prior to Tenant's operation of
its business in the Premises; and (iv) all Tenant's Work shall be done in
accordance with plans and specifications approved by Landlord.
Within fifteen (15) days following execution and delivery of the Lease by
both parties, Tenant shall cause to be delivered to Landlord plans and
specifications for Tenant's Work prepared by a licensed architect approved by
Landlord and Landlord shall either approve or disapprove of same within
fifteen (15) days following receipt. If disapproved, Landlord shall specify its
objections and Tenant shall re-submit the revised plans and specifications
within ten (10) days thereafter for approval by Landlord.
The approved plans, although not attached hereto are hereby incorporated
into this Lease by reference and shall set forth all items of improvement work
to the Premises. Any changes to the plans or to Tenant's Work must be approved
by Landlord.
Tenant's Work shall be performed by a "Qualified Contractor" meaning a
general contractor meeting all of the following specifications:
(1) The Contractor shall be authorized to do the type of construction work
necessary to construct the improvement work set forth in the approved plans in
Fremont, California;
(2) The Contractor shall furnish evidence that it is bondable with surety
satisfactory to Landlord and Tenant in an amount sufficient to insure full
performance of the construction of the work and to insure payment of all
subcontractors and materialmen;
(3) The Contractor shall agree to warrant in writing to Landlord and
Tenant that all work shall be free from defective workmanship and materials for
a period of at least one (1) year after the work is completed; and
(4) The Contractor has experience constructing improvements similar to the
work in the approved plans; and
(5) The Contractor has a proven record of lien-free construction.
All subcontractors must be approved by Landlord and shall be subject to
the foregoing criteria.
Following approval of the plans, approval of contractors and issuance of
all permits, Tenant shall immediately commence construction of Tenant's Work in
accordance with the approved plans and shall diligently prosecute same to
completion.
Landlord agrees to contribute a sum not to exceed Forty-Nine Thousand Four
Hundred Twenty-Five and No/100 Dollars ($49,425.00) to apply towards
installation of leasehold improvements in the Premises. Said sum is
hereinafter referred to as "Allowance". The Allowance shall not be used for
signs or personal property.
The Allowance shall be paid to Tenant within forty (40) days following
Tenant's initial operation of its business in the Premises and receipt
by Landlord of (i) an architect's certificate certifying completion of the work
in full compliance with the approved plans, (ii) evidence of payment by Tenant
of all costs and claims on account of labor and materials furnished to Tenant
by any contractors and/or subcontractors and/or materialmen, together with
mechanics' lien releases and other lien releases on account of all work
performed on the Premises in an amount at least equal to the Allowance, (iii)
the delivery to Landlord of all other documents required to be furnished to
Landlord or to any governmental authority having jurisdiction, and (v) delivery
to Landlord of (a) a Certificate of Occupancy for the Premises; (b) conformed
copy of a recorded Notice of Completion,and (c) copy of "as-built" plans for
the Premises.
EXHIBIT "C"
<PAGE> 45
EXHIBIT "D"
(Intentionally Omitted)
EXHIBIT "D"
<PAGE> 46
EXHIBIT "E"
TENANT'S CERTIFICATE
STATEMENT OF TENANT RE: LEASE
Date: ______________________, 19________
Re: Address ____________________________
________________________________________
______________________________________ For Premises in:
______________________________________ ________________________________________
______________________________________ ________________________________________
Gentlemen:
It is our understanding that you (i) have committed to place a mortgage
upon the subject premises or, (ii) are a purchaser of the Project under an
agreement of purchase and sale, and, as a condition precedent thereof, have
required this certification by the undersigned.
The undersigned, as Tenant under that certain Lease dated _______________,
19 ____, made and entered into between ________________________________________,
as Landlord and the undersigned, as Tenant, hereby ratifies said Lease and
certifies that the undersigned has entered into occupancy of the premises
described in said Lease on _____________________________, 19 _______, and the
Minimum Rent in the monthly amount of $ ________________________________ was
payable from that date; that said Lease is in full force and effect and has not
been assigned, modified, supplemented or amended in any way (except by
agreement(s) dated _________________________________________); that the same
represents the entire agreement between the parties as to this leasing; that
the term of said Lease expires on ________________________, 19 ___________;
that all conditions under said Lease to be performed by Landlord have been
satisfied, all required contributions by Landlord to Tenant on account of
Tenant's improvements have been received , and on this date there are no
existing defenses or offsets which the undersigned has against the enforcement
of said Lease by Landlord; that rental has (has not) been paid in advance and
security in the sum of $ ___________________________________________ has been
deposited with Landlord; and that Minimum Rent for ___________________________,
19 _____, has been paid.
The undersigned agrees to advise you by collect telegram of any changes in
the above matters which may arise within forty-five (45) days immediately
following the date of this statement, and acknowledges that you may, for said
forty-five (45) day period, rely upon this statement in the absence of any such
notification.
Very truly yours,
_________________________________________
_________________________________________
TENANT
<PAGE> 1
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Heritage Commerce Corp
on Form S-1 of our report dated January 23, 1998, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 14, 1998
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Heritage Bank of Commerce:
We consent to the use of our report on the financial statements of Heritage
Bank of Commerce, as of December 31, 1996, and for each of the years in the
two-year period ended December 31, 1996, included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Mountain View, California
April 14, 1998
