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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-26081
SCRIPPS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0855985
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5787 Chesapeake Court, San Diego, CALIFORNIA 92123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 456-2265
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To be so Registered Each Class is to be Registered
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NONE NOT APPLICABLE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-X contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-K or any amendment to this Form 10-K. [ ]
As of March 23, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $ 48,250,000.
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Shares of Common Stock held by each officer and director and each person
owning more than five percent of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of the affiliate status is not necessarily a conclusive
determination for other purposes
The number of shares of Common Stock of the registrant outstanding as of
February 29, 2000, was 6,913,139.
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The following report contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "project" and "continue" or similar words. You should
read statements that contain these words carefully because they: (1) discuss
our future expectations; (2) contain projections of our future results of
operations or of our financial condition; or (3) state other
"forward-looking" information. We believe it is important to communicate our
expectations; however, there may be events in the future that we are not able
to predict accurately or over which we have no control. Our actual results
may differ materially from the expectations we describe in forward-looking
statements. Factors that could cause actual results to differ materially from
those we describe include, but are not limited to, local economic conditions
in Southern California and particularly in San Diego, the ability to manage
growth of Scripps Financial Corporation ("SFC") and Scripps Bank ("Scripps"),
business conditions and interest rate fluctuation, competition, a decline in
real estate prices, new product development, federal and state regulation.
Forward-looking statements below should be read in light of these factors.
PART I
ITEM 1. BUSINESS
GENERAL
SCRIPPS FINANCIAL CORPORATION. SFC is a California corporation, which was
formed in the spring of 1999 as a federally regulated bank holding company.
SFC acquired the stock of Scripps on June 30, 1999 in a transaction in which
all of the shareholders of Scripps became shareholders of SFC. At this time
Scripps became a wholly owned subsidiary of SFC. The transaction was
accounted for by SFC at historical cost in a manner comparable to a
pooling-of-interests. As a result of this accounting treatment, periods
presented in the financial statements of SFC from before its incorporation
include data for Scripps. Prior to the merger SFC had no operations and held
no assets other than the stock in the subsidiary used to effect the merger.
In the merger each shareholder of Scripps received a number of shares of SFC
equal to the number of shares such shareholder held in Scripps immediately
prior to the merger. They therefore received the same percentage interest in
SFC as they held in Scripps immediately prior to the merger. Currently, SFC
holds all of the stock of Scripps. Information regarding Scripps is set forth
below to provide a better understanding of the primary asset of SFC, which is
its ownership of Scripps.
SCRIPPS BANK. Scripps, a California banking corporation, is a federally
insured bank with its headquarters in Kearny Mesa and main office in La Jolla
and additional full-service offices in downtown San Diego, El Cajon,
Escondido, Kearny Mesa, Encinitas, Point Loma and Chula Vista. Scripps
commenced operations on January 16, 1984. Scripps is licensed and regulated
by the California Department of Financial Institutions ("DFI"), and its
deposits are insured up to the maximum legal limits by the FDIC.
OPERATIONS OF SFC
Management of SFC includes two officers. SFC has six directors.
SFC is committed to enhancing shareholder value by building a solid future
for its customers, employees and the communities it serves. It was formed as
a holding company for Scripps to provide regulatory flexibility, because bank
holding companies have certain business opportunities not available to
state-regulated banks.
BANKING SERVICES
Scripps targets businesses, professionals and individuals interested in
personalized relationship-oriented financial services in its geographical
markets of San Diego County currently comprising La Jolla, downtown San
Diego, El Cajon, Escondido, Kearny Mesa, Encinitas, Point Loma and Chula
Vista. The bank offers a broad range of banking products and services
including but not limited to:
- Business loans and lines of credit - includes secured and
unsecured loans to finance working capital, inventory and
accounts receivable, and term loans for the purchase of equipment.
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- Consumer loans and lines of credit - includes equity lines of credit,
home improvement loans, car loans and loans for investment purposes.
- Real estate construction loans - includes construction loans for
single family dwellings and small to medium size commercial and
multi-family buildings.
- Real estate mortgage loans - includes intermediate and long term
mortgage loans for commercial and residential property.
- Corporate lending - specializes in loans to larger companies and in
mortgage financing.
- SBA guaranteed lending - Scripps is designated as a Preferred lender
by the Small Business Administration (SBA) and offers commercial and
real estate SBA loans.
- Equipment leasing
- Residential lending brokerage services - specializes in brokerage
services for single family residences, condos and two to four unit
dwellings.
- International department services - provides collection services,
letters of credit and foreign exchange services.
- Cash management services for businesses - provides collection
services, letters of credit and foreign exchange services.
- Credit and debit cards through affiliated institutions
- Customized depository services, including demand, savings, money
market, money fund, certificates of deposit, US Savings Bonds and
individual retirement accounts
- On-line home banking with bill pay service - individuals have access
to their account information through their PC, along with the bill
payment option.
- Automated teller machines - Scripps has ATMs at each branch and
belongs to several networks that allow customers to obtain cash
throughout the world.
- 24 hour telephone banking - the "Any Time Line" provides access to
account balance and transaction information and allows funds transfer.
- Customer courier services - business customers have the option of
courier services to bring deposits to Scripps.
- Safe deposit boxes
- Property management banking is specifically designed to meet the
unique banking needs of property management companies and individual
Homeowners Association by offering a variety of services to include
Remittance Processing and specialized Depository and Loan services.
Scripps holds no patents, registered trademarks, licenses (other than
licenses obtained from regulatory agencies), franchises or concessions.
Scripps has not spent material amounts on research and development of new
products or services or improvements to existing products or services.
LENDING SERVICES
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COMMERCIAL
Loans in this category include loans to small and middle market businesses,
individuals and professionals located primarily in Scripps' market areas.
Scripps provides secured and unsecured loans and lines of credit for the
operation and expansion needs of businesses, including working capital lines
of credit inventory and accounts receivable financing and equipment
financing. Scripps typically looks to the cash flow generated by a borrower
as the principal source of repayment. Scripps may also take personal property
and/or a first or second deed of trust on real estate as an additional form
of collateral. This category of loans represents our most risky loans. While
the majority of these loans are collateralized by business assets, in a
troubled debt situation, which can arise from a variety of factors, the risk
of significantly diminished collateral value is high. To mitigate such risks,
management has established a process to segment the portfolio by industry
type in order to evaluate concentration risk. Also, in 1999 Scripps started a
credit department to provide consistent credit analysis, central review of
loan covenants and collateral tracking.
REAL ESTATE
Scripps makes intermediate and long-term real estate loans to homeowners and
other borrowers who have a defined repayment source. These loans generally
carry terms of three to thirty years with amortization schedules of up to 30
years. This category also includes interim construction loans for single
family dwellings, and small or medium size commercial and multi-family
buildings and lots to be developed. Scripps also makes longer-term real
estate loans on commercial properties in conjunction with the SBA guaranteed
lending program. The SBA guarantees second trust deed secured debentures,
which are junior liens to Scripps' loans, to enable business owners to
acquire commercial facilities for their businesses.
CONSUMER
Consumer loans are primarily automobile secured loans, home improvement
loans, and equity lines of credit, generally secured by second trust deeds on
personal residences, loans secured by various personal property and unsecured
lines of credit. Fixed rate consumer loans, which comprise approximately 33%
of the consumer portfolio, are generally made as amortizing loans over terms
in excess of one year. The variable rate portion of consumer loans are
primarily equity lines of credit secured by lien positions on real property
or unsecured revolving credit facilities to qualified individuals. This
category is more risky than real estate loans, due in large part to
industry-wide excessive availability of credit, an overall increase in the
consumers' appetite for debt, and the relative ease by which consumers can
discharge their obligations through bankruptcy.
LEASES
A major portion of Scripps' lease assets is comprised of leases for
electronic equipment, such as computers and data processing equipment. The
remaining balance of the lease portfolio includes leases on a variety of
other equipment.
CREDIT REVIEW
All loans are rated by an objective risk rating system, which is applied on a
regular basis. Any exceptions to underwriting standards are tracked in order
to identify trends. The credit review process was outsourced in early 1999.
This provides management and the Board of Directors with reports from an
unbiased third party on the status of loans. The bank maintains a Special
Asset Department, which actively monitors classified loans - those loans that
have deteriorated to the degree that there is a potential for loss. The
objective of this department is to identify the classified loans as soon as
possible, to protect or enhance the Bank's position, and ultimately to return
the loan to non-classified status or recognize it as a loss.
TRUST SERVICES AND INVESTMENT MANAGEMENT SERVICES
The Scripps Trust Department is committed to providing San Diego County with
high quality personalized trust and investment management services. The Trust
Department offers a full range of personal trust services to individuals,
including the administration of:
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- living trusts
- testamentary trusts
- custodial agencies
- investment agencies
- executorships
- conservatorships
All standard employee benefit trust services are available, including trust
administration and asset management. The Trust Department also assists
individuals who wish to establish an IRA rollover for qualified retirement
plan distributions.
The Trust Department strives to attain a personalized approach to trust
services by custom tailoring products and services to meet the customer's
needs. The Trust Department utilizes an independent registered investment
advisor to provide investment advice to the Trust Investment Committee in an
attempt to provide individualized asset management programs for each trust
account. The Trust Department also offers "no load" mutual funds for some
accounts to achieve proper diversification of assets.
Scripps has offered the ability to buy and sell stocks, bonds, and mutual
funds through the Scripps Trust Department since June 1999. These products
are not FDIC insured.
COMMITMENTS AND CONTINGENT LIABILITIES
In the course of normal business, SFC enters into various types of
transactions that include commitments to extend credit that are not reflected
on its statements of financial condition. SCF's exposure to loss under
commitments to extend credit is represented by the total amount of these
commitments. See "Notes to Consolidated financial statements."
COMPETITION
The banking business in California generally, and in the San Diego market
area specifically, is highly competitive with numerous competitors both
making loans and accepting deposits. The trust and investment management
services business in SFCs' market area is also highly competitive, with six
major banks and various credit unions and savings and loans serving the area.
SFC competes for loans, deposits and trust services with other commercial
banks, savings and loan associations, finance companies, money market funds,
credit unions, brokerage firms and other financial institutions, including a
number of institutions that have significantly greater financial resources
than SFC. SFC also competes for business with unregulated lenders. There has
been increased competition for deposit and loan business over the past
several years as a result of deregulation, and with the advent of interstate
banking, bank holding companies headquartered outside of California may also
enter the California market in greater numbers and provide further
competition for SFC. Many of the major commercial banks operating in SFC's
market area offer some services which SFC does not offer directly but can
provide through a correspondent bank or through a strategic alliance with a
financial service provider. Additionally, banks with larger capitalization
have larger lending limits and are thereby better able to serve the higher
dollar needs of larger customers. SFC intends to compete with such banks
through customer service orientation, active involvement of its board of
directors, management and employees in community affairs, and commitment to
the community. With nine branches, Scripps is the largest locally owned and
managed bank in San Diego County. Scripps holds 2.65% of the deposit market
share countywide.
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The regulatory climate became more favorable to large competitors in the
1990s. On September 29, 1994, President Clinton signed into law the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The Interstate Banking Act has various provisions
designed to facilitate the acquisition of banks and branching across state
borders. It allows the FRB to approve a bank holding company's application to
acquire control or substantial assets of a bank located outside the bank
holding company's home state, regardless of whether the acquisition would be
prohibited by state law. In addition, the Interstate Banking Act now permits
a bank in one state to merge with another bank in a different state. On
October 2, 1995, the California legislature adopted the Caldera, Weggeland,
and Killea California Interstate Banking and Branching Act of 1995 (the
"California Act"). The California Act expressly permits an out-of-state bank
to acquire an entire California bank by acquiring an entity through a merger
or purchase. Merely adding a branch or directly acquiring a branch in
California continues to be prohibited to out-of-state banks. Out-of-state
banks are permitted to affiliate with California institutions and may
establish facilities in California (such as loan production offices) under
conditions set forth in the California Act.
APPLICABLE REGULATIONS
Bank holding companies and financial institutions are extensively regulated
under federal and state law. As a result, the growth and earnings of SFC can
be affected by the regulations and policies of governmental regulatory
authorities in addition to management decisions and general economic
conditions. Several of the more significant regulations which apply to SFC
and Scripps are discussed below. When information in this report describes
statutory or regulatory provisions, it is qualified in its entirety to the
statutes or regulations.
SFC is subject to the periodic reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). As a result, SFC files annual,
quarterly and other current reports with the SEC and is subject to securities
regulations including rules regarding proxies. Directors, executive officers
and principal shareholders of more than 10% of SFC's common stock are also
subject to periodic reporting requirements. Both SFC and Scripps are subject
to the Internal Revenue Service and state taxing authorities.
SFC is a bank holding company under the Bank Holding Company Act of 1956, as
amended, so is required to file reports with the Federal Reserve Board. Prior
to March 13, 2000, a bank holding company generally was prohibited from
acquiring the beneficial ownership or control of more than 5% of the voting
shares or substantially all of the assets of any company, including a bank,
without the FRB's prior approval. Also, prior to March 13, 2000, a bank
holding company generally was limited to engaging in banking and activities
that the FRB had determined to be closely related to banking. Under the
Gramm-Leach-Bliley Act of 1999, beginning March 13, 2000 eligible bank
holding companies may elect to become financial holding companies, and
thereafter affiliate with securities firms and insurance companies and engage
other activities that are financial in nature. A bank holding company is
eligible to become a financial holding company if each of its subsidiary
banks and savings associations is well capitalized, is well managed, and has
a Community Reinvestment Act rating of satisfactory or better. SFC has not
yet determined whether it will elect to become a financial holding company.
Even if SFC were to elect to become a financial holding company, it would
continue to be required to comply with other bank holding company regulations
promulgated by the FRB.
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The FRB has by regulation determined certain activities in which holding
companies including SFC may or may not conduct business. As a holding company
SFC is currently prohibited from such activities as real estate brokerage and
syndication; real estate development; property management; underwriting of
life insurance not related to credit transactions; and, with certain
exceptions, securities underwriting and equity funding.
As a California state-chartered bank, Scripps is subject to primary
supervision, periodic examination and regulation by the California Department
of Financial Institutions and the FDIC. If, as a result of an examination of
a bank, the FDIC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of the bank's operations are unsatisfactory or that the bank or its
management is violating or has violated any law or regulation, various
remedies are available to FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase
in capital, to restrict the growth of the bank, to assess civil monetary
penalties, to remove officers and directors and ultimately to terminate a
bank's deposit insurance, which for a California state-charted bank would
result in a revocation of the bank's charter. The DFI has many of the same
remedial powers.
Scripps is insured by the FDIC, which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, each
bank pays a semi-annual statutory premium and is subject to the rules and
regulations of the FDIC. Although Scripps is not a member of the Federal
Reserve System, it is subject to certain regulations of the FRB.
CAPITAL ADEQUACY GUIDELINES
The FRB and the FDIC have issued guidelines to implement risk-based capital
requirements. The guidelines are intended to establish a systematic
analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations and
takes off-balance sheet items into account in assessing capital adequacy and
minimizes disincentives to holding liquid, low-risk assets. Under these
guidelines, assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to
one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain United States government securities, to 100% for
relatively high-risk assets, such as loans and investments in fixed assets,
premises and other real estate owned. The aggregate dollar amount of each
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of eight percent, of which at least four percent must
consist of Tier 1 capital. Higher risk-based ratios are required for an
insured depository institution to be considered well capitalized under the
prompt corrective action provisions of the FDIC Improvement Act. See "Federal
Deposit Insurance Corporation Improvement Act of 1991."
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A banking organization's qualifying total capital consists of two components:
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).
Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock (plus,
for bank holding companies, qualifying percentage of cumulative perpetual
preferred stock in an amount up to 25% of Tier 1 capital) and minority
interest in the equity accounts of consolidated subsidiaries. Intangibles,
such as goodwill, are generally deducted from Tier 1 capital; however,
purchased mortgage servicing rights and purchased credit card relationships
may be included, subject to certain limitations. At least 50% of banking
organization's total regulatory capital must consist of Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock (which for bank
holding companies must have an original maturity of 20 years or more) and
related surplus; (iii) hybrid capital instruments with characteristics of
both debt and equity), perpetual debt and mandatory convertible debt
securities; and (iv) eligible term subordinated debt and intermediate-term
preferred stock with an original maturity of five years or more, including
related surplus, in an amount up to 50% of Tier 1 capital. The inclusion of
the foregoing elements of Tier 2 capital are subject to certain requirements
and limitations of the Federal banking agencies.
The FRB and the FDIC also have adopted a minimum leverage ratio of Tier 1
capital to average total assets of three percent for institutions which have
been determined to be in the highest of five categories used by regulators to
rate financial institutions. This leverage ratio is only a minimum. All other
institutions are required to maintain leverage ratios of at least 100 to 200
basis points above the three percent minimum. Furthermore, higher leverage
ratios are required for an insured depository institution to be considered
well capitalized or adequately capitalized under the prompt corrective action
provisions of the FDIC Improvement Act. As of December 31, 1999, SFC's Tier 1
risk-based capital and total risk-based capital ratios were 10.18% and
11.35%, respectively.
The risk-based capital standards of the federal banking agencies take into
account concentrations of credit (relatively large proportions of loans
involving one borrower, industry, location, collateral or loan type) and the
risks of "non-traditional" activities (those that have not customarily been
part of the banking business). These regulations require institutions with
high or inordinate levels of risk to operate with higher minimum capital
standards, and authorize the regulators to review an institution's management
of such risks in assessing an institution's capital adequacy.
The federal banking agencies have also revised the risk-based capital
regulations to include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a bank's capital adequacy. Interest
rate risk is the exposure of a bank's current and future earnings and equity
capital arising from adverse movements in interest rates. While interest risk
is inherent to a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank.
The FRB also requires the maintenance of a leverage capital ratio designed to
supplement the risk-based capital guidelines. Banks and Bank Holding
Companies that have received the
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highest regulatory ratings must maintain Tier 1 leverage capital ratio of at
least 3.0%. All other institutions are required to maintain a leverage ratio
of at least 100 to 200 basis points above the 3.0% minimum, for a minimum of
4.0% to 5.0%. Pursuant to federal regulations, banks must maintain capital
levels commensurate with the level of risk to which they are exposed,
including the volume and severity of problem loans, and federal regulators
may, however, set higher capital requirements when a bank's particular
circumstances warrant. As of December 31, 1999 SFC's and Scripps' Tier 1
leverage capital ratios were 7.5% and 7.4%, respectively, exceeding
regulatory minimums. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Capital Resources."
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, the FDIC Improvement Act was enacted into law. This
legislation substantially revises the bank regulatory and funding provisions
of the Federal Deposit Insurance Act and makes revisions to several other
federal banking statutes. Set forth below is a brief discussion of certain
portions of this law and implementing regulations that have been adopted by
the FRB, the Office of the Comptroller of the Currency, the Office of Thrift
Supervision and the FDIC (collectively, the "Federal banking agencies").
- - - IMPROVED EXAMINATIONS. All insured depository institutions must undergo a
full-scope, on-site examination by their primary Federal banking agency at
least once every 12 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate Federal
banking agency against each institution or affiliate as it deems necessary
or appropriate.
- - - STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDIC Improvement Act,
the Federal banking agencies have issued safety and soundness standards and
guidelines on matters such as loan underwriting and documentation, asset
quality and growth, earnings, internal controls, information and audit
systems, interest rate risk exposure and compensation and other employee
benefits. The Federal banking agencies have also issued final regulations
prescribing uniform guidelines for real estate lending, which require
insured depository institutions to adopt written policies establishing
standards, consistent with such guidelines, for extensions of credit
secured by real estate. The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not
exceed the supervisory limits prescribed by the regulations.
- - - PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires each
Federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios. The purpose of this law is to resolve
the problems of insured depository institutions at the least possible
long-term cost to the appropriate deposit insurance fund.
The law requires each Federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital
requirements), adequately capitalized (meeting the required capital
requirements), undercapitalized (failing to meet one or more of the capital
requirements), significantly
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undercapitalized (significantly below one or more capital requirements) and
critically undercapitalized (failing to meet all capital requirements).
In September, 1992, the Federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution
will be deemed to be:
- "Well capitalized" if it (i) has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of six percent or greater and
a leverage ratio of five percent or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure;
- "Adequately capitalized" if it has a total risk-based capital ratio
of eight percent or greater, a Tier 1 risk based capital ratio of four percent
or greater and a leverage ratio of four percent or greater (or a leverage ratio
of three percent or greater if the institution is rated composite 1 under the
applicable regulatory rating system in its most recent report of examination);
- "Undercapitalized" if it has a total risk-based capital ratio that is
less than eight percent, a Tier 1 risk-based capital ratio that is less than
four percent or a leverage ratio that is less than four percent; and
- "Significantly undercapitalized" if it has a total risk-based capital
ratio that is less than six percent, a Tier 1 risk-based capital ratio that is
less than three percent or a leverage ratio that is less than three percent; and
- "Critically capitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than two percent.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified
to the next lower capital category if the appropriate Federal banking agency,
after notice and opportunity for hearing, (i) determines that the institution
is in an unsafe or unsound condition or (ii) deems the institution to be
engaging in an unsafe or unsound practice and not to have corrected the
deficiency. At each successive lower capital category, an insured depository
institution is subject to more restrictions and federal banking agencies are
given less flexibility in deciding how to deal with such institution.
The law prohibits insured depository institutions from paying management fees
to any controlling persons or; with certain limited exceptions, making
capital distributions, including dividends, if after such transaction the
institution would be undercapitalized. If an insured depository institution
is undercapitalized, it will be closely monitored by the appropriate Federal
banking agency, subject to asset growth restrictions, and required to obtain
prior regulatory approval for acquisitions, branching and engaging in new
lines of business. Any undercapitalized depository institution must submit an
acceptable capital restoration plan to the appropriate Federal banking agency
45 days after becoming undercapitalized. The appropriate Federal banking
agency cannot accept a capital plan unless, among other things, it determines
that the plan (i) specifies the steps the institution will take to become
adequately capitalized, (ii) is based on realistic assumptions and (iii) is
likely to succeed in restoring the depository
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institution's capital. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution
will comply with the capital plan until the depository institution has been
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the
lesser of (a) an amount equal to five percent of the depository institution's
total assets at the time the institution became undercapitalized and (b) the
amount which is necessary to bring the institution into compliance with all
capital standards applicable to such institutions as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate Federal banking agency may impose on any undercapitalized
depository institution any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the prompt corrective action
provisions.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized and requirements to reduce the
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
OTHER REQUIREMENTS OF THE FDIC IMPROVEMENT ACT
The FDIC Improvement Act also, among other things, (i) limits the percentage
of interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires
the FDIC to charge insurance premiums based on the risk profile of each
institution; (iii) eliminates "pass-through" deposit insurance for certain
employee benefit accounts unless the depository institution is well
capitalized or, under certain circumstances, adequately capitalized; (iv)
prohibits insured state-chartered banks from engaging as principal in any
type of activity that is not permissible for a national bank unless the FDIC
permits such activity and the bank meets all of its regulatory capital
requirements; (v) directs the appropriate Federal banking agency to determine
the amount of readily marketable purchased mortgage servicing rights that may
be included in calculating such institution's tangible, core and risk-based
capital; and (vi) provides that, subject to certain limitations, any Federal
savings association may acquire or be acquired by any insured depository
institution.
The FDIC has also issued final regulations which prohibit, subject to certain
specified exceptions, insured state-chartered banks from engaging as
principal in any activity not permitted of a national bank, without FDIC
approval. The regulations also provide that, subject to certain specified
exceptions, subsidiaries of insured state-charted banks may not engage as
principal in any activity that is not permitted of a subsidiary of a national
bank, without FDIC approval.
The impact of the FDIC Improvement Act on Scripps is uncertain. Certain
provisions may affect the way in which Scripps conducts its business, and
other provisions, such as those relating to the establishment of the
risk-based premium system and the limitations on pass-through insurance may
affect its results of operations. Furthermore, the actual and potential
restrictions and sanctions that apply to or may be imposed on
undercapitalized institutions under the prompt corrective action and other
provisions of the FDIC Improvement Act may significantly affect the
12
<PAGE>
operations and liquidity of Scripps, the value of SFC Common Stock and its
ability to raise funds in the financial markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Community Reinvestment Act ("CRA") requires banks, as well as other
lenders, 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. The CRA also requires the FDIC to assess the performance of a
bank 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 CRA rating may be the basis for denying
such an application.
Scripps is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and CRA activities. In
addition to substantive penalties and corrective measures that may be
required for a violation of certain fair lending laws, the Federal banking
agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In 1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that Federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment, and evidence of
disparate impact.
In connection with its assessment of CRA performance, the FDIC assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." The FDIC conducts examinations of a bank's CRA performance,
among other matters, approximately every two years. Based on a CRA and
consumer compliance examination conducted during November 1999, Scripps was
rated "satisfactory." There can be no assurance that Scripps will retain this
rating.
FEDERAL RESERVE SYSTEM
The FRB requires banks to maintain noninterest-earning reserves against
certain of their transactional accounts (primarily deposit accounts that may
be accessed by writing checks) and non-personal time deposits.
As a creditor and a financial institution, Scripps is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation
B (Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (inter bank liabilities),
Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act), and Regulation DD (Truth in Savings Act). As creditors on
loans secured by real property and as owners of real property, financial
institutions, including Scripps, may be subject to potential liability under
various statutes and regulations applicable to property owners, generally
including statutes and regulations relating to the environmental condition of
the property.
13
<PAGE>
Other state and federal statutes and regulations apply to many aspects of the
operations of SFC and Scripps, including requirements to maintain reserves
against deposits and meet capital requirements, and regulation of interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends and locations of branch offices. 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 intermediaries.
Proposals to change the laws and regulations governing the operations and
taxation of banks, bank holding companies and other financial intermediaries
are frequently made in Congress, in the California legislature and before
various bank regulatory and other professional agencies. The likelihood of
any major changes and the impact such changes might have on SFC and Scripps
are impossible to predict.
EMPLOYEES
14
<PAGE>
As of December 31, 1999, Scripps had a full time equivalent staff of 275
persons on a full-time and part-time basis. SFC had no employees.
ITEM 2. PROPERTIES.
SFC and Scripps together have 14 locations, nine of which are branch offices
of Scripps. Another location, in Carmel Valley, will open in Fall 2000. In
February 2000 SFC relocated its SFC and Scripps corporate headquarters to
5787 Chesapeake Court, San Diego, California, 92123, from Ivanhoe Avenue in
La Jolla.
Scripps' main office branch is located at 7733 Girard, La Jolla, California,
92037. Scripps has sub-leased major portions of the former corporate
headquarters in La Jolla and offsets rent expense with the income from the
sub-leases. Scripps plans on sub-leasing the second floor of the Carmel
Valley property, while retaining the first floor for a branch.
The following table sets forth-certain information regarding SFC and Scripps
property, net of accumulated depreciation, at December 31, 1999:
15
<PAGE>
<TABLE>
<CAPTION>
SQUARE DATE NET BOOK VALUE OF
FEET LOCATION OPENED PREMISES & EQUIPMENT
------ -------- ------ --------------------
<S> <C> <C> <C>
7,000 South Bay Regional Office 1984 $ 196,000
20,200 Corporate Headquarters (former), La Jolla 1984 357,000
-- Trust Department, La Jolla 1990 175,000
5,500 East County Regional Office, El Cajon 1992 195,000
5,400 San Diego Regional Office, Downtown San Diego 1993 184,000
5,600 North County Coastal Regional Office, Escondido 1994 142,000
9,300 Service Center 1995 1,638,000
6,700 Chula Vista Center City Office 1995 331,000
5,200 Kearny Mesa Regional and Corporate Lending 1997 448,000
4,800 Encinitas Regional Office 1997 572,000
4,100 Point Loma Regional Office 1997 227,000
6,900 Girard Office, La Jolla main office 1999 1,478,000
1,300 Rancho Bernardo Center 1999 69,000
23,000 Corporate Headquarters (current), San Diego 2000 0
29,000 Carmel Valley Office To Open 0
Fall 2000
TOTAL $6,012,000
</TABLE>
The SFC and Scripps facilities are held under lease agreements that expire at
various times from 2001 through 2026. The lease agreements have option
periods to extend their terms at rates equivalent to the then market rates.
Annual minimum lease commitments for SFC and Scripps together approximate
$2.1 million on average through the year 2004.
ITEM 3. LEGAL PROCEEDINGS.
No litigation against SFC is known by its board of directors to be pending or
threatened. Scripps is at times subject to pending and threatened legal
actions that arise out of the normal course of business. Management, after
reviewing all actions and proceedings pending against SFC and Scripps,
considers that the ultimate disposition of pending or threatened litigation
will not have a material effect on the financial condition or results of
operations of SFC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
SFC COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
In October 1999 SFC listed its common stock on the American Stock Exchange
(AMEX). Between this listing and July 1, 1999, SFC Common Stock was traded on
the over-the-counter bulletin board. Before July 1, 1999, Scripps common
stock was listed on the over-the-counter bulletin board.
Scripps is the sole subsidiary of SFC. As a state-chartered bank, the ability
of Scripps to pay dividends or make distributions to SFC is subject to
restrictions set forth in the California Financial Code. The California
Financial Code provides that neither a bank nor any majority-owned subsidiary
of a bank may make a distribution to its shareholders in an amount which
exceeds the lesser of (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 or by any majority-owned subsidiary of the
bank to the shareholders of the bank during such period. However, a bank or a
majority-owned subsidiary of a bank may, with the prior approval of the
Commissioner of the DFI, make a distribution to the shareholders of the bank
in an amount not exceeding the greatest of (i) the bank's retained earnings,
(ii) the bank's
16
<PAGE>
net income for its last fiscal year, or (iii) the bank's net income for its
current fiscal year. In the event that the Commissioner of the DFI determines
that the stockholders' 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
the bank to refrain from making a proposed distribution. As of December 31,
1999 Scripps had approximately $11.6 million legally available for the
payment of dividends. SFC paid semi-annual cash dividends to its shareholders
for a total of $.12 per share and $.16 per share in 1999 and 1998,
respectively. In 1999 the first payment was declared by Scripps and the
second payment by SFC. SFC will depend on dividends from its subsidiaries for
operating funds and to provide dividends to its shareholders. Payment of
future dividends by SFC will be subject to the discretion of the SFC Board of
Directors and will depend upon available revenue, its financial condition,
its capital requirements, its need for funds, applicable governmental
policies and regulations and such other matters, as the Board deems
appropriate. At present, SFC desires to continue paying cash dividends on a
periodic basis comparable to the historical levels paid by Scripps, which has
been semi-annual payments ranging from 13% to 18% of net income. However, the
ability of SFC to make such payments and the rate at which such payments may
be made is not assured and will depend on the factors discussed above.
The price information contained in the following table sets forth the high
and low closing prices per share of SFC or Scripps Common Stock as reported
by the composite closing price table published by the Bloomberg Financial
Markets Service. The high and low bid prices of SFC and Scripps Common Stock
do not include retail markups, markdowns or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
First Quarter 21.38 17.38
Second Quarter 20.50 17.00
Third Quarter 20.38 16.63
Fourth Quarter 17.50 15.25
1999
First Quarter 17.25 14.75
Second Quarter 15.50 14.00
Third Quarter* 16.00 13.63
Fourth Quarter* 16.38 13.50
</TABLE>
*SFC common stock
On March 22, 2000, the last sales price of the SFC Common Stock, according to
the composite closing price table published by the Bloomberg Financial
Markets Service was $12.125 per share. There were approximately 449 holders
of Common Stock of SFC as of March 22, 2000.
SALES OF UNREGISTERED SECURITIES.
No unregistered securities have been issued by SFC since its formation.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA OF SFC
(Dollar amounts in thousands, except per share data)
The selected consolidated financial data presented below as of and for the
years ended December 31, 1999, 1998, 1997, 1996 and 1995 have been derived
from the consolidated financial statements of SFC audited by
PricewaterhouseCoopers, LLP. In the opinion of SFC management, the unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
necessary for a fair presentation of the financial position and the results
of operations for these periods, the most recent three years of which are
included in this filing. The data below should be read in conjunction with
the audited consolidated financial statements and notes there to, and with
management's discussion and analysis included in this report.
17
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income $ 32,839 $ 28,396 $ 23,218 $ 18,099 $ 15,958
Provision for loan losses (7,230) (1,805) (1,452) (922) (1,263)
Noninterest income 5,624 6,095 5,390 4,230 3,554
Noninterest expense (24,014) (22,823) (20,168) (15,746) (13,792)
Provision for income taxes (2,790) (3,995) (2,758) (2,259) (1,835)
---------- ---------- ---------- ---------- ----------
Net income $ 4,429 $ 5,868 $ 4,230 $ 3,402 $ 2,622
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER COMMON SHARE DATA: (1)
Net income (basic) $ 0.64 $ 0.87 $ 0.63 $ 0.56 $ 0.52
Net income (diluted) 0.63 0.84 0.61 0.55 0.52
Cash dividends declared 0.12 0.16 0.34 0.31 0.36
Period-end book value 6.56 6.44 5.66 5.12 4.11
SHARES OUTSTANDING:
Weighted average common
shares outstanding (basic) 6,879,000 6,754,000 6,726,000 6,026,000 5,064,000
Weighted average common
shares outstanding (diluted) 6,991,000 6,974,000 6,987,000 6,213,000 5,090,000
Common shares outstanding at period end 6,909,000 6,797,000 6,708,000 6,772,000 5,570,000
AVERAGE FINANCIAL CONDITION DATA: (2)(3)
Investment securities (4) $ 151,467 $ 127,003 $ 99,318 $ 86,899 $ 55,319
Loans 365,105 307,061 243,895 183,176 161,083
Assets 588,058 508,871 404,605 324,825 263,732
Deposits 537,820 463,829 364,927 293,795 240,661
Shareholders' equity 46,005 41,095 36,117 28,542 20,930
ASSET QUALITY RATIOS: (2)
Net charge-offs to average loans 1.80% 0.22% 0.27% 0.36% 0.56%
Nonperforming loans to total
Loans (5) (10) 1.09% 0.40% 0.35% 0.62% 2.09%
Nonperforming assets to total
Assets (10) 0.68% 0.23% 0.31% 0.50% 1.20%
Allowance for loan losses to total
Loans (10) 1.36% 1.40% 1.28% 1.32% 1.58%
Allowance for loan losses to
Nonperforming loans (10) 125.25% 352.07% 368.29% 213.31% 75.56%
PERFORMANCE RATIOS: (2)
Return on average assets 0.75% 1.15% 1.05% 1.05% 0.99%
Return on average equity 9.63% 14.28% 11.71% 11.92% 12.53%
Equity to assets 7.82% 8.08% 8.93% 8.79% 7.94%
Dividend payout 18.64% 18.57% 53.99% 54.65% 69.80%
Net interest margin (6) 6.03% 6.02% 6.31% 6.16% 6.67%
Efficiency ratio (7) 62.35% 66.12% 70.36% 70.32% 70.49%
REGULATORY CAPITAL RATIOS: (8) (10)
Leverage ratio (9) 7.54% 7.63% 8.30% 9.63% 7.83%
Tier 1 risk-based capital 10.18% 10.19% 11.10% 13.93% 16.21%
Total risk-based capital 11.35% 11.32% 12.20% 15.08% 17.24%
</TABLE>
(1) Per share data have been retroactively adjusted to reflect a 10% stock
dividend in 1996, a 10% stock dividend in 1997 and a two for one split in
1997 for all periods presented.
(2) Amounts have not been derived from SFC's consolidated financial statements
but were compiled separately by management.
(3) Average balance sheet data has been derived from quarterly balances for
1995, otherwise from year-to-date daily balances.
(4) Amounts are derived from average balances based upon market value.
18
<PAGE>
(5) Nonperforming loans represent nonaccrual loans and loans still accruing
interest and contractually past due 90 days or more.
(6) Net interest income divided by average interest-earning assets.
(7) Efficiency ratio is defined as the ratio of noninterest expenses, less cost
related to real estate owned, to the sum of net interest income and
noninterest income exclusive of securities gains/(losses).
(8) Computed in accordance with 1992 Federal guidelines, which were initially
effective January 1, 1990.
(9) Leverage ratio is defined as the ratio of Tier 1 capital to average assets
for the most recent quarter.
(10) Data is as of period end.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
SFC, with $632 million in total assets at December 31, 1999, derives
substantially all of its revenues and income by providing a full range of
commercial banking, consumer banking and trust services primarily to small
and middle market businesses and individuals in San Diego County, California.
The revenues of SFC are derived principally from interest earned on loans and
investment securities, from trust and residential lending service fees, and
from other loan and deposit account-related fees and service charges. The
operations of SFC are influenced significantly by general economic conditions
and by policies of its primary regulators, FRB, and for Scripps DFI and FDIC.
Return on average equity ("ROE") is determined by dividing annual net income
by average shareholders' equity and indicates the effectiveness of an
institution in generating net income from the capital invested by its
shareholders. For the year ended December 31, 1999, SFCs' ROE was 10%
compared to 14% for 1998 and 12% for 1997. Return on average assets ("ROA")
measures net income in relation to total average assets and generally
indicates an institution's ability to use its assets profitably. For the year
ended December 31, 1999, SFCs' ROA was 0.8% compared to 1.2% for 1998 and
1.1% for 1997. ROE for 1999 decreased by 0.4% from 1998 primarily as a result
of the need to replenish the reserve for loan losses due to net charge-offs
of $6.6 million. $6.4 million of the charge-offs were from two loans and are
considered by management to be non-recurring in nature. In 1998 PCB merged
with and into Scripps, resulting in two new offices for Scripps. Management
believes the continued growth of market share in existing and new markets,
enhanced internal efficiency, the continued resolution of its nonperforming
assets, and a general economic recovery of Southern California will have a
positive effect upon future operations, although there can be no assurance
these developments will occur. There are many factors that could adversely
affect the future operations of SFC, including any decline in the San Diego
County economy at a time when SFC is incurring costs of expansion.
INSTITUTIONAL GROWTH
Scripps began to experience significant growth in 1995 as the local economy
improved and following the failure or merger of several larger San Diego
headquartered financial institutions. The decision was made to increase the
bank's capital and to take advantage of the opportunity to increase market
share. Prior to 1996, the bank had established offices in La Jolla, El Cajon,
downtown San Diego and Escondido. In 1996, the bank obtained an additional
$9.5 million through the sale of Scripps Common Stock and received regulatory
approval to open three new offices in Kearny Mesa, Encinitas and Point Loma.
Those offices were opened during 1997, and all have experienced satisfactory
growth in loans and deposits. In 1998 Scripps expanded into Chula Vista and
the South Bay area of San Diego County, adding two offices, through its
merger with PCB.
SFC's long term plan includes establishing a total of eleven to thirteen
Scripps offices strategically located throughout San Diego County. Through
the merger of PCB and Scripps, the resulting institution has nine branches
serving much of San Diego County. Although there can be no assurances that it
will prove to be correct, SFC's management believes that significant growth
and market opportunity will occur in the near future in the South Bay area,
and that it is therefore very important for the bank to be represented in
that area. It is anticipated that in the future, one or two additional
offices may be opened in North County, and possibly one additional office in
East County.
Growth has and will enable SFC to expand its deposit gathering and loan
delivery systems geographically within San Diego County. Increases in average
interest-earning assets and average interest-bearing liabilities contributed
to increases in total interest income interest expense and net interest
income. Expansion has
19
<PAGE>
also contributed to the gathering of additional noninterest-bearing deposits,
which effectively lowers SFC's internal cost of funds and increases net
interest income. Growth has also caused, and can be expected to continue to
cause, increases in noninterest expense.
SFC's growth during the period from 1994 through the end of 1999 facilitated
increases in earnings per share. In 1999 income per share decreased due to
loan charge-offs as noted above. As SFC's growth continues and as noninterest
expense continues to rise, income per share may decline. SFC believes that
even if additional investment in growth comes at the cost of lower income per
share for several quarters, SFC's profitability will be enhanced over the
long term, although there can be no assurance that this will in fact be the
case.
ANNUAL COMPARISON
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
results of operations and the financial condition of SFC. This discussion and
analysis should be read in conjunction with SFC's audited consolidated
financial statements, including notes thereto, located elsewhere in this
report.
NET EARNINGS
Net earnings were $4 million ($.64 per share basic; $.63 per share diluted)
for the year ended December 31, 1999, compared with $6 million ($.87 per
share basic; $.84 per share diluted) for 1998, a decrease of $2 million or
25%. Net earnings for 1998 reflect an increase of $2 million or 39% over net
earnings of $4 million ($.63 per share basic; $.61 per share diluted) for the
year ended December 31, 1997. SFC's decrease in earnings between 1999 and
1998 resulted primarily from the charge-offs noted above. The charge-offs
were partially offset by earnings from an increase in average
interest-earning assets, primarily in loans and investment securities. SFC's
improved performance between 1998 and 1997 was primarily due to an increase
in average interest-earning assets, primarily in loans and investment
securities. The higher levels of net interest income in 1998 and 1997 were
partially offset by the costs and additional salary expense associated with
the Scripps-PCB merger in 1998.
NET INTEREST INCOME
Net interest income, which constitutes one of the principal sources of income
for SFC, represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The net yield on total interest-earning assets, also referred to as interest
rate margin or net interest margin, represents net interest income divided by
average interest-earning assets. SFC's principal interest-earning assets are
loans, investment securities and Federal funds sold, while its principal
interest-bearing liabilities are interest-bearing demand accounts, savings
deposits and time deposits.
Net interest income was $33 million for fiscal 1999, an increase of $5
million or 16% compared with net interest income of $28 million for 1998,
which represented an increase of $5 million or 22% compared to net interest
income of $23 million for 1997. Comparing 1999 to 1998, SFC's average
interest-earning assets increased to $545 million in 1999 from $472 million
in 1998, representing an increase of 15% which resulted from increases in all
interest-earning asset categories but primarily in loans (19%) and
investments (19%). Average interest-bearing deposits increased to $372
million in 1999 from $328 million in 1998, representing an increase of 14%,
while average noninterest-bearing demand deposits also increased $30 million
or 22%. The net interest margin of 6.03% for 1999 reflects an increase of 1
basis point from that of 1998. This increase in net interest margin resulted
primarily from average interest-earning asset growth out pacing average
interest-bearing deposits, and the effective interest rate paid on deposits
was significantly lower than 1998. This increase was partially offset by both
the decrease in the prime rate from an average of 8.3% in 1998 to 8.0% in
1999 (since a majority of Scripps' loans are tied to the prime rate, a
decrease in the rate immediately affects net interest income) and continued
competitive pressure in pricing loans. Comparing 1998 to 1997, SFC's average
interest-earning assets increased to $472 million in 1998 from $368 million
in 1997, representing an increase of 29% which resulted from increases in all
interest-earning asset categories. Average interest-bearing deposits
increased to $328 million in 1998 from $258 million in 1997, representing an
increase of 27%, while average noninterest-bearing demand deposits also
increased $29 million or 27%. The net interest margin of 6.02% for 1998
reflects a decrease of 29 basis points from that of 1997.
20
<PAGE>
This decrease in net interest margin resulted primarily from both the
decrease in the prime rate from an average of 8.4% in 1997 to 8.3% in 1998,
and competitive loan pricing.
SFC's net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as a
"volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities,
referred to as a "rate change." The following table sets forth the categories
of interest-earning assets and interest-bearing liabilities, the average
amounts outstanding, the interest earned or paid on such amounts, and the
average rate earned or paid for the periods indicated. The table also sets
forth the average rate earned on all interest-earning assets, the average
rate paid on all interest-bearing liabilities, and the net yields earned by
SFC for the same periods.
21
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
----------------------------- ----------------------------- ----------------------------
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans, net (1) $365,105 $36,230 9.92% $307,061 $32,151 10.47% $243,895 $26,214 10.75%
Investment securities 153,651 8,732 5.68% 132,740 7,830 5.90% 104,335 6,372 6.11%
Federal funds 25,945 1,309 5.05% 31,982 1,730 5.41% 19,851 1,085 5.47%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 544,701 46,271 8.49% 471,783 41,711 8.84% 368,081 33,671 9.15%
Other assets 43,357 37,088 36,524
-------- -------- --------
Total assets $588,058 $508,871 $404,605
-------- -------- --------
-------- -------- --------
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand deposits $251,443 $ 8,434 3.35% $219,223 $ 8,387 3.83% $164,110 $ 6,155 3.75%
Savings deposits 26,525 622 2.34% 24,596 623 2.53% 22,768 594 2.61%
Time deposits 94,163 4,331 4.60% 84,056 4,305 5.12% 70,936 3,705 5.22%
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 372,131 13,387 3.60% 327,875 13,315 4.06% 257,814 10,454 4.05%
Other borrowed money 382 45 11.78% 0 0 0.00% 0 0 0.00%
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits 165,689 135,954 107,113
Other liabilities 3,840 3,947 3,449
Stockholders' equity 46,016 41,095 36,229
-------- -------- --------
Total liabilities and
Stockholders' equity $588,058 $508,871 $404,605
-------- -------- --------
-------- -------- --------
Net interest income $32,839 $28,396 $23,217
------- ------- -------
------- ------- -------
Net interest spread (2) 4.90% 4.78% 5.09%
Net interest margin (3) 6.03% 6.02% 6.31%
</TABLE>
- - ---------------------
(1) Nonaccrual loans are included in the average balances used in this table.
(2) Net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
The following table illustrates the changes in Scripps' net interest income
due to changes in volume (change in volume multiplied by initial rate) and
changes in interest rate (change in rate multiplied by initial volume) for
the periods indicated. Changes attributable to the combined effect of volume
and interest rate have been allocated proportionately to the changes in
volume and the changes in interest rate.
22
<PAGE>
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
1999 1998
COMPARED WITH COMPARED WITH
1998 1997
-------------------------------------- -------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
VOLUME RATE CHANGES VOLUME RATE CHANGES
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans, net (1) $ 5,638 $ (1,559) $ 4,079 $ 6,595 $ (658) $ 5,937
Investment securities 1,175 (272) 903 1,667 (209) 1,458
Federal funds (310) (111) (421) 656 (11) 645
-------- -------- ------- -------- -------- -------
Total interest income 6,503 (1,942) 4,561 8,918 (878) 8,040
-------- -------- ------- -------- -------- -------
Interest paid on:
Interest-bearing demand
Deposits 291 (244) 47 2,106 126 2,232
Savings deposits (19) 18 (1) 46 (17) 29
Time deposits 171 (145) 26 670 (70) 600
-------- -------- ------- -------- -------- -------
Total deposit interest
expense 443 (371) 72 2,822 39 2,861
Other borrowed money 45 0 45 0 0 0
-------- -------- ------- -------- -------- -------
Total interest expense 488 (371) 117 2,822 39 2,861
-------- -------- ------- -------- -------- -------
Net interest income $ 6,015 $ (1,571) $ 4,444 $ 6,096 $ (917) $ 5,179
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
</TABLE>
(1) Nonaccrual loans are included in the average balances used in calculating
this table.
PROVISION FOR LOAN LOSSES
Provisions for loan losses are charged to earnings to bring the total reserve
for loan losses to a level deemed appropriate by management based upon such
factors as historical loss experience, the volume and type of lending
conducted by Scripps, the amounts of classified and nonperforming assets,
regulatory policies and examination results, concentrations, general economic
and business conditions, credit quality trends, and other factors related to
the collectability of loans in Scripps' portfolio. The provision for loan
losses was $7.2 million for 1999, an increase of $5.4 million or 301%
compared to the provision for loan losses of $1.8 million for 1998, which in
turn represented an increase of $0.3 million or 24% compared to the provision
for loan losses of $1.5 million for 1997.
The increase in the provision for 1999 reflects the following: Scripps
charged-off two large loans in 1999 totalling $6.4 million, average loans
increased 19% over the prior year and non-accrual loans increased 128% for
the same period. Factors influencing the 1998 provision include the 26%
increase in average loans over the prior year and the increase of 39% in
non-accrual loans for the same period.
NONINTEREST INCOME
Noninterest income was $6 million for the year ended December 31, 1999,
unchanged compared with noninterest income of $6 million for 1998, which
represented an increase of $1 million or 13% compared with noninterest income
of $5 million for 1997. In 1999 trust income increased by 18%, but was offset
by a decrease in service charge and other income. The primary reasons for the
increase in noninterest income over the years presented are growth in trust
assets under administration of 20% to $804 million over the two year period
ended December 31,
23
<PAGE>
1999 and growth in deposits of 38% to $582 million over the two year period
ended December 31, 1999. There continues to be high levels of competition in
the deposit services and trust services arena.
The following table sets forth the various categories of noninterest income.
<TABLE>
<CAPTION>
NONINTEREST INCOME DATA
(Dollars in thousands)
YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1999 % CHANGE 1998 % CHANGE 1997
------ ---------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Customer service charges $1,955 -14% $2,269 24% $1,833
Trust fees 2,528 18% 2,140 15% 1,862
Gain on sale of securities 0 0% 0 -100% 44
Other non-interest income 284 -27% 387 45% 222
Other fees 857 -34% 1,299 -9% 1,429
------ ---------- ------ -------- ------
Total $5,624 -8% $6,095 13% $5,390
------ ------ ------
------ ------ ------
</TABLE>
NONINTEREST EXPENSE
Noninterest expense was $24 million for 1999, an increase of $1 million or 5%
compared with noninterest expense of $23 million for 1998, and an increase of
$3 million or 13% compared with noninterest expense of $20 million for 1997.
Personnel expense was $13.5 million for 1999, an increase of $1.5 million or
12% compared with personnel expense of $12 million for 1998, and an increase
of $1 million or 10% compared with personnel expense of $11 million for 1997.
Occupancy expense was $2.7 million for 1999, an increase of $0.2 million or
6% compared with occupancy expense of $2.5 million for 1998, and an increase
of $0.4 million or 15% compared with occupancy expense of $2.1 million for
1997. The aggregate increases over the three-year period principally reflect
the additional costs associated with opening new locations as part of SFC's
long-term growth strategy. In 1998, noninterest expense included expenses
associated with the Scripps-PCB merger.
Data processing expense was $0.2 million for 1999, a decrease of $0.6 million
or 72% compared with data processing expense of $0.8 million for 1998, an
increase of $0.2 million or 23% compared with data processing expense of $0.6
million for 1997. The decrease in data processing expense resulted
principally from the in house servicing of the acquired PCB offices along
with enhanced technical functionality from equipment acquired in 1998. The
increase over the prior two-year period resulted principally from the
increase in volumes processed due to loan and deposit growth, offset in part
by enhanced technical functionality from equipment acquired in 1996.
The following table sets forth the amount of each of the various categories
of noninterest expense for the periods indicated.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE DATA
(Dollars in thousands)
YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1999 % CHANGE 1998 % CHANGE 1997
------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $13,460 12% $12,023 10% $10,884
Occupancy and equipment 2,689 6% 2,528 15% 2,190
Data processing 210 -72% 756 23% 615
Depreciation and amortization 1,483 24% 1,200 4% 1,156
Other real estate owned 31 63% 19 -51% 39
Professional services 1,463 -29% 2,052 39% 1,472
Other general and administrative 4,678 10% 4,245 11% 3,812
------- ---------- ------- -------- -------
Total $24,014 5% $22,823 13% $20,168
------- ------- -------
------- ------- -------
</TABLE>
24
<PAGE>
INCOME TAXES
The provision for income taxes was $3 million, $4 million and $3 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Effective tax
rates, the percentage of earnings set aside for federal and state income
taxes were 39%, 41% and 39% for the years ended December 31, 1999, 1998 and
1997, respectively. The decrease in effective rate reflects higher levels of
tax exempt income in 1999, as compared to 1998, while 1998 experienced a rise
in the effective rate due to lower levels of tax-exempt income over 1997.
LOANS AND ASSET QUALITY
Net loans (gross loans less unearned income and reserve for loan losses) were
$392 million at December 31, 1999, an increase of $56 million or 17% from
loans of $336 million at December 31, 1998. This increase followed loan
growth of $56 million or 20% from loans of $280 million at December 31, 1997.
This increase was preceded by an increase of $68 million or 32% from loans of
$212 million at the end of 1996. The rate of loan growth for these periods
increased due to an overall improvement in the Southern California economy as
well as Scripps' positive reputation in the community to provide quality
service and products. Management expects loan growth to be moderate in 2000
assuming that the economy will remain strong, but that the overall
competition for loans will be a factor to contend with. If the economy
weakens or competition increases, loan growth may be less than expected.
Scripps' lending activities are guided by the basic lending policy
established by its Board of Directors. The Scripps Board of Directors has
established loan approval limits for the officers of Scripps. Under
regulations governing California state-chartered banks, Scripps may lend up
to 15% of its total capital on an unsecured basis and 25% of its total
capital on a secured basis to any one borrower, up to a limit of 25% of total
capital for all direct and indirect loans to any one borrower. Additionally,
loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities or resident in the same geographic region,
which would cause them to be similarly affected by economic or other
conditions. Scripps, on a regular and periodic basis, evaluates these
concentrations for the purposes of making corrections in its lending
practices in consideration of economic conditions, industry trends and a
variety of other factors. As a result of SFC's market focus, Scripps has a
concentration of its customers and assets in San Diego County.
The following table sets forth the composition of Scripps' loan portfolio by
type of loan on the dates indicated in terms of amount and as a percentage of
the total loan portfolio.
<TABLE>
<CAPTION>
LOAN PORTFOLIO ANALYSIS
(Dollars in thousands)
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and leases:
Commercial and other $154,290 39% $156,236 46% $134,960 48% $105,229 49% $ 82,097 50%
Real estate construction(1) 57,975 14% 37,932 11% 29,510 11% 14,396 7% 5,335 3%
Real estate mortgage(1) 120,256 31% 93,681 28% 74,516 26% 57,049 26% 43,402 27%
Consumer (2) 58,076 15% 48,375 14% 42,390 15% 35,718 17% 28,177 18%
Lease financing 7,852 2% 6,199 2% 3,212 1% 3,608 2% 5,172 3%
Less: Unearned income
and fees 1,073 1% 1,648 1% 941 1% 901 1% 1,112 1%
-------- -------- -------- -------- -------- ---------
Total $397,376 100% $340,775 100% $283,647 100% $215,099 100% $163,071 100%
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
</TABLE>
25
<PAGE>
- - -----------------------------
(1) The calculation of real estate loans for financial statement purposes
differs from the calculation of loans secured by real estate as reported in
Scripps' regulatory call reports. At December 31, 1999, for instance, total
loans secured by real estate as reported in Scripps' call report were 225
million or 57%.
(2) Represents installment loans to individuals.
The following table sets forth the selected loan maturity data of Scripps'
loan portfolio. Maturities are presented on a contractual basis.
<TABLE>
<CAPTION>
SELECTED LOAN PORTFOLIO MATURITY
(Dollars in thousands)
DECEMBER 31, 1999
Maturing
----------------------------------------------
After One
Within But Within More Than
One Year Five Years Five Years Total
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Commercial and other loans $ 82,529 $ 58,727 $ 13,034 $154,290
Real estate construction loans 49,486 6,944 1,544 57,974
Real estate mortgage loans 23,565 55,979 40,713 120,257
-------- ---------- ---------- --------
Total $155,580 $121,650 $ 55,292 $332,522
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Sensitivity of loans due after one year
to changes in interest rates:
Fixed rate loans $ 68,792 $ 35,966 $104,758
Variable rate loans 52,858 19,326 72,184
---------- ---------- --------
Total $121,650 $ 55,292 $176,942
---------- ---------- --------
---------- ---------- --------
</TABLE>
LOAN CONCENTRATIONS
Scripps tracks loan concentrations by standard industry codes (SIC). The
table set forth below estimates concentrations of 10 percent or more of total
loans as of December 31, 1999. (Dollars in thousands)
<TABLE>
<CAPTION>
SIC Percent Amount
- - --- ------- ------------
<S> <C> <C>
Manufacturing 13% $ 51,798
Finance, insurance, and real estate 20% 79,690
Services 19% 75,705
Managers and administrators 14% 55,783
--- --------
Total 66% $262,976
All real estate related loans 34% $135,473
</TABLE>
Much of the San Diego economy is based on real estate development and
investment. As noted above, real estate related borrowers make up
approximately 34% of Scripps' loan portfolio, therefore the portfolio is
vulnerable to stress in this sector. The Bank has several tools in place to
mitigate exposure in the real estate sector, such as conservative
underwriting practices, monitoring of sales price trends, centralized
monitoring of loans based on accounts or contracts receivable or work in
process, and a concerted focus on the underlying strength of the borrower.
26
<PAGE>
NONPERFORMING ASSETS
Generally, Scripps' policy is to discontinue accrual of interest on loans,
which are delinquent for 90 days, or more unless management determines that a
loan is adequately collateralized or other circumstances justify treating a
loan as fully collectable. When a loan is placed on nonaccrual status, income
is not recognized until payment has actually been received and future
payments of principal and interest appear certain. Interest income, which has
been accrued up to the point a loan is placed on nonaccrual status, is
reversed if management determines that the collectability of the accrued
interest is doubtful. Real estate acquired by Scripps as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate
owned. Such real estate is reclassified to real estate owned at the lower of
cost or fair value less estimated selling costs, and any estimated loss upon
reclassification is charged to allowance for losses at that time. Further
increases to the allowance for losses on real estate owned are recorded as
charges to noninterest expense at the time such costs are incurred or
management believes additional deterioration in value has occurred.
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that as of
December 31, 1999, all problem loans to date had been identified and included
in the nonaccrual or 90 days past due totals reflected below. Management, as
part of the responsibilities of Credit Administration and Regulatory Risk
Management, is particularly focused upon the objective of reducing its
nonperforming and classified assets. In fact, management noted an increase in
nonperforming loans in 1999 and is closely monitoring the adequacy of the
loan loss reserve in light of this increase. There can be no assurance that
management will achieve the objective of reducing nonperforming and
classified assets.
The following table sets forth certain information with respect to Scripps'
nonaccrual loans, accruing loans for which payments of principal and interest
are contractually past due 90 days or more, and real estate owned for the
periods indicated.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
(Dollars in thousands)
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 2,759 $ 1,211 $ 872 $ 661 $ 2,015
Accruing loans past due 90
days or more 1,562 143 112 669 1,393
-------- -------- -------- -------- --------
Total nonperforming loans 4,321 1,354 984 1,330 3,408
Real estate owned 0 0 428 488 48
-------- -------- -------- -------- --------
Total nonperforming assets $ 4,321 $ 1,354 $ 1,412 $ 1,818 $ 3,456
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total nonperforming assets
to total assets .68% .23% .31% .50% 1.20%
</TABLE>
Reductions in real estate owned over the years presented have resulted
principally from Scripps' efforts to dispose of, and keep to a minimum,
holdings of such non-earning assets. The bank's level of restructured loans
was $1,351,000, $549,000, $643,000, $651,000 and $2,252,000 at December 31,
1999, 1998, 1997, 1996 and 1995 respectively, for which it had established
reserves for potential losses of $150,000, $97,000, $153,000, $164,000 and
$475,000.
Scripps has a Special Assets Department with the primary responsibilities of
regular internal loan quality reviews and the monitoring and disposition of
nonperforming and classified assets. However, there can be no assurance that
reductions in the balance and percent of nonperforming assets will occur in
the future.
27
<PAGE>
RESERVE FOR LOAN LOSSES
In originating loans, Scripps recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things,
general economic conditions, the type of loan being made, the
creditworthiness of the borrower over the term of the loan and, in the case
of a collateralized loan, the quality of the collateral for such loan.
Management maintains a reserve for loan losses at a level considered adequate
to absorb known and inherent risks in the loan portfolio. Management's
evaluation of the adequacy of the reserve is ongoing and comprehensive.
The following table set forth the breakdown of the allocation of the reserve
for loan losses by category of loan on the dates indicated. The allocation of
the reserve to each category is not necessarily indicative of future losses
and does not restrict the use of the reserve to absorb losses in any other
category.
28
<PAGE>
<TABLE>
<CAPTION>
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
(Dollars in thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and leases:
Commercial and other $3,993,480 39% $3,798,916 46% $2,988,051 48% $1,773,785 49% $1,483,867 50%
Real Estate
construction 280,470 14% 0 11% 0 11% 0 7% 0 3%
Real Estate mortgage 612,866 31% 568,653 28% 397,337 26% 349,433 26% 396,376 27%
Consumer 485,338 15% 345,431 14% 156,222 15% 621,824 17% 694,757 18%
Lease financing 39,846 2% 54,000 2% 82,390 1% 91,958 2% 0 3%
---------- ---------- ---------- ---------- ----------
Total allowance
for Loan losses $5,412,000 100% $4,767,000 100% $3,624,000 100% $2,837,000 100% $2,575,000 100%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Management has and will continue to actively monitor Scripps' asset quality,
to charge off loans against the reserve for loan losses when appropriate and
to provide for specific losses when necessary. Although management believes
it uses the best information available to make determinations with respect to
the reserve for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. There can be no assurance that economic conditions that may
adversely affect SFC's market area or other circumstances will not result in
increased loan losses in Scripps' loan portfolio.
The following table sets forth an analysis of Scripps' reserve for loan
losses for the periods indicated.
29
<PAGE>
<TABLE>
<CAPTION>
RESERVE FOR LOAN LOSSES DATA
(Dollars in thousands)
DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning balance of reserve for
loan losses $ 4,767 $ 3,624 $ 2,837 $ 2,575 $ 2,208
--------- --------- --------- --------- ---------
Loans charged off:
Real estate construction 0 0 0 0 45
Real estate mortgage 90 88 0 169 288
Commercial and other 6,605 394 664 619 515
Consumer 74 241 123 116 99
Lease financing 0 12 2 25 3
--------- --------- --------- --------- ---------
Total loans charged off 6,769 735 789 929 950
--------- --------- --------- --------- ---------
Recovery of loans previously
charged off:
Real estate mortgage 28 1 1 63 7
Commercial and other 132 30 114 190 8
Consumer 16 13 9 8 39
Lease financing 9 29 0 8 0
--------- --------- --------- --------- ---------
Total recoveries 185 73 124 269 54
--------- --------- --------- --------- ---------
Net loans charged off 6,585 662 665 660 896
Provision for loan losses 7,230 1,805 1,452 922 1,263
--------- --------- --------- --------- ---------
Ending balance of reserve for loan
losses $ 5,412 $ 4,767 $ 3,624 $ 2,837 $ 2,575
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average net loans outstanding
during the period $365,105 $307,061 $243,895 $183,176 $161,083
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total net loans outstanding at
period-end $397,376 $340,775 $283,647 $215,099 $163,071
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loans charged off to average
net loans 1.80% .22% .27% .36% .56%
Reserve for loan losses as a
percentage of nonperforming
loans 125.25% 352.07% 368.29% 213.31% 75.56%
Reserve for loan losses as a
percentage of total net loans
outstanding at
period-end 1.36% 1.40% 1.28% 1.32% 1.58%
</TABLE>
INVESTMENT ACTIVITIES
Scripps' investment portfolio is used primarily for liquidity purposes and
secondarily for investment income. Investment securities classified as available
for sale ("AFS") are stated at their current market value with stockholders'
equity being adjusted for the after-tax unrecognized gain (loss) on said
securities. Investment securities classified as held to maturity ("HTM") are
stated at cost, decreased by amortization of premium and increased by accretion
of discount, over the period to maturity of the related securities. During 1999
and 1998, Scripps classified its entire investment portfolio as available for
sale. Management attempts to maintain investment
30
<PAGE>
securities in its portfolio that offer a stable total return profile over a
wide range of interest rate environments, as well as securities with varied
maturities (a "laddered" portfolio) so that, under normal conditions, there
should be no need to sell securities prior to maturity dates, thereby
minimizing the impact of interest rate fluctuations on net interest income.
However, there can be no assurance that Scripps' investment securities will
continue to reflect a stable total return profile over time or that SFC would
not sell any investment securities during a rising interest rate environment
and recognize a loss.
Scripps' current investment policy enables management to invest primarily in
United States Treasury and Government Agency obligations, United States
Government-sponsored agency securities, mortgage-backed securities,
collateralized mortgage obligations and obligations of states and political
subdivisions with a maximum aggregate portfolio duration not to exceed four
years. Scripps uses an investment advisor to provide added expertise with
respect to managing the portfolio. Scripps retains control of all investment
decisions. Equity Securities are comprised of mutual fund shares in a variable
rate government bond fund, which was acquired through the merger with PCB.
The following table sets forth an analysis of Scripps' investment portfolio as
of the dates indicated.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO COMPOSITION
(Dollars in thousands)
DECEMBER 31,
-----------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and U.S. Government
Corporation & Agency
Securities $70,074 $59,907 $36,517
Mortgage-backed securities:
U.S. Government Agency 32,406 38,260 13,530
U.S. Government-Sponsored
Agency Securities 3,157 4,970 4,684
Collateralized Mortgage
Obligations 36,686 38,507 39,792
States and political
subdivisions 19,652 18,128 17,903
Equity Securities 1,308 1,335 1,360
---------- ----------- -----------
Total available for sale 163,283 161,107 113,786
HELD TO MATURITY:
U.S. Treasury and U.S. Government
Corporation & Agency
Securities 0 0 3,798
Mortgage-backed securities:
U.S. Government Agency 0 0 102
U.S. Government-Sponsored
Agency Securities 0 0 45
Collateralized Mortgage
Obligations 0 0 970
Total held to maturity 0 0 4,915
---------- ----------- -----------
Total investment securities $163,283 $161,107 $118,701
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
31
<PAGE>
The following table sets forth the maturity distribution and weighted average
yield of the investment portfolio as of December 31, 1999.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITY DISTRIBUTION AND YIELDS
(Dollars in thousands)
----------------------------------------------------------------------------------
DUE FROM ONE DUE FROM MORTGAGE-
YEAR FIVE YEARS BACKED AND
DUE IN ONE THROUGH FIVE THROUGH TEN DUE AFTER SBA LOAN
YEAR OR LESS YEARS YEARS TEN YEARS POOLS TOTAL
------------ ------------ ----------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and U.S.
Government Corporation &
Agency securities $4,995 $57,424 $1,460 $ 0 $6,195 $70,074
Weighted average Yield 6.03% 6.16% 6.91% 6.01% 6.15%
Mortgage-backed securities:
U.S. Government Agency 32,406 32,406
Weighted average yield 6.93% 6.93%
U.S. Government-sponsored
Agency Securities 3,157 3,157
Weighted average yield 7.83% 7.83%
Collateralized Mortgage
Obligations 36,686 36,686
Weighted average yield 6.00% 6.00%
States and political
subdivisions 372 10,399 8,881 19,652
Weighted average yield (1) 5.36% 5.05% 5.48% 5.25%
Equity Securities 1,308 1,308
Weighted average yield 4.46% 4.46%
------------ ------------ ----------- --------- ---------- -----
Percentage of total 3% 36% 7% 5% 49% 100%
</TABLE>
- - -------------------------------
(1) The calculation of this yield is not on a tax equivalent basis.
DEPOSIT ACTIVITIES
Scripps attracts deposits through the offering of a broad variety of deposit
instruments for both the consumer and business customer including checking
accounts, money market accounts, negotiable orders of withdrawal ("NOW")
accounts, savings accounts, term certificates of deposit (including "jumbo"
certificates in denominations of $100,000 or more), and retirement savings
plans.
Scripps' average balance of total deposits was approximately $538 million for
the year ended December 31, 1999, an increase of $74 million or 16% compared
with the average balance of total deposits for 1998. Scripps' average balance of
total deposits was approximately $464 million for the year ended December 31,
1998, an increase of $99 million or 27% compared with the average balance of
total deposits of approximately $365 million for 1997.
The following table sets forth the average balances and weighted average rates
for Scripps' categories of deposits for the periods indicated.
32
<PAGE>
<TABLE>
<CAPTION>
AVERAGE DEPOSITS
(Dollars in thousands)
DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- ---------------------------------
AVERAGE % OF TOTAL AVERAGE % OF TOTAL AVERAGE % OF TOTAL
BALANCE DEPOSITS BALANCE DEPOSITS BALANCE DEPOSTIS
-------------- --------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 165,689 30% $ 135,954 29% $107,113 29%
Interest-bearing demand
deposits (Money Market
and NOW accounts) 251,443 47% 219,223 47% 164,110 45%
Weighted average rate 3.35% 3.83% 3.75%
Savings deposits 26,525 5% 24,596 5% 22,768 5%
Weighted average rate 2.34% 2.53% 2.61%
Time deposits 94,163 18% 84,056 18% 70,936 15%
Weighted average rate 4.60% 5.12% 5.22%
</TABLE>
The following table sets forth the amount of Scripps' certificates of deposit of
$100,000 or more by time remaining until maturity.
<TABLE>
<CAPTION>
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)
DECEMBER 31, 1999
------------------------------------
BALANCE % OF TOTAL
-------- ----------
<S> <C> <C>
Three months or less $ 44,941 64%
Over three months through six months 12,906 19%
Over six months through twelve months 10,949 16%
Over twelve months 955 1%
-------- ----------
Total $ 69,751 100%
--------
--------
</TABLE>
LIQUIDITY
The objective of liquidity management is to maintain a balance between sources
and uses of funds in such a way that the cash requirements of customers for
loans and deposit withdrawals are met in the most economical manner. Management
monitors its liquidity position continuously in relation to trends of loans and
deposits for short term as well as long term requirements. Liquid resources are
monitored on a daily basis to assure maximum availability. Management also
manages its liquidity requirements by maintaining an adequate level of readily
marketable assets (primarily Federal funds and investment securities available
for sale) and access to short term funding sources. Currently, Scripps also has
a line of credit of $22 million from non-affiliated financial institutions that
enable it to borrow Federal funds on an unsecured basis. Scripps also has a
secured discount window borrowing facility with the Federal Reserve Bank of $82
million and a secured borrowing facility with the Federal Home Loan Bank of
approximately $23 million. At December 31, 1999, Scripps had no amounts
outstanding in connection with any of its borrowing facilities. Management uses
several tools and processes to monitor liquid resources: semi-monthly liquidity
projection reports, liquidity and volatile deposit dependency ratios, deposit
product trends, weekly deposit rate management, and daily large balance
fluctuation reports, among others.
Management uses a Bank liquidity ratio, defined as the sum of unpledged
marketable securities, Federal funds sold, and cash and balances due from banks
divided by total deposits, as a measurement tool indicating the volume of liquid
resources. This ratio will increase or decrease in response to general economic
conditions, loan demand, the phases of the interest rate cycle, and deposit
growth/contraction, among other things, and was approximately 37%, 42% and 39%
at December 31, 1999, 1998 and 1997, respectively. The decrease in the liquidity
ratio from 1998 to 1999 actually reflects a more cost-effective level of
liquidity that is well within Scripps' policy guidelines. There can be no
assurance that Scripps liquidity will continue to be maintained at a level
comparable to that in 1999. Additionally, Scripps closely monitors its
loan-to-deposit ratio. This ratio (calculated as gross loans divided by total
deposits) was 68%, 64% and 68% at December 31, 1999, 1998 and 1997,
respectively. Management anticipated the ratio increase in 1999 with the
expanding local economy. This ratio decreased between 1998 and 1997, primarily
as a result of deposit growth outpacing loan growth. There can be no assurances
that the economy will continue to expand or that loans will outpace deposit
growth.
33
<PAGE>
Scripps' ratio of core deposits (defined as customers' deposits less time
certificates of deposit of $100,000 or more) to total deposits was 88% at
December 31, 1999, compared to 89% at December 31, 1998, compared with 87% at
December 31, 1997. While total time deposits as a percent of total deposits has
been 18%, 17% and 20% for December 31, 1999, 1998 and 1997, respectively, the
percent of time deposits greater than $100,000 has increased, thereby decreasing
the core deposit ratio. A significant portion of Scripps' core deposits is
concentrated in the Scripps Money Fund, a higher interest-bearing demand deposit
product that comprised $192 million or 33% of total deposits at December 31,
1999. The Money Fund balance at December 31, 1999 represented a decrease of $3
million or 2% from the balance of $195 million or 37% of deposits at December
31, 1998. Comparing 1998 and 1997, the Money Fund increased $78 million or 67%
from the balance of $117 million or 33% of deposits at year end 1997. Another
significant portion of Scripps' core deposits is non-interest-bearing demand
deposits. These deposits increased to $166 million or 31% of deposits at
December 31, 1999, from $136 million or 29% at December 31, 1998. Comparing 1998
and 1997, non-interest-bearing demand deposits increased $29 million or 29% from
the balance of $107 million or 32% of deposits at year end 1997. Management
attempts to actively monitor its liquidity position and deposit composition;
however, there can be no assurance that Scripps' overall liquidity position and
deposit base will continue to be satisfactory in the future.
CAPITAL RESOURCES
Total stockholders' equity was $45 million at December 31, 1999, an increase
of $1 million or 4% compared with stockholders' equity of $44 million as of
December 31, 1998. This increase is attributable primarily to earnings of $4
million for 1999 and new share issuances of $0.6 million, partially offset by
the increase in unrealized holding loss on available for sale securities and
dividends declared of $0.8 million. Total stockholders' equity of $44 million
at December 31, 1998, reflects an increase of $6 million or 15% compared with
stockholders' equity of $38 million as of December 31, 1997. This increase is
primarily the result of the earnings of $6 million for 1998, partially offset
by dividends declared of approximately $0.8 million.
Management seeks to maintain capital adequate to support anticipated asset
growth and credit risks and to ensure that SFC is within established regulatory
guidelines and industry standards. The 1992 risk-based capital guidelines
adopted by the FRB and FDIC require SFC to maintain certain minimum ratios of
capital to risk-weighted assets. In addition, the FRB and FDIC have adopted a
leverage ratio that requires a minimum ratio of Tier 1 capital to total assets.
Higher minimum requirements for an institution may be established if, for
example, a bank has previously received special attention or has a higher
susceptibility to interest rate risk. These risk-based capital guidelines
require state banks to have a ratio of Tier 1 capital to total risk-weighted
assets of four percent and a ratio of total capital to total risk-weighted
assets of eight percent. As depicted in the following table, the capital ratios
of SFC have continuously exceeded the federal minimum regulatory requirements
for a well-capitalized institution.
The following table sets forth the actual capital ratios of SFC as of the dates
indicated.
<TABLE>
<CAPTION>
CAPITAL RATIOS
DECEMBER 31,
----------------------------
WELL MINIMUM
CAPITALIZED CAPITAL
CAPITAL RATIOS(1): 1999 1998 1997 RATIOS RATIOS
----------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Leverage (2) 7.54% 7.63% 8.30% 5.0% 4.0%
Tier 1 risk-based 10.18% 10.19% 11.10% 6.0% 4.0%
Total risk-based 11.35% 11.32% 12.20% 10.0% 8.0%
</TABLE>
- - ----------------------------------------
(1) Computed in accordance with 1992 Federal guidelines, which were initially
effective January 1, 1990.
(2) Leverage ratio is defined as the ratio of Tier 1 capital to the most recent
quarterly average assets.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
34
<PAGE>
The consolidated financial statements and related consolidated financial data
concerning SFC presented in this filing have been prepared in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation in accordance with generally accepted
accounting principles. The primary effect of inflation on the operations of SFC
is reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant effect on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of SFC, including the
influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the FRB. The FRB implements national monetary policy such as
seeking to curb inflation and combat recession by its open market operations in
United States government securities, control of the discount rate applicable to
borrowing by banks and the establishment of reserve requirements against bank
deposits. The actions of the FRB in these areas influence the growth of bank
loans, investments and deposits, and affect the interest rates charged on loans
and paid on deposits. The nature, timing and impact of any future changes in
federal monetary and fiscal policies on SFC and its results of operations are
not predictable.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For SFC, this new standard is effective in 2000
and is not to be applied retroactively to financial statements of prior periods.
The impact of this Statement, if any, is yet to be determined.
35
<PAGE>
OUR PERFORMANCE DEPENDS ON THE SOUTHERN CALIFORNIA ECONOMY
All of SFC's operations are in Southern California, principally San Diego
County. As a result of this geographic concentration, our growth and
operations are significantly influenced by local economic conditions. There
can be no assurance that general economic conditions and the local business
environment will continue to be favorable. During California's economic
downturn of the early 1990's, many actual and prospective customers of SFC
experienced reductions in their net worth, cash flow and the value of their
real estate.
FLUCTUATIONS IN INTEREST RATES AFFECT OUR FINANCIAL PERFORMANCE
Changes in interest rates will affect the value of Scripps' investment
securities portfolio, all of which is designated as available for sale, and
which at December 31, 1999 represented 25.8% of total assets. Generally, an
increase in interest rates would result in a decline in the value of fixed
rate investment securities available for sale, which would result in a
corresponding adjustment, net of tax effects, in shareholders' equity.
Therefore, Scripps' shareholders' equity and regulatory capital levels could
be adversely affected by an increase in interest rates, due to a reduction in
the value of investment securities available for sale. An increase in
interest rates would also generally cause a decline in the market value of
Scripps' fixed rate loan portfolio, which at December 31, 1999 represented
approximately 22% % of total assets. Approximately 41% of assets at December
31, 1999 were comprised of variable rate loans tied to Prime or similar
indices. A decline in interest rates will generally have the immediate effect
of reducing interest income associated with such loans. Declines in interest
rates will also typically result in accelerated loan prepayments, which can
impact our net interest income and profitability.
FLUCTUATIONS IN INTEREST RATES CAN REDUCE DEMAND FOR OUR SERVICES AND LOANS
The operations of SFC and Scripps are significantly influenced by general
economic conditions and by the related monetary and fiscal policies of the
Federal government. The nature, timing and impact of any future changes in
federal monetary and fiscal policies on Scripps and its results of operations
are not predictable. Deposit flows and the cost of funds are influenced by
interest rates of competing investments and general market rates of interest.
Lending activities are affected by the demand for loans which, in turn, is
affected by the interest rates at which such financing may be offered and by
other factors affecting the availability of funds.
Increases in the level of interest rates may reduce the demand for loans and
therefore the amount of loans originated by Scripps and, thus, the amount of
loan and commitment fees. Moreover, decreases in interest rates relative to
the rate of return on other investment vehicles may result in
disintermediation, which is the flow of funds away from depository
institutions into direct investments, such as corporate securities and other
investment vehicles which, because of the absence of Federal deposit
insurance, generally pay higher rates of return than deposits in depository
institutions.
COMPETITION MAY AFFECT OUR MARKET SHARE
The banking business in California generally, and in Scripps' market area
specifically, is highly competitive with respect to both loans and deposits.
The trust and investment management services business in Scripps' market area
is also highly competitive. Scripps competes for loans, deposits and trust
services with other commercial banks, savings and loan associations, finance
companies, money market funds, credit unions, brokerage firms and other
financial institutions,
36
<PAGE>
including a number of institutions that have significantly greater financial
resources than Scripps. Scripps also competes for business with institutions
in unregulated industries. Deregulation has increased competition for deposit
and loan business over the past several years. After interstate banking
became lawful in the 1990's, bank holding companies headquartered outside of
California entered the California market, providing further competition for
Scripps. Many of the major commercial banks operating in Scripps' market area
offer certain services which Scripps does not offer directly but can provide
through a correspondent bank or through other financial services providers.
Banks with larger capitalization also have larger lending limits and are
thereby better able to serve the higher dollar needs of larger customers.
There are no assurances that the strategies of Scripps for responding to this
competition will succeed.
AN ADVERSE REAL ESTATE MARKET COULD AFFECT OUR LOAN PORTFOLIO
On December 31, 1999, Scripps had approximately $178.2 million in loans
secured in whole or in part by real property, including interim construction
loans, short, intermediate, and long term commercial and residential real
estate loans, home improvement loans, and equity lines of credit. This
reflects approximately 45% of Scripps' total loan portfolio at that date. A
sharp and significant decline in real estate prices would potentially have a
material adverse affect on Scripps' lending activities and on the quality of
Scripps' real estate loan portfolio.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
SFC and Scripps are subject to extensive state and federal supervision,
regulation and legislation. We cannot predict the precise impact of recent
legislation, nor the probable course or impact of future legislation or
regulatory actions affecting the financial services industry.
WE NEED TO IMPLEMENT GROWTH SUCCESSFULLY
SFC and Scripps plan to expand its regional office network over time
throughout San Diego County. The overall success of this strategy will
largely depend on SFC's and Scripps' ability to manage its credit, interest
rate and fiduciary risks, control costs, and attract and retain high quality
personnel with business followings and skills sufficient for SFC and Scripps
to operate profitably in new markets, while continuing to provide
relationship-oriented banking services and competitive financial products.
There are no assurances that existing and prospective customers will be
responsive to, or have the need for, the services offered by SFC and Scripps
in new markets. In addition, we may not receive the approvals required by the
Federal Reserve Board ("FRB"), California Department of Financial
Institutions ("DFI") and Federal Deposit Insurance Corporation ("FDIC") in
order to grow into new markets. Expansion activity will likely require the
expenditure of substantial sums to lease or purchase real property and
equipment and to hire high quality, experienced and regionally-oriented new
personnel. Our expansion may not generate the returns our management
anticipates. Our ability to implement our growth strategy may depend on our
retention of existing management.
OUR STOCK MAY NOT BE LIQUID
SFC Common Stock was listed on the American Stock Exchange in October 1999.
Accordingly, there has been a very limited trading market for SFC Common
Stock. Any swing in the price of our stock may be magnified into a material
reduction in price because relatively few buyers may be available to purchase
our stock. No assurance can be given that an active public market will exist
in the future.
37
<PAGE>
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of SFC common stock has been volatile, reflecting loan
write-offs, quarterly variations in our operating results, changes in market
interest in local banks and financial stocks in general, and economic and
financial conditions.
WE MAY NOT PAY DIVIDENDS
The California Financial Code restricts the payment of dividends by bank
holding companies and banks. While SFC has paid cash and stock dividends in
the past on its Common Stock, there can be no assurance that it will continue
to do so or will be legally permitted to do so in the future. Any payment of
dividends by SFC will depend on receipt of dividends from Scripps.
Generally, California state banks such as Scripps may not declare or pay a
dividend without the prior written approval of the California Commissioner,
if the total of all dividends declared by such bank in any calendar year
would exceed the total of its net profits, as defined, for that year combined
with its retained net profits, as defined, for the preceding two years.
The payment of dividends by Scripps is also affected by various regulatory
requirements and policies, such as the requirement to maintain capital at or
above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending on
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease
and desist from such practice. The FDIC has issued policy statements which
provide that insured banks should generally only pay dividends out of current
operating earnings. If Scripps is unable to pay dividends or if the Scripps
board of directors determines to reduce its payment of dividends to SFC, SFC
in turn may be unable to make or may reduce dividend payments to its
shareholders.
OUR CHARTER DOCUMENTS MAY DETER ACQUISITIONS
The organizational documents of SFC contain certain provisions designed to
encourage takeover bidders to engage in arm's-length negotiations with SFC
before attempting a takeover. However, these provisions may make the SFC
Common Stock less attractive to potential acquirers and may serve as a
deterrent to acquisitions of SFC Common Stock, thus potentially preventing
shareholders from realizing a return on their investment in an acquisition.
The Board of Directors of SFC is authorized, without further shareholder
approval, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
granted or imposed upon any unissued shares of preferred stock and to fix the
number of shares constituting any series and the designations of such shares.
The issuance of preferred stock may have the effect of delaying or preventing
a change in control of SFC. The issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders
of SFC Common Stock or could adversely effect the rights and powers,
including voting rights, of the holders of SFC Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SFC's balance sheet consists of interest-earning assets, primarily loans and
investment securities, which are principally funded by interest-bearing
liabilities, primarily deposits. These financial instruments have varying levels
of sensitivity to changes in market interest rates resulting in market risk. In
evaluating the exposure of SFC to market risk, management relies on gap analysis
and rate shock analysis. Gap analysis provides information on the timing and
repricing differences between rate sensitive assets and rate sensitive
liabilities. Rate shock analysis provides management with estimates of the
impact of immediate changes in interest rates both in terms of the change in net
interest income and the change in fair market value of these instruments. There
are certain shortcomings inherent in these methods and the following table that
must be considered in evaluating market risk. Although certain assets may have
similar maturities or periods to reprice, they may react in different degrees to
changes in interest rates or they may precede or lag behind changes in market
interest rates. In addition, certain interest rate sensitive assets may have
contractual limitations to changes in interest rates. SFC considers these
various factors and their anticipated effects in managing the company's exposure
to interest rate risk.
Management seeks to maintain a reasonably balanced interest rate risk position
over one year to protect its financial condition and net interest margin from
market fluctuations in interest rates. Overall management strategies to reduce
SFC's interest rate risk consist of: (i) maintaining a majority of its loan
assets and deposit liabilities on an adjustable rate basis, (ii) limiting the
volume of its loans with terms-to-maturity in excess of five years and (iii)
maintaining a portion of its investment securities with varied terms to
maturity. Additionally, Scripps maintains a Management Asset/Liability Committee
and a Directors Asset/Liability Committee, both of which review on a regular and
periodic basis such matters as earnings, asset quality, asset and liability mix,
liquidity and funding sources, investment resources, capital, interest rate
risk, and economic events and trends, among other matters. Both Committees
review bank compliance with a set of Board-approved directives with which
Scripps should comply to meet its asset and liability management objectives.
The following table presents additional information about SFC's financial
instruments that are sensitive to changes in interest rates. Cash flows in this
presentation are grouped by maturity dates rather than repricing dates.
Consideration is given to prepayment assumptions for mortgage-backed securities
(MBS), including collateralized mortgage obligations (CMOs). The cash flows from
mortgage-backed securities are influenced by prepayments, which are dependent on
a number of factors, including the current interest rate and the interest rate
on the security, the availability of refinancing of the underlying mortgages at
attractive terms, as well as geographic specific factors
38
<PAGE>
which affect the sales and price levels of residential property. SFC's
management uses average prepayment speeds provided by Wall Street dealers to
calculate principal repayments and estimated maturity dates for these
securities. The cash flows for other securities are based on the actual
maturity dates of the instruments, except for equity securities. Equity
securities, for which there is no contractual maturity, consist of a variable
rate government fund, which is included in the second column (after one year
but within two years). Fair values for investment securities are based on
quoted market prices or dealer quotes. Loans are distinguished by variable or
fixed rates. Because variable rate loans are repricable immediately as market
rates change, the fair value is assumed to be equal to the carrying value.
The fair value of fixed rate loans is estimated using a discounted cash flow
calculation. Non-maturing deposits consist of interest-bearing demand,
savings, and money market accounts and have no maturity dates. Cash flow
amortizations for these deposits are included in the first column (within one
year). The fair value of non-maturing deposits is estimated to be the
carrying value, which is the amount payable on demand. Time deposits are
grouped according to contractual maturity dates. The fair value of time
deposits is estimated using a discounted cash flow calculation. Average
interest rates represent the weighted average yield in each category.
39
<PAGE>
<TABLE>
<CAPTION>
INTEREST-SENSITIVE FINANCIAL INSTRUMENTS
(Dollars in thousands)
EXPECTED MATURITY DATE AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------
AFTER 2
AFTER 1 YEARS BUT AFTER 3 AFTER 4
YEAR BUT WITHIN YEARS BUT YEARS BUT
WITHIN ONE WITHIN TWO THREE WITHIN FOUR WITHIN FIVE
YEAR YEARS YEARS YEARS YEARS THEREAFTER TOTAL FAIR VALUE
----------- ---------- --------- ----------- ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans:
Variable rate $143,776 $24,608 $10,757 $28,332 $15,341 $32,934 $255,748 $255,748
Average interest rate 9.73% 9.88% 9.90% 9.48% 9.90% 10.35% 9.81%
Fixed rate 13,645 22,224 17,695 33,686 12,067 42,311 141,628 140,760
Average interest rate 8.54% 8.42% 9.05% 8.89% 8.68% 8.37% 8.63%
Investment securities:
CMOs 5,767 4,358 3,767 5,867 4,275 13,285 37,319 33,280
Average interest rate 6.04% 6.36% 6.04% 6.03% 6.03% 5.96% 6.01%
MBS 13,707 10,455 5,824 4,537 926 947 36,396 34,783
Average interest rate 7.03% 7.02% 6.96% 6.91% 6.88% 6.67% 6.99%
SBAs 153 2,737 3,334 6,224 6,299
Average interest rate 9.73% 6.13% 6.20% 6.26%
U.S. Treasury and
Agency 8,511 25,256 24,348 6,953 65,068 47,667
Average interest rate 6.18% 6.20% 6.27% 5.50% 6.15%
States and political
subdivisions 38 1,959 9,793 8,144 19,934 18,641
Average interest rate 8.10% 5.46% 5.30% 5.13% 5.25%
Equity 1,461 1,461 1,308
Average interest rate 4.46% 4.46%
Federal Home Loan
Bank Stock 1,793 1,793 1,793
Average interest rate 5.49% 5.49%
Interest bearing due
from banks 789 789 789
Average interest rate 5.90% 5.90%
Federal funds sold 29,670 29,670 29,670
Average interest rate 5.14% 5.14%
Financial Liabilities:
Interest bearing
deposits:
Non-maturing Deposits 293,914 293,914 293,914
Average interest rate 3.64% 3.64%
Time deposits 101,876 2,473 80 27 104,456 104,427
Average interest rate 4.79% 4.86% 4.57% 5.25% 4.79%
Capitalized lease
obligation 767 767 767
Average interest rate 9.87% 9.87%
Guarantee of loan to
ESOP Trust 38 6 44 44
Average interest rate 7.75% 7.75% 7.75%
</TABLE>
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Scripps Financial Corporation
The information contained in the accompanying consolidated statements of
financial condition and the related consolidated statements of income, of
changes in stockholders' equity and of cash flows have been prepared by
management. Management has the primary responsibility for ascertaining that
these financial consolidated statements present fairly the financial position
and the results of operations and cash flows of Scripps Financial Corporation
as of and for the years ended December 31, 1999 and 1998.
These financial statements were prepared in accordance with generally
accepted accounting principles and necessarily include amounts that are based
on best estimates and judgments with appropriate consideration given to
materiality. Management has made these estimates and judgments based on
extensive experience and a substantive understanding of the underlying events
and transactions.
In fulfilling its responsibility for the reliability and integrity of
financial information, management has established and maintains accounting
procedures and related internal control systems. Management believes that
these systems and controls provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorizations and properly recorded to permit the preparation of reliable
financial statements in conformity with generally accepted accounting
principles, and that material errors or irregularities are either prevented
or detected within a timely period by employees in the normal course of
performing their assigned duties. Scripps Financial Corporation's independent
accountants review and test the established internal control systems to the
extent necessary to express an opinion on the accompanying consolidated
financial statements.
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF SCRIPPS FINANCIAL CORPORATION
- - --------------------------------------------------------------------------------
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, of changes in
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Scripps Financial Corporation and its
subsidiary at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management, our responsibility is to Express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Diego, California
February 4, 2000
42
<PAGE>
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - ------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks $25,046,000 $24,330,000
Federal funds sold 29,670,000 42,790,000
--------------------------
Cash and cash equivalents 54,716,000 67,120,000
Interest bearing due from banks 789,000 4,352,000
Investment securities 163,283,000 161,107,000
Investment in Federal Home Loan Bank stock 1,793,000 1,210,000
Loans and leases, net 391,964,000 336,008,000
Premises and equipment, net 6,012,000 4,441,000
Other assets and accrued interest receivable 13,388,000 8,392,000
--------------------------
$631,945,000 $582,630,000
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $184,015,000 $152,697,000
Money market, NOW and savings accounts 293,914,000 290,113,000
Time certificates:
Under $100,000 34,705,000 31,861,000
$100,000 or greater 69,751,000 56,303,000
--------------------------
Total deposits 582,385,000 530,974,000
Guarantee of loan to ESOP Trust 44,000 76,000
Capitalized lease obligation 767,000 0
Other liabilities and accrued interest expense 3,452,000 7,825,000
--------------------------
Total liabilities 586,648,000 538,875,000
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
6,909,000 shares (1998 6,797,000 shares) 34,702,000 34,092,000
Retained earnings 12,497,000 8,896,000
Guarantee of loan to ESOP Trust (44,000) (76,000)
Accumulated other comprehensive (loss) income, net (1,858,000) 843,000
--------------------------
Total stockholders' equity 45,297,000 43,755,000
--------------------------
$631,945,000 $582,630,000
==========================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
<PAGE>
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- - ------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Interest income:
Loans and leases, including fees earned $36,230,000 $32,151,000 $26,215,000
Investment securities:
Taxable 7,566,000 6,500,000 5,401,000
Exempt from federal income tax 955,000 920,000 651,000
Dividends from Federal Home Loan Bank stock 84,000 66,000 16,000
Federal funds sold 1,309,000 1,730,000 1,085,000
Balances due from Banks 127,000 344,000 304,000
-------------------------------------
Total interest income 46,271,000 41,711,000 33,672,000
Interest expense on deposits (13,387,000) (13,315,000)(10,454,000)
Interest expense on other borrowed money (45,000) 0 0
-------------------------------------
Total interest expense (13,432,000) (13,315,000)(10,454,000)
Net interest income 32,839,000 28,396,000 23,218,000
Provision for loan losses (7,230,000) (1,805,000) (1,452,000)
-------------------------------------
Net interest income after provision for
loan losses 25,609,000 26,591,000 21,766,000
Non-interest income 5,624,000 6,095,000 5,390,000
Non-interest expense (24,014,000) (22,823,000)(20,168,000)
-------------------------------------
Income before provision for income taxes 7,219,000 9,863,000 6,988,000
Provision for income taxes (2,790,000) (3,995,000) (2,758,000)
-------------------------------------
Net income $4,429,000 $5,868,000 $4,230,000
=====================================
Basic net income per share $0.64 $0.87 $0.63
=====================================
Diluted net income per share $0.63 $0.84 $0.61
=====================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44
<PAGE>
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Guarantee Other Total
------------------------- Retained of Loan to Comprehensive Stockholders'
Shares Amount Earnings ESOP Trust (Loss) Income Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,031,000 $27,352,000 $7,415,000 $(143,000) $ 64,000 $34,688,000
Comprehensive income:
Net income 4,230,000 4,230,000
Unrealized holding gain
on available for sale
Securities, net of tax
of $463,000 694,000 694,000
---------------------------------------------------------------------------------
Total comprehensive income 4,924,000
---------------------------------------------------------------------------------
Net principal decrease
of loan to ESOP Trust 36,000 36,000
Stock options exercised 52,000 346,000 346,000
Cash dividends declared (917,000) (917,000)
Stock dividend declared (10%) 223,000 5,516,000 (5,516,000) 0
Stock dividend declared (2.3%) 85,000 668,000 (668,000) 0
Repurchase and retirement of common
stock (149,000) (380,000) (740,000) (1,120,000)
Stock split (2 for 1, in the form
of a 100% stock dividend) 2,466,000 0
---------------------------------------------------------------------------------
Balance at December 31, 1997 6,708,000 $33,502,000 $3,804,000 $(107,000) $ 758,000 $37,957,000
---------------------------------------------------------------------------------
Comprehensive income:
Net income 5,868,000 5,868,000
Unrealized holding gain
on available for sale
securities, net of tax
of $70,000 85,000 85,000
---------------------------------------------------------------------------------
Total comprehensive income 5,953,000
---------------------------------------------------------------------------------
Net principal decrease
of loan to ESOP Trust 31,000 31,000
Stock options exercised 74,000 280,000 280,000
Cash dividends declared (776,000) (776,000)
Stock issued for services 12,000 250,000 250,000
Stock issued for dividends
reinvested 3,000 60,000 60,000
---------------------------------------------------------------------------------
Balance at December 31, 1998 6,797,000 $34,092,000 $8,896,000 $ (76,000) $ 843,000 $43,755,000
---------------------------------------------------------------------------------
Comprehensive income:
Net income 4,429,000 4,429,000
Unrealized holding loss
on available for sale
securities (2,701,000) (2,701,000)
---------------------------------------------------------------------------------
Total comprehensive income 1,728,000
---------------------------------------------------------------------------------
Net principal decrease
of loan to ESOP Trust 32,000 32,000
Stock options exercised 110,000 574,000 574,000
Cash dividends declared (828,000) (828,000)
Stock issued for dividends
reinvested 2,000 36,000 36,000
---------------------------------------------------------------------------------
Balance at December 31, 1999 6,909,000 $34,702,000 $12,497,000 ($44,000) ($1,858,000) $45,297,000
=================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
<PAGE>
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $4,429,000 $5,868,000 $4,230,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,483,000 1,200,000 1,156,000
Provision for loan losses 7,230,000 1,805,000 1,411,000
Amortization of discounts, premiums and
loan fees (245,000) (808,000) (805,000)
Loss (gain) on sale of real estate owned 2,000 (10,000) (26,000)
Stock issued for services 0 250,000 0
Decrease (increase) in other assets and
accrued interest receivable (3,384,000) (837,000) (946,000)
Increase (decrease) in other liabilities and
accrued interest expense (3,612,000) 4,459,000 559,000
-------------------------------------
Net cash provided by operating activities 5,903,000 11,927,000 5,579,000
-------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal payments
received from investment securities 109,286,000 106,782,000 17,009,000
Proceeds from sale of investment securities 0 0 29,421,000
Proceeds from sale of furniture, fixtures & equipment 8,000 169,000 10,000
Proceeds from sale of real estate owned 250,000 438,000 487,000
Maturities/(purchases) of investment certificate of
deposit 3,563,000 1,385,000 (89,000)
Purchases of investment securities (117,235,000)(149,266,000)(72,159,000)
Net funding of loans (62,274,000) (56,957,000)(69,024,000)
Purchases of premises and equipment, net (3,104,000) (1,820,000) (2,765,000)
-------------------------------------
Net cash used in investing activities (69,506,000) (99,269,000)(97,110,000)
-------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 35,119,000 104,824,000 72,609,000
Net increase (decrease) in certificates of deposit 16,292,000 5,473,000 20,980,000
Net proceeds from issuance of common stock 610,000 340,000 346,000
Repurchase and retirement of common stock 0 0 (1,120,000)
Dividends paid (822,000) (674,000) (833,000)
-------------------------------------
Net cash provided by financing activities 51,199,000 109,963,000 91,982,000
-------------------------------------
Net increase (decrease) in cash and cash equivalents (12,404,000) 22,621,000 451,000
Cash and cash equivalents at beginning of year 67,120,000 44,499,000 44,048,000
-------------------------------------
Cash and cash equivalents at end of year $54,716,000 $67,120,000 $44,499,000
=====================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
46
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Scripps Financial Corporation, a California corporation ("SFC"), was formed
on May 14, 1999 as a federally regulated bank holding company. Its
wholly-owned subsidiary Scripps Bank ("the Bank") is a California State
Banking Corporation organized in 1983, whose primary business is commercial
banking. At December 31, 1999, the Bank is the only business activity of SFC.
The accounting and reporting policies of SFC are in accordance with generally
accepted accounting principles and conform to practices within the banking
industry. The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. A summary of the significant accounting policies used in the
preparation of these consolidated financial statements follows.
BASIS OF PRESENTATION AND BUSINESS COMBINATION
The accompanying consolidated financial statements include the accounts of
both SFC and the Bank. All inter-company transactions and balances have been
eliminated.
The merger in August 1998 with Pacific Commerce Bank, as described in Note
13, was accounted for as a pooling-of-interests. Under this method of
accounting, the assets, liabilities and shareholders' equity of Pacific
Commerce Bank were carried forward at their historical amounts and its
results of operations were combined with the Bank's results of operations,
retroactively for all periods. No adjustments to conform accounting methods
of the merged company to the Bank were required. Certain amounts have been
reclassified with regard to presentation of the financial information of the
merged banks.
INVESTMENT SECURITIES
The Bank has classified its entire securities portfolio as available-for-sale
at December 31, 1999 and 1998. Available-for-sale securities are recorded at
estimated market value with the unrealized cumulative gain or loss being
reflected in accumulated other comprehensive income as a component of
stockholders' equity. The held-to-maturity securities acquired through the
merger with Pacific Commerce Bank were transferred to the available-for-sale
account at the merger date, resulting in a decrease in unrealized gain of
$19,000, net of tax of $13,000. The amortized cost of these securities at the
date of the merger was $3,860,000. Gains and losses realized upon sale of
securities are determined using the specific identification method.
LOANS AND LEASES
Loans are reported at their outstanding principal amount, net of unearned
discounts and fees. Unearned discounts and interest on loans and other
interest earning assets are accrued monthly as earned. The accrual of
interest on loans is discontinued when, in management's judgment, the
interest will not be paid in accordance with contractual terms of the loan
agreement. Loan origination fees, net of direct costs, are amortized to
interest income as an adjustment of yield over the term of the loan.
The Bank considers a loan to be impaired when, based on current information
and events, it is probable that the Bank may not collect amounts due
according to the original contractual terms of, and as scheduled in, the
original loan agreement. The Bank measures impaired loans by using one of the
following methods: (i) the present value of expected cash flows discounted at
the loan's effective interest rate; (ii) the observable value of the loan's
market price; or (iii) the fair value of the collateral if the loan is
collateral dependent. Cash receipts for impaired loans placed on non-accrual
status are first applied to reduce principal.
Direct financing lease agreements are recorded at the aggregate of lease
payments receivable and the estimated residual values, net of unearned
income. Lease income is recognized to yield a level rate of return on the net
investment in leases outstanding.
47
<PAGE>
OTHER REAL ESTATE OWNED
Real estate acquired in satisfaction of loan obligations is recorded at the
lower of the loan balance at the date of acquisition, the present value of
expected cash flows or the fair value less expected selling costs. Subsequent
operating expenses or income, reductions in estimated value, and gains or
losses upon sale are charged to earnings as incurred.
RESERVE FOR LOAN LOSSES
The Bank maintains a reserve for estimated loan losses at a level considered
adequate by the Bank to provide for known and inherent risks in the loan and
lease portfolio. The reserve is increased by provisions charged to expense
and reduced by charge-offs, net of recoveries. Management's evaluation of the
adequacy of the reserve includes periodic review and assessment of the
overall risk in the loan and lease portfolio, prior loan and lease loss
experience, and prevailing and anticipated economic conditions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (3 to 25 years). Leasehold improvements are
capitalized and amortized over the term of the lease or the estimated useful
life of the improvement, whichever is shorter. Maintenance and repair costs
are expensed as incurred, while renewals and betterments are capitalized.
Capital leases are included in premises and equipment at cost, less
accumulated depreciation.
INCOME TAXES
Income taxes are provided using the liability method of accounting. Under
this method, a deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial statement and tax
basis of assets and liabilities and for the expected future tax benefit to be
derived from tax loss and tax credit carry forwards. This method also
requires the establishment of a valuation allowance, if necessary, to reflect
the likelihood of realization of deferred tax assets. The effect of tax rate
changes are reflected in income in the period such changes are enacted.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The guaranteed borrowing by SFC's ESOP Trust is reflected in the accompanying
consolidated financial statements as both a liability and a reduction of
stockholders' equity. The debt service requirements of the plan are funded by
contributions from SFC. Such contributions are included in non-interest
expense for the period in which the contributions are made.
DIVIDEND REINVESTMENT PLAN
SFC has a Dividend Reinvestment Plan ("the Plan"), which allows shareholders
to automatically reinvest all or a portion of cash dividends paid on their
shares of Common Stock in newly issued shares without payment of any
brokerage commissions or service charges. The Plan is currently suspended
until such time as the necessary SEC registration filing is made.
EARNINGS PER SHARE ("EPS")
Basic EPS represents net income divided by the weighted average common shares
outstanding during the period excluding any potential dilutive effects. The
weighted average number of shares used for the computation of basic EPS was
6,879,000, 6,754,000 and 6,726,000 shares in 1999, 1998 and 1997,
respectively. Diluted EPS gives effect to all potential issuances of common
stock that would have caused basic EPS to be lower as if the issuance had
already occurred. Accordingly, diluted EPS reflects an increase in the
weighted average shares outstanding of 112,000, 220,000 and 261,000 for 1999,
1998 and 1997 respectively, due to the assumed exercise of stock options.
48
<PAGE>
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and Federal funds sold.
Total interest paid on deposits in 1999, 1998 and 1997 aggregated approximately
$14,377,000, $13,991,000 and $10,778,000, respectively. Income taxes paid in
1999, 1998 and 1997 total approximately $4,250,000, $4,294,000 and $3,280,000,
respectively. Dividends declared, not yet paid in 1999, 1998 and 1997 were
$415,000, $408,000 and $300,000, respectively.
TRUST DEPARTMENT
In accordance with the usual practice of financial institutions, the assets and
liabilities of individual trusts, agencies, and fiduciary funds are not included
in the accompanying consolidated financial statements. Trust assets under
management total approximately $804,400,000 and $867,312,000 at December 31,
1999 and 1998, respectively.
NOTE 2 - INVESTMENT SECURITIES
The components of investment securities, which management has classified
entirely as available-for-sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------------------
<S> <S> <C> <C> <C>
US Treasury and US Government Corporation
& Agency securities $ 71,292,000 $ 16,000 $ (1,234,000) $ 70,074,000
Mortgage-backed securities:
US Government Agency 33,231,000 106,000 (931,000) 32,406,000
US Government-sponsored
Agency securities 3,165,000 8,000 (16,000) 3,157,000
Collateralized mortgage obligations 37,319,000 6,000 (639,000) 36,686,000
States and political subdivisions 19,934,000 51,000 (333,000) 19,652,000
Equity securities 1,461,000 0 (153,000) 1,308,000
---------------- ---------------- -------------- --------------
$ 166,402,000 $ 187,000 $ (3,306,000) $ 163,283,000
---------------- ---------------- -------------- --------------
---------------- ---------------- -------------- --------------
</TABLE>
The collateralized mortgage obligations owned by the Bank at December 31, 1999
are issued or guaranteed by a US Government Agency ("GNMA") or US
Government-sponsored Agencies ("FNMA" and "FHLMC") or are collateralized by
mortgage-backed securities issued or guaranteed by the same agencies. These
securities have weighted average lives estimated at less than five years,
although actual terms to maturity may differ due to the variability of principal
repayments. Equity securities are comprised of mutual fund shares in a
variable-rate government bond fund.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury and US Government Corporation
& Agency securities $ 59,655,000 $ 323,000 $ (71,000) $ 59,907,000
Mortgage-backed securities:
US Government Agency 38,009,000 314,000 (63,000) 38,260,000
US Government-sponsored
49
<PAGE>
Agency securities 4,922,000 64,000 (16,000) 4,970,000
Collateralized mortgage obligations 38,418,000 171,000 (82,000) 38,507,000
States and political subdivisions 17,236,000 892,000 18,128,000
Equity securities 1,461,000 (126,000) 1,335,000
---------------- ---------------- -------------- --------------
$ 159,701,000 $ 1,764,000 $ (358,000) $ 161,107,000
---------------- ---------------- -------------- --------------
---------------- ---------------- -------------- --------------
</TABLE>
The maturity distribution of available-for-sale investment securities at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
--------------------------------
<S> <C> <C>
Due in one year or less $ 5,000,000 $ 4,995,000
Due from one year through five years 58,951,000 57,796,000
Due from five years through ten years 12,004,000 11,860,000
Due after ten years 9,048,000 8,880,000
Mortgage-backed and guaranteed Small Business Administration
loan-backed securities 79,938,000 78,444,000
Equity securities 1,461,000 1,308,0000
-------------- --------------
$ 166,402,000 $ 163,283,000
-------------- --------------
-------------- --------------
</TABLE>
The maturities of mortgage-backed securities, collateralized mortgage
obligations, and Small Business Administration (a US Government Agency)
loan-backed securities will differ from contractually-stated maturities because
the mortgages or loans underlying the securities amortize regularly and may also
prepay without penalty; in addition, equity securities have no stated maturity
date. Accordingly, these securities are listed separately in the above maturity
distribution.
Securities with a fair value of $114,676,000 and $14,867,000 at December 31,
1999 and 1998, respectively, were pledged to secure certain deposits and other
borrowings as required or permitted by law. Realized net gains from the sale of
securities during 1999, 1998 and 1997 were $0, $0 and $44,000, respectively. The
increase in pledged securities between 1998 and 1999 was the result of the
Bank's decision to establish Y2K liquidity lines, none of which were drawn on.
NOTE 3 - LOANS AND LEASES, AND RESERVE FOR LOAN LOSSES
Loans and leases comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
LOANS AND LEASES:
Commercial $ 154,290,000 $ 156,236,000
Real estate construction 57,975,000 37,932,000
Real estate mortgage 120,256,000 93,681,000
Consumer 58,076,000 48,375,000
Lease financing 7,852,000 6,199,000
--------------- ---------------
398,449,000 342,423,000
LESS:
Unearned income and fees 1,073,000 1,648,000
Reserve for loan losses 5,412,000 4,767,000
--------------- ---------------
Total $ 391,964,000 $ 336,008,000
--------------- ---------------
--------------- ---------------
</TABLE>
50
<PAGE>
At December 31, 1999, minimum lease payments to be received on direct financing
leases for each of the succeeding years ending December 31 are estimated as
follows: $3,469,000 in 2000, $2,570,000 in 2001, $1,577,000 in 2002, $946,000 in
2003 and $375,000 in 2004.
The Bank has made loans to various directors and officers of the Bank or SFC.
The loans, which were made in accordance with the Bank's general lending
policies, totaled $119,000 and $1,363,000 at December 31, 1999 and 1998,
respectively. During 1999, new loans (including drawdowns on revolving lines of
credit and advances) aggregated $0 and repayments aggregated $1,244,000.
Loans placed on non-accrual status totaled $2,759,000 and $1,211,000 at December
31, 1999 and 1998, respectively. The Bank's investment in impaired loans was
$1,351,000 and $549,000 at December 31, 1999 and 1998, respectively, for which
it had established reserves for estimated losses of $150,000 and $97,000. The
average recorded investment in impaired loans during 1999 and 1998 was
$1,354,000 and $552,000, respectively. Interest income on impaired loans of
$116,000, $40,000 and $41,000 was recognized for cash payments received in 1999,
1998 and 1997, respectively.
Activity in the reserve for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 4,767,000 $ 3,624,000 $ 2,837,000
Provision charged to expense 7,230,000 1,805,000 1,452,000
Loans charged off (6,769,000) (735,000) (789,000)
Recoveries 184,000 73,000 124,000
---------------- --------------- ---------------
Balance at end of year $ 5,412,000 $ 4,767,000 $ 3,624,000
---------------- --------------- ---------------
---------------- --------------- ---------------
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 8,634,000 $ 7,047,000
Leasehold improvements 3,505,000 3,083,000
Premises 777,000 89,000
--------------- ---------------
12,916,000 10,219,000
Less: Accumulated depreciation and amortization 6,976,000 5,778,000
--------------- ---------------
Premises and equipment, net $ 6,012,000 $ 4,441,000
--------------- ---------------
--------------- ---------------
</TABLE>
Included in premises at December 31, 1999 is a branch office leased under a
capital lease in the amount of $760,000. Future minimum lease payments at
December 31, 1999 are as follows:
<TABLE>
<S><C>
2000 $ 167,000
2001 171,000
2002 180,000
2003 180,000
51
<PAGE>
2004 192,000
Thereafter 5,973,000
---------------
Total minimum capital lease payments $ 6,863,000
---------------
---------------
</TABLE>
The Bank leases its facilities under non-cancelable operating leases that expire
at various times beginning in the years 2001 through 2026. The Bank leases one
of its offices from a partnership in which a director of the Bank is the general
partner under a lease expiring on September 24, 2006. In the opinion of
management, the terms of the lease are comparable to the terms of other leases
that could be obtained if the Bank leased similar space from an unrelated party.
The lease agreements have option periods to extend at rates equivalent to the
then market rates. The future minimum rental commitments at December 31, 1999
are as follows:
<TABLE>
<S><C>
2000 $ 1,820,000
2001 2,442,000
2002 2,393,000
2003 2,292,000
2004 1,763,000
Thereafter 10,944,000
---------------
Total minimum lease payments $ 21,654,000
---------------
---------------
</TABLE>
The total rental expense was $1,424,000, $1,350,000 and $1,102,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
NOTE 5 - NON-INTEREST INCOME AND EXPENSE
Non-interest income consists of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Customer service charges $ 1,955,000 $ 2,269,000 $ 1,833,000
Trust income 2,528,000 2,140,000 1,862,000
Other fees 857,000 1,299,000 1,429,000
Other non-interest income 284,000 387,000 266,000
--------------- --------------- ---------------
$ 5,624,000 $ 6,095,000 $ 5,390,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Non-interest expense consists of:
Salaries and employee benefits $ 13,460,000 $ 12,023,000 $ 10,884,000
Occupancy & equipment 2,689,000 2,528,000 2,190,000
Depreciation and amortization 1,483,000 1,200,000 1,156,000
Data processing 210,000 756,000 615,000
Professional services 1,463,000 2,052,000 1,472,000
Other general and administrative 4,709,000 4,264,000 3,851,000
--------------- --------------- ----------------
$ 24,014,000 $ 22,823,000 $ 20,168,000
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
NOTE 6 - INCOME TAXES
The provision for income taxes includes the following components:
52
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $ 2,225,000 $ 3,460,000 $ 2,210,000
State 764,000 1,157,000 892,000
--------------- --------------- ----------------
2,989,000 4,617,000 3,102,000
DEFERRED:
Federal (206,000) (574,000) (245,000)
State 7,000 (48,000) (99,000)
--------------- --------------- ----------------
(199,000) (622,000) (344,000)
--------------- --------------- ----------------
$ 2,790,000 $ 3,995,000 $ 2,758,000
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
Deferred tax assets and liabilities represent the expected future income tax
impact of the differences between tax basis and financial statement basis of
assets and liabilities.
The components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Loan loss provision $ 1,661,000 $ 1,273,000
Deferred loan fees 437,000 332,000
Leases (555,000) (236,000)
Deferred compensation 564,000 460,000
Fixed assets 549,000 335,000
Unrealized gain on AFS securities 1,259,000 (599,000)
Other (282,000) 217,000
--------------- ----------------
$ 3,633,000 $ 1,782,000
--------------- ----------------
--------------- ----------------
</TABLE>
Based on SFC's earnings history and projections, management considers the net
deferred tax asset to be realizable. Accordingly, no valuation allowance has
been established.
The reconciliation between the statutory Federal income tax rate and the
effective rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Tax exempt income (5) (8) (4)
State tax, net of Federal tax effect 7 11 8
Other 2 4 1
--------------- -------------- ----------------
Effective tax rate 39% 41% 39%
--------------- -------------- ----------------
--------------- -------------- ----------------
</TABLE>
53
<PAGE>
NOTE 7 - EMPLOYEE BENEFIT PLANS
SFC has a 401(k) plan covering substantially all employees who meet certain age
and service requirements. The Board of Directors determines employer
contributions based on net income. During 1999, 1998 and 1997 SFC contributed to
the plan $306,000, $240,000 and $226,000, respectively. The Scripps Bank Board
of Directors changed the plan to a matching contribution, effective January
1999. In 1999, SFC contributed an amount equal to 50% of the employee's
contribution, up to 12% of the employee's salary. Beginning January 1, 2000 the
SFC contribution was reduced to 50% of the employee's contribution, up to 6% of
the employee's salary.
In 1996, the ESOP obtained a loan to purchase shares of common stock, which are
held by a third party lender as security for the loan. The loan is guaranteed by
the Bank as to payment of principal and interest. The outstanding loan balances
at December 31, 1999 and 1998 were $44,000 and $76,000, respectively. SFC's
contributions to the ESOP during 1999, 1998 and 1997 were approximately $40,000,
$80,000 and $75,000 respectively. At December 31, 1999, approximately 103,200
shares owned by the ESOP are allocated to the ESOP participants, and
approximately 6,400 shares currently owned by the ESOP are held as collateral
for the ESOP loan.
SFC has a stock purchase plan in which all employees and directors may
participate. SFC contributes an amount equal to 25% of the participants'
contributions; these contributions are then used to purchase common stock of
SFC. During 1999, 1998 and 1997, SFC contributed $59,000, $60,000 and $46,000,
respectively, to the plan. The plan held approximately 134,000 and 122,300
shares of common stock at December 31, 1999 and 1998, respectively.
The Bank has adopted supplemental retirement plans to provide additional
retirement benefits for its president. The present value of the estimated future
obligation is being accrued and funded over the vesting period.
NOTE 8 - STOCK OPTIONS
EMPLOYEE STOCK OPTION PLANS
SFC has granted incentive stock options and non-qualified stock options to
certain officers, employees and directors to purchase common stock. The purpose
of these Plans is to advance the interest of SFC and its shareholders by
providing officers, directors and key employees with an incentive to serve and
to continue service with SFC. SFC currently has options outstanding under three
option plans, the 1998 Outside Director Plan ("1998 Plan"), the 1995 Stock
Option Plan ("1995 Plan"), and the 1992 Stock Option Plan ("1992 Plan").
The stock options under these plans vest at various rates up to five years and
expire over a period of up to ten years. No compensation cost has been
recognized for its employee stock option grants, which are fixed in nature, as
the options have been granted at a price equal to the market value of SFC's
common stock at the date of grant. Had compensation cost for SFC's stock based
compensation plans been determined based on the estimated fair value at the
grant date rather than market value during the year ended December 31, 1999,
SFC's net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported $ 4,429,000 $ 5,868,000 $ 4,230,000
Pro forma $ 4,265,000 $ 5,697,000 $ 4,143,000
BASIC EARNINGS PER SHARE:
As reported $.64 $.87 $.63
Pro forma $.62 $.84 $.62
DILUTED EARNINGS PER SHARE:
As reported $.63 $.84 $.61
Pro forma $.61 $.82 $.59
</TABLE>
54
<PAGE>
The fair value of each option grant has been estimated on the date of grant
using the following assumptions: for 1999: an expected option life of three and
eight years, a constant dividend yield of 1%, a risk-free interest rate of 6.62%
and 6.79%, and a volatility factor of 31%; for 1998: an expected option life of
three and eight years, a constant dividend yield of 1%, a risk-free interest
rate of 4.60% and 4.80%, and a volatility factor of 34%; for 1997: an expected
option life of eight years, a constant dividend yield of 1%, a risk-free
interest rate of 5.60%, and a volatility factor of 27%.
Employee transactions are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
EMPLOYEE STOCK OPTIONS
Options outstanding at beginning of year 388,847 $9.51 417,095 $7.31 421,904 $4.67
Granted 44,500 14.75 55,000 18.34 92,194 16.51
Exercised 111,278 4.07 74,438 3.95 94,825 3.63
Forfeited 26,668 14.72 8,810 7.00 2,178 5.70
------- -------- --------
Options outstanding at end of year 295,401 11.88 388,847 9.51 417,095 7.31
------- -------- -------
------- -------- -------
Options exercisable at end of year 158,487 9.26 204,045 5.48 199,885 4.09
Weighted average fair value per share of
options granted during the year $5.97 $7.37 $6.88
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF REMAINING AVERAGE WEIGHTED-
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER OF AVERAGE
PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
---------------------------------------------------------- --------------------------------
<C> <C> <C> <C> <C> <C>
$3 to $9 146,801 4.8 yrs. $ 5.97 114,047 $ 5.35
$10 to $20 148,600 7.5 yrs. $ 17.71 44,440 $ 19.29
</TABLE>
Approximately 260,500 shares of common stock were available for future grant
under the Plan at December 31, 1999.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with disclosure requirements, management has estimated the fair
value of SFC's financial instruments. In cases where quoted market prices are
not available, fair value estimates are based on the present value of expected
future cash flows, or other valuation techniques, all of which are significantly
affected by the assumptions used therein. Accordingly, most fair value estimates
cannot be substantiated by comparison to independent market quotes and could not
be realized from offering for sale SFC's entire holdings of a particular
financial instrument at one time. Furthermore, management does not intend to
dispose of significant portions of all of its financial instruments and, thus,
any aggregate unrealized gain or loss should not be interpreted as a forecast of
future earnings and cash flows.
55
<PAGE>
Certain financial instruments such as equity investments in consolidated
subsidiaries, obligations for pension and other postretirement benefits and
deferred compensation arrangements, among others, are generally excluded from
fair value disclosure requirements. In addition, the fair value estimates do not
attempt to include the value of anticipated future business, such as trust and
core deposit relationships, and the value of assets and liabilities that are not
considered financial instruments such as deferred tax assets, intangibles, and
premises and equipment.
The fair values of financial instruments are derived using numerous subjective
assumptions and may not be necessarily indicative of the net realizable or
liquidation value of these instruments. These fair value estimates involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. The fair values are also influenced by the estimation
methods, including discount rates and cash flow assumptions, chosen from
acceptable alternatives. Comparisons of fair value information among companies
are limited by variability in estimations and judgments.
The following methods and assumptions were used to estimate the fair value of
each material class of financial instruments at a specific point in time:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount of these financial instruments reasonably approximates fair
value.
INVESTMENT SECURITIES
The fair value of investment securities is based upon independently quoted
market prices.
LOANS AND LEASES
The fair value of loans and leases is based upon the aggregate estimated fair
values of each product type, giving effect to credit quality and time to
maturity. The fair value of fixed rate loans and leases is estimated by
discounting expected future cash flows, based upon rates offered as of the
reporting date for similar loans and leases. The carrying amount of variable
rate loans reasonably approximates fair value.
DEPOSITS
The fair value of demand, money market, NOW and savings deposits is the amount
payable on demand at the reporting date. The carrying amount for variable rate
time deposit accounts reasonably approximates fair value. The fair value of
fixed rate time deposits is estimated using a discounted cash flow calculation.
The discount rate on such deposits is based upon rates offered as of the
reporting date for deposits with similar remaining maturities.
GUARANTEE OF LOAN TO ESOP TRUST
The carrying amount of this financial instrument reasonably approximates fair
value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit is
estimated to be the cost to terminate or otherwise settle such obligations with
counterparties. The fair value of such items at the reporting date is not
considered to be material in relation to the consolidated financial statements
taken as a whole (Note 11).
The carrying amount and fair value of SFC's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- ------------------------------
CARRY FAIR CARRY FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 25,046,000 $ 25,046,000 $ 24,330,000 $ 24,330,000
Federal funds sold 29,670,000 29,670,000 42,790,000 42,790,000
Investment securities, available-for-sale 165,076,000 165,076,000 162,317,000 162,317,000
Loans and leases, net 391,964,000 391,096,000 336,008,000 337,588,000
FINANCIAL LIABILITIES:
Deposits 582,385,000 582,356,000 530,974,000 531,120,000
Guarantee of loan to ESOP trust 44,000 44,000 76,000 76,000
</TABLE>
56
<PAGE>
NOTE 10 - FINANCIAL INSTITUTION RISK
In the normal course of its business, SFC encounters two significant types of
risk: economic and regulatory. Economic risk is comprised of three components -
interest rate risk, credit risk, and market risk. SFC is subject to interest
rate risk to the degree that its interest-bearing liabilities mature and reprice
at different speeds, or on a different basis, than its interest-bearing assets.
Credit risk is the risk of default on the Bank's loan portfolio that results
from the borrower's inability or unwillingness to make contractually required
payments. Market risk results from changes in the value of assets and
liabilities which may impact, favorably or unfavorably, the realizability of
those assets and liabilities. Additionally, SFC is subject to regulations of
various governmental agencies. These regulations can and do change significantly
from period to period. SFC also undergoes periodic examinations by the
regulatory agencies, which may subject it to further changes with respect to
asset valuations, amounts of required loss allowances and operating restrictions
resulting from the regulators' judgments based on information available to them
at the time of their examination.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include loan commitments and standby letters of credit.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated financial
statements. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those instruments.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. Since many of the loan commitments may expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counter party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and other income-producing
commercial properties.
The Bank's lending activities are concentrated in San Diego County, California.
The Bank's commercial loan portfolio is diverse as to the industries
represented. The real estate portion of the loan portfolio includes credits to
many different borrowers for a variety of projects and for residential real
estate.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
Undisbursed loan commitments amount to approximately $193,604,000 and
$157,757,000 at December 31, 1999 and 1998, respectively. Standby letters of
credit total approximately $1,927,000 and $4,447,000 at December 31, 1999 and
1998, respectively. International letters of credit total approximately
$1,362,000 and $477,000 at December 31, 1999 and 1998, respectively.
SFC is at times subject to pending and threatened legal actions that arise out
of the normal course of business. Management has reviewed these matters with
legal counsel and, in the opinion of management, the ultimate disposition of all
pending or threatened litigation will not have a material effect on the
financial condition or results of operations of SFC.
The Bank has a line of credit available to purchase federal funds from a
non-affiliated financial institution at the prevailing market rate. The line is
subject to the availability of funds at the lending institution. The Bank also
has borrowing lines with Federal Reserve Bank "FRB" and Federal Home Loan Bank
"FHLB". Borrowing at FRB would be at the discount rate as set by FRB. Borrowing
at FHLB would be at the prevailing rate offered by FHLB. No amounts were
outstanding on any line at December 31, 1999 and 1998.
57
<PAGE>
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
Risk-based capital guidelines issued by bank regulatory authorities incorporate
into the determination of capital adequacy an institution's asset risk profile
and off-balance sheet exposures, such as unused loan commitments and standby
letters of credit. The guidelines for an adequately capitalized institution
require a total capital to risk-weighted assets ratio of at least 8.0% and a
tier 1 capital to risk-weighted assets ratio of at least 4.0%. The risk-based
capital rules have been further supplemented by a leverage ratio, defined as
tier 1 capital divided by average total assets of the most recent quarter. A
minimum leverage ratio of 4.0% is required for most banking institutions. As of
December 31, 1999, the most recent notification from the appropriate regulatory
agency categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. Management is not aware of any conditions or
events subsequent to December 31, 1999, which would have caused a change in the
Bank's category. The following table summarizes SFC and the Bank's regulatory
capital ratios:
<TABLE>
<CAPTION>
ACTUAL
DECEMBER 31, WELL
--------------------------------- CAPITALIZED REGULATORY
1999 1998 THRESHOLD MINIMUM
---------------------------------
<S> <C> <C> <C> <C>
SFC
Total risk-based capital ratio 11.4% 11.3% 10.0% 8.0%
Tier 1 risk-based capital ratio 10.2% 10.2% 6.0% 4.0%
Leverage ratio 7.5% 7.6% 5.0% 4.0%
BANK
Total risk-based capital ratio 11.2% 11.3% 10.0% 8.0%
Tier 1 risk-based capital ratio 10.1% 10.2% 6.0% 4.0%
Leverage ratio 7.4% 7.6% 5.0% 4.0%
</TABLE>
NOTE 13 - MERGER
On August 31, 1998, Pacific Commerce Bank was merged with and into Scripps Bank.
Pursuant to the Agreement and Plan of Merger, dated April 22, 1998, each share
of Pacific Commerce Bank was exchanged for 2.1789 shares of Scripps Bank common
stock, resulting in approximately 1.8 million shares being issued. At the date
of merger, Pacific Commerce Bank had total assets of $72.3 million, including
$43.5 in loans and $22.3 million in investment securities, and $65.0 million in
liabilities, including $64.2 million in deposits. The merger was accounted for
as a pooling-of-interests and, accordingly, financial results for 1998 and prior
periods include the combined financial results of both entities.
Merger costs totaling $821,000 were recorded during 1998 in connection with the
Pacific Commerce Bank transaction. Such costs related primarily to professional,
legal and other support activities.
NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following tables present condensed financial information for 1999, the year
in which SFC was formed.
Condensed Parent Only Statement of Financial Condition
- - ------------------------------------------------------
58
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
ASSETS
Cash and cash equivalents $120,000
Investment in subsidiary 44,794,000
Other assets and accrued interest receivable 812,000
------------
$45,726,000
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities and accrued interest expense $429,000
------------
Total liabilities 429,000
------------
Stockholders' equity:
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
6,909,000 shares 34,702,000
Retained earnings 12,497,000
Guarantee of loan to ESOP Trust (44,000)
Accumulated other comprehensive income, net (1,858,000)
------------
Total stockholders' equity 45,297,000
------------
$45,726,000
------------
------------
</TABLE>
Condensed Parent Only Statement of Income
- - -----------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Non-interest income $0
Non-interest expense (223,000)
------------
Income before provision for income taxes (223,000)
Provision for income taxes 64,000
------------
59
<PAGE>
Income before undistributed income of subsidiary (159,000)
Equity in undistributed income of subsidiary 4,588,000
------------
Net income $4,429,000
------------
------------
Basic net income per share $0.64
------------
------------
Diluted net income per share $0.63
------------
------------
</TABLE>
Condensed Parent Only Statement of Cash Flows
- - ---------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Cash flows from operating activities:
Net income $4,429,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income from subsidiary (4,588,000)
Increase in other assets and accrued interest receivable (812,000)
Increase in other liabilities and accrued interest expense 423,000
------------
Net cash used by operating activities (548,000)
------------
Cash flows from investing activities:
Net cash provided by subsidiary 880,000
------------
Net cash provided by investing activities 880,000
------------
60
<PAGE>
Cash flows from financing activities:
Net proceeds from issuance of common stock 610,000
Dividends paid (822,000)
------------
Net cash used by financing activities (212,000)
------------
Net Increase in cash and cash equivalents 120,000
Cash and cash equivalents at beginning of year 0
------------
Cash and cash equivalents at end of year $120,000
------------
------------
</TABLE>
NOTE 15 - SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999 Quarters Ended
----------------------------------------------------
December 31 September 30 June 30 March 31
----------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $12,416,000 $11,757,000 $11,119,000 $10,979,000
Interest expense (3,812,000) (3,296,000) (3,011,000) (3,313,000)
----------------------------------------------------
Net interest income 8,604,000 8,461,000 8,108,000 7,666,000
Provision for loan losses (4,320,000) (750,000) (1,275,000) (885,000)
----------------------------------------------------
Net interest income after provision for
loan losses 4,284,000 7,711,000 6,833,000 6,781,000
Non-interest income 1,407,000 1,417,000 1,404,000 1,396,000
Non-interest expense (5,964,000) (6,552,000) (5,854,000) (5,644,000)
----------------------------------------------------
Income before provision for income taxes (273,000) 2,576,000 2,383,000 2,533,000
Provision for income taxes 192,000 (1,030,000) (952,000) (1,000,000)
----------------------------------------------------
Net income ($81,000) $1,546,000 $1,431,000 $1,533,000
----------------------------------------------------
----------------------------------------------------
61
<PAGE>
Basic net income per share ($0.01) $0.22 $0.21 $0.22
----------------------------------------------------
----------------------------------------------------
Diluted net income per share ($0.02) $0.22 $0.21 $0.22
----------------------------------------------------
----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 Quarters Ended
----------------------------------------------------
December 31 September 30 June 30 March 31
----------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $11,130,000 $10,897,000 $10,185,000 $9,499,000
Interest expense (3,548,000) (3,531,000) (3,190,000) (3,046,000)
----------------------------------------------------
Net interest income 7,582,000 7,366,000 6,995,000 6,453,000
Provision for loan losses (360,000) (520,000) (465,000) (460,000)
----------------------------------------------------
Net interest income after provision for
loan losses 7,222,000 6,846,000 6,530,000 5,993,000
Non-interest income 1,320,000 1,494,000 1,613,000 1,668,000
Non-interest expense (5,902,000) (5,861,000) (5,636,000) (5,424,000)
----------------------------------------------------
Income before provision for income taxes 2,640,000 2,479,000 2,507,000 2,237,000
Provision for income taxes (1,107,000) (1,006,000) (1,002,000) (880,000)
----------------------------------------------------
Net income $1,533,000 $1,473,000 $1,505,000 $1,357,000
----------------------------------------------------
----------------------------------------------------
Basic net income per share $0.23 $0.22 $0.22 $0.20
----------------------------------------------------
----------------------------------------------------
Diluted net income per share $0.21 $0.21 $0.22 $0.20
----------------------------------------------------
----------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNERS AGE POSITION(S)
- - --------------------------------------- --- -----------
<S> <C> <C>
Ronald J. Carlson...................... 65 President, Chief Executive Officer and Director of SFC
M. Catherine Wright.................... 49 Secretary and Chief Financial Officer of SFC
Christopher C. Calkins................. 54 Director
Christopher S. McKellar................ 50 Director
William E. Nelson...................... 73 Chairman of the Board
Alfred B. Salganick, M.D............... 62 Director
William T. Stephens.................... 61 Director
</TABLE>
62
<PAGE>
CHRISTOPHER C. CALKINS is a director of SFC, Vice Chairman of the Board of
Scripps, President of Carltas Management, Manager of Carltas Company, a real
estate holding company, and general counsel of the Paul Ecke Ranch, a
floricultural production company. He has been a director of Scripps since 1984.
He is a Director of the Thomas C. Ackerman Foundation and President of the
Charles H. and Anna S. Stern Foundation. Mr. Calkins is a former partner of the
law firm of Gray Cary Ames & Frye (now Gray Cary Ware & Freidenrich).
RONALD J. CARLSON is President and a director of SFC. He assumed the position of
President and Chief Operating Officer of Scripps Bank (in organization) on July
1, 1983, and was named President and Chief Executive Officer of Scripps Bank on
December 20, 1984. Prior to joining Scripps, Mr. Carlson served as President and
Chief Executive Officer of the Bank of Rancho Bernardo from 1981 to 1983, and
President and Chief Operating Officer and Executive Vice President of La Jolla
Bank & Trust Company from 1973 to 1980. Prior to his employment with La Jolla
Bank & Trust Company, he was employed by California First Bank (now Union Bank
of California) for 10 years in various assignments including Manager of the Main
Office and Regional Vice President. Mr. Carlson has a B.S. degree from the
University of Colorado. He is a Regent of California Lutheran University,
Chairman of the Board of Directors of the Greater San Diego Division of the
American Heart Association, Advisory Director of the Salvation Army, and a
Trustee of the San Diego Maritime Museum.
CHRISTOPHER S. MCKELLAR was a director of Scripps from 1984 until the 1999
annual meeting of Scripps and is a director of SFC. He is Chief Executive
Officer of California Traditions, Inc. Mr. McKellar has been involved in more
than $1 billion of commercial, industrial and residential development in
Southern California and Utah. Mr. McKellar serves as Chairman of the Board of
the Medical Biology Institute. Formerly, he served on the boards of the Scripps
Memorial Hospital Foundation, Chancellor's Advisory Board of University of
California, San Diego, and the Mayor's Housing Committee.
WILLIAM E. NELSON has been Chairman of the Board of Scripps since 1984 and is
Chairman of the Board of SFC. He is an attorney and real estate developer. He
served as President and Chief Executive Officer of Scripps Institution of
Medicine and Science from 1993 to 1996. He has been the prime developer of
several commercial buildings in Southern California. He has also authored books
and articles on real estate finance and served as a Lecturer on finance at the
University of Southern California. He currently is a Regent's Lecturer on
Economics and Ethics of Health Care at University of California, San Diego. He
is currently President and a Director of the San Diego Blood Bank, a Director of
the San Diego Dialogue, which he also founded, and is involved with other
community activities such as the San Diego Opera.
ALFRED B. SALGANICK, M.D. is on the board of SFC. He retired from his practice
as a family practice physician in 1997. He received his pre-medical education in
New York and completed medical school in Chicago. Dr. Salganick served in the
U.S. Navy from 1965 through 1967 and then practiced medicine in Chula Vista,
California from 1967 through 1997. He was a founder and Chairman of the Board of
Pacific Commerce Bank ("PCB") in Chula Vista, which merged with Scripps in 1998.
Immediately after the PCB merger, Dr. Salganick joined the Scripps Board. Dr.
Salganick has been a member of the New York Stock Exchange since 1978.
WILLIAM T. STEPHENS is a director of SFC, director of Scripps since 1996 and
President of Kennebec Financial Corporation, a company providing trustee and
investment services to private trusts. Mr. Stephens has been in banking for over
35 years and served on the board of directors of San Diego Trust and Saving Bank
until its sale in 1994. He currently is a Director of the J.W. Sefton Foundation
and serves on the Board of Directors of the San Diego County Tax Payers
Association and is an active member of the San Diego Downtown Rotary Club. He
has served as an officer and director for many local philanthropic organizations
including having served as President and a Director of the local American Cancer
Society. Mr. Stephens is a Staff Commodore of the San Diego Yacht Club and a
member of the De Anza Country Club.
M. CATHERINE WRIGHT assumed the position of Senior Vice President/Chief
Financial Officer/Finance & Administration Division Manager of Scripps in
December 1997 and is Secretary and Chief Financial Officer of SFC. Ms. Wright
has over 25 years of banking experience which include serving as Senior Vice
President/Cashier at First National Bank, Vice President/Cashier at Bank of
Commerce and in various capacities in the areas of lending and operations at
Bank of America. She has a B.S. in Accountancy from National University, San
Diego and is a
63
<PAGE>
graduate of Pacific Coast Banking School at the University of Washington and
the ABA National School of Bank Investments and Financial Management. Ms.
Wright is a member of Financial Women International.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
To the knowledge of SFC, no director, officer or beneficial owner of greater
than 10% of the common stock of SFC during fiscal 1999 failed to file on a
timely basis reports required by Section 16(a) of the Securities and Exchange
Act of 1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid to or earned by the
named executive officers--the SFC President and Chief Executive Officer, and
the Secretary and Chief Financial Officer--the only two officers of SFC
during the fiscal year ended December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1999 ANNUAL
COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------------- ----------------------------------------------------
SECURITIES OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION (1)
- - --------------------------------------- ------------ -------------- -------------------- --------------------------------
<S> <C> <C> <C> <C>
Ronald J. Carlson, President and Chief $230,000 $22,304 - $219,489 (2)
Executive Officer
M. Catherine Wright, Secretary and 87,550 9,044 - 11,831
Chief Financial Officer
</TABLE>
- - ----------------------------------
(1) Includes taxable auto allowance or lease value, club dues, term life
insurance in excess of $50,000, and the bank's contribution to the Stock
Purchase Plan, the Stock Ownership Plan and the 401(k) Plan.
(2) Includes accruals toward supplemental retirement plans.
There were no grants of options to purchase SFC Common Stock made during the
fiscal year ended December 31, 1999 to the named executive officers.
The following table provides the specified information concerning option
exercises during fiscal year 1999 and the exercisable and unexercisable options
held by the named executive officers.
OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 (3) DECEMBER 31, 1999 (2)
---------------------------------- --------------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - -------------------- ---------------- -------------- --------------- ------------------ ---------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Carlson 6,050 $64,731 9,840 11,210 $36,348 $9,087
M. Catherine Wright 0 $0 1,200 4,800 $0 $0
</TABLE>
- - ---------------------------
(1) Difference between fair market value of shares acquired and cost of shares
pursuant to exercise of option.
(2) Based on the closing sale price of SFC Common Stock as of December 31, 1999
as reported by Bloomberg Financial Markets Service ($13.50).
(3) The number of unexercised stock options has been restated to reflect the
effect of all prior stock dividends and a two for one stock split declared in
November 1997.
64
<PAGE>
DIRECTORS' COMPENSATION
SFC and Scripps pay fees to all non-management directors for their attendance at
board meetings and committee meetings, including $750 for attendance at board
meetings and $200 for attendance at all committee meetings. Because of the
additional time commitment, the Chairman of SFC and Scripps receives $1,500 per
month for attendance at board meetings. No director has received reimbursement
for travel expenses incurred in traveling to meetings. In 1999, as a group, SFC
and Scripps non-management directors received compensation totaling $219,350 for
services in their capacity as directors. This amount does not include
approximately $34,100 contributed on their behalf by SFC and Scripps to the
Restated Stock Purchase Plan. Under the 1992 Stock Option Plan, there were
outstanding stock options for the purchase of 7,260 shares of common stock with
a weighted average exercise price of $4.96. There are no shares available for
grant in the 1992 Plan. In addition, under the 1998 Outside Directors Stock
Option Plan, each non-employee director was granted an option to purchase 1,000
shares of Common Stock of SFC after the last annual meeting and will receive an
option to purchase additional 1,000 shares upon re-election. As of December 31,
1999 there were outstanding stock options for the purchase of 30,000 shares of
Common Stock with a weighted average exercise price of $17.47. As of that date,
there were 70,000 shares available for grant.
SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
SUPPLEMENTAL RETIREMENT PLAN
Scripps has entered into a Supplemental Retirement Plan (the "Retirement Plan")
with Mr. Carlson. Under the Retirement Plan, if Mr. Carlson remains in the
employment of Scripps until he attains age 67, he will be entitled to a monthly
annuity payment in the base amount of $4,167. The amount of the monthly payment
will adjust annually by a three- percent increase as a cost-of-living
adjustment. If Mr. Carlson terminates employment with Scripps prior to age 67,
he may elect early commencement of a reduced monthly payment, as determined
actuarially. However, if Mr. Carlson terminates employment prior to age 67 due
to total disability, he will be entitled to the full amount of the monthly
annuity payment beginning on the first day of the month following such
termination of service. If Mr. Carlson dies and is survived by Barbara Ann
Carlson, then she will be entitled for life to monthly payments equivalent to
those Mr. Carlson would have received if he were alive. Scripps has established
a grantor trust to which it may make contributions to help satisfy its
obligations under the Retirement Plan. All assets held in the trust are subject
to the claims of general creditors of Scripps.
PRESIDENT'S UNFUNDED DEFERRED COMPENSATION AGREEMENTS
Scripps has entered into two Unfunded Deferred Compensation Agreements (the
"Deferred Compensation Agreements") with Mr. Carlson. Under one Deferred
Compensation Agreement, an annual benefit of $20,000 per year is to be paid to
Mr. Carlson following the latter of the dates at which he attains age 65 or the
date he separates from service with Scripps. Payments are to be made each year
beginning with the year in which Mr. Carlson attains age 66. The amount of this
payment is adjusted on each annual anniversary date to take into effect any cost
of living increases from the date in which he attains the age of 65. If Mr.
Carlson dies, is impaired by a disability, or otherwise separates from service
prior to attaining age 65, then he or Barbara Ann Carlson if he is deceased,
receives a reduced annual benefit.
Under the other Deferred Compensation Agreement, an annual benefit of $25,000
per year, increased by 3% as a cost of living adjustment, is to be paid to Mr.
Carlson commencing upon his retirement if he remains in the employment of
Scripps until the earlier of October 1, 2002 or total and permanent disability.
If Scripps terminates Mr. Carlson's employment prior to October 1, 2002 for
reasons other than cause, he is entitled to receive the retirement benefit. If
Mr. Carlson's employment is terminated by Scripps for cause at any time, no
payments will be made under this Deferred Compensation Agreement. This Deferred
Compensation Agreement includes death benefits payable to Deirdre Carlson.
The obligations of Scripps under the Deferred Compensation Agreements are
unfunded. Scripps accrues a liability for its obligations each year, but does
not set aside a separate fund to be held in trust for Mr. Carlson's benefit.
65
<PAGE>
LONG TERM INCENTIVE COMPENSATION PLAN
The Bank has entered into a Long Term Incentive Compensation Plan with Mr.
Carlson. The Plan allows for awards based on the bank's attainment of certain
performance related goals. The goals will be measured as of December 31, 2001.
If the goals are met or exceeded, awards would be payable to Mr. Carlson as of
October 1, 2002. The maximum amount payable would be 140 percent of Mr.
Carlson's salary as of October 1, 2002. Mr. Carlson will have the option to
receive his award in the form of cash, SFC stock, or deferred payments up to
five years.
EMPLOYMENT AGREEMENTS
Scripps has entered into employment agreements ("Employment Agreements") with
Mr. Ronald Carlson and Ms. M. Catherine Wright, which provide for base annual
salaries that adjust annually. As of December 31, 1999, the base salaries of
such employees were $230,000 and $87,550, respectively. In addition, the
Employment Agreements provide for an automobile use allowance. The respective
terms of the Employment Agreements expire October 2002 and June 2001.
SCRIPPS FINANCIAL CORPORATION 1992 AND 1995 STOCK OPTION PLANS
The purpose of the SFC Stock Option Plans is to attract, retain and reward
persons providing services to SFC and certain affiliated entities and to
motivate such persons to contribute to the growth and profits of SFC. Options
may be granted to directors and full-time salaried employees, including officers
and directors who are also employees.
As of December 31, 1999, there were outstanding stock options for the purchase
of 221,249 shares of Common Stock under the Stock Option Plan originally adopted
in 1995 (the "1995 Plan") with a weighted average exercise price of $12.44 per
share. As of that date, there were 190,542 shares of Common Stock available for
grant under the 1995 Plan. As of December 31, 1999, there were outstanding stock
options for the purchase of 44,152 shares of SFC Common Stock under the Stock
Option Plan originally adopted in 1992 (the "1992 Plan"), with weighted average
exercise price of $5.32 per share. No shares of Common Stock remain available
for grant under the 1992 Plan.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The members of the Compensation and Nominations Committee review and recommend
to the full Scripps board of directors the salaries and other terms of
employment of executive officers of Scripps. The Scripps Compensation and
Nominations Committee, comprised of Scripps directors F. Seth Brown, Christopher
C. Calkins, Ronald J. Carlson, Martin C. Dickinson, James A. McKellar, William
F. Miller, Jr., Gail K. Naughton, and William E. Nelson held seven meetings in
1999. Except for Mr. Carlson, none of these individuals was at any time during
1999 an officer or employee of Scripps. Martin Dickinson was formerly a senior
vice president of Scripps but retired in 1996. The Compensation and Nomination
Committee considers and sets, by recommendation to the full board, the
individuals to be nominated for election to the board as well as the
compensation, titles, and other aspects of the powers and names of individuals
acting as, or being considered for, executive officers. Further, the Committee
considers and sets, by similar recommendation, the general levels of
compensation for all employees by class, not individually, and it reviews and
sets by recommendation, any and all bonus, incentive plans, or other special
awards and payments.
In its consideration of individual executive officers, weight is given to the
recommendations of the Chief Executive Officer; however, supporting data such as
industry comparisons and individual performance outcomes are also reviewed.
With respect to the CEO, his performance standards are established and agreed to
in writing at the start of each year. The Chairman of the Board (who is not an
officer or employee) reviews with the CEO the objective achievements as compared
to those agreed upon standards each quarter. This review is documented as a
signed report kept in the appropriate file.
The CEO's compensation is discussed and decided by the board when he is not
present. The degree of difficulty of the agreed performance standards, the
actual accomplishments, any special achievements, and the local industry
66
<PAGE>
trends rae all issues bearing on the ultimate compensation. Since the CEO's
age at the commencement of his employment was significantly different than
the ages of other executive officers, it was clear that the standard
retirement program would seriously disadvantage him. Therefore, with the
concurrence of the full board (except the CEO who was not present) special
supplementary retirement programs were designed by a consultant and adopted
by the board.
With respect to all compensation and benefits, the performance of SFC,
objectively measured by Return on Equity, Return on Assets and other criteria
approved by the Board, is a primary factor; however, subjective factors such as
"shopping reports," customer comments and growth also have weight.
SHAREHOLDER TOTAL RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return to
shareholders on the SFC's Common Stock with the cumulative total return on the
American Stock Exchange Composite Index (Amex) and the S & P Banks Index for the
five year period ending December 31, 1999. Since SFC was established in 1999,
the data presented prior to 1999 represents the return for Scripps Bank Common
Stock. (1)
[GRAPHIC]
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SFC $100 $125.10 $179.10 $431.70 $ 351.90 $ 281.90
- - ----------------------------------------------------------------------------------------------------------
Amex $100 $126.42 $134.50 $163.13 $ 165.96 $ 214.40
- - ----------------------------------------------------------------------------------------------------------
S & P Banks $100 $158.40 $223.00 $321.00 $ 342.00 $ 298.60
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes that $100 was invested in SFC's Common Stock on December 31, 1994,
and that all dividends were reinvested. Stockholder returns over the indicated
period should not be considered indicative of future stockholder returns.
67
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 29, 2000,
with respect to the beneficial ownership of SFC Common Stock by (i) all persons
known by SFC to be the beneficial owners of more than five percent of the
outstanding SFC Common Stock, (ii) each director of SFC, and (iii) each
executive officer of SFC named in the Summary Compensation Table.
<TABLE>
<CAPTION>
SHARES THAT
MAY BE
ACQUIRED
WITHIN 60 DAYS
NAME AND ADDRESS OF PERCENTAGE OF OF FEBRUARY
BENEFICIAL OWNERS (1) SHARES OWNED CLASS (2) 29, 2000
- - --------------------------------------------------------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Ronald J. Carlson (3) 31,200 * 9,840
M. Catherine Wright (3) 1,852 * 1,200
Christopher C. Calkins (3) 57,535 * 1,000
Christopher S. McKellar (3)(4)(5) 286,650 4.15% 1,000
William E. Nelson (3)(6) 578,068 8.36% 1,000
Alfred B. Salganick, M.D. (3) 492,384 7.12% 1,000
William T. Stephens (3) 16,822 * 1,000
Thomas W. Sefton Trust (7) 710,208 10.27% 0
Executive Officers and Directors as a group (7 persons) 2,174,719 31.38% 16,040
</TABLE>
*Less than 1%
- - -----------------------------
(1) Except as indicated in the footnotes to this table, (a) the address of the
persons named in this table is 5787 Chesapeake Court, San Diego, California
92123 and (b) the persons named in the table have sole voting and
investment power with respect to all shares of SFC Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
(2) Calculated on the basis of 6,913,139 shares of Scripps Common Stock
outstanding. Shares of Scripps Common Stock underlying options exercisable
within 60 days of February 29, 2000 are deemed to be outstanding for
purposes of calculating the beneficial ownership of securities of the
holders of such options.
(3) Includes shares beneficially owned as a participant in SFC Restated Stock
Purchase Plan for employees, officers and directors of SFC and Scripps.
(4) Christopher S. McKellar is the son of James A. McKellar, who is on the
Scripps Bank board of directors.
(5) Includes 5,240 shares held in trust for which Christopher S. McKellar is
trustee, 56,332 shares held as custodian for the benefit of his children,
and 57,474 shares held as a general partner and 114,460 shares held in the
name of Axiom Inc.
(6) Includes 140,788 shares owned by Nelson Management, Inc., of which Mr.
Nelson is President and 399,491 shares held in trust for which Mr. Nelson
is co-trustee.
(7) The address of the Thomas W. Sefton Trust is 2550 Fifth Avenue, Suite 808,
San Diego, California 92103-6624.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Scripps from time to time has outstanding extensions of credit to individual
officers, directors, principal security holders or their associates. Extensions
of credit to such persons were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectability or present other
unfavorable features. The aggregate extensions of credit by Scripps to
directors, executive officers, principal shareholders, employees and their
associates as of December 31, 1999 totaled approximately $333,194.
SFC has entered into indemnification agreements in a form originally approved by
its shareholders with each director and various executive officers containing
provisions which may require it, among other things, to indemnify its officers
and directors against liabilities that m may arise by reasons of their status or
service as officers or directors and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
Scripps and SFC intend to execute these agreements with their future directors
and executive officers.
68
<PAGE>
Richard B. Huntington, a director of Scripps, and his wife own shares of a
corporation that is the general partner of the lessor of Scripps' Point Loma
branch. Together, Mr. Huntington and his wife own one-third of the real estate
partnership. The ten-year lease of Scripps for this office space began in 1997.
Scripps paid for tenant improvements, which are amortized over the lease term,
and monthly rent, which increases by 4% annually; 2000 rental and premises and
equipment expenses are expected to be approximately $162,000.
In 1997 Sefton Capital Management began providing advisory services for the
securities portfolio of Scripps. This agreement was approved by the Scripps
Board of Directors. In 1998 an independent committee of the Scripps board of
directors approved the Scripps trust department entering into a contract with
Sefton Capital Management for the management of trust investment vehicles for
which investment was not otherwise designated. The fees for these services were
based upon the bank's understanding of the market rate for such services. In
1999, aggregate fees paid to Sefton Capital Management were approximately
$217,000. In the first quarter of 1999, the Trust Department reviewed the
services it could obtain elsewhere; it terminated the agreement with Sefton
Capital Management effective May 1999. Harley K. Sefton, a director of Scripps,
is an officer, principal and shareholder of Sefton Capital Management. In
November 1999 Sefton Capital Management merged into another company, at which
time the investment portfolio advisory service was moved to Chandler Asset
Management in San Diego.
The husband of Susan Whiteley, the Senior Vice President/Services and Support
Division Manager of Scripps, is the Chief Operating Officer of Advanced Network,
Inc. ANI provides Scripps with information technology consulting, automated
teller machine processing and servicing and merchant deposit processing
services. The fee arrangements with ANI were based in part on competitive bids
and were approved by the board of directors of Scripps. Scripps paid ANI an
aggregate of approximately $373,000 in 1999.
When PCB merged with and into Scripps in 1998, Dr. Salganick, the former
Chairman of PCB, became a director of Scripps and began to receive compensation
and stock options at the same level as the other outside directors of Scripps.
Pursuant to the terms of the merger agreement, each of the directors of PCB who
was party to an ongoing deferred compensation agreement elected, effective as of
the effective date of the PCB merger, to have all deferred compensation drawn
and paid within ten years of the "normal retirement date" or "expiration date."
69
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Documents Filed as Part of this Report
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - ------- -----------------------------------------------------------------
3.1 * Articles of Incorporation of SFC.
3.2 * By-laws of SFC.
4.1 * Specimen Common Stock Certificate of SFC.
10.1 * Form of Indemnification Agreement for directors and executive
officers
10.2 * 1995 Stock Option Plan, and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement thereunder
10.3 * 1992 Stock Option Plan, and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement thereunder
10.4 * 1998 Outside Directors Stock Option Plan
10.5 * Agreement and Plan of Merger between Scripps and PCB
10.6 * Form of Employment Agreement for executive officers
10.7 * Employment Agreement dated October 1, 1995, between Thomas D.
Michelli and Pacific Commerce Bank, as amended
10.8 * Lease, dated September 1, 1983, between Scripps and Oklahoma City
Investment Group, as amended
10.9 * Lease, dated April 25, 1995, between Scripps and Kearny Villa
Center East
10.10 * Sublease, dated March 1, 1999, between Scripps and Wells Fargo
Bank, N.A.
10.11 * Supplemental Retirement Plan between Scripps and Ronald J.
Carlson
10.12 * 1992 Unfunded Deferred Compensation Agreement between Scripps and
Ronald J. Carlson
10.13 * 1999 Unfunded Deferred Compensation Agreement between Scripps and
Ronald J. Carlson
10.14 Lease, dated October 21, 1999, between Scripps and Prentiss
Properties Acquisition Partners, L.P.
10.15 Lease, dated September 23, 1999, between Scripps and Balboa
Investors 1 Ltd.
10.16 Long-Term Incentive Compensation Plan between Scripps and Ronald
J. Carlson
21.1* List of SFC Subsidiaries.
23.1 Consent of PricewaterhouseCoopers, LLP
27.1 Financial Data Schedule.
- - ----------------------
* Incorporated by reference herein from the SFC Registration Statement on Form
10 (Registration No. 0-26081) filed with the SEC on May 14, 1999, as
subsequently amended.
(b) SFC did not file any reports on Form 8-K during the quarter ended December
31, 1999.
(c) See (a) above for all exhibits filed herewith and the exhibit index.
(d) There are no financial statements or schedules which were excluded from
Item 8 which are required to be reported herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
SCRIPPS FINANCIAL CORPORATION
March 30, 2000 /s/ Ronald J. Carlson
- - ---------------- -------------------------------------
Date Name: Ronald J. Carlson, President, Chief
Executive Officer and Director
70
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, this report has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
/s/ Ronald J. Carlson March 30, 2000
- - ------------------------------------- ----------------
Ronald J. Carlson, President, Chief Executive Officer and Date
Director
/s/ Christopher C. Calkins March 30, 2000
- - ------------------------------------- ----------------
Christopher C. Calkins, Director Date
/s/ Christopher S. McKellar March 30, 2000
- - ------------------------------------- ----------------
Christopher S. McKellar, Director Date
/s/ William E. Nelson March 30, 2000
- - ------------------------------------- ----------------
William E. Nelson, Director Date
/s/ M. Catherine Wright March 30, 2000
- - ------------------------------------- ----------------
M. Catherine Wright, Chief Financial Officer (Principal Date
Accounting Officer)
71
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "LEASE") is made and entered into by and
between PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P., a Delaware limited
partnership ("LANDLORD"), and SCRIPPS BANK, a California banking corporation
("TENANT"), upon all the terms set forth in this Lease and in all Exhibits and
Riders hereto, to each and all of which terms Landlord and Tenant hereby
mutually agree.
ARTICLE I
BASIC LEASE INFORMATION AND CERTAIN DEFINITIONS
1.1. Each reference in this Lease to information and definitions
contained in the Basic Lease Information and Certain Definitions and each use of
the terms capitalized and defined in this Section 1.1 shall be deemed to refer
to, and shall have the respective meaning set forth in, this Section 1.1.
A. Premises: That certain space identified by diagonal
lines or shaded area on the floor plans
attached hereto as Exhibit "A", consisting
of a portion of the first (1st) floor and
the entire second (2nd) floor of the
Building.
B. Building: The building to be constructed and to be
located at 11988 El Camino Real, San Diego,
California 92130.
C. Land: Those certain parcels of land underlying the
Project.
D. Parking Facility: The parking areas to be located on the Land.
E. Project: The Land and all improvements to be
constructed thereon, including the Building,
the Parking Facility, and all Common Areas,
all as conceptually shown on EXHIBIT "B"
attached hereto.
F. Commencement Date: The date defined in Section 3.1 hereof.
G. Usable Area of Premises: 25,845 square feet.
H. Term: Ten (10) years, unless this Lease is sooner
terminated as provided herein, beginning on
the Commencement Date.
I. Net Rentable Area of the 29,349 square feet of Net Rentable Area
Premises: consisting of (i) approximately 9,235 square
feet of Net Rentable Area on the first (1st)
floor of the Building, and (ii)
approximately 20,114 square feet of Net
Rentable Area on the second (2nd) floor of
the Building.
J. Net Rentable Area of the 163,635 square feet of Net Rentable Area.
Building:
K. Tenant's Share: 17.94%, representing a fraction, the
numerator of which is the Net Rentable Area
of the Premises and the denominator of which
is the Net Rentable Area of the Building,
subject to future adjustment pursuant to the
provisions of Section 5.4 hereof
L. Rent: The Base Rent and the Additional Rent.
<PAGE>
M. Base Rent: The Base Rent shall be as shown in this
Section 1.1(M) below. Base Rent includes
Base Year Operating Costs.
<TABLE>
<CAPTION>
Monthly Base
Rent per Square
Month of Lease Monthly Base Foot of Net
Term Rent Rentable Area
---- ---- -------------
<S> <C> <C>
1-12 $77,774.85 $2.65
13-24 $79,242.30 $2.70
25-36 $80,709.75 $2.75
37-48 $82,177.20 $2.80
49-60 $83,644.65 $2.85
61-72 $85,112.10 $2.90
73-84 $86,579.55 $2.95
85-96 $88,047.00 $3.00
97-108 $89,514.45 $3.05
109-120 $90,981.90 $3.10
</TABLE>
N. Additional Rent The Additional Rent shall be all other sums
due and payable by Tenant under the Lease,
including, but not limited to, Tenant's
Share of Operating Costs.
0. Base Year Operating The grossed up (to 95% occupancy) Operating
Costs: Costs for the calendar year 2001.
P. Parking Permits: Tenant shall be entitled to take, at no
charge during the initial Term, one hundred
three (103) Parking Permits consisting of
(i) seventy-eight (78) unassigned parking
spaces to be used in common with others in
the Parking Facility and (ii) twenty-five
(25) reserved parking spaces in, subject to
Article 6, the Parking Facility.
Q. Tenant's Permitted Uses: Tenant may use the Premises for general
office use and for no other purpose
whatsoever, except that the portion of the
Premises located on the ground floor may be
used for retail banking purposes.
R. Security Deposit: None.
S. Broker(s): Business Real Estate Brokerage Company
representing Landlord and CB Richard Ellis
representing Tenant.
T. Landlord's Address for Prentiss Properties Acquisition Partners,
Notice: L.P.
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Attention: Thomas F. August
With a copy to:
Prentiss Properties Acquisition Partners,
L.P.
970 West 190th Street, Suite 550
Torrance, California 90502
Attention: Chris Hipps
U. Landlord's Address for Prentiss Properties Acquisition Partners,
Payment: L.P.
P. 0. Box 100435
Pasadena, California 91189-0435
V. Tenant's Address for Scripps Bank
Notice: P.0 Box 8996
La Jolla, California 92038
Attention: Linda Ahlswede-Cox
W. Guarantor(s): None.
X. Extension Option(s): See Section 3.6 hereof.
Y. Allowance for Leasehold See EXHIBIT "C".
Improvements:
-2-
<PAGE>
ARTICLE 2
PREMISES AND QUIET ENJOYMENT
2.1. Landlord hereby leases the Premises to Tenant, and Tenant
hereby rents and hires the Premises from Landlord, for the Term. During the
Term, Tenant shall have the right to use, in common with others and in
accordance with the Rules and Regulations, the Common Areas.
2.2. Provided that Tenant fully and timely performs all the terms
of this Lease on Tenant's part to be performed, including payment by Tenant of
all Rent, Tenant shall have, hold and enjoy the Premises during the Term without
hindrance or disturbance from or by Landlord; subject, however, to all of the
terms, conditions and provisions of any and all ground leases, deeds to secure
debt, mortgages, restrictive covenants, easements, and other encumbrances now or
hereafter affecting the Premises or the Project (collectively, the
"ENCUMBRANCES"). Landlord shall, on or before the Commencement Date, endeavor to
provide Tenant with notice of any such Encumbrances hereafter affecting the
Premises or the Project that may, in Landlord's good faith opinion, adversely
affect Tenant's rights and obligations hereunder.
ARTICLE 3
TERM; COMMENCEMENT DATE
DELIVERY AND ACCEPTANCE OF PREMISES
3.1. The Commencement Date shall be the earlier of (a) the date the
Premises are deemed Available for Occupancy pursuant to Section 3.2 hereof or
(b) the date Tenant, or anyone claiming by, through or under Tenant, occupies
all or any portion of the Premises for the purpose of the conduct of Tenant's
(or such other person's) business therein; provided, however, that until the
Premises are deemed Available for Occupancy (pursuant to Section 3.2 hereof) the
Base Rent payable by Tenant for the Premises after the occurrence of the
Commencement Date pursuant to Section 3.1(b) above shall be prorated based on
the ratio of the total Net Rentable Area in the Premises and the Net Rentable
Area in the Premises actually occupied by Tenant (or anyone claiming by, through
or under Tenant) for the purpose of the conduct of Tenant's (or such other
person's) business therein.
3.2. A. The Premises shall be deemed Available for Occupancy
as soon as the following conditions have been met: (a) the Leasehold
Improvements (as defined in EXHIBIT "C" to the Lease) have been substantially
completed as determined by Landlord's architect or space planner; (b) either a
certificate of occupancy (temporary or final) or other certificate permitting
the lawful occupancy of the Premises has been issued for the Premises, or such
portion of the Premises, as the case may be, by the appropriate governmental
authority; and (c) at least three (3) Business Days' notice of the anticipated
occurrence of the conditions in clauses (a) and (b) above has been given to
Tenant.
B. Notwithstanding anything to the contrary contained herein, if
there is a delay in the Availability for Occupancy of the Premises due to Tenant
Delay (as defined in EXHIBIT "C" to the Lease), then the Premises shall be
deemed Available for Occupancy on the date on which the Premises would have been
available for occupancy but for such Tenant Delay, even though a certificate of
occupancy or other certificate permitting the lawful occupancy of the Premises
has not been issued or the Leasehold Improvements have not been commenced or
completed.
C. In the event that the Premises is not Available for
Occupancy by January 1, 2001 ("COMPLETION OUTSIDE DATE"), as such Completion
Outside Date may be extended by the number of days of Tenant Delays and by
the number of days of "Force Majeure Delays" (as defined below), then the
sole remedy of Tenant shall be the right to deliver a notice to Landlord (the
"TERMINATION NOTICE") electing to terminate this Lease effective upon receipt
of the Termination Notice by Landlord (the "TERMINATION EFFECTIVE DATE").
Except as provided hereinbelow, the Termination Notice must be delivered by
Tenant to Landlord, if at all, not earlier than the Completion Outside Date
and not later than five (5) business days after the Completion Outside Date.
If Tenant delivers the Termination Notice to Landlord, then Landlord shall
have the right to suspend the Termination Effective Date for a period ending
thirty (30) days after the original Termination Effective Date. In order to
suspend the Termination Effective Date, Landlord must deliver to Tenant,
within five (5) business days after receipt of the Termination Notice, a
certificate of the general contractor certifying that it is such contractor's
best good faith judgment that the Premises will be Available for Occupancy
within thirty (30) days after the original Termination Effective Date. If the
Premises is Available for Occupancy within said thirty (30) day suspension
period, then the Termination Notice shall be of no further force and effect;
if, however, the Premises is not Available for Occupancy within said thirty
(30) day suspension period, then this Lease shall terminate as of the date of
expiration of such thirty (30) day period. If prior to the Completion Outside
Date Landlord determines that the Premises will not be Available for
Occupancy by the Completion Outside Date, Landlord shall have the right to
deliver a written notice to Tenant stating Landlord's opinion as to the date
by which the Premises will be Available for Occupancy and Tenant shall be
required, within five (5) business days after receipt of such notice, to
either deliver the Termination Notice (which will mean that this Lease shall
thereupon terminate and shall be of no further force and effect) or agree to
extend the Completion Outside Date to that date which is set by Landlord.
Failure of Tenant to so respond in writing within said five (5) business day
period shall be deemed to constitute Tenant's agreement to extend the
Completion Outside Date to that date which is set by Landlord. If the
Completion Outside Date is so extended, Landlord's right to request Tenant to
elect to either terminate or further extend the Completion Outside Date shall
remain and shall continue to remain, with each of the notice periods and
response periods set forth above, until the Premises is Available for
Occupancy or until this Lease is terminated. For purposes of this Section
3.2.C, "FORCE MAJEURE DELAYS" shall mean and refer to a period of delay or
delays encountered by Landlord affecting Landlord's completion of the
Building and/or the Project and/or the work of construction of the Leasehold
Improvements
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because of delays due to excess time in obtaining governmental permits or
approvals for a lot split/lot line adjustment of the Land and/or pertaining to
grading permits and/or building permits beyond the time period normally required
to obtain such permits or approvals for similar work, similarly improved, in the
Carmel Valley area of San Diego County; fire, earthquake or other acts of God;
acts of the public enemy; riot; insurrection; governmental regulations of the
sales of materials or supplies or the transportation thereof; strikes or
boycotts; shortages of material or labor or any other cause beyond the
reasonable control of Landlord.
3.3. The Net Rentable Area of the Premises and the Building are as
stated in Sections 1.1I and J, respectively. By written instrument
substantially in the form of EXHIBIT "D" attached hereto, Landlord shall notify
Tenant of the Commencement Date, the Net Rentable Area of the Premises and all
other matters stated therein. The Commencement Notice shall be conclusive and
binding on Tenant as to all matters set forth therein, unless within ten (10)
days following delivery of such Commencement Notice, Tenant contests any of the
matters contained therein by notifying Landlord in writing of Tenant's
objections. The foregoing notwithstanding, Landlord's failure to deliver any
Commencement Notice to Tenant shall not affect Landlord's determination of the
Commencement Date.
3.4. Except as otherwise provided in Paragraph 10 of EXHIBIT "C",
Tenant may not enter or occupy the Premises prior to the Commencement Date
without Landlord's express written consent and any entry by Tenant shall be
subject to all of the terms of this Lease; provided however, that no such early
entry shall change the Commencement Date or the date on which the Term expires
(the "EXPIRATION DATE").
3.5. Occupancy of the Premises or any portion thereof by Tenant or
anyone claiming through or under Tenant for the conduct of Tenant's or such
other person's business therein shall be conclusive evidence that Tenant and all
parties claiming through or under Tenant (a) have accepted the Premises or such
portion as suitable for the purposes for which the Premises are leased
hereunder, (b) have accepted the Common Areas as being in a good and
satisfactory condition, and (c) have waived any defects in the Premises and the
Project; provided however, that, if any Leasehold Improvements have been
constructed and installed to prepare the Premises for Tenant's occupancy,
Tenant's acceptance of the Premises, and waiver of any defect therein, shall
occur upon Landlord's substantial completion of the Leasehold Improvements in
accordance with the terms of EXHIBIT "C" hereof, subject only to Landlord's
completion of items on Landlord's punchlist (in accordance with Section 9 of
EXHIBIT "C") and latent defects of which Tenant has given Landlord notice within
forty five (45) days following the date on which Landlord first makes the
Premises available to Tenant for any occupancy or any work in the Premises to be
undertaken by Tenant.
3.6. A. Subject to the terms of this Section 3.6 and
Section 3.7, Landlord hereby grants to Tenant an option (the "EXTENSION OPTION")
to extend the Term of this Lease with respect to the entire Premises for one (1)
additional period of five (5) years (the "OPTION TERM"), on the same terms,
covenants and conditions as provided for in this Lease during the initial Lease
Term, except that the rent payable by Tenant during such Option Term (including
all economic terms such as, without limitation, monthly Base Rent, a new Base
Year for Operating Costs, parking charges, etc.), shall be equal to the "fair
market rental rate" for the Premises for the Option Term as defined and
determined in accordance with the provisions of this Section 3.6 below;
provided, however, that under no circumstances shall the "fair market rental
rate" be less than the Base Rent rate paid by Tenant at the end of the original
Lease Term.
B. The Extension Option must be exercised, if at all, by
written notice ("EXTENSION NOTICE") delivered by Tenant to Landlord no earlier
than the date which is twelve (12) months, and no later than the date which is
six (6) months, prior to the expiration of the then current Term of this Lease.
C. The term "FAIR MARKET RENTAL RATE" as used herein
shall mean the annual amount per rentable square foot, projected during the
relevant period, that a willing, comparable, non-equity tenant (excluding
sublease and assignment transactions) would pay, and a willing, comparable
landlord of a comparable quality building located in the Comparison Area would
accept, at arm's length (what Landlord is accepting in current transactions for
the Building may be considered), for space unencumbered by any other tenant's
expansion right and comparable in size, quality and floor height as the Premises
taking into account the value of the existing improvements in the Premises to
Tenant, as compared with the value of the existing improvements in such
comparable space, with such value to be based on the age, quality and layout of
the existing improvements in the Premises (and the extent to which the same
could be utilized by Tenant with consideration given to the fact that the
improvements existing in the Premises are specifically suitable to Tenant) and
taking into account items that lessors customarily consider in renewal
transactions including, but not limited to, rental rates, office space
availability, tenant size, operating expenses and allowance, parking charges,
and any other amounts then being charged by Landlord or the lessors of such
similar office buildings.
D. Landlord's determination of fair market rental rate
shall be delivered to Tenant in writing not later than thirty (30) days
following Landlord's receipt of Tenant's Extension Notice. Tenant will have
thirty (30) days ("TENANT'S REVIEW PERIOD") after receipt of Landlord's notice
of the fair market rental rate within which to accept such fair market rental
rate or to object thereto in writing. Tenant's failure to accept the fair market
rental rate submitted by Landlord in writing within Tenant's Review Period will
conclusively be deemed Tenant's disapproval thereof. If Tenant objects to (or is
deemed to have disapproved) the fair market rental rate submitted by Landlord
within Tenant's Review Period, then Landlord and Tenant will attempt in good
faith to agree upon such fair market rental rate using their best good faith
efforts. If Landlord and Tenant fail to reach agreement on such fair market
rental rate within fifteen (15) days following the expiration of Tenant's Review
Period (the "OUTSIDE AGREEMENT DATE"), then Tenant may, within five (5) business
days following the Outside Agreement Date, demand by written notice to Landlord
that each party's determination be submitted to appraisal in accordance with the
provisions below of this Section 3.6. Tenant's failure to timely demand
appraisal will constitute Tenant's rescission of its Extension Notice and the
Extension Option will be void and of no further force or effect.
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E. (1) Landlord and Tenant shall each appoint one
independent, unaffiliated appraiser who shall by profession be a real estate
broker who has been active over the five (5) year period ending on the date of
such appointment in the leasing of comparable office space in the Comparison
Area. Each such appraiser will be appointed within thirty (30) days after the
Outside Agreement Date.
(2) The two (2) appraisers so appointed will
within fifteen (15) days of the date of the appointment of the last appointed
appraiser agree upon and appoint a third appraiser who shall be qualified under
the same criteria set forth herein above for qualification of the initial two
(2) appraisers.
(3) The determination of the appraisers shall be
limited solely to the issue of whether Landlord's or Tenant's last proposed (as
of the Outside Agreement Date) new fair market rental rate for the Premises is
the closest to the actual new fair market rental rate for the Premises as
determined by the appraisers, taking into account the requirements of Paragraph
C and this Paragraph E regarding same.
(4) The three (3) appraisers shall within thirty
(30) days of the appointment of the third appraiser reach a decision as to
whether the parties shall use Landlord's or Tenant's submitted new fair market
rental rate (i.e., the appraisers may only select Landlord's or Tenant's
submission and may not select a compromise position), and shall notify Landlord
and Tenant thereof.
(5) The decision of the majority of the three
(3) appraisers shall be binding upon Landlord and Tenant. The cost of each
party's appraiser shall be the responsibility of the party selecting such
appraiser, and the cost of the third appraiser (or arbitration, if necessary)
shall be shared equally by Landlord and Tenant.
(6) If either Landlord or Tenant fails to
appoint an appraiser within the time period in Paragraph E(1) herein above, the
appraiser appointed by one of them shall reach a decision, notify Landlord and
Tenant thereof and such appraiser's decision shall be binding upon Landlord and
Tenant.
(7) If the two (2) appraisers fail to agree upon
and appoint a third appraiser, both appraisers shall be dismissed and the matter
to be decided shall be forthwith submitted to arbitration under the provisions
of the American Arbitration Association (but subject to the requirements of
Paragraph C and this Paragraph E).
(8) In the event that the new Monthly Base Rent
is not established prior to end of the initial Term of the Lease, the monthly
Base Rent immediately payable at the commencement of such Option Term shall be
the monthly Base Rent payable in the immediately preceding month.
Notwithstanding the above, once the fair market rental is determined in
accordance with this section, the parties shall settle any underpayment or
overpayment on the next monthly Base Rent payment date falling not less than
thirty (30) days after such determination.
3.7. A. As used in this Section, the word "OPTION" means the
Extension Option pursuant to Section 3.6 herein.
B. The Option is personal to the original Tenant
executing this Lease ("ORIGINAL TENANT") or any successor by merger or
acquisition of all or substantially all of Tenant's assets (the "PERMITTED
TRANSFEREE") and may be exercised only by the original Tenant executing this
Lease or a Permitted Transferee while occupying the entire Premises and may not
be exercised or be assigned, voluntarily or involuntarily, by any person or
entity other than the original Tenant executing this Lease or a Permitted
Transferee. The Option is not assignable separate and apart from this Lease, nor
may the Option be separated from this Lease in any manner, either by reservation
or otherwise.
C. Tenant shall have no right to exercise the Option,
notwithstanding any provision of the grant of Option to the contrary, and
Tenant's exercise of the Option may, at Landlord's option, be nullified by
Landlord and deemed of no further force or effect, if Tenant shall be in default
under the terms of this Lease after the expiration of applicable cure periods
as of Tenant's exercise of the Option or at any time after the exercise of such
Option and prior to the commencement of the Option event.
ARTICLE 4
RENT
4.1. Tenant shall pay to Landlord, without notice, demand, offset
or deduction, in lawful money of the United States of America, at Landlord's
Address for Payment specified in Section 1.1.U above, or at such other place as
Landlord shall designate in writing from time to time: (a) the Base Rent in
equal monthly installments, in advance, on the first day of each calendar month
during the Term, and (b) the Additional Rent, at the respective times required
hereunder. The first monthly installment of Base Rent shall be paid in advance
on the date of Tenant's execution of this Lease and applied to the first
installment of Base Rent coming due under this Lease. Payment of Rent shall
begin on the Commencement Date; provided, however, that, if either the
Commencement Date or the Expiration Date falls on a date other than the first
day of a calendar month, the Rent due for such fractional month shall be
prorated on a per diem basis between Landlord and Tenant so as to charge Tenant
only for the portion of such fractional month falling within the Term.
4.2. All past due installments of Rent not paid within five (5)
days after notice that such amount is due shall be subject to a late charge of
five percent (5%) of the amount of the late payment and shall further bear
interest until paid at a rate per annum (the "INTEREST RATE") equal to the
greater of fifteen percent (15%) or four percent (4%)
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above the prime rate of interest from time to time publicly announced by Bank of
America, a national banking association, or any successor thereof; provided,
however, that, if at the time such interest is sought to be imposed the rate of
interest exceeds the maximum rate permitted under federal law or under the laws
of the State of California, the rate of interest on such past due installments
of Rent shall be the maximum rate of interest then permitted by applicable law.
ARTICLE 5
OPERATING COSTS
5.1. Tenant shall pay to Landlord, as Additional Rent, for each
year or fractional year during the Term, an amount ("TENANT'S OPERATING COSTS
PAYMENT") equal to Tenant's Share of Operating Costs, for such year in excess
of Tenant's Share of Base Year Operating Costs, such amount to be calculated
and paid as follows:
A. Beginning on January 1st of the year following the
year in which the Commencement Date occurs, and on the first day of January of
each year during the Term thereafter, or as soon thereafter as is practicable,
Landlord shall furnish Tenant with a statement ("LANDLORD'S OPERATING COSTS
ESTIMATE") setting forth Landlord's reasonable estimate of grossed up Operating
Costs for the forthcoming year and Tenant's Operating Costs Payment for such
year. On the first day of each calendar month during such year, Tenant shall pay
to Landlord one-twelfth (1/12th) of Tenant's Operating Costs Payment as
estimated on Landlord's Operating Costs Estimate. If for any reason Landlord has
not provided Tenant with Landlord's Operating Costs Estimate on the first day of
January of any year during the Term, then (a) until the first day of the
calendar month following the month in which Tenant is given Landlord's Operating
Costs Estimate, Tenant shall continue to pay to Landlord on the first day of
each calendar month the sum, if any, payable by Tenant under this Section 5.1
for the month of December of the preceding year, and (b) promptly after
Landlords' Operating Costs Estimate is furnished to Tenant, Landlord shall give
notice to Tenant stating whether the installments of Tenant's Operating Costs
Payments previously made for such year were greater or less than the
installments of Tenant's Operating Costs Payments to be made for such year, and
(i) if there shall be a deficiency, Tenant shall pay the amount thereof to
Landlord within twenty (20) days after the delivery of Landlord's Operating
Costs Estimate, or (ii) if there shall have been an overpayment, Landlord shall
apply such overpayment as a credit against the next accruing monthly
installment(s) of Tenant's Operating Costs Payment due from Tenant until fully
credited to Tenant (or pay such amount to Tenant if this Lease has expired or
terminated), and (iii) on the first day of the calendar month following the
month in which Landlord's Operating Costs Estimate is given to Tenant and on the
first day of each calendar month throughout the remainder of such year, Tenant
shall pay to Landlord an amount equal to one-twelfth (1/12th) of Tenant's
Operating Costs Payment.
B. On the first day of March of each year during the
Term (beginning on the first day of March of the second year following the year
in which the Commencement Date occurs), or as soon thereafter as is practicable,
Landlord shall furnish Tenant with a statement of the grossed up Operating Costs
for the preceding year. Within thirty (30) days after Landlord's giving of such
statement, Tenant shall make a lump sum payment to Landlord in the amount, if
any, by which Tenants' Operating Costs Payment for such preceding year as shown
on such Landlord's statement, exceeds the aggregate of the monthly installments
of Tenant's Operating Costs Payments paid during such preceding year. If
Tenant's Operating Costs Payment, as shown on such Landlord's statement, is less
than the aggregate of the monthly installments of Tenant's Operating Costs
Payment actually paid by Tenant during such preceding year, then Landlord shall
apply such amount to the next accruing monthly installment(s) of Tenant's
Operating Costs Payment due from Tenant until fully credited to Tenant.
C. If the Term ends on a date other than the last day of
December, the actual Operating Costs for the year in which the Expiration Date
occurs shall be prorated so that Tenant shall pay that portion of Tenant's
Operating Costs Payment for such year represented by a fraction, the numerator
of which shall be the number of days during such fractional year falling within
the Term, and the denominator of which is 365 (or 366, in the case of a leap
year). The provisions of this Section 5.1 shall survive the Expiration Date or
any sooner termination provided for in this Lease.
5.2. A. For purposes of this Lease, the term "OPERATING
COSTS" shall mean any and all expenses, costs and disbursements of every kind
which Landlord pays, incurs or becomes obligated to pay in connection with the
operation, management, repair and maintenance of all portions of the Project and
which are allocated by Landlord to the Building (as opposed to the adjacent
building(s)) on a reasonable and consistent basis. All Operating Costs shall be
determined according to consistently applied accounting principles. Operating
Costs include, without limitation, the following: (a) Wages, salaries, benefits
and fees of all personnel or entities to the extent engaged in the operation,
repair, maintenance, management, or safekeeping of the Project, including taxes,
insurance, and benefits relating thereto and the costs of all supplies and
materials used in the operation, repair, maintenance and security of the
Project; (b) Cost of performance by Landlord's personnel of, or of all service
agreements for, maintenance, janitorial services, access control, alarm service,
window cleaning, elevator maintenance and landscaping for the Project. Such cost
shall include the rental of personal property used by Landlord's personnel in
the maintenance and repair of the Project; (c) Cost of utilities for the
Project, including water, sewer, power, electricity for common areas, gas, fuel,
lighting and all air-conditioning, heating and ventilating costs; (d) Cost of
all insurance, including casualty and liability insurance applicable to the
Project and to Landlord's equipment, fixtures and personal property used in
connection therewith, business interruption or rent insurance against such
perils as are commonly insured against by prudent landlords, such other
insurance as may be required by any lessor or mortgagee of Landlord, and such
other insurance which Landlord considers reasonably necessary in the operation
of the Project, together with all appraisal and consultants' fees in connection
with such insurance; (e) All Taxes. For purposes hereof, the term "TAXES" shall
mean, all taxes, assessments, and other governmental charges, applicable to or
assessed against the Project or any portion thereof, or applicable to or
assessed against Landlord's personal property used in connection therewith,
whether federal, state, county, or municipal and whether assessed by taxing
districts or authorities presently taxing the Project or the operation thereof
or by other taxing authorities subsequently created, or otherwise, and any other
taxes and assessments attributable to
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or assessed against all or any part of the Project or its operation; including
any reasonable expenses, including fees and disbursements of attorneys, tax
consultants, arbitrators, appraisers, experts and other witnesses, incurred by
Landlord in contesting any taxes or the assessed valuation of all or any part of
the Project. If at any time during the Term there shall be levied, assessed, or
imposed on Landlord or all or any part of the Project by any governmental entity
any general or special ad valorem or other charge or tax directly upon rents
received under leases, or if any fee, tax, assessment, or other charge is
imposed which is measured by or based, in whole or in part, upon such rents, or
if any charge or tax is made based directly or indirectly upon the transactions
represented by leases or the occupancy or use of the Project or any portion
thereof, such taxes, fees, assessments of other charges shall be deemed to be
Taxes; provided, however, that any (i) franchise, corporation, income or net
profits tax, unless substituted for real estate taxes or imposed as additional
charges in connection with the ownership of the Project, which may be assessed
against Landlord or the Project or both, (ii) transfer taxes assessed against
Landlord or the Project or both, (iii) penalties or interest on any late
payments of Landlord, and (iv) personal property taxes of Tenant or other
tenants in the Project, shall be excluded from Taxes. If any or all of the Taxes
paid hereunder are by law permitted to be paid in installments, notwithstanding
how Landlord pays the same, then, for purposes of calculating Operating Costs,
such Taxes shall be deemed to have been divided and paid in the maximum number
of installments permitted by law, and there shall be included in Operating Costs
for each year only such installments as are required by law to be paid within
such year, together with interest thereon and on future such installments as
provided by law; (f) Legal and accounting costs incurred by Landlord or paid by
Landlord to third parties (exclusive of legal fees with respect to disputes with
individual tenants, negotiations of tenant leases, or with respect to the
ownership rather than the operation of the Project), appraisal fees, consulting
fees, all other professional fees and disbursements and all association dues;
(g) Cost of non-capitalized repairs and general maintenance for the Project
(excluding repairs and general maintenance paid by proceeds of insurance or by
Tenant, other tenants of the Project or other third parties); (h) Amortization
of the cost of improvements or equipment which are capital in nature and which
(1) are for the purpose of reducing Operating Costs for the Project, up to the
amount reasonably anticipated to be saved as a result of the installation
thereof, as reasonably estimated by Landlord, or (2) are required by any
governmental authority, or (3) replace any Building equipment needed to operate
the Project at the same quality levels as prior to the replacement. All such
costs, including interest thereon, shall be amortized on a straight-line basis
over the useful life of the capital investment items, as reasonably determined
by Landlord, but in no event beyond the reasonable useful life of the Project as
a first class office project; (i) the Project management office rent or rental
value; (j) a management fee comparable to that being charged by institutional
landlords of comparable projects in the Comparison Area, but not to be less than
four percent (4%) or more than five percent (5%) of revenues from the Building
(whether or not Landlord engages a manager for the Project or manages the
Project with Landlord's personnel) and all items reimbursable to the Project
manager, if any, pursuant to any management contract for the Project; and (k)
amounts payable to any associations created under any instruments of record
affecting the Building or the Land, as amended from time to time.
B. "Operating Costs" shall not include (a) costs for any
capital repairs, replacements or improvements, except as provided above; (b)
expenses for which Landlord is reimbursed or indemnified (either by an insurer,
condemnor, tenant, warrantor or otherwise), to the extent of funds received by
Landlord; (c) expenses incurred in leasing or procuring tenants (including lease
commissions, advertising expenses and expenses of renovating space for tenants);
(d) payments for rented equipment, the cost of which would constitute a capital
expenditure not permitted pursuant to the foregoing if the equipment were
purchased; (e) interest or amortization payments on any mortgages; (f) net basic
rents under ground leases; (g) costs representing an amount paid to an affiliate
of Landlord which is in excess of the amount which would have been paid in the
absence of such relationship; (h) costs specially billed to and paid by specific
tenants; (i) damage and repairs to the extent actually reimbursed to Landlord
under any insurance policy carried by Landlord in connection with the Building,
Common Areas or Parking Facilities; j) Landlord's general overhead expenses not
related to the Building, Common Areas or Parking Facility; (k) costs (including
permit, license and inspection fees) incurred in renovating or otherwise
improving, decorating, painting or altering space for other tenants or other
occupants of the vacant space within the Building; (l) costs incurred due to a
violation by Landlord or any other tenant in the Building of the terms and
conditions of any lease; (m) rentals and other related expenses for leasing HVAC
systems, elevators, or other items (except when needed in connection with normal
repairs and maintenance of the Building or the Project) which if purchased,
rather than rented, would constitute a capital improvement not included in
Operating Costs pursuant to this Lease; (n) depreciation, amortization and
interest payments, except as specifically included in Operating Costs pursuant
to the terms of this Lease and except on materials, tools, supplies and
vendor-type equipment purchased by Landlord to enable Landlord to supply
services Landlord might otherwise contract for with a third party, where such
depreciation, amortization and interest payments would otherwise have been
included in the charge for such third party's services, all as determined in
accordance with generally accepted accounting principles, consistently applied,
and when depreciation or amortization is permitted or required, the item shall
be amortized over its reasonably anticipated useful life; or (o) interest and
tax penalties incurred as a result of Landlord's negligence, inability or
unwillingness to make payments or file returns when due. There shall be no
duplication of costs or reimbursements. Operating Costs attributable to the
Common Areas or Parking Facilities in general will be equitably prorated among
all of the buildings in the Project and Tenant shall be responsible for Tenant's
Share of those costs attributable to the Building. In the event of any dispute
as to the amount of Tenant's Share of Operating Costs, Tenant or a nationally
recognized accounting firm selected by Tenant and reasonably satisfactory to
Landlord (billing hourly and not on a contingency fee basis) will have the
right, by prior written notice ("AUDIT NOTICE") given within sixty (60) days
("AUDIT PERIOD") following receipt of Landlord's annual reconciliation ("ACTUAL
STATEMENT") and at reasonable times during normal business hours, to audit
Landlord's accounting records with respect to Operating Costs relative to the
year to which such Actual Statement relates at the offices of Landlord's
property manager. In no event will Landlord or its property manager be required
to (i) photocopy any accounting records or other items or contracts, (ii) create
any ledgers or schedules not already in existence, (iii) incur any costs or
costs relative to such inspection, or (iv) perform any other tasks other than
making available such accounting records as aforesaid. Neither Tenant nor its
auditor may leave the offices of Landlord's property manager with copies of any
materials supplied by Landlord. Tenant must pay Tenant's Share of Operating
Costs when due pursuant to the terms of this Lease and may not withhold payment
of Operating Costs or any other rent pending results of the audit or during a
dispute regarding Operating Costs. The audit must be completed within thirty
(30) days of the date of Tenant's Audit Notice and the results of such audit
shall be delivered to Landlord within forty-five (45) days of the date of
Tenant's Audit Notice.
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If Tenant does not comply with any of the aforementioned time frames, then such
Actual Statement will be conclusively binding on Tenant. If such audit or review
correctly reveals that Landlord has overcharged Tenant, then within thirty (30)
days after the results of such audit are made available to Landlord, Landlord
agrees to reimburse Tenant the amount of such overcharge. If the audit reveals
that Tenant was undercharged, then within thirty (30) days after the results of
the audit are made available to Tenant, Tenant agrees to reimburse Landlord the
amount of such undercharge. In all cases, Tenant agrees to pay the cost of such
audit. Tenant agrees to keep the results of the audit confidential and will
cause its agents, employees and contractors to keep such results confidential.
To that end, Landlord may require Tenant and its auditor to execute a
confidentiality agreement provided by Landlord.
C. For purposes of this Section 5.2.C, the term
"CONTROLLABLE OPERATING COSTS" shall mean all Operating Costs (as defined above)
except those Operating Costs described in subsections 5.2(A)(c), 5.2(A)(d) and
5.2(A)(e) above. Notwithstanding anything to the contrary contained herein and
solely for purposes of calculating Tenant's Operating Costs Payment, the
aggregate Controllable Operating Costs for any year after the Base Year shall
not increase more than seven percent (7%) over the maximum permitted
Controllable Operating Costs for the immediately preceding year (regardless of
the actual Controllable Operating Costs incurred for such preceding calendar
year); provided, however, if the actual Controllable Operating Costs for any
calendar year are greater than the maximum amount permitted to be charged to
Tenant hereunder, the difference shall be added to Controllable Operating Costs
for succeeding calendar years until such excess(es) is/are exhausted. The
maximum permitted Controllable Operating Costs for the Base Year shall be the
actual amounts of permitted Controllable Operating Costs for the Base Year.
5.3. If the Building is not fully completed (in accordance with the
base building plans for the Building), occupied (meaning ninety-five percent
(95%) of the Net Rentable Area of the Building) and/or assessed (for purposes of
Taxes) during any full or fractional year of the Term (including the Base Year),
the actual Operating Costs (including Taxes) shall be adjusted for such year to
an amount which Landlord estimates would have been incurred in Landlord's
reasonable judgment had the Building been ninety-five percent (95%) completed,
occupied and fully assessed.
5.4. If during the Term any change occurs in either the number of
square feet of the Net Rentable Area of the Premises or of the Net Rentable
Area of the Building, Tenant's Share of Operating Costs shall be adjusted,
effective as of the date of any such change. Landlord shall promptly notify
Tenant in writing of such change and the reason therefor. Any changes made
pursuant to this Section 5.4 shall not alter the computation of Operating Costs
as provided in this Article 5, but, on and after the date of any such change,
Tenant's Operating Costs Payment pursuant to Section 5.1A shall be computed upon
Tenant's Share thereof, as adjusted. If such estimated payments of Tenant's
Share are so adjusted during a year, a reconciliation payment for Tenant's Share
of Operating Costs pursuant to this Article 5 for the calendar year in which
such change occurs shall be computed pursuant to the method set forth in Section
5.1B, such computation to take into account the daily weighted average of
Tenant's Share of Operating Costs during such year.
ARTICLE 6
PARKING
Subject to the terms hereof, Landlord hereby grants to Tenant a license
to use in common with other tenants and with the public the Parking Facility and
shall issue Parking Permits for such use. Each such Parking Permit shall entitle
Tenant to one (1) unassigned parking space in the Parking Facility. Each
reserved Parking Permit shall entitle Tenant to one (1) reserved, covered
parking space in the Parking Facility in a location to be designated by Landlord
from time to time in Landlord's reasonable discretion. Notwithstanding anything
above to the contrary, Landlord shall have the right, in its sole and absolute
discretion, to provide up to ten (10) of such reserved Parking Permits in the
uncovered parking lot depicted on EXHIBIT "B". Any costs incurred by Landlord to
designate Tenant's reserved parking spaces as reserved for Tenant shall be paid
by Tenant, as additional rent, within ten (10) days after Tenant's receipt of an
invoice therefor. All such parking shall be free of charge throughout the
initial Lease Term. Thereafter, the charge for all parking shall be at the
prevailing rates as determined by Landlord. The number of parking permits to be
issued to Tenant is set forth in Section 1.1P. Landlord shall not be obligated
to provide Tenant with any additional Parking Permits. If Tenant fails to
observe the Rules and Regulations with respect to the Parking Facility, then
Landlord, at its option, shall have the right to treat such failure as a default
under this Lease and to terminate Tenant's Parking Permits, without legal
process, and to remove Tenant's vehicles and those of its employees, licensees
or invitees and all of Tenant's personal property from the Parking Facility. If
all or any portion of the Parking Facility shall be damaged or rendered
unusable by fire or other casualty or any taking pursuant to eminent domain
proceeding (or deed in lieu thereof), and as a result thereof Landlord or the
garage operator is unable to make available to Tenant the parking provided for
herein, then the number of cars which Tenant shall be entitled to park hereunder
shall be proportionately reduced so that the number of cars which Tenant may
park in the Parking Facility after the casualty or condemnation in question
shall bear the same ratio to the total number of cars which can be parked in the
Parking Facility at such time as the number of cars Tenant had the right to park
in the Parking Facility prior to such casualty condemnation bore to the
aggregate number of cars which could be parked therein at that time.
ARTICLE 7
UTILITIES AND SERVICES
7.1 A. During the Term, Landlord shall furnish Tenant with
the following services: (a) hot and cold water in Building Standard bathrooms
and chilled water in Building Standard drinking fountains; (b) heating,
ventilating or air-conditioning, as appropriate, during Business Hours (as
defined in Article 26) at such temperatures
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and in such amounts as customarily and seasonally provided to tenants occupying
comparable space in first-class office buildings in the San Diego Corporate
Center/Del Mar Heights office submarket area ("COMPARISON AREA"); (c) electrical
wiring and facilities and power for normal general office use to accommodate a
maximum capacity of seven and one-half (7.5) watts limited to a maximum demand
consumption of three and one-quarter (3.25) watts per square foot of Usable Area
in the Premises available at the bus riser during all hours; (d) electric
lighting for the Common Areas of the Project; (e) passenger elevator service, in
common with others, for access to and from the Premises twenty-four (24) hours
per day, seven (7) day per week; provided, however, that Landlord shall have the
right to limit the number of (but not cease to operate all) elevators to be
operated after Business Hours and on Saturdays, Sundays and Holidays; (f)
janitorial cleaning services; (g) facilities for Tenant's loading, unloading,
delivery and pick-up activities, including access thereto during Business Hours,
subject to the Rules and Regulations, the type of facilities, and other
limitations of such loading facilities; and (h) replacement, as necessary, of
all Building Standard lamps and ballasts in Building Standard light fixtures
within the Premises. All services referred to in this Section 7.1A shall be
provided by Landlord and paid for by Tenant as part of Tenant's Operating Costs
Payment.
B. If Tenant requires electricity, air-conditioning,
heating or other services, including cleaning services, routinely supplied by
Landlord for hours or days in addition to the hours and days specified in
Section 7.1A, Landlord shall make commercially reasonable efforts to provide
such additional service after reasonable prior written request therefor from
Tenant, and Tenant shall reimburse Landlord for the amount Landlord reasonably
determines to be its total actual cost of providing such additional service as
further described below. Landlord shall have no obligation to provide any
additional service to Tenant at any time Tenant is in default under this Lease
unless Tenant pays to Landlord, in advance, the actual cost of such additional
service. If Tenant uses electricity, water or heat or air-conditioning in the
Premises during hours or days in addition to the hours and days specified in
Section 7.1A or otherwise in excess of that required to be supplied by Landlord
pursuant to Section 7.1.A above, or if Tenant's consumption of electricity in
the Premises shall exceed three and one-quarter (3.25) watts of lights and
receptacle demand electrical load per square foot of Usable Area of the
Premises, Tenant shall pay to Landlord, upon billing, all actual costs incurred
by Landlord in connection with the provision of such excess consumption, the
actual cost of the installation, operation, and maintenance of equipment which
is installed in order to supply and measure such excess consumption, the actual
cost of the increased wear and tear on existing or future equipment in the
Building caused by such excess consumption and depreciation of any such
equipment. If any machinery or equipment which generates abnormal heat or
otherwise creates unusual demands on the air-conditioning or heating system
serving the Premises is used in the Premises and if Tenant has not, within five
(5) days after demand from Landlord, taken such steps, at Tenant's expense, as
shall be necessary to cease such adverse affect on the air-conditioning or
heating system, Landlord shall have the right to install supplemental air-
conditioning or heating units in the Premises, and the full cost of such
supplemental units (including the cost of acquisition, installation, operation,
use and maintenance thereof) shall be paid by Tenant to Landlord in advance or
on demand.
C. At no time shall use of electricity in the Premises
exceed the capacity of existing feeders and risers to or wiring in the Premises.
Any risers or wiring to meet Tenant's excess electrical requirements shall, upon
Tenant's written request, be installed by Landlord, at Tenant's sole cost, if,
in Landlord's reasonable judgment, the same are necessary and shall not (i)
cause permanent damage or injury to the Project, the Building or the Premises,
(ii) cause or create a dangerous or hazardous condition, (iii) entail excessive
or unreasonable alterations, repairs or expenses, or (iv) interfere with or
disturb other tenants or occupants of the Building.
7.2. Landlord's obligation to furnish the utility services
specified herein shall be subject to the rules and regulations of the supplier
of such electricity or other utility services and the rules and regulations of
any municipal or other governmental authority regulating the business of
providing electricity and other utility services. Landlord shall have the right,
at Landlord's option, upon not less than thirty (30) days' prior written notice
to Tenant (provided such prior notice will be less if either the discontinuance
of such service is required by applicable law or Landlord receives shorter
notice from the utility company providing electricity or other utility service),
to discontinue utility services to the Premises and arrange for a direct
connection thereof through a public utility supplying such service. If Landlord
gives such notice of discontinuance, Landlord shall make all necessary
arrangements with the public utility supplying such utility service directly to
the Building to furnish such utility service to the Premises, and, unless
prohibited by law or regulations of such public utility, Landlord shall not
discontinue such utility service to the Premises until such public utility is
ready to supply service to the Premises. Tenant shall, however, be responsible
for contracting promptly and directly with such public utility supplying such
service and for paying all deposits for, and all costs relating to, such
service.
7.3. No failure to furnish, or any stoppage of, the services
referred to in this Article 7 resulting from in any cause shall make Landlord
liable in any respect for damages to any person, property or business, or be
construed as an eviction of Tenant, or entitle Tenant to any abatement of Rent
or other relief from any of Tenant's obligations under this Lease. Should any
malfunction of any systems or facilities occur within the Project or should
maintenance or alterations of such systems or facilities become necessary,
Landlord shall repair the same promptly and with reasonable diligence, and
Tenant, except as otherwise expressly provided below, shall have no claim for
rebate, abatement of Rent, or damages because of malfunctions or any such
interruptions in service. Tenant hereby waives the provisions of California
Civil Code Section 1932(1) or any other applicable existing or future law,
ordinance or governmental regulation permitting the termination of this Lease
due to an interruption, failure or inability to provide any services.
7.4. Tenant may, at its sole cost and expense, install its own
security system ("TENANT'S SECURITY SYSTEM") in the Premises; provided, however,
that Tenant shall coordinate the installation and operation of Tenant's Security
System with Landlord to assure that Tenant's Security System is, in Landlord's
reasonable discretion, compatible with Landlord's security system and the
Building systems and equipment and to the extent that Tenant's Security System
is not compatible with Landlord's security system and the Building systems and
equipment, Tenant shall not be entitled to install or operate it. Tenant shall
be solely responsible, at Tenant's sole cost and expense, for the monitoring,
operation and removal (upon the expiration or earlier termination of this Lease)
of Tenant's Security
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System. Tenant acknowledges and agrees that Tenant's obligations to indemnify,
defend and hold Landlord harmless as provided in Article 17 of this Lease shall
apply to Tenant's use and operation of Tenant's Security System and that the
installation of Tenant's Security System shall be subject to the terms and
conditions of Article 10 of this Lease. Landlord and Tenant acknowledge and
agree that nothing contained in this Section 7.4 shall be construed to limit the
rights of Landlord under Article 20 of this Lease. In connection with Tenant's
installation of Tenant's Security System, Tenant shall provide to Landlord,
commencing with the installation of Tenant's Security System in the Premises,
the telephone number(s) of an authorized representative of Tenant to whom
Landlord shall give reasonable prior notice (as determined by Landlord, given
the circumstances, emergency or otherwise) in the event Landlord must enter the
Premises pursuant to Article 20 hereof, but in no event shall Landlord,
following Landlord's provision of such reasonable notice to Tenant's authorized
representative, be obligated to delay Landlord's entry into the Premises or to
monitor or otherwise operate Tenant's Security System while inside the Premises.
ARTICLE 8
ASSIGNMENT AND SUBLETTING
8.1. Neither Tenant nor its legal representatives or successors in
interest shall, by operation of law or otherwise, assign, mortgage, pledge,
encumber or otherwise transfer this Lease or any part hereof, or the interest of
Tenant under this Lease, or in any sublease or the rent thereunder. The Premises
or any part thereof shall not be sublet, occupied or used for any purpose by
anyone other than Tenant, without Tenant's obtaining in each instance the prior
written consent of Landlord in the manner hereinafter provided. As indicated in,
and subject to, Section 8.4 below, Landlord's consent shall not be unreasonably
withheld. Tenant shall not modify, extend, or amend a sublease previously
consented to by Landlord without obtaining Landlord's prior written consent
thereto.
8.2. An assignment of this Lease shall be deemed to have occurred
(a) if, in a single transaction or in a series of transactions, a more than
fifty percent (50%) interest in Tenant, any guarantor of this Lease, or any
subtenant (whether stock, partnership, interest or otherwise) is transferred,
diluted, reduced, or otherwise affected with the result that the present holder
or owners of Tenant, such guarantor, or such subtenant have less than a Fifty
percent (50%) interest in Tenant, such guarantor or such subtenant, or (b) if
Tenant's obligations under this Lease are taken over or assumed in consideration
of Tenant leasing space in another office building. The transfer of the
outstanding capital stock of any corporate Tenant, guarantor or subtenant
through the "OVER-THE-COUNTER" market or any recognized national securities
exchange shall not be included in the calculation of such 50% interest in clause
(a) above.
8.3. Notwithstanding anything to the contrary in Section 8.1,
Tenant shall have the right, upon notice to Landlord, to (a) sublet or license
all or part of the Premises to any related corporation or other entity which
controls Tenant, is controlled by Tenant or is under common-control with
Tenant; or (b) assign this Lease to a successor corporation into which or with
which Tenant is merged or consolidated or which acquired substantially all of
Tenant's assets and property; provided that (i) such successor corporation
assumes all of the obligations and liabilities of Tenant and shall have assets,
capitalization and net worth at least sufficient to perform the obligations of
Tenant under this Lease, accounting for the obligations assumed by such
successor in such transaction, (ii) Tenant shall provide in its notice to
Landlord the information required in Section 8.4, and (iii) such assignment or
sublease is not a subterfuge by Tenant to avoid its obligations under this
Lease. An assignee of Tenant's entire interest in this Lease may be referred to
herein as a "PERMITTED ASSIGNEE". No such transaction shall operate to release
Tenant from any liability under this Lease. For the purpose hereof "CONTROL"
shall mean ownership of not less than fifty percent (50%) of all the voting
stock or legal and equitable interest in such corporation or entity.
8.4. If Tenant should desire to assign this Lease or sublet the
Premises (or any part thereof), Tenant shall give Landlord written notice no
later than the time required for notice under Section 8.3 in the case of an
assignment or subletting, or thirty (30) days in advance of the proposed
effective date of any other proposed assignment or sublease, specifying (a) the
name, current address, and business of the proposed assignee or sublessee, (b)
the amount and location of the space within the Premises proposed to be so
subleased, (c) the proposed effective date and duration of the assignment or
subletting, and (d) the proposed rent or consideration to be paid to Tenant by
such assignee or sublessee. Tenant shall promptly supply Landlord with financial
statements and other information as Landlord may request to evaluate the
proposed assignment or sublease. For assignments and sublettings other than
those permitted by Section 8.3, Landlord shall have fifteen (15) days following
receipt of such notice and other information requested by Landlord within which
to notify Tenant in writing that Landlord elects: (i) to terminate this Lease as
to the space so affected as of the proposed effective date set forth in Tenant's
notice, in which event Tenant shall be relieved of all further obligations
hereunder as to such space, except for obligations under Articles 17, 19 and 22
and all other provisions of this Lease which expressly survive the termination
hereof; or (ii) to permit Tenant to assign or sublet such space; provided,
however, that, if the rent rate agreed upon between Tenant and its proposed
subtenant is greater than the rent rate that Tenant must pay Landlord hereunder
for that portion of the Premises, or if any consideration shall be promised to
or received by Tenant in connection with such proposed assignment or sublease
(in addition to rent), then 50% of such excess rent and other consideration
shall be considered Additional Rent owed by Tenant to Landlord (less brokerage
commissions, attorneys' fees and other disbursements reasonably incurred by
Tenant for such assignment and subletting if acceptable evidence of such
disbursements is delivered to Landlord), and shall be paid by Tenant to
Landlord, in the case of excess rent, in the same manner that Tenant pays Base
Rent and, in the case of any other consideration, within ten (10) Business Days
after receipt thereof by Tenant; or (iii) to refuse, in Landlord's reasonable
discretion, to consent to Tenant's assignment or subleasing of such space and to
continue this Lease in full force and effect as to the entire Premises. Landlord
cannot unreasonably withhold its consent, but the parties agree that Landlord
shall be deemed reasonable in its refusal to consent to an assignment or
subletting for the following reasons (without limiting any other reasons): the
proposed assignee or subtenant is not financially creditworthy, is a
governmental authority or agency, an organization or person enjoying sovereign
or diplomatic immunity, a medical or dental practice or a user that will attract
a volume, frequency or type of visitor or employee to the Building which is not
consistent with the standards
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of a high quality office building or that will impose an excessive demand on or
use of the facilities or services of the Building. It shall also be reasonable
for Landlord to refuse to consent to any assignment or subletting if (x) Tenant
is then in default under this Lease, or (y) such assignment of subletting would
cause a default under another lease in the Building or under any ground lease,
deed of trust, mortgage, restrictive covenant, easement or other encumbrance
affecting the Project. If Landlord should fail to notify Tenant in writing of
such election within the aforesaid fifteen (15) day period, Landlord shall be
deemed to have elected option (iii) above. Tenant agrees to reimburse Landlord
for reasonable legal fees not to exceed One Thousand Dollars ($1,000.00), and
any other reasonable costs incurred by Landlord in connection with any proposed
assignment or subletting and such payment shall not be deducted from the
Additional Rent owed to Landlord pursuant to subsection (ii) above. Tenant shall
deliver to Landlord copies of all documents executed in connection with any
permitted assignment or subletting, which documents shall be in form and
substance reasonably satisfactory to Landlord. No acceptance by Landlord of any
Rent or any other sum of money from any assignee, sublessee or other category of
transferee shall be deemed to constitute Landlord's consent to any assignment,
sublease, or transfer.
8.5. Any attempted assignment or sublease by Tenant in violation of
the terms and provisions of this Article 8 shall be void and shall constitute a
material breach of this Lease. In no event, shall any assignment, subletting or
transfer, whether or not with Landlord's consent, relieve Tenant of its primary
liability under this Lease for the entire Term, and Tenant shall in no way be
released from the full and complete performance of all the terms hereof. If
Landlord takes possession of the Premises before the expiration of the Term of
this Lease, Landlord shall have the right, at its option, to terminate all
subleases, or to take over any sublease of the Premises or any portion thereof
and such subtenant shall attorn to Landlord, as its landlord, under all the
terms and obligations of such sublease occurring from and after such date, but
excluding previous acts, omissions, negligence, or defaults of Tenant.
8.6. The term "Landlord," as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, shall be limited
to mean and include only the owner or owners, at the time in question, of the
fee title to, or a lessee's interest in a ground lease of, the Land or the
Building. In the event of any transfer, assignment or other conveyance or
transfers of any such title or interest, Landlord herein named (and in case of
any subsequent transfers or conveyances, the then grantor) shall be
automatically freed and relieved from and after the date of such transfer,
assignment or conveyance of all liability as respects the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed and, without further agreement, the transferee of
such title or interest shall be deemed to have assumed and agreed to observe and
perform any and all obligations of Landlord hereunder, during its ownership of
the Project. Landlord may transfer its interest in the Project without the
consent of Tenant.
ARTICLE 9
REPAIRS
9.1. Landlord agrees to repair and maintain the structural portions
of the Building and the plumbing, heating, ventilating, air conditioning and
electrical systems installed or furnished by Landlord, unless such maintenance
and repairs are (i) attributable to items installed in the Premises by Tenant or
which are above standard interior improvements (such as, for example, custom
lighting, special HVAC and/or electrical panels or systems, kitchen or restroom
facilities and appliances constructed or installed within the Premises) or (ii)
caused by the negligence or willful misconduct or gross negligence of Tenant or
its agents, contractors, invitees and licensees, in which case Tenant will pay
to Landlord, as additional rent, the cost of such maintenance and repair plus a
fee equal to fifteen percent (15%) of the actual costs to cover overhead and a
fee for Landlord's agent or manager. Amounts payable by Tenant pursuant to this
Section 9.1 shall be payable on demand after receipt of an invoice therefor from
Landlord. Landlord has no obligation and has made no promise to maintain, alter,
remodel, improve, repair, decorate, or paint the Premises, the Building or the
Project or any part thereof, except as specifically set forth in this Lease. In
no event shall Landlord have any obligation to maintain, repair or replace any
furniture, furnishings, fixtures or personal property of Tenant. Tenant hereby
waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942
and or any similar law, statute or ordinance now or hereafter in effect.
9.2. Tenant shall keep the Premises (including the Leasehold
Improvements) in good order and in a safe, neat and clean condition, and, when
and if needed, at Tenant's sole cost and expense, shall make all repairs to the
Premises and every part thereof. In the event Tenant fails to promptly commence
and diligently pursue the performance of such maintenance or the making of such
repairs or replacements, then Landlord, at its option, may perform such
maintenance or make such repairs and Tenant shall reimburse Landlord, on demand
after Tenant receives an invoice therefor, the cost thereof plus a fee equal to
fifteen percent (15%) of the actual costs to cover overhead and a fee for
Landlord's agent or manager.
9.3. All repairs made by Tenant pursuant to Section 9.2 shall be
performed in a good and workmanlike manner by contractors or other repair
personnel selected by Tenant from an approved list of contractors and repair
personnel maintained by Landlord in the Project's management office; provided,
however, that neither Tenant nor its contractors or repair personnel shall be
permitted to do any work affecting the Central Systems (as such term is defined
in EXHIBIT "C" hereof). In no event shall such work be done for Landlord's
account or in a manner which allows any liens to be filed in violation of
Article 11. To the extent any repairs involve the making of alterations to the
Premises, Tenant shall comply with the provisions of Article 10.
9.4. Subject to the other provisions of this Lease imposing
obligations regarding repair upon Tenant, Landlord shall repair all machinery
and equipment necessary to provide the services of Landlord described in Article
7 (provided that Tenant shall pay the costs of any repair to such systems or any
part thereof damaged by Tenant and Tenant's employees, customers, clients,
agents, licensees and invitees) and for repair of all portions of the Project
which do not comprise a part of the Premises and are not leased to others.
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ARTICLE 10
ALTERATIONS
10.1. Tenant shall not at any time during the Term make any
alterations to the Premises without first obtaining Landlord's written consent
thereto, which consent Landlord shall not unreasonably withhold or delay;
provided, however, that Landlord shall not be deemed unreasonable by refusing to
consent to any alterations which are visible from the exterior of the Building
or the Project, which will or are likely to cause any weakening of any part of
the structure of the Premises, the Building or the Project or which will or are
likely to cause damage or disruption to the Central Systems or which are
prohibited by any underlying ground lease or mortgage. Notwithstanding the
foregoing, Landlord's prior approval will not be required for any alterations to
the interior of the Premises which are not visible from the exterior of the
Premises which are either cosmetic in nature (such as floor or wall coverings)
or are nonstructural in nature and do not affect any Central Systems and cost
less than Ten Thousand Dollars ($10,000.00) in the aggregate, provided Landlord
receives prior notice thereof and the other conditions set forth in this Article
10 are satisfied. Should Tenant desire to make any alterations to the Premises,
Tenant shall submit all plans and specifications for such proposed alterations
to Landlord for Landlord's review before Tenant allows any such work to
commence, and Landlord shall promptly approve or disapprove such plans and
specifications for any of the reasons set forth in this Section 10.1 or for any
other reason reasonably deemed sufficient by Landlord. Tenant shall select and
use only contractors, subcontractors or other repair personnel from those listed
on Landlord's approved list maintained by Landlord in the Project management
office. Upon Tenant's receipt of written approval from Landlord, and upon
Tenant's payment to Landlord of a reasonable fee prescribed by Landlord for the
work of Landlord and Landlord's employees and representatives in reviewing and
approving such plans and specifications, Tenant shall have the right to proceed
with the construction of all approved alterations, but only so long as such
alterations are in strict compliance with the plans and specifications so
approved by Landlord and with the provisions of this Article 10. All alterations
shall be made at Tenant's sole cost and expense, by contractors retained by
Tenant pursuant to this Section 10.1 above; however, if Tenant requests, and
Landlord agrees, that Landlord shall retain the contractors, Tenant shall pay to
Landlord a fee of fifteen percent (15%) of the actual costs of such work to
cover Landlord's overhead and a fee for Landlord's agent or manager in
supervising and coordinating such work. In no event, however, shall anyone other
than Landlord or Landlord's employees or representatives perform work to be done
which affects the Central Systems.
10.2. All construction, alterations and repair work done by or for
Tenant shall (a) be performed in such a manner as to maintain harmonious labor
relations; (b) not adversely affect the safety of the Project, the Building or
the Premises or the systems thereof and not affect the Central Systems; (c)
comply with all building, safety, fire, plumbing, electrical, and other codes
and governmental and insurance requirements; (d) not result in any usage in
excess of Building Standard of water, electricity, gas, or other utilities or of
heating, ventilating or air-conditioning (either during or after such work)
unless prior written arrangements satisfactory to Landlord are made with respect
thereto; (e) be completed promptly and in a good and workmanlike manner and in
compliance with all rules and regulations promulgated by Landlord; and (f) not
disturb Landlord or other tenants in the Building. After completion of any
alterations to the Premises, Tenant will deliver to Landlord a copy of "as
built" plans and specifications depicting and describing such alterations.
10.3. All Leasehold Improvements, alterations and other physical
additions made to or installed by or for Tenant in the Premises shall be and
remain Landlord's property (except for Tenant's furniture, personal property and
movable trade fixtures) and shall not be removed without Landlord's written
consent; provided, however, Landlord may, by notice to Tenant given concurrently
with Landlord's approval of any alterations or physical additions made to the
Premises after the Commencement Date, elect to require Tenant to remove same
upon the expiration or earlier termination of the Term of this Lease. Tenant
agrees to remove, at its sole cost and expense, all of Tenant's furniture,
personal property and movable trade fixtures, and, if directed to or permitted
to do so by Landlord in writing, all, or any part of, the alterations and other
physical additions made by Tenant to the Premises, on or before the Expiration
Date or any earlier date of termination of this Lease. Tenant shall repair, or
promptly reimburse Landlord for the cost of repairing, all damage done to the
Premises or the building by such removal. Any alterations or physical additions
made by Tenant which Landlord does not direct or permit Tenant to remove at any
time during or at the end of the Term shall become the property of Landlord at
the end of the Term without any payment to Tenant. Landlord reserves the right
to require Tenant to remove any alterations or physical additions made by Tenant
to which Landlord did not expressly consent. If Tenant fails to remove any of
Tenant's furniture, personal property or movable trade fixtures by the
Expiration Date or any sooner date of termination of the Lease or, if Tenant
fails to remove any alterations and other physical additions made by Tenant to
the Premises which Landlord has in writing directed Tenant to remove, Landlord
shall have the right, on the fifth (5th) day after Landlord's delivery of
written notice to Tenant to deem such property abandoned by Tenant and to
remove, store, sell, discard or otherwise deal with or dispose of such abandoned
property in a commercially reasonable manner. Tenant shall be liable for all
costs of such disposition of Tenant's abandoned property, and Landlord shall
have no liability to Tenant in any respect regarding such property of Tenant.
The provisions of this Section 10.3 shall survive the expiration or any earlier
termination of this Lease.
ARTICLE 11
LIENS
Tenant shall keep the Project, the Building and the Premises and
Landlord's interest therein free from any liens arising from any work performed,
materials furnished, or obligations incurred by, or on behalf of Tenant (other
than by Landlord pursuant to Exhibit "C"). Notice is hereby given that neither
Landlord nor any mortgagee or lessor of Landlord shall be liable for any labor
or materials furnished to Tenant except as furnished to Tenant by Landlord
pursuant to Exhibit "C". If any lien is filed for such work or materials, such
lien shall encumber only Tenant's interest in leasehold improvements on the
Premises. Within ten (10) days after Tenant learns of the filing of any
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such lien, Tenant shall notify Landlord of such lien and shall either discharge
and cancel such lien of record or post a bond sufficient under the laws of the
State of California to cover the amount of the lien claim plus any penalties,
interest, attorneys' fees, court costs, and other legal expenses in connection
with such lien. If Tenant fails to so discharge or bond such lien within ten
(10) calendar days after written demand from Landlord, Landlord shall have the
right, at Landlord's option, to pay the full amount of such lien without inquiry
into the validity thereof, and Landlord shall be promptly reimbursed by Tenant,
as Additional Rent, for all amounts so paid by Landlord, including expenses,
interest, and attorneys' fees.
ARTICLE 12
USE AND COMPLIANCE WITH LAWS
12.1 The Premises shall be used only for the uses specifically set
forth in Section 1.1Q and for no other purposes whatsoever. Tenant shall use
and maintain the Premises in a clean, careful, safe, lawful and proper manner
and shall not allow within the Premises, any offensive noise, odor, conduct or
private or public nuisance or permit Tenant's employees, agents, licensees or
invitees to create a public or private nuisance or act in a disorderly manner
within the Building or in the Project. Any statement as to the particular nature
of the business to be conducted by Tenant in the Premises and uses to be made
thereof by Tenant as set forth in Section 1.1Q hereof shall not constitute a
representation or warranty by Landlord that such business or uses are lawful or
permissible under any certificate of occupancy for the Premises or the Building
or are otherwise permitted by law. Landlord does, however, represent that any
certificate of occupancy issued with respect to the Premises shall allow use for
executive and administrative offices.
12.2. Tenant shall, at Tenant's sole expense, (a) comply with all
laws, orders, ordinances, and regulations of federal, state, county, and
municipal authorities having jurisdiction over the Premises, (b) comply with any
directive, order or citation made pursuant to law by any public officer
requiring abatement of any nuisance or which imposes upon Landlord or Tenant any
duty or obligation arising from Tenant's occupancy or use of the Premises or
from conditions which have been created by or at the request or insistence of
Tenant, or required by reason of a breach of any of Tenant's obligations
hereunder or by or through other fault of Tenant, (c) comply with all insurance
requirements applicable to the Premises and (d) indemnify and hold Landlord
harmless from any loss, cost, claim or expense which Landlord incurs or suffers
by reason of Tenant's failure to comply with its obligations under clauses (a),
(b) or (c) above. If Tenant receives notice of any such directive, order
citation or of any violation of any law, order, ordinance, regulation or any
insurance requirement, Tenant shall promptly notify Landlord in writing of such
alleged violation and furnish Landlord with a copy of such notice.
12.3. Because Tenant is preparing the Construction Drawings for the
Leasehold Improvements, Tenant shall be solely responsible for causing, at
Tenant's sole cost and expense, the Premises (including the Leasehold
Improvements therein) to comply with the Americans With Disabilities Act of
1990, as subsequently amended (the "ADA"), and all similar federal, state and
local laws, rules and regulations and subsequent amendments thereof; provided,
however, that Landlord shall be responsible for causing the other portions of
the Building (excluding the Premises) to comply with the requirements of the ADA
and other applicable laws in effect as of the date of this Lease including such
laws pertaining to the presence of Hazardous Materials and seismic requirements.
Further, Operating Costs shall not include any cost (if any) incurred by
Landlord in connection with upgrading the Building or the Premises to comply
with the requirements of the ADA and other applicable laws that are in effect as
of the date of this Lease, including penalties or damages incurred due to such
noncompliance; provided, however that to the extent such costs are incurred as a
result of Tenant's specific use of the Premises, or as a result of any
alterations to the Premises made by or on behalf of Tenant, in which case such
costs will be the sole responsibility of Tenant. Landlord shall use commercially
reasonable efforts to remedy any problems which may arise with systems and
equipment serving the Building as a result of the transition from calendar year
1999 to calendar year 2000 and the expense of such efforts shall be excluded
from Operating Costs. Upon written request from Tenant, Landlord shall provide
Tenant with documentation reasonably evidencing Landlord's compliance with the
requirements of this Section 12.3.
ARTICLE 13
DEFAULT AND REMEDIES
13.1. The occurrence of any one or more of the following events
shall constitute an "EVENT OF DEFAULT" of Tenant under this Lease: (a) if Tenant
fails to pay any Rent hereunder as and when such Rent becomes due and such
failure shall continue for more than five (5) days after Landlord gives Tenant
notice of past due Rent; (b) if the Premises are abandoned or if Tenant fails
to take possession of the Premises on the Commencement Date or promptly
thereafter; (c) if Tenant permits to be done anything which creates a lien upon
the Premises and fails to discharge or bond such lien or post such security with
Landlord as is required by Article 11; (d) if Tenant violates the provisions of
Article 8 by attempting to make an unpermitted assignment or sublease; (e) if
Tenant fails to maintain in force all policies of insurance required by this
Lease and such failure shall continue for more than ten (10) days after Landlord
gives Tenant notice of such failure; or (f) if Tenant fails to perform or
observe any other terms of this Lease and such failure shall continue for more
than thirty (30) days after Landlord gives Tenant notice of such failure, or, if
such failure cannot be corrected within such thirty (30) day period, if Tenant
does not commence to correct such default within said thirty (30) day period and
thereafter diligently prosecute the correction of same to completion within a
reasonable time and in any event prior to the time a failure to complete such
correction could cause Landlord to be subject to prosecution for violation of
any law, rule, ordinance or regulation or causes, or could cause, a default
under any mortgage, underlying lease, tenant leases or other agreements
applicable to the Project. The provisions of any notice given pursuant to the
foregoing will be in lieu of, and not in addition to, any notice required under
applicable law (including, without limitation, California Code of Civil
Procedure Section 1161 regarding unlawful detainer actions and any successor
statute or similar law)
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13.2. If an Event of Default occurs, Landlord shall have the right
at any time to give a written termination notice to Tenant and, on the date
specified in such notice, Tenant's right to possession shall terminate and this
Lease shall terminate. Upon such termination, Landlord shall have the right to
recover from Tenant:
A. The worth at the time of award of all unpaid Base
Rent and Additional Rent which had been earned at the time of termination;
B. The worth at the time of award of the amount by which
all unpaid Base Rent and Additional Rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided;
C. The worth at the time of award of the amount by which
all unpaid Base Rent and Additional Rent for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; and
D. All other amounts necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform all of
Tenant's obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom. The "worth at the time of award" of the
amounts referred to in clauses (a) and (b) above shall be computed by allowing
interest at the Interest Rate. The "worth at the time of award" of the amount
referred to in clause (c) above shall be computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
Notwithstanding the occurrence of an Event of Default, pursuant to
California Civil Code Section 1951.4, or any successor statute thereof, Landlord
may continue this Lease in effect after Tenant's breach and abandonment and
recover all rent as it becomes due, if Tenant has the right to sublet or assign,
subject only to reasonable restrictions. Acts of maintenance or preservation or
efforts to relet the Premises or the appointment of a receiver upon initiative
of Landlord to protect Landlord's interest under this Lease shall not constitute
a termination of Tenant's right to possession unless written notice of
termination is given by Landlord to Tenant. The remedies provided for in this
Lease are in addition to all other remedies available to Landlord at law or in
equity by statute or otherwise.
13.3. No agreement to accept a surrender of the Premises and no act
or omission by Landlord or Landlord's agents during the Term shall constitute an
acceptance or surrender of the Premises unless made in writing and signed by
Landlord. No re-entry or taking possession of the Premises by Landlord shall
constitute an election by Landlord to terminate this Lease unless a written
notice of such intention is given to Tenant.
13.4. No provision of this Lease shall be deemed to have been waived
by Landlord unless such waiver is in writing and signed by Landlord. Landlord's
acceptance of Rent following an Event of Default hereunder shall not be
construed as a waiver of such Event of Default. No custom or practice which may
arise between the parties in connection with the terms of this Lease shall be
construed to waive or lessen Landlord's right to insist upon strict performance
of the terms of this Lease, without a written notice thereof to Tenant from
Landlord.
13.5. The rights granted to Landlord in this Article 13 shall be
cumulative of every other right or remedy provided in this Lease or which
Landlord may otherwise have at law or in equity or by statute, and the exercise
of one or more rights or remedies shall not prejudice or impair the concurrent
or subsequent exercise of other rights or remedies or constitute a forfeiture or
waiver of Rent or damages accruing to Landlord by reason of any Event of Default
under this Lease. Tenant agrees to pay to Landlord all costs and expenses
incurred by Landlord in the enforcement of this Lease, including all attorneys'
fees incurred in connection with the collection of any sums due hereunder or the
enforcement of any right or remedy of Landlord.
13.6. Landlord will not be in default in the performance of any
obligation required to be performed by Landlord under this Lease unless Landlord
fails to perform such obligation within thirty (30) days after the receipt of
written notice from Tenant specifying in detail Landlord's failure to perform;
provided however, that if the nature of Landlord's obligation is such that more
than thirty (30) days are required for performance, then Landlord will not be
deemed in default if it commences such performance within such thirty (30) day
period and thereafter diligently pursues the same to completion. Upon any
default by Landlord, Tenant may exercise any of its rights provided at law or in
equity, subject to the limitations on liability set forth in Section 25.5 of
this Lease; provided, however: (a) Tenant shall have no right to offset or abate
Rent in the event of any default by Landlord under this Lease, except to the
extent offset rights are specifically provided to Tenant in this Lease; (b)
Tenant shall have no right to terminate this Lease; (c) Tenant's rights and
remedies hereunder shall be limited to the extent (i) Tenant has expressly
waived in this Lease any of such rights or remedies and/or (ii) this Lease
otherwise expressly limits Tenant's rights or remedies; and (d) in no event
shall Landlord be liable for consequential damages or loss of business profits.
ARTICLE 14
INSURANCE
14.1. A. Tenant, at its sole expense, shall obtain and keep in
force during the Term the following insurance: (a) "SPECIAL FORM" insurance
insuring all property located in the Premises, including furniture, equipment,
fittings, installations, fixtures, supplies and any other personal property,
leasehold improvements and alterations, including the Leasehold Improvements
("TENANT'S PROPERTY"), in an amount equal to ninety percent (90%) of the full
replacement value, it being understood that no lack or inadequacy of insurance
by Tenant shall in any event make Landlord subject to any claim by virtue of any
theft of or loss or damage to any uninsured or inadequately insured property;
(b) Extra Expense insurance in an amount that will reimburse Tenant for direct
or indirect loss of earnings attributable to all perils insured against under
Section 14.1(a) or attributable to the prevention of access to the Premises by
civil authority; (c) Commercial general public liability insurance including
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personal injury, bodily injury, broad form property damage, operations hazard,
owner's protective coverage, contractual liability, with a cross liability
clause and a severability of interests clause to cover Tenant's indemnities set
forth herein, and products and completed operations liability, in limits not
less than Two Million Dollars ($2,000,000) inclusive per occurrence or such
higher limits as Landlord may reasonably require from time to time during the
Term; (d) Worker's Compensation and Employer's Liability insurance, in form and
amount as required by applicable law for Worker's Compensation, and One Million
Dollars ($1,000,000) per occurrence for Employer's Liability; and (e) any other
form or forms of insurance or any changes or endorsements to the insurance
required herein as Landlord, or any mortgagee or lessor of Landlord may
reasonably require, from time to time, in form or in amount, and for insurance
risks against which a prudent tenant would protect itself, but only to the
extent coverage for such risks and amounts are available in the insurance market
at commercially acceptable rates.
B. Tenant shall have the right to include the insurance
required by Section 14.1A under Tenant's policies of "BLANKET INSURANCE,"
provided that no other loss which may also be insured by such blanket insurance
shall affect the insurance coverages required hereby and further provided that
Tenant delivers to Landlord a certificate specifically stating that such
coverages apply to Landlord, the Premises and the Project. All policies of
insurance required by Section 14.1A(c) shall name Landlord as additional insured
and shall also name all mortgagees and lessors of Landlord, of which Tenant has
been notified, additional insureds, all as their respective interest may appear.
All such policies or certificates shall be issued by insurers reasonably
acceptable to Landlord and in form satisfactory to Landlord. Tenant shall
deliver to Landlord certificates with certificates of policies, together with
satisfactory evidence of payment of premiums for such policies, by the
Commencement Date and, with respect to renewals of such policies, not later than
thirty (30) days prior to the end of the expiring term of coverage. All policies
of insurance shall be endorsed to be primary and noncontributory to any
insurance which may be carried by Landlord. All such policies shall contain an
agreement by the insurers that the insurers shall notify Landlord and any
mortgagee or lessor of Landlord in writing, by certified mail, return receipt
requested, not less than thirty (30) days before any material change,
cancellation, including cancellation for nonpayment of premium, or other
termination thereof or change therein and shall (with respect to the insurance
required by clauses (a) and (b) of Section 14.1A) include a clause or
endorsement denying the insurer any rights or subrogation against Landlord.
14.2. Landlord shall insure the Building and the Project (but
excluding the Leasehold Improvements) against damage with property insurance and
shall carry commercial general public liability insurance, all in such amounts
and with such deductible as Landlord reasonably deems appropriate. As provided
hereinabove, Landlord shall not be required to carry insurance of any kind on
Tenant's Property, and Tenant hereby agrees that Tenant shall have no right to
receive any proceeds from any insurance policies carried by Landlord.
14.3. Tenant shall not knowingly conduct or permit to be conducted
in the Premises any activity, or place any equipment in or about the Premises or
the Building, which will invalidate the insurance coverage in effect or increase
the rate of insurance on the Premises or the Building, and Tenant shall comply
with all requirements and regulations of Landlord's insurers which are provided
in writing to Tenant. If any invalidation of coverage or increase in the rate of
fire insurance or other insurance occurs or is threatened by any insurance
company due to any act or omission by Tenant, or its agents, employees,
representatives, or contractors, such statement or threat shall be conclusive
evidence that the increase in such rate is due to such act of Tenant or the
contents or equipment in or about the Premises, and, as a result thereof, Tenant
shall be liable for such increase and shall be considered Additional Rent
payable with the next monthly installment of Base Rent due under this Lease. In
no event shall Tenant introduce or permit to be kept on the Premises or brought
into the Building any dangerous, noxious, radioactive or explosive substance.
14.4. Landlord and Tenant each hereby waive any right of subrogation
and right of recovery or cause of action for injury or loss to the extent that
such injury or loss is covered by fire, extended coverage, "Special Form" or
similar policies covering real property or personal property (or which would
have been covered if Tenant or Landlord, as the case may be, was carrying the
insurance required by this Lease). Said waivers shall be in addition to, and not
in limitation or derogation of, any other waiver or release contained in this
Lease. Insurance policies shall be properly endorsed, if necessary, to prevent
the invalidation of said policies by reason of such waivers.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
15.1. If the Building or any portion thereof (exclusive of the
Premises) is damaged or destroyed by any casualty to the extent that, in
Landlord's reasonable judgment, (a) repair of such damage or destruction would
not be economically feasible, or (b) the damage or destruction to the Building
cannot be repaired within two hundred seventy (270) days after the date Landlord
learns of the necessity for repairs as a result of such damage or destruction,
or if the proceeds from insurance remaining after any required payment to any
mortgagee or lessor of Landlord are insufficient to repair such damage or
destruction, Landlord shall have the right, at Landlord's option, to terminate
this Lease (provided Landlord terminates the leases, where Landlord has the
right to do so, of all of the other tenants of the Building similarly affected)
by giving Tenant notice of such termination, within sixty (60) days after the
date Landlord learns of the necessity for repairs as a result of such damage or
destruction.
15.2. If the Premises or any portion thereof is damaged or destroyed
by any casualty, and if, in Landlord's reasonable opinion, the Premises cannot
be rebuilt or made fit for Tenant's purposes within two hundred seventy (270)
days after the date Landlord learns of the necessity for repairs as a result of
such damage or destruction, or if the proceeds from the insurance Landlord is
required to maintain pursuant to Article 14 hereof (or the amount of proceeds
which would have been available if Landlord was carrying such insurance) are
insufficient to repair such damage or destruction, then either Landlord or
Tenant shall have the right, at the option of either party, to terminate this
Lease by giving the other written notice, within sixty (60) days after Landlord
learns of the necessity for repairs as a result of such damage or destruction.
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15.3. In the event of partial destruction or damage to the Building
or the Premises which is not subject to Section 15.1 or 15.2, but which renders
the Premises partially but not wholly untenantable or renders the Premises
wholly untenantable for a short enough period of time that this Lease is not
otherwise terminated in accordance with the terms of this Article 15, this Lease
shall not terminate and Rent shall be abated in proportion to the area of the
Premises which cannot be used or occupied by Tenant as a result of such
casualty. Landlord shall in such event, within a reasonable time after the date
of such destruction or damage, subject to force majeure (as defined in Section
25.6) or to Tenant Delay and to the extent and availability of insurance
proceeds, restore the Premises to as near the same condition as existed prior to
such partial damage or destruction. If Landlord fails to proceed with reasonable
diligence to rebuild the Premises, or if the Premises are not repaired or
rebuilt within two hundred seventy (270) days after Landlord learns of the
necessity for repairs as a result of such damage or destruction, for a reason
other than force majeure or Tenant Delays, then Tenant may, at Tenant's sole
option, elect to terminate this Lease upon thirty (30) days written notice to
Landlord, unless Landlord cures the failure within such thirty (30) day period
of time, in which case Tenant's termination notice shall be of no effect. In no
event shall Rent abate (except to the extent Landlord recovers insurance
therefor) nor shall any termination by Tenant occur if damage to or destruction
of the Premises is the result of the negligence or willful act of Tenant, or
Tenant's agents, employees, representatives, contractors, successors, assigns,
licensees or invitees.
15.4. If any material portion of the Premises is destroyed by fire
or other causes at any time during the last year of the Term, such that the
Premises or a material portion thereof cannot be occupied for in excess of
thirty (30) days as a result thereof, then either Landlord or Tenant shall have
the right, at the option of either party, to terminate this Lease by giving
written notice to the other within fifteen (15) days after the date of such
destruction.
15.5. Landlord shall have no liability to Tenant for inconvenience,
loss of business, or annoyance arising from any repair of any portion of the
Premises or the Building. Tenant hereby waives California Civil Code Sections
1932(2) and 1933(4), providing for termination of hiring upon destruction of the
thing hired and Sections 1941 and 1942, providing for repairs to and of the
Premises.
15.6. In the event of termination of this Lease pursuant to Sections
15.1, 15.2, 15.3 or 15.4, all Rent shall be apportioned and paid to the date on
which possession is relinquished or the date of such damage, whichever last
occurs, and Tenant shall immediately vacate the Premises according to such
notice of termination; provided, however, that those provisions of this Lease
which are designated to cover matters of termination and the period thereafter
shall survive the termination hereof.
15.7. In the event of any damage or destruction of all or any part
of the Premises, Tenant shall: (a) immediately notify Landlord thereof, and (b)
within thirty (30) days of such damage or destruction, deliver to Landlord all
insurance proceeds received by Tenant with respect to the Leasehold Improvements
and Tenant's alterations and improvements to the Premises (excluding proceeds
for Tenant's furniture and other personal property), whether or not this Lease
is terminated as permitted in this Article 15, and Tenant hereby assigns to
Landlord all rights to receive such insurance proceeds. If Tenant fails to
receive insurance proceeds covering the full replacement cost of such Leasehold
Improvements and Tenant's alterations and improvements to the Premises which are
damaged, Tenant shall be deemed to have self-insured the replacement cost of
such Leasehold Improvements and Tenant's alterations and improvements, and upon
any damage or destruction thereto, Tenant shall immediately pay to Landlord the
full replacement cost of such items, less any insurance proceeds actually
received by Landlord from Landlord's or Tenant's insurance with respect to such
items.
ARTICLE 16
CONDEMNATION
16.1. In the event the whole or substantially the whole of the
Building or the Premises are taken or condemned by eminent domain or by any
conveyance in lieu thereof (such taking, condemnation or conveyance in lieu
thereof being hereinafter referred to as "CONDEMNATION"), this Lease shall
terminate on the earlier of the date the condemning authority takes possession
or the date title vests in the condemning authority.
16.2. In the event any portion of the Building shall be taken by
condemnation (whether or not such taking includes any portion of the Premises),
which taking, in Landlord's judgment, is such that the Building cannot be
restored in an economically feasible manner for use substantially as originally
designed, then Landlord shall have the right, at Landlord's option, to terminate
this Lease (provided Landlord also terminates the leases of the other tenants of
the Building similarly situated), effective as of the date specified by Landlord
(at least sixty (60) days in the future) in a written notice of termination from
Landlord to Tenant.
16.3. In the event any portion of the Parking Facility shall be
taken by condemnation, which taking in Landlord's judgment is such that the
Parking Facility cannot be restored in an economically feasible manner for use
substantially as originally designed, including in such consideration the
possible use of additional Parking Facility in the vicinity of the Building,
then Landlord shall have the right, at Landlord's option, to terminate this
Lease (provided Landlord also terminates the leases, where Landlord has the
right to do so, of the other tenants of the Building similarly affected),
effective as of the date specified by Landlord (at least sixty (60) days in the
future) in a written notice of termination from Landlord to Tenant.
16.4. In the event that a portion, but less than substantially the
whole, of the Premises shall be taken by condemnation, then this Lease shall be
terminated as of the date of such condemnation as to the portion of the Premises
so taken, and unless Landlord exercises its option to terminate this Lease
pursuant to Section 16.2 or Tenant exercises its option to terminate this Lease
pursuant to this Section 16.4 below, this Lease shall remain in full force and
effect as to the remainder of the Premises. If any part of the Premises shall
be taken by condemnation and such partial condemnation renders the Premises
unusable for the business of Tenant, as reasonably determined by Tenant, or in
the event a substantial portion of the Building or the Parking Facility is taken
by condemnation
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rendering the Premises unusable for the business of Tenant, as reasonably
determined by Tenant, then in either such event Tenant may elect to terminate
this Lease as of the date specified by Tenant in a written notice of termination
from Tenant to Landlord, which date shall not be later than sixty (60) days
following the date of the taking. If such condemnation is not sufficiently
extensive to render the Premises unusable for the business of Tenant as
reasonably determined by Tenant, and Landlord has not elected to terminate this
Lease in accordance with the provisions of Section 16.2, 16.3 or this Section
16.4, then Landlord shall promptly restore the Premises to a condition
comparable to its condition immediately prior to such condemnation (excluding
Tenant's alterations, furniture, fixtures and equipment), less the portion
thereof lost in such condemnation, and this Lease shall continue in full force
and effect, except that after the date of any such taking of the Premises, the
Rent shall be equitably apportioned from and after such date.
16.5. In the event of termination of this Lease pursuant to the
provisions of Section 16.1, 16.2, or 16.3, the Rent shall be apportioned as of
such date of termination; provided, however, that those provisions of this Lease
which are designated to cover matters of termination and the period thereafter
shall survive the termination hereof.
16.6. All compensation awarded or paid upon a condemnation of any
portion of the Project shall belong to and be the property of Landlord without
participation by Tenant. Nothing herein shall be construed, however, to preclude
Tenant from prosecuting any claim directly against the condemning authority for
loss of business, loss of good will, moving expenses, damage to, and cost of
removal of, trade fixtures, furniture and other personal property belonging to
Tenant.
16.7. If any portion of the Project other than the Building or the
Parking Facility is taken by condemnation, or if the temporary use or occupancy
of all or any part of the Premises shall be taken by condemnation during the
Term, this Lease shall be and remain unaffected by such condemnation, and Tenant
shall continue to pay in full the Rent payable hereunder. In the event of any
such temporary taking for use or occupancy of all or any part of the Premises,
Tenant shall be entitled to appear, claim, prove and receive the portion of the
award for such taking that represents compensation for use or occupancy of the
Premises during the Term and Landlord shall be entitled to appear, claim, prove
and receive the portion of the award that represents the cost of restoration of
the Premises and the use or occupancy of the Premises after the end of the Term
hereof. In the event of any such condemnation of any portion of the Project
other than the Building, Landlord shall be entitled to appear, claim, prove and
receive all of that award. In the event of any permanent taking of the Premises,
Tenant will have the right to recover from the condemning authority (but not
from Landlord) any compensation as may be separately awarded or recoverable by
Tenant for the taking of Tenant's furniture, fixtures, equipment and other
personal property within the Premises, for Tenant relocation expenses, and for
any loss of good will or other damage to Tenant's business by reason of such
taking, but Tenant will not be entitled to any so-called bonus or excess value
of this Lease, which will be the sole property of Landlord.
16.8. Landlord and Tenant each hereby waive the provisions of
California Code of Civil Procedure Section 1265.130 and any other applicable
existing or future law, ordinance or governmental regulation providing for, or
allowing either party to petition the courts of the state in which the Project
is located for, a termination of this lease upon a partial taking of the
Premises and/or the Building.
ARTICLE 17
INDEMNIFICATION
17.1. Tenant shall, and hereby agrees to, indemnify and hold
Landlord harmless from any damage to any property or injury to, or death of,
any person arising from (a) the use or occupancy of the Premises, or (b) the
negligent or intentionally wrongful use or occupancy of the Common Areas by
Tenant, its agents, employees, representatives, contractors, successors,
assigns, licensees, or invitees, except to the extent such damage or injury is
caused by the negligence or willful misconduct of Landlord, its agents,
employees, representatives, or contractors (in which case Landlord shall be
responsible to the extent such damage or injury is not covered by insurance
required to be carried by Tenant under this Lease or actually carried by
Tenant). Landlord shall not be liable for any damage or injury caused by other
tenants or persons in the Building or by occupants of adjacent property thereto,
or by the public, or caused by construction (except to the extent caused by the
negligence or willful misconduct of Landlord (in which case Landlord shall be
responsible to the extent such damage or injury is not covered by insurance
required to be carried by Tenant under this Lease or actually carried by
Tenant)) or by any private, public or quasipublic work. Tenant's foregoing
indemnity shall include attorneys' fees, investigation costs, and all other
reasonable costs and expenses incurred by Landlord in any connection therewith.
The provisions of this Article 17 shall survive the expiration or termination of
this Lease with respect to any damage, injury, or death occurring before such
expiration or termination. If Landlord is made a party to any litigation
commenced by or against Tenant or relating to this Lease or to the Premises, and
provided that in any such litigation Landlord is not finally adjudicated to be
solely at fault, then Tenant shall pay all costs and expenses, including
attorneys' fees and court costs, incurred by or imposed upon Landlord because of
any such litigation, and the amount of all such costs and expenses, including
attorneys' fees and court costs, shall be a demand obligation owing by Tenant to
Landlord.
17.2. Landlord shall, and hereby agrees to, indemnify and hold
Tenant harmless from any damages in connection with loss of life, bodily or
personal injury or property damage arising from any occurrence in the Common
Areas to the extent not the result of the negligence or willful misconduct of
Tenant. If Tenant is made a party to any litigation commenced by or against
Landlord or relating to this Lease or to the Premises, and provided that in any
such litigation Tenant is not finally adjudicated to be solely at fault, then
Landlord shall pay all costs and expenses, including attorneys' fees and court
costs, incurred by or imposed upon Tenant because of any such litigation, and
the amount of all such costs and expenses, including attorneys' fees and court
costs, shall be a demand obligation owing by Landlord to Tenant.
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ARTICLE 18
SUBORDINATION AND ESTOPPEL CERTIFICATES
18.1. This Lease and all rights of Tenant hereunder are subject and
subordinate to all underlying leases now or hereafter in existence, and to any
supplements, amendments, modifications, and extensions of such leases heretofore
or hereafter made and to any deeds to secure debt, mortgages, or other security
instruments which now or hereafter cover all or any portion of the Project or
any interest of Landlord therein, and to any advances made on the security
thereof, and to any increases, renewals, modifications, consolidations,
replacements, and extensions of any of such mortgages. This provision is
declared by Landlord and Tenant to be self-operative and no further instrument
shall be required to effect such subordination of this Lease. Upon demand,
however, Tenant shall execute, acknowledge, and deliver to Landlord any further
instruments and certificates evidencing such subordination as Landlord, and any
mortgagee or lessor of Landlord shall reasonably require, and if Tenant fails to
so execute, acknowledge and deliver such instruments within ten (10) days after
Landlord's request, Tenant shall be in default of this Lease. Tenant shall not
unreasonably withhold, delay, or defer its written consent reasonable
modifications in this Lease which are a condition of any construction, interim
or permanent financing for the Project or any reciprocal easement agreement with
facilities in the vicinity of the Building, provided that such modifications do
not increase the obligations of Tenant hereunder or materially and adversely
affect Tenant's use and enjoyment of the Premises. This Lease is further subject
and subordinate to: (a) all applicable ordinances of any government authority
having jurisdiction over the Project, relating to easements, franchises, and
other interests or rights upon, across, or appurtenant to the Project; and (b)
all utility easements and agreements, now or hereafter created for the benefit
of the Project. Notwithstanding anything above to the contrary, Landlord agrees
to provide Tenant with commercially reasonable non-disturbance agreement(s) in
favor of Tenant from any ground lessors, mortgage holders and deed of trust
beneficiaries of Landlord acquiring an interest in the Building or the
underlying land after the date of this Lease until the expiration of the Term of
this Lease in consideration of, and as an express condition precedent to, any
subordination of this Lease provided for hereunder.
18.2. Notwithstanding the generality of the foregoing provisions of
Section 18.1, any mortgagee or lessor of Landlord shall have the right at any
time to subordinate any such mortgage or underlying lease to this Lease, or to
any of the provisions hereof, on such terms and subject to such conditions as
such mortgagee or lessor of Landlord may consider appropriate in its discretion.
At any time, before or after the institution of any proceedings for the
foreclosure of any such mortgage, or the sale of the Building under any such
mortgage, or the termination of any underlying lease, Tenant shall, upon request
of such mortgagee or any person or entities succeeding to the interest of such
mortgagee or the purchaser at any foreclosure sale ("SUCCESSOR LANDLORD"),
automatically become the Tenant (or if the Premises has been validly subleased,
the subtenant) of the Successor Landlord, without change in the terms or other
provisions of this Lease (or, in the case of a permitted sublease, without
change in this Lease or in the instrument setting forth the terms of such
sublease); provided, however, that the Successor Landlord shall not be (i) bound
by any payment made by Tenant of Rent or Additional Rent for more than one (1)
month in advance, except for (i) a Security Deposit previously paid to Landlord
(and then only if such Security Deposit has been deposited with and is under the
control of the Successor Landlord and/or (ii) overpayment of installments of
Tenant's Operating Costs Payments (based on Landlord' Operating Costs Estimate)
in excess of actual Operating Costs for such period payable by Tenant), (ii)
bound by any termination, modification, amendment or surrender of the Lease done
without the Successor Landlord's consent, (iii) liable for any damages or
subject to any offset or defense by Tenant to the payment of Rent by reason of
any act or omission of any prior landlord (including Landlord), or (iv)
personally or corporately liable, in any event, beyond the limitations on
liability set forth in Section 25.5 of this Lease. This agreement of Tenant to
attorn to a Successor Landlord shall survive any such foreclosure sale,
trustee's sale conveyance in lieu thereof or termination of any underlying
lease. Tenant shall upon demand at any time, before or after any such
foreclosure or termination execute, acknowledge, and deliver to the Successor
Landlord any written instruments and certificates evidencing such attornment as
such Successor Landlord may reasonably require; provided, however, that Landlord
shall use its reasonable efforts to require that such agreement provide that
upon such attornment, as long as Tenant is not in default hereunder, Tenant's
possession of the Premises under this Lease shall not be disturbed.
18.3. Tenant shall, from time to time, within ten (10) business days
after request from Landlord, or from any mortgagee or lessor of Landlord,
execute, acknowledge and deliver in recordable form a certificate certifying, to
the extent true, that this Lease is in full force and effect and unmodified (or,
if there have been modifications, that the same is in full force and effect as
modified and stating the modifications); that the Term has commenced and the
full amount of the Rent then accruing hereunder; the dates to which the Rent has
been paid; that Tenant has accepted possession of the Premises and that any
improvements required by the terms of this Lease to be made by Landlord have
been completed to the satisfaction of Tenant; the amount, if any, that Tenant
has paid to Landlord as a Security Deposit; that no Rent under this Lease has
been paid more than thirty (30) days in advance of its due date; that the
address for notices to be sent to Tenant is as set forth in this Lease (or has
been changed by notice duly given and is as set forth in the certificate); that
Tenant, as of the date of such certificate, has no charge, lien, or claim of
offset under this Lease or otherwise against Rent or other charges due or to
become due hereunder; that, to the knowledge of Tenant, Landlord is not then in
default under this Lease; and such other matters as may be requested by Landlord
or any mortgagee or lessor of Landlord. Any such certificate may be relied upon
by Landlord, any Successor Landlord, or any mortgagee or lessor of Landlord.
18.4. Landlord shall use its good faith efforts to deliver to
Tenant, within ninety (90) days after Tenant's written request, a Subordination,
Non-Disturbance and Attornment Agreement substantially in the form of EXHIBIT
"E" attached hereto and made a part hereof (or such other form as may be
required by any ground lessor, mortgage holder or deed of trust beneficiary of
Landlord's interest in the Project) ("NON-DISTURBANCE AGREEMENT"), which
Non-Disturbance Agreement Tenant shall execute and deliver to Landlord within
five (5) days after Tenant's receipt thereof. Within ninety (90) days after
Landlord's receipt of the Non-Disturbance Agreement (executed by Tenant),
Landlord shall use its good faith efforts to cause the Non-Disturbance Agreement
to be executed by any ground lessors, mortgage holders and deed of trust
beneficiaries in existence as of the date hereof.
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ARTICLE 19
SURRENDER OF THE PREMISES
Upon the Expiration Date or earlier termination of this Lease, Tenant,
at Tenant's sole cost and expense, shall peacefully vacate and surrender the
Premises to Landlord in good order, broom clean and in the same condition as at
the beginning of the Term or as the Premises may thereafter have been improved
by Landlord or Tenant (subject to Section 10.3 hereof), reasonable use and wear
thereof and repairs which are Landlord's obligations under Articles 9, 15 and 16
only excepted, and Tenant shall remove all of Tenant's Property and turn over
all keys for the Premises to Landlord. No provision of this Lease shall impose
upon Landlord any obligation to care for or preserve any of Tenant's Property
left upon the Premises, and Tenant hereby waives and releases Landlord from any
claim or liability in connection with the removal of such property from the
Premises and the storage thereof and specifically waives the provisions of
California Civil Code Section 1542 with respect to such release. Should Tenant
continue to hold the Premises after the expiration or earlier termination of
this Lease, such holding over, unless otherwise agreed to by Landlord in
writing, shall constitute and be construed as a tenancy at sufferance at monthly
installments of Rent equal to one hundred fifty percent (150%) of the monthly
portion of Rent in effect as of the date of expiration or earlier termination,
and subject to all of the other terms, charges and expenses set forth herein
except any right to renew this Lease or to expand the Premises or any right to
additional services. Tenant shall also be liable to Landlord for all damage
which Landlord suffers because of any holding over by Tenant, and Tenant shall
indemnify Landlord against all claims made by any other tenant or prospective
tenant against Landlord resulting from delay by Landlord in delivering
possession of the Premises to such other tenant or prospective tenant. The
provisions of this Article 19 shall survive the expiration or earlier
termination of this Lease.
ARTICLE 20
LANDLORD'S RIGHT TO INSPECT
Landlord shall retain duplicate keys to all doors of the Premises.
Tenant shall provide Landlord with new keys should Tenant receive Landlord's
consent to change the locks. Landlord shall have the right to enter the
Premises to provide janitorial service as required under this Lease and other
times at reasonable hours following reasonable prior notice (or, in the event
of an emergency, at any hour) (a) to exhibit the same to present to
prospective mortgagees, lessors or purchasers during the Term and to
prospective tenants during the last year of the Term, (b) to inspect the
Premises, (c) to confirm that Tenant is complying with all of Tenant's
covenants and obligations under this Lease, (d) to make repairs required of
Landlord under the terms of this Lease, (e) to make repairs to areas
adjoining the Premises, and (f) to repair and service utility lines or other
components of the Building; provided, however, Landlord shall use reasonable
efforts to minimize interference with Tenant's business.
ARTICLE 21
SECURITY DEPOSIT
Tenant's Security Deposit (if any) shall be held by Landlord,
without liability for interest except to the extent required by law, as
security for the performance of Tenant's obligations under this Lease.
Unless required by applicable law, Landlord shall not be required to keep the
Security Deposit segregated from other funds of Landlord. Tenant shall not
assign or in a any way encumber the Security Deposit. Upon the occurrence of
any Event of Default by Tenant, Landlord shall have the right, without
prejudice to any other remedy, to use the Security Deposit, or portions
thereof, to the extent necessary to pay any arrearages in Rent, and any other
damage, injury or expense. Following any such application of all or any
portion of the Security Deposit, Tenant shall pay to Landlord, on demand, the
amount so applied in order to restore the Security Deposit to its original
amount. If Tenant is not in default at the termination of this Lease, any
remaining balance of the Security Deposit shall be returned to Tenant,
provided that Tenant surrenders the Premises without damage pursuant to
Article 19 hereof. If Landlord transfers its interest in the Premises during
the Term, Landlord shall assign the Security Deposit to the transferee, and
thereafter Landlord shall have no further liability to Tenant for the
Security Deposit.
ARTICLE 22
BROKERAGE
Tenant and Landlord each represent and warrant to the other that it
has not entered into any agreement with, or otherwise had any dealings with,
any broker or agent in connection with the negotiation or execution of this
Lease which could form the basis of any claim by any such broker or agent for
a brokerage fee or commission, finder's fee, or any other compensation of any
kind or nature in connection herewith, other than with Brokers listed in
Section 1.1.S (who shall be paid by Landlord in accordance with Landlord's
separate agreement(s) with the Brokers) and each party shall, and hereby
agrees to, indemnify and hold the other harmless from all costs (including
court costs, investigation costs, and attorneys' fees), expenses, or
liability for commissions or other compensation claimed by any broker or
agent with respect to this Lease which arise out of any agreement or
dealings, or alleged agreement or dealings, between the indemnifying party
and any such agent or broker, other than with Brokers. This provision shall
survive the expiration or earlier termination of this Lease.
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ARTICLE 23
OBSERVANCE OF RULES AND REGULATIONS
Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully and comply strictly with all Rules and
Regulations (herein so called) attached to this Lease as Rider No. 1, as such
Rules and Regulations may be changed from time to time. Landlord shall at all
times have the right to make reasonable changes in and additions to such Rules
and Regulations; provided Landlord gives Tenant prior notice of such changes and
provided that such new rules and regulations or changes in existing rules and
regulations do not conflict with this Lease, and do not materially interfere
with the lawful conduct of Tenant's business in the Premises. Any failure by
Landlord to enforce any of the Rules and Regulations now or hereafter in effect,
either against Tenant or any other tenant in the Building, shall not constitute
a waiver of any such Rules and Regulations. Landlord shall not be liable to
Tenant for the failure or refusal by any other tenant, guest, invitee, visitor,
or occupant of the Building to comply with any of the Rules and Regulations.
Landlord shall enforce the Rules and Regulations in a nondiscriminatory manner.
ARTICLE 24
NOTICES
All notices, consents, demands, requests, documents, or other
communications (other than payment of Rent) required or permitted hereunder
(collectively, "NOTICES") shall be deemed given, whether actually received or
not, when dispatched for hand delivery or delivery by air express courier (with
signed receipts) to the other party, or on the second Business Day after deposit
in the United States mail, postage prepaid, certified, return receipt requested,
except for notice of change of address which shall be deemed given only upon
actual receipt. The addresses of the parties for notices are set forth in
Article 1, or any such other addresses subsequently specified by each party in
notices given pursuant to this Article 24.
ARTICLE 25
MISCELLANEOUS
25.1. PROFESSIONAL FEES. In any action or proceeding brought by
either party against the other under this Lease, the prevailing party shall be
entitled to recover from the other party its professional fees for attorneys,
appraisers and accountants, its investigation costs, and any other legal
expenses and court costs incurred by the prevailing party in such action or
proceeding.
25.2. REIMBURSEMENTS. Wherever the Lease requires Tenant to
reimburse Landlord for the cost of any item, such costs will be the reasonable
and customary charge periodically established by Landlord for such item.
Landlord shall keep in its manager's office a schedule of such charges (which
Landlord may periodically change) for Tenant's examination. The schedule of
charges may include, at the discretion of Landlord, a reasonable allocation of
overhead, administrative, and related costs and a reasonable fee for Landlord's
agent or manager who performs such services or arranges for performance of such
services. All such charges shall be payable upon demand as Additional Rent.
25.3. SEVERABILITY. Every agreement contained in this Lease is, and
shall be construed as, a separate and independent agreement. If any term of this
Lease or the application thereof to any person or circumstances shall be invalid
or unenforceable, the remaining agreements contained in this Lease shall not be
affected.
25.4. NON-MERGER. There shall be no merger of this Lease with any
ground leasehold interest or the fee estate in the Project or any part thereof
by reason of the fact that the same person may acquire or hold, directly or
indirectly, this Lease or any interest in this Lease as well as any ground
leasehold interest or fee estate in the Project or any interest in such fee
estate.
25.5. LANDLORD'S LIABILITY. Anything contained in this Lease to the
contrary notwithstanding, Tenant agrees that Tenant shall look solely to the
estate and property of Landlord in the Project for the collection of any
judgment or other judicial process requiring the payment of money by Landlord
for any default or breach by Landlord under this Lease, subject, however, to the
prior rights of any mortgagee or lessor of the Project. No other assets of
Landlord or any members, partners, shareholders, or other principals of Landlord
shall be subject to levy, execution or other judicial process for the
satisfaction of Tenant's claim.
25.6. FORCE MAJEURE. Whenever the period of time is herein
prescribed for action to be taken by Landlord or Tenant, Landlord or Tenant
shall not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to force majeure, which
term shall include strikes, riots, acts of God, shortages of labor or materials,
war, governmental approvals, laws, regulations, or restrictions, or any other
cause of any kind whatsoever which is beyond the reasonable control of Landlord
or Tenant. Force Majeure shall not excuse or delay Tenant's obligation to pay
Rent or any other amount due under this Lease.
25.7. HEADINGS. The article headings contained in this Lease are for
convenience only and shall not enlarge or limit the scope or meaning of the
various and several articles hereof. Words in the singular number shall be held
to include the plural, unless the context otherwise requires. All agreements and
covenants herein contained shall be binding upon the respective heirs, personal
representatives, and successors and assigns of the parties thereto.
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25.8. SUCCESSORS AND ASSIGNS. All agreements and covenants herein
contained shall be binding upon the respective heirs, personal representatives,
successors and assigns or the parties hereto. If there be more than one Tenant,
the obligations hereunder imposed upon Tenant shall be joint and several. If
there is a guarantor of Tenant's obligations hereunder, Tenant's obligations
shall be joint and several obligations of Tenant and such guarantor, and
Landlord need not first proceed against Tenant hereunder before proceeding
against such guarantor, and any such guarantor shall not be released from its
guarantee for any reason, including any amendment of this Lease, any forbearance
by Landlord or waiver of any of Landlord's rights, the failure to give Tenant or
such guarantor any notices, or the release of any party liable for the payment
or performance of Tenant's obligations hereunder. Notwithstanding the foregoing,
nothing contained in this Section 25.8 shall be deemed to override Article 8.
25.9. LANDLORD'S REPRESENTATIONS. Neither Landlord nor Landlord's
agents or brokers have made any representations or promises with respect to the
Premises, the Building, the Parking Facility, the Land, or any other portions of
the Project except as herein expressly set forth and all reliance with respect
to any representations or promises is based solely on those contained herein. No
rights, easements, or licenses are acquired by Tenant under this Lease by
implication or otherwise except as, and unless, expressly set forth in this
Lease.
25.10. ENTIRE AGREEMENTS; AMENDMENTS. This Lease and the Exhibits and
Riders attached hereto set forth the entire agreement between the parties and
cancel all prior negotiations, arrangements, brochures, agreements, and
understandings, if any, between Landlord and Tenant regarding the subject matter
of this Lease. No amendment or modification of this Lease shall be binding or
valid unless expressed in writing executed by both parties hereto.
25.11. TENANT'S AUTHORITY. If Tenant signs as a corporation,
execution hereof shall constitute a representation and warranty by Tenant that
Tenant is a duly organized and existing corporation, that Tenant has been and is
qualified to do business in the State of California and in good standing with
the State of California, that the corporation has full right and authority to
enter into this Lease, and that all persons signing on behalf of the corporation
were authorized to do so by appropriate corporate action. If Tenant signs as a
limited liability company, partnership, trust, or other legal entity, execution
hereof shall constitute a representation and warranty by Tenant that Tenant has
complied with all applicable laws, rules, and governmental regulations relative
to Tenant's right to do business in the State of California, that such entity
has the full right and authority to enter into this Lease, and that all persons
signing on behalf of Tenant were authorized to do so by any and all necessary or
appropriate company, partnership, trust, or other actions.
25.12. GOVERNING LAW. This Lease shall be governed by and construed
under the laws of the State of California. Should any provision of this Lease
require judicial interpretation, Landlord and Tenant hereby agree and stipulate
that the court interpreting or considering same shall not apply the presumption
that the terms hereof shall be more strictly construed against a party by reason
of any rule or conclusion that a document should be construed more strictly
against the party who itself or through its agents prepared the same, it being
agreed that all parties hereto have participated in the preparation of this
Lease and that each party had full opportunity to consult legal counsel of its
choice before the execution of this Lease.
25.13. TENANT'S USE OF NAME OF THE BUILDING. Tenant shall not,
without the prior written consent of Landlord, use the name of the Building for
any purpose other than as the address of the business to be conducted by Tenant
in the Premises, and Tenant shall not do or permit the doing of anything in
connection with Tenant's business or advertising (including brokers' flyers
promoting sublease space) which in the reasonable judgment of Landlord may
reflect unfavorably on Landlord or the Building or confuse or mislead the public
as to any apparent connection or relationship between Tenant and Landlord, the
Building, or the Land.
25.14. VIEW AND LIGHTS. Any elimination or shutting off of light,
air, or view by any structure which may be erected on lands adjacent to the
Building shall in no way affect this Lease and Landlord shall have no liability
to Tenant with respect thereto.
25.15. CHANGES TO PROJECT BY LANDLORD. Landlord shall have the
unrestricted right to make changes to all portions of the Project in Landlord's
reasonable discretion for the purpose of improving access or security to the
Project or the flow of pedestrian and vehicular traffic therein. Landlord shall
have the right at any time, without the same constituting an actual or
constructive eviction and without incurring any liability to Tenant therefor, to
change the arrangement or location of entrances or passageways, doors and
doorways, corridors, elevators, stairs. bathrooms, or any other Common Areas so
long as reasonable access to the Premises remains available. Landlord shall also
have the right to (a) rearrange, change, expand or contract portions of the
Project constituting Common Areas, (b) to use Common Areas while engaged in
making improvements, repairs or alterations to the Project, or any portion
thereof, and (c) to do and perform such other acts and make such other changes
in to or with respect to the Project, or any portion thereof, as Landlord may,
in the exercise of sound business judgment, deem to be appropriate. Without
liability to Tenant, Landlord shall be entitled to change the name or address of
the Building or the Project. A name change shall not require any prior notice to
Tenant; provided, however, Landlord will provide Tenant with reasonable advance
notice if Landlord voluntarily changes the address of the Building. Landlord
shall have the right to close, from time to time, the Common Areas and other
portions of the Project for such temporary periods as Landlord deems legally
sufficient to evidence Landlord's ownership and control thereof and to prevent
any claim of adverse possession by, or any implied or actual dedication to, the
public or any party other than Landlord.
25.16. TIME OF ESSENCE. Time is of the essence of this Lease.
25.17. LANDLORD'S ACCEPTANCE OF LEASE. The submission of this Lease
to Tenant shall not be construed as an offer and Tenant shall not have any
rights with respect thereto unless said Lease is consented to by mortgagee, and
any lessor of Landlord, to the extent such consent is required, and Landlord
executes a copy of this Lease and delivers the same to Tenant.
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25.18. PERFORMANCE BY TENANT. All covenants and agreements to be
performed by Tenant under any of the terms of this Lease shall be performed by
Tenant, at Tenant's sole cost and expense, and without any abatement of Rent. If
Tenant shall fail to pay any Rent, other than Base Rent, required to be paid by
it hereunder or shall fail to perform any other act on its part to be performed
hereunder, and such failure shall continue for longer than the period of cure,
if any, permitted in Section 13.1, Landlord may, at its option, without waiving
or releasing Tenant from obligations of Tenant, make any such payment or perform
any such other act on behalf of Tenant. All sums so paid by Landlord and all
necessary incidental costs, together with interest thereon at the Interest Rate,
from the date of such payment by Landlord, shall be payable to Landlord on
demand. Tenant covenants to pay any such sums, and Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and remedies
in the event of the non-payment thereof by Tenant as in the case of default by
Tenant in the payment of Rent.
25.19. FINANCIAL STATEMENTS. At any time during the term of this
Lease, Tenant shall, upon ten (10) days prior written notice from Landlord,
provide Landlord with the most recent existing financial statement and existing
financial statements of the two (2) years prior to the most recent financial
statement year. Such statements shall be prepared in accordance with generally
accepted accounting principles and, if such is the normal practice of Tenant,
shall be audited by an independent certified public accountant.
25.20. AUTOMATED TELLER MACHINE AND DEPOSITORY. Landlord and Tenant
hereby agree that Tenant shall be entitled, during the Lease Term (and any
Option Term, if applicable) at its sole cost and expense and subject to the
terms and conditions of this Section 25.20, to install, maintain and operate (i)
one (1) automated teller machine ("ATM"), together with related equipment,
accessories, and identifying signage (collectively, the "ATM EQUIPMENT") and
(ii) one (1) after-hours depository ("DEPOSITORY"), all at the location in the
Premises shown on Exhibit "A-1." Tenant's installation of the ATM, the ATM
Equipment and the Depository shall comply with all the terms and conditions of
the Work Letter Agreement attached hereto as Exhibit "C" and otherwise in
compliance with Article 10 and for purposes of this Lease, the ATM, the ATM
Equipment and the Depository shall be considered part of the Leasehold
Improvements. In connection with Tenant's installation, maintenance and
operation of the ATM, the ATM Equipment and the Depository, Tenant shall, at its
sole cost and expense (i) obtain all necessary federal, state, and local
permits, licenses, and approvals; (ii) comply with all laws applicable to the
installation, use and operation of the ATM, the ATM Equipment and the
Depository, including, without limitation any provisions of the ADA; (iii)
maintain the ATM, the ATM Equipment and the Depository, and the area in the
vicinity thereof in clean and working condition and service the ATM and fill the
ATM with cash and supplies (such services shall be performed before or after the
normal business hours of the Project, except as deemed reasonably necessary by
Tenant) and except for such periodic servicing and maintenance, Tenant shall
operate the ATM continuously during reasonably operating hours as determined by
Tenant from time to time; (iv) provide all security measures that are customary
for similar facilities in comparable buildings in the vicinity of the Project
including, without limitation, mirrors, surveillance cameras, door locks,
adequate lighting, card entry systems, and warning signage and Tenant shall
review such security measures at least annually and revise same to reflect then
customary security measures; (v) pay all real, personal property, or other taxes
or fees assessed or imposed on the ATM, the ATM Equipment and the Depository;
(vi) remove, upon the expiration or earlier termination of the Lease (or at
Landlord's option, upon the transfer or assignment of the Original Tenant's
interest in this Lease), the ATM, the ATM Equipment and the Depository,
including any ATM Signage (as that term is defined below) and repair any damage
to the Project caused by such removal; and (vii) arrange with, and pay directly
to, the applicable public or private utilities, as the case may be, for
furnishing, installing, and maintaining of all telecommunications lines,
services, and equipment as may be required by Tenant for the operation of the
ATM, the ATM Equipment and the Depository and, in connection therewith, Tenant
shall not modify or disturb any telecommunications lines, services and/or
equipment in the Project without Landlord's prior written consent. Further,
subject to Landlord's prior approval (which approval shall not be unreasonably
withheld to the extent that such signage is required by applicable law), Tenant
shall be permitted, at Tenant's sole cost and expense, to install signage and
any other advertising material or displays at the ATM ("ATM SIGNAGE"), which ATM
Signage shall identify Tenant and/or any automated teller network operated by
Tenant and/or any shared automatic teller networks with which the ATM is
affiliated. Tenant shall be responsible, at its sole cost and expense, for
obtaining any permits or governmental approval required for the ATM Signage and
for the maintenance and repair of the ATM Signage. Landlord reserves the right
(but Landlord shall have no obligation) to engage a security consultant to
determine whether any additional or different security measures are necessary at
the Project as a result of Tenant's installation of the ATM, the ATM Equipment
and the Depository and Tenant shall pay as additional rent, within ten (10) days
after Landlord's invoice, all costs and expenses incurred by Landlord in
connection therewith and Tenant shall, at Tenant's sole cost and expense,
promptly implement such recommendations of such security consultant; provided,
however, that if Landlord engages said security consultant, such engagement
shall be for the sole benefit of Landlord and Tenant shall not rely thereon.
Landlord may restrict the hours of operation of the ATM or require Tenant to
temporarily discontinue services in connection with Landlord's maintenance and
repair of the Project or any portion thereof, or if necessary in Landlord's
reasonable judgment, for the security of the Project or its occupants or
contents, and any such action by Landlord shall not be deemed a constructive
eviction of Tenant or a disturbance of Tenant's use of the Premises or the
Project and without Landlord incurring any liability to Tenant whatsoever.
Landlord shall have no responsibility whatsoever for the ATM, the ATM Equipment
and the Depository and shall not be liable for any damage or disruption to same
however caused, including without limitation, due to a disruption in electrical
or telecommunication service. Landlord makes no representations as to the
suitability of the Project for an ATM or the Depository, whether or not the ATM
and/or the Depository may be installed in the Project under applicable zoning
ordinances or other laws, or as to the safety or security of the Project. The
ATM and the Depository and surrounding area with respect thereto shall be deemed
to constitute a portion of the Premises for purposes of Articles 14 and 17
above.
25.21. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant
that upon Tenant paying the rent required under this Lease and paying all other
charges and performing all of the covenants and provisions on Tenant's part to
be observed and performed under this Lease, Tenant may peaceably and quietly
have, hold and enjoy the Premises in accordance with this Lease without
hindrance or molestation by Landlord or its employees or agents.
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25.22. SIGNAGE.
A. INTERIOR SIGNAGE.
(1) FULL FLOORS. Subject to Landlord's prior
written approval, in its sole discretion, and provided all signs are in keeping
with the quality, design and style of the Building and Project, Tenant, for any
portion of the Premises which comprises an entire floor of the Building, at its
sole cost and expense, may install identification signage anywhere in such full
floor portion of the Premises including in the elevator lobby of such full floor
portion of the Premises, provided that such signs must not be visible from the
exterior of the Building. Tenant shall be responsible, at Tenant's sole cost and
expense, for maintenance and repair of any such signs. In addition, Tenant shall
cause such signs to be removed from the Premises and shall repair all damage to
the Premises and the Building resulting from such removal, at Tenant's sole cost
and expense, prior to the expiration or earlier termination of this Lease.
(2) MULTI-TENANT FLOORS. If other tenants occupy
space on the floor on which the Premises is located, Tenant's identifying
signage shall be provided by Landlord, at Tenant's cost, and such signage shall
be comparable to that used by Landlord for other similar floors in the Building
and shall comply with Landlord's Building standard signage program.
(3) DIRECTORY. Tenant, at Tenant's sole cost and
expense, shall be entitled to have Tenant's name, as well as the names of
Tenant's employees, listed on a directory sign in the main lobby of the
Building, up to a maximum of two (2) directory strips.
B. TENANT'S EXTERIOR SIGNAGE.
(1) TOP OF THE BUILDING SIGNAGE. Subject to the
terms hereof, the Original Tenant shall have the exclusive right to install, at
Original Tenant's sole cost and expense, signage identifying the Original
Tenant on the top of the exterior wall of the Building in the two (2) locations
generally depicted on Exhibit "F," attached hereto and incorporated herein by
this reference. The signage to which Tenant is entitled pursuant to the
immediately preceding sentence may be referred to herein as Tenant's "BUILDING
TOP SIGNAGE." The graphics, materials, color, design, lettering, lighting, size,
specifications, manner of affixing and exact location of the Building Top
Signage shall be subject to Landlord's sole and absolute (but good faith)
discretion. In addition, the Building Top Signage shall be subject to Tenant's
receipt of all required governmental permits and approvals and shall be subject
to all applicable governmental laws and ordinances, and any covenants,
conditions and restrictions affecting the Project; provided, however, if Tenant
does not receive the necessary governmental permits and approvals for the
Building Top Signage, Landlord's and Tenant's rights and obligations under the
remaining provisions of this Lease shall, except as otherwise provided in below,
be unaffected. The cost of installation of the Building Top Signage, as well as
all costs of design and construction of such signage and all other costs
associated with such signage including, without limitation, permits and
maintenance and repair, shall be the sole responsibility of Tenant.
(2) EYEBROW SIGN. The Original Tenant shall have
the right to install, at Original Tenant's sole cost and expense, one (1)
"eyebrow" sign (the "EYEBROW SIGN") identifying the Original Tenant on the
exterior of the Building in the location generally depicted on Exhibit "F". The
graphics, materials, color, design, lettering, lighting, size, specifications,
manner of affixing and exact location of the Eyebrow Sign shall be subject to
Landlord's sole and absolute (but good faith) discretion. In addition, the
Eyebrow Sign shall be subject to Tenant's receipt of all required governmental
permits and approvals and shall be subject to all applicable governmental laws
and ordinances, and any covenants, conditions and restrictions affecting the
Project; provided, however, if Tenant does not receive the necessary
governmental permits and approvals for the Eyebrow Sign, Landlord's and Tenant's
rights and obligations under the remaining provisions of this Lease shall,
except as otherwise provided in below, be unaffected. The cost of installation
of the Eyebrow Sign, as well as all costs of design and construction of such
signage and all other costs associated with such signage including, without
limitation, permits and maintenance and repair, shall be the sole responsibility
of Tenant. Notwithstanding anything above to the contrary, Landlord and Tenant
acknowledge and agree that, without limiting the generality of the foregoing,
Tenant's right to install such Eyebrow Sign is subject to Tenant's installation
of a separate primary entrance to the Premises (other than through the lobby of
the Building). As such, Tenant acknowledges and agrees that such entry shall be
included, if at all, in connection with the construction of the Leasehold
Improvements (and such entry shall be set forth in Tenant's Design Development
Drawings (and in the Final Plans) and shall, therefore, be subject to Landlord's
approval as to location and other specifications and criteria. Tenant further
acknowledges and agrees that the hard costs of the construction of such entry
(including, but not limited to, door(s) and hardware) shall, notwithstanding
anything in this Lease to the contrary, be shared by Landlord and Tenant on an
equal basis; provided, however, in no event shall Tenant be obligated to expend
more than Five Thousand Dollars ($5,000.00) in connection with the hard
construction costs associated with such entry access.
(3) SIGNAGE TERMINATION. The Building Top
Signage and the Eyebrow Sign are collectively referred to herein as the
"EXTERIOR SIGNAGE." The rights to the Exterior Signage are personal to the
Original Tenant and shall exist only as long as the Original Tenant actually
occupies the entire Premises. Upon the expiration or sooner termination of this
Lease, or if at any time after the Commencement Date, Tenant fails to occupy the
entire Premises (each, a "SIGNAGE TERMINATION EVENT"), then Tenant's Exterior
Signage rights shall forever terminate and Tenant shall, at Tenant's sole cost
and expense, cause the Exterior Signage to be removed from the Building and to
repair any damage (including any discoloration) to the Building resulting from
such removal. If Tenant fails to remove its Exterior Signage from the Building
and to repair any damage to the Building resulting from such removal within
thirty (30) days following a Signage Termination Event, then Landlord may
perform such work, and all costs and expenses incurred by Landlord in so
performing shall be reimbursed by Tenant to Landlord within thirty (30) days
after Tenant's receipt of Landlord's invoice therefor. The immediately preceding
sentence shall survive the expiration or earlier termination of this Lease.
Notwithstanding anything to the contrary contained in this Section 22.22.B,
Landlord shall have the right, in its sole discretion (and without the necessity
of
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obtaining Tenant's consent or providing prior notice to Tenant), to grant to
any other tenant(s) of the Building "eyebrow" signage or other signage rights in
the Project which other tenant(s') signage may be more prominent than Tenant's
Exterior Signage.
(4) CONDITIONAL RENT ABATEMENT. Notwithstanding
anything above to the contrary, Landlord acknowledges and agrees that in the
event Tenant, after utilizing Tenant's best efforts (including appearing before
the applicable governmental bodies and instituting court action (if necessary)),
fails to obtain the necessary governmental permits and approvals for Tenant's
Building Top Signage and/or Eyebrow Sign (to the extent a separate entryway to
the Premises in compliance with all laws, permits and approvals has been
constructed ) within six (6) months from the Commencement Date (the "TRIGGER
DATE") then, after such Trigger Date, the applicable monthly Base Rent per
square foot of Net Rentable Area set forth in Section 1.1.M of this Lease shall
be deemed reduced by five cents ($0.05) (the "SPECIAL RENT ABATEMENT");
provided, however, that (i) Tenant shall only be entitled to the Special Rent
Abatement to the extent that, and only for so long as, the applicable
governmental authorities disallow any form of Tenant's Building Top Signage
and/or (subject to the terms hereof) Eyebrow Signage and (ii) Tenant shall not,
in any event, be entitled to any such Special Rent Abatement for the period of
time prior to the Trigger Date (i.e., the first six (6) months of the Term).
C. PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs,
notices, logos, pictures, names or advertisements which are visible from the
exterior of the Premises and that have not been separately approved by Landlord
may be removed without notice by Landlord at the sole expense of Tenant. Except
as expressly set forth herein, Tenant may not install any signs on the exterior
of the Project. Any signs, window coverings, or blinds (even if the same are
located behind the Landlord-approved window coverings for the Building), or
other items visible from the exterior of the Premises or Building, shall be
subject to the prior written approval of Landlord, in its sole discretion.
25.23. WAIVER OF JURY TRIAL. Each party hereby waives any right to a
trial by jury in any action seeking specific performance of any provision of
this Lease, for damages for any breach under this Lease, or otherwise for
enforcement of any right or remedy hereunder.
25.24. LEASING RESTRICTIONS. So long as the Original Tenant (i) is
not in default under this Lease and (ii) is occupying all of the Net Rentable
Area in the Premises as a licensed banking company or banking corporation in the
business of accepting money deposits from the general public, Landlord will not,
without Tenant's prior written consent (which consent shall not be unreasonably
withheld, conditional or delayed), lease any space in the ground floor of the
Building to any tenant whose primary stated use in its lease is a licensed
banking company or banking corporation, savings and loan, bank thrift or credit
union but only to the extent that any such tenant entity's business involves
accepting money deposits from the general public; provided, however, that such
restriction is only for the benefit of the Original Tenant and not any other
person or entity. If the circumstances descried in items (i) or (ii) do not
apply, the leasing restriction in the immediately preceding sentence shall
thereafter be null and void.
25.25. SECURED AREAS. Notwithstanding anything to the contrary
contained herein, Tenant shall be entitled, during the Lease Term to designate a
reasonable portion (or portions) of the Premises as a "SECURED AREA" and to
install door locks or other access control systems as necessary to secure such
Secured Area(s), provided that Tenant gives Landlord prior written notice of
Tenant's designation of such Secured Area(s) and that such Secured Area(s) shall
be used by Tenant solely for the purposes permitted under this Lease. Tenant
hereby agrees and acknowledges that Landlord shall have no obligation to perform
janitorial services in such Secured Area(s) unless Tenant provides Landlord a
written request for same and provides Landlord with access to such Secured
Area(s) (by providing Landlord a key or other device, by scheduling Landlord's
entry with an escort or otherwise) and, in the event that Tenant does not
provide Landlord with a key or other device to gain access to such Secured
Area(s), Landlord shall have the right to use reasonable force to gain access to
such Secured Area(s) in the case of emergency and Landlord shall have no
liability whatsoever to Tenant in connection therewith. Landlord and Tenant
hereby agree and acknowledge that, except as provided in the immediately
preceding sentence, Landlord shall enter such Secured Area(s) only upon one (1)
business days' prior notice to Tenant and only after providing Tenant with the
opportunity to have a representative of Tenant present as an escort. Landlord
and Tenant hereby agree to use commercially reasonable efforts to schedule any
such entries into the Secured Area(s) by Landlord at times that are mutually
convenient to both Landlord and Tenant, taking into consideration the nature of
Tenant's operations in the Premises. Tenant agrees that Tenant shall be
responsible, at its sole cost and expense, for complying with all applicable
laws regarding such Secured Area(s) and that such Secured Area(s) are subject to
the indemnification provisions of Article 17 above.
ARTICLE 26
OTHER DEFINITIONS
When used in this Lease, the terms set forth hereinbelow shall have the
following meanings:
(a) "BUSINESS DAYS" shall mean Monday through Friday (except for
Holidays); "BUSINESS HOURS" shall mean 7:30 a.m. to 6:00 p.m. on Monday through
Friday and 9:00 a.m. to 1:00 p.m. on Saturdays (except for Holidays); and
"HOLIDAYS" shall mean those holidays designated by Landlord, which holidays
shall be consistent with those holidays designated by landlords of other
first-class office buildings in the Comparison Area.
(b) "COMMON AREAS" shall mean those certain areas and facilities
of the Building and the Parking Facility and those certain improvements to the
Land which are from time to time provided by Landlord for the use of tenants of
the Building and their employees, clients, customers, licensees and invitees or
for use by the public, which facilities and improvements include any health
facility (if any) in the Project, any and all corridors, elevator foyers,
vending areas, bathrooms, electrical and telephone rooms, mechanical rooms,
janitorial areas and other similar facilities of the Building and of the Parking
Facility and any and all grounds, parks, landscaped areas, outside
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sitting areas, sidewalks, walkways, tunnels, pedestrianways, skybridges, and
generally all other improvements located on the Land, or which connect the Land
to other buildings.
(c) The words "DAY" or "DAYS" shall refer to calendar days, except
where "Business Days" are specified.
(d) The words "HEREIN", "HEREOF", "HEREBY", "HEREUNDER" and words
of similar import shall be construed to refer to this Lease as a whole and not
to any particular Article or Section thereof unless expressly so stated.
(e) The words "INCLUDE" and "INCLUDING" shall be construed as if
followed by the phrase "without being limited to."
(f) "NET RENTABLE AREA" and "USABLE AREA" shall mean "Net Rentable
Area" and "Usable Area" (as applicable) determined in accordance with the
Standard Method For Measuring Floor Area in Office Buildings ANSI/BOMA
Z65.1-1996 ("BOMA STANDARD"); provided, however, that for all purposes under
this Lease the calculation of the Usable Area shall in no event include the area
comprising the elevator lobbies, telephone rooms, electrical rooms, mechanical
rooms, freight vestibule areas or restrooms. Landlord shall have the right,
within ninety (90) days after the Commencement Date, to verify the Net Rentable
Area and/or Usable Area of the Premises in accordance with the BOMA Standard (as
modified pursuant to the immediately preceding sentence). Tenant shall have the
right, at its sole cost and expense, within sixty (60) days after the
Commencement Date, to have a qualified architect or space planner reasonably
approved by Landlord verify the Net Rentable Area and/or Usable Area of the
Premises and the Building in accordance with the BOMA Standard (as modified
pursuant to the immediately preceding sentence); provided, however, that such
determination shall be subject to the reasonable review and approval of Landlord
and its designated consultants, surveyors, or engineers. If, as a result of such
verification (and approval by Landlord), it is determined that the Net Rentable
Area and/or Usable Area of the Premises are different than the amounts set
forth in Section 1.1 above, all corresponding amounts set forth this Lease
(including, without limitation, Tenant's Share, the amount of monthly Base Rent,
the amount of the Security Deposit and the Allowance) shall be retroactively
adjusted and appropriate payments, if applicable, shall be made by Landlord to
Tenant or Tenant to Landlord (as applicable) within ten (10) days after such
determination and approval by Landlord. Both parties agree to execute a
commercially reasonable instrument in order to document such revised amounts.
From time to time throughout the Term of this Lease, Landlord shall have the
right, at its sole cost and expense, to verify the Net Rentable Area and/or
Usable Area of the Premises, the Building and the Project in accordance with the
BOMA Standard and this subparagraph (f) (pertaining to adjustment of certain
Lease provisions and appropriate payments (if applicable)).
(g) Reference to Landlord as having "NO LIABILITY TO TENANT" or
being "WITHOUT LIABILITY TO TENANT" or words of like import shall mean that
Tenant is not entitled to terminate this Lease, or to claim actual or
constructive eviction, partial or total, or to receive any abatement or
diminution of rent, or to be relieved in any manner of any of Tenant's other
obligations hereunder, or to be compensated for loss or injury suffered or to
enforce any other right or kind of liability whatsoever against Landlord under
or with respect to this Lease or with respect to Tenant's use or occupancy of
the Premises.
(h) A "REPAIR" shall be deemed to include such rebuilding,
replacement and restoration as may be necessary to achieve and maintain good
working order and condition.
(i) The "TERMINATION OF THIS LEASE" and words of like import
includes the expiration of the Term or the cancellation of this Lease pursuant
to any of the provisions of this Lease or to law. Upon the termination of this
Lease, the Term shall end at 11:59 p.m. (local time for the Building) on the
date of termination as if such date were the Expiration Date, and neither party
shall have any further obligation or liability to the other after such
termination except (i) as shall be expressly provided for in this Lease and (ii)
for such obligations as by their nature or under the circumstances can only be,
or by the provisions of this Lease, may be, performed after such termination
and, in any event, unless expressly otherwise provided in this Lease, any
liability for a payment (which shall be apportioned as of the date of such
termination) which shall have accrued to or with respect to any period ending at
the time of termination shall survive the termination of this Lease.
(j) The "TERMS OF THIS LEASE" shall be deemed to include all
terms, covenants, conditions, provisions, obligations, limitations,
restrictions, reservations and agreements contained in this Lease.
(k) "TENANT" shall be deemed to include Tenant's successors and
assigns (to the extent permitted by Landlord) and any and all occupants of the
Premises permitted by Landlord and claiming by, through or under Tenant.
ARTICLE 27
RIGHT OF FIRST NEGOTIATION
27.1. IN GENERAL. Subject to the terms hereof, Landlord hereby
grants to Tenant a right of first negotiation with respect to space on the
ground floor of the Building (the "FIRST NEGOTIATION SPACE"). Notwithstanding
the foregoing, such first negotiation right shall be subordinate and secondary
to all rights of expansion, first refusal, first offer or similar rights granted
to Brandes Investment Partners, L.P., an existing tenant of the Project (the
rights described above to be known as "SUPERIOR RIGHTS"). Tenant's right of
first negotiation shall be on the terms and conditions set forth in this Article
27.
27.2. PROCEDURE FOR NEGOTIATION. Landlord shall notify Tenant (the
"FIRST NEGOTIATION NOTICE") from time to time when Landlord receives a proposal
for all or any portion of the First Negotiation Space which Landlord
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would seriously consider (and where no holder of a Superior Right desires to
lease such space). The First Negotiation Notice shall describe the space so
offered to Tenant and shall set forth Landlord's proposed economic terms and
conditions applicable to Tenant's lease of such space (collectively, the
"ECONOMIC TERMS").
27.3. PROCEDURE FOR ACCEPTANCE. If Tenant wishes to exercise
Tenant's right of first negotiation with respect to the space described in the
First Negotiation Notice, then within three (3) business days after delivery of
the First Negotiation Notice to Tenant ("ELECTION DATE"), Tenant shall deliver
notice to Landlord of Tenant's exercise its right of first negotiation with
respect to the entire space described in the First Negotiation Notice based on
the Economic Terms contained therein. If Tenant does not exercise its right of
first negotiation within such three (3) business day period or if Tenant
exercises its right of first negotiation but objects to any of the Economic
Terms then, in any event, Landlord shall be free to lease the space described in
the First Negotiation Notice to any person or entity within twelve (12) months
after the Election Date upon any terms Landlord desires and Tenant's right of
first negotiation shall terminate as to the First Negotiation Space described in
the First Negotiation Notice. Notwithstanding anything to the contrary contained
herein, Tenant must elect to exercise its right of first negotiation, if at all,
with respect to all of the space offered by Landlord to Tenant at any particular
time, and Tenant may not elect to lease only a portion thereof.
27.4. CONDITION OF FIRST NEGOTIATION SPACE. Subject to the Economic
Terms, Tenant shall lease the First Negotiation Space in its "then as-is"
condition as of the date of Landlord's delivery of the First Negotiation Space
to Tenant. Tenant may construct improvements in the First Negotiation Space in
accordance with Article 10 of the Lease.
27.5. LEASE OF FIRST NEGOTIATION SPACE. If Tenant timely exercises
Tenant's right to lease the First Negotiation Space as set forth herein,
Landlord and Tenant shall, within five (5) business days after the Election
Date, execute an amendment adding such First Negotiation Space to this Lease
upon the same non-economic terms and conditions as applicable to the initial
Premises, and the economic terms and conditions as provided in this Article 27.
Tenant shall commence payment of rent for the First Negotiation Space and the
Lease Term of the First Negotiation Space shall commence on the date Landlord
makes such First Negotiation Space available to Tenant. The Lease Term for the
First Negotiation Space shall expire co-terminously with Tenant's lease of the
initial Premises; provided, however, that notwithstanding anything above to the
contrary, Tenant acknowledges and agrees that in no event shall Landlord be
obligated to provide Tenant with a First Negotiation Notice during the last
thirty-six (36) months of the Lease Term and, accordingly, Tenant will not have
a right to lease any First Negotiation Space for a term of less than thirty-six
(36) months.
27.6. NO DEFAULTS. The rights contained in this Article 27 shall be
personal to the Original Tenant and any Permitted Assignee of the Original
Tenant's entire interest in this Lease and may only be exercised by the
Original Tenant (and such Permitted Assignee) if the Original Tenant occupies
the entire Premises as of the date of the First Negotiation Notice. Tenant
shall not have the right to lease First Negotiation Space as provided in this
Article 27 if, as of the date of the First Negotiation Notice, or, at
Landlord's option, as of the scheduled date of delivery of such First
Negotiation Space to Tenant, Tenant is in default under this Lease or Tenant
has previously been in default under this Lease more than once.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date
set forth on the cover page hereof.
TENANT: LANDLORD:
SCRIPPS BANK, PRENTISS PROPERTIES ACQUISITION
a California banking corporation PARTNERS, L.P., a Delaware limited
partnership
By: Prentiss Properties I, Inc.
By: /s/ Ronald J. Carlson Its: General Partner
-----------------------------
Name: Ronald J. Carlson
------------------------
Title: President & CEO
-----------------------
By: /s/ Christopher M. Hipps
----------------------------
Name: Christopher M. Hipps
-----------------------
Title: Senior Vice President
-----------------------
By: /s/ M. Catherine Wright
-----------------------------
Name: M. Catherine Wright
------------------------ By: /s/ J. Kevan Dilbeck
Title: Sr. Vice President/CFO ---------------------------
----------------------- Name: J. Kevan Dilbeck
----------------------
Title: Senior Vice President
----------------------
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EXHIBIT "C"
WORK LETTER AGREEMENT
[ALLOWANCE]
This WORK LETTER AGREEMENT ("AGREEMENT") supplements the Office Lease
(the "LEASE") dated October 21, 1999, executed concurrently herewith, by and
between PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P., a Delaware limited
partnership ("LANDLORD"), and SCRIPPS BANK, a California banking corporation
("TENANT"), covering certain premises described in the Lease (the "PREMISES").
All terms not defined herein shall have the same meaning as set forth in the
Lease.
1. CONSTRUCTION OF BUILDING.
At Landlord's sole cost, Landlord shall construct, through its
contractor, the Parking Facility and the Building shell, including the following
as part of the Building shell: (a) concrete floor; (b) unfinished ceilings on
tenant space; (c) finished core area, including elevators, toilet rooms,
electrical rooms, telephone rooms, janitorial closets, exit stairs and
mechanical shaft; (d) dry wall (taped and finished, not painted) around surfaces
of core walls; (e) primary heating, ventilating and air conditioning service to
the edge of the Building core (not including branch distribution, controls and
heat pumps); (f) primary sprinkler stem, main distribution loops, primary loop
piping and distribution piping on an open-plan, unoccupied basis; and (g) life
safety systems as required by code for the Building shell. The elevators and the
items described in clauses (e), (f) and (g) above are referred to in the Lease
as the "CENTRAL SYSTEMS."
2. CONSTRUCTION PLANS FOR PREMISES.
All plans and drawings required by this Paragraph shall be prepared in
accordance with the schedule provided in Paragraph 7 below.
2.1. Tenant shall retain J.A. Lindberg Interiors (the
"SPACE PLANNER") to prepare, for Landlord's approval, preliminary space plans
sufficient to convey the architectural design of the Premises, including
preliminary partition layout and reflective ceiling plans ("TENANT'S DESIGN
DEVELOPMENT DRAWINGS"). Tenant's Design Development Drawings shall be furnished
to Landlord on or before the due date specified in Section 7(ii) of this
Agreement. If Landlord shall disapprove of any portion of Tenant's Design
Development Drawings, Landlord shall advise Tenant of such revisions, and
reasons therefor, as are reasonably required by Landlord for the purpose of
obtaining approval. Tenant shall then submit to Landlord for Landlord's
approval, a redesign of Tenant's Design Development Drawings, incorporating the
revisions requested by Landlord and such modifications thereof as are suggested
by Tenant, said modifications to be subsequently approved by Landlord prior to
Tenant's submission of Final Plans.
2.2. Based on Tenant's Design Development Drawings which
have been approved by Landlord, Tenant shall retain Smith Consulting Architects
("ARCHITECT") and cause Architect to prepare complete architectural plans,
drawings and specifications and complete engineered mechanical, structural and
electrical working drawings for the Premises showing the subdivision, layout,
finish and decoration work (including carpeting and other floor coverings)
desired by Tenant (collectively, "FINAL PLANS"; the work shown thereon being
called the "LEASEHOLD IMPROVEMENTS") and in such form and such detail as may be
reasonably required by Landlord; provided, however, that Tenant shall be
required to use the architectural firm of Syska & Hennessy for those portions of
the Final Plans pertaining to the electrical, mechanical and plumbing systems.
The Final Plans shall: (i) comply with all applicable laws and ordinances, and
the rules and regulations of all governmental authorities having jurisdiction;
(ii) comply with all applicable insurance regulations; (iii) include locations
and complete dimensions; and (iv) be compatible with the Building shell, with
the design, construction and equipment of the Building and with the standards
set forth in Schedule I to this EXHIBIT "C" (the "BUILDING STANDARDS"), it being
agreed that Tenant shall not deviate from the Building Standards without the
prior written approval of Landlord. Tenant's Final Plans shall be furnished to
Landlord on or before the due date specified in Section 7(vi) of this Agreement
for the approval of Landlord. The approval/disapproval process for the Final
Plans shall be as provided in Subparagraph 2.1 above for approval by Landlord of
Tenant's Design Development Drawings and in accordance with Paragraph 7 hereof
(and Landlord shall have approval rights over the same as provided in
Subparagraph 2.1 above).
2.3. If the Final Plans or any amendment thereof or
supplement thereto shall, due to the original design of the Premises as depicted
in Tenant's Design Development Drawings, require changes in the Building shell,
the increased cost of the Building shell work caused by such changes shall be
charged against the Allowance or shall be promptly paid by Tenant if the
Allowance has been expended.
2.4. Tenant's Design Development Drawings and the Final
Plans are sometimes referred to herein as the "CONSTRUCTION DRAWINGS." Tenant
and Tenant's Architect shall verify, in the field, the dimensions and conditions
as shown on the relevant portions of the Base Building Plans, and Tenant and
Tenant's Architect shall be solely responsible for the same, and Landlord shall
have no responsibility in connection therewith. Landlord's review of the
Construction Drawings as set forth in this Agreement, shall be for its sole
purpose and shall not imply Landlord's review of the same, or obligate Landlord
to review the same, for quality, design, code compliance or other like matters.
Accordingly, notwithstanding that any Construction Drawings are reviewed by
Landlord or its space planner, architect, engineers and consultants, and
notwithstanding any advice or assistance which may be rendered to Tenant by
Landlord or Landlord's space planner, architect, engineers, and consultants,
Landlord shall have no liability whatsoever in connection therewith and shall
not be responsible for any omissions or errors contained in the Construction
Drawings.
EXHIBIT "C"
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2.5. On or before the due date specified in Paragraph
7(xii), Tenant shall deliver to Landlord all applicable building permits
necessary to allow Landlord's contractor to commence and fully complete the
construction of the Leasehold Improvements (collectively, the "PERMITS") and, in
connection therewith, Tenant shall coordinate with Landlord in order to allow
Landlord, at Landlord's option, to take part in all phases of the permitting
process, and shall supply Landlord, as soon as possible, with all plan check
numbers and dates of submittal. Notwithstanding the foregoing, Tenant hereby
agrees that neither Landlord nor Landlord's consultants shall be responsible for
obtaining any building permit for the Premises and that the obtaining of the
same shall be Tenants responsibility; provided, however, that Landlord shall, in
any event, cooperate with Tenant in executing permit applications and performing
other ministerial acts reasonably necessary to enable Tenant to obtain any such
permit.
3. ALLOWANCE FOR WORK.
3.1. Tenant shall receive from Landlord an allowance
(the "ALLOWANCE") of Thirty-Five Dollars ($35.00) per square foot of Usable
Area of the Premises, i.e., Nine Hundred Four Thousand Five Hundred
Seventy-Five Dollars ($904,575.00), which Allowance shall be used solely for
the design, engineering and permitting fees, materials procurement,
construction management fees, and installation of the Leasehold Improvements
and other aspects of the Work Cost as hereinafter defined. All items of the
Leasehold Improvements, whether or not the cost thereof is covered by the
Allowance, shall become the property of Landlord upon expiration or earlier
termination of the Lease and shall remain on the Premises at all times during
the Term of this Lease. Tenant shall be entitled to no payment, credit or
rent reduction for any part of the Allowance not used by Tenant. Tenant shall
have the option, exercisable by written notice to Landlord within ten (10)
days after Tenant's submittal to Landlord of Tenant's Design Development
Drawings, to increase the amount of the Allowance by up to Five Dollars
($5.00) per square foot of Usable Area of the Premises (the "INCREASED
ALLOWANCE AMOUNT"); provided, however, that notwithstanding anything in this
Exhibit "C" to the contrary, such Increased Allowance Amount may only be used
by Tenant for the design and construction of Leasehold Improvements
pertaining to the ground floor portion of the Premises. If Tenant exercises
such option, the monthly Base Rent payable by Tenant throughout the ten (10)
year Lease Term shall be increased by an amount sufficient to fully amortize
such Increased Allowance Amount throughout said ten (10) year period based
upon equal monthly payments of principal and interest, with interest imputed
on the outstanding principal balance at the rate of ten and one-half percent
(10.5%) per annum. By way of illustration only, a Five Dollar ($5.00) per
square foot of Useable Area Increased Allowance Amount will result in an
increase, on a per rentable square foot basis, in the Base Rent of $0.0675
per square foot of Rentable Area of the Premises per month (or $0.81 per
square foot of Rentable Area of the Premises per year).
3.2. Prior to the commencement of any Leasehold
Improvements, Landlord shall submit to Tenant a preliminary written statement
of Work Cost (as hereinafter defined) of all Leasehold Improvements, which
preliminary written statement shall be based on the Tenant's Final Plans.
Thereupon Tenant shall either approve the estimate or disapprove specific
items and submit to Landlord revisions of Final Plans to reflect the deletion
of and/or substitution for such disapproved items. Submission and approval of
the preliminary Work Cost statement shall proceed in accordance with the
schedule provided in Paragraph 7 below. Upon Tenant's approval of said
statement, such approved statement to be hereinafter known as the "WORK COST
STATEMENT," Landlord shall have the right to purchase materials and to
commence the construction of the items included in said Work Cost Statement
pursuant to Paragraph 4 hereof. If the Work Cost Statement exceeds the
Allowance, Tenant shall be liable for and shall pay to Landlord within five
(5) business days after invoice therefor, the estimated excess costs for the
Leasehold Improvements. If the Work Cost exceeds the amount reflected on the
Work Cost Statement due to changes requested by Tenant or any governmental
entity, Tenant agrees to pay to Landlord such excess (except to the extent
the Allowance is still available) within five (5) business days after invoice
therefor (less any sums previously paid by Tenant for such excess pursuant to
the Work Cost Statement). In no event will the Allowance be used to pay for
Tenant's furniture, artifacts, equipment, telephone systems or any other
item of personal property which is not affixed to the Premises.
3.3. Until Tenant approves the Work Cost Statement and
pays any excess costs to Landlord as contemplated in Subparagraph 3.2 above,
Landlord shall be under no obligation to perform the installation of the items
of the Leasehold Improvements.
4. CONSTRUCTION.
Following Tenant's approval of the Work Cost Statement described in
Subparagraph 3.2 and upon Tenant's payment of any amounts as contemplated in
Subparagraph 3.2 above, and at such time when, in Landlord's discretion, the
Building has reached the stage of construction where it is appropriate to
commence construction, a contractor or contractors selected by Landlord shall
commence and diligently proceed with the construction of all of the Leasehold
Improvements. Landlord shall cause such contractor to submit to bidding, all
trades except for that portion of the Leasehold Improvements involving
mechanical, electrical and sprinkler work, which mechanical, electrical and
sprinkler work shall, in any event, be performed by landlord's subcontractors
for the Project. Landlord shall have the right to review the bids and to perform
a reconciliation in order to adjust inconsistent or incorrect assumptions so
that a like-kind comparison can be made and low bidder(s) determined. Landlord
shall select the lowest bidder who can meet Landlord's construction schedule.
Promptly upon the commencement of the Leasehold Improvements, Landlord shall
furnish Tenant with a schedule setting forth the projected completion dates
therefor and showing the deadlines for any actions required to be taken by
Tenant during such construction, and Landlord may from time to time during the
prosecution of the Leasehold Improvements modify or amend such schedule due to
delays encountered by Landlord. Landlord shall make a reasonable effort to meet
such schedule (as the same may be modified or amended).
5. WORK COST.
"WORK COST" means: (i) all design and engineering fees incurred by
Tenant or Landlord in connection with the preparation of the preliminary space
plans and Final Plans; (ii) governmental agency plan check, permit and other
fees; (iii) sales and use taxes; (iv) Title 24 fees; (v) testing and
inspecting costs; (vi) the actual costs and
EXHIBIT "C"
-2-
<PAGE>
charges for material and labor, contractor's profit and general overhead
incurred by Landlord in having the Leasehold Improvements constructed; (vii) all
other costs to be expended by Landlord in the construction of the Leasehold
Improvements, including those costs incurred by Landlord for construction of
elements of the Leasehold Improvements in the Premises, which construction was
performed by Landlord prior to the execution of this Lease by Landlord and
Tenant (i.e., during or after the construction of the Building shell) and which
construction is for the benefit of tenants and is customarily performed by
Landlord prior to the execution of leases for such space in the Building for
reasons of economics [examples of such construction would include wall
construction, column enclosures and painting outside of the core of the
Building, ceiling hanger wires and window treatment; and (viii) an
administration fee for Landlord of 5% of the total Work Cost specified in (i)
through (vii) above.
6. ELEVATOR.
Landlord shall, consistent with its obligations to other tenants then
in occupancy in the Building, make an elevator available to Tenant in connection
with initial decorating, furnishing and moving into the Premises.
7. SCHEDULE.
Preparation and approval of all plans and drawings and the Work Cost
Statement shall proceed as indicated below and each action shall be completed on
or before the date herein specified:
<TABLE>
<CAPTION>
Due Date
in Calendar Days
Action Responsibility Following Date of Lease
------ -------------- -----------------------
<S> <C> <C> <C>
(i) Delivery to Tenant's architect of Building Landlord (Delivered September 23,
background drawings 1999)
(ii) Delivery to Landlord of Tenant's Design Tenant January 3, 2000
Development Drawings
(iii) Delivery to Tenant of written notice approving Landlord January 10, 2000
or disapproving Tenant's Design Development
Drawings
(iv) Delivery to Landlord, if necessary, of redesign of Tenant January 31, 2000
Tenant's Design Development Drawings
(v) Delivery to Tenant of written notice of final Landlord February 7, 2000
approval of Tenant's Design Development
Drawings
(vi) Delivery to Landlord of Final Plans. Tenant March 20, 2000
(vii) Delivery to Tenant of written notice approving Landlord March 27, 2000
or disapproving Final Plans
(viii) Delivery to Landlord, if necessary, of redesign of Tenant April 3, 2000
Final Plans
(ix) Delivery to Tenant of written notice of final Landlord April 10, 2000
approval of Final Plans
(x) Delivery to Tenant of Work Cost estimate Landlord April 124, 2000
(xi) Delivery to Landlord of written notice of final Tenant May 1, 2000
approval of Work Cost Statement
(xii) Delivery to Landlord of Building Permits Tenant May 8, 2000
</TABLE>
8. DELAYS.
Except as otherwise set forth in Section 3.1 of the Lease, the Term of
the Lease shall not commence until Landlord has substantially completed all work
to be performed by Landlord in this Work Letter Agreement as provided in Section
3.1 of the Lease; provided, however, that if Landlord shall be delayed in
substantially completing said work as a result of any of the following
(collectively, "TENANT DELAYS"):
(i) Tenant's failure to complete any action item on or
before the due date which is the responsibility of Tenant, or
(ii) Tenant's changes to the Final Plans after the final
approval date in Subparagraph 7(ix) above, or
(iii) Tenant's request for materials, finishes, or
installations other than Building Standard work, or
EXHIBIT "C"
-3-
<PAGE>
(iv) Any delay of Tenant in making payment to Landlord for
Tenant's share of Work Cost,
then as soon as reasonably possible following the Commencement Date, Landlord
shall provide to Tenant a reasonably particularized statement of the net number
of Tenant Delays, and Tenant shall pay to Landlord, as Additional Rent under
this Lease, the product of the per diem Base Rent times the number of days of
such net Tenant Delays, such payment to be made within thirty (30) days of
receipt of the invoice from Landlord together with said particularized
statement.
9. PUNCH-LIST ITEMS.
Within five (5) days of Substantial Completion, Tenant shall provide to
Landlord a detailed punch-list of unfinished items of the Leasehold
Improvements. Upon receipt of the punch-list, Landlord shall, at Landlord's sole
cost and expense, proceed diligently to remedy such items; provided, however,
that Tenant shall be responsible, at Tenant's sole cost and expense, for the
remediation of any items on the punch-list caused by Tenant's acts or
omissions.
10. EARLY ENTRY.
Provided that Tenant and its agents will not, in Landlord's sole
discretion, interfere with the Contractor's work in the Building and the
Premises and subject to the terms hereof, Landlord shall allow Tenant access to
the Premises prior to the date of Substantial Completion of the Leasehold
Improvements for the purpose of Tenant installing equipment or trade fixtures
(including Tenant's data and telephone equipment, transmission cables and lines,
and interior permanent and non-permanent improvements) in the Premises only.
Tenant shall hold Landlord harmless from and indemnify, protect and defend
Landlord against any loss or damage to the Building or Premises and against
injury to any persons caused by Tenant's actions pursuant to this Paragraph 10.
TENANT: LANDLORD:
SCRIPPS BANK, PRENTISS PROPERTIES ACQUISITION
a California banking corporation PARTNERS, L.P., a Delaware limited
partnership
By: Prentiss Properties I, Inc.
By: /s/ Ronald J. Carlson Its: General Partner
-----------------------------
Name: Ronald J. Carlson
------------------------
Title: President & CEO
-----------------------
By: /s/ Christopher M. Hipps
----------------------------
Name: Christopher M. Hipps
-----------------------
Title: Senior Vice President
-----------------------
By: /s/ M. Catherine Wright
-----------------------------
Name: M. Catherine Wright
------------------------
Title: Sr. Vice President/CEO
----------------------- By: /s/ J. Kevan Dilbeck
---------------------------
Name: J. Kevan Dilbeck
----------------------
Title: Senior Vice President
----------------------
EXHIBIT "C"
-4-
<PAGE>
BUSINESS PROPERTY LEASE AGREEMENT INDUSTRIAL
THIS LEASE is made and entered into Thursday, September 23. 1999.
For and in consideration of the rental and of the covenants and agreements
hereinafter set forth to be kept and performed by the Tenant, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the Premises herein
described for the term, at the rental and subject to and upon all of the terms,
covenants and agreements hereinafter set forth.
SECTION I PARTIES: TERM: POSSESSION: PREMISES.
1.01 PARTIES: Landlord and Tenant are as follows:
Landlord: BALBOA INVESTORS 1 LTD Tenant SCRIPPS BANK
c/o Balboa Development Corp. 7817 Ivanhoe Avenue
PO Box 9037 La Jolla, CA 92037
Le Jolla, CA 92038-9037
State Of Incorporation; CALIFORNIA State Of Incorporation: CALIFORNIA
Tax Identification No.: 95-3761297 Tax Identification No.: 95-3875333
1.01 FINANCIAL INFORMATION: Tenant agrees to provide financial statements as may
be required by Landlord or Landlord's lender or mortgagee, at the request of
Landlord. Such requests shall be limited to no more than once per calendar year
during the term of this lease or extension thereof. All such financial
statements shall be received by Landlord in confidence.
1.02 TERM: Except as otherwise provided in this Lease, the Commencement Date is
the TWENTYTHIRD day of SEPTEMBER, 1999 and the Expiration Date is the
THIRTYFIRST day of DECEMBER, 2009.
1.02-1 POSSESSION OF PREMISES: Landlord shall deliver possession of the
Premises to Tenant upon execution of the lease document and delivery of
certificates of insurance indicating that Tenant's Insurance obligations
are in full force and effect.
1.02-2 ACCEPTANCE OF PREMISES: Tenant accepts the building, premises and
related parking "as is", and agrees that they have completed their due
diligence with regard to existing conditions.
1.02-3 RENEWAL OPTION: If this Lease then remains in full force and effect,
Tenant shall have the option to extend the term of this Lease for TWO (2)
additional FIVE (5) year terms upon all the terms and conditions set forth
in this Lease; except that the monthly basic rent to be paid by Tenant to
Landlord for the extended term shall be the greater of the then current
market rate for comparable space in the buildings market area or that
computed by adding to the minimum monthly basic rent set forth in Section
II paragraph 2.01-1 of this Lease a sum obtained by multiplying said
minimum monthly basic rent by a factor equal to the percentage increase in
the Consumer Price Index (All Urban Consumers), as defined in Section II
paragraph 2.02 of this Lease, last published prior to the commencement of
the original term of this Lease and the Consumer Price Index (All Urban
Consumers) last published immediately preceding the commencement of the
extended term. In no event shall the monthly basic rent for the extended
term be less than the monthly basic rent (as adjusted) which is in effect
at the time of the expiration of the initial Lease term. Tenant shall have
no further renewal options. This option to renew must be exercised by
written notice to Landlord one-hundred eighty (180) days prior to the
expiration of the initial term or any subsequent terms, and once exercised
is irrevocable. Any brokerage or agency services utilized by Tenant in
connection with the exercise of this option shall be at Tenants expense.
1.03 PREMISES: Landlord leases to Tenant and Tenant leases from Landlord the
Premises designated as all of the Office Building and the adjacent parking which
is located at 5787 CHESAPEAKE COURT in the City of San Diego and the State of
California. The Premises do NOT include, and expressly exclude, that vacant land
lying to the north of the existing parking structure and adjoining Kearny Villa
Road. Landlord reserves the right to perform a lot split severing the vacant lot
so described from the balance of the existing lot. Tenant agrees to cooperate
with reasonable requests in connection with any such lot split.
1:03-1 DESCRIPTION: The Premises contain approximately TWENTY THREE
THOUSAND (23,000) square feet, which represents ONE HUNDRED percent (100%)
of the total rentable area of the Building, in which the Premises are
located. This percentage will be used for purposes of proration of expenses
or other allocations required by the lease agreement, and may be changed
from time to time by Landlord, to reflect any change in the total rentable
area of the Building, The property and Premises am further described in
Exhibit A attached.
1.03-2 IMPROVEMENT: The obligations of Landlord and Tenant to perform the
work and supply material and labor to prepare the Premises for occupancy
are set forth in detail in Exhibit B. Landlord and Tenant shall expand all
funds and do all acts required of them and shall have the work performed
promptly and diligently.
SECTION II RENT: ADJUSTMENTS TO RENT: SECURITY DEPOSIT: LANDLORD'S LIEN:
2.01 RENT: WHEN DUE: WHERE PAID: All moneys payable by Tenant to Landlord under
this Lease shall be deemed to be rent and shall be payable and recoverable as
rent in the manner herein provided and Landlord shall have all rights against
Tenant for default in any such payment. Rent shall be paid to Landlord in
advance, on the first day of each calendar month, during the entire term of this
Lease, without deduction or offset, in legal tender of the jurisdiction in which
the Building is located at the address of Landlord as set forth, or to such
other person or entity or to such other address as Landlord may designate in
writing. Tenant's obligation to pay all rent due under this Lease shall survive
the expiration or earlier termination of this Lease. Should this Lease commence
on a day other than the first day of the month or terminate on a day other than
the last day of the month, the rent for such partial month shall be prorated
based on a three hundred sixty-five (365) day year.
2.01-1 BASIC RENT: Tenant agrees to pay a base rent of SIXTEEN THOUSAND ONE
HUNDRED dollars ($16,100.00) per month (as such amount may be modified from
time to time in accordance with provisions of Section II of this Lease) to
Landlord.
2.01-2 DELIVERY OF RENT: All payments by Tenant to Landlord under this
Lease shall be deemed made only at such time as Landlord receives good
funds in hand. Tenant bears the risk of any delay in delivery of payments
to Landlord, whether by US Postal Service or independent courier. The date
of posting or delivery to an Independent courier service shall not be
determinative of timely payment and Tenant alone bears the risk of
dependence on methods of
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<PAGE>
delivery. In the event any payment by Tenant to Landlord is made in the
form of a check which is dishonored for any reason upon presentation for
payment, such payment shall be deemed to have not been made and Landlord
may require that all subsequent payments by Tenant be made in the form of a
cashier's check or other guaranteed funds. Rent may be paid by direct wire
transfer to Landlord's benefit in a bank and account that may be designated
from time to time by Landlord and obligations shall be deemed paid by such
deposit.
2.01-3 LATE PAYMENT CHARGE: Tenant hereby acknowledges that late payment by
Tenant to Landlord of rent and other sums due here under will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult to ascertain. Such costs include, but are
not limited to, processing and accounting charges, and late charges which
may be imposed on Landlord by the terms of any mortgage or trust deed
covering the Premises. Accordingly, if any installment of rent or any other
sum due from Tenant shall not be received by Landlord or Landlord's
designee within ten (10) days after such amount shall be due, Tenant shall
pay to Landlord a late payment charge equal to the greater of, six percent
(6%) of the amount of each item or occurrence, or ONE HUNDRED dollars
($100.00). The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs 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 here under.
ACKNOWLEDGMENT OF THE ABOVE NEGOTIATED AGREEMENT: TENANT LA LANDLORD FH
-- --
2.01-4 INTEREST ON PAST DUE OBLIGATIONS: Except as expressly herein
provided any amount due to Landlord and not paid when due shall bear
interest at the maximum legal rate, or if no legal rate, at the rate of one
percent (1%) per month from the date due until paid. Payment of such
interest shall not excuse or cure any default by Tenant under this Lease.
2-01-5 PREPAID: In the event this Lease terminates before the expiration
date, there shall be no refunds of prepaid rents.
2.02 ADJUSTMENT TO RENT (FIXED INCREASE): The monthly basic rent plus prior
fixed increases to be paid Landlord by Tenant shall be adjusted effective
January First of each calendar year of the lease term, beginning January First
2001, by an amount equal to FIVE HUNDRED AND SIXTY THREE AND FIFTY ONE
HUNDREDTHS dollars ($563.50). During any renewal period of this lease, the
annual adjustment shall be equal to FOUR percent (4%) of the base rent
determined at the commencement of the option period.
2.03 ADJUSTMENT TO RENT (UTILITIES): Tenant shall contract for and pay directly
the cost of all utilities supplied to or used in the Premises at the rate
prevailing for Tenant's class of use as established by the company providing
utilities to Premises. Landlord shall not be liable for any failure or
interruption of any utility service being furnished to the Premises, and no such
failure or interruption shall entitle Tenant to terminate this Lease, or seek
compensation from Landlord or his agent.
2.04 ADJUSTMENT TO RENT (REAL PROPERTY TAXES); Landlord shall pay all real
property taxes and Tenant shall reimburse Landlord for such taxes within 10 days
of invoice from Landlord. Tenant shall NOT be responsible for increases to
property taxes to the extent they result from reassessment due to the sale of
the property.
2.05 ADJUSTMENT TO RENT (RENTAL TAX): Tenant shall pay an excise, transaction,
sales, business or privilege tax (except income tax) attributed to or measured
by rental which is now or subsequently imposed upon Landlord by any government
or unit thereof.
2.06 ADJUSTMENT TO RENT (OPERATING COST): Tenant shall pay all "Operating
Costs", necessary or appropriate for the efficient operation, maintenance and
repair of the Building, the interiors thereof, the land upon which it is
situated, and any parking or other facilities provided by Landlord for tenant.
Tenant shall pay the cost of all alterations or improvements required to be
made to the Building by reason of the laws and/or requirements of any insurer,
mortgagee, trust deed beneficiary, or governmental agency.
SECTION III USE: RESTRICTIONS ON USE: BUILDING REGULATIONS: QUIET ENJOYMENT:
PARKING:
3.01 USE: Premises shall be used by Tenant for banking and general office space
and for no other purpose. Tenant shall, at Tenant's expense, comply with all
laws, rules, regulations, requirements, and ordinances existing or hereafter
enacted or imposed by any governmental authority having jurisdiction over the
Building, Premises, Landlord or Tenant applicable to Tenant and Tenant's use of
the Building and Premises. Tenant acknowledges that neither Landlord nor any
agent, employee or representative of Landlord has made any representation or
warranty with respect to the suitability of the Building or Premises for the
conduct of Tenant's business or any other purpose, or the compliance of Tenant's
intended use with local zoning or other governmental regulation.
3.02 RESTRICTIONS ON USE: Tenant shall not:
3.02-1 INSURANCE INCREASE: Do or permit to be done anything which will
invalidate or increase the cost of insurance coverage on the Building and
the Premises.
3.02-2 ILLEGAL USE: IMPROPER USE: Tenant shall not use the Premises or
permit anything to be done in or about the Premises which will in any way
conflict with any law, statute, zoning restriction, ordinance or
governmental rule or regulation or requirements or duly constituted public
authorities now in force or which may hereafter be enacted or promulgated.
3.02-3 NUISANCE: Cause, maintain or permit any nuisance or objectionable
uses in or about the Premises.
3.02-4 WASTE: Commit or permit any waste to be committed in the Premises.
3.02-5 SERVICE OVERLOAD: Install in the Premises or bring into the Building
any fixtures, equipment, furniture, materials or other objects which will
overload, damage of obstruct any utility lines or heating or air
conditioning equipment or systems providing services to the Building or
Premises.
3.02-6 FLOOR LOADING: Install in the Premises or bring into the Building
any fixtures, equipment, furniture, materials or other objects which will
overload the floors in the Premises or in any way affect the structural
capacity or design of the Premises or the Building. Tenant shall bear the
expense of any professional services required to determine the suitability
of any specific item or installation. Tenant is expressly authorized to
increase the structural capacity of the building floor loads as it deems
necessary for its use. Such modifications shall be considered
"alterations", and are subject to the conditions set forth in Section V
Paragraph 5.04.
3.02-7 HAZARDOUS MATERIALS: Tenant shall not, without the prior written
consent of Landlord, store, inventory or use materials, chemicals or
compounds which have been determined by any Municipal, State, or Federal
agency or regulation to be toxic or otherwise injurious to any person or
persons who might be exposed to these materials as a result of their
storage, inventory or use, Tenant agrees that they will bear the cost and
comply with all prudent or regulatory requirements, obtain any required
permits, pay any and all taxes or charges associated with the disposal of
any toxic materials or waste, and bear the cost of any required
modifications to the Premises, should Landlord elect at its sole discretion
to allow such storage or use on or about the Premises. As a condition of
consent, tenant shall at tenant's expense provide landlord with a phase 1
environmental audit reports, at intervals of twelve (12) months during the
remaining term of this Lease or any extension thereof, from an independent
firm, acceptable to Landlord, licensed or qualified to perform toxic or
hazardous material investigations. The initial report is to be provided at
time of initial request. All reports shall be at least a complete Phase 1
or higher as may be necessitated by the nature of the use or storage and
shall include the completion of any recommended further investigation. If,
within ten (10) days following notice by Landlord,
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<PAGE>
Tenant fails or refuses to supply the required reports, Landlord may, at
its option, cause all required reports to be prepared. Tenant shall
promptly pay Landlord all costs incurred plus an administrative fee of
twenty percent (20%) of such costs.
3.03 BUILDING REGULATIONS: Tenant shall obey all rules and regulations of the
Building as imposed by Landlord and set forth in Exhibit C and incorporated as a
part of this Lease. The rules and regulations are in addition to, and shall not
be construed to modify or amend this Lease in any way. Landlord shall have the
right to make changes or additions to such rules and regulations provided such
changes or additions, except those affecting the safety and operation of the
Building or Premises, do not unreasonably affect Tenant's use of the Premises.
3.04 QUIET ENJOYMENT: Landlord represents and covenants that it has the
authority to enter into this Lease, and that Tenant, upon payment of the rentals
and performance of the covenants and Tenant's part to be performed, shall and
may peaceably and quietly occupy the Premises during the term of this Lease and
any renewal or extension thereof. Landlord agrees to make reasonable efforts to
protect Tenant from interference or disturbance by other tenants or third
persons; however, Landlord shall not be liable for any such interference or
disturbance, nor shall Tenant be released from any of the obligations of this
lease because of such interference or disturbance.
SECTION IV ASSIGNMENT: SUBLET: RECAPTURE OF PREMISES: MORTGAGE BY LANDLORD:
SUBORDINATION: ATTORNMENT: ESTOPPEL CERTIFICATE: NOTICE TO MORTGAGE: SALE BY
LANDLORD:
4.01 ASSIGNMENT: SUBLET: Tenant shall not assign this Lease or any part
thereof or sublet all or any part of the Premises without prior written
consent of Landlord, which shall not be unreasonably withheld. If Tenant
desires to assign or sublet all or a portion of the Premises, Tenant shall
first advise Landlord in writing of the name, proposed use of Premises and
such financial information as Landlord may reasonably require applicable to
the proposed assignee or subtenant. Tenant shall also accompany such request
for consent with a copy of the proposed assignment or sublease and any other
agreements to be entered into concurrently with such assignment or sublease.
Tenant at Tenant's expense shall provide Landlord with an environmental audit
report from an independent firm, acceptable to Landlord, licensed or
qualified to perform toxic or hazardous material investigations. The presence
of Toxic or Hazardous materials, with or without Landlord's consent, shall be
cause to deny assignment or sublet. It shall not be unreasonable for Landlord
to withhold consent if the reputation, financial responsibility or business
of proposed assignee or subtenant is unacceptable to Landlord or if the
intended use by the proposed assignee or subtenant is not comparable to the
use of the Premises authorized Tenant by the provisions of this Lease or if
the proposed assignee or subtenant is a present or former tenant of the
Building. Any assignment or subletting consented to by Landlord shall be
evidenced in writing in a form acceptable to Landlord. This Lease shall not
be assignable by operation of law. Any transfer of this Lease by merger,
consolidation, liquidation or change in ownership of or power to vote the
majority of outstanding stock of Tenant or, if Tenant is a partnership, any
withdrawal, replacement or substitution of any partner or partners, either
general or limited, shall constitute an assignment, whether the result of a
single or series of transactions. Any assignment or subletting shall not
diminish the liability of the Tenant. Consent by Landlord shall not relieve
the Tenant from obtaining written consent to any subsequent assignment or
subletting. Tenant agrees to pay Landlord the sum of Five Hundred dollars
($500.00) to defray expenses associated with reviewing and processing of any
application for assignment or subletting of the premises, whether or not such
consent is ultimately granted. Further, Tenant agrees to pay any
out-of-pocket costs incurred by Landlord in connection with such review and
processing including, but not limited to, fees incurred for consulting with
attorneys, accountants, or other professionals. Prior to delivery of the
Premises to any Sub-Tenant or assignee, Tenant shall comply with those
requirements contained in paragraph 9.01 hereof, with specific regard to the
physical condition of the Premises. Such action does not relieve Tenant of
those responsibilities, or any other responsibilities, at the subsequent
termination of this Lease.
4.02 CORPORATE TRANSFER: If Tenant is a corporation, Tenant may, so long as the
use of Premises as herein provided is not changed, assign or sublet all or a
part of the Premises, to Tenant's parent corporation or a wholly-owned
subsidiary of Tenant or tenant's parent without Landlord's prior approval,
provided, however, that in such event, Tenant shall promptly notify Landlord in
writing of such assignment or subletting. Such notification shall be in a form
acceptable to Landlord, executed by Tenant and Tenant's assignee or subtenant
and shall provide that Tenant and Tenant's assignee or subtenant are jointly
and severally liable under this Lease. Such an assignment or sublet shall not
effect or change the rental rate at the time of the action and no processing fee
(Paragraph 4.01) shall be charged.
4.03 MARKET RENTAL RATE: Landlord and Tenant acknowledge that in the course
of negotiating this lease they have discussed and negotiated Landlord's right
to receive market rental rate even if this results in an increase in rent, at
such time as Tenant either assigns or subleases the Premises. Accordingly,
Landlord and Tenant agree that the rental rate charged here under shall be
adjusted to market rental rate, given the terms and conditions of the Lease
at the time of such assignment or sublease, including, but not limited to,
remaining term, configuration of the premises, and existing use. Landlord and
Tenant shall attempt to negotiate such market rent. In the event Landlord and
Tenant are unable to agree, market rental shall be determined by appraisal.
Landlord and Tenant shall attempt to select a single appraiser who shall
determine market rent. In the event Landlord and Tenant are unable to agree
upon a single appraiser, each party shall pick one appraiser and the two so
chosen shall pick a third, who shall determine market rent for the proposed
sublease or assignment. Landlord shall receive such market rental commencing
on the effective date of such sublease or assignment. In no event, however,
shall the rental to be paid to Landlord be less than the rent currently
payable pursuant to the terms of the lease agreement absent the assignment or
sublease. Tenant hereby agrees to bear the cost of any appraisal required in
order to determine market rental pursuant to this paragraph. All other terms
of this Lease including cost of living adjustments and Tenant paid expenses
shall remain in full force and effect.
ACKNOWLEDGMENT OF THE ABOVE NEGOTIATED AGREEMENT: TENANT LA LANDLORD FH
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4.04 MORTGAGE BY LANDLORD: Landlord shall have the right to transfer, assign,
mortgage or convey in whole or in part the Building, land upon which it is
situated, and any and all of its rights under this Lease, and nothing herein
shall be construed as a restriction upon Landlord's so doing.
4.05 SUBORDINATION: This Lease is and shall be subject and subordinate in all
respects to any and all mortgages and deeds of trust now or hereafter placed
on the Building or the land upon which it is situated, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Any
mortgagee or beneficiary may elect to give the rights and interest of Tenant
priority over the lien of its mortgage or deed of trust. In the event of such
election and upon the mortgagee or beneficiary notifying Tenant of such
election, the rights and interests of Tenant under this Lease shall be deemed
superior to or have priority over the lien of said mortgage or deed of trust,
whether this Lease is dated prior to or subsequent to the date of such
mortgage or deed of trust. In such event, Tenant shall within ten (10) days
after written demand, execute and deliver whatever instruments may be
required by said mortgagee or beneficiary and if Tenant fails to do so,
Tenant hereby irrevocably appoints Landlord an attorney-in-fact of Tenant, in
Tenant's name to execute such instruments required by said mortgagee or
beneficiary.
4.06 ATTORNMENT: Not withstanding any subordination of this Lease to mortgagees
and Deeds of Trust as stated in 4.05 above, this Lease and Tenant's rights and
obligations herein provided shall survive any foreclosures, institution offsets
or other proceedings or any termination of Landlord's interest hereunder. Tenant
shall promptly, upon request, execute appropriate Attornment Agreements,
prospectively with any Lender, or upon any Termination of Landlord's interests.
4.07 ESTOPPEL CERTIFICATE: Tenant shall any time and from time to time upon not
less than ten (10) days prior notice from Landlord or Landlord's mortgagee,
execute, acknowledge and deliver a written statement certifying that this Lease
is in full force and effect subject only to such modifications as may be set
out; and, Tenant is in possession of the Premises and is paying rent as provided
in his Lease; and, the date to which rent is paid in advance; and, there are
not, to the signatory's knowledge any uncured defaults on the part of the
Landlord, or specifying such defaults if any are claimed. Any such statement may
be relied upon by any prospective transferee or encumbrancer of all or any
portion of the Building or land upon which it is situated, or any assignee of
any such persons. If Tenant fails to timely deliver such statement, Tenant shall
be deemed to have acknowledged that this Lease is in full force and effect,
without modification except as may be represented by Landlord and that there are
no uncured defaults in Landlord's performance.
4.08 LIABILITY OF LANDLORD: SALE BY LANDLORD: The liability of Landlord under
this Lease is limited to Landlord's interest in the Building and land upon which
it is situated, and any judgment against Landlord will be enforceable solely
against Landlord's interest in said Building and land. In the event Landlord
transfers its interest in the Building, Landlord shall thereby be released from
any further obligation here under, and Tenant agrees to look solely to the
successor in interest of the Landlord for the
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performance of such obligations. Landlord shall transfer Tenant's security
deposit, if any, to such assignee or transferee and Tenant shall look solely to
such assignee or transferee for the return, if any, of all or any part of such
deposit to which Tenant may be entitled.
SECTION V MAINTENANCE AND REPAIRS: RIGHT OF ENTRY: ALTERATIONS: LIENS: SIGNS:
5.01 MAINTENANCE AND REPAIRS BY TENANT: By occupying the Premises, Tenant
shall be deemed to accept the same and acknowledge that they comply fully
with Landlord's covenants and obligations as provided in this Lease, subject
to completion of any items which it is Landlord's responsibility to furnish
and which have been listed by Landlord and Tenant upon inspection of the
Premises. During the term of this Lease, Tenant shall maintain exterior walls
and roof, the Premises, including all electrical, mechanical and plumbing in
as good condition as when Tenant took possession, ordinary wear and tear and
repairs which are specifically Landlord's responsibility as provided for in
this Lease excepted, and shall repair all damage or injury to the Building or
to fixtures, appurtenances and equipment of the Building caused by Tenant's
installation or removal of its property or resulting from any acts or conduct
of Tenant, its employees, contractors, agents, licensees or invitees.
Ordinary wear and tear shall consist only of that wear and/or deterioration
which is uniform throughout the Premises and which has not been caused
directly by abuse, failure to maintain, alteration or the accumulation of
soil, dirt or foreign substances. Abuse of walls, ceilings, floors or floor
coverings as a result of concentrated traffic or abrasion shall not be
considered ordinary wear and tear. Tenant shall be responsible for the
effectiveness of periodic janitorial or maintenance services whether or not
these services are supplied by Tenant or Landlord. Tenant's obligations to
maintain the Premises in good condition and repair is part of the
consideration for Landlord's leasing the Premises to Tenant. All maintenance
and repairs made by Tenant shall be performed only by licensed contractors
first approved in writing by Landlord. Tenant shall require its contractor to
comply with Landlord's requirements regarding all work to be performed.
5.01-1 LANDLORD'S RIGHT TO MAINTAIN OR REPAIR: If, within ten (10) days
following notice by Landlord, Tenant fails or refuses to do any maintenance
or to repair or replace any damage to the Premises or Building caused by
Tenant, its agents, employees or invitees. Landlord may, at its option,
cause all required maintenance, repairs or replacements to be made. Tenant
shall promptly pay Landlord all costs incurred plus an administrative fee
of twenty percent (20%) of such costs.
5.02 LANDLORD'S RIGHT OF ENTRY: Landlord, its agents and employees, shall
have the right to enter the Premises at any time to inspect the Premises upon
reasonable notice and with an employee or agent of Tenant, to exhibit the
Premises to prospective purchasers, lenders or tenants; to determine if
Tenant is complying with all terms and provisions of this Lease; to supply
any service to be provided by Landlord to Tenant as required in this Lease;
to post notices of responsibility and to make repairs required of Landlord
here under or repairs to any adjoining space or utility services or make
repairs, alterations or improvements to any other portion of the Building,
provided however that all such repairs, alterations and improvements shall be
done promptly in a manner so as to minimize interference with Tenant's use of
the Premises, it being understood however that Landlord shall not be required
to have such work performed outside of normal business hours. Tenant hereby
waives any claim for damages for any injury or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises or any
other loss occasioned by such entry. Any entry to the Premises by Landlord,
its agents or employees, shall not under reasonable circumstances be
considered to be a forcible or unlawful entry of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
5.03 MAINTENANCE BY LANDLORD: Landlord shall be responsible for the repair of
structural components of the building and foundation. ALL other repairs and
maintenance shall be performed and paid for by Tenant.
5.04 ALTERATIONS BY TENANT: Tenant shall make no alterations, additions or
improvements to the Premises without prior written consent of Landlord. Such
consent shall not be unreasonably withheld in the case of alterations,
improvements or additions to the interior of the Premises if such alterations,
additions or improvements are normal for the permitted use of the Premises, do
not adversely affect the utility of the Premises for future Tenants, do not
alter the exterior of the Building and are not of a structural nature. Tenant
shall conduct its work in such a manner as to maintain harmonious labor
relations and shall not interfere with the operation of the Building or other
tenants situated therein. Prior to commencing its work, Tenant shall submit to
Landlord copies of all necessary permits. All alterations, additions or
improvements, whether temporary or permanent, made in or upon the Premises,
either by Landlord or Tenant, shall be Landlord's property and shall remain in
the Premises upon expiration or termination of this lease without compensation
to Tenant. If, however, Landlord shall, no later than thirty (30) days prior to
expiration or termination of this Lease, request, in writing, Tenant shall
immediately remove any and all alterations, additions and improvements made or
installed by Tenant in the Premises and will repair any damage caused by such
removal and Tenant failing to remove and repair as requested by Landlord,
Landlord may effect such removal and repairs at Tenant's expense, including rent
at the then current rate until the Premises have been restored and are available
for occupancy. Landlord may require restoration of the Premises at the end of
the Lease term or extensions thereof as a condition of consent. Landlord shall
not be responsible for ADA compliance requirements at the premises, including
the Building, parking lot, access or otherwise. Tenant shall have this
responsibility.
5.05 ALTERATIONS BY LANDLORD: Landlord may make any repairs, alterations or
improvements which Landlord deems necessary or advisable for the preservation or
safety of the Building or the Premises.
5.06 LIENS: Except with respect to activities for which Landlord is
responsible, Tenant shall pay as due all claims for work done on and for
services rendered or material furnished to the Premises and shall keep the
Premises, Building and land upon which the Building is located free from any
liens. If Tenant fails to pay any such claims or to discharge any lien,
Landlord may do so and Tenant shall pay Landlord the amount so expended upon
demand. Such action by Landlord shall not constitute a waiver of any right or
remedy which Landlord may have on account of Tenant's default. Tenant may
withhold payment of any claim in connection with a good-faith dispute over
the obligation to pay, so long as Landlord's property interests are not
jeopardized. If a lien is filed as a result of non-payment, Tenant shall,
within ten (10) days after knowledge of the filing, secure the discharge of
the lien or deposit with Landlord cash or sufficient corporate surety bond or
other security acceptable to Landlord in an amount sufficient to discharge
the lien plus any costs, attorneys' fees, and other charges that could accrue
as a result of a foreclosure or sale under the lien.
5.07 SIGNS: Tenant may erect or install any sign, lettering, placard, picture,
name, notice or advertising media which are allowed by cognizant CC&R's codes or
regulations on any part of the outside or inside of the Building or Premises
without Landlord's prior consent. Tenant also agrees to maintain any signs
installed by Tenant or at Tenant's direction or expense, in good condition and
repair at all times, to remove such sign or media at the expiration or
termination of this Lease and to repair all damage caused by such installation
or removal. Landlord reserves the right to allocate special or Building
identification signage to one or more major Tenants of the Building.
SECTION VI INSURANCE: INDEMNITY: SUBROGATION:
6.01 INSURANCE BY LANDLORD: Landlord shall maintain insurance for those perils
and in amounts which would be considered prudent for similar type income
property situated in the general area of the Building or which is required by
any mortgagee or creditor of Landlord. The named insured on all policies of
insurance maintained by Landlord shall be the Landlord, and if required, any
mortgagee or creditor of Landlord. Cost of insurance maintained by Landlord
shall be paid by Tenant and Tenant shall reimburse Landlord within 10 days of
invoice from Landlord.
6.02 INSURANCE BY TENANT: Tenant shall maintain at all times during the term of
this Lease, at Tenant's expense:
6.02-1 LIABILITY AND PROPERTY DAMAGE: Comprehensive public liability and
property damage insurance providing protection against all perils,
including fire, extended coverage, vandalism, malicious mischief, break-in,
sprinkler leakage, flood and overage water and special extended (all risk)
coverage on an occurrence basis with respect to Tenant's business and
occupancy of the Premises for any one occurrence or claim of not less than
TWO MILLION dollars ($2,000,000.00) or such greater amount as Landlord may
reasonably require in writing from time to time. Such insurance shall
contain a provision including coverage for all liabilities assumed by
Tenant under this Lease.
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6.02-2 WORKMAN'S COMPENSATION: Workman's Compensation insurance for all
Tenant's employees working in the Premises in an amount sufficient to
comply with applicable laws or regulations.
6.02-3 BUSINESS INTERRUPTION INSURANCE: Tenant at its cost shall maintain
business interruption insurance insuring that the minimum monthly rent will
be paid to the Landlord for a period of one (1) year if the leased premises
are destroyed or rendered inaccesable by a risk insured against by a policy
of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, or flood and overage waters insurance.
6.02-4 OTHER COVERAGE: Insurance against such other perils and in such
amounts as Landlord may from time to time reasonably require in writing.
Such request shall be made on the basis that the insurance coverage
requested is customary at the time for prudent tenants.
6.02-5 POLICY FORM: All policies of insurance maintained by Tenant shall be
in a form acceptable to Landlord; issued by an insurer acceptable to
Landlord and licensed to do business in the state in which the Building is
situated; if requested, name Landlord and any managing agent and other
designee as additional insured; and require at least thirty (30) days
written notice to Landlord of termination or material alteration and waive,
to the extent available, any right of subrogation against Landlord. Tenant
shall, upon the Commencement Date of this Lease and thereafter within
thirty (30) days prior to the expiration of each such policy, promptly
deliver to Landlord certified copies of such policies and evidence
satisfactory to Landlord that all premiums have been paid and policies are
in effect. Landlord and it's agents shall be named as additional insureds
of Tenant's policy.
6.02-6 FAILURE TO MAINTAIN: If Tenant fails to secure or maintain any
insurance coverage required by Landlord or should insurance secured not be
approved by Landlord and such failure or approval not be corrected within
twenty-four (24) hours after written notice from Landlord, Landlord may, in
Landlord's sole discretion, purchase such insurance coverage required at
Tenant's expense. Tenant shall reimburse Landlord on demand for any moneys
expended, including reasonable administrative and out of pocket expense.
6.03 INDEMNITY: Tenant shall indemnify and hold harmless Landlord from all loss,
claim, demand, damage, liability or expense, including attorneys' fees, for any
injury or damage occasioned by use of the Premises, the failure or interruption
of any utility service, flooding, discharge of sprinklers, heating and air
conditioning equipment, fire, tornado, windstorm, hail, water, snow, frost,
excessive heat or cold, falling plaster, broken glass, sewage, gas, odors,
noise, or the bursting or leakage of pipes or plumbing fixtures upon or in the
Building or adjacent premises, including consequential damages specifically
including business interruption and loss of profits caused by anything other
than the misconduct or failure to perform lease obligations, by Landlord or
Landlord's agents. Tenant waives and releases all claims against Landlord, its
employees or agents for any injury or damage, either proximate or remote, caused
by any repairs, alterations, defects or injuries, in or to the Building or the
Premises, whether by reason of negligence or default of Landlord, its agents or
employees or by visitors, patrons, licensees or tenants of the Building or
Premises and any and all claims for injury or death to persons or injury or loss
to property occasioned by any act, omission or negligence of Tenant, its agents,
employees or invitees, or occasioned from want of repair of Premises or
furniture, fixtures or equipment located therein, occurring in any way upon the
Premises or the Building. All property in the Building or Premises belonging to
Tenant, its agents, employees or invitees shall be there at the risk of Tenant.
Tenant agrees to indemnify Landlord against claims for damage to, theft,
misappropriation or loss of said property.
6.04 WAIVER OF SUBROGATION: Regardless of fault or negligence, Landlord and
Tenant hereby waive any claim arising in favor of one against the other, or
anyone claiming through either, by way of subrogation or otherwise, for any loss
of or damage to any property of either which loss or damage is recovered under
said policies. Said waiver shall be in addition to any other waiver or release
contained in this Lease with regard to loss or damage to property of either.
Landlord and Tenant shall request its insurers to consent to such waiver and
agree to waive all rights or subrogation against the other party. In the event
that any policy of insurance is in place relative to this lease which would be
voided by virtue of this paragraph, then in that event this paragraph shall have
no force or effect with respect to such policy.
SECTION VII DAMAGE AND DESTRUCTION:
7.01 DAMAGE REPAIR: In the event the Building or the Premises shall be
destroyed or rendered untenantable, either in whole or in major part, by fire
or other casualty, Landlord may, at its option, restore the Building or
Premises to as near their previous condition as is reasonably possible, and
in the meantime, unless the damage was caused by acts, omissions or
negligence of Tenant, its agents, employees, contractors or invitees, the
rent shall be abated in the same proportion as the untenantable portion of
the Premises bears to the whole thereof; but unless Landlord, within sixty
(60) days after the happening of any such casualty, shall notify Tenant of
its election to restore, this Lease shall not continue and Landlord shall not
commence the necessary restoration. Such restoration by Landlord shall not
include replacement of furniture, equipment or other items that are not part
of the Building or any improvements to the Premises in excess of those in
place as of the commencement date of this Lease. Tenant agrees to pay
Landlord the amount of any deductible relating to insurance coverage within
ten (10) days of such casualty. Restoration of the Premises required beyond
Landlord's obligation shall be performed by Tenant at no cost to Landlord. If
Landlord shall elect to notify Tenant that Landlord shall not restore, this
Lease shall terminate as of the date of the occurrence and Tenant shall
promptly vacate the Premises. Upon vacating, any prepaid rent from date of
vacating shall be refunded to Tenant.
7.02 DAMAGE CAUSED BY VANDALISM OR BREAK-IN: In the event of damage to the
Premises resulting from vandalism, malicious mischief, break-in or causes
outside the control of Tenant, then Tenant shall be responsible for such
repairs utilizing insurance proceeds as described herein or at Tenant's own
expense. Tenant shall be responsible for repairs to the extent of any
deductible. In the event of damage to the building apart from the Premises
resulting from vandalism, malicious mischief, break-in or causes outside the
control of Tenant, the Landlord shall repair such damages which shall
constitute additional operating costs within the meaning of Section II
paragraph 2.06 of this agreement. Damage to doors permitting access to the
Premises or windows of the Premises caused by vandalism, malicious mischief
or break-in shall be repaired by Landlord at Tenant's expense.
7.03 DAMAGE CAUSED BY TENANT: In the event of damage to the Premises or the
Building by fire or other causes resulting from fault or negligence of
Tenant, its agents, employees, contractors or invitees, such damage shall be
promptly reported to Landlord and shall be repaired at the expense of Tenant
under direction and supervision of Landlord. There shall be no abatement of
rent during the period of repair.
7.04 DELAY BEYOND LANDLORD'S CONTROL: No penalty shall accrue to Landlord for
delay in commencing or completing repairs caused by adjustment of insurance
claims, governmental requirements or any cause beyond Landlord's reasonable
control.
7.05 BUSINESS INTERRUPTION: No damages, compensation or claim shall be payable
by Landlord for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the Premises or of the Building.
Landlord shall use its best efforts to effect such repairs promptly and in such
manner as not unreasonably to interfere with Tenant's occupancy.
7.06 TENANT IMPROVEMENTS: Landlord will not carry insurance of any kind on any
improvements, additions or alterations made and paid for by Tenant or Tenant's
furniture or furnishings or on any fixtures, equipment, improvements or
appurtenances of Tenant under this Lease and Landlord (except as provided by law
by reason of its negligence) shall not be obligated to repair any damage thereto
or replace the same. Landlord shall, if electing to repair, make repairs or
restoration only of those portions of the Premises which were originally
provided at Landlord's expense, and the repair and restoration of items not
provided at Landlord's expense shall be the obligation of Tenant.
7.07 DESTRUCTION DURING LAST YEAR OF TERM: In case the Building shall be
substantially destroyed by fire or other causes at any time during the last year
of the term of this Lease, either Landlord or Tenant may terminate this Lease
upon written notice to the other party hereto given within ten (10) days of the
date of such destruction.
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7.08 MUTUAL RELEASE: Upon any termination of this Lease as a result of damage or
destruction of the Building or Premises as provided herein, the parties shall be
released thereby without further obligation to the other from the date
possession of the Premises is surrendered to Landlord except for rent and any
other moneys or obligations which have accrued and are then unpaid or
unfulfilled.
7.09 UNINSURED CASUALTY: In the event the Premises shall be damaged to any
extent by any casualty, act or occurrence not covered by Landlord's insurance,
Landlord may repair the damage, in which event this Lease shall continue, or, at
Landlord's sole option, Landlord may elect not to repair the damage and to
terminate this Lease in which event Landlord shall upon electing to terminate,
notify Tenant in writing within sixty (60) days following the date such damage
occurred, of Landlord's election to terminate
7.10 WAIVER OF STATUTORY RIGHTS: Tenant waives any statutory rights of
termination that may arise by reason of any partial or total destruction of
Premises repaired by Landlord as provided in this Lease.
7.11 REQUIREMENTS OF MORTGAGEE: Provided that the insurance proceeds recovered
from any casualty to the building are sufficient to permit rebuilding, such
proceeds shall be applied to that purpose. If reconstruction is feasible, but
the proceeds are insufficient to complete reconstruction, the Landlord shall
nevertheless reconstruct provided that Tenant funds the difference between the
insurance proceeds and the cost to reconstruct. In the event that such proceeds
are insufficient for such purpose and any beneficiary, creditor or mortgagee
under a deed of trust, security agreement or mortgage should require that the
insurance proceeds payable upon damage to or destruction of the Building or
Premises by fire or other casualty be used to retire or apply on the debt
secured by such deed of trust, security agreement or mortgage, or in the event
any lessor under any underlying ground lease should require that such proceeds
be paid to such lessor, Landlord shall, in such event, have no obligation to
repair or rebuild such damage and at Landlord's election, this Lease shall
terminate upon Landlord's furnishing Tenant written notice of Landlord's
election to terminate.
SECTION VIII CONDEMNATION:
8.01 CONDEMNATION; AWARD; TERMINATION: If the Building or Premises shall be
taken or condemned for any public purpose, or for any reason whatsoever, to
such an extent as to render either or both untenantable, either Landlord or
Tenant shall have the option to terminate this Lease effective as of the date
of taking or condemnation. If the taking or condemnation does not render the
Building and the Premises untenantable, this Lease shall continue in effect
and Landlord shall promptly restore the portion not taken to the extent
possible to the condition existing prior to the taking. In such event,
however, Landlord shall not be required to expend an amount in excess of the
proceeds received by Landlord from the condemning authority. If, as a result
of such restoration, the area of the Premises is reduced, the rental shall be
reduced proportionately. All proceeds from any taking or condemnation shall
be paid to Landlord. In the event the Premises are taken in Eminent Domain by
a public agency, the parties shall share in the award as their interests may
be determined by the court in accordance with California law. A voluntary
sale or conveyance in lieu of but under the threat of condemnation shall be
considered a taking or condemnation for public purpose.
8.02 CONDEMNATION FOR A LIMITED PERIOD: If all or any portion of the Premises
shall be taken for a limited period, this Lease shall not terminate, there shall
be no abatement of rent or additional rent payable here under and Tenant shall
be entitled to receive the entire award (whether paid as damages, rent or
otherwise) unless the period of occupancy by the condemning body extends beyond
the expiration of this Lease. In such event Landlord shall be entitled to such
part of the award as shall be properly allocable to the cost of restoration of
the Premises to the condition in which they were prior to the taking, and the
balance of such award shall be apportioned between Landlord and Tenant as of the
date of such expiration. If the termination of such occupancy by the condemning
body is prior to the expiration of this Lease, Tenant shall, after application
for and diligent pursuit of an award for the purpose of restoring the Premises,
to the extent such award has been made, restore the Premises to the condition in
which they were prior to the taking.
SECTION IX SURRENDER OF PREMISES:
9.01 SURRENDER AT TERMINATION: At the expiration or termination of this
Lease, Tenant shall peaceably vacate and deliver the Premises and all
alterations and additions thereto in good order, repair and condition,
ordinary wear and tear as defined in paragraph 5.01 herein excepted,
restoring the Premises wherever necessary and leaving them clean and neat.
Tenant shall remove all personal property prior to the expiration of this
Lease, including any signs, notices and displays placed by Tenant, and Tenant
shall perform any necessary restoration of the Premises occasioned by such
removal. Tenant shall also remove those improvements, alterations and
additions made by Tenant or by Landlord on behalf of Tenant which Landlord
required Tenant to remove when Landlord provided Tenant with its consent to
the installation of such improvements, alterations and additions, unless
Landlord, prior to the expiration or termination of this Lease, elects in
writing not to require such removal. Tenant shall repair any damage caused by
such removal and shall restore the Premises and leave them clean. If Tenant
is not required by Landlord to remove such improvements, alterations or
additions to the Premises upon the expiration or termination of this Lease,
such improvements, alterations and additions to the Premises, as well as any
of Tenant's personal property left on the Premises by Tenant shall become the
property of Landlord and shall remain and be surrendered with the premises.
Tenant waives all claims against Landlord for any damage to Tenant resulting
from Landlord's retention or disposition of any such improvements,
alterations, additions or Tenant's personal property. Tenant shall be liable
to Landlord for Landlord's costs for storing, removing and disposing of any
improvements, alterations, additions or Tenant's personal property, together
with the then current rental value of the premises during the time required
to perform any such clean up or restoration.
9.02 ENVIRONMENTAL AUDIT AT TERMINATION: At the expiration or termination of
this Lease, Tenant shall provide Landlord an environmental audit, survey or
investigation to determine the presence or residue of toxic or hazardous
materials, if Tenant at any time during the term of this Lease has, with or
without Landlord's consent, inventoried, stored or used toxic or hazardous
materials on or about the Premises. This includes the legal or illegal use of
these materials by Tenant or any of its employees, agents or invitees. This
report shall be at least a complete Phase 1 or higher as may be necessitated by
the nature of the prior use or storage and shall include the completion of any
recommended further investigation. The cost of this report or any clean-up or
restoration as might be recommended or required by such investigation or
governmental agency shall be borne solely by Tenant. These costs are to include
all costs related to the removal of any material or waste and the restoration of
any parts of the Premises required by compliance with any clean-up or removal
recommended or required, including all taxes or licenses, and any legal or
professional expenses which may be necessary to insure completion and
compliance. Should clean-up or restoration commence or continue beyond the term
of this Lease, such a period shall be considered a holding over without
Landlord's consent and rent shall continue to be due and payable in accordance
with Section 12, Paragraph 12.02 of this Lease. If, within ten (10) days
following notice by Landlord, Tenant fails or refuses to supply the required
reports, Landlord may, at its option, cause all required reports to be prepared.
Tenant shall promptly pay Landlord all costs incurred plus an administrative fee
of twenty percent (20%) of such costs.
9.03 SURVIVAL OF TENANT'S OBLIGATION: Tenant's obligation to observe or perform
the provisions of this Section shall survive the expiration or other termination
of this Lease.
SECTION X ARBITRATION:
10.01 APPOINTMENT OF ARBITRATORS: If any dispute arises under this Lease as to a
matter which this Lease provides should be arbitrated, or as to any other
question involving apportionment, valuation or rental, either party may request
arbitration and appoint as arbitrator one attorney or property manager or real
estate appraiser, whichever is most appropriate, having experience with respect
to the matter in dispute. The other party shall select an arbitrator with
qualifications similar to those of the first selected, and the two arbitrators
shall within thirty (30) days select a third with similar qualifications. If the
selection of the second or third arbitrator is not made within thirty (30) days
after selection of the prior arbitrator then either party may apply to the
presiding judge of the Superior Court of California to select the required
arbitrator. If agreed to by both Landlord and Tenant, in writing, a single
arbitrator may act in lieu of the three arbitrator panel described above.
10.02 SUBMISSION: At any time within ten (10) days after appointment of the
third arbitrator, either party may submit the dispute for settlement by the
arbitrators.
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<PAGE>
10.03 INVESTIGATION: DISCOVERY: HEARING: DECISION: The arbitrators to whom a
dispute is submitted shall conduct such investigations and hearings as shall be
reasonably necessary, and the written decision of the majority shall be
submitted to both parties within thirty (30) days after the referral unless the
arbitrators determine that further time is reasonably required to make a proper
investigation of the relevant facts. In addition to the powers conferred by law
or this agreement, a majority of the arbitrators shall have the power to compel
oral or documentary evidence from either party or any other person or firm at
the request of either party for discovery purposes. The arbitration shall take
place in San Diego, California.
10.04 EFFECT OF ARBITRATORS' DECISION: The parties shall be bound by the
decision of a majority of the arbitrators, including any decision as to whether
or not the question was subject to arbitration.
10.05 COSTS: Each party shall pay the fees and expenses of the one of the two
original arbitrators appointed by such party, or in whose stead as above
provided, such arbitrator was appointed, and the fees and expenses of the third
arbitrator, if any, shall be borne equally by both parties.
SECTION XI DEFAULT: EVENTS: REMEDIES:
11.01 EVENTS OF DEFAULT: The occurrence of any one of the following events
shall constitute a default of this Lease by Tenant:
11.01-1 FAILURE TO PAY RENT: Failure of Tenant to make any payment of rent
or other required payment, when due.
11.01-2 FAILURE TO TAKE POSSESSION: Failure by Tenant to take possession of
the Premises within ten (10) days following commencement of this Lease.
11.01-3 ABANDONMENT: Vacating or abandonment of all or a substantial
portion of the Premises.
11.01-4 FAILURE TO COMPLY WITH LEASE PROVISIONS: Failure of Tenant to
comply with any provision of this Lease, other than payment of rent, and
such failure shall continue for thirty (30) days after mailing of written
notice by Landlord to Tenant specifying the nature of non-compliance by
Tenant with reasonable particularity provided, however, that if the nature
of Tenant's default is such that more than thirty (30) days are reasonably
required for its cure, Tenant shall not be in default if Tenant immediately
commences or has commenced such cure and thereafter diligently proceeds to
cure such default within ten (10) days.
11.01-5 CREDITORS ASSIGNMENT: The making of an assignment or general
arrangement for the benefit of creditors by Tenant or any guarantor of
Tenant's obligations under the Lease.
11.01-6 BANKRUPTCY: The filing by Tenant or any guarantor of Tenant's
obligations under this Lease of a petition under any section or chapter of
the present Federal Bankruptcy Act (or foreign equivalent) or amendment
thereto or under any similar law or statute of the United States (or
foreign country) or any state (or province) thereof, or the failure of the
dismissal, within thirty (30) days after the filing of an involuntary
petition of bankruptcy or insolvency against Tenant or guarantor of
Tenant's obligations.
11.01-7 RECEIVERSHIP: The appointment of a receiver or trustee for all or
substantially all the assets of Tenant or any guarantor of Tenant's
obligations under this Lease and such receivership shall not have been
terminated or stayed within the time permitted by law.
11.01-8 SEIZURE OF TENANTS ASSETS: The attachment, execution or other
judicial seizure of substantially all of Tenant's assets located in the
Premises or of Tenant's interest in this Lease where such seizure is not
discharged within thirty (30) days.
11.02 REMEDIES IN EVENT OF DEFAULT: Upon the occurrence of any event of default,
Landlord shall have the option to do any one or more of the following without
any notice or demand:
11.02-1 TERMINATION OF LEASE: Terminate this Lease, in which event Tenant
shall immediately surrender the Premises to Landlord. If Tenant shall fail
to do so, Landlord may without notice and prejudice to any other remedy
available, enter and take possession of the Premises and remove Tenant or
anyone occupying the Premises and its effects without being liable to
prosecution or any claim for damages. Tenant agrees to indemnify Landlord
for all loss and damage suffered by Landlord because of such termination
whether through inability to re-let the Premises or otherwise, including
any loss of rent for the remainder of the term of this Lease. If Landlord
elects to terminate this Lease, Tenant's liability to Landlord for damages
shall survive such termination.
11.02-2 ACCELERATION OF RENT: Declare the entire amount of all rent past
due as well as which would have become due and payable during the remainder
of the term of this Lease to be due and payable immediately, in which event
Tenant agrees to pay the same to Landlord immediately. Such payment shall
constitute payment of past due rent and payment in advance of the rent
stipulated for the remainder of the lease term. Acceptance by Landlord of
the payment of such rent shall not constitute a waiver of any then
existing default occurring thereafter. Landlord shall specifically be
entitled to recover those damages provided for in California Civil Code
1951.2 including but not limited to the worth at the time of award of the
amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss
that the tenant proves could have reasonably avoided.
11.02-3 RE-LETTING OF PREMISES: Enter upon and take possession of the
Premises as agent of Tenant without terminating this Lease and without
being liable to prosecution or any claim for damages. Landlord may re-let
the Premises and in that connection may make any suitable alterations or
refurbish the Premises, or both, or change the character or use of the
Premises, but Landlord shall not be required to re-let for any use or
purpose other than that specified in this Lease or which Landlord may
reasonably consider injurious to the Premises, or to any tenant which
Landlord may consider objectionable. Landlord may re-let all or any portion
of the Premises, alone or in conjunction with other portions of the
Building, for a term longer or shorter than the term of this Lease, at a
rental rate greater or less than the then current rental rate provided in
this Lease, and upon such other terms (including the granting of
concessions) as Landlord solely determines to be acceptable. If Landlord
elects to reenter and re-let all or any portion of the Premises, Landlord
shall be entitled to recover, as damages, immediately, without waiting
until the due date of any future rent, or until the date fixed for
expiration of this Lease, the total of all rent owing and unpaid as of the
date of the default; the costs of reentry and re-letting include without
limitation the cost of any clean-up, refurbishing, removal of Tenant's
property and fixtures; and other expense occasioned by Tenant's failure to
quit the Premises and to leave them in the required condition; any
remodeling costs; attorneys' fees; court costs; brokers' commissions;
advertising costs and the difference between the rent and all of Tenant's
other obligations under this Lease and the actual rent received by Landlord
from the Premises for the period commencing with the date of the default
and continuing through the date designated as the expiration date of this
Lease. No such reentry or taking possession of the Premises shall be
construed as an election on Landlord's part to terminate this Lease unless
a written notice of such intention be given to Tenant. Landlord, however,
shall have no duty to re-let the Premises and Landlord's failure to do so
shall not release Tenant's liability for rent or damages. If Landlord
elects to enter and re-let the Premises the Landlord may at any time
thereafter elect to terminate this Lease for Tenant's default. If Landlord
takes possession of the Premises, Landlord shall have the right to rent any
other available space in the Building before re-letting or attempting to
re-let the Premises.
11.02-4 LANDLORD'S RIGHT TO PERFORM: Landlord may do whatever Tenant is
obligated to do by the provisions of this Lease and may enter the Premises
without being liable to prosecution or claim for damages in order to
accomplish this purpose. Tenant agrees to reimburse Landlord immediately
upon demand for any expenses which Landlord may incur in complying with the
terms of this Lease on behalf of Tenant. Tenant agrees that Landlord shall
not be liable for any damages to Tenant from such action, whether caused by
negligence of Landlord or otherwise.
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11.02-5 RIGHT TO SUE MORE THAN ONCE: Landlord may sue periodically to
recover damages during the period corresponding to the remainder of the
term of this Lease, and no action for damages shall bar a later action for
damages subsequently accruing.
11.02-6 REMEDIES CUMULATIVE: The remedies as set forth and available to
Landlord because of the default of Tenant, shall be in addition to and
shall not exclude any other remedy available to Landlord under this Lease
or applicable law.
11.03 WAIVER OF REDEMPTION RIGHTS: Tenant, for itself, and on behalf of any and
all persons claiming through or under it, including creditors of all kinds, does
hereby waive and surrender all right and privilege which they or any of them
might have under or by reason of any present or future law, to redeem the
Premises or to have a continuance of this Lease for its remaining term after
having been dispossessed or ejected from the Premises by process of law or
under the terms of this Lease or after the termination of this Lease as herein
provided.
11.04 LIMITATION OF LANDLORD'S LIABILITY: Each of the following covenants and
agreements shall be applicable to any covenant or agreement either expressly
contained in this Lease or imposed by statute or at common law.
11.04-1 LANDLORD DEFAULT: If Landlord is in default of this Lease, and as a
consequence, Tenant recovers a money judgment against Landlord, the
judgment shall be satisfied only out of the proceeds of sale received on
execution of the judgment and levy against the right, title, and interest
of Landlord in the premises which the leased premises are a part, and out
of rent or other income from such real property receivable by Landlord or
out of the consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right title, and interest in
the premises of which the leased premises are a part.
11.04-2 PERSONAL LIABILITY: Landlord shall not be personally liable for any
deficiency and it Landlord or its successor is a partnership it shall not
be personally liable and no partner of Landlord shall be sued or named as a
party in any suit or action or service of process be made against any
partner of the partnership. No partner of Landlord shall be required to
answer or otherwise plead to any service of process and no judgment will be
taken or writ of execution levied against any partner of Landlord.
SECTION XII GENERAL PROVISIONS:
12.01 WAIVER: No provision of this Lease shall be deemed to have been waived by
Landlord unless such waiver is in writing signed by Landlord. Landlord's waiver
of a breach of any term or condition of this Lease shall not prevent a
subsequent act, which would have originally constituted a breach, from having
the effect of any original breach. Landlord's receipt of rent with knowledge of
a breach by Tenant of any term or condition of this Lease shall not prevent a
subsequent act, which would have originally constituted a breach, from having
the effect of any original breach. Landlord's receipt of rent with knowledge of
a breach by Tenant of any term or condition of this Lease shall not be deemed a
waiver of such breach. Landlord's failure to enforce against Tenant or any other
tenant of the Building any of the rules or regulations made by Landlord shall
not be deemed a waiver of such rules or regulations. No act or thing done by
Landlord, its agents or employees during this lease term shall be deemed an
acceptance of a surrender of the Premises and no agreement to accept a surrender
of the Premises shall be valid unless in writing signed by Landlord. The
delivery of keys to any of Landlord's agents or employees shall not operate as a
termination of this Lease or a surrender of the Premises. No payment by Tenant,
or receipt by Landlord, of a lesser amount than the rent due shall be deemed to
be other than on account of the earliest stipulated rent, nor shall any
endorsement or statement on any check or any letter accompanying a payment as
rent be deemed an accord and satisfaction and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
rent or pursue any other remedy available to Landlord.
12.02 HOLDING OVER: If Tenant shall, with the written consent of Landlord,
continue to occupy all or any portion of the Premises following the expiration
or sooner termination of this Lease, such occupancy shall be deemed a
month-to-month tenancy which may be terminated by either Landlord or Tenant in
accordance with then applicable law. During such tenancy, Tenant agrees to pay
Landlord monthly the then building scheduled rental rate or the rental due for
the month preceding the expiration or termination, whichever amount is greater
and Tenant further agrees to be bound by all other applicable terms and
provisions of this Lease. Consent shall be at Landlord's sole discretion. If
Landlord shall not give written consent to continue occupancy of the Premises by
Tenant, Tenant shall, until possession of the Premises has been surrendered to
Landlord, pay to Landlord monthly rent equal to two (2) times the then building
scheduled rental rate for the Premises. For any period of holding over the
applicable monthly rate shall be due for each month of occupancy, or part
thereof, without proration.
12.03 REMOVAL OF PROPERTY: Upon termination or sooner termination of this Lease,
all of Tenant's trade fixtures, personal property and improvements remaining in
the Premises or the Building shall be deemed conclusively to have been abandoned
by Tenant and may be appropriated, sold, destroyed or otherwise disposed of by
Landlord without notice or obligation to compensate Tenant or to account
therefor, and Tenant shall pay to Landlord on written demand all costs incurred
by Landlord in connection therewith.
12.04 NOTICES: All notices under this Lease shall be in writing and delivered in
person or sent by prepaid registered or certified mail to Landlord at the same
place to which rent payments are made, and to the Tenant at the Premises, or
such addresses as hereafter may be designated by either party in writing.
Notices mailed shall be deemed given on the date of mailing.
12.05 CONSENT NOT UNREASONABLY WITHHELD: Unless otherwise specifically provided,
whenever consent or approval of Landlord or Tenant is required under the terms
of this Lease, such consent or approval shall not be unreasonably withheld or
delayed. Tenant's sole remedy if Landlord unreasonably withholds or delays
consent or approval shall be an action for specific performance and Landlord
shall not be liable for damages. If either party withholds any consent or
approval, such party shall on written request deliver to the other party a
written statement giving the reasons therefor.
12.06 ATTORNEYS' FEES: If Tenant or Landlord shall bring any action for any
relief against the other, declaratory or otherwise, arising out of this Lease,
including any suit by Landlord for the recovery of rent or possession of the
Premises, the losing party shall pay the successful party a reasonable sum for
attorneys' fees and costs which shall be deemed to have accrued on the
commencement of such action and shall be paid whether or not such action is
prosecuted to judgment. Such attorneys' fees and costs shall be payable with
respect to any suit, action at law or arbitration, whether binding, non-binding,
judicially directed, or conducted pursuant to stipulation of the parties.
12.07 TIME OF THE ESSENCE: In all instances where Tenant is required by the
terms and provisions of this Lease to pay any sum or to do any act at a
particular indicated time or within an indicated period, it is understood and
agreed that time is of the essence.
12.08 WAIVER OF JURY TRIAL: In event suit or action is commenced by either
Landlord or Tenant against the other in connection with any controversy arising
out of this Lease, Landlord and Tenant each hereby waive their right to a jury
trial.
12-09 DESIGNATED PARTIES: Landlord may act in any matter provided for herein by
its property manager or any other person who shall from time to time be
designated by Landlord by notice to Tenant. Tenant may designate in writing a
person to act on its behalf in any matter provided for herein and may, by
written notice, change such designation. In the absence of such designation, the
person or persons executing this Lease for Tenant shall be deemed to be
authorized to act on behalf of Tenant in any matter provided for herein.
12.10 SUCCESSORS: All covenants, agreements, terms and conditions contained in
this Lease shall apply to and be binding upon Landlord and Tenant and their
respective heirs, executors, administrators, successors and assignees.
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12.11 JOINT AND SEVERAL LIABILITY: If there is more than one Tenant, the
obligations here under imposed upon Tenant shall be joint and several.
12.12 MERGER: The voluntary or other surrender of this Lease by Tenant or the
cancellation of this Lease by mutual agreement of Landlord and Tenant shall not
work a merger, and shall at Landlord's option terminate all or any subleases or
sub-tenancies. Landlord's option shall be exercised by notice to Tenant and all
known tenants under any sublease or sub-tenancies.
12.13 RELATIONSHIP OF PARTIES: Nothing contained in this Lease shall create any
relationship between the Landlord and Tenant other than that of Landlord and
Tenant, and it is acknowledged and agreed that Landlord does not in any way or
for any purpose become a partner of Tenant in the conduct of Tenant's business,
or a joint venture or a member of a joint or common enterprise with Tenant.
12.14 ENTIRE AGREEMENT: CAPTIONS: Tenant acknowledges and agrees that it has
not relied upon any statement, representation, agreement or warranty except
such as may be expressly set forth in this Lease and it is agreed by Landlord
and Tenant that no amendment or modification of this Lease shall be valid or
binding unless in writing executed by Landlord and Tenant. No provision of
this Lease shall be altered, waived, amended or extended except in writing
executed by Landlord and Tenant. The paragraph headings contained in this
Lease are for convenience only and shall in no way enlarge or limit the scope
or meaning of the provisions of this Lease.
12.15 SEVERABILITY: If any clause or provision of this Lease is held to be
illegal, invalid or unenforceable under present or future law effective during
the term of this Lease, the remainder of this Lease shall not be affected
thereby. In lieu of such clause or provision held to be illegal, invalid or
unenforceable there shall be added, as a part of this Lease, a clause or
provision as similar in terms as possible which shall be legal, valid and
enforceable.
12.16 GENDER: Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
12.17 BROKERAGE COMMISSIONS: Landlord has engaged the services of IPC Commercial
Real Estate. Tenant has retained Capital Growth Properties as its broker.
Landlord's sole obligation with respect to brokerage commissions shall be as is
set forth in Landlord's agreement with IPC Commercial Real Estate. Any
commissions payable to Capital Growth Properties shall be paid either by IPC
Commercial Real Estate pursuant to agreement with Capital Growth Properties, or
by Tenant.
12.18 CORPORATE OR PARTNERSHIP AUTHORITY: If Tenant is a corporation, Tenant
shall, upon request from Landlord, furnish Landlord with a certified copy of
resolutions of the board of directors of Tenant authorizing this Lease and
granting the person or persons who executed this Lease the authority to execute
it. If Tenant is a general or limited partnership and less than all the general
partners of Tenant have executed this Lease, Tenant shall, upon request of
Landlord, furnish Landlord with an agreement executed by all partners
authorizing this Lease and granting the person or persons who executed this
Lease the authority to execute it.
12.19 GOVERNING LAW: This Lease shall be governed by, construed and enforced in
accordance with the laws of the State of California USA.
12.20 FORCE MAJEURE: Landlord shall not be required to perform any term,
condition or covenant in this Lease so long as such performance is delayed or
prevented by acts of God, strikes, lockouts, material or labor restrictions by
any governmental authority, civil riot, floods, and any other cause not
reasonably within the control of Landlord and which by the exercise of due
diligence Landlord is unable, wholly or in part, to prevent or overcome.
12.21 RECORDATION: Tenant shall not record this Lease without the prior written
consent of Landlord. Either party shall, upon request of the other party,
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes, the cost of preparation and recording the memorandum to be borne by
the party requesting execution of the memorandum.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this Lease.
Landlord: /s/ F.E. Hollow Tenant: /s/ Linda Ahlswede-Cox
------------------- ------------------------
F.E. Hollow - President Linda Ahlswede-Cox -
Senior Vice President
BALBOA DEVELOPMENT CORP - SCRIPPS BANK
GENERAL PARTNER
BALBOA INVESTORS 1 LTD
Date: 9/23/99 Date: 9/23/99
--------------------- ---------------------
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<PAGE>
SCRIPPS BANK
AMENDED AND RESTATED LONG-TERM INCENTIVE COMPENSATION
PLAN FOR PRESIDENT & CHIEF EXECUTIVE OFFICER
BACKGROUND
Ronald J. Carlson currently has the following compensation arrangement with
Scripps Bank:
A. Based on his 11/97 employment agreement, as amended and restated as of
March __, 2000, Ronald J. Carlson currently has:
- An annual base salary of $230,000 and is eligible to receive
annual salary increases.
- Receives both the standard employee benefit package (E.G.,
401(k), ESOP, health benefits) and additional executive
perquisites (E.G., car allowance).
B. Has an amended and restated supplemental retirement plan which will
provide to him a $50,000 annuity (paid monthly) commencing upon his
planned retirement on October 1, 2002.
C. Has an additional $25,000 amended and restated supplemental retirement
agreement with spousal survivor benefit.
D. Has an amended and restated unfunded deferred compensation agreement
that provides him an annual $20,000 benefit which can be adjusted from
time to time. This arrangement was approved August 1992.
E. Is eligible for the annual Stakeholders Bonus. In 1998, he received
$22,304.
F. Has received additional discretionary awards, the last one in the
amount of $9,000 for fiscal year 1998.
G. Receives periodic grants of stock options.
OBJECTIVES
A. Scripps Bank desires to amend and restate the long-term compensation
plan for Ronald J. Carlson dated as of October 20, 1999 as set forth in
this Amended and Restated Long Term Compensation Plan (the "Amended
Plan"). The Amended Plan is intended to focus his attention on
achieving the strategic plan that the Bank developed and approved this
year.
B. The Amended Plan is independent of any other pay or incentives
currently available to Ronald J. Carlson.
<PAGE>
C. The Amended Plan should be a performance based plan whereby Ronald J.
Carlson's performance at the expected date of his retirement (October
2002), can be measured on both a quantitative and qualitative basis by
the Board of Directors.
D. Ronald J. Carlson would not be eligible for any award under the Amended
Plan unless he achieves minimum targets as set forth herein.
E. The earliest Ronald J. Carlson can receive any awards under the Amended
Plan would be upon his retirement from the Bank.
F. The Amended Plan should have a deferral provision, so that Ronald J.
Carlson could elect either a lump sum payment of any earned awards or
stretch out the receipt of such payment over a number of years.
AMENDED PLAN DESIGN
A. ELIGIBILITY:
This Amended Plan is solely designed for Mr. Ronald J. Carlson in his
capacity as President and Chief Executive Officer of Scripps Bank.
Ronald J. Carlson will be eligible for the incentive compensation
awards detailed in this Amended Plan as long as:
1. Ronald J. Carlson is employed as the President and Chief
Executive Officer of Scripps Bank through October 1, 2002 and
meets all conditions stated in his Amended Employment
Agreement.
2. Ronald J. Carlson achieves the minimum performance
requirements as described in this Amended Plan.
3. Ronald J. Carlson has made all elections as required under
this Amended Plan.
B. AMENDED PLAN PERIOD:
This Amended Plan is effective with the approval of the Scripps Bank
Board of Directors and will remain in place through October 1, 2002.
The Amended Plan period may be modified should Scripps Bank and Ronald
J. Carlson agree to modify the Term of the Amended Employment
Agreement, as defined therein.
C. PERFORMANCE GOALS:
1. Performance goals will be based upon the July 1999 Scripps
Bank Strategic Plan adopted by the Scripps Bank Board of
Directors.
2. Under this Amended Plan, there will be FOUR GOALS which will
be evaluated by the Board of Directors at the end of the
Amended Plan period to determine if Ronald J. Carlson is
eligible for any incentive compensation awards.
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<PAGE>
3. The four goals are:
GOAL #1: To obtain a return on ending equity of 16.0%
by the end of 2001.
GOAL #2: To grow assets to $800,000,000 by the end of
2001.
GOAL #3: Meet or exceed quality trigger from
Stakeholders Plan model - net loan losses
and classified loans as a percentage of Plan
loans.
GOAL #4: To achieve five non-financial "Big Picture
Goals" as stated on Page 2 of the Strategic
Plan. In summary, these are:
(a) To be viewed as the premier
relationship bank in San Diego
County.
(b) To hire and retain the highest
level of financial service
professionals.
(c) To attract and retain profitable
customer relationships.
(d) To assure that the Bank electronic
banking services are enhanced to be
superior to other community banks
of similar size and potential.
(e) To have established a plan for
orderly management successors.
D. MEASUREMENT DOCUMENTATION:
GOAL #1: A report from the Chief Financial Officer of Scripps
Bank and the Bank's independent auditor.
GOAL #2: A report from the Chief Financial Office of Scripps
Bank and the Bank's independent auditor.
GOAL #3: A detailed report from the President and Chief
Executive Officer describing the accomplishments made
to achieving the four Big Picture Goals. The report
should reference the specific strategies to be
accomplished in the Strategic Plan.
GOAL #4: A detailed report from the Chairman of the Board
taking up each factor and providing an objective
appraisal for review by the Board.
E. COMPENSATION:
1. The basis for determining Ronald J. Carlson's incentive
compensation award will be:
(a) Ronald J. Carlson's annual base salary as of
10/1/2002.
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<PAGE>
(b) How well Ronald J. Carlson has achieved each of the
three goals.
(c) An award amount calculated from a percentage of
Ronald J. Carlson's annual base salary.
2. The award schedule described below is predicated on Ronald J.
Carlson earning 100% of his final base salary for achieving
100% of all three goals.
Note that more emphasis is placed upon achieving the first two
goals (which are measured quantifiably) than Goal #3 (a
qualitative and more subjective measurement).
3. The award schedule is as follows:
PERCENT OF GOAL ACHIEVED
90% 100% 110+%
<TABLE>
<CAPTION>
GOAL PERCENT OF BASE SALARY AWARDED
----
<S> <C> <C> <C>
#1 20% 40% 60%
#2 20% 40% 60%
#3 0% 20% 20%
</TABLE>
4. In the above schedule, Goal #3 is measured as either a
pass/fail, as determined by the Board of Directors after
reviewing the documentation indicated.
5. The schedule extends to 110% with a specific award, however,
it shall remain within the discretion of the Board upon
retirement to increase the award for performance found to be
superior.
6. In the example below, upon his retirement date on October 1,
2002, let us assume that:
(a) Ronald J. Carlson's annual salary is $250,000
(b) Ronald J. Carlson's performance to each of the three
goals was:
GOAL #1: 105% of goal achieved.
GOAL #2: 115% of goal achieved.
GOAL #3: Met the goal.
4
<PAGE>
(c) Calculation of Ronald J. Carlson's award:
GOAL #1: $250,000 x 40% = $100,000
GOAL #2: $250,000 x 60% = $150,000
GOAL #3: $250,000 x 25% = $ 50,000
TOTAL AWARD: = $300,000
F. METHOD OF PAYMENT:
1. Ronald J. Carlson should be provided the opportunity to elect
payment of his award among the following options:
(a) A cash award upon his retirement date on October 1,
2002. This would be a lump sum payment subject to
taxation similar to any other bonus payment.
(b) An award of Scripps Bank Stock equivalent to the cash
award. This, too, would be subject to applicable tax
rules at the time of issuance.
(c) An election to defer payments (via a non-qualified
deferred compensation arrangement) for a period of up
to five years. Bank can elect to purchase an annuity
to fulfill this method of payment. This will require
that Ronald J. Carlson make an election in the year
prior to his retirement as to whether he wishes to
defer and, if so, in what manner.
For example, the Amended Plan could be structured so
that his options are:
1. No deferral resulting in a lump sum payment
and applicable taxation.
2. Deferral for up to five years, at which time
he would receive his award and applicable
taxes would then be taken.
3. Equal payout installments over X years (not
to exceed five).
If Ronald J. Carlson elects either #2 or #3, the Bank
could apply an interest rate to the undistributed
funds.
(d) If the Bank adopts the deferral provision, a formal
plan document adhering to current legal requirements
should be prepared as an additional to the incentive
compensation plan.
G. MISCELLANEOUS PROVISIONS:
1. This Amended Plan can be modified, amended, rescinded, or
terminated at any time at the sole and absolute discretion of
the Board of Directors. There are no
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<PAGE>
representations, inducements, promises or agreements, oral
or otherwise, that are made by anyone acting on behalf of
the Bank, which are not embodied herein, and that no
agreement, statement or promise not contained or referenced
in this Amended Plan shall be valid or binding.
2. If any legal action, including an action for declaratory
relief, is brought to enforce or interpret the provisions of
this Amended Plan, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs from the other
party. These fees, which may be set by the court in the same
action or in a separate action brought for that purpose, are
in addition to any relief to which the prevailing party may be
entitled. This provision applies to the entire Amended Plan.
3. In the event of a transfer or sale of the assets of Scripps
Bank or a merger or consolidation of Scripps Bank into or with
any other corporation or entity, each of the Performance Goals
set forth in Section C of this Amended Plan shall be deemed
met at the 100% level as of the date of any such transfer or
sale of assets, merger or consolidation; therefore entitling
Ronald J. Carlson to receive no later than October 1, 2002,
the compensation award set forth in Section E of this Amended
Plan.
By: By:
------------------------------- ---------------------------
William E. Nelson Ronald J. Carlson
Chairman of the Board President and Chief
Executive Officer
Date: Date:
------------------------------- --------------------------
6
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-87745) of Scripps Financial Corporation of our
report dated February 4, 2000 which is included in this Annual Report on Form
10-K.
PricewaterhouseCoopers LLP
San Diego, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF SFC AS OF AND FOR THE YEAR ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 25,046
<INT-BEARING-DEPOSITS> 789
<FED-FUNDS-SOLD> 29,670
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 165,076
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 397,376
<ALLOWANCE> 5,412
<TOTAL-ASSETS> 631,945
<DEPOSITS> 582,385
<SHORT-TERM> 44
<LIABILITIES-OTHER> 3,452
<LONG-TERM> 767
0
0
<COMMON> 34,702
<OTHER-SE> 10,595
<TOTAL-LIABILITIES-AND-EQUITY> 631,945
<INTEREST-LOAN> 36,230
<INTEREST-INVEST> 8,605
<INTEREST-OTHER> 1,436
<INTEREST-TOTAL> 46,271
<INTEREST-DEPOSIT> 13,387
<INTEREST-EXPENSE> 13,432
<INTEREST-INCOME-NET> 32,839
<LOAN-LOSSES> 7,230
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24,014
<INCOME-PRETAX> 7,219
<INCOME-PRE-EXTRAORDINARY> 4,429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,429
<EPS-BASIC> .64
<EPS-DILUTED> .63
<YIELD-ACTUAL> 6.03
<LOANS-NON> 2,759
<LOANS-PAST> 1,562
<LOANS-TROUBLED> 1,351
<LOANS-PROBLEM> 530
<ALLOWANCE-OPEN> 4,767
<CHARGE-OFFS> 6,769
<RECOVERIES> 184
<ALLOWANCE-CLOSE> 5,412
<ALLOWANCE-DOMESTIC> 5,412
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
