<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
101 MONTGOMERY STREET, SAN FRANCISCO, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - $0.01 par value New York Stock Exchange, Inc.
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. [ x ]
As of March 13, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $4,210,149,060. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant and by the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan were deemed to be shares of Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 13, 1997 was
176,254,174 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1996 Annual Report to Stockholders by reference to portions of that
document. Part III of this Form 10-K incorporates certain information contained
in the registrant's definitive proxy statement for its annual meeting of
stockholders to be held May 12, 1997 by reference to portions of that document.
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THE CHARLES SCHWAB CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
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TABLE OF CONTENTS
<TABLE>
<S> <S>
Part I
Item 1. Business ................................................................................... 1
Item 2. Properties ................................................................................ 9
Item 3. Legal Proceedings .......................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 9
Item 4a. Executive Officers of the Registrant ....................................................... 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................... 9
Item 6. Selected Financial Data .................................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 10
Item 8. Financial Statements and Supplementary Data ................................................ 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 10
Part III
Item 10. Directors and Executive Officers of the Registrant ......................................... 10
Item 11. Executive Compensation ..................................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. 12
Item 13. Certain Relationships and Related Transactions ............................................. 12
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 12
Exhibit Index ........................................................................ 14
Signatures ........................................................................... 19
Index to Financial Statement Schedules ............................................... F-1
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<PAGE> 3
THE CHARLES SCHWAB CORPORATION
PART I
ITEM 1. BUSINESS
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. As used herein, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Mayer & Schweitzer, Inc.
(M&S), a subsidiary acquired in 1991, is a market maker in Nasdaq securities
that provides trade execution services to broker-dealers and institutional
customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and ShareLink. CSIM,
incorporated in 1989, acts as the investment adviser for Schwab's proprietary
mutual funds. The Company refers to certain funds for which CSIM is the
investment adviser as the SchwabFunds (registered trademark). CSTC, incorporated
in 1992, provides custody services for fee-compensated independent investment
managers and serves as trustee for employee benefit plans, primarily 401(k)
plans. ShareLink, acquired in 1995 to expand the Company's international
operations, is a retail discount securities brokerage firm located in the United
Kingdom.
New developments in the Company's business during 1996 include broadening
its offering of online brokerage services and expanding its retirement plan
services. In addition, the Company is enhancing the ways in which it may help
investors by using its branch office network to assist investors in developing
asset allocation strategies and evaluating their investment choices. This
assistance is directed to the new generation of investors who are currently
entering their peak savings years, as well as the many individuals who are
willing to assume greater control over their financial affairs.
(b) Financial Information About Industry Segments. The Company operates in
a single industry segment: securities brokerage and related financial services.
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1996. As of December
31, 1996, approximately 27% of Schwab's total customer accounts were located in
California. The next highest geographic concentrations of total customer
accounts were approximately 7% in New York and 6% in Texas.
(c) Narrative Description of Business. The Company's strategy is to attract
and retain customer assets by focusing on a number of areas within the financial
services industry - retail brokerage, mutual funds, support services for
independent investment managers, equity securities market-making, online
brokerage and 401(k) defined contribution plans. To pursue its strategy and its
objective of long-term profitable growth, the Company plans to continue to
leverage its competitive advantages. These advantages include advertising and
marketing programs that have created a national brand, a broad range of products
and services, diverse delivery systems and an ongoing investment in technology.
The Company's primary focus is serving retail investors, directly or
through independent investment managers, who seek a wide selection of quality
investment services at prices that, in most cases, are substantially lower than
those of full-commission firms. The Company, through Schwab, serves over 4.0
million active customer accounts(a). Customer assets totaled $253.2 billion as
of December 31, 1996.
The Company, through M&S and Schwab, engages in market-making activities in
Nasdaq and exchange-listed securities. New rules, regulatory actions, and
changes in market customs and practices are significantly impacting these
market-making activities. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in the Company's 1996 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" below.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. Such fluctuations
are affected by many national and international economic and political factors
that cannot be predicted, including broad trends in business and finance, the
availability of credit and capital, legislation and regulation affecting the
United States and international business and financial communities, currency
values, and the level and volatility of interest rates. Shifts in customer
investment preferences or in customer usage of Schwab's diverse delivery
systems could reduce transaction-based revenues, which include commission and
principal transaction revenues. Since transaction-based revenues continue to
represent a majority of the Company's revenues, the Company may experience
significant variations in revenues from period to period.
The Company adjusts its expenses in anticipation of and in response to
changes in financial market conditions and customer trading patterns. Certain of
the Company's expenses (including variable compensation, portions of
communications, and commissions, clearance and floor brokerage) vary directly
with changes in financial performance or customer trading activity. Expenses
relating to the level of temporary employees, contractors, overtime hours,
professional services, and advertising and market
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(a) Accounts with balances or activity within the preceding twelve months.
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THE CHARLES SCHWAB CORPORATION
SOURCES OF REVENUES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1996 1995 1994
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TYPE OF REVENUE AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions
Listed securities $ 423,232 22.9% $ 356,069 25.1% $ 278,025 26.1%
Nasdaq 393,882 21.3% 283,024 19.9% 169,236 15.9%
Mutual funds 70,805 3.8% 58,470 4.1% 59,949 5.6%
Options 66,210 3.5% 53,333 3.8% 38,902 3.7%
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COMMISSIONS 954,129 51.5% 750,896 52.9% 546,112 51.3%
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MUTUAL FUND SERVICE FEES 311,067 16.8% 218,784 15.4% 156,812 14.7%
PRINCIPAL TRANSACTIONS 256,902 13.9% 191,392 13.5% 162,595 15.3%
Interest revenue
Investments, customer-related 316,760 17.1% 283,031 19.9% 168,485 15.8%
Margin loans to customers 339,433 18.3% 264,025 18.6% 184,871 17.4%
Other 24,667 1.4% 21,064 1.6% 9,588 .9%
Interest expense (425,872) (23.0%) (357,223) (25.2%) (198,236) (18.6%)
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INTEREST REVENUE, NET OF
INTEREST EXPENSE 254,988 13.8% 210,897 14.9% 164,708 15.5%
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OTHER 73,836 4.0% 47,934 3.3% 34,370 3.2%
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TOTAL $1,850,922 100.0% $1,419,903 100.0% $1,064,597 100.0%
==============================================================================================================================
This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
</TABLE>
development are adjustable over the short term to help the Company achieve its
financial objectives. Additionally, developmental spending (e.g., branch
openings, product and service rollouts, and technology enhancements) is
discretionary and can be altered in response to market conditions. However, a
significant portion of the Company's expenses such as salaries and wages,
occupancy and equipment, and depreciation and amortization do not vary directly,
at least in the short term, with fluctuations in revenues or securities trading
volumes. Given the nature of the Company's revenues and expenses, and the
economic and competitive factors discussed in this report, the Company's
earnings and common stock price may be subject to significant volatility. The
Company's results for any period are not necessarily indicative of results for a
future period.
The table above sets forth on a comparative basis the Company's revenues
for the three years ended December 31, 1996.
COMPETITION
The Company faces significant competition from full commission and discount
brokerage firms, as well as mutual fund companies. Increasingly, competition has
also come from banks, software development companies, insurance companies and
others as they expand their product lines. A general trend of consolidation in
financial services has
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THE CHARLES SCHWAB CORPORATION
attracted new competitors and strengthened existing ones. Some of
these competitors are larger, more diversified, have greater financial
resources, and offer a wider range of services and financial products than the
Company. Particularly as financial services and products proliferate, to the
extent such competitors are able to attract and retain customers on the basis of
the convenience of one-stop shopping, the Company's business or its ability to
grow could be adversely affected. In many instances, the Company is competing
with such organizations for the same customers. The Company primarily competes
on the basis of quality, convenience, price of services and products offered,
technological innovation and expertise, and breadth of product line.
Most discount brokerage firms charge commissions lower than Schwab.
Full-commission brokerage firms also offer discounted commissions to selected
retail brokerage customers. Many brokerage firms employ substantial funds in
advertising and direct solicitation of customers to increase their market share
of commission dollars and other securities-related income. Such competition may
negatively impact the Company's customer asset growth, revenue growth and profit
margin.
ADVERTISING AND MARKETING PROGRAMS
The Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as its products and services. The Company's
advertising and market development expense for the years ended December 31,
1996, 1995 and 1994 was $84 million, $53 million and $36 million, respectively.
For the same years, new accounts opened were 985,000, 698,000 and 688,000,
respectively. New account openings represent a significant portion of the growth
in customer assets, which the Company believes is critical to growth in
revenues. Accounts opened during 1996, 1995 and 1994 generated approximately
16%, 13% and 14% of total commission revenues during each of those years,
respectively.
Schwab advertises regularly in financially-oriented newspapers and
periodicals and occasionally in general circulation publications. Schwab
advertisements appear regularly on national and local cable television and
periodically on radio and independent television stations. Schwab also engages
extensively in targeted direct mail advertising through monthly statement
"inserts" and special mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
PRODUCTS AND SERVICES
The Company offers a broad range of products and services to meet
customers' investment and financial needs at prices that management believes
represent superior value.
Accounts and Features. The Company offers the purchase and sale of
securities which include Nasdaq and exchange-listed securities, options, mutual
funds, variable annuities and fixed income investments, including United States
Treasuries, zero-coupon bonds, listed and OTC corporate bonds, municipal bonds,
GNMAs, unit investment trusts and CDs. If approved for margin transactions, a
customer may borrow a portion of the price of certain securities purchased
through Schwab, or may sell securities short. Customers must have specific
approval to trade options; as of December 31, 1996, 205,000 accounts were so
approved. To write uncovered options, customers must go through an additional
approval process and must maintain a significantly higher level of equity in
their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept into certain SchwabFunds (registered trademark)
money market funds.
A customer may receive additional services by qualifying for and opening a
Schwab One (registered trademark) brokerage account. A customer may access
available funds in his or her Schwab One account either with a personal check
or a VISA debit card. When a Schwab One customer is approved for margin trading,
the checks and debit card also provide access to margin cash available. For cash
balances awaiting investment, Schwab pays interest to Schwab One customers at a
discretionary rate of interest. Alternatively, Schwab One customers seeking
tax-exempt income may elect to have cash balances swept into one of three
tax-exempt SchwabFunds money market funds or a tax-exempt municipal trust (for
Florida taxpayers only). During 1996, the number of active Schwab One accounts
increased 29% to 966,000 accounts and the customer assets in all Schwab One
accounts increased 42% to $114.7 billion.
Customers who want to interact with Schwab through their computers may use
e.Schwab (trademark), one of Schwab's flexible online brokerage services. A
customer may open an e.Schwab account to place orders, receive account
information and obtain real-time securities information, all online.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of
three SchwabFunds money market funds. During 1996, active IRAs increased 20%
to 1,342,000 accounts and customer assets in all IRAs increased 35% to $65.4
billion. Schwab also acts as custodian and broker for Keogh accounts.
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THE CHARLES SCHWAB CORPORATION
Customer Financing. Customers' securities transactions are effected on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by settlement date,
usually three business days after the trade is executed. However, for purchases
of certain types of securities, such as certain mutual fund shares, a customer
must have a cash or money market fund balance in his or her account sufficient
to pay for the trade prior to execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the proceeds, on
settlement date. In an account authorized for margin trading, Schwab may lend
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the customer's
account. Short sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date. Customers may
sell securities short in a margin account subject to minimum equity and
applicable margin requirements and the availability of such securities to be
borrowed and delivered.
Interest on margin loans to customers provides an important source of
revenue to Schwab. During the year ended December 31, 1996, Schwab's outstanding
margin loans to its customers averaged $4.5 billion.
In permitting a customer to engage in transactions, Schwab takes the risk
of such customer's failure to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer's obligation
is not greater than specified percentages of the cash and market values of the
securities in the account. As a matter of policy, Schwab generally requires its
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 of the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by
Schwab at interest costs lower than Schwab's costs of borrowing from
alternative sources (e.g., balances in Schwab One (registered trademark)
brokerage accounts) or at no interest cost (e.g., balances in other accounts
and outstanding checks that have not yet cleared Schwab's bank), Schwab's cost
of funds is reduced and its net income is enhanced. Such interest savings
contribute substantially to Schwab's profitability and, if a significant
reduction of customer cash balances were to occur, Schwab's borrowings from
other sources may have to increase and such profitability would decline. To the
extent Schwab's customers elect to have cash balances in their brokerage
accounts swept into certain SchwabFunds(registered trademark) money market
funds, the cash balances available to Schwab for investments or for
financing margin loans are reduced. However, Schwab receives mutual fund
service fees from such funds based on the daily average invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Company's 1996 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Regulation" below.
Mutual Funds. At December 31, 1996, Schwab's Mutual Fund OneSource
(registered trademark) service enabled customers to trade over 620 mutual funds
in 70 well-known fund families without incurring transaction fees. The service
is particularly attractive to investors who would otherwise execute mutual fund
trades directly with multiple mutual fund companies to avoid brokerage
transaction fees, and to achieve investment diversity among fund families. In
addition, investors' record keeping, investment monitoring and tax reporting are
simplified through consolidated statements. Fees received by Schwab for
providing services, including record keeping and shareholder services, from the
Mutual Fund OneSource program are based upon daily balances of customer assets
invested in the participating funds through Schwab and are paid by the funds
and/or fund sponsors. Customer assets held by Schwab that have been purchased
through the Mutual Fund OneSource service, excluding Schwab's proprietary funds,
totaled $39.2 billion at the end of 1996.
Schwab's proprietary funds, collectively referred to as the SchwabFunds,
include money market funds, equity funds, bond funds, asset allocation funds,
which contain stocks, bonds and cash equivalents, and funds that primarily
invest in stock, bond and money market funds. Schwab customers may elect to have
cash balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds,
substantially all of which are in money market funds, were $43.1 billion at the
end of 1996. Fees received by the Company from the SchwabFunds, for providing
transfer agent services, shareholder services, administration and investment
management, are based upon daily balances of customer assets invested in these
funds.
Through its Mutual Fund Marketplace (registered trademark) program, Schwab
purchases and redeems for its customers shares of over 1,100 mutual funds in
over 260 fund families sponsored by third parties. Customer assets invested in
the Mutual Fund Marketplace, excluding the Mutual Fund OneSource service,
totaled $35.4 billion at the end of 1996. Schwab charges a transaction fee on
trades placed in the funds included in the
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THE CHARLES SCHWAB CORPORATION
Mutual Fund Marketplace (registered trademark) (except on trades through the
Mutual Fund OneSource(registered trademark) service)and these fees are
recorded as commission revenues. Commissions from customer transactions in
mutual fund shares comprised 7%, 8% and 11% of Schwab's total commission
revenues in 1996, 1995 and 1994, respectively.
Market Making In Nasdaq and Exchange-Listed Securities. M&S provides trade
execution services in Nasdaq securities to broker-dealers, including Schwab, and
institutional customers. In most instances, customer orders are routed directly
to M&S' trading system and are executed automatically. M&S generally executes
customer trades as principal. M&S business practices call for competitively
priced customer trade executions on the most favorable terms under the
circumstances, generally defined as the highest bid price on a sell order and
the lowest offer price on a buy order reasonably available in the market.
Certain customer trades are executed on a negotiated basis. Substantially all
Nasdaq security trades originated by the customers of Schwab are directed to
M&S.
Schwab has specialist operations on the Pacific Exchange to make markets in
exchange-listed securities. The majority of trades originated by the customers
of Schwab in exchange-listed securities for which Schwab makes a market are
directed to these operations. At December 31, 1996, Schwab had 14 specialist
posts that collectively made markets in 900 securities. In January 1997, Schwab
expanded its specialist operations to include three specialist posts on the
Boston Stock Exchange.
In the normal course of its market making in Nasdaq and exchange-listed
securities activities, M&S and Schwab maintain inventories in such securities on
both a long and short basis. While long inventory positions represent M&S' and
Schwab's ownership of securities, short inventory positions represent
obligations of M&S and Schwab to deliver specified securities at a contracted
price, which may differ from market prices prevailing at the time of completion
of the transaction. Accordingly, long or short inventory positions may result in
gains or losses as market values of such securities fluctuate.
Services for Independent Investment Managers. To attract the business of
accounts managed by fee-compensated independent investment managers, Schwab has
a dedicated business unit which includes experienced registered representatives
assigned to individual managers. Independent investment managers participating
in this program may use SchwabLink (registered trademark), the computer-based
information network for investment managers who custody customer accounts
at Schwab, to access information in their customers' accounts directly from
Schwab's computer data bases and to enter their customers' trades online.
During 1996, Schwab customer assets held in accounts managed by 4,800 active
independent investment managers increased $22.3 billion (44%) to a total of
$72.9 billion. Independent investment managers and other professional investors
generated 12% of Schwab's total commission revenues in 1996, 13% in 1995 and
14% in 1994.
Retirement Plan Services. In response to the growth in 401(k) assets,
Schwab began serving company 401(k) plans directly through a dedicated sales
force, as well as indirectly through alliances with national and regional
third-party administrators. During 1996, Schwab introduced SchwabPlan
(trademark), a comprehensive 401(k) retirement plan offering. This new service
enables employers to offer a wide range of investment options as well as
employee education to their 401(k) retirement plan participants.
DIVERSE DELIVERY SYSTEMS
The Company invests in diverse delivery systems that uphold the Company's
customer service standards. In addition to its branch office network, the
Company maintains four regional customer telephone service centers as well as
electronic brokerage channels.
Branch Office Network. At December 31, 1996, the Company operated 235
branch offices in 46 states, the Commonwealth of Puerto Rico and the United
Kingdom. The branch office network plays a key role in building Schwab's
business. With the customer service support of regional customer telephone
service centers and online brokerage channels, branch personnel are focusing a
significant portion of their time on business development. Customers can use
branch offices to obtain market information, place orders, open accounts,
deliver and receive checks and securities, and obtain related customer services
in person, yet most branch activities are conducted by telephone and mail.
The Company is enhancing the ways in which it may help investors by using
the branch office network to assist investors in developing asset allocation
strategies and evaluating their investment choices. Branch staff are also
referring investors who desire additional guidance to independent
fee-compensated investment managers through the Schwab AdvisorSource (trademark)
service.
Regional Customer Telephone Service Centers. Schwab's four regional
customer telephone service centers, located in Indianapolis, Denver, Phoenix and
Orlando, handle calls to many of Schwab's toll-free numbers, customer calls that
otherwise would have to wait for available registered representatives at
branches during business hours, and calls routed from branches after hours and
on weekends. Through the service centers, customers may place orders twenty-four
hours-a-day, seven days-a-week, except for certain holidays. Customer orders
placed during nonmarket hours are routed to appropriate markets the following
business day. The capacity
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THE CHARLES SCHWAB CORPORATION
of the service centers allows new branches to be opened and maintained
at lower staffing levels.
The Company's customer service approach is to use teams of registered
representatives in the service centers, working closely with branch personnel.
Each registered representative has immediate access to the customer account and
market-related information necessary to respond to any customer's inquiries, and
for most customer orders, can enter the order and confirm the transaction. As a
result of this approach, the departure of a registered representative generally
does not result in a loss of customers for the Company.
Electronic Brokerage Channels. The Company's electronic brokerage channels
include telephonic channels such as TeleBroker (registered trademark) - Schwab's
touch-tone telephone trading service and VoiceBroker (trademark) - introduced in
the third quarter of 1996 as the first telephone-based service that uses voice
recognition technology to provide individual investors with real-time quotes.
Other channels include PC-based online services such as SchwabLink (registered
trademark), StreetSmart (registered trademark), e.Schwab (trademark) and
SchwabNOW! (trademark), introduced in the third quarter of 1996 which provides
information and trading services through the Company's World Wide Web site.
These electronic brokerage channels enable investors to place orders, receive
account information and obtain real-time securities market information. These
channels are designed to provide added convenience for customers and minimize
Schwab's costs of responding to and processing routine customer transactions.
In addition, TeleBroker, e.Schwab and SchwabNOW! provide customers with
significant commission discounts from Schwab's standard rates. During 1996, the
electronic brokerage channels handled over 67% of Schwab's total calls and over
43% of Schwab's total trades.
INFORMATION SYSTEMS
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer account information, obtain securities prices and
related information, and enter orders online.
To support its diverse delivery systems, as well as other applications
such as clearing functions, account administration, record keeping and direct
customer access to investment information, Schwab maintains a sophisticated
computer network connecting all of the branch offices and regional customer
telephone service centers. Schwab's computers are also linked to the major
registered United States securities exchanges, M&S, the National Securities
Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations. External events, such as an earthquake or
power failure, loss of external information feeds, such as security price
information, as well as internal malfunctions, such as those that could occur
during the implementation of system modifications, could render part of or all
such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains carefully monitored backup and recovery functions. These include
logging of all critical files intraday, duplication and storage of all critical
data outside of its central computer site every 24 hours, and maintenance of
facilities for backup and communications in San Francisco. They also include the
maintenance and periodic testing of a disaster recovery plan that management
believes would permit Schwab to recommence essential computer operations if its
central computer site were to become inaccessible. To reduce the exposure to
system failures caused by external factors, including earthquakes, the Company's
primary data center is located in Phoenix.
CLEARING AND ACCOUNT MAINTENANCE
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer transactions
through the facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement
through a clearing corporation, are settled directly with the mutual funds or
other financial institutions. Schwab is obligated to settle transactions with
clearing corporations, mutual funds and other financial institutions even if
Schwab's customer fails to meet his or her obligations to Schwab. In addition,
for transactions that do not settle through a clearing corporation, Schwab takes
the risk of the other party's failure to settle the trade. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
EMPLOYEES
As of December 31, 1996, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 10,400
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<PAGE> 9
THE CHARLES SCHWAB CORPORATION
full-time employees, including 8,900 full-time employees and part-time
equivalents.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The Securities and Exchange
Commission (SEC) is the Federal agency charged with administration of the
Federal securities laws. Schwab and M&S are registered as broker-dealers with
the SEC. Schwab and CSIM are registered as investment advisers with the SEC.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers (NASD) and the national securities exchanges such as the New
York Stock Exchange (NYSE), which has been designated by the SEC as Schwab's
primary regulator with respect to its securities activities. The NASD has been
designated by the SEC as M&S' primary regulator with respect to its securities
activities. During 1996, the Chicago Board Options Exchange was Schwab's
designated primary regulator with respect to options trading activities, and
also has been designated as such for 1997. These self-regulatory organizations
adopt rules (subject to approval by the SEC) governing the industry and conduct
periodic examinations of broker-dealers. Securities firms are also subject to
regulation by state securities authorities in the states in which they do
business. Schwab was registered as a broker-dealer in 50 states, the District of
Columbia and Puerto Rico as of December 31, 1996. M&S was registered as a
broker-dealer in 32 states and the District of Columbia as of December 31, 1996.
The principal purpose of regulations and discipline of broker-dealers and
investment advisers is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisers. The regulations to which broker-dealers and investment
advisers are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure of securities firms, record
keeping, fee arrangements, disclosure to clients, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules may directly affect the method of
operation and profitability of broker-dealers and investment advisers. The SEC,
self-regulatory organizations and state securities authorities may conduct
administrative proceedings which can result in censure, fine, cease and desist
orders, or suspension or expulsion of a broker-dealer or an investment adviser,
its officers, or employees. Schwab and M&S have been the subject of such
administrative proceedings.
In August 1996, the SEC adopted certain new rules and rule amendments,
known as the Order Handling Rules, which significantly alter the manner in which
orders related to both Nasdaq and listed securities are handled. These rules
became effective on January 20, 1997, with respect to exchange-listed stocks and
a limited number of Nasdaq securities, and are being phased in with respect to
additional Nasdaq securities during 1997. The SEC has also issued for comment
certain proposed rules by the NASD which, if approved, would introduce a new
system for processing orders in the Nasdaq market. The proposed NASD rules, if
approved, along with other potential regulatory actions and improvements in
technology, could impact the manner in which business is currently conducted in
the Nasdaq market. In addition, during 1994, the SEC commenced an investigation
into the Nasdaq market and the activities of broker-dealers, including M&S, who
act as market makers in Nasdaq securities. On August 8, 1996, the SEC issued a
report of its investigation, and the NASD consented to sanctions for failing to
enforce compliance with its rules and the federal securities laws. The SEC is
continuing its investigation and has stated that further enforcement proceedings
have not been precluded. These new rules, regulatory actions, and changes in
market customs and practices are expected to have a material adverse impact on
M&S' principal transaction revenues, M&S' profit margin and on the manner in
which M&S conducts its business. See "Commitments and Contingent Liabilities"
note in the Notes to Consolidated Financial Statements in the Company's 1996
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
As registered broker-dealers and NASD member organizations, Schwab and M&S
are required by Federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 for
claims of between-investment cash balances. SIPC is funded through assessments
on registered broker-dealers. In addition, in 1996, Schwab purchased from a
private surety company additional account protection of up to $74.5 million per
customer, as defined, for customer securities positions only. This additional
account protection was increased to $99.5 million in March 1997. Stocks, bonds,
mutual funds and money market funds are considered securities and are protected
on a share basis for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
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<PAGE> 10
THE CHARLES SCHWAB CORPORATION
Schwab is also authorized by the Municipal Securities Rulemaking Board to
effect transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and M&S is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the Chicago Board Options
Exchange govern the amount of margin customers must provide and maintain in
writing uncovered options.
As a California state-chartered trust company, CSTC is primarily regulated
by the California State Banking Department. Since it provides employee benefit
plan trust services, CSTC is also required to comply with the Employee
Retirement Income Security Act of 1974 (ERISA) and, consequently, is subject to
oversight by both the Internal Revenue Service and Department of Labor. CSTC is
required under ERISA to maintain a fidelity bond for the protection of employee
benefit trusts for which it serves as trustee.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an
arranger with the Securities and Futures Authority (SFA) in the United Kingdom,
and engages in business development activities on behalf of Schwab.
ShareLink is registered as a broker-dealer with the SFA in the United
Kingdom.
NET CAPITAL REQUIREMENTS
As registered broker-dealers, Schwab and M&S are subject to the Uniform Net
Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule), which
has also been adopted through incorporation by reference in NYSE Rule 325.
Schwab is a member firm of the NYSE and the NASD, and M&S is a member firm of
the NASD. The Net Capital Rule specifies minimum net capital requirements for
all registered broker-dealers and is designed to measure financial integrity and
liquidity. Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain specified
levels of net capital, such failure would constitute a default by CSC under
certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to 20 business days.
Schwab and M&S have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 of the Securities Exchange
Act of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Under the alternative
method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the
payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends
or permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than 15 consecutive
business days; NYSE Rule 326 also prohibits the expansion of business if net
capital is less than 5% of aggregate debit items for more than 15 consecutive
business days. The provisions of NYSE Rule 326 also become operative if capital
withdrawals (including scheduled maturities of subordinated borrowings during
the following six months) would result in a reduction of a firm's net capital to
the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
M&S' operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Company's 1996 Annual
Report to Stockholders, which is incorporated herein by reference to Exhibit No.
13.1 of this report.
At December 31, 1996, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $105 million and had total regulatory net capital
of $541 million. At December 31, 1996, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $436 million, $332 million and $279 million,
respectively.
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<PAGE> 11
THE CHARLES SCHWAB CORPORATION
At December 31, 1996, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total regulatory net capital of
$6 million. At December 31, 1996, the amount in excess of 2% of aggregate debit
items was $5 million.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at the
then market rental value. Schwab also leases space in other buildings for its
San Francisco operations aggregating 536,000 additional square feet at year-end
1996. M&S' headquarters are located in leased office space in Jersey City, New
Jersey.
All of the Company's branch offices are located in leased premises,
generally with lease expiration dates five to ten years from inception.
The Company has four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
330,000 and 164,000 square feet, respectively. The Company leases the service
centers located in Orlando and Denver, with 216,000 and 150,000 square feet,
respectively.
The Company owns its primary data center facility located in Phoenix with
105,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The information required to be furnished pursuant to this item is set forth
under the caption "Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1996.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 in Part III of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange and the
Pacific Exchange under the ticker symbol SCH. The number of common stockholders
of record as of February 7, 1997 was 2,705.
The other information required to be furnished pursuant to this item is set
forth under the caption "Quarterly Financial Information (Unaudited)" in the
Company's 1996 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
ITEM 6. SELECTED FINANCIAL DATA
The information required to be furnished pursuant to this item is set forth
under the captions "Operating Results (for the year)," "Other (for the year)"
and "Other (at year end)" in the Company's 1996 Annual Report to Stockholders,
which are incorporated herein by reference to Exhibit No. 13.1 of this report.
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<PAGE> 12
THE CHARLES SCHWAB CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition" in the Company's 1996 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1996 and
1995 are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Three Months Ended
December 31,
1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $6,544 $5,144
Average interest rate 5.33% 5.68%
Margin loans to customers:
Average balance outstanding $4,812 $3,759
Average interest rate 7.55% 8.08%
Average yield on earning assets 6.27% 6.69%
FUNDING SOURCES (CUSTOMER-RELATED
AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $9,137 $7,257
Average interest rate 4.42% 4.72%
Other interest-bearing sources:
Average balance outstanding $ 926 $ 491
Average interest rate 4.24% 4.68%
Average noninterest-bearing portion $1,293 $1,155
Average interest rate on funding sources 3.90% 4.11%
SUMMARY:
Average yield on earning assets 6.27% 6.69%
Average interest rate on funding sources 3.90% 4.11%
- ---------------------------------------------------------------------
Average net interest margin 2.37% 2.58%
=====================================================================
</TABLE>
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1995 to the fourth quarter of 1996 was primarily due to higher levels
of average earning assets, partially offset by higher levels of funding sources
and a decrease in average net interest margin.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item is set forth
in the Consolidated Financial Statements and under the caption "Quarterly
Financial Information (Unaudited)" in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after December 31, 1996 (the Proxy Statement) under the
captions "Election of Directors" (excluding all information under the caption
"Information about the Board of Directors and Committees of the Board") and
"Principal Stockholders."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2001, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
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<PAGE> 13
THE CHARLES SCHWAB CORPORATION
================================================================================
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <S>
Charles R. Schwab 59 Chairman and Chief Executive Officer, and
Director
Lawrence J. Stupski 51 Vice Chairman, and Director
David S. Pottruck 48 President and Chief Operating Officer, and
Director
John Philip Coghlan 45 Executive Vice President - Schwab
Institutional (trademark)
Daniel O. Leemon 43 Executive Vice President - Business
Strategy
Dawn Gould Lepore 42 Executive Vice President and Chief
Information Officer
Timothy F. McCarthy 45 Executive Vice President - Financial
Products and International Group
Elizabeth Gibson Sawi 44 Executive Vice President - Electronic
Brokerage
Steven L. Scheid 43 Executive Vice President and Chief
Financial Officer
Tom Decker Seip 47 Executive Vice President - Retail
Brokerage
Luis E. Valencia 52 Executive Vice President and Chief
Administrative Officer
================================================================================
</TABLE>
MR. SCHWAB has been Chairman and Chief Executive Officer and a director of
the Company since its incorporation in 1986. Mr. Schwab was a founder of Schwab
in 1971 and has been its Chairman since 1978. Mr. Schwab is currently a director
of The Gap, Inc., Transamerica Corporation, Siebel Systems, Inc., AirTouch
Communications and a trustee of The Charles Schwab Family of Funds, Schwab
Investments, Schwab Capital Trust and Schwab Annuity Portfolios, all registered
investment companies.
MR. STUPSKI has been Vice Chairman of the Company since 1992 and a director
of the Company since its incorporation in 1986. Mr. Stupski was Chief Operating
Officer of the Company from 1986 to 1994 and the Company's President from 1986
to 1992. Mr. Stupski also served as Chief Executive Officer from 1988 to 1992
and Chief Operating Officer of Schwab from 1981 to 1992. Mr. Stupski served as
Vice Chairman of Schwab from 1992 to 1994.
MR. POTTRUCK has been Chief Operating Officer and a director of the Company
since 1994 and President of the Company since 1992. Mr. Pottruck was Executive
Vice President of the Company from 1987 to 1992. Mr. Pottruck has been Chief
Executive Officer of Schwab since 1992 and President of Schwab since 1988. Mr.
Pottruck was Executive Vice President of Schwab from 1987 to 1992. Mr. Pottruck
joined Schwab in 1984.
MR. COGHLAN has been Executive Vice President of the Company and Schwab and
General Manager of Schwab Institutional since 1992. Mr. Coghlan
joined Schwab in 1986, became Vice President in 1988 and became Senior Vice
President in 1990.
MR. LEEMON has been Executive Vice President - Business Strategy of the
Company and Schwab since 1995. Before joining Schwab in 1995, Mr. Leemon held
various positions with The Boston Consulting Group, Inc., a management
consulting firm, from 1989 to 1995, including Vice President from 1990.
MS. LEPORE has been Executive Vice President and Chief Information Officer
of the Company and Schwab since 1993. Ms. Lepore joined Schwab in 1983 and
became Senior Vice President in 1989.
MR. MCCARTHY has been Executive Vice President - Financial Products and
International Group of the Company and Schwab since September 1996 and was
Executive Vice President - Mutual Funds of the Company and Schwab and Chief
Executive Officer of CSIM from 1995 to 1996. Before joining Schwab in 1995,
Mr. McCarthy was Chief Executive Officer of Jardine Fleming Unit Trusts Ltd.,
a mutual fund company, from 1994 to 1995. From 1987 to 1994, Mr. McCarthy held
various executive positions with Fidelity Investments, including President of
Fidelity Investments
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<PAGE> 14
THE CHARLES SCHWAB CORPORATION
Advisor Group, President of National Financial Institutional Services and
Executive Director of Fidelity Brokerage Group.
MS. SAWI has been Executive Vice President - Electronic Brokerage of the
Company and Schwab since 1995. Ms. Sawi was President of CSIM from 1994 to
1995. From 1994 to 1995, Ms. Sawi was Executive Vice President - Mutual Funds
of the Company and Schwab. Prior to that, Ms. Sawi was Executive Vice President
- - Marketing and Advertising of the Company and Schwab from 1992 to 1994. Ms.
Sawi joined Schwab in 1982.
MR. SCHEID has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since June 1996. Before joining Schwab in 1996, Mr.
Scheid was Executive Vice President of Finance for First Interstate Bancorp
from 1994 to 1996 and was Principal Financial Officer from 1995 to 1996. From
1990 to 1994, Mr. Scheid was Chief Financial Officer of First Interstate Bank
of Texas.
MR. SEIP has been Executive Vice President - Retail Brokerage of the
Company and Schwab since 1994. Mr. Seip was President of CSIM from 1992 to 1994
and Chief Operating Officer of CSIM from 1991 to 1994. From 1992 to 1994, Mr.
Seip was Executive Vice President - Mutual Funds and Fixed Income Products of
the Company and Schwab. Mr. Seip joined Schwab in 1983.
MR. VALENCIA has been Executive Vice President and Chief Administrative
Officer of the Company and Schwab since February 1996. From 1994 to 1996, Mr.
Valencia was Executive Vice President - Human Resources of the Company and
Schwab. Before joining Schwab in 1994, Mr. Valencia served as a Managing
Director of Commercial Credit Corp., a subsidiary of the Travelers engaged in
consumer finance for the Travelers, from 1993 to 1994. From 1975 to 1993, Mr.
Valencia held various positions with Citicorp, including President and Chief
Executive Officer of Transaction Technology, a subsidiary of Citicorp, from 1990
to 1993.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the
captions "Election of Directors - Director Compensation", "Executive
Compensation" (excluding all information under the caption "Board
Compensation Committee Report on Executive Compensation" and "Performance
Graph") and "Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the caption
"Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under the
caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are set forth in
the Company's 1996 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
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<PAGE> 15
(b) Reports on Form 8-K
On November 8, 1996, the Registrant filed a Current Report on Form 8-K
relating to up to $196 million aggregate principal amount of debt securities
issuable by the Registrant pursuant to Registration Statement Numbers 333-12727
and 33-61943 declared effective by the SEC on November 1, 1996 and August 18,
1995, respectively. Certain exhibits relating to Medium-Term Notes, Series A,
issuable pursuant to the Registration Statements are contained in the Current
Report.
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<PAGE> 16
THE CHARLES SCHWAB CORPORATION
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
Exhibit
Number Exhibit
3.7 Third Restated Certificate of Incorporation, as amended on May 6,
1996, of the Registrant, filed as Exhibit 3.7 to the Registrant's
Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference.
3.8 Second Restated Bylaws, as amended on July 17, 1996, of the
Registrant, filed as Exhibit 3.8 to the Registrant's Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. Copies of
instruments with respect to long-term debt of lesser amounts will be
provided to the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and
former shareholders of Schwab Holdings, Inc. *
10.9 Executive Officer Stock Option Plan (1987) dated as of March 24,
1987, with form of Non-Qualified Stock Option Agreement (Executive
Officer Stock Option Plan (1987)) attached. * +
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between
International Business Machines Corporation and Charles Schwab &
Co., Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data
Research, Inc. and Beta Systems, Inc. and Assignment, dated February
21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta
Systems, Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush
Street Associates and Charles Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between Registrant
and certain members of the Board of Directors of Registrant, filed
as Exhibit 10.34 to the Registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
10.55 Cash Subordination Agreements between Schwab Holdings, Inc. and
Charles Schwab & Co., Inc. with Assignments dated March 31, 1987 by
Schwab Holdings, Inc., of all right, title, and interest in Cash
Subordination Agreements to Registrant, filed as Exhibit 4.20 to
Registrant's Registration Statement No. 33-16192 on Form S-1 and
incorporated herein by reference.
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<PAGE> 17
THE CHARLES SCHWAB CORPORATION
Exhibit
Number Exhibit
10.57 Registration Rights and Stock Restriction Agreement, dated as of
March 31, 1987, between the Registrant and the holders of the Common
Stock, filed as Exhibit 4.23 to Registrant's Registration Statement
No. 33-16192 on Form S-1 and incorporated herein by reference.
10.63 Revolving Subordinated Loan Agreement as of September 29, 1988,
between the Registrant and Charles Schwab & Co., Inc., filed as
Exhibit 10.63 to the Registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the
Registrant, filed as Exhibit 10.72 to the Registrant's Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
10.73 1987 Stock Option Plan, as Amended and Restated, as of April 17,
1989, with form of Non-Qualified Stock Option Agreement (General
Management Plan) attached, filed as Exhibit 4.1 to Registrant's
Registration Statement No. 33-21582 on Form S-8 and incorporated
herein by reference. +
10.83 First Amendment to Revolving Subordinated Loan Agreement, as of
April 18, 1990, between the Registrant and Charles Schwab & Co.,
Inc., filed as Exhibit 10.83 to the Registrant's Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25,
1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by
reference.
10.99 Second Amendment to Revolving Subordinated Loan Agreement, as of
November 1, 1991, between the Registrant and Charles Schwab & Co.,
Inc.
10.101 First Amendment to the Trust Agreement under the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan, effective January
1, 1992, dated December 20, 1991.
10.113 Schwab One Services Agreement dated April 17, 1992 between Charles
Schwab & Co., Inc. and Provident National Bank, filed as Exhibit
10.113 to the Registrant's Form 10-Q for the quarter ended March 31,
1992 and incorporated herein by reference.
10.116 Second Amendment to the Trust Agreement for the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan effective July 1,
1992, dated June 30, 1992, filed as Exhibit 10.116 to the
Registrant's Form 10-Q for the quarter ended June 30, 1992 and
incorporated herein by reference.
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.120 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference. +
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<PAGE> 18
THE CHARLES SCHWAB CORPORATION
Exhibit
Number Exhibit
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended,
effective January 1, 1994, filed as Exhibit 10.132 to Registrant's
Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.141 The Charles Schwab Corporation 1992 Stock Incentive Plan, as
amended October 18, 1994, filed as Exhibit 10.141 to the
Registrant's Form 10-Q for the quarter ended September 30, 1994
and incorporated herein by reference. +
10.143 Form of Nonstatutory Stock Option Agreement, filed as Exhibit 10.143
to the Registrant's Form 10-Q for the quarter ended September 30,
1994 and incorporated herein by reference. +
10.144 Form of Incentive Stock Option Agreement, filed as Exhibit 10.144 to
the Registrant's Form 10-Q for the quarter ended September 30, 1994
and incorporated herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995, filed as Exhibit 10.146 to the Registrant's Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference. +
10.147 Corporate Executive Bonus Plan dated as of January 1, 1995 (formerly
the Annual Executive Bonus Plan), filed as Exhibit 10.147 to the
Registrant's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference. +
10.149 Employment Agreement dated as of March 31, 1995 between the
Registrant and Charles R. Schwab, filed as Exhibit 10.149 to the
Registrant's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference. +
10.152 The Charles Schwab Profit Sharing and Employee Stock Ownership Plan,
amended July 6, 1995, effective January 1, 1995 and April 1, 1995,
filed as Exhibit 10.152 in the Registrant's Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by reference. +
10.155 Forms of Restricted Share Award Agreements, incorporating
performance vesting provisions and/or supplemental cash payment
provisions, filed as Exhibit 10.155 in the Registrant's Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference. +
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by
letter agreement dated September 21, 1995 and by Second Amendment to
Agreement of Sale dated September 22, 1995, between American Express
Company and Charles Schwab & Co., Inc., regarding American Express
Western Regional Operations Center located at 2423 Lincoln Drive,
Phoenix, Arizona, filed as Exhibit 10.156 in the Registrant's Form
10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference.
-16-
<PAGE> 19
THE CHARLES SCHWAB CORPORATION
Exhibit
Number Exhibit
10.157 The Charles Schwab Corporation Directors' Deferred Compensation
Plan, effective January 1, 1996, filed as Exhibit 10.157 to the
Registrant's Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference. +
10.158 Credit Agreement dated June 28, 1996 between the Registrant and the
banks listed therein, filed as Exhibit 10.158 to the Registrant's
Form 10-Q for the quarter ended June 30, 1996 and incorporated
herein by reference.
10.159 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended September 17, 1996, with form of Non-Qualified
Stock Option Agreement (Executive Officer Stock Option Plan (1987))
attached (supersedes Exhibit 10.9), filed as Exhibit 10.159 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference. +
10.160 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
September 17, 1996, with form of Non-Qualified Stock Option
Agreement (General Management Plan) attached (supersedes Exhibit
10.73), filed as Exhibit 10.160 to the Registrant's Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference. +
10.161 The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended
September 17, 1996 (supersedes Exhibit 10.141), filed as Exhibit
10.161 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference. +
10.162 The Charles Schwab Corporation Deferred Compensation Plan, as
amended September 17, 1996, filed as Exhibit 10.162 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co.
and Charles Schwab & Co., Inc. dated October 8, 1996.
10.164 Office Lease of Pacific Telesis Center Telesis Tower between
Post-Montgomery Associates and Charles Schwab & Co., Inc. dated
October 4, 1996.
10.165 Third Amendment to Revolving Subordinated Loan Agreement, as of
December 12, 1995, between the Registrant and Charles Schwab &
Co., Inc.
11.1 Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1996 Annual Report to
Stockholders, which have been incorporated herein by reference.
Except for such portions, such annual report is not deemed to be
"filed" herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
-17-
<PAGE> 20
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as amended
and declared effective on September 22, 1987.
+ Management contract or compensatory plan.
-18-
<PAGE> 21
THE CHARLES SCHWAB CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 1997.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ CHARLES R. SCHWAB
---------------------------------
Charles R. Schwab
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 28, 1997.
SIGNATURE TITLE
/s/ CHARLES R. SCHWAB Chairman, Chief Executive Officer and Director
- ------------------------- (principal executive officer)
Charles R. Schwab
/s/ LAWRENCE J. STUPSKI Vice Chairman and Director
- -------------------------
Lawrence J. Stupski
/s/ DAVID S. POTTRUCK President, Chief Operating Officer and Director
- -------------------------
David S. Pottruck
/s/ STEVEN L. SCHEID Executive Vice President and Chief Financial
- ------------------------- Officer
Steven L. Scheid (principal financial and accounting officer)
/s/ NANCY H. BECHTLE Director
- -------------------------
Nancy H. Bechtle
/s/ C. PRESTON BUTCHER Director
- -------------------------
C. Preston Butcher
/s/ DONALD G. FISHER Director
- -------------------------
Donald G. Fisher
/s/ ANTHONY M. FRANK Director
- -------------------------
Anthony M. Frank
/s/ FRANK C. HERRINGER Director
- -------------------------
Frank C. Herringer
/s/ STEPHEN T. McLIN Director
- -------------------------
Stephen T. McLin
/s/ ROGER O. WALTHER Director
- -------------------------
Roger O. Walther
-19-
<PAGE> 22
THE CHARLES SCHWAB CORPORATION
================================================================================
THE CHARLES SCHWAB CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
Independent Auditors' Report F-2
SCHEDULE I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income and Retained Earnings F-4
Condensed Statement of Cash Flows F-5
SCHEDULE II - Valuation and Qualifying Accounts F-6
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1996 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
================================================================================
F-1
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, and have
issued our report thereon dated February 21, 1997; such consolidated financial
statements and report are included in your 1996 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the financial
statement schedules of the Company and subsidiaries appearing on pages F-3
through F-6. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 1997
F-2
<PAGE> 24
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 74,785 $ 41,198
Receivable from subsidiaries 15,276 7,229
Subordinated receivable from subsidiaries 235,000 203,000
Investment in subsidiaries, at equity 820,289 640,368
Other assets 5,004 4,762
- -----------------------------------------------------------------------------------------------------------------
TOTAL $1,150,354 $896,557
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other $ 17,799 $ 23,663
Borrowings 278,000 240,000
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 295,799 263,663
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares authorized; $.01 par value per share;
none issued
Common stock - 500,000 shares authorized in 1996 and 200,000 shares authorized
in 1995; $.01 par value per share; 178,459 shares issued in 1996 and 1995 1,785 1,785
Additional paid-in capital 200,857 180,302
Retained earnings 723,085 520,532
Treasury stock - 3,391 shares in 1996 and 4,427 shares in 1995, at cost (60,277) (50,968)
Unearned ESOP shares (5,517) (9,397)
Unamortized restricted stock compensation (8,658) (7,074)
Foreign currency translation adjustment 3,280 (2,286)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 854,555 632,894
- -----------------------------------------------------------------------------------------------------------------
TOTAL $1,150,354 $896,557
=================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements in the Company's 1996 Annual
Report to Stockholders, which are incorporated herein by reference to Exhibit
No. 13.1 of this report, for a discussion of borrowings and contingent
liabilities.
================================================================================
F-3
<PAGE> 25
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest revenue $ 26,287 $ 18,879 $ 14,379
Interest expense (19,091) (13,886) (12,079)
- -----------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE 7,196 4,993 2,300
Other revenues 268 1,032 18
Other expenses (3,400) (2,984) (8,467)
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY
IN EARNINGS OF SUBSIDIARIES 4,064 3,041 (6,149)
Income tax expense (benefit) 1,568 1,235 (2,490)
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES 2,496 1,806 (3,659)
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 154,922 134,418 30,632
Dividends paid by subsidiaries 76,385 36,380 108,370
- -----------------------------------------------------------------------------------------------------------
Total 231,307 170,798 139,002
NET INCOME 233,803 172,604 135,343
Dividends on common stock (31,495) (24,249) (16,038)
Other 245 (984) 164
RETAINED EARNINGS:
At beginning of year 520,532 373,161 253,692
- -----------------------------------------------------------------------------------------------------------
AT END OF YEAR $723,085 $520,532 $373,161
===========================================================================================================
</TABLE>
================================================================================
F-4
<PAGE> 26
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 233,803 $172,604 $135,343
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (154,922) (134,418) (30,632)
Change in other assets (157) (50) (2,144)
Change in accrued expenses and other (7,805) 4,455 7,011
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 70,919 42,591 109,578
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in receivable from subsidiaries 23,446 53,958 17,475
Collection on subordinated loans to subsidiary 4,000 8,728
Issuance of subordinated loans to subsidiaries (36,000) (79,000)
Increase in net investment in subsidiaries (10,132) (16,206) (3,468)
Cash payments for businesses acquired (4,709) (63,696)
Other (1,720) (801)
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (23,395) (106,664) 21,934
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 64,000 70,000 20,000
Repayment of borrowings (26,000) (35,000)
Dividends paid (31,495) (24,249) (16,038)
Purchase of treasury stock (28,171) (17,345) (46,781)
Other 7,729 12,972 10,200
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (13,937) 41,378 (67,619)
- ------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,587 (22,695) 63,893
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 41,198 63,893 --
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 74,785 $ 41,198 $ 63,893
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements in the Company's 1996 Annual
Report to Stockholders, which are incorporated herein by reference to Exhibit
No. 13.1 of this report, for a discussion of additional cash flow information.
================================================================================
F-5
<PAGE> 27
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------- BALANCE AT
BEGINNING CHARGED END
DESCRIPTION OF YEAR TO EXPENSE OTHER WRITTEN OFF OF YEAR
------- ---------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1996:
Allowance for doubtful accounts $3,700 $2,651 $ 99 $ (932) $5,518
===============================================================
FOR THE YEAR ENDED
DECEMBER 31, 1995:
Allowance for doubtful accounts $3,204 $1,349 $272 $(1,125) $3,700
===============================================================
FOR THE YEAR ENDED
DECEMBER 31, 1994:
Allowance for doubtful accounts $2,229 $1,193 $150 $ (368) $3,204
===============================================================
</TABLE>
================================================================================
F-6
<PAGE> 1
EXHIBIT 10.99
SECOND AMENDMENT TO
REVOLVING SUBORDINATION AGREEMENT
This Second Amendment to Revolving Subordinated Loan Agreement ("this Second
Amendment") is made and entered into by and between The Charles Schwab
Corporation (the "Lender") and Charles Schwab & Co., Inc. (the "Organization")
as of this 1st day of November, 1991. Unless otherwise specified herein, all
capitalized terms used herein shall have the meanings ascribed to them in
Revolving Subordinated Loan Agreement dated as of September 29, 1988, as amended
by a First Amendment thereto dated as of April 18, 1990, both between the Lender
and the Organization (collectively, the "Agreement").
WHEREAS, the Organization and the Lender desire to amend the Agreement to
decrease the permissible aggregate principle amount of loans outstanding at any
one time from $205,000,000 to $180,000,000.
NOW, THEREFORE, the Organization and the Lender hereby amend the Agreement as
follows:
1. The figure "$180 million" shall be and hereby is substituted
in place of the figure "$205 million" in the second paragraph
of paragraph "1." of the Agreement.
2. Contemporaneously with the execution hereof, the Organization
shall execute and deliver to the Lender a new promissory note
in the form attached hereto as Exhibit A (the "new Revolving
Note"), which new Revolving Note shall replace and supersede
the Revolving Note dated April 18, 1990 made and delivered by
the Organization to the Lender.
3. Contemporaneously with the execution hereof, the Lender and
the Organization shall execute a Roll-Over Attachment in the
form attached hereto as Exhibit B (the "Roll-Over
Attachment"), pursuant to which the Lender and the
Organization agree the Commitment Termination Date and the
Scheduled Maturity Date shall in each year, without further
action by either the Lender or the Organization, be extended
to September 29 of the following year, unless on or before
the day twelve month preceding the Scheduled Maturity Date
then in effect, the Lender shall notify the Organization in
writing, with a written copy to the New York Stock Exchange,
Inc., that the Commitment Termination Date and the Scheduled
Maturity Date then in effect shall not be extended. The
Roll-Over Attachment shall become part of the Agreement as
amended by this Second Amendment.
1
<PAGE> 2
4. Except for the amendment, expressly specified above, all other
provisions of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the Second Amendment is executed as of November 1, 1991 at
San Francisco, California.
THE ORGANIZATION:
CHARLES SCHWAB & CO., INC.
By: /s/ A. John Gambs
--------------------------
A. John Gambs
Its: Executive Vice President - Finance and
Chief Financial Officer
THE LENDER:
THE CHARLES SCHWAB CORPORATION
By: /s/ Lawrence J. Stupski
-------------------------------------
Lawrence J. Stupski
Its: President and Chief Operating Officer
2
<PAGE> 3
Exhibit A
REVOLVING NOTE
$180,000,000 Date: November 1, 1991
For value received, the undersigned Charles Schwab & Co., Inc.
("Organization") hereby promises to pay to the order of The Charles Schwab
Corporation ("Lender") the principle amount of each advance made by the Lender
to the Organization under the terms of a Revolving Subordinated Loan Agreement
between the Organization and the Lender dated as of September 29, 1988, as
amended by a First Amendment thereto between the Organization and the Lender
dated as of April 18, 1990, and further amended by a Second Amendment thereto
between the Organization and the Lender dated as of November 1, 1991,
(collectively, the "Agreement"), as shown in the schedule attached hereto and
any continuation thereof, payable at such times as are specified in the
Agreement. The undersigned also promises to pay interest on the unpaid principle
amount of such advance from the date of such advance until such principle is
paid, and the rates per annum, and payable at such times, as are specified in
the Agreement. The Note shall be subject to the Agreement, and all principle and
interest payable hereunder shall be due and payable in accordance with the terms
of the Agreement. Terms defined in the Agreement are used herein with the same
meanings.
The maturity date of this Revolving Note shall be September 29, 1993.
The maturity date shall in each year, without further action by either the
Lender or the Organization, be extended to September 29 of the following year,
unless on or before the day twelve months preceding the maturity date then in
effect, the Lender shall notify the Organization in writing, with a written copy
to the New York Stock Exchange, Inc., that such maturity date shall not be
extended.
This Revolving Note replaces and supersedes the Revolving Note dated
April 18, 1990 in the maximum principle amount of $205,000,000 delivered by the
Organization to the Lender.
IN WITNESS WHEREOF, the undersigned has caused this Revolving Note to
be executed by its officer thereunto duly authorized and directed by appropriate
corporate authority.
CHARLES SCHWAB & CO., INC.
By: /s/ A. John Gambs
---------------------------
A. John Gambs
Its: Executive Vice President - Finance and
Chief Financial Officer
3
<PAGE> 4
ROLL-OVER ATTACHMENT
Additional provision for Revolving Subordinated Loan Agreement, as amended,
between The Charles Schwab Corporation ("Lender") and Charles Schwab & Co.,
Inc.("Organization").
PRINCIPLE AMOUNT: $180,000,000
DATE OF AGREEMENT: September 29, 1988
DATE OF FIRST AMENDMENT TO AGREEMENT: April 18, 1990
DATE OF SECOND AMENDMENT TO AGREEMENT: November 1, 1991
Pursuant to the roll-over provisions of the Agreement as amended, the Commitment
Termination Date in Paragraph 1 of the Agreement is September 29, 1992, and the
Scheduled Maturity Date in Paragraph 1 of the Agreement is September 29, 1993.
The Commitment Termination Date and the Scheduled Maturity Date shall in each
year, without further action by either the Lender or the Organization, be
extended to September 29 of the following year, unless on or before the day
twelve months preceding the Scheduled Maturity Date then in effect, the Lender
shall notify the Organization, in writing, with a written copy to the New York
Stock Exchange, Inc., that the commitment Termination Date and the Scheduled
Maturity Date then in effect shall not be extended.
THE ORGANIZATION:
CHARLES SCHWAB & CO., INC.
By: /s/ A. John Gambs
-----------------------------
A. John Gambs
Its: Executive Vice President - Finance and
Chief Financial Officer
THE LENDER:
THE CHARLES SCHWAB CORPORATION
By: /s/ Lawrence J. Stupski
------------------------------
Lawrence J. Stupski
Its: President and Chief Operating Officer
<PAGE> 1
EXHIBIT 10.101
FIRST AMENDMENT TO THE
SECURITY PACIFIC NATIONAL BANK TRUST AGREEMENT
FOR THE CHARLES SCHWAB PROFIT SHARING
AND EMPLOYEE STOCK OWNERSHIP PLAN
The "Security Pacific National Bank Trust Agreement for the Charles
Schwab Profit Sharing and Employee Stock Ownership Plan," which was amended and
restated in its entirety effective November 1, 1990, is hereby further amended,
effective January 1, 1992, as follows:
By DELETING Section 5.05(c) and SUBSTITUTING therefor the following:
(c) Cash dividends received on any Employer Securities held as
part of the Plan shall be invested as soon as possible in
additional shares of Employer Securities which shall be
purchased at such prices, in such amounts, in such manner, at
such times and through such broker-dealer as the Trustee may
determine in its absolute and uncontrolled discretion.
Executed by the Employer and Trustee on December 20, 1991.
CHARLES SCHWAB & CO., INC.
By: /s/ Charles R. Schwab
---------------------
Its: Chairman and CEO
SECURITY PACIFIC NATIONAL BANK
By: /s/ Mary Lau
------------------------
Its: Assistant Vice President
<PAGE> 1
EXHIBIT 10.163
LEASE OF 101 MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA
between
101 MONTGOMERY STREET CO. ("Landlord")
and
CHARLES SCHWAB & CO., INC. ("Tenant")
OCTOBER 8, 1996
<PAGE> 2
TABLE OF CONTENTS
RECITALS .............................................................. 1
1. Lease Covenant: Premises Defined.............................. 2
2. Term.......................................................... 3
(a) Term................................................. 3
(b) Option To Terminate As To Portion Of The Premises.... 3
(c) Options To Extend Term............................... 6
3. Rent.......................................................... 9
(a) Monthly Base Rent.................................... 9
(b) Payment Of Base Rent................................. 9
(c) Initial Base Rent Abatement.......................... 9
(d) Refurbishment Abatement.............................. 10
(e) Treatment Of Initial Abatement And Refurbishment
Abatement Upon Termination Of This Lease..... 10
(f) Proration............................................ 12
(g) "Additional Rent" And "Rent" Defined................. 12
(h) Interest On Late Payments: Time Is Of The Essence.... 12
4. Permitted Uses, Occupancy And Restrictions Concerning Use..... 13
(a) Basic Use Restriction................................ 13
(b) No Uses Other Than Those Expressly Allowed........... 14
(c) Specific Covenants With Respect To Parking........... 15
(d) Alterations and Improvements......................... 18
5. Assignment, Subletting And/Or Mortgaging Of Premises.......... 20
(a) General Covenant..................................... 20
(b) No Waiver............................................ 22
(c) Conditions Of Approval............................... 22
6. Alterations................................................... 25
(a) General Restriction.................................. 25
(b) Procedure............................................ 25
(c) Conditions That Apply To Improvement Work............ 26
(d) Protection Against Lien Claims....................... 27
(e) Ownership And Removal................................ 28
(f) Tax Aspects Of Alterations And Improvements.......... 30
(g) Tenant's Right to Increase Floor Load................ 30
i
<PAGE> 3
TABLE OF CONTENTS
(h) Certain Alterations Not Requiring Landlord's Consent... 30
ii
<PAGE> 4
TABLE OF CONTENTS
(continued)
7. Repairs....................................................... 31
(a) Tenant's Obligation.................................. 31
(b) Landlord's Obligation................................ 32
(c) Landlord to Minimize Interference.................... 33
(d) Current ADA And Related Requirements................. 33
8. Compliance With Laws, Insurance Standards And Security........ 34
(a) Compliance With Laws................................. 34
(b) Compliance With Laws by Landlord..................... 35
(c) Insurance Standards And Requirements................. 36
9. Subordination, Attornment And Non-Disturbance................. 37
(a) Subordination........................................ 37
(b) Foreclosure.......................................... 39
10. Building Security............................................. 39
11. Rules And Regulations......................................... 40
12. Insurance; Subrogation Waivers; Non-Liability For Certain
Events....................................................... 40
(a) Non-Liability........................................ 40
(b) Indemnity............................................ 41
(c) Tenant's Liability Insurance......................... 42
(d) Tenant's Property Insurance.......................... 43
(e) Tenant's Self-Insurance: Deductibles................. 43
(f) Landlord's Building And Property Insurance........... 43
(h) Subrogation Waiver................................... 45
(i) Termination Of Subrogation Waiver.................... 46
13. Damage And Destruction........................................ 47
(a) Minor Casualty....................................... 47
(b) Extended Restoration Period: Minor Casualty.......... 47
(c) Major Casualty: Termination of Lease................. 48
(d) Effect Of Termination................................ 49
(e) Contractor Selected For Damage Analysis And Reports.. 50
(f) Failure To Complete Work Within Estimated
Restoration Period................................... 50
(g) Use Of Expedited Construction Practices.............. 51
(h) Rent Abatement During Repair Period.................. 51
(i) Disruption of Tenant................................. 52
iii
<PAGE> 5
TABLE OF CONTENTS
(continued)
(j) Substantially Completed; Substantial Completion...... 52
14. Eminent Domain................................................ 52
(a) Definitions.......................................... 52
(b) Condemnation Of Total Premises....................... 53
(c) Condemnation Of Portion Of Premises.................. 53
(d) Allocation Of Award.................................. 53
(e) Condemnation Of Temporary Interests.................. 54
(f) Disruption of Tenant................................. 54
15. Basic Services................................................ 55
(a) Defined Terms........................................ 55
(b) Passenger Elevator Service........................... 55
(c) Freight Elevator Service; Loading Facilities......... 56
(d) Heating, Ventilation And Air Conditioning............ 56
(e) Electricity.......................................... 57
(f) Water................................................ 58
(g) Tenant's Supplemental Air Conditioning System........ 58
(h) Janitorial Service................................... 58
(i) Tenant's Emergency Generator......................... 61
(j) Service To Tenant's Equipment........................ 61
(k) Lighting And Building Systems Maintenance............ 61
(l) Service Interruption................................. 62
(m) Rent Abatement for Failure of Services............... 63
16. Access To Premises............................................ 64
(a) Tenant's Access...................................... 64
(b) Landlord's Access.................................... 65
17. Vaults And Vault Space........................................ 66
18. Sprinkler System.............................................. 66
(a) Condition: Notice: Duty To Repair.................... 66
(b) Alterations.......................................... 66
19. Bankruptcy Or Insolvency...................................... 67
(a) Right Of Termination................................. 67
(b) Rights On Termination................................ 68
20. Default....................................................... 68
(a) Events Of Default.................................... 68
(b) Remedies............................................. 69
iv
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TABLE OF CONTENTS
(continued)
(c) Late Charge.......................................... 70
(d) Remedies Allowed By Law.............................. 70
(e) Tenant's Remedies: Payment Under Protest............. 71
21. Self Help And Enforcement Costs............................... 71
(a) Landlord's Rights.................................... 71
(b) Tenant's Rights...................................... 72
22. Surrender; End Of Term........................................ 72
23. Quiet Enjoyment; Limitation Of Liability...................... 73
(a) Quiet Enjoyment...................................... 73
(b) Landlord's Obligations Run With Land................. 73
(c) Estoppel Certificates................................ 74
24. Amendments And Waivers........................................ 76
(a) No Amendment Except In Writing....................... 76
(b) No Waiver By Inaction................................ 76
25. Force Majeure................................................. 77
26. Notices....................................................... 77
27. Occupancy Costs: Tenant's Obligation To
Pay Increases After The Year 2000............................. 79
(a) Occupancy Cost Excess. .............................. 79
(b) Occupancy Costs Defined.............................. 79
(c) Occupancy Cost Exclusions............................ 82
(d) Building Occupancy Adjustment........................ 85
(e) Payment Of Estimated Occupancy Cost Excess........... 86
(f) Computation Of Actual Operating Cost Excess:
Adjustment For Variation Between Estimated And
Actual Occupancy Costs............................... 86
(g) Capital Improvements................................. 87
(h) Tenant's Audit Rights................................ 88
(i) Failure to Deliver Statements........................ 90
(j) Single Recovery...................................... 90
28. Tenant's Payment Of Increases In "Tax Costs."................. 90
(a) Payment Obligation................................... 90
(b) "Tax Costs" Defined.................................. 91
(c) Payment.............................................. 92
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<PAGE> 7
TABLE OF CONTENTS
(continued)
(d) Tax Reduction Proceedings............................ 93
(e) Proposition 13....................................... 96
(f) Failure to Deliver Statements........................ 97
29. Nuisance: Odor And Noise...................................... 97
30. Definition And Determination Of "Fair Market Rent."........... 97
(a) Definition........................................... 98
(b) Matters to be Arbitrated............................. 98
31. Captions...................................................... 101
32. Brokerage..................................................... 101
33. Successors And Assigns........................................ 102
34. Miscellaneous................................................. 102
(a) Competing Uses....................................... 102
(b) Building Name........................................ 103
(c) Litigation Indemnity................................. 103
(d) Construction......................................... 103
(e) Severability......................................... 103
(f) Name Change.......................................... 104
(g) Time Of Essence...................................... 104
(h) No Partnership....................................... 104
(i) Governing Law........................................ 104
(j) Calculation Of Abatement............................. 104
(k) Certificate Of Occupancy............................. 105
35. Exclusion Of Public Space From Premises....................... 105
36. Interpretation: Effect On Modified Initial Lease.............. 105
Exhibit A - Property Description (Page 1)*
Exhibit B - Leased Premises (Page 2)
Exhibit C - Square Footage of all Leased Space (Page 2)
Exhibit D - Termination Payment (Page 5)
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<PAGE> 8
TABLE OF CONTENTS
(continued)
Exhibit E - Original Elevator Software Identified (Page 4)
Exhibit F - Not used
Exhibit G - Planning Resolution (Page 14)
Exhibit H - Not used
Exhibit I - Floor Loadings (Page 30)
Exhibit J - National Holidays (Page 55)
Exhibit K - Janitorial Specification (Page 59)
Exhibit L - Chart of Accounts (Page 86)
Exhibit M - Certificate of Occupancy (Page 105)
*Page number where first reference to Exhibit occurs.
vii
<PAGE> 9
LEASE OF 101 MONTGOMERY STREET
THIS LEASE OF 101 MONTGOMERY STREET (this "Lease") is entered
into as of this eighth day of October, 1996, by and between 101 MONTGOMERY
STREET CO., a limited partnership ("Landlord") (in which Cahill Montgomery
Corp., a California corporation, is the general partner; and California Jones
Company, a California general partnership, is the limited partner) and CHARLES
SCHWAB & CO., INC., a California corporation ("Tenant").
RECITALS:
This Lease Of 101 Montgomery Street is entered into upon the
basis of the following facts, understandings and intentions of the parties:
A. Landlord's predecessor in interest, California Jones
Company ("Cal Jones") as Landlord, and Tenant entered into a certain AGREEMENT
OF LEASE (the "Initial Lease") dated as of the 18th day of May, 1983, providing
for the lease by Tenant of substantially all of the rentable space in a
high-rise office building located in the City and County of San Francisco, State
of California, known as 101 Montgomery Street (the "Building"), located on the
land more particularly described in Exhibit A, attached hereto and incorporated
herein by reference thereto (the "Land"). The Term of the Initial Lease expires
at 11:59 pm on April 7, 2000, subject to Tenant's right to extend such term
pursuant to certain options contained in the Initial Lease.
B. Cal Jones and Tenant amended the Initial Lease by executing
and delivering (i) an Amendment of Lease for 101 Montgomery Street, dated August
10, 1983 (the "First Amendment"), (ii) a Second Amendment of Lease for 101
Montgomery Street dated October 4, 1983 (the "Second Amendment"), and (iii) a
Letter Modification Agreement dated November 3, 1983 (the "Modification
Agreement"). Cal Jones assigned the Initial Lease, as amended by the First
Amendment, the Second Amendment and the Modification Agreement, to Landlord,
(and Landlord assumed the same), by Assignment dated as of September 1, 1989.
Landlord and Tenant then further amended the Initial Lease by executing and
delivering a Third Amendment of Lease (the "Third Amendment") dated as of
February 9, 1990, a Fourth Amendment Of Lease (the "Fourth Amendment") dated as
of October 1, 1993; and a Fifth Amendment Of Lease (the "Fifth Amendment") dated
as of November
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30, 1993. The Initial Lease as modified by the First Amendment, Second
Amendment, Third Amendment, Fourth Amendment, Fifth Amendment and the
Modification Agreement are referred to herein as the "Modified Initial Lease."
C. Landlord is now the Landlord under the Modified Initial
Lease and is also the holder of fee title to the Land and the Building
(collectively the "Property").
D. Although the Modified Initial Lease does not expire until
11:59 pm on April 7, 2000, Landlord and Tenant desire to enter into a lease for
a term commencing when the Modified Initial Lease term expires and continuing
until March 31, 2010. This Lease is intended to accomplish that purpose, to
supersede the options to extend contained in the Modified Initial Lease and to
provide all of the terms and conditions that apply to the leasing of the
Premises from and after the expiration of the term of the Modified Initial
Lease.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and
promises of the parties, the parties hereto agree as follows:
1. Lease Covenant: Premises Defined. Landlord shall lease to
Tenant and Tenant shall hire from Landlord the space in the Building more
particularly described in Exhibit B, attached hereto and incorporated herein by
reference thereto. The space so leased (as described in Exhibit B), together
with the appurtenant rights provided for in this Lease are referred to as the
"Premises." Tenant acknowledges that as of the date of this Lease, the Premises
are identical to the demised premises that are the subject of the Modified
Initial Lease; that it has accepted and is in beneficial occupancy of the entire
Premises; and Landlord has performed all of the obligations on its part to be
performed under the Modified Initial Lease with respect to completion of the
improvements to be made the Premises in order to make the same ready for initial
occupancy by Tenant. The rentable square feet contained on each floor and the
rentable square feet contained in the entire Building are stated on Exhibit C,
attached hereto and incorporated herein by reference thereto. Exhibit C
represents a final determination of the information shown thereon for all
purposes of this Lease as well as a final determination of the rentable square
feet on each floor and in the Building as a whole under the Modified Initial
Lease. Notwithstanding the foregoing, however, this Lease shall be null and void
if the Modified Initial Lease is terminated in
2
<PAGE> 11
its entirety for any reason prior to 11:59 pm on April 7, 2000.
2. Term.
(a) Term. The term of this Lease (the "Term") shall commence
(the "Commencement Date") immediately upon expiration of the term of the
Modified Initial Lease at 11:59 pm on April 7, 2000 and shall expire at 11:59 pm
on March 31, 2010, subject to earlier termination or extension by operation of
various provisions hereof.
(b) Option To Terminate As To Portion Of The Premises. Tenant
shall have a right to terminate this Lease as it applies to up to fourteen (14)
full floors of the Premises. Such right may be exercised in one or more
elections upon the following terms and conditions:
(1) Notice of each such election (the "Election Notice") must
be given by Tenant to Landlord at least eighteen (18) months prior to
the effective date of termination, which effective date shall be on the
last day of any calendar month stated in the Election Notice, but in no
event shall any such effective date occur before March 31, 2005 or
after March 31, 2007.
(2) The portion of the Premises to which each termination
shall apply shall consist only of a full floor or floors. If this Lease
is being terminated solely with respect to a single floor, that floor
shall be the 25th floor; and where this Lease is being terminated with
respect to more than one full floor, all floors as to which this Lease
shall be terminated shall be contiguous floors, commencing with the
25th floor of the Building and each contiguous floor below it. The
Election Notice (or Notices) shall specify the space to which the
termination election applies within the limits of the foregoing
requirements.
(3) Effective at 11:59 pm on the termination date specified in
the Election Notice (or Notices), (i)
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<PAGE> 12
all of Landlord's and Tenant's obligations with respect to the space as
to which this Lease has been terminated shall cease, except with respect
to obligations accruing prior to the effective date of termination and
obligations that are required to be performed under this Lease after
termination, (ii) Tenant shall have no right to extend the Term by
exercise of any of the options provided for in Paragraph 2.(c) with
respect to the portion of the Premises as to which this Lease has been
terminated, (iii) if this Lease shall have been terminated with respect
to five (5) or more floors, Landlord shall have the right to reduce
Tenant's rights to storage and parking (on the 29th floor and in the
basement) in direct proportion to the reduction of space in the Premises
upon sixty (60) days prior written notice to Tenant (but in so reducing
the 29th floor space, Landlord shall not recover the area occupied by
Tenant's UPS system and related equipment as shown on Exhibit B), (iv)
upon one hundred eighty (180) days prior written notice to Tenant,
Landlord shall have the right to require Tenant to eliminate ground floor
lobby-lanes and to remove the lobby mission statement, and Landlord may
also eliminate the cross-over elevator stops on the 9th and 15th floors,
elevator security and express features, and restore the computer software
that controls the timing of the elevators to the condition described in
Exhibit E, attached hereto and incorporated herein by reference thereto,
and Tenant shall reimburse Landlord for the reasonable and actual costs
incurred by Landlord to perform the work described in this subclause (iv)
within thirty (30) days after receipt of an invoice therefor accompanied
by supporting documentation, (v) if this Lease shall have been terminated
with respect to ten (10) or more floors, Landlord shall have the right to
change the name of the Building to any name desired by Landlord in its
sole discretion upon sixty (60) days prior written notice to Tenant, (vi)
the Base Rent for the floor or floors as to which this Lease has been
terminated (including, if applicable the 29th floor and the basement)
shall be reduced in accordance with Exhibit C, (vii) Tenant's obligations
under Paragraph 10 of this Lease with respect to Building
4
<PAGE> 13
security shall be modified as specified therein, (viii) Tenant's Proportionate
Share (as hereinafter defined) shall be reduced to reflect the reduction in the
Premises leased by Tenant, and (ix) all references to the Premises herein shall
refer to the portion of the original Premises as to which this Lease remains in
full force and effect and all provisions hereof that are based upon the
proportion that the Premises represents of the total space in the Building
shall be appropriately recalculated. Notwithstanding anything to the contrary
contained in this Paragraph 2.(b)(3), this Lease shall remain in full force and
effect with respect to the portions of the floors as to which a termination
option has been exercised that are occupied by shafts, rooms, conduits and
Tenant's equipment areas ("Shafts") required to connect Tenant's emergency and
other equipment on the 29th floor with the remaining Premises. Any rentable
area occupied by Shafts on floors as to which this Lease is terminated shall be
determined by physical measurement when such election to terminate is made. The
parties shall execute such amendment hereof as may be required to (aa) annex
the Shafts to the Premises, (bb) establish Base Rent for Shafts based upon the
area occupied at the rate stated in Exhibit C, and (cc) adjust Tenant's
Proportionate Share to include the rentable area of the Shafts in the
calculation.
(4) Exercise of the right of termination shall be conditioned
upon Tenant paying to Landlord, upon the date the termination becomes effective,
a termination payment consisting of (i) six (6) months Base Rent for each floor
for which Tenant shall have exercised a right of termination, determined on the
basis of Exhibit C; and (ii) the amount shown on Exhibit D with respect to each
floor for which Tenant shall have exercised its right to terminate, as
determined for the particular month in which this Lease shall terminate with
respect to such floor; provided, however, that if Tenant shall not have received
the Initial Abatement pursuant to Paragraph 3.(c) with respect to the portion
of the Premises as to which this Lease is terminated, then the termination
payment shall be
5
<PAGE> 14
reduced by the portion of the Initial Abatement not received by Tenant that
comprises part of the termination payment specified on Exhibit D, taking into
account the eight percent (8%) interest factor and the ten (10) year term used
to compute the termination payment.
(5) Nothing contained in this Paragraph 2 shall be deemed to
permit Landlord to remove any of Tenant's signs at the southeast corner of the
Building, all of which signage rights shall be retained by Tenant so long as
this Lease remains in full force and effect.
(6) For purposes of any determination of rentable square
footage required to be made pursuant to this Paragraph 2, rentable square feet
on each floor is stated on Exhibit C along with the total rentable square feet
in the Building. Any recalculation of Tenant's Proportionate Share after
exercise of a termination right shall be based upon the information contained in
Exhibit C.
(c) Options To Extend Term.
(1) Provided that as of the date Tenant exercises its option
to extend the Term, the Premises shall include at least fourteen (14) floors in
the Building (the parties agreeing that the portion of the ground floor occupied
as of this date by Tenant shall count as one floor for purposes of the foregoing
proviso), Tenant shall have the option to extend the Term for three (3)
successive periods of sixty (60) months each (each of which is referred to
herein as an "Extended Term"). The first Extended Term (the "First Extended
Term"), if any, shall commence immediately upon expiration of the initial Term
of this Lease and shall continue for a period of sixty (60) months thereafter.
The second Extended Term (the "Second Extended Term"), if any, shall commence
immediately upon expiration of the First Extended Term and shall continue for a
period of sixty (60) months thereafter. The third Extended Term (the "Third
Extended Term"), if any, shall commence immediately upon expiration of
6
<PAGE> 15
the Second Extended Term and shall continue for a period of sixty (60) months
thereafter. Tenant's right to exercise the options to extend the Term of this
Lease shall be subject to the conditions that (i) at the time the notice of
exercise is given, no Event of Default exists hereunder, and (ii) on the
commencement date of the Extended Term to which the notice applies, there shall
not be an outstanding Event of Default for failure on the part of Tenant to pay
when due any installment of Base Rent or any installment of Estimated Operating
Cost Excess (as defined in Paragraph 27.(e)) or Tenant Proportionate Share of
Excess Tax Costs (as defined in Paragraph 28.(a)). For purposes of interpreting
this Lease, references to the "Term" shall be deemed to include any then
current Extended Term if Tenant exercises an option to extend as provided
herein.
(2) Each option to extend the Term may be exercised only with
respect to (i) all of the space in the Premises under this Lease at the time of
the exercise, or (ii) all of the rentable area in the two lower elevator banks
(floors 1 through 16, inclusive), plus all or the portion of the 29th floor,
then being leased hereunder by Tenant. The notice of exercise shall specify the
space as to which the option is being exercised within the foregoing
limitations; provided, however, that failure to so specify shall be construed as
an exercise of the option with respect to all of the space then being leased by
Tenant.
(3) If Tenant elects to exercise any of Tenant's options to
extend the Term, Tenant shall give Landlord written notice of its election at
least eighteen (18) months prior to expiration of the then current Term. Within
sixty (60) days of receipt of Tenant's election to extend or twenty-eight (28)
months prior to expiration of the then current Term, whichever is the later,
Landlord shall notify Tenant in writing of the Base Rent for the Extended Term
based upon Landlord's determination of Fair Market Rent, with Base Rent for the
First Extended Term and the Second Extended Term fixed at ninety-five percent
(95%) of
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<PAGE> 16
Fair Market Rent; and Base Rent for the Third Extended Term fixed at one hundred
percent (100%) of Fair Market Rent; provided, however, that in any case where
Tenant exercises an option for only that portion of the Premises in the two
lower elevator banks, the Base Rent for each Extended Term thereafter shall be
fixed at one hundred percent (100%) of Fair Market Rent. Within sixty (60) days
after receipt of such written notice from Landlord, Tenant shall have the right
to: (i) elect to accept Landlord's statement of the Base Rent as the Base Rent
for the Extended Term; or (ii) elect to have Fair Market Rent determined by
arbitration pursuant to Paragraph 30 hereof. Fair Market Rent with respect to an
Extended Term shall be determined as of the date that the Extended Term in
question commences and not as of the date when the option to extend is
exercised.
(4) With its notice of Base Rent based on its determination of
Fair Market Rent, Landlord shall inform Tenant of any recent transactions
(including a reasonable summary of the economic terms of such transactions) that
Landlord considers to be reasonably comparable for purposes of establishing the
Fair Market Rent and the Base Rent; provided, however, that Tenant shall keep
such information confidential and use it solely for purposes of this Lease.
(5) Failure on the part of Tenant to elect in writing in a
timely manner to require arbitration of Fair Market Rent shall constitute an
election by Tenant to accept Landlord's determination of the Base Rent for the
Extended Term. If Tenant fails to exercise an option to extend the Term, all
further options for later Extended Terms shall be extinguished.
(6) From and after commencement of an Extended Term, all of
the other terms, covenants and conditions of this Lease shall apply, and
references to the Term shall be deemed to include the Extended Term then in
effect; provided, however, that Base Rent shall be revised as herein provided,
and Tenant shall have no option or right to further extend the Term beyond the
8
<PAGE> 17
third Extended Term provided for herein. Base Rent for each Extended
Term is referred to herein as "Extended Term Base Rent." With respect
to each of the Extended Terms, the Base Operating Year and the Base Tax
Year (as such terms are defined in Paragraphs 27 and 28 respectively)
shall be adjusted to be the calendar year in which the applicable
Extended Term commences and Tenant's Proportionate Share shall be
recalculated appropriately if Tenant exercises its option to extend for
less than all of the space the constituting the Premises
3. Rent.
(a) Monthly Base Rent. Commencing upon the commencement of the
Term, the base rent (the "Base Rent") for the Premises that Tenant covenants to
pay during the Term, shall be Six Million Eight Hundred Sixty Thousand Three
Hundred Eighty Eight Dollars ($6,860,388) per annum, payable in equal monthly
installments of Five Hundred Seventy-One Thousand Six Hundred Ninety-Nine
Dollars ($571,699) per month (subject to reduction upon exercise of a partial
termination option as provided in Paragraph 2.(b)). The Base Rent is based
upon the space included within the Premises, with the schedule of Base Rent
per square foot for various portions of the Premises being stated in Exhibit C.
(b) Payment Of Base Rent. Base Rent shall be paid on or before
the first day of each calendar month during the Term, in lawful money of the
United States, without deduction or offset (except as otherwise provided
herein), at Landlord's office or such other place as Landlord may direct in
writing. If the first day of any month during the Term falls on a Saturday,
Sunday, or legal holiday, Rent shall be due on the first Business Day (as
hereafter defined) thereafter.
(c) Initial Base Rent Abatement. Provided that as of the
Commencement Date, there shall not then be outstanding an event of default by
Tenant with respect to the payment of Base Rent or Occupancy Costs under the
Modified Initial Lease which default has not been cured by Tenant within thirty
(30) days after Landlord has given
9
<PAGE> 18
notice to Tenant of such default, Landlord grants to Tenant an abatement of Base
Rent, effective as of the Commencement Date ("Effective Abatement Date"), in the
amount of Nine Million Twenty-Five Thousand Nine Hundred Ninety-Nine Dollars
($9,025,999) (the "Initial Abatement"). The Initial Abatement shall be applied
by Tenant against the installments of Base Rent next falling due under this
Lease on and after the Effective Abatement Date and continuing until the entire
amount of the Initial Abatement shall have been applied.
(d) Refurbishment Abatement. Provided that as of October 1,
2007, there shall not be an outstanding Event of Default for
failure on the part of Tenant to pay when due any installment
of Base Rent or any installment of Estimated Operating Cost
Excess (as defined in Paragraph 27.(e)) or Tenant'
Proportionate Share of Excess Tax Costs (as defined in
Paragraph 28.(a)), and provided further that Tenant has
exercised the option provided for in Paragraph 2.(c)(1) to
extend the Term for the First Extended Term, Landlord grants
to Tenant an abatement of Base Rent in the amount of Two
Million Six Hundred Forty-Eight Thousand Eighty-Six Dollars
($2,648,086), said amount to be reduced, if (i) Tenant
exercises options to terminate pursuant to Paragraph 2.(b), or
(ii) if Tenant exercises the option to extend this Lease for
the First Extended Term pursuant to Paragraph 2.(c)(2) for
less than all of the Premises then being leased, said
reduction under clause (i) or clause (ii) to be equal to the
percentage that the rentable square feet of space as to which
this Lease has been so terminated (or the option to extend
for the First Extended Term has not been exercised)
represents of the total rentable square feet of office and
retail space in the Premises initially leased hereunder. The
abatement so determined is referred to herein as the
"Refurbishment Abatement". The Refurbishment Abatement shall
be applied by Tenant against the installments of Base Rent
falling due under this Lease commencing on October 1, 2007,
and continuing until the entire amount of the Refurbishment
Abatement shall have been applied.
(e) Treatment Of Initial Abatement And Refurbishment Abatement
Upon Termination Of This Lease.
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<PAGE> 19
(1) If this Lease is terminated prior to expiration of the
Term for any reason other than Landlord's default, Tenant shall not be entitled
to any portion of the Initial Abatement or the Refurbishment Abatement that it
has not realized as of the date of termination.
(2) If this Lease is terminated prior to expiration of the
initial Term due to default on the part of Tenant, then Landlord shall be
entitled to recover that portion of the Initial Abatement applied by Tenant
against Rent that would be allocated to the portion of the initial Term
remaining after the date of Lease termination, assuming that the entire Initial
Abatement is amortized on a straight line basis over the entire initial Term.
Landlord's rights hereunder shall be in addition to all of its other rights
arising by reason of Tenant's default.
(3) If this Lease is terminated prior to expiration of the
initial Term and the First Extended Term, but after October 1, 2007, due to
default on the part of Tenant, then Landlord shall be entitled to recover that
portion of the Refurbishment Abatement applied by Tenant against Rent that would
be allocated to the portion of the initial Term and First Extended Term
remaining after the date of Lease termination, assuming that the entire
Refurbishment Abatement is amortized on a straight line basis over the last two
and one-half (2 1/2) years of the initial Term and the First Extended Term.
Landlord's rights hereunder shall be in addition to all of its other rights
arising by reason of Tenant's default.
(4) If Tenant commits an Event of Default hereunder and as a
result, Tenant loses the right to possession of the Premises but the Lease is
not terminated, no Initial Abatement or Refurbishment Abatement remaining
unapplied shall be available as a reduction of Base Rent falling due hereunder.
Further, Landlord shall be entitled to recover from Tenant as additional damages
(A) that portion of the Initial Abatement applied by Tenant against Rent that
would be
11
<PAGE> 20
allocated to the portion of the initial Term remaining after the date
of Lease termination assuming that the entire Initial Abatement is
amortized on a straight-line basis over the entire initial Term, and
(B) that portion of the Refurbishment Abatement applied by Tenant
against Rent that would be allocated to the portion of the initial Term
and First Extended Term remaining after the date of Lease termination,
assuming that the entire Refurbishment Abatement is amortized on a
straight-line basis over the last two and one-half (2 1/2) years of the
initial Term and the full First Extended Term.
(5) If this Lease is terminated due to Landlord's default (and
not due to casualty, condemnation or other cause that does not
constitute a default on Landlord's part) Tenant shall be entitled to
recover from Landlord any unrealized portion of the Initial Abatement
and the Refurbishment Abatement in addition to all of Tenant's other
rights arising by reason of Landlord's default.
(f) Proration. If this Lease shall commence or be terminated as to all
or any portion of the Premises at any time other than the first or the last day
of a calendar month during the Term, Base Rent shall be appropriately prorated
based on the actual number of days in each month so that Tenant shall be charged
Base Rent solely for that period when this Lease is in effect as to the Premises
or that portion thereof as to which this Lease remains in effect.
(g) "Additional Rent" And "Rent" Defined. All monetary obligations of
Tenant hereunder shall be considered obligations for payment of rent. All such
monetary obligations other than Base Rent and Extended Term Base Rent are
referred to herein as "Additional Rent." Base Rent and Additional Rent are
referred to collectively herein as "Rent."
(h) Interest On Late Payments: Time Is Of The Essence. The time for
payment of Base Rent and Additional Rent hereunder is of the essence of this
Lease. In addition
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<PAGE> 21
to all other remedies available to Landlord hereunder, all Base Rent
and Additional Rent not paid when due hereunder shall bear interest at
the rate of one-half percent (1/2%) over the prime rate of Wells Fargo
Bank, N.A., or the highest rate allowed by law, whichever is less (the
"Interest Rate"). Interest shall accrue from the date when Landlord
gives the notice provided for in Paragraph 20.(a).
4. Permitted Uses, Occupancy And Restrictions Concerning Use.
(a) Basic Use Restriction. Tenant shall use and occupy the
Premises for the following purposes (collectively, the "Permitted Use"):
(1) The portion of the Premises on the 2nd through
28th floors shall be used for executive, administrative,
general or computer service offices with a trading floor or
floors, classrooms and auditoriums (but no place of public
group assembly requiring a permit, unless Tenant obtains such
a permit without cost or expense to Landlord but with Landlord
to cooperate with Tenant in the effort to procure such
permit). Subject to and in compliance with the provisions of
Paragraphs 6 and 29, Tenant may install and operate a lunch
room, cafeteria and recreational facilities on any of such
floors;
(2) In addition to the uses permitted under Paragraph
4.(a)(1), the portion of the Premises on the 2nd floor may be
used for any retail, wholesale, lunch room or cafeteria use;
(3) The portion of the Premises on the 1st floor
shall be used as follows: (i) the portion of the Premises
located at the south side of the Building lobby shall be used
for a customer lobby and financial services display area; (ii)
the portion of the Premises located to the north of the
Building lobby shall be used for a retail service delivery
center for Tenant's products, customer service and
information, (iii) for stock and securities brokerage
operations or as one of Tenant's retail branch offices, and/or
(iv) any retail
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use that is consistent with uses on the ground floor of comparable
buildings in the downtown financial district of San Francisco (the
"Downtown Financial District") and is a use that does not compete with
other retail uses on the first floor of the Building; provided,
however, that any uses allowed under clauses (i), (ii), (iii) and (iv)
above shall comply with the requirements, restrictions and limitations
contained in Resolution No. 8942 of the San Francisco City Planning
Commission, a copy of which is attached hereto, marked Exhibit G. If
Tenant desires to move the uses described in clauses (i) and/or (ii)
above and substitute another use in such space or spaces that is a
permitted use in other portions of the 1st floor, Landlord shall
cooperate with Tenant in its efforts to seek such permits for such
change as may be required at Tenant's sole cost and expense;
(4) The portion of the Premises on the 29th and 30th floors
shall be used for storage and for equipment to service the portions of
the Premises on other floors of the Building; and
(5) The portion of the Premises consisting of the garage space
shall be used for parking, storage and a maintenance shop and uses
incidental thereto.
(b) No Uses Other Than Those Expressly Allowed. Tenant shall not
use or occupy the Premises, or any part thereof, for any other purpose without
the prior written consent of Landlord, which said consent Landlord shall not
unreasonably withhold. The use restrictions contained in the Lease are
materially significant to the preservation of Landlord's interest in the
Building; provided, however, that the foregoing use restrictions are subject to
the following:
(1) At its expense, Tenant may install, maintain and replace
electronic financial service facilities within the Premises; subject to
the restrictions contained in Paragraph 6.
(2) At its expense, Tenant may furnish and install extra
equipment that it determines to be
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necessary, such as additional cooling towers, one or more microwave
antennae or dishes, laser transmission equipment, supplemental heating,
ventilating and air conditioning equipment, diesel fuel risers, tanks
and emergency generators, ancillary chilling unit(s), UPS system,
battery racks and EPS system on the 30th floor of the Building as shown
on page 5 of Exhibit B, subject to Paragraph 6 and the balance of this
subparagraph. Any such equipment shall not project higher than the
existing outside Building walls on the 30th floor. The installation and
location of such equipment shall be subject to the reasonable approval
of Landlord; and it shall be reasonable for Landlord to withhold such
approval if, in the reasonable opinion of Landlord's engineer(s), such
proposed installation or equipment would (i) materially interfere with
the proper operation of the Building, or (ii) overload its mechanical,
electrical or structural systems, or (iii) materially and adversely
affect other equipment or the rights of other tenants (if any) in the
Building (other than Tenant's Affiliates, as hereinafter defined);
provided, however, that in such event Landlord shall forthwith suggest
to, and discuss with, Tenant alternative proposed installations or
equipment that Landlord would approve and that Landlord believes might
be reasonably acceptable to Tenant. Subject to the terms and conditions
of this Lease, Landlord shall cooperate with Tenant throughout the Term
to facilitate the reasonable expansion or modification of its computer
facilities and attendant support systems, so long as such expansions
and/or modifications do not increase Landlord's operating costs,
capital costs or otherwise impose additional material burdens upon the
Building structure, the Building systems or Landlord.
(c) Specific Covenants With Respect To Parking.
(1) Throughout the Term, Tenant shall cooperate with Landlord
(without cost to Tenant) with regard to Landlord's fulfillment of its
obligation to provide the following in or about the portion of the
Premises designated for parking if, and to the extent, such obligation
is required by the City and County of
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San Francisco (the "City"): (i) not less than ten (10) safe and secure
bicycle and/or moped parking spaces; (ii) two (2) loading service
vehicle spaces below grade, and (iii) two (2) additional spaces for
small service vans. In addition, Landlord shall maintain the basement
portion of the Premises, at no cost to Tenant, so as to assure priority
for vanpool and carpool vehicles and vehicles driven by the physically
challenged ("Priority Parking"), if and to the extent, actually
required by the City.
(2) If Tenant is prevented from using for executive parking
any of the parking spaces in the basement of the Premises due to the
obligation to provide Priority Parking or for any other reason (except
Tenant's election to use the basement space for storage or other
purposes), Base Rent shall be abated in proportion to the number of
spaces lost that would otherwise have been available as a percentage of
the total spaces (based upon the Base Rent for the parking area in
accordance with Exhibit C) during the period that such parking is not
available.
(3) If (aa) Tenant is prevented from using for executive
parking more than fifty percent (50%) of the parking spaces in the
basement of the Premises due to Landlord's obligation to provide
Priority Parking, or (bb) if Landlord is required to provide access
to the basement portion of the Premises to members of the general
public in order to satisfy its obligation to provide Priority Parking
and as a result, the security of the basement for Tenant's purposes is
materially impaired, (i) Rent shall be abated in the manner provided
in the Paragraph 4.(c)(2), and (ii) Tenant shall have the option to
terminate this Lease with respect to the basement portion of the
Premises only, upon sixty (60) days' prior written notice to Landlord.
If this Lease is terminated as to the basement portion of the
Premises, Landlord shall provide loading and delivery spaces in the
basement as part of the Building common area for the entire portion
of the Term when the basement is not part of the Premises; and all of
Landlord's and Tenant's obligations hereunder with
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respect to the basement shall terminate except with respect to
obligations that accrue prior to the date of such termination and
obligations that are required to be performed under this Lease after
termination.
(4) If either party learns of a City action or request that
could result in Rent abatement or a lease termination with respect to
the basement portion of the Premises pursuant to this Paragraph, such
party shall immediately notify the other party. Landlord shall
thereupon have a period of sixty (60) days prior to any such Rent
abatement or Lease termination to consult with Tenant and with the City
to attempt to arrange an alternative solution(s) to the City action or
request that would eliminate Rent abatement or Lease termination
hereunder. If Landlord is unable to achieve an alternative solution
that is reasonably satisfactory to Tenant, the Rent abatement and Lease
termination rights with respect to the portion of the Premises in the
basement shall take effect as Tenant may elect, but in no event earlier
than the date when Tenant actually loses the use of the affected space
or spaces.
(5) If this Lease is so terminated with respect to the
basement portion of the Premises pursuant to this Paragraph 4.(c) and
the condition resulting in such termination is subsequently removed,
Landlord shall so notify Tenant in writing. Tenant shall have the
right to reinstate this Lease with respect to that portion of the
basement portion of the Premises that is available by written notice
given to Landlord not later than sixty (60) days after receipt of
Landlord's notice by Tenant. The Rent for the space as to which the
Lease is reinstated and Tenant's other obligations with respect
thereto shall be reinstated at the same level as they would have been
had the Lease never been terminated with respect thereto.
(6) If Tenant does so terminate this Lease as to the basement
portion of the Premises pursuant to this Paragraph 4.(c), then provided
this Lease is in full force and effect and no uncured Event Of Default
exists
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hereunder, Tenant shall have a continuing right of first refusal to
rent parking spaces in the Building garage in proportion that the space
in the Premises represents of the total space in the Building;
provided, however, that the continuing right of first refusal shall
terminate upon exercise by Tenant of the partial termination option
provided for in Paragraph 2.(b). Landlord shall give Tenant written
notice of the availability of each such space and the monthly charge
therefor as each space becomes available from time to time during the
Term and Tenant may exercise its right to rent the specified space by
giving to Landlord written notice of its desire to do so within five
(5) working days of Tenant's receipt of Landlord's notice. If Tenant
fails to so respond, Landlord may enter into a parking contract with
another party on the same terms and conditions as offered to Tenant
and subject to Tenant's further right of first refusal upon the
subsequent availability of the space.
(7) If this Lease shall have been terminated with respect to
the basement portion of the Premises, Landlord may adjust storage
charges for spaces made available to Tenant pursuant to Paragraph
4.(c)(6) once each calendar year to the then going market rate that
shall be competitive with other parking garages in the immediate
neighborhood of the Building. The obligation to pay for the use of
parking spaces shall be in addition to and not in lieu of Tenant's
other obligations hereunder.
(8) For the purpose of this Paragraph, the term "parking
space" or "space" shall mean the right to park one automobile in a
space in the basement of the Premises, but shall not mean that such
parking shall be in any particularly designated location in the
basement. The total number of spaces shall be based upon the number
that the basement of the Building can accommodate without regard to
Tenant's use of substantial parts of the garage area, originally
intended for parking space, as storage area.
(d) Alterations and Improvements. On the
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Commencement Date of the Term, Landlord shall deliver, and Tenant shall accept
the Premises in their "as is" condition as of the date hereof, subject to
reasonable wear and tear. All alterations and improvements to the Premises and
Building made by Tenant as of the date hereof and to which Landlord has
expressly consented may continue and remain in the Premises and Building without
any obligation on the part of Tenant to remove the same upon expiration of the
Term or earlier termination hereof. If Landlord discovers alterations and
improvements to the Premises made prior to the execution hereof to which
Landlord did not consent, Landlord shall not unreasonably require removal and
restoration. It shall be reasonable for Landlord to require removal of the
improvements if (i) they are not consistent with ordinary office use, (ii) they
materially interfere with or disrupt mechanical, electrical, elevator or life
safety systems as originally designed, or (iii) violate any "Requirements," as
defined in Paragraph 8.(a).
(e) Use Of Basement: Alexander Building Access. Ingress to and egress
from the basement for parking purposes is obtained by means of an access ramp
(the "Ramp") through the basement of an adjacent building located at 155
Montgomery Street and known as the Alexander Building (the "Alexander
Building"). Tenant has the right to utilize the Ramp and related portions of the
Alexander Building pursuant to the terms of a certain lease (the "Current
Alexander Building Lease"). Tenant and Landlord have entered into a new lease
for the space in the Alexander Building (the "New Alexander Building Lease"),
bearing even date herewith, to run concurrently with the Term. The premises
under the Current Alexander Building Lease are also used for the installation,
maintenance and operation of fuel tanks and pumps (referred to in the Current
Alexander Building Lease and the New Alexander Building Lease as the "System")
that are owned by Tenant and are part of Tenant's emergency power generation
system in the Building. The New Alexander Building Lease provides for
continuation of such use. In addition to the other provisions hereof that
pertain:
(1) If Tenant is prevented from using the parking in the
basement of the Building due to an event or condition that physically
or legally prevents use of
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the Ramp for ingress thereto or egress therefrom, Base Rent for parking
shall be subject to abatement in the same manner as provided in
Paragraph 4.(c) above and Landlord shall provide Tenant with another
means of loading and delivery to the Building.
(2) If Tenant is prevented from using the portion of the
Alexander Building leased to Tenant for installation, maintenance and
operation of the System, Tenant shall have the right to use the
basement of the Building for the System by installing the same or
similar components therein, including the right to install a fuel line
fill pipe outside of the Building, in a location reasonably approved by
Landlord, The installation of the System shall otherwise be subject to
the provisions of Paragraph 6.(b) through Paragraph 6.(h), with Tenant
to pay all costs thereof and to comply with all Requirements pertaining
thereto. If the System is relocated to a location in the basement as to
which this Lease has been terminated, Tenant shall pay Base Rent for
those portions of the basement occupied by the System in the amount
determined in accordance with Exhibit C.
5. Assignment, Subletting And/Or Mortgaging Of Premises.
(a) General Covenant.
(1) Tenant shall not (i) assign, mortgage or encumber this
Lease, or any interest therein, or (ii) sublet all or any portion of
the Premises (or allow the same to be used or occupied by others
outside the ordinary course of Tenant's business, except as otherwise
provided in this Paragraph 5), without the prior written consent of
Landlord in each instance, which consent shall not be unreasonably
withheld or conditioned and shall be given or refused within twenty
(20) days after Tenant's request for consent (and all information
necessary for action thereon has been provided to Landlord by Tenant).
Landlord's failure to respond within said twenty (20) day period shall
be deemed consent to Tenant's request. Any such purported
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assignment, mortgage, encumbrance, sublease or use by others for which
Landlord's consent is required without such consent shall be void and
shall constitute a default hereunder, if Landlord so elects. A transfer
of a controlling interest in Tenant shall constitute an assignment and
shall be subject to all of the provisions of this Paragraph 5;
provided, however, that the transfer of the outstanding capital stock
of any corporate tenant or subtenant shall be deemed not to include the
sale of such stock through the "over-the-counter" market or through any
recognized stock exchange or the sale of stock in any public offering;
and provided further, that restrictions on transfer of a controlling
stock interest shall not apply to the initial Tenant named in this
Lease.
(2) The provisions contained in Paragraph 5.(a)(1) shall not
apply to transactions with a corporation into or with which Tenant is
merged or consolidated or with an entity to which all or substantially
all of the assets of Tenant are transferred, nor shall the provisions
of Paragraph 5.(a)(1) apply to transactions with any Affiliate of
Tenant, so long as in the case of a merger, consolidation or transfer
of assets, the net worth of the successor, survivor or merged entity
in any such merger, consolidation or transfer of assets is at least
as great as the net worth of Tenant immediately prior thereto. An
"Affiliate" of any person shall mean an entity that controls such
person or is controlled by such person or is under common control with
such person. Notwithstanding and provisions contained in this
Paragraph 5.(a), Tenant shall have the right to assign this Lease or
to sublease the whole or any portion of the Premises to any of its
Affiliates without Landlord's consent and to permit any affiliate or
any of Tenant's partners in business projects to use all or any
portion of the Premises without Landlord's consent. The term "control"
as used in this Lease (i) in the case of a corporation shall mean
ownership of more than fifty (50%) percent of the outstanding capital
stock of that corporation, (ii) in the case of a general or limited
liability partnership, shall mean more than fifty (50%) of the general
partnership or membership interests of the partnership, (iii) in the
case of a limited partnership, shall mean more than fifty percent
(50%) of the general
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partnership interests of such limited partnership, and (iv) in the case
of a limited liability company, shall mean more than fifty percent
(50%) of the membership interests of such limited liability company.
(b) No Waiver. If this Lease or any interest herein is assigned, or if
the Premises or any part thereof are sublet or occupied by any party other than
Tenant, Landlord may, after the occurrence of an Event of Default by Tenant,
collect Rent from the assignee, subtenant or occupant, and apply the net amount
collected to the Rent herein reserved, but no such assignment, subletting,
occupancy or collection shall be deemed a waiver of the covenant stated in
Paragraph 5.(a), or the acceptance of the assignee, subtenant or occupant as a
successor to Tenant, or a release of Tenant from further performance of its
obligations contained in this Lease, nor shall it limit Landlord's right to seek
recourse first against the assignor or sublessor for any monetary default or
obligation. Any consent by Landlord to an assignment or subletting shall not be
construed to relieve Tenant, the assignee or the subtenant from the obligation
to obtain Landlord's written consent to any further assignment or subletting,
which shall be given or withheld in accordance with the provisions of Paragraph
5.(a); nor shall it be construed to release Tenant from any liability whether
past, present or future under this Lease. Landlord's consent to any such
subletting shall not relieve Tenant of liability for payment of invoices
rendered by Landlord for the charges incurred by the subtenant for services
and materials supplied to the Premises; but Tenant shall not be liable to
Landlord for extra services and materials supplied to an assignee after the
date of an assignment in any case where Landlord has no obligation hereunder
to provide such service or material.
(c) Conditions Of Approval. Landlord's exercise of its right to approve
any proposed assignment or sublease shall be conditioned upon the following:
(1) Without limiting the generality of the
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foregoing, it shall be reasonable for Landlord to withhold consent if:
(i) the use to be made of the Premises (or the portion
affected by the proposed assignment or sublease) by the proposed
assignee or sublessee is (aa) not generally consistent with uses in
comparable buildings in the Downtown Financial District, or (bb) a use
that conflicts with any restrictive covenant then in force in favor of,
or for any use that is the same as that stated in any lease to, another
tenant in the Building or the Alexander Building, providing for payment
of rent based in material part on the tenant's receipts (provided,
however, that in the case of such percentage lease, the use to be made
by the proposed assignee or sublessee is the same use with respect to
which the percentage rent is to be paid to Landlord), or (cc) a use
that would be prohibited by any provision hereof; or
(ii) the proposed assignee shall not be reputable or shall
have a financial net worth at the time of the consent of less than One
Hundred Million Dollars ($100,000,000) during the initial Term of this
Lease and Two Hundred Million Dollars ($200,000,000) after the
commencement of any Extended Term; or in the case of a sublease of less
than all of the Premises, the sublessee shall not be reputable or shall
not have a financial strength and reputation that is reasonably
satisfactory to Landlord given the size of the financial commitment
represented by the proposed sublease and considering the fact that
Tenant remains liable under this Lease.
(2) Any proposed assignee shall execute an agreement to perform
faithfully and be bound by all of the terms, covenants and conditions of this
Lease with respect to the interest assigned, without reservation or new
conditions. Any proposed sublessee shall execute an agreement with respect to
the space subleased requiring that it attorn to Landlord (at
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Landlord's option) upon termination of this Lease due to Tenant's default,
without reservation or new conditions; and
(3) Tenant shall pay to Landlord monthly on or before the last day of
each month during the Term in the case of an assignment or during the term of
the sublease in the case of a sublease, fifty percent (50%) of the Receipts (as
hereinafter defined) received by Tenant during such month from any such
assignment or subletting permitted hereunder (other than any assignment referred
to in Paragraph 5.(a)(2)); provided, however, that Tenant shall have no
obligation to pay any portion of Receipts to Landlord derived from transactions
with Affiliates. "Receipts" shall mean the excess, if any, of any and all rent
and other consideration (but not proceeds of sale or lease of Tenant's personal
property) actually collected by Tenant for such month under or in connection
with any sublease of the Premises (or any part thereof) or assignment of this
Lease over the sum of (i) the Base Rent for such space based upon the Base Rent
amounts per rentable square foot listed in Exhibit C, plus (ii) any Additional
Rent payable for such space under this Lease (all sums prorated to reflect
obligations allocable to that portion of the Premises subject to the sublease in
the case of a sublease of a portion of the Premises), and (iii) Tenant's
reasonable costs incurred in subleasing or assigning (including, without
limitation, architectural and engineering fees, brokerage commissions,
concessions, construction costs, advertising costs, attorneys' fees and
disbursements incurred in connection with such subletting or assignment),
amortized with interest at a fixed rate equal to the then current U.S. Treasury
rate for bills or notes in the open market with comparable maturities over (aa)
the term of the sublease in the case of a subletting, or (bb) the Term, in the
case of an assignment. Tenant shall compute the appropriate amortization and
interest rate and provide Landlord with written notice thereof (together with
supporting detail) not later than sixty (60) days after the total cost to be so
amortized has been incurred. Tenant
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shall provide Landlord with reasonable evidence of payment for all such
items within a reasonable time after request.
6. Alterations.
(a) General Restriction. Tenant shall make no alterations in or
improvements to the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. It shall be
reasonable for Landlord to withhold consent to any alteration or improvement
that is reasonably likely to (i) adversely affect the Building (aa) exterior,
(bb) structure, (cc) mechanical, electrical, elevator or life safety systems,
(ii) adversely affect the exterior appearance of the Premises, or any part
thereof, as seen from Building common areas (if this Lease is terminated as to a
portion of the Premises) or the exterior of the Building, (iii) increase the
floor loadings above the designed loadings of the Building, subject to Tenant's
rights under Paragraph 6.(g), (iv) result in the violation of any law,
ordinance, rule or regulation, (v) cause Landlord to incur expense in order to
upgrade or improve any part of the Building as required pursuant any law,
ordinance, rule or regulation promulgated or enacted after the date hereof
(unless Tenant agrees to bear the cost of any such upgrading or improvement).
(b) Procedure.
(1) Tenant shall give to Landlord prior written notice of its
intent to make an alteration in or improvement to the Premises, such
notice to include plans or drawings that fully disclose and describe
the same. Tenant may submit any such plans and specifications to
Landlord on a "fast-track" basis, i.e., plans may be submitted for
separate categories of work, and if such plans for separate categories
of work shall have been approved by Landlord, Tenant may commence work
on the categories of work described in the plans so approved. Landlord
shall have ten (10) days after receipt of Tenant's notice within which
to approve or disapprove the same or to request additional information,
if the request does not provide Landlord
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with sufficient information for the exercise of Landlord's reasonable
judgment. If Landlord grants its approval, it shall do so in writing
specifying the conditions and terms thereof pursuant to Paragraph
6.(c). Landlord's failure to respond to Tenant's request within such
ten (10) day period shall be deemed approval. If Landlord denies the
request for approval, it shall specify in writing, in reasonable
detail the grounds therefor and advise Tenant of the types of
revisions in the request that would make it acceptable where such
revisions reasonably appear to be available. If Landlord determines
that it cannot grant the request for lack of sufficient information,
it shall specify with particularity the reasons why the information
provided by Tenant is insufficient. Landlord shall cooperate with
Tenant in a good faith effort to reach agreement on alterations and
improvements that will achieve some or all of Tenant's objectives
consistent with the terms and conditions of this Lease.
(2) Tenant shall not be required to use Building standard or
Building stock materials in any work of alteration or improvement;
provided, however, that Tenant shall reimburse Landlord for any
additional maintenance, utility, service or operating costs that
Landlord may incur as a result of Tenant's use of such non-standard or
non-stock materials; and such additional cost shall not constitute an
Occupancy Cost pursuant to Paragraph 27.(b). Subject to the foregoing,
Tenant may re-use without charge improvements currently located in the
Premises in any such work of alteration or improvement.
(c) Conditions That Apply To Improvement Work. After the
Commencement Date, any alteration or improvement work permitted hereunder shall
be performed by contractors or mechanics approved by Landlord, which approval
shall not be unreasonably withheld or delayed, and only upon such reasonable
conditions as Landlord may impose, including, but without limitation, the time
of day when the work may be performed, restrictions upon deliveries and use of
Building systems; provided, however, that restrictions with respect
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to timing and deliveries shall not be imposed if Tenant is the sole occupant of
the Building (other than the 29th floor) above the ground floor. Tenant shall
submit the approved plans and specifications for performance of any work of
alteration or improvement to Cahill Contractors, Inc., or Cahill Construction
Services, Inc., (individually and collectively "Cahill"), among not less than
two (2) other responsible contractors for bids. Tenant shall select Cahill for
performance of the work, if it submits the lowest responsible bid. All such work
shall be done at such times and in such manner as Landlord may from time to time
reasonably designate; but Tenant shall not be required to do any work during
Overtime Periods (as hereinafter defined) or at overtime or premium pay rates
unless such work adversely affects the use of their space or Building common
areas by any other tenants of the Building. All work done by Tenant shall be
performed in compliance with all laws, rules, orders, ordinances, directions,
regulations and requirements of all governmental agencies, offices, departments,
bureaus and boards having jurisdiction, and in compliance with the rules,
orders, directions, regulations and requirements of the Insurance Services
Office or of any similar body. From time to time after the Commencement Date,
Landlord shall furnish to Tenant lists of contractors, subcontractors and
suppliers that Landlord considers acceptable for performance of the work. Tenant
shall reimburse Landlord for Landlord's actual and reasonable out-of-pocket
costs for plan review, permit application fees, monitoring, inspection and other
reasonable costs incurred in connection with Tenant's alteration and improvement
plans ("Review Expense"), consistent with the magnitude and nature of the work.
Landlord shall not charge Tenant a fee for any construction supervision or
administration over and above Review Expense; and Landlord shall not charge for
monitoring and inspection if Cahill is the contractor selected.
(d) Protection Against Lien Claims. Before commencing any work,
Tenant shall give Landlord at least five (5) days' prior written notice of the
proposed commencement of such work in order to afford Landlord an opportunity to
post appropriate notices of non-responsibility. At the option of Landlord in the
case of work being performed by a subtenant, or work that has a cost
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exceeding One Million Dollars ($1,000,000) in the case of the Tenant named in
this Lease or Five Hundred Thousand Dollars ($500,000) in the case of an
assignee, the party performing the work shall secure, without cost or expense to
Landlord, a completion and lien indemnity bond, reasonably satisfactory to
Landlord, for said work. Landlord shall waive the foregoing bond requirement in
the case of work being performed by a subtenant within the financial limits
stated above in any case where Tenant co-signs the construction contract and
becomes directly liable for the payment obligations thereunder. Tenant shall
cause any mechanic's lien filed against the Premises, or against the Building or
Property for work claimed to have been done for, or materials claimed to have
been furnished to Tenant or a sublessee of Tenant, to be discharged, by bond or
otherwise, within thirty (30) days after Tenant receives notice thereof, without
cost or expense to Landlord. If any such lien is filed and is not released of
record within thirty (30) days after Tenant receives notice thereof, Landlord
may, without waiving its rights and remedies based on such failure by Tenant and
without releasing Tenant from any obligations hereunder, cause such liens to be
released by any means it shall deem proper, including payment of the claim
giving rise to such lien in which event all amounts paid by Landlord shall
immediately be due and payable by Tenant upon Landlord's demand, supported by
invoice and documentary evidence of the amount paid.
(e) Ownership And Removal. Other than Tenant's computers, trade
fixtures, equipment, personal property, movable panels, movable partitions and
furniture systems, all alterations, additions or improvements in the Premises,
made by either party, including, without limiting the generality of the
foregoing, all permanently affixed panelling, permanently affixed partitions,
railings, mezzanine floors, galleries and the like, shall become the property of
Landlord, and shall remain upon, and be surrendered with the Premises at the end
of the Term, except as otherwise provided in Paragraph 4.(d). Notwithstanding
the foregoing, Landlord may elect to have Tenant remove those alterations or
improvements made by Tenant after the Commencement Date that are not consistent
with ordinary office use; provided, however, that Landlord shall have
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given written notice to Tenant at the time of Landlord's approval (or deemed
approval) of the plans and specifications for such alterations or improvements
that Landlord is reserving its right to require that such alterations or
improvements be removed on expiration or termination of the Term, with all
damage to the Building and Building systems caused by such removal repaired.
Notwithstanding the foregoing, if Tenant has exercised a termination option
pursuant to Paragraph 2.(b), Landlord may require Tenant to pay a portion of the
reasonable and actual cost of removing (i) its computer-related water towers,
condenser water piping and shafts, pumps and electrical installations related
thereto, (ii) the UPS system and battery racks, (iii) diesel fuel risers, tanks
and emergency generators and related electrical wiring, (iv) escalator and
internal stairs, and (v) cafeteria improvements, at the end of the Term or
earlier termination of this Lease, within thirty (30) days after Landlord's
invoice therefor is submitted to Tenant. The portion of the cost of removing the
foregoing improvements that Tenant shall pay shall be equal to the proportion
that the rentable square feet of the office space as to which Tenant has
exercised a termination option represents of the total rentable square feet of
the office and retail space in the original Premises under this Lease, said
amount to be paid within thirty (30) days after receipt from Landlord of an
invoice therefor based on Landlord's actual and reasonable cost of such removal,
including repair of all damage caused by such removal. Landlord agrees to obtain
competitive bids for such removal and restoration from three (3) subcontractors
and to use the lowest bid which is in compliance with the specifications for
such work and to deliver a copy of such bids to Tenant prior to commencing such
work. If Landlord or Landlord's contractor undertakes or supervises such work, a
reasonable fee of not to exceed ten percent (10%) of subcontractor charges shall
be included as a part of the reasonable and actual cost of removing the
foregoing improvements. With respect to any alterations or improvements that
Landlord has the right to require Tenant to remove, Landlord shall notify Tenant
(i) not less than one hundred eighty (180) days prior to the date when the Term
expires of the alterations or improvements to be removed, or (ii) within thirty
(30) after the earlier termination of this Lease. Tenant may, however,
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remove its computers, trade fixtures, equipment, personal property, movable
panels, movable partitions and furniture systems from the Premises in the
ordinary course of Tenant's business or in the ordinary course of any
reconstruction, renovation or alteration upon condition that Tenant shall repair
any damage caused by any removal of such property.
(f) Tax Aspects Of Alterations And Improvements. All accounting
for tax purposes shall allocate the benefits and burdens (i) to the party paying
for the particular improvement, (ii) in the case of improvements for which the
parties share the costs, in proportion to the amount paid by each, or (iii) as
otherwise agreed by the parties in writing.
(g) Tenant's Right to Increase Floor Load. If Tenant shall desire
to increase the floor loads of any floor in the Building above the load
capacities shown on Exhibit I, attached hereto and incorporated herein by
reference thereto, Landlord shall strengthen and reinforce the same so as to
give Tenant the load desired, provided that (i) the work necessary to increase
such floor load does not materially and adversely affect the structure of the
Building, (ii) such work will not materially interfere with the amount or
availability of any space adjoining, alongside, above or below the Premises,
(iii) Tenant shall submit to Landlord the plans showing the locations of and the
desired floor load for the areas in question; and (iv) Tenant shall agree to
reimburse Landlord, within thirty (30) days after demand, for the actual
out-of-pocket costs incurred by Landlord to provide such strengthening and
reinforcement. Landlord shall inform Tenant of the cost of such work prior to
commencing it. Notwithstanding the foregoing, if Tenant shall have terminated
this Lease with respect to any floor, then if Tenant needs access to such floor
(the "Access Floor") to strengthen the floor load of the floor above it,
Landlord may refuse to permit Tenant to increase the load of the floor above the
Access Floor if the floor or area shall then be occupied by another tenant.
(h) Certain Alterations Not Requiring Landlord's Consent.
Notwithstanding the restrictions contained in Paragraph 6.(a), (but subject to
the notice requirements
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contained in Paragraph 6.(d)), Tenant may make non-structural alterations to the
Premises without Landlord's prior consent, provided that (i) no permit is
required from any applicable authority for performance of such work, (ii) in the
case of work on the ground or second floors of the Building, the appearance of
the Building from the exterior shall not be affected by such alteration, (iii)
the proper functioning of each of the mechanical, electrical, sanitary,
plumbing, telecommunications, fire sprinkler and all other systems serving any
portion of the Building shall not be adversely affected by such alteration, (iv)
the work shall consist primarily of decorative work or changes to interior
layout such as changes in wall coverings, wall painting, floor coverings and
rearrangement of movable non-structural partitions and panels, (v) the
alterations shall not affect the exterior appearance of the Premises from any
Building common area if this Lease has been terminated as to any portion of the
Premises, (vi) the work shall comply with and be performed in accordance with
all applicable laws, ordinances rules and regulations, and (vii) Tenant shall
provide to Landlord a reproducible record print showing the proposed work with
such notice.
7. Repairs.
(a) Tenant's Obligation. Tenant shall take good care of the Premises
and fixtures therein, using reasonable diligence to prevent damage and
deterioration thereof beyond normal wear and tear, obsolescence and damage by
casualty or condemnation. In addition, Tenant shall be responsible for and
diligently repair and maintain during the Term (i) Tenant's condenser water
riser and cooling tower, related equipment, shafts, risers and cable racks; (ii)
Tenant's communication risers; (iii) Tenant's emergency and uninterruptible
power system and related conduit, panels and batteries; (iv) Tenant's cafeteria
equipment, fans and plumbing; and (v) Tenant's pneumatic tube system. Tenant
shall not be required to make any structural repairs or repairs to any Building
systems; provided, however, that Tenant shall be required to reimburse Landlord
for the cost of all such repairs made necessary due to the negligence or willful
misconduct of Tenant, its agents, servants, employees, contractors, invitees or
licensees. Promptly
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after Tenant becomes aware of the need for such repairs, Tenant shall inform
Landlord of the need for repairs to the Building structure or Building systems.
Tenant shall be fully responsible for the repair and maintenance of all trade
fixtures and personal property that remain the property of Tenant hereunder,
unless the repairs are necessary due to the negligence or willful misconduct of
Landlord or its agents, servants, employees, contractors, invitees or licensees,
in which event, Landlord shall repair the same; and the cost of repairs in such
an instance shall not be included as an Occupancy Cost. Tenant shall cause all
work for which it is responsible to be performed in a manner that does not cause
damage or injury to the Premises.
(b) Landlord's Obligation. Except as expressly otherwise provided in
Paragraph 7.(a) above, Landlord shall repair all damage or injury to the
Premises, or to the Building or to its fixtures, appurtenances or equipment,
promptly after receipt from Tenant of notice of the need for such repairs.
Unless other specific levels of service are specified herein, Landlord shall
operate and maintain the Building, Building structure and Building systems in
a manner consistent with comparable buildings in the Downtown Financial
District. All such work (including, but without limitation, structural repairs
and repairs to Building systems) shall be performed at the expense of Tenant,
in the case of negligence or willful misconduct of Tenant or Tenant's agents,
servants, employees, contractors, invitees or licensees, or as an Occupancy
Cost (as defined in Paragraph 27.(b)) to the extent permitted in the case of
normal wear and tear. Such repairs shall be made without cost or expense to
Tenant (and not charged as an Occupancy Cost) to the extent made necessary by
the negligence or willful misconduct of Landlord, its agents, servants,
employees, contractors, invitees or licensees. The Building's roofs, exterior
walls and windows shall be maintained at Landlord's expense and not as an
Occupancy Cost (except that the cost to replace window glass shall be an
Occupancy Cost if the glass is cracked or broken in its installed location as
a result of any cause other than (i) a defect in materials or installation,
(ii) an act of Landlord or its agents, servants, employees, contractors,
invitees or licensees, or (iii) an act of God that is covered by Landlord's
insurance;
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provided, however, that any portion of the loss not covered by Landlord's
insurance shall be included as an Occupancy Cost).
(c) Landlord to Minimize Interference. Landlord shall use
reasonable diligence to minimize interference with Tenant's use and occupancy of
the Premises in making any repairs; provided, however, that Landlord shall have
no obligation to employ contractors or labor at so-called overtime or other
premium pay rates or to incur any other overtime costs in connection with such
repairs. Notwithstanding the foregoing, if Tenant shall so request, Landlord
shall employ contractors or labor at so-called overtime or other premium pay
rates or incur other overtime costs in making such repairs, and Tenant shall pay
to Landlord, within thirty (30) days after demand therefor, an amount equal to
the excess costs incurred by Landlord to comply with Tenant's request.
(d) Current ADA And Related Requirements. Without cost to Tenant
and without inclusion of the cost of such work as an Occupancy Cost, Landlord
shall perform the work required to bring the portions of the Building described
in this Paragraph 7.(d) into compliance with the requirements of the Americans
With Disabilities Act ("ADA") and Title 24 of the California Code of
Regulations as said requirements exist on the date of performance of such work.
The work to be performed by Landlord shall bring into compliance the following:
(i) Ground floor entry to the Building lobby; (ii) Ground floor Building lobby
(excluding Tenant's security turnstile); (iii) Elevator cabs and call buttons
in each cab and on each floor (provided, however, that the foregoing shall not
require enlargement of elevator cabs); (iv) Building restrooms on Floors 2
through 28 (provided, however, that the foregoing shall not include the
private restroom on the 28th floor; and provided further, that the foregoing
shall exclude work that has already been performed). The work to be performed
by Landlord shall be limited to requirements that generally apply to "path of
travel" obligations and shall not include any work required to accommodate
Tenant's requirements in excess of such obligations normally incidental to
office building use. All such work shall be performed by Landlord prior to the
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Commencement Date. Landlord will either precede or match Tenant's remodeling
schedule on any floor, even if Tenant's work occurs from the date of execution
of this Lease to the Commencement Date. Landlord shall design the modifications
and obtain the alteration permit for restroom work. Landlord shall perform the
work so that at any one time, not more than six (6) pairs of restrooms in the
Building are out of service on non-contiguous floors. Except as expressly
provided in this Paragraph 7.(d), Landlord shall have no other responsibilities
or obligations to Tenant to comply with the current requirements of the ADA or
Title 24 of the California Code Of Regulations (including, but without
limitation, provision of fire rated corridors or visual warning systems).
8. Compliance With Laws, Insurance Standards And Security.
(a) Compliance With Laws By Tenant. Tenant shall comply with
all laws, ordinances, rules, regulations and orders ("Requirements") of federal,
state, county and municipal authorities having jurisdiction (each a "Government
Authority") pertaining to Tenant's use of the Premises, and with any direction
of any public officer or officers, pursuant to law, that shall impose any duty
upon Tenant with respect to the Premises, or the use or occupation thereof;
provided, however, that Tenant shall not be obligated to make any alterations or
improvements to the Premises necessary to comply with any Requirements, unless
compliance shall be required by reason of (i) Tenant's particular manner of use
or occupancy of the Premises (as opposed to mere use as executive, general and
administrative offices, retail space, parking or any other use permitted under
this Lease), or (ii) breach of any of Tenant's covenants or agreements under
this Lease, or (iii) any cause or conditions arising out of any alterations made
by Tenant in the Premises or Building during the Term hereof or during the Term
of the Modified Initial Lease. Specifically, but without limiting the generality
of the foregoing, Tenant shall comply with any order issued by any Government
Authority requiring removal and replacement of the Halon fire protection system
installed for protection of data
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processing equipment. Tenant shall not do or permit to be done, any act or thing
upon the Premises that subjects or might subject Landlord to any liability or
responsibility for injury to any person or persons or to any property by reason
of any business or operation being carried on in the Premises, and Tenant shall
indemnify Landlord and hold Landlord harmless from and against any such
liability and reasonable attorneys' fees. All business machines, computers and
mechanical equipment owned by Tenant and used in the Premises shall be placed
and maintained by Tenant at Tenant's expense in settings reasonably sufficient
to absorb and prevent excessive vibration, noise and annoyance affecting
portions of the Building occupied by other tenants, in Landlord's reasonable
judgement. At its sole cost and expense and after notice to Landlord, Tenant may
contest by appropriate proceedings the legality or applicability of any
Requirements affecting the Premises or the Building, provided that the
Certificate of Occupancy of the Building shall not be suspended by reason of
non-compliance or by reason of such contest. Tenant shall keep Landlord
regularly advised of the status of such proceedings.
(b) Compliance With Laws by Landlord. Except as otherwise expressly
provided in Paragraph 7.(d), Landlord shall comply with all Requirements that
impose a duty on Landlord or Tenant with respect to the Premises or the
Property with which Tenant is not required to comply. Further, Landlord
represents to Tenant that to the best of Landlord's knowledge, the Premises
and the Property are free of asbestos-containing materials and other Hazardous
Materials (as hereinafter defined). The term "Hazardous Materials" shall mean
any toxic or hazardous wastes, pollutants or substances, including, without
limitation, asbestos, PCBs, petroleum products and by-products, substances
defined or listed as "hazardous substances" or "toxic substances" or similarly
identified in or pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., and as
hazardous wastes under the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6010, et seq., any chemical substance or mixture regulated under the
Toxic Substance Control Act of 1976, as amended, 15 U.S.C. Section 2601, et
seq., any "toxic pollutant" under the
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Clean Water Act, 33 U.S.C. Section 466 et seq., as amended, any hazardous air
pollutant under the Clean Air Act, 42 U.S.C. Section 7401 et seq., hazardous
materials identified in or pursuant to the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1802, et seq., and any hazardous or toxic substances or
pollutant regulated under any other Requirements. If, after the date of this
Lease, asbestos-containing materials or other Hazardous Materials are found in
the Premises or on the Property, and the presence of such asbestos-containing
materials or other Hazardous Materials did not result from or in connection with
the act or omission of Tenant, its agents, employees, contractors, licensees,
invitees or sublessees, then Landlord, at its sole cost and expense, shall cause
such asbestos-containing materials or other Hazardous Materials to be removed,
encapsulated or handled in accordance with a hazardous materials operations and
maintenance plan, all in compliance with applicable Requirements, and shall
repair any damage caused by such removal.
(c) Insurance Standards And Requirements. Tenant shall not do or permit
to be done, any act or thing upon the Premises, that will invalidate or conflict
with fire or extended coverage insurance policies ("Fire Insurance") covering
the Building or its fixtures, appurtenances or equipment or the property located
therein or that constitutes a violation of any rules, orders and requirements of
the Insurance Services Office, (or any similar body that establishes controlling
insurance standards), and shall not conduct any activity or keep any substance
in the Premises, that will increase the rates of Fire Insurance on the Building
or its fixtures, appurtenances, equipment or property located therein. The use
or occupancy by Tenant of the Premises for the purposes permitted under this
Lease shall not be deemed to violate the provisions of this Paragraph. If Tenant
fails to comply with this Paragraph 8.(c) and as a result, the Fire Insurance
rate shall at any time be higher than it otherwise would have been if Tenant
had so complied, then Tenant shall reimburse Landlord, as Additional Rent, for
that part of all Fire Insurance premiums thereafter paid by Landlord due to such
violation by Tenant within thirty (30) days after Tenant shall have received an
invoice therefor from
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Landlord. In any action or proceeding wherein Landlord and Tenant are parties, a
schedule or "make up" of rates for the Building or the Premises issued by the
Insurance Services Office, or other body making Fire Insurance rates for the
Building or the Premises, shall be conclusive evidence of the facts therein
stated and of the several items and charges in the Fire Insurance rate that then
apply to the Premises.
9. Subordination, Attornment And Non-Disturbance.
(a) Subordination.
(1) This Lease is subject and subordinate to all ground or
underlying leases, mortgages and deeds of trust that now affect or
encumber the Property (including, without limitation, mortgages or
deeds of trust encumbering the leasehold estate in any ground leases)
and to all renewals, modifications, consolidations, replacements and
extensions thereof. Landlord represents that as of the date of this
Lease, there are no liens or encumbrances (other than liens or
encumbrances for real estate taxes, water and sewer charges) to which
this Lease is subject or subordinate, and that by their foreclosure
could result in termination of this Lease, other than the Deed of
Trust, Security Agreement and Fixture Filing with Assignment Of Rents
and Agreements, made for the benefit of The Prudential Insurance
Company Of America ("Prudential"), dated August 31, 1989, by 101
Montgomery Street Co., said Deed of Trust having been duly recorded on
August 31, 1989, in the Office of the Recorder of the City and County
of San Francisco at Reel E947, Image 2051-2100 (the "Deed of Trust").
(2) Within ninety (90) days after execution and delivery of
this Lease, Landlord shall deliver to Tenant an agreement in recordable
form from each and every such current lessor, mortgagee and beneficiary
to the effect that Tenant shall not be disturbed in its possession of
the Premises, nor shall Tenant's rights be reduced or its obligations
increased beyond those stated in this Lease by reason of such
subordination
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(unless such party shall have the right to do so by reason of an Event of
Default under this Lease). The agreement shall also provide that Tenant shall
not be named as a defendant in any judicial foreclosure action, request for
appointment of a receiver or any other form of judicial relief. Landlord and
Tenant shall share equally in the legal fees charged to Landlord by Prudential
as a condition to obtaining such an agreement from Prudential with respect to
the Deed of Trust. If despite diligent effort, Landlord is unable to secure such
an agreement from Prudential, and such failure continues for a period of an
additional ninety (90) days beyond the ninety (90) day period stated above, then
Tenant shall have the right to terminate this Lease by written notice given to
Landlord within thirty (30) days after expiration of such second ninety (90) day
period.
(3) At the option of Landlord, this Lease shall be subordinate to any
ground or underlying leases, mortgages or deeds of trust that may hereafter
affect or encumber the Property, but only upon condition that the lessor,
mortgagee or beneficiary named in any such lease, mortgage or deed of trust
enters into an agreement in recordable form with Tenant pursuant to which such
lessor, mortgagee or beneficiary agrees that Tenant shall not be disturbed in
its possession of the Premises, nor shall Tenant's rights be reduced or its
obligations increased beyond those stated in this Lease by reason of such
subordination (unless such party shall have the right to do so by reason of an
Event of Default under this Lease); and further agrees that Tenant shall not be
named as a defendant in any judicial foreclosure action, request for appointment
of a receiver or any other form of judicial relief. Tenant and such mortgagee,
lessor or beneficiary, as the case may be, shall promptly execute and deliver
such further agreements as may reasonably be required to carry out and
consummate such subordination and non-disturbance covenants, including, without
limitation, an agreement to attorn to the lessee, mortgagee or beneficiary upon
its demand after default beyond all notice and grace periods by Landlord
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as tenant or mortgagor under such documents.
(b) Foreclosure. Upon foreclosure or exercise of power of sale
under any mortgage or deed of trust now or hereafter affecting the
Property, Tenant shall not be disturbed in its possession of the
Premises (unless an Event of Default shall have occurred hereunder),
nor shall Tenant's obligations hereunder be increased or its rights
hereunder reduced as a result of or in connection with such
foreclosure; nor shall Tenant be named as a defendant in any judicial
foreclosure action, request for appointment of a receiver or any other
form of judicial relief. Upon reasonable request by the holder of any
such mortgage or deed of trust, Tenant shall execute and deliver the
instruments desired by such holder to establish the relative priority
of this Lease to any such mortgage or deed of trust so long as the full
substance of the covenant of non-disturbance of Tenant (as set forth in
Paragraph 9.(a) above) is preserved in any such documentation.
10. Building Security. Tenant shall provide a lobby guard service
24 hours per day, seven days per week, at Tenant's sole cost and expense;
provided, however, that if the ground floor lobby-lanes shall have been
eliminated pursuant to Paragraph 2(b)(3) of this Lease, Tenant shall not have
the obligation to provide a lobby guard service. In such event, Landlord shall
provide all security services as shall be consistent with the standard of
operation for comparable buildings in the Downtown Financial District with the
cost thereof to be charged as an Occupancy Cost hereunder. Unless Tenant shall
have exercised its right pursuant to Paragraph 2(b) to terminate this Lease with
respect to any portion of the Premises, any other security in the Building or
the Premises shall also be provided by Tenant at its sole cost and expense. All
security arrangements provided for by Tenant shall be subject to Landlord's
prior written consent which shall not be unreasonably withheld or delayed;
provided, however, that Landlord shall have no right of approval over security
guards who are employees of Tenant. All security arrangements made by Tenant
shall be established on terms and conditions that do not unreasonably interfere
with or restrict Landlord's rights hereunder or its ability to perform work
required to be performed in the fulfillment of Landlord's obligations under this
Lease or
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its ability to market available space in the Building or to operate the
Building. Without affecting or reducing Tenant's obligations to provide
security, Tenant may eliminate the ground floor lobby lanes in the Building on
not less than thirty (30) days prior written notice to Landlord without
exercising an option to terminate this Lease pursuant to Paragraph 2.(b). Within
thirty (30) days after receipt of an invoice submitted together with supporting
information, Tenant shall reimburse Landlord for the cost of repairing all
damage caused by such removal and restoration of the lobby (including, but
without limitation, replacement of floor tiles, the Building directory and metal
trim) as close as is reasonably possible to the original architectural design
and quality of finishes.
11. Rules And Regulations. Tenant and Tenant's agents,
servants, employees, contractors, visitors and licensees shall comply with such
rules and regulations as Landlord may adopt from time to time during the Term
(such rules and regulations to be consistent with what is customary and
reasonable in comparable buildings in the Downtown Financial District);
provided, however, that no rule or regulation shall require Tenant to pay
Additional Rent or bear additional economic obligations beyond those provided
for in this Lease. Landlord shall notify Tenant of any rules and regulations
(and amendments thereto) by providing a copy to Tenant in the manner provided
for giving of notices under Paragraph 26 of this Lease. Landlord shall not be
liable to Tenant for violation of any of rules and regulations, or the breach of
any lease, by any other tenant or other party in the Building. Landlord shall
use reasonable diligence, consistent with normal building management practice,
to enforce such compliance on a uniform basis.
12. Insurance; Subrogation Waivers; Non-Liability For Certain
Events.
(a) Non-Liability. Neither Landlord nor Landlord's
agents, contractors or employees shall be liable for any damage to
property entrusted to them, their employees or to the Building
personnel, or for the loss of any property by theft, breach of Building
security or otherwise. If at any time during the Term, any Building
windows become obstructed or darkened temporarily for any reason
whatsoever, including, but not limited to Landlord's
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own acts, or permanently due to the application of any Requirements,
Landlord shall not be liable for any damage that Tenant may sustain
thereby and Tenant shall not be entitled to any compensation or
abatement of rent or release from any of the obligations of Tenant
hereunder caused directly or indirectly by such obstruction, shadowing
or darkening. Landlord shall diligently seek to eliminate the condition
causing the obstruction or darkening. If, despite Landlord's diligent
effort, it reasonably appears that such obstruction or darkening is
"permanent," (i.e., of indefinite and long-term duration) Tenant shall
have the right to terminate this Lease as to the ground floor of the
Premises if such permanent obstruction or darkening affects not less
than thirty percent (30%) of the area of the ground floor exterior
windows, such termination to take effect sixty (60) days after written
notice by Tenant to Landlord of its election to so terminate based upon
such obstruction or darkening. Upon such termination, the Premises
shall be reduced, Base Rent for the ground floor shall be abated in the
manner provided herein with respect to partial termination for casualty
and the parties' rights and obligations with respect to the space as to
which the Lease is so terminated shall cease except with respect to
rights and obligations that have accrued prior to the date of
termination and obligations that are required to be performed under
this Lease after termination. Such right of partial Lease termination
shall constitute Tenant's sole remedy for any such obstruction.
(b) Indemnity. Tenant shall hold Landlord harmless from
any and all loss, cost, damage, expense claims and liability (including
reasonable attorney's fees) incurred in connection with or arising from
the Premises or Tenant's operations, other than that which may arise as
a result of, and to the extent of, the negligence or willful misconduct
of Landlord, to the extent that such liability is not covered by
Landlord's insurance. Landlord shall hold Tenant harmless from any and
all loss, cost, damage, expense claims and liability (including
reasonable attorney's fees) incurred in connection with or arising from
Landlord's acts or omissions in or with respect to the Building and/or
Property, other than that which may arise as a result of, and to the
extent of, the negligence or willful misconduct
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of Tenant, to the extent that such liability is not covered by Tenant's
insurance. The provisions of this Paragraph 12.(b) shall survive the
expiration or sooner termination of this Lease with respect to any claims or
liability occurring prior to such expiration or termination.
(c) Tenant's Liability Insurance. Tenant shall purchase and maintain in
force throughout the Term (without cost or expense to Landlord), commercial
general liability insurance (including public liability and property damage
insurance) in the amount of Ten Million and No/100 Dollars ($10,000,000) per
occurrence for legal liability arising out of personal injuries to or deaths of
persons occurring in or about the Premises. Such amounts may be satisfied with a
primary commercial general liability policy and an excess or "Umbrella"
liability policy affording coverage, at least as broad as that afforded by the
primary policy. Such insurance shall: (i) name Landlord, its managing agent, any
mortgagee of the Property and any lessor under any ground lease that Landlord
specifies by notice given in accordance with Paragraph 26 hereof, as additional
insureds; (ii) cover Tenant's contractual liability under Tenant's leases; (iii)
be issued by an insurance company that has a Best's Insurance Guide Rating of
A-XI or better; (iv) be primary and non-contributing with any insurance that may
be carried by Landlord; and (v) provide that it shall not be cancelled or
coverage changed without thirty (30) days' prior written notice to Landlord and
any mortgagee of Landlord's that has requested such notice in writing by notice
to Tenant in accordance with Paragraph 26 hereof. Tenant may obtain such
insurance under a blanket insurance policy covering other properties as well as
the Premises. At least one (1) Business Day prior to the Commencement Date,
Tenant shall deliver a certificate of such insurance to Landlord and shall
provide certificates of renewals thereof at least one (1) Business Day before
the expiration dates of the coverage then in effect. If Tenant shall fail to
procure such insurance before such date, or to deliver such certificates,
Landlord may, at its option, on notice to Tenant, procure such policies for the
account of Tenant, and the reasonable cost thereof shall be paid to Landlord as
Additional Rent within thirty (30) days after delivery to Tenant of an invoice
therefor.
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(d) Tenant's Property Insurance. Tenant shall obtain and maintain
throughout the Term "all risk" insurance on and for the full cost of replacement
of all of Tenant's property in the Premises, including, without limitation, all
furniture, equipment, and personal property and all items of Building fixtures,
alterations and improvements in which Tenant retains an ownership interest; and
Tenant shall provide Landlord with copies of current certificates for such
policy or policies that shall be kept current and in full force and effect at
all times during the Term.
(e) Tenant's Self-Insurance: Deductibles. Notwithstanding the
requirements of this Paragraph 12, the Tenant named in this Lease (but not any
successor or assignee of said Tenant, without Landlord's prior written consent
that Landlord shall have the right to withhold in its sole discretion) may
self-insure against any or all of the risks referred to in Paragraphs 12.(c)
and 12.(d) above, up to a total of One Million Dollars ($1,000,000); provided,
however, that at all times during the period Tenant shall have elected to
self-insure, Tenant shall have a net worth of not less than Two Hundred
Million Dollars ($200,000,000); and provided, further, that at all times that
Tenant shall have elected to self-insure with respect to the insurance required
to be carried pursuant to Paragraph 12.(c), a third party insurance company
shall perform the claims management and loss adjustment of all claims within
the scope of such coverage but for self-insurance.
(f) Landlord's Building And Property Insurance. Landlord shall maintain
and keep in full force and effect or cause to be maintained and kept in full
force and effect, with an insurance company that has a Best's Insurance Guide
rating of A-XI or better, at least the following insurance: (A) if there is a
boiler or other similar refrigeration equipment or pressure object or other
similar equipment in the Building, steam boiler, air-conditioning and machinery
insurance written on broad form basis with a limit of not less than $500,000;
(B) "all-risk" insurance, to the extent of one hundred percent (100%) of the
insurable replacement cost of the Building and all alterations and improvements
therein in which Landlord retains an ownership interest with
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rental abatement coverage for a period of not less than one (1) year due to
rental loss from an insured cause; and (C) worker's compensation, disability and
such other similar insurance in at least the statutory amounts covering all
persons employed in connection with any work performed by Landlord with respect
to the Property and with respect to whom death or bodily injury claims could be
asserted against Landlord, Tenant, the Premises or the Property. In addition,
Landlord shall have the right, but not the obligation, to maintain earthquake
insurance insuring the Building and personal property located therein against
loss due to earthquake in an amount reasonably determined by Landlord to provide
adequate protection against loss with commercially acceptable deductible
percentage as Landlord shall reasonably determine. All of the insurance policies
described in this Paragraph 12 shall be in form reasonably satisfactory to
Tenant, have deductibles of not less than Twenty Five Thousand Dollars ($25,000)
nor more than One Hundred Thousand Dollars ($100,000) (except as specifically
otherwise provided in the preceding sentence with respect to earthquake) and
provide in each case that it shall not be subject to cancellation, termination
or change except after at least thirty (30) days' prior written notice to
Tenant. Certificates shall be deposited by Landlord with Tenant on or before the
Commencement Date and certificates of renewal shall be deposited by Landlord
with Tenant at least one (1) Business Day before the expiration of the coverage
then in effect.
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(g) Landlord's Comprehensive General Liability Insurance. Landlord
shall have the right to purchase and maintain in force throughout the Term (or
from time to time during the Term) commercial general liability insurance
(including public liability and property damage insurance) in the amount of Ten
Million and No/100 Dollars ($10,000,000) for legal liability arising out of
personal injuries to or deaths of persons occurring in or about the Premises.
Such amounts may be satisfied with a primary commercial general liability policy
and an excess or "Umbrella" liability policy affording coverage, at least as
broad as that afforded by the primary policy. Such insurance shall: (i) cover
Landlord's contractual liability under Landlord's leases; (ii) be issued by an
insurance company that has a Best's Insurance Guide Rating of A-XI or better;
and (iii) provide that it shall not be cancelled or coverage changed without
thirty (30) days' prior written notice to Tenant. Landlord may obtain such
insurance under a blanket insurance policy covering other properties as well as
the Property.
(h) Subrogation Waiver. Landlord waives any and all rights of recovery
against Tenant for or arising out of injury to person or damage to or
destruction of the Building or any other property of Landlord or the Premises,
from causes then included under Fire Insurance policies or endorsements and
public liability and property damage insurance policies or endorsements (and
actually covered by the insurance policies then in force with proceeds payable
to Landlord), whether or not such injury, damage or destruction shall have been
caused by the negligence of Tenant, its agents, servants, employees,
contractors, visitors or licensees; provided, however, that the foregoing waiver
shall only apply to the extent that Landlord's insurance policies then in force
permit such waiver. Tenant waives any and all rights of recovery against
Landlord for or arising out of injury to person or damage to or destruction of
the Building or any other property of Tenant or the Premises, from causes then
included under Fire Insurance policies or endorsements and public liability and
property damage insurance policies or endorsements (and actually covered by the
insurance policies then in force with proceeds payable to Tenant), whether or
not such
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injury, damage or destruction shall have been caused by the negligence of
Landlord, its agents, servants, employees, contractors, visitors or licensees;
provided, however, that the foregoing waiver shall only apply to the extent that
Tenant's insurance policies then in force permit such waiver. Landlord and
Tenant represent that their present insurance policies now in force permit such
waivers.
(i) Termination Of Subrogation Waiver. If at any time during the Term,
any insurance carrier then providing insurance required to be provided
hereunder shall refuse to grant the waiver described in Paragraph 12.(h), or
such carrier shall revoke a consent previously given or shall cancel or
threaten to cancel any policy previously issued in order to revoke such waiver,
then, in any of such events, the party (either Landlord or Tenant) who receives
notice of such action or proposed action by the carrier shall notify the other
party in writing. Five (5) days after the date of such notice, the waivers by
both Landlord and Tenant as provided in Paragraph 12.(h) shall terminate as to
the loss, damage or destruction covered by such policy; provided, however,
that if at any time thereafter such consent shall be obtained without an
additional premium from any existing or substitute insurance carrier, the
waiver shall be reinstated. If such carrier shall consent to such waiver only
upon payment of an additional reasonable premium, the insured party shall pay
the additional reasonable premium and maintain such policy in effect.
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13. Damage And Destruction.
(a) Minor Casualty. If all or any part of the Premises
on any particular floor or floors in the Building are rendered
untenantable or inaccessible by damage from fire or other casualty
(other than a Major Casualty, as hereinafter defined) such that a
contractor selected by Landlord (subject to Paragraph 13.(e) below),
states in a written report that such damage can be substantially
repaired in compliance with Requirements within one (1) year from the
date of such casualty (employing normal construction methods without
overtime or other premium except as otherwise provided in Paragraph
13.(g)), Landlord shall promptly deliver a copy of such report to
Tenant and notify Tenant of the date by which Landlord estimates that
the repairs will be substantially complete, which date shall not be
later than the date stated in the contractor's report. Landlord shall
diligently repair such damage at its own expense; provided, however,
that damage to improvements, furniture, chattels or trade fixtures
that are the property of Tenant or that Tenant may be required to
remove upon termination of this Lease shall be repaired at Tenant's
expense. Failure to complete the work of repair or restoration within
the time specified for completion in the contractor's report shall
have the consequences specified in Paragraph 13.(f) below.
(b) Extended Restoration Period: Minor Casualty. If all or any
part of the Premises on any particular floor or floors in the Building
are rendered untenantable or inaccessible by damage from fire or other
casualty (other than a "Major Casualty" as specified in Paragraph
13.(c)) such that a contractor selected by Landlord (as provided in
Paragraph 13.(e) below), states in a written report that such damage
cannot be substantially repaired in compliance with Requirements
within one (1) year from the date of such casualty (employing normal
construction methods without overtime or other premium except as
otherwise provided in Paragraph 13.(g)), Landlord shall promptly
deliver a copy of such report to Tenant and notify Tenant of the date
by which Landlord estimates that the repairs can be substantially
complete, which date shall not be later than the date stated in the
contractor's report. Either Landlord or Tenant may
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elect to terminate this Lease with respect to the particular floor or
floors that have suffered the damage that cannot be repaired within the
one (1) year period referred to above, such termination to be effective
as of the date of such casualty, by written notice delivered to the
other not more than twenty (20) days after receipt of the contractor's
written opinion as to the date when the damage can be repaired. If
neither party elects to so terminate the Lease as to the damaged
floors, then Landlord shall promptly repair such damage at its own
expense; provided, however, that damage to improvements, furniture,
chattels or trade fixtures that do not belong to Landlord or that were
specially installed to accommodate Tenant's occupancy ((aa) Tenant's
computer-related water towers, condenser water piping and shafts, pumps
and electrical installations related thereto, (bb) UPS system and
battery racks, (cc) diesel fuel risers, tanks and emergency generators
and related electrical installations, (dd) escalator and internal
stairs, and (ee) Schwab University and cafeteria) shall be repaired at
Tenant's expense; provided, however, that Tenant may elect not to
repair or restore any of such items. Failure to complete the work of
repair or restoration within the time specified in the contractor's
report for completion shall have the consequences specified in
Paragraph 13.(f) below.
(c) Major Casualty: Termination of Lease. If thirty seven and
one-half percent (37.5%) or more of the rentable square footage of the
Premises then leased by Tenant from Landlord in the Building are
rendered untenantable or inaccessible by damage from fire or other
casualty such that a contractor selected by Landlord (as provided in
Paragraph 13.(e) below), states in a written report that (i) such
damage cannot be substantially repaired in compliance with Requirements
within one (1) year from the date of such casualty (employing normal
construction methods without overtime or other premium except as other
wise provided in Paragraph 13.(g)), and (ii) at least sixty two and
one-half percent (62.5%) of the total rentable square footage of the
Premises can be tenantable and accessible within one (1) year from the
date of such casualty (employing normal construction methods without
overtime or other premium), then Landlord shall promptly deliver a
copy
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of such report to Tenant and notify Tenant of the date by which
Landlord estimates that such repairs can be substantially completed,
which shall not be later than the time period stated in the
contractor's report. Either Landlord or Tenant may elect to terminate
this Lease with respect to the portion of the Premises that has
suffered the damage that cannot be repaired within the one (1) year
period referred to above, such termination to be effective as of the
date of such casualty, by written notice delivered to the other not
more than thirty (30) days after receipt of the contractor's report as
to the date when the damage can be repaired; or Tenant may elect to
terminate this Lease in its entirety by written notice delivered to
Landlord not more than thirty (30) days after Tenant's receipt of the
estimate for completion of the work, based upon the contractor's
report. If neither party elects to so terminate the Lease in whole or
in part, then Landlord shall promptly repair damage with respect to
all or the portion of the Premises as to which this Lease remains in
full force and effect at its own expense; provided, however, that
damage to improvements, furniture, chattels or trade fixtures that do
not belong to Landlord or that were specially installed to accommodate
Tenant's occupancy ((aa) Tenant's computer-related water towers,
condenser water piping and shafts, pumps and electrical installations
related thereto, (bb) UPS system and battery racks, (cc) diesel fuel
risers, tanks and emergency generators and related electrical
installations, (dd) escalator and internal stairs, and (ee) Schwab
University and cafeteria) shall be repaired at Tenant's expense;
provided, however, that Tenant may elect not to repair or restore any
of such items. Failure to complete the work of repair or restoration
within the time specified in the contractor's report for completion
shall have the consequences specified in Paragraph 13.(f) below. If
the provisions of Paragraph 13.(b) and 13.(c) both apply to any
situation that arises hereunder, Paragraph 13.(c) shall control.
(d) Effect Of Termination. If Tenant or Landlord elects to
terminate this Lease, under this Paragraph 13 with respect to any
particular floor, floors or portion of the Premises, then the Base Rent
shall be reduced by the amount that Tenant was paying for such portion
of the Premises and
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Tenant's Proportionate Share and other obligations hereunder shall be
commensurately reduced so as to apply solely to the Premises that
remain subject to the Lease, based on the square footage of the portion
of the Premises as to which the Lease is terminated as determined
pursuant to Exhibit C. If this Lease shall have been terminated under
this Paragraph 13 with respect to the entire Premises, then this Lease
shall expire as of the date of termination stated in such notice with
the same effect as if that were the date on which the Term expires; and
all Rent payable under this Lease shall be apportioned as of such date.
If Tenant shall have paid any Base Rent or any Additional Rent pursuant
to Paragraphs 27 or 28 for any period after expiration of this Lease,
Landlord shall promptly refund such amount to Tenant.
(e) Contractor Selected For Damage Analysis And Reports. The
contractor referred to in this Paragraph shall be a reputable,
independent contractor or construction manager and not an Affiliate of
either Landlord or Tenant and shall be selected by Landlord within
twenty (20) days after the date of the casualty. Landlord's choice
shall be subject to the prior written approval of Tenant, which
approval shall not be unreasonably withheld or delayed.
(f) Failure To Complete Work Within Estimated Restoration
Period. During the course of Landlord's restoration work, Landlord
shall diligently seek to notify Tenant in writing as soon as it
reasonably appears to Landlord that work of repair and restoration may
not be completed within the time period estimated by Landlord as
provided this Paragraph 13. Landlord and Tenant shall promptly meet and
confer in an effort to reach agreement as to the best method of
completing the work so that the Premises will again be tenantable and
accessible and the outside date when such work shall be completed. If
(i) Landlord and Tenant are unable to reach such an agreement, and (ii)
Landlord has been unable to complete the work so that the damaged
portions of the Premises have been made tenantable and accessible
within sixty (60) days after the date originally estimated in the
contractor's report, then this Lease may be terminated by written
notice given by Tenant within twenty (20) after the end of said sixty
(60) day period with respect to the particular floor or floors
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that are damaged in the case of a Minor Casualty and as to the entire
Premises in the case of a Major Casualty.
(g) Use Of Expedited Construction Practices. Notwithstanding
anything to the contrary in this Paragraph, Landlord may elect at its
sole option to have the one (1) year period for completion of repairs
(referred to in Paragraphs 13.(a), 13.(b) and 13.(c) above),
calculated by assuming use of expedited construction methods and/or
with overtime or other premium. Landlord shall notify Tenant and the
contractor to be selected pursuant to Paragraph 13.(e) of the type and
extent of expedited construction methods that Landlord is willing to
employ. The contractor shall then base its estimate of the number of
days to complete the work on the basis of such expedited methods.
Landlord shall then use the expedited methods so identified in
performance of the work, if it undertakes or is required to undertake
repair and restoration as provided herein.
(h) Rent Abatement During Repair Period. If this Lease remains
in full force and effect with respect to any portion of the Premises
that has been damaged and rendered untenantable or inaccessible, Base
Rent and Additional Rent payable under Paragraphs 27 and 28 shall be
reduced in proportion to the ratio that the rentable square footage
so rendered untenantable or inaccessible to Tenant on such floor bears
to the total rentable square footage of such floor, such reduction to
commence on the date of such fire or other casualty and to continue
until the earlier of (i) thirty (30) days after substantial completion
by Landlord of the repairs to the part of the Premises rendered
untenantable or inaccessible, or (ii) Tenant's occupancy of the space
for the conduct of its business. Landlord shall organize the
restoration work to the best of Landlord's ability in a manner that
will allow Tenant to begin its work before Landlord has completed its
restoration so that Tenant can recommence the conduct of its business
in the restored space as expeditiously as possible. If damage to the
Premises occurs during a period when Tenant is entitled to rental
abatement pursuant to Paragraph 3.(c) or 3.(d), the abatement provided
for in this Paragraph shall be added to the abatement period then in
effect under Paragraph 3.(c) or Paragraph 3.(d) so that Tenant will
not lose the benefit of any
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abatement provided for in this Lease due to overlapping abatement
periods.
(i) Disruption of Tenant. Landlord shall use reasonable
diligence to minimize any inconvenience or annoyance to Tenant or
injury to the business of Tenant resulting in any way from damage from
fire or other casualty or the repair thereof.
(j) Substantially Completed; Substantial Completion. Whenever
used in this Paragraph 13 with respect to any work to be performed by
Landlord, "Substantially Completed" or "Substantial Completion" shall
mean that stage of the progress of such work as shall enable Tenant to
have (i) all of the services to be provided to Tenant pursuant to
Paragraph 15 hereof, and (ii) access to the Premises to commence
Tenant's use of the Premises for the purpose of installing Tenant's
improvements and alterations without interference (except to an
immaterial degree) by reason of the completion of unfinished details of
Landlord's work. Landlord shall complete such unfinished details of
Landlord's work within a reasonable time and with minimal disturbance
of Tenant. The time limits for completion of work provided for in this
Paragraph 13 shall not be extended by reason of force majeure.
14. Eminent Domain.
(a) Definitions. The terms used in this Paragraph
shall have the following meanings:
(1) "Condemnation" means (i) the exercise by a
governmental or quasi-governmental agency or authority of the
lawful power to acquire or "take" interests in property for a
public purpose, whether by legal action or otherwise, or (ii)
a voluntary sale or transfer by Landlord to any governmental
or quasi-governmental agency, under threat of condemnation or
while proceedings for condemnation are pending.
(2) "Date of Taking" means the date that the
condemnor becomes lawfully entitled to the interest that it
seeks to acquire.
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(3) "Award" means all consideration paid for the
property being acquired through condemnation.
(b) Condemnation Of Total Premises. If the whole of the Premises are
taken by Condemnation, this Lease and the Term shall terminate on the Date of
Taking.
(c) Condemnation Of Portion Of Premises. If any portion of the Premises
is taken by Condemnation, this Lease shall remain in effect, except that Tenant
may elect to terminate this Lease as of the Date of Taking if thirty percent
(30%) or more of the total amount of rentable square footage of the Premises is
taken. If Tenant elects to terminate this Lease, Tenant must exercise its right
to terminate pursuant to this Paragraph 14 by giving notice of such election to
Landlord within ninety (90) days after the nature and extent of the taking have
been finally determined. Tenant shall have sixty (60) days thereafter within
which to vacate the Premises. Any Base Rent or Additional Rent paid by Tenant
for periods after the effective date of termination shall be refunded promptly
by Landlord. If any portion of the Premises is taken by Condemnation and this
Lease remains in full force and effect as to the remainder of the Premises, then
on the Date of Taking, the Base Rent shall be reduced by a sum equal to the Base
Rent per square foot of the area taken as determined pursuant to Exhibit C on
the floor(s) from which space is taken, multiplied by the number of square feet
taken from such floor(s); and Tenant's Proportionate Share and other obligations
under this Lease shall be commensurately reduced so as not to include
obligations relating to that portion of the Premises as to which the Lease has
been terminated. Landlord shall diligently restore the part of the Premises not
taken (including, but without limitation, the alterations and improvements made
by Tenant) to a self-contained rental unit without cost or expense to Tenant (no
such costs to be charged as part of Occupancy Cost).
(d) Allocation Of Award. The Award shall belong first to any mortgagee
of the Property pursuant to the terms of its mortgage. The remaining Award, if
any, shall belong to and be paid to Landlord, provided, however, that Tenant
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shall receive from the Award the following:
(i) A sum attributable to the value at Date of Taking of
Tenant's improvements or Alterations made to the Premises by Tenant at
Tenant's sole cost and expense, as shown on Tenant's Federal income tax
or information returns;
(ii) A sum attributable to the value at Date of Taking of
Tenant's trade fixtures, equipment and other personal property included
in the Condemnation; and
(iii) Any sum attributable to Tenant's loss of goodwill or
relocation expenses, but only to the extent that compensation for such
loss is included in the Award as a separate item of damage.
(e) Condemnation Of Temporary Interests. If all or any portion of
the Premises is taken by exercise of the power of eminent domain for a period
that is less than the then remaining Term, then this Lease shall remain in full
force and effect. If, by reason of such acquisition or condemnation, changes or
alterations are required to be made to the Premises or to restore the Premises,
Landlord shall perform such changes or alterations at Landlord's sole cost and
expense (which cost shall not be charged as an Occupancy Cost). Tenant shall
continue to pay all Rent due hereunder, but shall be entitled to receive the
entire Award made in connection with any such temporary taking (less a portion
thereof necessary to cover the reasonable expenses of the restoration described
in the preceding sentence, which shall be retained by Landlord and applied
toward such restoration). A temporary taking extending beyond the then-remaining
Term shall be treated as a permanent taking for purposes of this Lease.
(f) Disruption of Tenant. Landlord shall use reasonable diligence
to minimize any inconvenience or annoyance to Tenant or injury to the business
of Tenant resulting in any way from any repairs in connection with any
Condemnation.
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15. Basic Services. Landlord shall provide services to the
Premises as follows:
(a) Defined Terms. As used in this Paragraph 15, the
following terms are defined as follows:
(i) "Basic Services" means the services that Landlord
is required to provide to Tenant under this Lease without
extra charge beyond payment of Base Rent, except as
otherwise provided in Paragraph 27. Landlord shall
generally operate the Building in a manner customary in
buildings comparable to the Building in the Downtown
Financial District unless other specific levels of service
are specified herein. The cost of services in excess of
Basic Services that are separately billed to Tenant
pursuant to the terms of this Lease shall not be
considered an Occupancy Cost pursuant to Paragraph 27 of
this Lease.
(ii) "Normal Business Hours" means from 8:00 a.m. to
6:00 p.m. on weekdays (other than National Holidays) and
8:00 a.m. to 2:00 p.m. on Saturdays.
(iii) "Overtime Periods" means all times other than
Normal Hours.
(iv) "National Holidays" means the days identified on
Exhibit J, attached hereto and incorporated herein by
reference thereto and any other day designated after the
date of this Lease as a holiday by the federal government.
(v) "HVAC System" means the Building heating,
ventilation and air conditioning system.
(vi) "Business Days" means all days, excluding
Saturdays, Sundays and National Holidays.
(b) Passenger Elevator Service. Landlord shall cause the
elevators in all elevator banks to be fully accessible and usable
by Tenant during Normal Business Hours for passenger service to
the Premises (subject to necessary
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shutdown for repairs). At least two passenger elevators shall be
functioning to provide access to each floor within the Premises at all
other times.
(c) Freight Elevator Service; Loading Facilities. Landlord
shall provide one freight elevator serving the Premises on call on a
"first come, first served" basis during Normal Business Hours and on a
reservation, "first come, first served" basis during Overtime Periods.
Use of the freight elevator serving the Premises shall be available to
Tenant during Overtime Periods at the reasonable actual cost to
Landlord of providing such service to Tenant, which Tenant shall pay,
within thirty (30) days after receipt of Landlord's invoice accompanied
by reasonably detailed and satisfactory supporting documentation. In
addition, if this Lease shall be terminated as to the basement portion
of the Premises, Landlord shall provide loading and delivery spaces in
the basement, as provided in Paragraph 4.(c) at no cost to Tenant.
(d) Heating, Ventilation And Air Conditioning. During Normal
Business Hours, Landlord shall ventilate the Premises and furnish
heating or air conditioning when in the reasonable judgment of Landlord
it may be required for the comfortable occupancy of the Premises or
when required by law. Heating, air conditioning and ventilation shall
be available to Tenant at all times outside of Normal Business Hours
upon reasonable prior notice from Tenant to Landlord specifying the
service needed and the floors of the Premises (if less than all) to be
so serviced. Tenant shall pay the reasonable and actual cost of
providing heating, ventilation or air conditioning from the Building's
central system outside of Normal Business Hours. Tenant shall be
responsible for keeping all exterior doors to the Premises and all
exterior windows in the Premises closed. Tenant shall cooperate with
Landlord and comply with such reasonable rules as Landlord may
establish from time to time to preserve the efficiency and integrity of
the HVAC System. Tenant shall not install or use in the Premises any
equipment that generates heat so as to adversely affect the HVAC System
without Landlord's prior written consent which shall not be
unreasonably withheld or delayed; provided, however, that it shall be
reasonable for Landlord to refuse
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consent unless Tenant's proposal can be modified to mitigate any
adverse impact on the HVAC System. Throughout the Term, Landlord shall
have free access to any and all mechanical installations of Landlord
or Tenant, including, but not limited to air conditioning, fan,
ventilating and machine rooms, telephone rooms and electrical closets,
subject to the limitations contained in Paragraph 16.(b). Tenant shall
not construct partitions or other obstructions that might unreasonably
interfere with Landlord's free access to such installations, or
unreasonably interfere with the moving of Landlord's equipment to or
from the enclosures containing said installations. Tenant shall not
tamper with, adjust, modify, touch or otherwise in any manner
adversely affect the HVAC System.
(e) Electricity. Landlord shall provide electricity to the
Premises for normal and usual lighting and office business machines
(including, without limitation, computers, printers, facsimile
machines, photocopying machines, electronic data processing and
ancillary equipment) only. Tenant's use of electric current shall never
exceed the capacity of the feeders to the Building or the risers or
wiring installation. Tenant shall not install or use or permit the
installation or use in the Premises, of any computer or electronic data
processing or ancillary equipment or any other electrical apparatus
designed to operate on electrical current in excess of 120 volts,
without the prior written consent of Landlord which shall not be
unreasonably withheld or delayed. Total electrical usage by Tenant in
the Building (including, but without limitation, power for the HVAC
System, elevators and other Building systems) shall not exceed four
hundred twenty-seven thousand six hundred eighty-five (427,685)
kilowatt hours per month. If Tenant exceeds the foregoing usage, it
shall reimburse Landlord for the cost of the excess within thirty (30)
days after receipt of an invoice therefor, submitted together with the
power bill from the utility company that demonstrates the overage.
Electricity provided to all retail space within the Building shall be
separately metered, the cost of such electricity shall be charged to
the tenants of such space and no portion thereof shall be included in
Occupancy Costs or charged to Tenant; nor shall the electricity charged
to tenants of the retail space be
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counted against or included in the monthly kilowatt hour limit stated
above.
(f) Water. Landlord shall furnish hot and cold water for
drinking, cleaning, kitchen and lavatory purposes in a manner customary in
buildings comparable to the Building in the Downtown Financial District.
Landlord shall also furnish water to Tenant's cooling towers and to
Tenant's cafeteria and for all other needs of Tenant. Tenant shall pay the
cost of all water delivered to Tenant's cooling towers and Tenant's
cafeteria, as separately metered to Tenant within thirty (30) days after
receipt of an invoice therefor from Landlord. All other water consumption
charges are included in Occupancy Costs pursuant to Paragraph 27 of this
Lease. Tenant shall keep the meters and installation equipment in good
working order and repair at Tenant's sole cost and expense, in default of
which Landlord may cause such meter and equipment to be replaced or
repaired and collect the cost thereof from Tenant within thirty (30) days
after invoice therefor.
(g) Tenant's Supplemental Air Conditioning System. Tenant has
installed in a portion of the Premises a supplemental air conditioning
system, including water towers, condenser water pipes and shafts, pumps
and related electrical installations to provide supplemental air
conditioning to a portion of the Premises. Tenant shall have access to all
such equipment and facilities for the purpose of inspecting, repairing,
replacing, operating, testing and maintaining the same during the Term,
notwithstanding that Tenant may have terminated this Lease with respect to
a portion of the Premises. If Tenant shall need access to an area leased
to another tenant for any such purposes, Landlord shall use reasonable
diligence to gain access to such area for Tenant to perform such work in
such leased area. Tenant shall pay directly all costs of operating and
maintaining such supplemental air conditioning system and the cost thereof
shall be in addition to and not a part of Occupancy Costs.
(h) Janitorial Service.
(1) Landlord shall cause all portions of the
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Premises (including the cafeteria) other than the storage areas,
parking areas and kitchen for the cafeteria to be kept clean,
provided the same are used for uses permitted hereunder, and are
kept reasonably in order by Tenant, in accordance with the cleaning
specifications attached hereto, marked Exhibit K, attached hereto
and incorporated herein by reference thereto. Janitorial service
provided by Landlord shall be provided after 5:30 p.m. on Business
Days. Basic Service shall not include (i) janitorial service for
additional weekday or weekend shifts, (ii) cleaning of kitchen and
kitchen facilities for the cafeteria or the executive restroom,
(iii) cleaning of rooms used solely for Tenant's mechanical
equipment and fixtures, and (iv) polishing of Tenant's metalwork or
millwork. Landlord's obligation to provide such service shall be
suspended during any period when the Premises are untenantable or
inaccessible and Tenant is receiving an abatement of Base Rent
hereunder by reason of such condition.
(2) Any part of the Premises not required to be cleaned
by Landlord shall be kept clean and in order by Tenant at Tenant's
expense, by contractor's approved by Landlord (such approval not to
be unreasonably withheld or delayed) or by Tenant's employees.
Landlord shall remove all of Tenant's refuse and rubbish. Tenant
shall pay to Landlord the cost of removal of any of Tenant's refuse
and rubbish, to the extent that the same exceeds the refuse and
rubbish customarily and normally generated by commercial office
space use of space comparable to the Premises, fixed by the parties
as two (2) loads per week of a fifteen (15) cubic yard container of
compacted refuse averaging four thousand one hundred (4,100) pounds
per load.
(3) Landlord shall furnish window washing service for
the exterior side of the exterior windows at least once every three
(3) months and for the interior side of the exterior windows at
least once each year, the cost thereof to be an item of Occupancy
Costs.
(4) Provided that Tenant has not exercised
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any option pursuant to Paragraph 2.(b), Tenant may elect to provide
its own janitorial service at any time and from time to time during
the Term; provided, however, that if Tenant elects to provide its own
janitorial service, it shall assume such responsibility for the entire
Building (except for retail uses in the Building that are not those
Tenant or Tenant's sublessees) and Tenant shall not have the right to
require Landlord again to provide such service for a period of one (1)
year thereafter. To exercise such an election, Tenant shall notify
Landlord in writing with a full and complete list of all of the
persons who will be performing the work for Tenant. All such persons
who are not employees of Tenant shall be subject to the prior written
approval of Landlord, which said approval shall not be unreasonably
withheld or delayed; provided, however, that it shall be reasonable
for Landlord to condition approval upon (i) the agreement of all such
persons to comply with reasonable rules and regulations from time to
time established by Landlord for performance of such work, including,
but without limitation, use of freight elevators, cleaning equipment,
trash receptacles and the like; and (ii) compliance by such persons
with labor contracts (if any) to which Landlord may be subject in the
Building. Whenever and for any period when Tenant has assumed
responsibility for performance of the janitorial service, Tenant shall
cause its service provider to deliver trash to the Building loading
dock, separated in the manner required to comply with all applicable
recycling and solid waste management requirements. The refuse and
rubbish shall then be removed in the manner provided in Paragraph
15.(h)(2). Once Tenant has assumed responsibility for performance of
janitorial services, it shall not have the right to relinquish
performance of the service to have the same again assumed by Landlord
on less than ninety (90) days prior written notice to Landlord. If
Tenant shall be providing janitorial services for the Building,
Landlord shall provide to Tenant a credit against monthly installments
of Base Rent in an aggregate amount equal to the then reduction in
Landlord's actual costs as a result of Landlord not being required to
provide the janitorial
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services to the Building set forth in Exhibit K. If Tenant shall
have made the election provided in this Lease during any part of the
Term during which Tenant is entitled to an abatement in Base Rent,
then instead of a rent credit, Landlord shall pay to Tenant on the
first day of each month during such abatement period an amount equal
to the then reduction in Landlord's actual costs as a result of
Landlord not being required to provide the janitorial services to
the Building set forth in Exhibit K.
(i) Tenant's Emergency Generator. Tenant has installed in a
portion of the Premises an emergency generator, including related fuel
tanks and lines and related electrical installations to provide emergency
power to a portion of the Premises and to certain Building systems. Tenant
shall have access to all such equipment and facilities for the purpose of
inspecting, repairing, replacing, operating, testing and maintaining the
same during the Term, notwithstanding that Tenant may have terminated this
Lease with respect to a portion of the Premises. If Tenant shall need
access to an area leased to another tenant for any of such purposes,
Landlord shall use reasonable diligence to gain access to such area for
Tenant to perform such work in such leased area. Tenant shall pay
directly, and not as an item of Occupancy Cost, all costs of operating and
maintaining such emergency generator system.
(j) Service To Tenant's Equipment. Tenant shall provide
and be responsible for servicing its own equipment and other
improvements at Tenant's direct cost and not as an item of Occupancy
Cost.
(k) Lighting And Building Systems Maintenance. Landlord shall
maintain Building standard light fixtures, including tube and ballast
replacement, throughout the Building (including, but without limitation,
the Premises). Landlord shall maintain the Building systems in good
working order sufficient to serve the Premises in a manner customary in
buildings comparable to the Building in the Downtown Financial District.
Should any portion of the Premises be used in excess of Normal Business
Hours on a regular basis, Tenant shall reimburse Landlord for any
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additional light and Building systems maintenance costs incurred as a
consequence of such use.
(l) Service Interruption. Landlord shall not be liable for
failure to furnish utilities or services to the Premises when the failure
results from accident, breakage, strikes, lock-outs, shortages or other
causes beyond Landlord's reasonable control or the need to make repairs
due to emergency or otherwise; but in case of such failure Landlord shall
take all reasonable steps promptly to restore the interrupted utilities
and services and to minimize the inconvenience to and disruption of
Tenant's use or enjoyment of the Premises. Such service or utility
interruption shall not constitute a constructive eviction of Tenant nor
shall Tenant be entitled to abatement of Rent except as expressly
otherwise provided in Paragraph 15.(m). Landlord shall use reasonable
diligence to provide Tenant with prior notice of any proposed curtailment
or cessation of a utility or service and the length of time of such
disruption, except in the event of an emergency, in which case Landlord
shall notify Tenant of such curtailment or cessation of utility or service
and the length of disruption promptly after Landlord has become aware of
same. Landlord shall not be required to perform any such repairs or
maintenance on an overtime or premium pay basis, except that Landlord
shall employ contractors or laborers at so-called overtime or other
premium pay rates if necessary to make any repair required to be made by
it hereunder to remedy any condition that (i) results in a denial of
access to all or a material portion of the Premises, (ii) is dangerous to
persons in the Premises, or (iii) that renders thirty thousand (30,000)
rentable square feet or more of the Premises untenantable for more than
one Business Day; provided, however, that nothing in this Paragraph 15.(l)
shall operate to enlarge Landlord's obligations in any case where
Paragraph 13 applies. In all other cases, at Tenant's request, Landlord
shall employ contractors or laborers at so-called overtime or other
premium pay rates and incur any other costs or expenses in making any
repairs, maintenance, alterations, additions or improvements, and Tenant
shall pay to Landlord, within thirty (30) days after written demand, an
amount equal to the difference between the overtime or other premium pay
rates and the regular pay rates for such labor
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and any other overtime costs or expenses incurred by Landlord.
(m) Rent Abatement for Failure of Services.
(1) Notwithstanding any provision contained in this
Lease to the contrary, should any cessation or curtailment of any
utility or Building service, caused by a "Landlord Failure" (as
hereinafter defined) materially impair Tenant's ability to conduct
its normal business in the Premises (an "Interruption") for at least
four (4) consecutive Business Days, then Base Rent and the
Additional Rent payable pursuant to Paragraphs 27 and 28, for that
portion of the Premises so affected shall be abated from the first
Business Day following such cessation or curtailment until the
utilities or services are fully restored. If an Interruption shall
result from any cause emanating from outside the Property and not
the result of a Landlord Failure, and such Interruption shall
continue for ten (10) consecutive days, then Base Rent and the
Additional Rent payable pursuant to Paragraphs 27 and 28 for that
portion of the Premises so affected shall be abated from the first
Business Day following such cessation or curtailment until the
utilities or services are fully restored. Tenant shall not be
entitled to abatement of Rent with respect to space within the
Premises that remains unimpaired and/or can be used by Tenant for
the conduct of its business by operation of Tenant's emergency
generators and other emergency equipment, subject to Landlord's
obligation to reimburse Tenant for the use of such generators and
equipment as provided in Paragraph 15.(m)(4).
(2) A "Landlord Failure" shall mean any Interruption
caused by Landlord's work of repair, alteration, installation,
addition or improvement or by reason of Landlord's failure to make
any repairs, alterations, installations, additions or improvements
that Landlord is required to make pursuant to this Lease.
(3) Landlord shall be entitled to the
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proceeds of any rental abatement insurance payable with respect to
any period for which Tenant may abate payments of Rent pursuant to
this Paragraph 15.(m).
(4) Tenant shall use its emergency generators and other
emergency equipment to minimize the service interruption and its
effect on Tenant's operation. Landlord shall reimburse Tenant for
the cost of operating such emergency generators and equipment within
thirty (30) days after receipt of an invoice therefor from Tenant
that itemizes the costs so incurred.
(5) During any period when payments of Base Rent and
Additional Rent payable under Paragraphs 27 and 28 are abated
hereunder in whole or in part, Tenant shall nonetheless remain
liable to Landlord, and shall pay when due as provided herein, any
reimbursable items for which Tenant is liable hereunder. Nothing
contained in this Paragraph 15.(m) shall be deemed to confer upon
Tenant the right to withhold any payment of Base Rent or
installment of Additional Rent payable under Paragraphs 27 and 28
or to offset any Rent abated pursuant to this Paragraph
15.(m) against payments of Base Rent and/or Additional Rent next
falling due hereunder. Tenant shall recover any Rent abated under
this Paragraph 15.(m) by invoice submitted to Landlord that shall
be due thirty (30) days thereafter.
(6) If right to abatement hereunder occurs during a
period when Tenant is entitled to rental abatement pursuant to
Paragraph 3.(c) or 3.(d), the abatement provided for in this
Paragraph shall be added to the abatement period then in effect
under Paragraph 3.(c) or Paragraph 3.(d) so that Tenant will not
lose the benefit of any abatement provided for in this Lease due to
overlapping abatement periods.
16. Access To Premises.
(a) Tenant's Access. Tenant and Tenant's agents, servants,
employees, contractors, invitees and licensees shall be entitled to access
to the Premises 24 hours per
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day, 7 days per week, subject to such reasonable security measures as
Landlord and/or Tenant may establish to protect against entry by
unauthorized persons.
(b) Landlord's Access. With the prior written consent of
Tenant in each instance, which consent shall not be unreasonably withheld
or delayed, Landlord may erect, use, and maintain pipes, conduits and
other elements of the Building mechanical, electrical and life safety
systems in, through and adjacent to walls, partitions and columns of the
Premises, provided that the work shall be concealed behind, beneath or
within partitioning, columns, ceilings or floors or, where the same cannot
be so concealed, completely furred at points immediately adjacent to
partitioning, columns or ceilings and that Landlord shall repaint and
repair all damage caused thereby, and further provided that the same do
not interfere with Tenant's use of the Premises or decrease the usable
area of any floor of the Premises to greater than a de minimis extent.
Tenant shall permit Landlord, and its authorized representatives, upon
reasonable prior notice to Tenant and with Tenant to have the right to
have a representative accompanying Landlord and Landlord's
representatives, to enter the Premises at all reasonable times during
Normal Business Hours for the purpose of (i) inspecting the same, (ii)
posting notices of non-responsibility in connection with work to be
performed by Tenant, (iii) making any repairs to the Premises required to
be made under this Lease, (iv) performing work that may be necessary to
comply with any laws, ordinances or governmental rules or regulations, or
that may be necessary to prevent waste or deterioration, and (v) showing
the Premises to prospective mortgagees, purchasers; and during the last
sixteen (16) months of the Term, to prospective tenants. All rights of
Landlord hereunder shall be exercised in a reasonable manner, upon
reasonable notice and so as not to cause unreasonable interference with
Tenant's business, except in an emergency (in which event, Landlord shall
use reasonable diligence to minimize the amount of time Landlord or its
representatives remain in the Premises and to minimize interference with
Tenant's business). So long as Landlord acts reasonably under the
circumstances, Landlord shall not be liable to Tenant for diminution of
rental value, inconvenience, annoyance or injury to Tenant's
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business arising from such entry by Landlord, nor shall Tenant be entitled
to an abatement of Rent by reason thereof. If, during the last month of
the Term, Tenant shall have removed all or substantially all of Tenant's
property from the Premises, Landlord may immediately enter and alter,
renovate and redecorate the Premises, without reduction or abatement of
Rent, or other compensation, and such acts shall have no effect upon this
Lease. If (i) Tenant has exercised an election to terminate this Lease as
to ten (10) or more Floors, or (ii) Landlord is required by law to make
such change, Landlord shall have the right to change the arrangement and
location of public entrances and passageways, doors and doorways, and
corridors, elevators, stairs, toilets, and other public parts of the
Building after reasonable notice, provided that no such change impairs
Tenant's access to the Premises or Tenant's use of the Premises for any
Permitted Use. Landlord shall use reasonable diligence to make any such
changes in the public portions of the Building in a manner that minimizes
the inconvenience to and disruption of Tenant's use and enjoyment of the
Premises.
17. Vaults And Vault Space. No vaults, vault space or space not
within the boundary of the Property is leased hereunder, anything contained in
or indicated on any sketch, blueprint or plan, or anything contained elsewhere
in this Lease to the contrary notwithstanding. Landlord makes no representation
as to the location of the boundary of the Property. All vaults and vault space
and all space not within the boundary of the Property, that Tenant may be
permitted to use or occupy, is to be used or occupied under a revocable license,
and if any such license be revoked, or if the amount of such space be curtailed
by any federal, state or municipal authority, or public utility, Landlord shall
not be liable to Tenant, nor shall Tenant be entitled to any compensation or
diminution or abatement of Rent, nor shall such revocation or curtailment be
deemed a constructive or actual, total or partial eviction. Any fee or license
charge of municipal authorities for any such vault used or occupied by Tenant
shall be paid by Tenant.
18. Sprinkler System.
(a) Condition: Notice: Duty To Repair. The
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Building sprinkler system performs an essential life-safety function in
the Building. Tenant shall promptly inform Landlord of any damage or
injury to the sprinkler system, or whenever Tenant believes that all or
any part of the sprinkler system might not be in good working order, and
Tenant shall pay the cost of any repairs thereto made necessary by any act
or omission of Tenant, Tenant's agents, servants, employees, contractors,
invitees or licensees.
(b) Alterations. If the Insurance Services Office (or similar
body) or any bureau, department or official of the state, county or city
government, or any governmental authority having jurisdiction, require or
recommend that changes, modifications, alterations, or additions be made
in or to the sprinkler system by reason of Tenant's business, or the
location of partitions, trade fixtures, or other contents of the Premises,
or if any such changes, modifications, alterations, additional sprinkler
heads or other equipment, become necessary to prevent the imposition of a
penalty or charge against the full allowance for a sprinkler system in the
fire insurance rate as fixed by said Office, or by any fire insurance
company providing coverage for the Building, Tenant shall promptly make
and supply such changes, modifications, alterations, additional sprinkler
heads or other equipment without cost or expense to Landlord.
19. Bankruptcy Or Insolvency.
(a) Right Of Termination. If (i) at any time during the Term,
Tenant shall file (or be named as the defendant in) a bankruptcy or
insolvency petition under any federal or state statute, or a petition
seeking the appointment of a receiver, trustee or conservator of all or a
portion of Tenant's property, or if Tenant makes an assignment for the
benefit of creditors, and (ii) any of the foregoing either (x) results in
any such entry of an order for relief, adjudication of bankruptcy or
insolvency or such an appointment or the issuance or entry of any other
order having a similar effect, or (y) is not dismissed, discharged or
dissolved within sixty (60) days after commencement thereof (or if the
same reasonably cannot be accomplished within said sixty (60) days, if
Tenant shall not have
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commenced to cure the same within such period and continued to diligently
prosecute the cure thereof to completion within a reasonable time), then
this Lease may be cancelled and terminated at the option of Landlord,
exercised within a reasonable time after notice of the happening of any
one or more of such events. Upon such cancellation, neither Tenant nor
any person claiming through or under Tenant shall be entitled to
possession or to remain in possession of the Premises but shall forthwith
quit and surrender the Premises. In addition to the other rights and
remedies granted by Paragraph 19.(b) hereof, or by virtue of any other
provision in this Lease or any statute or rule of law, Landlord may
retain as damages any Rent, security, deposit or moneys received by it
from Tenant or others on behalf of Tenant. If the exercise of any right
granted to Landlord in this Paragraph 19.(a) is limited by any provision
of law, this Paragraph 19.(a) shall be given the maximum effect
consistent with such overriding or conflicting law.
(b) Rights On Termination. If this Lease is terminated
pursuant to Paragraph 19.(a), Landlord shall be entitled to the rights and
remedies stated in Paragraphs 20.(b), 20.(c), 20.(d) and 21 of this Lease.
20. Default.
(a) Events Of Default. The occurrence of any of the
following shall constitute a default by Tenant and shall be referred to
herein as an "Event Of Default":
(1) Failure by Tenant to pay Rent required to be paid
hereunder when due where such failure continues (i) for two (2)
Business Days after written notice from Landlord of such default in
the case of failure to pay Base Rent, and (ii) for five (5) Business
Days after written notice from Landlord of such default in the case
of all other failures to pay Rent.
(2) Tenant's abandonment of all or any portion of the
Premises if such abandonment continues for twenty (20) consecutive
days after written notice from Landlord to Tenant.
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(3) Failure by Tenant to comply with any other provision
of this Lease that constitutes an obligation of Tenant, where such
failure continues for thirty (30) days after written notice thereof
from Landlord; provided, however, that if such default cannot
reasonably be cured within said thirty (30) day period, then the
default shall not be deemed to be uncured if Tenant commences to
cure the same within thirty (30) days after Landlord's notice and
continues to prosecute diligently such cure to completion within a
reasonable time thereafter.
(4) The occurrence of any of the events specified in
Paragraph 19 hereof concerning bankruptcy and insolvency that
results in cancellation and termination of this Lease.
(b) Remedies. If an Event Of Default shall occur, then
Landlord shall have the following rights:
(1) The right to terminate this Lease and recover from
Tenant as provided by California Civil Code Section 1951.2: (i) the
worth at the time of award of the unpaid Rent and other amounts that
had been earned at the time of termination; (ii) the worth at the
time of award of the amount by which the unpaid Rent that 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; (iii) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Term after
the time of award exceeds the amount of such Rent loss that Tenant
proves Landlord could reasonably avoid; and (iv) any other amount
necessary to compensate Landlord for all the detriment proximately
caused by Tenant's failure to perform its obligations under this
Lease or that would be likely to result therefrom in the ordinary
course of things. The "worth at the time of award" of the amount
referred to in clause (iii) 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
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percent (1%). For purposes of computing unpaid Rent that would have
accrued and become payable under the Lease pursuant to the
provisions of this subparagraph (1), unpaid Rent shall consist of
the sum of the unpaid Rent and all other amounts payable hereunder
as reasonably estimated by Landlord for the balance of the Term; or
(2) The right to continue this Lease in effect and
enforce all of its rights and remedies under this Lease, as provided
by California Civil Code Section 1951.4, including the right to
recover Rent for so long as Landlord does not terminate Tenant's
right to possession. Acts of maintenance or preservation, efforts to
relet the Premises, or the appointment of a receiver upon Landlord's
initiative to protect its interest under this Lease, shall not
constitute a termination of Tenant's right to possession, and no
such termination shall be deemed to have taken place unless and
until Landlord provides to Tenant written notice that it has elected
to terminate the Lease by reason of an Event Of Default in
accordance with this Lease.
(c) Late Charge. Late payment by Tenant to Landlord of the
Rent will cause Landlord to incur costs not contemplated by this Lease,
including, but not limited to, processing and accounting charges and
late charges. Accordingly, if any installment of Base Rent or Additional
Rent payable under Paragraphs 27 and 28 is not received by Landlord or
Landlord's designee within three (3) Business Days after the same becomes
due, Tenant shall pay a late payment charge of one percent (1%) of such
unpaid amounts. Acceptance of such late charge by Landlord shall not
constitute a waiver of Tenant's default with respect to such overdue
amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
(d) Remedies Allowed By Law. Nothing contained in this
Paragraph 20 shall limit Landlord's right to obtain as damages in any
action against Tenant or in any bankruptcy, insolvency, receivership,
reorganization, or dissolution proceeding, an amount equal to the maximum
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allowed by any statute or rules of law governing such a proceeding and in
effect at the time when such damages are to be proved, whether or not such
amount be greater, equal to, or less than the amounts recoverable, either
as damages or Rent, referred to in any of the preceding provisions of this
Paragraph.
(e) Tenant's Remedies: Payment Under Protest. Nothing
contained in this Paragraph 20 shall limit the right of Tenant to make any
payment, perform any act, or observe any provision of this Lease under
protest; and Tenant shall be entitled to bring a legal action for damages
and/or an equitable action for specific performance and/or declaratory
relief if it contends that Landlord is in default hereunder or that any
payment, performance or observation by Tenant is not required under the
terms of this Lease; provided, however, that Tenant's damages in any such
action shall be limited to (i) Tenant's out-of-pocket expenses in
restoring itself to its condition immediately prior to such payment,
performance or observation under protest; and (ii) interest on such
expenses at the rate specified in Paragraph 3.(h) of this Lease. If Tenant
prevails in any such action, Landlord shall pay such sums to Tenant within
thirty (30) days after Tenant's demand therefor. Tenant shall not be
entitled to recover from Landlord any consequential damages for business
interruption or loss of business, however arising, and Tenant hereby
waives and relinquishes any and all such claims.
21. Self Help And Enforcement Costs.
(a) Landlord's Rights. Subject to Tenant's rights under
Paragraph 20.(e), if Tenant defaults in the performance of any obligation
on Tenant's part to be performed under this Lease, and Landlord shall
give Tenant written notice thereof pursuant to Paragraph 20, and if
Tenant shall fail to cure or to begin and thereafter pursue with due
diligence the curing of such default within the applicable time as
specified in Paragraph 20, then Landlord may perform the same for the
account of Tenant. If Landlord pays any sum of money, or performs any act
that requires the payment of money in connection with such performance
for the account of Tenan or, if Landlord, after such notice, incurs
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any expense (excluding attorneys' fees in instituting, prosecuting or
defending any action or proceeding, whether or not such action or
proceeding proceeds to judgment) by reason of the occurrence of an Event
Of Default hereunder, the sum or sums so paid by Landlord with costs and
damages, shall constitute Additional Rent and shall be due from Tenant to
Landlord thirty (30) days after receipt by Tenant of an invoice therefor
presented by Landlord.
(b) Tenant's Rights. If within ten (10) days after written
notice from Tenant to Landlord, Landlord shall fail to perform or observe
any covenant or condition herein contained (or to commence within ten (10)
days and diligently pursue performance or observance of matters reasonably
requiring more than ten (10) days to complete), Tenant may perform the
same for Landlord's account, and any sums paid by Tenant for such purpose
shall be immediately paid by Landlord to Tenant with interest thereon at
the Interest Rate within thirty (30) days after Tenant makes written
demand for such payment until the date when Landlord pays said sum. In
case of emergency, Tenant may proceed to perform Landlord's obligation
immediately as necessary; provided, however, that Tenant shall diligently
notify Landlord thereof as promptly as possible thereafter.
22. Surrender; End Of Term. Upon the expiration or other termination
of the Term, Tenant shall quit and surrender the Premises to Landlord, broom
clean and in as good order, condition and repair as they shall exist on the
Commencement Date, ordinary wear and tear and damage by casualty and
condemnation excepted. Tenant shall remove such property of Tenant as shall be
required to be removed under the terms of this Lease and reimburse Landlord for
costs associated with such removal as required pursuant to Paragraph 6.(e). Any
such property of Tenant left in the Premises for more than ten (10) days after
the expiration or other termination of this Lease, or after recovery by
Landlord of possession of the Premises after an Event of Default shall be
deemed abandoned and disposed of by Landlord at the expense and risk of Tenant.
Tenant releases Landlord of and from any and all claims and liability for
damage to or loss of property left by Tenant upon the Premises at the
expiration or other termination of this Lease. If Tenant holds over after the
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Term with the written consent of Landlord, such tenancy shall be from month to
month only and shall not be a renewal hereof, and Tenant shall pay the Rent and
all other charges at the same rate as herein provided, and also comply with all
of the terms, covenants, conditions, provisions and agreements of this Lease for
the time during which Tenant holds over. If Tenant holds over after the Term
without the written consent of Landlord and shall fail to vacate the Premises
after the expiration or sooner termination of this Lease, Tenant shall be liable
to Landlord for Rent at one hundred fifty percent (150%) of the monthly
installment of Base Rent as provided in this Lease for the last month of the
Term hereunder plus any Additional Rent. In addition, Tenant shall be
responsible to Landlord for all damage (including, but without limitation,
consequential damage) that Landlord shall suffer by reason thereof, and Tenant
indemnifies Landlord against all claims made by any succeeding tenant against
Landlord, resulting from delay by Landlord in delivering possession of the
Premises to such succeeding tenant where such delay is caused by Tenant's
failure timely to vacate the Premises upon expiration of the Term. If the last
day of the Term falls on a day other than a Business Day, this Lease shall
expire on the Business Day immediately preceding. Tenant's obligations under
this Paragraph shall survive the expiration or other termination of this Lease.
23. Quiet Enjoyment; Limitation Of Liability.
(a) Quiet Enjoyment. Landlord covenants that upon payment and
performance of the obligations on Tenant's part to be paid and performed
hereunder, Tenant shall have peaceable and quiet possession of the
Premises for the Term, subject, however, to the terms of this Lease and of
the ground leases, underlying leases, mortgages and deeds of trust
identified in this Lease as having priority over this Lease. The parties
shall execute, acknowledge, deliver and record a Short Form of Lease in
the City and County of San Francisco immediately upon execution hereof,
that is sufficient to give constructive notice hereof; and execute,
acknowledge, deliver and record any amendments thereto.
(b) Landlord's Obligations Run With Land. The foregoing
covenant of quiet enjoyment and all of Landlord's obligations under this
Lease shall bind and be enforceable
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against Landlord and each successor to Landlord's interest, subject to the
terms hereof, only so long as Landlord or any such successor has fee
simple title to the Property, but not thereafter in any case where the
successor to fee simple title has assumed and agreed to perform Landlord's
obligations under this Lease. Each conveyance by Landlord (or any of its
successors) of Landlord's interest in the Property prior to the expiration
or other termination of the Term shall be subject to this Lease and shall
relieve the grantor of any further obligations or liability as Landlord as
of the date the grantor relinquishes fee simple title to the Property and
ceases to collect Rent from Tenant hereunder, except that the grantor
shall remain liable for all obligations and liability of Landlord under
this Lease that accrue prior to the date of such conveyance, and provided
that any such successor shall assume and agree to perform Landlord's
obligations under this Lease. Tenant shall attorn to Landlord's successors
in interest where such interest is acquired by sale or transfer.
(c) Estoppel Certificates.
(1) Within ten (10) days following any written request
that Landlord may make from time to time (but no more often than
twice in any calendar year), Tenant shall execute and deliver to
Landlord, and, at Landlord's request, to any prospective purchaser
and any ground or underlying lessor or mortgagee of the Building or
Property, a statement certifying: (i) that Tenant has accepted the
Premises (or, if Tenant has not done so, specifying the reasons
therefor); (ii) the expiration date of this Lease; (iii) the fact
that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that this Lease is in full force and
effect, as modified, and stating the dates and nature of such
modifications); (iv) the date to which the Rent and other charges
payable under this Lease have been paid; (v) the fact that, to the
best of the Tenant's knowledge, there are no current defaults by
Landlord and no defenses against the enforcement of any of Tenant's
obligations under this Lease except as specified in Tenant's
statement; and (vi) such other
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matters with respect to this Lease as may be reasonably requested by
Landlord. Landlord and Tenant intend that any statement delivered
pursuant to this Paragraph may be relied upon by any mortgagee,
beneficiary, ground or underlying lessor, purchaser or prospective
purchaser of the Building or any interest therein. If Tenant fails
to deliver such certificate within the time specified herein, and if
Landlord's request makes statements concerning Landlord's position
as to the items specified in clauses (i) through (vi) above, the
truth and accuracy of Landlord's statements shall be conclusive upon
Tenant.
(2) Within ten (10) days following any written request
that Tenant may make from time to time (but no more often than twice
in any calendar year), Landlord shall execute and deliver to Tenant,
and, at Tenant's request, to any prospective assignee or sublessee
of Tenant's certifying: (i) the expiration date of this Lease; (ii)
the fact that this Lease is unmodified and in full force and effect
(or, if there have been modifications, that this Lease is in full
force and effect, as modified, and stating the dates and nature of
such modifications); (iii) the date to which the Rent and other
charges payable under this Lease have been paid; (iv) the fact that,
to Landlord's knowledge, there are no current defaults by Tenant and
no defenses against the enforcement of any of Landlord's obligations
under this Lease except as specified in Landlord's statement; and
(v) such other matters with respect to this Lease as may be
reasonably requested by Tenant. Landlord and Tenant intend that any
statement delivered pursuant to this Paragraph may be relied upon by
any assignee or sublessee of Tenant.
(3) A party shall not be liable to the requesting party
or third person or entity requesting or receiving a certificate
hereunder on account of any information therein contained,
notwithstanding the omission for any reason to disclose correct
and/or relevant information, but the party providing information
shall be estopped with respect to the requesting party or such third
person or entity from
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asserting any right or obligation or utilizing any defense that
contravenes or is contrary to such information.
24. Amendments And Waivers.
(a) No Amendment Except In Writing. No amendment or purported
amendment hereof shall have any force or effect unless it is written and
signed by the party against which enforcement is sought. No act or thing
done by Landlord or Landlord's agents during the Term shall be deemed an
acceptance of surrender of the Premises, and no agreement to accept such
surrender shall be valid unless in writing signed by Landlord. No employee
of Landlord or of Landlord's agents shall have any power to accept the
keys of the Premises prior to the expiration or termination of this Lease.
The delivery of keys to any employee of Landlord or of Landlord's agents
shall not operate as a termination of this Lease or a surrender of the
Premises. If Tenant desires to have Landlord sublet the Premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive
said keys for such purposes without releasing Tenant from any of the
obligations under this Lease.
(b) No Waiver By Inaction. The failure of either party to seek
redress for violation of, or to insist upon the strict performance of, any
term, covenant, condition, provision or agreement of this Lease shall not
constitute a waiver of the default or any subsequent default of the same
or different nature and shall not prevent a subsequent act, that would
have originally constituted a violation, from having all of the force and
effect of an original violation. The receipt by Landlord of Rent with
knowledge of a breach of any term, covenant, condition, provision or
agreement of this Lease, shall not be deemed a waiver of such breach. The
failure of Landlord to enforce any of the Rules and Regulations attached
to this Lease, or hereafter adopted, against Tenant or any other tenant in
the Building shall not be deemed a waiver of any such Rule or Regulation.
No provision of this Lease shall be deemed to have been waived by either
party, unless such waiver is in writing signed by the waiving party. No
payment by Tenant or receipt by Landlord of a lesser amount than the Rent
then due shall be
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deemed to be other than on account of the earliest item(s) of Rent, nor
shall any endorsement or statement on any check or any letter accompanying
any check or 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 the Rent or pursue any other remedy
available to it.
25. Force Majeure. Each party shall be excused from performing an
obligation or undertaking provided for in this Lease (other than the obligations
of Tenant to pay Rent) so long as such performance is prevented or delayed,
retarded or hindered by acts of God, fire, earthquake, flood, explosion, action
of the elements, war, invasion, insurrection, riot, mob violence, sabotage,
inability to procure or a general shortage of labor, equipment, facilities,
materials, or supplies in the open market, failure of transportation, strike,
lockout, action of labor unions, a taking by eminent domain as herein defined,
requisition, laws, orders or government, or civil or military or naval
authorities, or any other cause whether similar or dissimilar to the foregoing,
not within the reasonable control of the party prevented, retarded, or hindered
thereby. In each such instance of inability to perform, the party prevented,
retarded, or hindered shall exercise due diligence to eliminate the cause of
such inability to perform. The inability of Landlord or Tenant to pay for goods
or services or to pay its debts shall not excuse Landlord or Tenant, as the case
may be, from performing its obligations under this Lease.
26. Notices. Any bill, statement, notice, request, consent, demand,
approval or other communication that may or shall be given under the terms of
this Lease shall be in writing and either shall be delivered (i) by hand with
receipt acknowledged, or (ii) sent by United States registered or certified
mail, first class postage prepaid, return receipt requested, or (iii) sent by a
nationally recognized overnight courier service, as follows:
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To Tenant: Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, California 94104
Attn: Senior Vice President
Corporate Services
With a copy of
notices of default
only by
certified mail to: Charles Schwab & Co., Inc.,
P.O. Box 881566
San Francisco, California 94188-1566
ATTN: Corporate Real Estate Lease
Administration
and
With a copy of
notices of default
to: Corbin Silverman & Sanseverino
805 Third Avenue
11th Floor
New York, New York 10022
ATTN: Raymond A. Sanseverino, Esq.
To Landlord: Gerald K. Cahill
Calfox, Inc.
425 California Street, Ste 2300
San Francisco, CA 94104
with a copy of
notices of default
only to: William R. Cahill
Cahill Montgomery Corp.
425 California Street, Ste 2300
San Francisco, CA 94104
Notice shall be deemed given upon delivery, if delivered by hand; or upon
receipt if by mail (or in the case of failure to deliver by reason of changed
address of which no notice was given or a refusal to accept delivery, as of the
date of such failure as indicated on the return receipt or by notice of the
postal
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service), or one Business Day following delivery to a nationally
recognized overnight courier service marked for next day delivery. Any and all
notices to be given to either party shall be given to that party only by
delivery or mailing to the specific individuals above designated, until further
designation, and either party may, at any time change the designation or the
address for notice or add one additional person to receive a copy by delivering
or mailing, as aforesaid, a notice stating the changes.
27. Occupancy Costs: Tenant's Obligation To Pay Increases After
The Year 2000.
(a) Occupancy Cost Excess. Commencing on January 1, 2001 and
for the remainder of the Term, Tenant shall pay, in equal monthly
installments, Tenant's Proportionate Share of the amount by which
Occupancy Costs for each Operating Year that falls (in whole or in part)
during the Term (prorated for any partial calendar year at the beginning
and at the end of the Term) exceed Occupancy Costs for the Base Operating
Year (the "Occupancy Cost Excess"). The term "Base Operating Year" shall
mean calendar year 2000. The term "Operating Year" shall mean each
calendar year after the Base Operating Year.
(b) Occupancy Costs Defined. Occupancy Costs shall mean all
reasonable and actual expenses and costs (but not costs that are
separately billed to and paid by specific tenants), net of refunds and
reimbursements received, of every kind and nature that Landlord shall pay
or incur (including, without limitation, such reasonable and actual costs
incurred by managers and agents that are reimbursed by Landlord) because
of or with respect to the management, maintenance, preservation and
operation of the Building and Property (as allocated in accordance with
generally accepted accounting principles, consistently applied)("GAAP")
except as otherwise provided in Paragraph 27.(g)(3)), including, but
not limited to the following:
(1) Wages, salaries and reimbursable expenses and
benefits of all on-site and off-site personnel (not above the grade
of Building manager) engaged in the operation, maintenance and
security of
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the Property, and the direct costs of training such employees;
provided, however, that the amounts included in Occupancy Costs
shall only be such amounts directly and fairly allocable to services
rendered by the employees and personnel for the benefit of the
Property (with respect to employees who perform work on other
projects as well as the Property).
(2) All supplies, materials and rental equipment used in
the operation and maintenance of the Building and Property,
including, without limitation, temporary lobby displays and events,
the cost of erecting, maintaining and dismantling art work and
similar decorative displays customary in buildings comparable to the
Building in the Downtown Financial District.
(3) Utilities, including, without limitation, water,
power, gas, sewer, waste disposal, communication and cable T.V.
facilities, heating, cooling, lighting and ventilation of the
Building and Property.
(4) All payments under maintenance, janitorial and
service agreements for the Building and Property and the equipment
therein, including, but not limited to, alarm service, window
cleaning, elevator maintenance, and maintenance and repair of
sidewalks, landscaping, Building exterior and service areas.
(5) A management fee equal to two and one quarter
percent (2.25%) of all Rent and other rental income (excluding such
management fee) derived from the Property; provided, however, that
the management fee shall be increased to three percent (3%) from and
after the effective date of partial termination of this Lease
resulting from exercise by Tenant of any option pursuant to
Paragraph 2.(b), hereof.
(6) Legal fees and costs, and fees for accounting
services for the management and operation of the Building and
Property, including, but not limited to, the costs of audits by
certified public accountants
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of Occupancy Cost records.
(7) All insurance premiums and related costs incurred to
obtain the insurance Landlord is required or allowed to carry under
this Lease, including but not limited to the premiums and cost of
fire, boiler and machinery, casualty, liability, rental abatement
and earthquake insurance applicable to the Building and Property and
Landlord's personal property used in connection therewith (and all
"deductible" amounts paid due to loss, up to the amount permitted
under Paragraph 12.(f) to be carried as a deductible and except as
otherwise provided below with respect to earthquake insurance).
Should Landlord incur any loss or cost of repair caused by
earthquake damage that is not covered by earthquake insurance or is
part of the deductible amount of earthquake insurance, such loss or
cost of repair shall not be included in Occupancy Cost. In the case
where the cost of insurance coverage that is permitted to be
included under this Paragraph 27 is carried by Landlord in an
Operating Year, but not during the Base Year, the cost of such
insurance coverage shall be added to the Occupancy Costs for the
Base Year for the purpose of calculating Occupancy Cost Excess for
that Operating Year. In the case where the cost of insurance
coverage that is permitted to be included under this Paragraph 27 is
carried by Landlord in the Base Year, but not during an Operating
Year, the cost of such insurance coverage shall be deducted from the
Occupancy Costs for the Base Year for the purpose of calculating
Occupancy Cost Excess for that Operating Year. In the case where the
insurance coverage in any Operating Year that is permitted to be
included under this Paragraph 27 is not reasonably consistent (as to
the risks covered or the amount of coverage) with the insurance
coverage carried by Landlord in the Base Year, the cost of such
insurance for the Base Year shall be adjusted to reflect the cost
which Landlord would have incurred had such coverage been reasonably
consistent.
(8) Repairs, replacements, general maintenance and
security costs (to the extent of
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security service provided by Landlord) incurred by Landlord in
providing Basic Services.
(9) The cost incurred by Landlord to maintain and
operate the loading and delivery area.
(10) Amortization (together with reasonable financing
charges) of capital improvements made to the Property after the
Commencement Date to the extent permitted by Paragraph 27.(g).
Notwithstanding the foregoing, however, Landlord may treat as
expenses (chargeable in the year incurred) and not as capital costs
items that would otherwise be categorized as capital costs but that
are, in the aggregate, less than two percent (2%) of Estimated
Occupancy Costs for the year in question, subject to the limitations
contained in Paragraph 27.(g)(3).
(c) Occupancy Cost Exclusions. Notwithstanding anything to the
contrary contained in Paragraph 27.(b), Occupancy Costs shall not include
(or have deducted from them, as the case may be), expenses for: (i)
depreciation and amortization of the Building; (ii) the cost of the
design, construction, renovation, redecorating or other preparation of
tenant improvements for Tenant or other tenants or prospective tenants of
the Building (including design fees for space planning and all third party
fees and charges, permit, license and inspection fees) and allowances
therefor; (iii) real estate brokerage and leasing commissions and fees;
(iv) advertising and promotional expenses; (v) expenditures that would be
required to be treated as capital improvements and replacements under
GAAP except to the extent otherwise specifically provided in Paragraph
27.(g); (vi) wages, salaries, reimbursable expenses, benefits and other
compensation of (1) any personnel above the grade of Building manager,
and (2) Landlord's general overhead expenses not related to the Building
and any management fees in excess of the amounts expressly permitted
hereunder; (vii) legal, accounting or other professional fees incurred in
connection with negotiating, preparing or enforcing leases or lease
terms, amendments of leases, terminations of leases or extensions of
leases, proceedings against any tenant (including Tenant) relating
to the
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collection of rent or other sums due to Landlord from such tenant or any
other disputes with any tenant (including Tenant), legal costs incurred in
connection with the development, construction, alteration or improvement
of the Building or the Property, or legal, auditing, accounting or other
professional fees not allocated to the operation or management of the
Property; (viii) any rental under any ground or underlying lease; (ix)
interest, including interest on debt, debt service or amortization
payments on any mortgage encumbering the Building or the Property and any
financing and refinancing costs with respect thereto; (x) repairs or
improvements paid for from the proceeds of insurance, or paid for directly
by Tenant, any other tenants of the Building or any third party, or
repairs or improvements made for the benefit solely of tenants of the
Building other than Tenant; (xi) the cost of any utilities (including,
without limitation, water, electricity, power, gas, sewer, waste disposal,
communication and cable T.V. facilities, heating, cooling, lighting and
ventilation) for which Landlord is entitled to be reimbursed by Tenant
pursuant to Paragraph 15 of this Lease or by any other tenant; (xii) any
expense for which Landlord is entitled to be reimbursed by any tenant
(including Tenant) as an additional charge in excess of Base Rent and such
tenant's pro rata share of Occupancy Costs, or by any third party; (xiii)
any fee payable to any operator of the garage facilities located in the
Building; (xiv) any loss and the costs of repairs or replacements incurred
by reason of fire or other casualty or cause covered or required by this
Lease to be covered by casualty or other insurance (with the exception of
deductible payments that shall be so included in Occupancy Costs to the
extent permitted to be so included in this Lease) or by the exercise of
the right of eminent domain; (xv) overhead and profit increment paid to
Affiliates of Landlord for services on or to the Building or the Property
or for supplies or other materials, to the extent that the costs of the
services, supplies, or materials exceed the competitive costs of the
services, supplies, or materials were they not provided by an Affiliate of
Landlord, unless the cost of the supplies, materials or services were
approved by Tenant in a particular instance; (xvi) costs incurred to test,
survey, clean up, contain, encapsulate, abate, remove, dispose of,
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or otherwise remedy hazardous wastes or asbestos-containing materials on,
in, at, under or from the Building or the Property; (xvii) amounts
received by Landlord through proceeds of insurance to the extent they are
compensation for sums previously included in Occupancy Costs; (xviii) Tax
Costs; (xix) Landlord's income taxes and franchise, gains or estate taxes
imposed upon the income of Landlord; (xx) real estate association dues,
unless specifically approved by Tenant in a particular instance; (xxi)
costs with respect to the creation of a mortgage or a superior lease or in
connection with a sale of the Building or the Property including, without
limitation, survey, legal fees and disbursements, transfer stamps and
appraisals, engineering and inspection reports associated with the
contemplated sale; (xxii) costs incurred with respect to any specialty use
in the Building that is operated by Landlord and is not available for use
by Tenant or its employees; (xxiii) payment of damages, attorneys' fees
and any other amounts to any person seeking recovery for negligence or
other torts (including any tort claims relating to asbestos); (xxiv) the
cost of any repairs, alterations, additions, improvements or replacements
made to rectify, remedy or correct any structural or other defect in the
original design, construction materials, installations or workmanship of
the Property as of the time of such construction or installation; (xxv)
damages and repairs necessitated by the negligence or willful misconduct
of Landlord or Landlord's employees, contractors or agents; (xxvi) costs
incurred due to violations by Landlord, or by any tenant (including
Tenant) in the Building, of the terms and conditions of any lease, and
penalties or interest for late payment of any obligation of Landlord
(unless such penalties or interest result from Tenant's late payment of
Rent); (xxvii) Landlord's general corporate overhead, including without
limitation, the cost of Landlord's general corporate accounting and the
cost of preparation of Landlord's income tax or information returns;
(xxviii) any tenant improvement allowance given to any tenant (including
Tenant) whether given by contribution or credit against Rent or otherwise,
and any abatements or credits to Base Rent or Additional Rent, including
the Initial Abatement and the Refurbishment Abatement; (xxix) the costs
incurred in performing work or furnishing services for any tenant
(including Tenant) in the
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Building, whether at such tenant's or Landlord's expense, to the extent
that such work or service is in excess of any work or service that
Landlord is obligated to furnish to Tenant; (xxx) any rental concessions
to, or lease buy-outs of, Tenant or any other tenant in the Building;
(xxxi) any costs expressly to be excluded as Occupancy Costs under any
other provision of this Lease; (xxxii) that portion of any insurance
premiums for insurance with respect to which Landlord does not maintain at
least the minimum deductible required to be maintained under this Lease;
(xxxiii) if Tenant is the sole tenant in the Building, the cost of any
temporary works of art and any other lobby or common area decoration;
(xxxiv) the costs of any commercial concessions operated by Landlord;
(xxxv) the costs of providing 4705 KWH per month representing unsubmetered
electrical power provided as a Basic Service to the 29th floor, basement
and roof premises (said cost to be adjusted from time to time to reflect
actual power consumption in such space); (xxxvi) the cost of permanent
works of art; and (xxxvii) any loss due to uninsured casualty except for
losses that fall within the deductible provisions of such insurance to the
extent permitted in this Lease.
Occupancy Costs shall be net only and for that purpose
shall be deemed reduced by the amount of all reimbursements, recoupments,
payments, discounts, credits, reductions, allowances or the like actually
received by Landlord in connection with Occupancy Costs; provided,
however, that Landlord may include in Occupancy Costs the reasonable and
actual costs and expenses, if any, incurred by Landlord in obtaining such
reimbursements, recoupments, payments, discounts, credits, reductions,
allowances or the like.
(d) Building Occupancy Adjustment. Notwithstanding any other
provision herein to the contrary, if the Building is less than ninety-five
percent (95%) occupied on a time-weighted average during any calendar year
of the Term (including the Base Operating Year), an adjustment shall be
made in computing Occupancy Costs for such calendar year (including the
Base Operating Year) so that Occupancy Costs shall be adjusted to the
amount that would normally be expected to be incurred had the Building
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been ninety-five percent (95%) occupied on a time-weighted average
throughout such calendar year, without adjustment for any vacancy or
reduction caused by or attributable to alteration work being performed by
Tenant.
(e) Payment Of Estimated Occupancy Cost Excess. Prior to
December 1 of each calendar year during the Term commencing on December
1, 2000, Landlord shall deliver to Tenant a reasonable written estimate
of the amount (if any) by which the Occupancy Costs for the following
year will exceed the Occupancy Costs for the year Base Operating Year,
(the "Estimated Occupancy Cost Excess") as adjusted pursuant to Paragraph
27.(d). Such computation shall be broken down into reasonable detail as
shown on the chart of accounts attached hereto as Exhibit L and shall
state the assumptions and facts upon which the computation was based.
Landlord's failure to provide such notice shall not constitute a waiver
of the right to require Tenant to pay any Estimated Occupancy Cost Excess
as provided herein. As Additional Rent payable hereunder, Tenant shall
pay with each monthly installment of Base Rent one-twelfth (1/12th) of
Tenant's Proportionate Share of the Estimated Occupancy Cost Excess for
that year (prorated for any partial calendar year at the beginning and at
the end of the Term). "Tenant's Proportionate Share" shall mean the ratio
of the square footage of rentable area contained in the Premises at the
time of the calculation (excluding all Non-Occupancy Space) to the total
square footage of rentable area in the Building (excluding all
Non-Occupancy Space). As of the date of this Lease, Tenant's
Proportionate Share is ninety-nine and fifty-nine one hundredths percent
(99.59%). If the rentable area contained in the Premises changes,
Tenant's Proportionate Share shall be proportionately adjusted, provided,
however, that as to the calendar year in which such change occurs,
Tenant's Proportionate Share shall be determined on the basis of the
number of days during such calendar year during which each
percentage is in effect.
(f) Computation Of Actual Operating Cost Excess: Adjustment
For Variation Between Estimated And Actual Occupancy Costs. Within one
hundred eighty (180) days after the end of each calendar year (or portion
thereof) for which Tenant is required to pay the Estimated Occupancy Cost
Excess, Landlord shall compute the actual Occupancy Cost
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Excess for the prior calendar year and shall give notice thereof (the
"Occupancy Cost Statement") to Tenant. Landlord's failure to give the
Occupancy Cost Statement within one hundred eighty (180) days after the
end of any calendar year shall not release either party from the
obligation to make the adjustment provided for in this Paragraph 27.(f),
except as otherwise provided in Paragraph 27.(i). Landlord shall prepare
its Occupancy Cost Statement in accordance with GAAP, broken down into
the categories shown on Exhibit L. Each Occupancy Cost Statement shall
contain the following statement and be executed by the person in charge
of Landlord's real estate accounting function and an executive officer or
partner of Landlord and acknowledged: "This Occupancy Cost Statement is
correct and fairly states the Occupancy Costs for the years shown and was
prepared in accordance with the terms of the Lease between Landlord and
Tenant." Within thirty (30) days after receipt of such notice, Tenant
shall pay any deficiency in Tenant's Proportionate Share of the actual
Occupancy Cost Excess from the Estimated Occupancy Cost Excess for the
prior calendar year (prorated for any partial calendar year at the
beginning and at the end of the Term). If Tenant has made an overpayment,
Landlord shall refund the amount of the overpayment to Tenant within
thirty (30) days thereafter. Any adjustment required of Landlord or
Tenant that exceeds two percent (2%) of the Estimated Occupancy Costs for
the year in question shall bear interest at the Interest Rate from the
date of the Occupancy Cost Statement until the date of payment.
(g) Capital Improvements.
(1) If, after the Commencement Date of this Lease,
Landlord makes any capital expenditure or purchases any item of
capital equipment that is installed in the Building (i) to comply
with Requirements enacted and effective after the Commencement Date,
or (ii) for the purpose of reducing or minimizing the increases in
expenses that would otherwise be included in Occupancy Costs, then
the costs of such capital equipment or capital expenditure shall be
included in Occupancy Costs for the Operating
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Year in which the costs are incurred and every subsequent Operating
Year, amortized on a straight-line basis over the useful life (as
determined in accordance with GAAP), with interest at the rate of
eight percent (8%) per annum, (except that Landlord may charge as
current Occupancy Costs capital costs within the limits specified
in the second sentence of Paragraph 27.(b)(10)). If Landlord leases
any item of capital equipment to bring about savings or reductions
in expenses that would otherwise be included in Occupancy Costs,
then the rentals and other costs paid with respect to such leasing
shall be included in Occupancy Costs for the Operating Years in
which such rentals and costs are incurred.
(2) The maximum amount that may be included in Occupancy
Costs in any Operating Year for any capital equipment or capital
expenditure incurred to bring about savings in Occupancy Costs shall
be the amount of savings in Occupancy Costs realized by the
installation of such capital equipment or capital expenditure,
either in direct reductions or by minimizing cost increases.
(3) Notwithstanding any other provision of this Lease
(but subject to the aggregate limitation contained in Paragraph 27)
items of repair and/or replacement that do not exceed Forty Thousand
Dollars ($40,000) in cost per item during the initial Term and Sixty
Thousand Dollars ($60,000) in cost per item after commencement of
any Extended Term shall be treated as an expense, with the cost
thereof included in Occupancy Cost in the year when the cost is
incurred, whether or not GAAP or other accounting reference might
otherwise require that some or all of such costs be considered
"capital" in nature.
(h) Tenant's Audit Rights. Tenant and its representatives
shall have the right, upon reasonable notice to Landlord, given within two
(2) years after Tenant's receipt of an Occupancy Cost Statement, to
examine Landlord's books and records pertaining to the Occupancy Costs
reflected in such Statement (and to make copies
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thereof as required) at the Landlord's management office in San Francisco,
California. In addition, Tenant shall have the right to examine in the
same manner Landlord's books and records with respect to the Base Year by
written notice given within two (2) years after Tenant's receipt of the
Occupancy Cost Statement for the first Operating Year after the Base Year.
Any such examination shall be conducted during Normal Business Hours and
at Tenant's sole cost and expense, except as otherwise provided herein. In
making such examination, Tenant shall (and shall cause its representatives
and employees conducting the examination to agree in writing to) keep
confidential any and all information contained in such books and records,
save and except that Tenant may disclose such information (i) to a trier
of fact if any dispute between Landlord and Tenant pertaining to the
Statement in question cannot be resolved by agreement between the parties;
provided, however, that Tenant shall not oppose such protective or other
orders in the proceeding as may be reasonably required to preserve the
confidentiality of such information, (ii) as may be required by law, and
(iii) to Tenant's executives, agents and representatives. Landlord shall
maintain all of its books and records pertaining to Occupancy Costs
reasonably necessary for Tenant to substantiate Landlord's Occupancy Costs
Statements and all Additional Rent paid by Tenant pursuant to this Lease,
for each calendar year of the Term or portion thereof, for a period of
three (3) years following the end of each such year. Landlord shall
maintain such records on a current basis, in a manner consistent with the
provisions of this Lease. Any investigation of Occupancy Costs conducted
by Tenant shall be conducted for it by its employees or by any reputable
accounting firm or a person having a certificate in facilities management
under a compensation arrangement that does not provide for contingent
payments based upon the amount of savings that the audit procures. If
Tenant does not give notice of intent to examine or dispute Occupancy
Costs within such two (2) year period, then the Statement as furnished by
Landlord shall be conclusive and binding upon Tenant. Tenant shall provide
to Landlord a true and correct copy of the audit report prepared by
Tenant's accountant with respect to each such examination of an Occupancy
Cost Statement. If Tenant's examination establishes that either
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party owes an adjustment based upon an overstatement or understatement of
Occupancy Costs, such adjustment shall be made by payment within thirty
(30) days after completion of the audit report. If it is established that
an Occupancy Cost Statement overstated Occupancy Costs by three percent
(3%) or more, then Landlord shall reimburse Tenant for the reasonable cost
of such audit.
(i) Failure to Deliver Statements. Notwithstanding anything to
the contrary contained herein, if Landlord shall have failed to render an
Occupancy Cost Statement with respect to any Operating Year within one
year after the end of such calendar year, Tenant shall not be obligated to
make any payment shown to be due with respect to such calendar year on any
Occupancy Cost Statement thereafter delivered.
(j) Single Recovery. Landlord shall not collect as Occupancy
Costs an amount that would reimburse Landlord for a sum in excess of 100%
of Occupancy Costs in any calendar year and Landlord shall not recover any
Occupancy Costs more than once.
(k) Tenant's Janitorial Service. If Tenant elects to
provide its own janitorial service, the provisions of Paragraph 15.(h)(4)
shall apply with respect to that service.
28. Tenant's Payment Of Increases In "Tax Costs."
(a) Payment Obligation. Commencing on January 1, 2001, and for
the remainder of the Term, Tenant shall pay to Landlord Tenant's
Proportionate Share of the amount (the "Excess Tax Costs") by which the
"Tax Costs" (as hereinafter defined) for each Tax Year that falls (in
whole or in part) during the Term (prorated for any partial calendar year
at the beginning and at the end of the Term) exceed Tax Costs for the Base
Tax Year (the "Base Tax Costs"). "Base Tax Year" shall mean the calendar
year 2000. The term "Tax Year" shall mean each calendar year after the
Base Tax Year. Tax Costs for the Base Tax Year shall be determined as
follows:
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(1) Items Of Tax Costs Based Upon Assessment Roll. All
items of Tax Costs that are determined by multiplying a tax rate
times the assessed valuation of the Building, Property, any part
thereof or interest therein shall be determined by multiplying the
tax rate for the year 2000 times an assessed valuation equal to the
assessed valuation of the Building, Property or part or interest in
question for the assessment date of March 1, 1995, escalated at the
rate of two percent (2%) per year until the year 2000; and
(2) Items Of Tax Costs Not Based Upon Assessment Roll.
All other items of Tax Costs for the Base Tax Year shall be the
actual amounts that become due (and must be paid to avoid penalty)
during said year as appropriately prorated.
(b) "Tax Costs" Defined. "Tax Costs" shall mean all real
estate or personal property taxes, possessory interest taxes, business or
license taxes or fees, service payments in lieu of such taxes or fees,
gross receipts taxes, assessments, charges, fees and levies, annual or
periodic license or use fees, including, but not limited to, all of the
following: (i) all real estate taxes and assessments, and all other taxes
relating to, or levied, assessed or imposed on, the Building or Property,
or any portion thereof, or interest therein; (ii) all taxes, assessments,
charges, levies, fees, excises or penalties, general and special, ordinary
and extraordinary, unforeseen as well as foreseen, of any kind and nature
imposed, levied upon, measured by or attributable to Landlord's equipment,
furniture, fixtures and other property located in and used in connection
with the Building or Property, or levied upon, measured by or attributable
to the cost or value of any of the foregoing, or attributable to
Landlord's equipment and fixtures located in, on and used in connection
with the Property or levied upon, measured by or reasonably attributable
to the cost or value of any of the foregoing; (iii) all other taxes,
assessments, charges, levies, fees, or penalties, general and special,
ordinary and extraordinary, unforeseen as well as foreseen, of any kind
and nature imposed, levied, assessed, charged or collected
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by any governmental authority or other entity either directly or
indirectly (A) for public improvements, user, maintenance or development
fees, transit, housing, employment, police, fire, open space, streets,
sidewalks, utilities, job training, child care or other governmental
services or benefits, (B) upon or with respect to the development,
possession, leasing, operation, management, maintenance, alteration,
repair, use or occupancy of, or business operations in, the Building or
Property, (C) upon, against or measured by the area of the Building or
Property, or uses made thereof, or leases made to tenants thereof, or all
or any part of the rents collected or collectible from tenants thereof,
and (D) for environmental matters or as a result of the imposition of
mitigation measures, including parking taxes, employer parking
regulations, or fees, charges or assessments as a result of the treatment
of the Building or Property, or any portion thereof or interest therein,
as a source of pollution or storm water runoff; and (iv) any tax or
excise, however described, imposed in substitution partially or totally
for any or all of the foregoing taxes, assessments, charges or fees. If by
law any item constituting Tax Costs may be paid in installments at the
option of the taxpayer, then Landlord shall include within Tax Costs only
those installments (including interest, if any) that would become due by
exercise of such option. Tax Costs shall not include (i) franchise,
transfer, capital stock, inheritance or estate taxes imposed upon or
assessed against the Property, or any part thereof or interest therein, or
(ii) taxes computed upon the basis of the net income derived from the
Building or Property by Landlord or the owner of any interest therein,
(iii) any tax on Tenant's personal property or similar taxes paid by other
tenants on their personal property or other such taxes (under similar
provisions in their leases or otherwise), (iv) any penalties, fines,
interest or charges attributable to the late payment of any Tax Costs by
Landlord (unless caused by Tenant's failure to make any payment required
hereunder), and (v) real estate taxes attributable to any improvements the
cost of which is not includible in Occupancy Costs under this Lease in
whole or in part.
(c) Payment. Tenant shall pay any Excess Tax Costs for any Tax
Year of the Term after January 1, 2001
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<PAGE> 101
within thirty (30) days after receipt of an invoice therefor from Landlord
submitted together with tax bills supporting Landlord's computation of the
amount due. Tenant's obligation for such payment shall be in addition to
its obligation for payment of Occupancy Costs as provided in Paragraph 27.
(d) Tax Reduction Proceedings.
(1) Prior to the date that is thirty (30) days prior to
the last day of each year when the assessed valuation of the
Property or any other item of Tax Costs may be contested by the
appropriate administrative or legal proceedings, Landlord shall
notify Tenant whether Landlord will contest the assessed valuation
of the Property or any other item of Tax Costs. If Landlord shall
have notified Tenant that Landlord will contest the same, Landlord
shall do so. If Landlord shall have notified Tenant that Landlord
will not contest the assessed valuation or other items of Tax Costs,
or if Landlord shall have failed to notify Tenant of Landlord's
intentions with respect to any such contest, then upon written
notice to Landlord, and provided that Tenant then leases not less
than sixty percent (60%) of the rentable square feet in the
Building, Tenant shall have the right to require that Landlord
contest the amount or validity of the assessed valuation and/or
items of Tax Costs designated in Tenant's notice. Landlord shall
diligently prosecute any such contest as requested by Tenant. Any
such proceeding shall be undertaken by counsel or other professional
consultant selected by Landlord and reasonably approved by Tenant;
and Tenant shall cooperate with Landlord in connection with such
proceedings. Landlord agrees that it will promptly upon receipt (but
in no event later than ten (10) days after receipt) furnish Tenant
with copies of all tax bills and other relevant notices and
supporting documentation so that Tenant can determine whether it
desires to have Landlord undertake a contest that Landlord has not
otherwise determined to undertake.
(2) If Landlord shall have contested the
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<PAGE> 102
amount or validity of any Tax Costs and shall not have obtained a
determination in Landlord's favor or shall have obtained one not
reasonably satisfactory to Tenant, Landlord shall appeal from such
determination (if same shall be appealable) or give Tenant the right
to appeal from such determination, at no cost to Landlord, unless
Landlord shall, at the commencement of such contest or proceeding
and continuously during such contest or proceeding, have given
Tenant the opportunity to participate in decisions regarding the
contest or proceeding and Tenant shall have rejected such
opportunity. Landlord shall cooperate with Tenant (at no cost to
Landlord) in prosecuting any appeal and shall furnish to Tenant
copies of tax bills and other documentation, all as provided in the
immediately preceding subparagraph. Landlord and Tenant shall notify
the other of the determination of any administrative or legal
proceeding instituted by Landlord or Tenant, as the case may be,
contesting the amount or validity of Tax Costs within five (5)
Business Days after such determination and whether it will appeal.
(3) Neither Landlord nor Tenant shall, without the prior
approval of the other, which approval shall not be unreasonably
withheld or delayed, enter into, or agree to any settlement,
compromise or disposition of any contest, or discontinue or withdraw
from any contest, or accept any refund, adjustment or credit with
respect to any Tax Costs that either Landlord or Tenant shall have
contested; provided, however, that for Tenant to have the benefit of
this provision, Tenant must have a representative present at all
assessment and appeal hearings to participate in settlement or
compromise discussions as appropriate, reasonable notice of which
shall have been given by Landlord to Tenant.
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<PAGE> 103
(4) If the Tax Costs for a Tax Year for which Tenant
shall have paid Tenant's Proportionate Share of Excess Tax Costs
pursuant to this Paragraph shall be reduced, whether as the result
of protest of any tentative assessment, or by means of agreement, or
as the result of legal proceedings or otherwise, Tenant's
Proportionate Share of Excess Tax Costs becoming due in said Tax
Year pursuant to this Paragraph shall be determined on the basis of
said reduced Tax Costs. If Tenant shall have paid Tenant's
Proportionate Share of Excess Tax Costs for such year prior to any
said reduction, Landlord shall refund to Tenant any excess amount
thus paid as reflected by said reduced Tax Costs, less Tenant's
Proportionate Share of any cost, expense or fees (including experts'
and attorneys' fees) incurred by Landlord in obtaining said
reduction in Tax Costs, provided that the same shall be customarily
acceptable costs, expenses and fees for buildings comparable to the
Building in the Downtown Financial District. If said reduction in
Tax Costs shall occur prior to Tenant's payment of Tenant's
Proportionate Share of Excess Tax Costs for such Tax Year, Tenant
shall pay Tenant's Proportionate Share of any cost, expenses or fees
(including experts' and attorneys' fees) incurred by Landlord in
obtaining said Tax reduction, provided that the same shall be
customarily acceptable costs, expenses and fees for buildings
comparable to the Building in the Downtown Financial District.
(5) If Tax Costs shall be reduced by reason of
appropriate administrative or legal proceedings instituted by Tenant
after payment by Tenant of Tenant's Proportionate Share of Excess
Tax Costs that included Tax Costs for the applicable Tax Year, all
costs, expenses and fees (including experts' and attorneys' fees)
incurred by Tenant in obtaining said adjustment in Tax Costs,
(provided, however, that the same shall be customarily acceptable
costs, expenses and fees for buildings comparable to the Building in
the Downtown Financial District) shall first be deducted from the
amount of any refund and paid to
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<PAGE> 104
Tenant as reimbursement for such costs and Tenant shall receive
Tenant's Proportionate Share of such refund and the balance shall be
paid to Landlord. If Tax Costs or the assessed valuation of the
Property shall be reduced as a result of appropriate administrative
or legal proceedings instituted by Tenant prior to the payment of
Tenant's Proportionate Share of Excess Tax Costs that include Taxes
for the applicable year, Landlord shall pay to Tenant all costs,
expenses and fees (including experts' and attorneys' fees) incurred
by Tenant in obtaining said reduction in Tax Costs (provided,
however, that the same shall be customarily acceptable costs,
expenses and fees for buildings comparable to the Building in the
Downtown Financial District) less Tenant's Proportionate Share of
such costs.
(e) Proposition 13. Notwithstanding any provision contained in
this Lease to the contrary, if the assessed valuation of the Property (or
any portion thereof) is increased for real estate tax purposes (under
Proposition 13 or otherwise) by reason of a conveyance or other "change in
ownership" (as defined in California Revenue and Taxation Code) of the
Property (or any portion thereof), then only the following percentages of
the increase in such assessed valuation of the Property (or any portion
thereof) attributable to such conveyance or change in ownership shall be
included in the computation of Tax Costs:
(1) No portion of the increase in Tax Costs attributable
to such conveyance or change in ownership shall be included in
Tax Costs during the period commencing on the Commencement
Date and ending on August 4, 2003.
(2) Only 33.33% of the increase in Tax Costs
attributable to such conveyance or change in ownership shall
be included in Tax Costs during the period commencing on
August 5, 2003 and ending on December 5, 2006.
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<PAGE> 105
(3) Only 66.67% of the increase in Tax Costs
attributable to such conveyance or change in ownership shall
be included in Tax Costs during the period commencing on
December 6, 2006 and ending on March 31, 2010.
Landlord shall make a reasonable determination of the portion of any
increase in the assessed valuation of the Property (or any portion
thereof) that is attributable to such conveyance or change in
ownership. Tenant may dispute such determination within one hundred
eighty (180) days after Landlord shall notify Tenant of such
determination.
(f) Failure to Deliver Statements. Notwithstanding anything to
the contrary contained in this Paragraph 28, if Landlord shall have failed
to render an invoice (together with a tax bill supporting Landlord's
computation of the amount due where the computation is based upon a tax
bill or bills rendered to Landlord) with respect to any Tax Year within
one (1) year after the end of such Tax Year, Tenant shall not be obligated
to make any payment shown to be due with respect to such Tax Year on any
invoice thereafter delivered.
29. Nuisance: Odor And Noise. Tenant may place anywhere in the
Premises such coffee and vending machines and other food and beverage dispensing
equipment as normally are used in offices. Subject to the provisions of
Paragraph 6, Tenant may install a lunch room or cafeteria and recreational
facilities on any floor of the Premises other than the ground floor. Tenant
shall conduct its operation of all food and beverage equipment and facilities
and all recreational facilities on the Premises in such manner as not
unreasonably to interfere with the conduct of the business of any other tenants
of the Building and shall not permit any noxious odors or vapors or any
disturbing noises to be emitted from the Premises.
30. Definition And Determination Of "Fair Market Rent."
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<PAGE> 106
(a) Definition. "Fair Market Rent" shall mean the rental rate
being charged for comparable space in buildings comparable to the Building
in the Downtown Financial District between a knowledgeable landlord and
tenant, dealing at arms' length, with neither being under compulsion to
consummate a lease, taking into consideration: location in the Building,
tenant improvements, allowances or lease concessions provided or to be
provided, rental abatements, lease takeovers/assumptions, moving expenses
and other forms of rental concessions, proposed term of lease, extent of
service provided or to be provided, the ownership of the comparable space
and of the Building, the size, quality and financial strength of Tenant
and the tenant in the comparable space, the time the particular rate under
consideration became or is to become effective considering the market
condition and any other relevant terms or conditions; provided, however,
that payment or non-payment of real estate brokerage commissions shall not
be taken into account. The other provisions of this Lease to the contrary
notwithstanding, in no event shall Fair Market Rent be less than the total
of Base Rent and Occupancy Cost Excess payable during the last year of the
Term in the case of the First Extended Term, or the last year of the
preceding Extended Term in the case of the Second and Third Extended
Terms.
(b) Matters to be Arbitrated. Any dispute between the parties
concerning Fair Market Rent shall be determined by arbitration in
accordance with the procedures specified in this Paragraph 30.(b), if
Tenant elects to determine Fair Market Rent by arbitration in accordance
with Paragraph 2.(c)(3). Any such arbitration shall be final and binding
between the parties as to the matters at issue, and the order of the
arbitrator may be enforced in the manner provided for enforcement of a
judgment of a court of law pursuant to the applicable provisions of the
California Code of Civil Procedure.
(1) Claim and Demand. If Tenant elects to have an
arbitrator determine Fair Market Rent pursuant to the provisions of
Paragraph 2.(c)(3), Landlord's statement
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<PAGE> 107
of its proposed Base Rent shall constitute its claim (the "Claim").
(2) Obligation to Meet and Confer. Landlord and Tenant
shall meet and confer in an attempt to resolve their differences. If
they are unable to reach a resolution within sixty (60) days after
the date of the Claim, then within ten (10) days thereafter,
Landlord shall either (i) restate its Claim, (ii) amend the Claim,
or (iii) withdraw the Claim, in each case presented together with
the evidence upon which Landlord relies. Failure on the part of
Landlord to withdraw or amend the Claim in writing shall constitute
a restatement thereof.
(3) Response to Claim. If the Claim is not withdrawn
within the ten (10) day period provided for in Paragraph 30.(b)(2)
above, Tenant shall, within fifteen (15) days after expiration of
the ten (10) day period provided for in Paragraph 30.(b)(2) above,
prepare a response to the Claim (the "Response") stating
specifically Tenant's determination of Fair Market Rent, together
with the evidence upon which Tenant relies for its determination.
(4) Submission to Arbitrator. The arbitrator shall be
appointed by mutual agreement of the parties involved in the
dispute. The arbitrator shall be a person who holds the senior
professional designation awarded by one of the following
professional groups: the American Institute of Real Estate
Appraisers, the Society of Real Estate Appraisers, the American
Society of Real Estate Counselors, the Institute of Real Estate
Management, or the then pre-eminent real estate appraisal,
counseling, or management professional organization. In addition,
the appraiser-arbitrator shall have at least five (5) years of
current experience in the appraisal of office buildings and office
building space in the Downtown Financial District, negotiating
leases in office buildings, the appraisal of market rental value in
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<PAGE> 108
office buildings, or the performance of office building market
rental surveys. If the parties are unable to agree upon such a
person within thirty (30) days after Landlord's receipt of Tenant's
Response, then either party shall have the right to apply to the
Presiding Judge of the Superior Court of the City and County of San
Francisco, acting in his or her private, non-judicial capacity, to
make the appointment. The appointment made by such Judge shall be
final and binding upon the parties. The matter in dispute shall be
submitted to the arbitrator on the basis of the issues as framed by
the Claim (as the same may have been amended pursuant to Paragraph
30.(b)(2) above) and the Response. The arbitration proceeding shall
be conducted in accordance with standard commercial arbitration
rules or any other procedures to which the parties may agree with
the arbitrator (except that the arbitrator shall be bound by the
rules of law, and the attorney/client and work product privileges
shall apply) and shall take place in San Francisco, California.
(5) Decision of Arbitrator. As soon as convenient after
appointment, the arbitrator shall meet with Landlord and Tenant to
hear evidence and argument on the Claim and Response. The arbitrator
shall not be bound by the rules of evidence in the conduct of such
proceeding, although the arbitrator shall take account of said rules
in considering the weight of the evidence. In making a decision, the
sole function of the arbitrator shall be to determine whether (i)
the Claim, or (ii) the Response most closely approximates the
arbitrator's opinion of Fair Market Rent as herein defined. Unless
the arbitrator's opinion as to Fair Market Rent is closer to the
statement of Fair Market Rent contained in the Response, then Fair
Market Rent for purposes hereof shall be that stated in the Claim.
If the arbitrator's opinion as to Fair Market Rent is closer to the
statement of Fair Market Rent contained in the Response, then Fair
Market Rent for purposes hereof shall be that stated in the
Response. The
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<PAGE> 109
arbitrator shall have no right to (i) fashion an independent
determination of Fair Market Rent, split the difference between the
parties, nor (iii) amend the terms of this Lease.
(6) Costs. Each party shall pay one-half (1/2) of the
fees and costs of the arbitrator and all of its own costs and
attorneys' fees in connection with the arbitration; provided,
however, that at the end of the arbitration proceeding, the
arbitrator shall award costs properly incurred to the prevailing
party but not the costs and attorneys' fees of the other party.
(7) Determination After Commencement Of Extended Term.
If a final determination of Fair Market Rent is not arrived at until
after the applicable Extended Term shall have commenced, Tenant
shall pay the Base Rent plus Additional Rent per rentable square
foot of the Premises applicable at the end of the preceding Term
monthly until such final determination is made. Within thirty (30)
days after such final determination is made, Tenant shall pay to
Landlord, retroactively for the period from the commencement of the
applicable lease period until the date of such determination, the
excess Rent payable pursuant to such determination over the Rent
actually paid by Tenant to Landlord in said period together with
interest at the Interest Rate.
31. Captions. Captions and marginal notes are inserted only
as a matter of convenience and for reference and in no way define, limit or
describe the scope or intent of this Lease nor do they in any way affect this
Lease.
32. Brokerage. Tenant represents that it has not had dealings with
any real estate broker, finder, or other person, with respect to this Lease
other than Colliers Damner Pike of San Francisco, California, ("Broker"); and
Tenant shall indemnify and hold Landlord harmless of and from any damages and
costs Landlord may suffer by reason of the claims of persons other than Broker
who purport to have dealt with Tenant. Landlord represents that
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<PAGE> 110
it has dealt with no person, firm or entity other than Broker as Tenant's
representative in the procurement and negotiation of this Lease and has not
entered into any listing agreement with any real estate broker, finder or other
person with respect to this Lease other than Broker. Landlord shall pay any
commissions or fees that are payable to Broker with respect to this Lease in
accordance with the provisions of a separate commission agreement. Landlord
shall indemnify, defend and hold Tenant harmless from all claims, actions,
suits, liability, damages, and demands of any kind resulting from any entity's
purported dealings as a broker or finder in connection with this Lease with or
on behalf of Landlord; provided, however, that Landlord's indemnity shall not
extend to claims based upon purported contacts between the claimant and Tenant
that are not consistent with Tenant's representation in the first sentence of
this Paragraph 32.
33. Successors And Assigns. The terms, covenants and conditions
contained in this Lease shall bind and inure to the benefit of Landlord and
Tenant their successors and assigns, subject to the limitations contained in
this Lease.
34. Miscellaneous.
(a) Competing Uses. Other tenants in the Building shall
not include stock or securities brokerages, banks, or other direct
competitors of Tenant.
(b) Building Name. Provided that Tenant has not exercised its
option to terminate this Lease as to a portion of the Premises pursuant to
Paragraph 2.(b) comprising more than ten (10) floors hereof, the name of
the Building shall be "The Charles Schwab Building," and letters spelling
said name currently existing over the main entrance doors of the Building
, both at the curbside face and immediately above the doors, shall be
maintained by Tenant at Tenant's expense. Any change in the type, style,
size, shape, location and color of said letters and the marquee referred
to in the next sentence shall be subject to the reasonable approval of
Landlord. At Tenant's cost, Landlord has placed and constructed a stock
quotation marquee at the southeast
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corner of the ground floor of the Premises. The marquee displays the
Charles Schwab & Co. name. Any change in the type, style and color of said
marquee shall be subject to the prior approval of Tenant which shall not
be unreasonably withheld or delayed. Said letters and marquee shall be
maintained in good order and repair by Tenant at its expense. Landlord has
also provided stock quotation readout devices in those elevators servicing
the Premises. Tenant shall pay for any change in or addition to such
signs. Subject to Landlord's prior written approval (which shall not be
unreasonably withheld or delayed), Tenant may install a sign of reasonable
size and in an appropriate location designating its parcel pick-up and
delivery station. At its expense, Tenant shall have the right from time to
time to replace said signs if it so elects, in conformity with applicable
laws and ordinances, and subject to the prior written approval of
Landlord, which shall not be unreasonably withheld or delayed.
(c) Litigation Indemnity. If either party becomes a party to
any litigation concerning this Lease or the Premises by reason of any act
or omission of the other party or its authorized representatives, and not
by any act or omission of the party that becomes a party to that
litigation or any act or omission of its authorized representatives, the
party that causes the other party to become involved in the litigation
shall be liable to that party for reasonable attorney's fees and court
costs incurred by it in the litigation; provided, however, that in any
litigation between the parties to this Lease, each shall bear its own
costs and attorneys' fees.
(d) Construction. The language in this Lease shall be
construed according to its normal and usual meaning, not strictly for
or against either Landlord or Tenant.
(e) Severability. If any term, covenant, condition, provision
or agreement herein contained is held to be invalid or void by any court
of competent jurisdiction, the invalidity of any such term, covenant,
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condition, provision or agreement shall in no way affect any other term,
covenant, condition, provision or agreement herein contained.
(f) Name Change. If the name of either party or any successor
or assign shall be changed during the Term, such party shall promptly
provide the other with written notice thereof, accompanied by a certified
copy of the document effecting such change of name.
(g) Time Of Essence. Time is of the essence of each and
every provision of this Lease.
(h) No Partnership. Nothing herein contained shall be deemed
to make Landlord and Tenant partners or joint venturers or to create a
relation of principal and agent between them, nor shall either Landlord or
Tenant hold itself out as joint venturer, partner, or agent of the other
contrary to the terms of this Lease by advertising or otherwise. Neither
party shall be bound by any representation, act, or omissions whatsoever
of the other made contrary to the provisions of this Lease.
(i) Governing Law. This Lease shall be construed and enforced
in accordance with the law of the State of California. The venue for any
action to enforce this Lease or to secure relief for breach shall be in
the City and County of San Francisco.
(j) Calculation Of Abatement. Whenever, Rent is abated
hereunder or the Lease is terminated with respect to a portion of the
Premises, such abatement or reduction of Rent, (1) if occurring during the
Term, shall be at the appropriate rent(s) per square foot (for the
floor(s) as to which Rent is abated or the Lease is terminated) stated in
Exhibit C, or (2) if occurring during one of the three five (5) year
Extended Terms, at a Rent equal to the current rent per rentable square
foot then payable by Tenant to Landlord for such particular floor(s) with
respect to which Rent is to be abated or this Lease terminated.
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(k) Certificate Of Occupancy. Landlord represents that the
Certificate of Occupancy for the Building has been duly issued and remains
in full force and effect. A true and correct copy of the Certificate of
Occupancy is attached hereto, marked Exhibit M and incorporated herein by
reference thereto.
35. Exclusion Of Public Space From Premises. As a condition to its
building permit for the Building, Landlord may be required to construct and
maintain two spaces in the Building located above the 19th floor, each having an
area of approximately 750 square feet for the purpose of a restaurant, lunch
room or other facility open to the public during normal working hours. Upon
determination that such space(s) are required and the exact locations thereof,
Landlord shall so notify Tenant, with appropriate written documentation.
Landlord shall bear all cost of improvements to the public area, of separating
the public area from the Premises and of securing the Premises from entry by
members of the public who visit or purport to be visiting the public area. Such
space(s) shall not be within Tenant's Premises unless unavoidably required by
the City and County of San Francisco, in which case the Lease shall be amended
to exclude such space(s), Base Rent and Tenant's Proportionate Share and other
obligations under this Lease, shall be reduced proportionately, and Landlord
shall bear all reasonable and actual costs of relocating Tenant or otherwise
vacating Tenant from the public area. Landlord shall also pay the reasonable and
actual costs for such adjustments in security as may be required to preserve the
integrity of Tenant's security system while accommodating such public space
uses.
36. Interpretation: Effect On Modified Initial Lease. This
Lease constitutes the full and complete agreement of the parties with respect
to the subject matter hereof. The options to extend the term contained in
the Modified Initial Lease and the rights of the parties to terminate the
Modified Initial Lease under Paragraph 10.(H) are deleted therefrom.
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IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
LANDLORD:
101 MONTGOMERY STREET CO., a
California limited partnership
By: Cahill Montgomery Corp.,
a California corporation
Its: General Partner
By: /S/ Gerald K. Cahill
-----------------------------
Gerald K. Cahill
Its: Vice President
TENANT:
CHARLES SCHWAB & CO., INC., a California
corporation
By: /s/ Steven L. Scheid
-----------------------------
Steven L. Scheid
Its: Chief Financial Officer
By: /s/ Luis E. Valencia
-----------------------------
Luis E. Valencia
Its: Executive Vice President and
Chief Administrative Officer
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EXHIBIT A
Property Description
<PAGE> 116
EXHIBIT B (PAGE 1 OF 5)
PREMISES
101 MONTGOMERY STREET
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the
following space ("Premises") in the 101 Montgomery Street Building:
I. The entire floor area of each floor beginning with the 2nd Floor through
and including the entire 28th Floor.
II. Basement (garage) area as set forth on the Plan, Exhibit B - Page 2 of 5,
attached hereto.
III. Ground Floor (First Floor) areas as shown on the Plan, Exhibit B - Page 3
of 5, attached hereto.
IV. 29th Floor area as shown on the Plan, Exhibit B - Page 4 of 5, attached
hereto.
V. Roof (30th Floor) areas as shown on the Plan, Exhibit B - Page 5 of 5,
attached hereto.
Areas leased by Tenant are shown in diagonal crosshatching on the attached
plans.
Premises does not include building fire stairs, building systems, shafts and
risers, elevator shafts, and machine rooms and building system equipment area.
Premises does include internal tenant stairs between 9 and 10 in the cafeteria
area, between 28th and 27th elevator lobbies, between the second floor north
and Montgomery Street exit and the escalator between the first and second floor.
Tenant has installed a shaft for its computer-related condenser water, as well
as power, and telecommunications risers which are included in the Premises.
(Floor Plans - Pages 2 through 5)
<PAGE> 117
EXHIBIT C
101 MONTGOMERY STREET
<TABLE>
<CAPTION>
Net Rentable
RETAIL AND Area of Base Monthly Rent Base
OFFICE FLOOR Premises in Sq. Ft. Per Sq. Ft. Monthly Rent
- ------------ ------------------- ----------- ------------
<S> <C> <C> <C>
1 5,784 $2.00 $11,568.00
2 11,026 $2.00 $22,052.00
3 11,533 $2.00 $23,066.00
4 11,533 $2.00 $23,066.00
5 11,533 $2.00 $23,066.00
6 11,533 $2.00 $23,066.00
7 11,533 $2.00 $23,066.00
8 11,533 $2.00 $23,066.00
9 9,492 $2.00 $18,984.00
10 9,492 $2.00 $18,984.00
11 9,169 $2.00 $18,338.00
12 9,468 $2.00 $18,936.00
13 9,468 $2.00 $18,936.00
14 9,468 $2.00 $18,936.00
15 9,528 $2.00 $19,056.00
16 9,550 $2.00 $19,100.00
17 9,550 $2.00 $19,100.00
18 9,756 $2.00 $19,512.00
19 9,756 $2.00 $19,512.00
20 9,756 $2.00 $19,512.00
21 9,756 $2.00 $19,512.00
22 9,756 $2.00 $19,512.00
23 9,756 $2.00 $19,512.00
24 9,756 $2.00 $19,512.00
25 9,086 $2.00 $18,172.00
26 9,391 $2.00 $18,782.00
27 9,391 $2.00 $18,782.00
28 9,391 $2.00 $18,782.00
----- ----- ----------
Subtotal - retail/office area 276,744 $553,488.00
------- -----------
Non-Finished Areas
29 - Storage 5,036 $1.00 $5,036.00
Roof 1,880 $1.00 $1,880.00
Basement 11,295 $1.00 $11,295.00
------ ----- ----------
Subtotal 18,211 $18,211.00
------ ----------
TOTAL LEASED PREMISES 294,955 $571,699.00
======= ===========
NON-LEASED RETAIL SPACE 1,151
-------
TOTAL BLDG RENTABLE AREA 296,106
=======
</TABLE>
<PAGE> 118
EXHIBIT D
101 MONTGOMERY STREET
page 1 of 2
<TABLE>
<CAPTION>
DATE OF TERMINATION
last day of
month of: MARCH APRIL MAY JUNE JULY AUGUST
2005 2005 2005 2005 2005 2005
----- ----- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
FLOOR NO.
25 $192,447 $189,828 $187,191 $184,537 $181,865 $179,175
24 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
23 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
22 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
21 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
20 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
19 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
18 $206,634 $203,821 $200,990 $198,140 $195,272 $192,384
17 $202,272 $199,519 $196,748 $193,958 $191,150 $188,323
16 $202,272 $199,519 $196,748 $193,958 $191,150 $188,323
15 $201,807 $199,060 $199,296 $193,512 $190,710 $187,890
14 $200,533 $197,804 $195,058 $192,291 $189,506 $186,704
13 $200,533 $197,804 $195,058 $192,291 $189,506 $186,704
12 $200,533 $197,804 $195,058 $192,291 $189,506 $186,704
</TABLE>
<TABLE>
<CAPTION>
DATE OF TERMINATION
last day of
month of: SEPT OCT NOV DEC JAN FEB
2005 2005 2005 2005 2006 2006
----- ----- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
FLOOR NO.
25 $176,468 $173,742 $170,998 $168,236 $165,455 $162,656
24 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
23 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
22 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
21 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
20 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
19 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
18 $189,476 $186,550 $183,604 $180,638 $177,652 $174,647
17 $185,477 $182,612 $179,728 $176,825 $173,902 $170,961
16 $185,477 $182,612 $179,728 $176,825 $173,902 $170,961
15 $185,051 $182,192 $179,315 $176,419 $173,503 $170,568
14 $183,882 $181,042 $178,183 $175,305 $172,407 $169,491
13 $183,882 $181,042 $178,183 $175,305 $172,407 $169,491
12 $183,882 $181,042 $178,183 $175,305 $172,407 $169,491
</TABLE>
<PAGE> 119
EXHIBIT D
101 MONTGOMERY STREET
page 2 of 2
<TABLE>
<CAPTION>
DATE OF TERMINATION
last day of
month of: MARCH APRIL MAY JUNE JULY AUGUST
2006 2006 2006 2006 2006 2006
----- ----- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
FLOOR NO.
25 $159,838 $157,002 $154,146 $151,272 $148,378 $145,465
24 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
23 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
22 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
21 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
20 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
19 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
18 $171,622 $168,576 $165,510 $162,424 $159,317 $156,189
17 $167,999 $165,018 $162,016 $158,995 $155,954 $152,892
16 $167,999 $165,018 $162,016 $158,995 $155,954 $152,892
15 $167,613 $164,638 $161,644 $158,630 $155,595 $152,541
14 $166,555 $163,599 $160,623 $157,628 $154,613 $151,578
13 $166,555 $163,599 $160,623 $157,628 $154,613 $151,578
12 $166,555 $163,599 $160,623 $157,628 $154,613 $151,578
</TABLE>
<TABLE>
<CAPTION>
DATE OF TERMINATION
last day of
month of: SEPT OCT NOV DEC JAN FEB MAR
2006 2006 2006 2006 2007 2007 2007
----- ----- ---- ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
FLOOR NO.
25 $142,533 $139,581 $136,610 $133,618 $130,607 $127,575 $124,524
24 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
23 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
22 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
21 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
20 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
19 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
18 $153,040 $149,871 $146,680 $143,468 $140,235 $136,980 $133,704
17 $149,810 $146,707 $143,584 $140,440 $137,275 $134,089 $130,881
16 $149,810 $146,707 $143,584 $140,440 $137,275 $134,089 $130,881
15 $149,466 $146,370 $143,254 $140,117 $136,959 $133,781 $130,581
14 $148,522 $145,446 $142,350 $139,233 $136,095 $132,936 $129,756
13 $148,522 $145,446 $142,350 $139,233 $136,095 $132,936 $129,756
12 $148,522 $145,446 $142,350 $139,233 $136,095 $132,936 $129,756
</TABLE>
<PAGE> 120
EXHIBIT E
Original Elevator Software Identified
<PAGE> 121
EXHIBIT F
(Not Used)
<PAGE> 122
EXHIBIT G
Planning Resolution
<PAGE> 123
EXHIBIT H
(Not Used)
<PAGE> 124
EXHIBIT I
Floor Loadings
<PAGE> 125
EXHIBIT J
National Holidays
<PAGE> 126
EXHIBIT K
Janitorial Specification
<PAGE> 127
EXHIBIT L
Chart of Accounts
<PAGE> 128
EXHIBIT M
Certificate of Occupancy
<PAGE> 1
EXHIBIT 10.164
OFFICE LEASE
PACIFIC TELESIS CENTER
TELESIS TOWER
San Francisco, California
LANDLORD:
POST-MONTGOMERY ASSOCIATES
TENANT:
CHARLES SCHWAB & CO., INC.
October 4, 1996
<PAGE> 2
TABLE OF CONTENTS
PAGE
1. Definitions.................................................... 1
1.1. Terms Defined....................................... 1
1.2. Basic Lease Information............................. 26
1.3. Effect of Certain Defined Terms..................... 26
2. Lease of Premises.............................................. 27
2.1. Premises............................................ 27
2.2. Antenna and Antenna Area............................ 28
2.3. Lease for Generator Area............................ 37
2.4. Expansion of Premises............................... 41
2.5. Notice Right with Respect to Certain Floors......... 50
2.6. Limited Right of Termination with Respect to
Certain Floors...................................... 50
2.7. Right of Termination with Respect to Floor 2
Galleria............................................ 53
3. Term .......................................................... 54
3.1. Condition and Acceptance of Premises................ 54
3.2. Extension........................................... 60
4. Rent .......................................................... 67
4.1. Obligation to Pay Rent.............................. 67
4.2. Manner of Payment of Rent and Additional Charges.... 69
4.3. Additional Charges.................................. 70
4.4. Late Payment of Rent and Additional Charges;
Interest............................................ 70
4.5. Free Rent........................................... 71
5. Calculation and Payments of Escalation Charges................. 73
5.1. Payment of Estimated Escalation Charges............. 73
5.2. Escalation Charges Statement and Adjustment......... 74
5.3. Proration for Partial Year.......................... 76
5.4. Tenant Audit Rights With Respect to Escalation
Charges............................................. 76
5.5. Certain Limitations With Respect to Estimates
of Escalation Charges............................... 80
5.6. Certain Limitations on Real Estate Taxes; Contest
of Real Estate Taxes; Contest of Impositions........ 81
5.7. Adjustment of Base Year Operating Expenses
for Certain Insurance Items......................... 84
TOC - I
<PAGE> 3
5.8. Dispute Resolution.................................. 85
6. Impositions Payable by Tenant.................................. 85
7. Use of Premises................................................ 86
7.1. Permitted Use....................................... 86
7.2. No Violation of Legal and Insurance Requirements.... 87
7.3. Compliance with Legal, Insurance and Life Safety
Requirements........................................ 89
7.4. No Nuisance......................................... 90
7.5. Compliance With Environmental Laws; Use of
Hazardous Materials................................. 90
7.6. Cost of Handicap Access and Life-Safety Code
Compliance.......................................... 91
8. Building Services.............................................. 92
8.1. Maintenance of Complex.............................. 93
8.2. Building Standard Services.......................... 94
8.3. Interruption or Unavailability of Services;
Abatement of Rent and Additional Charges............ 95
8.4. Tenant's Use of Excess Electricity, Water, and
Heating, Ventilation and Air-Conditioning........... 97
8.5. Provision of Additional Services.................... 99
8.6. Standards With Respect to Certain Services.......... 99
8.7. Compliance With Environmental Laws; Use of
Hazardous Materials................................. 102
9. Maintenance of Premises........................................ 104
10. Alterations to Premises....................................... 105
10.1. Landlord Consent; Procedure........................ 105
10.2. General Requirements............................... 107
10.3. Ownership and Removal of Alterations............... 109
10.4. Landlord's Construction Allowance.................. 111
10.5. Right of Tenant to Make Certain Alterations to
Complex............................................ 119
11. Liens......................................................... 120
12. Damage or Destruction......................................... 120
12.1. Duration of Repair................................. 120
12.2. Obligation to Repair............................... 122
12.3. Election on Certain Events......................... 123
12.4. Cost of Repairs.................................... 125
TOC - II
<PAGE> 4
12.5. Damage at End of Term.............................. 125
12.6. Proration of Rent and Additional Charges on
Termination........................................ 126
12.7. Waiver of Statutes................................. 126
13. Eminent Domain................................................ 126
13.1. Effect of Taking................................... 126
13.2. Condemnation Proceeds.............................. 128
13.3. Restoration of Premises and Complex................ 128
13.4. Tenant Waiver...................................... 129
14. Insurance..................................................... 129
14.1. Liability Insurance................................ 129
14.2. Landlord Casualty Insurance........................ 130
14.3. Tenant Casualty Insurance.......................... 130
14.4. Form of Policies................................... 131
14.5. Tenant Right of Self-Insurance..................... 132
15. Waiver of Claims and Subrogation Rights....................... 132
16. Waiver of Liability and Indemnification....................... 133
16.1. Waiver and Release................................. 133
16.2. Indemnification of Landlord........................ 133
16.3. Indemnification of Tenant.......................... 135
17. Assignment and Subletting..................................... 136
17.1. Compliance Required................................ 136
17.2. Request by Tenant; Landlord Response............... 136
17.3. Conditions for Landlord Approval................... 139
17.4. Costs and Expenses................................. 140
17.5. Payment of Excess Rent and Other Consideration..... 140
17.6. Assumption of Obligations; Further Restrictions
on Subletting...................................... 141
17.7. No Release......................................... 142
17.8. No Encumbrance..................................... 143
17.9. Certain Rights with Respect to Assignments and
Subleases.......................................... 143
18. Rules and Regulations......................................... 146
19. Entry of Premises by Landlord................................. 146
19.1. Right to Enter..................................... 146
19.2. Certain Secure Areas; Cooperation with Tenant
Security Personnel................................. 148
TOC - III
<PAGE> 5
19.3. Tenant Waiver of Claims............................ 149
19.4. Scope of Emergencies............................... 150
20. Default and Remedies.......................................... 150
20.1. Events of Default.................................. 150
20.2. Notice to Tenant................................... 152
20.3. Remedies Upon Occurrence of Default................ 153
20.4. Damages Upon Termination........................... 153
20.5. Landlord's Right to Cure Defaults.................. 154
20.6. Waiver of Forfeiture............................... 154
20.7. Landlord Default; Tenant's Right to Cure
Landlord Default................................... 155
20.8. Remedies Cumulative................................ 156
21. Subordination, Attornment and Non-disturbance................. 157
21.1. Landlord Right to Encumber; Subordination and
Attornment......................................... 157
21.2. Non-disturbance.................................... 158
21.3. No Superior Encumbrances........................... 159
22. Sale or Transfer by Landlord; Lease Non-Recourse.............. 159
22.1. Release of Landlord on Transfer.................... 159
22.2. Lease Non-recourse to Landlord..................... 160
23. Estoppel Certificate.......................................... 162
23.1. Tenant's Certificate............................... 162
23.2. Landlord's Certificate............................. 163
23.3. Effect of Certificate.............................. 163
24. No Light, Air, or View Easement............................... 164
25. Holding Over.................................................. 165
26. Waiver........................................................ 165
27. Notices....................................................... 166
28. Authority; Tenant Financial Information; Confidentiality...... 167
28.1. Authority.......................................... 167
28.2. Tenant Financial Information; Confidentiality...... 167
29. Parking....................................................... 168
30. Signage....................................................... 169
TOC - IV
<PAGE> 6
31. Miscellaneous................................................. 171
31.1. No Joint Venture.................................. 171
31.2. Successors and Assigns............................ 171
31.3. Construction and Interpretation................... 171
31.4. Severability...................................... 172
31.5. Entire Agreement; Amendments...................... 172
31.6. Governing Law..................................... 173
31.7. Litigation Expenses............................... 173
31.8. Standards of Performance and Approvals............ 173
31.9. Brokers........................................... 174
31.10. Memorandum of Lease............................... 175
31.11. Quiet Enjoyment................................... 175
31.12. Surrender of Premises............................. 175
31.13. Building Directory................................ 176
31.14. Name of Building; Address......................... 176
31.15. Exhibits.......................................... 176
31.16. Arbitration of Fair Market Rent and Fair Market
Renewal Rent...................................... 176
31.17. Arbitration of Dispute............................ 178
31.18. Survival of Obligations........................... 181
31.19. Time of the Essence............................... 181
TOC - V
<PAGE> 7
OFFICE LEASE
PACIFIC TELESIS CENTER
TELESIS TOWER
San Francisco, California
BASIC LEASE INFORMATION
Lease Date: October 4, 1996
Landlord: Post-Montgomery Associates,
a California general partnership, consisting
of The Prudential Insurance Company of
America, and NLI Properties West, Inc.
Landlord's Address: One Montgomery Street, Suite 1300
San Francisco, California 94104
Attn: General Manager
With a copy to:
Cassidy & Verges
20 California Street, Suite 500
San Francisco, California 94111
Attn: Stephen K. Cassidy, Esq.
Tenant: Charles Schwab & Co., Inc.,
a California corporation
Tenant's Address: 101 Montgomery Street
San Francisco, California 94104
Attn: Vice President,
Corporate Services
With copies to:
P.O. Box 881566
c/o Corporate Real Estate Lease
Administration
San Francisco, California 94188-1566
i
<PAGE> 8
and
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, California 94104
Attn: Mary B. Templeton, Esq.
General Counsel
and
Corbin Silverman & Sanseverino
805 Third Avenue
New York, New York 10022
Attn: Raymond A. Sanseverino, Esq.
Premises: 15,805 feet of Galleria Rentable Area
located on Floor 2 (also designated as Level
3 of the Galleria and referred to in this
Lease as "Floor 2 Building") as shown by the
hatching on the Floor Plan attached as
Exhibit A-1; the Rentable Area of Floor 3 as
shown by the hatching on the Floor Plan
attached as Exhibit A-2; and the entire
Rentable Area of - Floors 4, 5, 6, 7, 8, 9,
10, 11, 12, 13, 14, 17, 18, 19, 20 and 21,
as shown on the Floor Plans attached as
Exhibit A-2 through A-18, respectively; and
1,347 feet of Galleria Rentable Area on
Floor 2 (also designated as Level 3 of the
Galleria and referred to in this Lease as
"Floor 2 Galleria") as shown by the hatching
on the Floor Plan attached as Exhibit A-19.
Base Year: For each Floor or partial Floor of the
Premises (other than Floor 2 which has no
Base Year), the calendar year in which the
Delivery Date (as determined pursuant to
Section 3.1 below) for such Floor shall
occur, except that if a Delivery Date shall
occur on or after October 1 of a calendar
year, then the Base Year for the affected
Floor shall be the next calendar year.
-ii-
<PAGE> 9
Expansion
Premises:
<TABLE>
<CAPTION>
================================================================================
Floor Rentable Area Tenant's Percentage Share
- --------------------------------------------------------------------------------
<S> <C> <C>
15 18,607 2.83%
- --------------------------------------------------------------------------------
16 18,625 2.84%
- --------------------------------------------------------------------------------
22 18,923 2.88%
- --------------------------------------------------------------------------------
23 18,923 2.88%
- --------------------------------------------------------------------------------
24 18,923 2.88%
- --------------------------------------------------------------------------------
25 18,923 2.88%
================================================================================
</TABLE>
Extended Terms: Two (2) periods of five (5) years each.
Floor, Rentable Area, Delivery Dates, Expiration Dates, Base Rent and Tenant's
Percentage Share:
<TABLE>
<CAPTION>
=========================================================================================================================
Base Rent Tenant's
Rentable ---------------------------------- Percentage
Floor Area Delivery Date Expiration Date Years 1-5 Years 6 - Share
of Term Expiration Date
of Term
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 1,347 December 18, 1999 December 31, 2011 $32,328.00 $36,705.75 1.54%
Galleria
- -------------------------------------------------------------------------------------------------------------------------
2 15,805 December 18, 1999 December 31, 2011 $189,660.00 $241,026.25 18.04%
Building
- -------------------------------------------------------------------------------------------------------------------------
3 5,892 December 18, 2000 December 31, 2011 $141,408.00 $160,557.00 0.90%
- -------------------------------------------------------------------------------------------------------------------------
4 18,590 April 1, 2001 December 31, 2011 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
5 18,590 April 1, 2001 December 31, 2011 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
6 18,590 April 1, 2001 December 31, 2011 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
7 18,590 January 1, 2000 December 31, 2011 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
8 18,590 July 1, 2001 December 31, 2011 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
9 18,590 July 1, 2001 December 31, 2011 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
10 18,590 July 1, 2001 December 31, 2010 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
11 18,590 January 1, 2000 December 31, 2010 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
12 18,590 January 1, 2000 December 31, 2010 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
13 18,590 January 1, 2001 December 31, 2010 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
14 18,590 December 18, 1999 December 31, 2010 $446,160.00 $506,577.50 2.83%
- -------------------------------------------------------------------------------------------------------------------------
17 18,302 December 18, 2000 December 31, 2010 $466,701.00 $549,060.00 2.79%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
-iii-
<PAGE> 10
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
18 18,369 January 1, 2000 December 31, 2009 $468,409.50 $551,070.00 2.80%
- -------------------------------------------------------------------------------------------------------------------------
19 18,926 January 1, 2000 December 31, 2009 $482,613.00 $567,780.00 2.88%
- -------------------------------------------------------------------------------------------------------------------------
20 18,923 January 1, 2000 December 31, 2009 $482,536.50 $567,690.00 2.88%
- -------------------------------------------------------------------------------------------------------------------------
21 18,923 January 1, 2000 December 31, 2009 $482,536.50 $567,690.00 2.88%
=========================================================================================================================
</TABLE>
-iv-
<PAGE> 11
Construction Allowances:
<TABLE>
<CAPTION>
===============================================================================================================
Floor Construction Floor Construction
Allowance Allowance
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Floor 2 $40,410.00 Floor 10 $650,650.00
Galleria
Floor 2 $711,225.00 Floor 11 $557,700.00
Building
Floor 3 $206,220.00 Floor 12 $557,700.00
Floor 4 $619,580.00 Floor 13 $650,650.00
Floor 5 $557,700.00 Floor 14 $650,650.00
Floor 6 $650,650.00 Floor 17 $640,570.00
Floor 7 $557,700.00 Floor 18 $551,070.00
Floor 8 $650,650.00 Floor 19 $567,780.00
Floor 9 $650,650.00 Floor 20 $567,690.00
Floor 21 $567,690.00
===============================================================================================================
</TABLE>
-v-
<PAGE> 12
Permitted Use: Except as to Floor 2 Galleria, general
executive and administrative offices
consistent with Class A office buildings in
the Downtown Financial District and, in
addition, as to Floor 2 Building of the
Premises, photocopying facilities; and as to
Floor 3 of the Premises, mail room, storage,
and photocopying facilities; and as to Floor
2 Galleria, a travel agency providing travel
services, advice and sales at retail to the
public, and/or securities brokerage services
providing services and/or advice to the
public at retail with respect to the
purchase and sale of, or investment in,
securities and other investment vehicles,
and/or the sale of clothing items to the
public at retail bearing Tenant's or
Tenant's Affiliates logos and/or
identifications.
Antenna: The rooftop microwave dish or antenna which
may be located in the Antenna Area,
including all replacements thereof effected
by Tenant from time to time.
Antenna Areas: Those areas of the roof of the Complex shown
on Exhibit A-20 where the Antenna may be
located.
Antenna Fee: The fair market rent for the Antenna Area.
Generator: The generator which may be located in the
Generator Area, including all replacements
thereof effected by Tenant from time to
time.
Generator Area: The portion of the basement and/or roof of
the Complex where the Generator may be
located.
Building Directory
-vi-
<PAGE> 13
Spaces: On the Lease Date, for the Existing
Premises, the number of Building Directory
Spaces utilized by Tenant as of the Lease
Date, and for each Floor in the New
Premises, the number of Building Directory
Spaces allocated to such Floor immediately
prior to the Delivery Date applicable to
such Floor; and after the Delivery Date for
a Floor to Tenant, if additional Building
Directory Spaces become available and Tenant
then desires additional Building Directory
Spaces for the Premises, then the number of
Building Directory Spaces so available and
desired to be used by Tenant up to Tenant's
Proportionate Share of the total Building
Directory Spaces then on the Building
Directory.
Brokers:
Landlord's Broker: Cushman & Wakefield of California, Inc.
Tenant's Broker: Colliers Damner Pike
Exhibits:
Exhibit A-1 to A-19: Floor Plans of Premises
Exhibit A-20: Antenna Area
Exhibit B: Landlord's Work for Floors 2 and 3
Exhibit C: Existing Tenant Options
Exhibit D: List of Multi-Tenant Floors
Exhibit E: Categories for Escalation Charges
Statement
Exhibit F-1, F-2: Confidentiality Agreements
Exhibit G: List of Recorded Documents
Exhibit H: Janitorial Services
Exhibit I: Rules and Regulations of the
Complex
Exhibit J: Tenant's Signage
-vii-
<PAGE> 14
OFFICE LEASE
THIS OFFICE LEASE (the "Lease") is made and entered into by and between
Landlord and Tenant as of the Lease Date.
Landlord and Tenant hereby agree as follows:
1. Definitions.
1.1. Terms Defined. The following terms have the meanings
set forth below. Certain other terms have the meanings set forth elsewhere in
this Lease.
Additional Charges: Escalation Charges and all other
additional charges and amounts payable by Tenant in accordance with this Lease.
Additional Security: A written guarantee of each and
every obligation of Tenant under this Lease, in form and substance satisfactory
to Landlord and its counsel in their sole discretion, and containing all
customary waivers of suretyship and other defenses, delivered by an Affiliate of
Tenant in favor of Landlord as of the applicable date, which Affiliate has a
then net worth not less than Four Hundred Seventy-Five Million Dollars
($475,000,000.00), as evidenced by such Affiliate's separate, unconsolidated
audited financial statements with a clean and unqualified opinion delivered to
Landlord by such Affiliate with such guarantee (which audited financial
statements shall have been issued not more than fifteen [15] months prior to the
applicable date).
Affiliate: Any subsidiary or parent of a party, any
subsidiary of a parent of a party, any entity in which a party owns a majority
interest, any entity with which a party may merge or consolidate, or any entity
to which a party sells or transfers all
-1-
<PAGE> 15
or substantially all of its assets or transfers all or substantially all of its
stock or other beneficial ownership interests; and as to Tenant, the following
entities: (i) The Charles Schwab Corporation, Schwab (SIS) Holdings, Inc. I,
Schwab (SIS) Holdings, Inc. II, Charles Schwab (Cayman) Limited, Charles Schwab
Holdings (U.K.), Charles Schwab (U.K.), ShareLink Investment Services,
ShareFinder, ShareLink Nominees Limited, ShareLink, ShareLink Services Limited,
Schwab Holdings, Inc., Charles Schwab Limited, Charles Schwab (Hong Kong)
Limited, Mayer and Schweitzer, Inc., Charles Schwab Investment Management, Inc.,
The Charles Schwab Trust Company, Performance Technologies, Inc., TrustMark,
Inc., and Schwab Retirement Services, Inc.; and (ii) such other financial
services entities (including insurance services) in which Tenant or any of the
foregoing entities may subsequently own at least a majority interest.
Alterations: Alterations, additions or other
improvements to the Premises made by or on behalf of Tenant.
Building: The high-rise office portion of the Complex,
including related Common Areas, commonly known as Telesis Tower, including the
Complex parking garage. The Building does not include the Galleria, other than
the portion of the Complex parking garage which may be located under the
Galleria.
Building Holidays: New Year's Day, Presidents' Day,
Memorial Day, Fourth of July, Labor Day, Thanksgiving Day, and Christmas Day,
and such other days designated as holidays under applicable California or
Federal law, or ordinance or resolution of the City and County of San Francisco,
or under contracts with any union governing or covering the Building, if
Landlord is either required to adhere to such laws, ordinance, resolution and/or
contract or determines, in its reasonable
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judgment, based thereon and based on the practices of Comparable Buildings, to
designate such day a Building Holiday.
Building Operating Expenses: All reasonable and actual
costs of management, preservation, operation, maintenance and repair of the
Building and supporting facilities serving the Building, including: (i)
salaries, wages, bonuses, retirement plan contributions, other compensation, and
all payroll burden of employees, and all payroll, social security, worker's
compensation, unemployment and similar taxes and impositions with respect to
such employees, and the cost of providing disability or other benefits imposed
by law or otherwise with respect to such employees; (ii) property management
fees and expenses, including a management fee to Landlord to the extent Landlord
shall perform any management of the Building in lieu of a third party manager;
(iii) fair market rent and expenses for the management office for the Complex;
(iv) electricity, natural gas, water, waste disposal, rubbish removal and
recycling, sewer, steam, heating, lighting, air conditioning and ventilating and
other utilities; (v) janitorial, maintenance, security, life safety and other
services, such as alarm service, window cleaning, elevator maintenance,
landscaping, exterminators, and uniforms (and the clean-up or replacement
thereof) for personnel providing services to the Building; (vi) materials,
supplies, tools and rental equipment; (vii) license, permit and inspection fees
and costs; (viii) insurance premiums and costs (including earthquake and/or
flood if carried by Landlord, to the extent permitted in Sections 14.2 and
14.4); (ix) the deductible portion of any insured loss under Landlord's
insurance to the extent permitted in Sections 14.2 and 14.4, except that the
deductible portion of any insured loss for the repair of damage or
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destruction covered by Landlord's insurance shall be amortized on a
straight-line basis over the useful life of improvements made to effect such
repair and reconstruction at an interest rate of 10% per annum, provided that
the total annual amortization amount allocable to Tenant as part of Escalation
Charges shall not exceed a sum equal to the product of $5.00 and the Rentable
Area and Galleria Rentable Area contained in the Premises in each calendar year
during the Term; (x) sales, use and excise taxes; (xi) legal, accounting and
other professional services for the Building, including costs, fees and expenses
of preparing reports, information and analyses for Landlord of the management,
operation, and income and receipts of the Building, and costs, fees and expenses
of contesting the validity or applicability of any law, ordinance, rule,
regulation or order relating to the Building; (xii) the cost of supplies and
services such as telephone, courier services, postage and stationary supplies;
(xiii) normal repair and replacement of worn-out equipment, facilities and
installations; (xiv) depreciation on personal property, including exterior
window draperies provided by Landlord and Common Area floor coverings, and/or
rental costs of leased furniture, fixtures, and equipment; and (xv) expenditures
for capital improvements made at any time to the Building (A) that are intended
in Landlord's judgment as labor saving devices, or to reduce or eliminate other
Building Operating Expenses or to effect other economies in the operation,
maintenance, or management of the Building, or (B) that are necessary or
appropriate in Landlord's judgment for the health and safety of occupants of the
Building, or (C) that are required under any law, ordinance, rule, regulation or
order which was not applicable to the Building at the time it was constructed,
all
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<PAGE> 18
amortized on a straight-line basis over the useful life of the capital
improvements, determined in accordance with GAAP, at an interest rate of 10% per
annum. Building Operating Expenses shall not include: (1) Real Estate Taxes; (2)
Impositions; (3) legal, accounting or other professional fees incurred in
connection with negotiating, preparing or enforcing leases or lease terms,
amendments of leases, terminations of leases or extensions of leases,
proceedings against any tenant (including Tenant) relating to the collection of
rent or other sums due Landlord from such tenant or any other disputes with any
tenant (including Tenant); (4) depreciation, except as expressly set forth in
clause (xiv) above; (5) except as a component of amortization as set forth in
clauses (ix) and (xv) above, interest, including interest on debt, debt service
or amortization payments on any mortgage encumbering the Building (or any
portion thereof) and any financing and refinancing costs with respect thereto;
(6) capital items repairs and replacements, except as set forth in clauses (ix)
and (xv) above; (7) the cost of the design, construction, renovation,
redecorating or other preparation of tenant improvements for Tenant or other
tenants or prospective tenants of the Building (including design fees for space
planning and all third party fees and charges, permit, license and inspection
fees), and moving expenses to move in or out, or relocate, Tenant or other
tenants to or from the Building or within the Building, and allowances for any
of the foregoing; (8) real estate brokerage and leasing commissions and fees;
(9) advertising and promotional expenses incurred for the purpose of leasing
space in the Building or promoting patronage of the Building by invitees; (10)
wages, salaries, reimbursable expenses, benefits and other compensation of any
personnel above
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the grade of the building manager of the Complex; (11) legal costs incurred in
connection with the initial development, construction or improvement of the
Building; (12) any rental under any ground or underlying lease; (13) repairs and
improvements paid for from the proceeds of insurance (or which would have been
paid from the proceeds of insurance required to be carried by Landlord under
this Lease if Landlord has failed to carry such insurance, or which would have
been paid from the proceeds of insurance, but for deductibles under policies
carried by Landlord under Article 14 in excess of those Landlord is permitted to
carry under Article 14), and repairs and improvements paid for directly by
Tenant, any other tenants of the Building, or any third party, and repairs or
improvements made for the benefit solely of individual tenants of the Building
other than Tenant, and deductibles in excess of those Landlord is permitted to
carry under this Lease, and the deductible portion of any insured loss in excess
of those amounts permitted pursuant to clause (ix) above; (14) loss, or the cost
to repair any damage or destruction to the Building, not covered by insurance
carried by Landlord pursuant to this Lease or otherwise carried by Landlord;
(15) any expense for which Landlord is entitled to be reimbursed by any tenant
(including Tenant) as an additional charge in excess of base rent and such
tenant's share of Building Operating Expenses; (16) amounts received by Landlord
through proceeds of insurance to the extent they are compensation for sums
previously included in Building Operating Expenses; (17) Landlord's income taxes
and franchise, gains or estate taxes imposed upon the income of Landlord; (18)
costs with respect to the creation of a mortgage or a superior lease or in
connection with a sale of the Building, including survey, legal fees and
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disbursements, transfer stamps and appraisals, engineering and inspection
reports associated with the contemplated sale; (19) payment of damages,
attorneys' fees and any other amounts to any person seeking recovery for bodily
injury, death or property damage due to Landlord's or its agents' negligence or
other tortious acts committed by Landlord or its agents (including any tort
claims relating to asbestos); (20) the cost of any repairs, alterations,
additions, improvements or replacements made to rectify, remedy or correct any
structural or other defect in the original design, construction materials,
installations or workmanship of the Building; (21) costs incurred due to
violations by Landlord, or by any tenant (including Tenant) in the Building, of
the terms and conditions of any lease, and penalties and interest for late
payment of any obligation of Landlord (unless such penalties or interest result
from Tenant's late payment of Rent and Additional Charges); (22) any tenant
improvement allowance given to any tenant (including Tenant), whether given by
contribution or credit against rent or otherwise, and any abatements or credits
to base rent or additional rent; (23) the costs incurred in performing work or
furnishing services for any tenant (including Tenant) in the Building, whether
at such tenant's or Landlord's expense, to the extent that such work or service
is in excess of any work or service that Landlord is obligated to furnish to
Tenant under this Lease; (24) any rental concessions to, or lease buy-outs of,
Tenant or any other tenant in the Building; (25) the portion of the premium for
earthquake insurance (if carried by Landlord pursuant to Section 14.2)
attributable to coverage under such earthquake insurance for deductibles less
than permitted under Section 14.2 or for coverage exceeding that permitted under
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Section 14.2; (26) costs incurred by Landlord to cure any violation of its
obligations with respect to Hazardous Materials under Section 8.7 below and
costs to comply with the recommendations described in the Phase I Report; (27)
the costs, expenses and fees of any asset manager or investment advisor
representing Landlord or any partner or any other constituent member of
Landlord; (28) rent or rental value for any management office in the Complex in
excess of the amount permitted under clause (iii) above; (29) Landlord's
internal overhead expenses, including the cost of internal accounting and the
cost of preparation of Landlord's income tax or information returns; (30)
overhead and profit increment paid to Affiliates of Landlord for services on or
to the Building (other than any property management fees payable pursuant to
clause (ii) above), or for supplies or other materials, to the extent that such
increment or the cost of such supplies or materials exceed such increment or
costs in Comparable Buildings; (31) the costs for utilities to service the
Complex parking garage, the premiums for insurance covering the Complex parking
garage, and salaries, wages, bonuses, retirement plan contributions or other
compensation, and all payroll burden of employees engaged directly in the
operation of the Complex parking garage, and all payroll, social security,
worker's compensation, unemployment, and similar taxes and impositions with
respect to such employees, and the cost of providing disability or other
benefits imposed by law or otherwise with respect to such employees; (32) any
costs (including compensation paid to clerks, attendants or other persons)
incurred for concessions (such as a newspaper stand or flower stand) or
specialty use (such as a fitness center) operated by Landlord with the intent to
make a profit;
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<PAGE> 22
(33) damages and repairs necessitated by the gross negligence or willful
misconduct of Landlord or Landlord's employees, contractors or agents; (34)
Galleria Operating Expenses; and (35) any costs expressly excluded as a Building
Operating Expenses under any other provisions of this Lease. Building Operating
Expenses shall be "net" so that they are reduced by the amount of all
recoupments, discounts, credits, reductions, allowances or the like actually
received by Landlord from third parties, on account of Building Operating
Expenses, except that Landlord may include in Building Operating Expenses the
reasonable and actual costs and expenses, if any, incurred by Landlord in
obtaining such recoupments, discounts, credits, reductions, allowances or the
like. For purposes of determining Building Operating Expenses, whenever Building
Operating Expenses are derived from costs or expenses attributable to the
Complex, Landlord shall determine the allocation of such costs and expenses to
Building Operating Expenses in accordance with GAAP based on the operating
principles and practices for the Complex, consistently applied, including usage
of the affected portion of the Complex as of the time in question, and the time
or labor devoted to an item or matter as of the time in question. If less than
ninety-five percent (95%) of the entire Rentable Area of the Building is
occupied in any calendar year during the Term (including the Base Year), then
Building Operating Expenses for that year shall be adjusted to reflect
Landlord's reasonable estimate of Building Operating Expenses had 95% of the
entire Rentable Area of the Building been continuously occupied. The
determination of Building Operating Expenses shall be made by Landlord in
accordance with GAAP based on the provisions of this definition of Building
Operating Expenses.
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Building Property Taxes: Eighty-Eight and Four-
Tenths Percent (88.4%) of Real Estate Taxes, except that to the extent the
Building, or a portion thereof, is separately assessed, then One Hundred Percent
(100%) of such separately assessed Real Estate Taxes.
Business Days: Monday through Friday of each week,
excluding, however, Building Holidays.
Comparable Buildings: The following buildings located
in the Downtown Financial District: One Embarcadero Center; Two Embarcadero
Center; Three Embarcadero Center; Four Embarcadero Center; One Market Plaza; and
101 California Street.
Complex: The Land, the Building, the Galleria, all
other buildings, other improvements and building systems at any time located on
the Land, and all appurtenances related thereto, commonly known as Pacific
Telesis Center.
Common Areas: Those areas of the Complex designated by
Landlord from time to time for the nonexclusive use of occupants of the Complex,
and their agents, employees, customers, invitees and licensees, and other
members of the public. Except to the extent that the use thereof is granted to
Tenant pursuant to this Lease and then only to the extent of such grant, Common
Areas do not include the exterior windows and walls and the roof of the Complex,
or any space in the Complex (including in the Premises) used for common shafts,
stacks, pipes, conduits, ducts, electrical or other utilities, or other Complex
service facilities, the use of and access to which are reserved exclusively to
Landlord.
Critical Area: Facilities and/or equipment located in
a portion of the Premises, the use or operation of, or
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<PAGE> 24
access to which, is reasonably required by Tenant for the conduct by Tenant of
its business in another portion or portions of the Premises.
Downtown Financial District: That portion of the City
and County of San Francisco, California, located within the area from the
intersection of Kearny Street and Market Street, along Kearny Street to
Washington Street, along Washington Street to The Embarcadero, along The
Embarcadero to Howard Street, along Howard Street to Spear Street, along Spear
Street to Market Street, and along Market Street to Kearny Street.
Environmental Laws: All present and future statutes,
ordinances, orders, rules and regulations of all federal, state or local
governmental agencies relating to the environment, health and safety, or the
use, generation, handling, emission, release, discharge, storage or disposal of
Hazardous Materials.
Escalation Charges: As to each Floor of the Premises,
other than Floor 2, Tenant's Percentage Share of the total Dollar increase, if
any, in Building Operating Expenses, and Tenant's Percentage Share of the total
Dollar increase, if any, in Building Property Taxes, each as incurred by
Landlord in each calendar year, or part thereof, after the Base Year applicable
to such Floor, over the amount of Building Operating Expenses and of Building
Property Taxes for the Base Year applicable to each Floor; and as to Floor 2 of
the Premises, Tenant's Percentage Share of Galleria Operating Expenses, and
Tenant's Percentage Share of Galleria Property Taxes, each as incurred by
Landlord in each calendar year, or part thereof, during the Term applicable to
Floor 2.
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<PAGE> 25
Executive Floors: A Floor or Floors within the highest
three (3) Floors in the Building then comprised in the Premises which is
occupied mainly by executives of Tenant with the rank of Senior Vice President
and above and their support staff.
Existing Premises: Floors 5, 7, 11, 12, 18, 19, 20,
21, and approximately 6,214 feet of Rentable Area on Floor 4 of the Building
occupied by Tenant as of the date hereof.
Floor: The entire Rentable Area of any Floor in the
Building, except as to Floor 2 (also designated as "Level 3" of the Galleria) of
the Premises, which is comprised of 15,805 feet of Galleria Rentable Area for
Floor 2 Building, and 1,347 feet of Galleria Rentable Area for Floor 2 Galleria,
as shown on Exhibits A-1 and A-19. References in this Lease to "Floor 2" shall
mean the entirety of Floor 2 included in the Premises, as shown on Exhibits A-1
and A-19; references in this Lease to "Floor 2 Building" shall mean that portion
of Floor 2 shown on Exhibit A-1; and references in this Lease to "Floor 2
Galleria" shall mean that portion of Floor 2 shown on Exhibit A-19.
GAAP: Generally accepted accounting principles and
practices.
Galleria: The retail shopping center portion of the
Complex, including related Common Areas, and the Galleria roof garden located on
top of the third (3rd) level of the Galleria, commonly known as The Crocker
Galleria, and including the Complex parking garage. The Galleria does not
include the Building, other than the portion of the Complex parking garage which
may be located under the Building.
Galleria Operating Expenses: All reasonable and actual
costs of management, preservation, operation,
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<PAGE> 26
maintenance and repair of the Galleria and supporting facilities serving the
Galleria, including: (i) salaries, wages, bonuses, retirement plan
contributions, other compensation, and all payroll burden of employees, and all
payroll, social security, worker's compensation, unemployment and similar taxes
and impositions with respect to such employees, and the cost of providing
disability or other benefits imposed by law or otherwise with respect to such
employees; (ii) property management fees and expenses, including a management
fee to Landlord to the extent Landlord shall perform any management of the
Galleria in lieu of a third party manager; (iii) fair market rent and expenses
for the management office for the Complex; (iv) electricity, natural gas, water,
waste disposal, rubbish removal and recycling, sewer, steam, heating, lighting,
air conditioning and ventilating and other utilities; (v) janitorial,
maintenance, security, life safety and other services, such as alarm service,
window cleaning, elevator maintenance, landscaping, exterminators, and uniforms
(and the clean-up or replacement thereof) for personnel providing services to
the Galleria; (vi) materials, supplies, tools and rental equipment; (vii)
license, permit and inspection fees and costs; (viii) insurance premiums and
costs (including earthquake and/or flood if carried by Landlord, to the extent
permitted in Sections 14.2 and 14.4); (ix) the deductible portion of any insured
loss under Landlord's insurance to the extent permitted in Sections 14.2 and
14.4, except that the deductible portion of any insured loss for the repair of
damage or destruction covered by Landlord's insurance shall be amortized on a
straight-line basis over the useful life of improvements made to effect such
repair and reconstruction at an interest rate of 10% per annum, provided
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<PAGE> 27
that the total annual amortization amount allocable to Tenant as part of
Escalation Charges shall not exceed a sum equal to the product of $5.00 and the
Rentable Area and Galleria Rentable Area contained in the Premises in each
calendar year during the Term; (x) sales, use and excise taxes; (xi) legal,
accounting and other professional services for the Galleria, including costs,
fees and expenses of preparing reports, information and analyses for Landlord of
the management, operation, and income and receipts of the Galleria, and costs,
fees and expenses of contesting the validity or applicability of any law,
ordinance, rule, regulation or order relating to the Galleria; (xii) the cost of
supplies and services such as telephone, courier services, postage and
stationary supplies; (xiii) normal repair and replacement of worn-out equipment,
facilities and installations; (xiv) depreciation on personal property, including
exterior window draperies provided by Landlord and Common Area floor coverings,
and/or rental costs of leased furniture, fixtures, and equipment; (xv)
expenditures for capital improvements made at any time to the Galleria (A) that
are intended in Landlord's judgment as labor saving devices, or to reduce or
eliminate other Galleria Operating Expenses or to effect other economies in the
operation, maintenance, or management of the Galleria, or (B) that are necessary
or appropriate in Landlord's judgment for the health and safety of occupants of
the Galleria, or (C) that are required under any law, ordinance, rule,
regulation or order which was not applicable to the Galleria at the time it was
constructed, all amortized on a straight-line basis over the useful life of the
capital improvements, determined in accordance with GAAP, at an interest rate of
10% per annum; (xvi) advertising and promotional expenses (including fees paid
to third parties) incurred for the
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<PAGE> 28
purpose of marketing and promoting the retail operations of the Galleria; and
(xvii) costs and expenses for the management, preservation operation and
maintenance and repair of the Galleria roof garden located on the third level of
the Galleria, subject to the limitations on such costs and expenses set forth in
this definition of Galleria Operating Expenses. Galleria Operating Expenses
shall not include: (1) Real Estate Taxes; (2) Impositions; (3) legal, accounting
or other professional fees incurred in connection with negotiating, preparing or
enforcing leases or lease terms, amendments of leases, terminations of leases or
extensions of leases, proceedings against any tenant (including Tenant) relating
to the collection of rent or other sums due Landlord from such tenant or any
other disputes with any tenant (including Tenant); (4) depreciation, except as
expressly set forth in clause (xiv) above; (5) except as a component of
amortization as set forth in clauses (ix) and (xv) above, interest, including
interest on debt, debt service or amortization payments on any mortgage
encumbering the Galleria (or any portion thereof) and any financing and
refinancing costs with respect thereto; (6) capital items repairs and
replacements, except as set forth in clauses (ix) and (xv) above; (7) the cost
of the design, construction, renovation, redecorating or other preparation of
tenant improvements for Tenant or other tenants or prospective tenants of the
Galleria (including design fees for space planning and all third party fees and
charges, permit, license and inspection fees), and moving expenses to move in or
out, or relocate, Tenant or other tenants to or from the Galleria or within the
Galleria, and allowances for any of the foregoing; (8) real estate brokerage and
leasing commissions and fees; (9) advertising and promotional expenses incurred
for the purpose
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<PAGE> 29
of leasing space in the Galleria; (10) wages, salaries, reimbursable expenses,
benefits and other compensation of any personnel above the grade of the building
manager of the Complex; (11) legal costs incurred in connection with the initial
development, construction or improvement of the Galleria; (12) any rental under
any ground or underlying lease; (13) repairs or improvements paid for from the
proceeds of insurance (or which would have been paid from the proceeds of
insurance required to be carried by Landlord under this Lease if Landlord has
failed to carry such insurance, or which would have been paid from the proceeds
of insurance, but for deductibles under policies carried by Landlord under
Article 14 in excess of those Landlord is permitted to carry under Article 14),
and repairs and improvements paid for directly by Tenant, any other tenants of
the Galleria, or any third party, and repairs or improvements made for the
benefit solely of individual tenants of the Galleria other than Tenant, and
deductibles in excess of those Landlord is permitted to carry under this Lease;
(14) loss or the cost to repair any damage or destruction to the Galleria, not
covered by insurance carried by Landlord pursuant to this Lease or otherwise
carried by Landlord; (15) any expense for which Landlord is entitled to be
reimbursed by any tenant (including Tenant) as an additional charge in excess of
base rent and such tenant's share of Galleria Operating Expenses; (16) amounts
received by Landlord through proceeds of insurance to the extent they are
compensation for sums previously included in Galleria Operating Expenses; (17)
Landlord's income taxes and franchise, gains or estate taxes imposed upon the
income of Landlord; (18) costs with respect to the creation of a mortgage or a
superior lease or in connection with a sale of the Galleria,
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<PAGE> 30
including survey, legal fees and disbursements, transfer stamps and appraisals,
engineering and inspection reports associated with the contemplated sale; (19)
payment of damages, attorneys' fees and any other amounts to any person seeking
recovery for bodily injury, death or property damage due to Landlord's or its
agents' negligence or other tortious acts committed by Landlord or its agents
(including any tort claims relating to asbestos); (20) the cost of any repairs,
alterations, additions, improvements or replacements made to rectify, remedy or
correct any structural or other defect in the original design, construction
materials, installations or workmanship of the Galleria; (21) costs incurred due
to violations by Landlord, or by any tenant (including Tenant) in the Galleria,
of the terms and conditions of any lease, and penalties and interest for late
payment of any obligation of Landlord (unless such penalties or interest result
from Tenant's late payment of Rent and Additional Charges); (22) any tenant
improvement allowance given to any tenant (including Tenant), whether given by
contribution or credit against rent or otherwise, and any abatements or credits
to base rent or additional rent; (23) the costs incurred in performing work or
furnishing services for any tenant (including Tenant) in the Galleria, whether
at such tenant's or Landlord's expense, to the extent that such work or service
is in excess of any work or service that Landlord is obligated to furnish to
Tenant under this Lease; (24) any rental concessions to, or lease buy-outs of,
Tenant or any other tenant in the Galleria; (25) the portion of the premium for
earthquake insurance (if carried by Landlord pursuant to Section 14.2)
attributable to coverage under such earthquake insurance for deductibles less
than permitted under Section 14.2 or for coverage exceeding that permitted under
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<PAGE> 31
Section 14.2; (26) costs incurred by Landlord to cure any violation of its
obligations with respect to Hazardous Materials under Section 8.7 below and
costs to comply with the recommendations described in the Phase I Report; (27)
the costs, expenses and fees of any asset manager or investment advisor
representing Landlord or any partner or any other constituent member of
Landlord; (28) rent or rental value for any management office in the Complex in
excess of the amount permitted under clause (iii) above; (29) Landlord's
internal overhead expenses, including the cost of internal accounting and the
cost of preparation of Landlord's income tax or information returns; (30)
overhead and profit increment paid to Affiliates of Landlord for services on or
to the Galleria (other than any property management fees payable pursuant to
clause (ii) above), or for supplies or other materials, to the extent that such
increment or the cost of such supplies or materials exceed such increment or
costs in Comparable Buildings; (31) the costs for utilities to service the
Complex parking garage, the premiums for insurance covering the Complex parking
garage, and salaries, wages, bonuses, retirement plan contributions or other
compensation, and all payroll burden of employees engaged directly in the
operation of the Complex parking garage, and all payroll, social security,
worker's compensation, unemployment, and similar taxes and impositions with
respect to such employees, and the cost of providing disability or other
benefits imposed by law or otherwise with respect to such employees; (32) any
costs (including compensation paid to clerks, attendants or other persons)
incurred for concessions (such as a newspaper stand or flower stand) or
specialty use (such as a fitness center) operated by Landlord with the intent to
make a profit;
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<PAGE> 32
(33) damages and repairs necessitated by the gross negligence or willful
misconduct of Landlord or Landlord's employees, contractors or agents; (34)
Building Operating Expenses; and (35) any costs expressly excluded as a Galleria
Operating Expenses under any other provisions of this Lease. Galleria Operating
Expenses shall be "net" so that they are reduced by the amount of all
recoupments, discounts, credits, reductions, allowances or the like actually
received by Landlord from third parties, on account of Galleria Operating
Expenses, except that Landlord may include in Galleria Operating Expenses the
reasonable and actual costs and expenses, if any, incurred by Landlord in
obtaining such recoupments, discounts, credits, reductions, allowances or the
like. For purposes of determining Galleria Operating Expenses, whenever Galleria
Operating Expenses are derived from costs or expenses attributable to the
Complex, Landlord shall determine the allocation of such costs and expenses to
Galleria Operating Expenses in accordance with GAAP based on the operating
principles and practices for the Complex, consistently applied, including usage
of the affected portion of the Complex as of the time in question, and the time
or labor devoted to an item or matter as of the time in question. If less than
ninety-five percent (95%) of the entire Galleria Rentable Area of the Galleria
is occupied in any calendar year during the Term, then Galleria Operating
Expenses for that year shall be adjusted to reflect Landlord's reasonable
estimate of Galleria Operating Expenses had 95% of the entire Galleria Rentable
Area of the Galleria been continuously occupied. The determination of Galleria
Operating Expenses shall be made by Landlord in accordance with GAAP based on
the provisions of this definition of Galleria Operating Expenses.
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<PAGE> 33
Galleria Property Taxes: Eleven and Six-Tenths
Percent (11.6%) of Real Estate Taxes, except that to the extent the Galleria, or
a portion thereof, is separately assessed, One Hundred Percent (100%) of such
separately assessed Real Estate Taxes shall be included in Galleria Property
Taxes.
Galleria Rentable Area: The aggregate square footage
contained within leasable space of the Galleria computed (i) by measuring from
the exterior Galleria walls fronting on public streets, from the inside surface
of other exterior Galleria walls to the finished surface of the corridor side of
corridor partitions, from the center of demising walls separating adjoining
leased premises and from the outside face of tenant storefronts facing the
interior Common Areas of the Galleria; (ii) without deductions for columns and
projections of the Complex; (iii) including and allocating prorata to Galleria
tenants (including Tenant) as applicable, all areas within exterior Galleria
walls serving more than one (1) leased premises, except for elevator shafts and
elevator machine rooms, public stairs, fire towers and fire tower courts and
main telephone and electric switchboards (other than telephone and electric
switchboards leased by a tenant or comprising a special installation by a
tenant); (iv) allocating all areas, including enclosing walls, serving only one
(1) leased premises (such as stairs, elevators, door recesses, toilets,
auxiliary air conditioning facilities, janitorial closets and telephone and
electric closets) to such leased space; and (v) including, and allocating
prorata to all tenants of the Galleria (including Tenant), any other areas
within the exterior Galleria walls which are not intended for the exclusive use
of any leased premises, but excluding the Complex parking garage.
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Hazardous Materials: Petroleum, asbestos,
polychlorinated biphenyls, radioactive materials, radon gas or any chemical,
material or substance now or hereafter defined as or included in the definition
of "hazardous substances", "hazardous wastes", "hazardous materials",
"pollutants", "contaminants", "extremely hazardous waste", "restricted hazardous
waste" or "toxic substances", or words of similar import, under any
Environmental Laws.
Impositions: Taxes, assessments, charges, excises and
levies, business taxes, license, permit, inspection and other authorization
fees, transit development fees, assessments or charges for housing funds,
service payments in lieu of taxes and any other fees or charges of any kind at
any time levied, assessed, charged or imposed by any federal, state or local
entity, (i) upon, measured by or reasonably attributable to the cost or value of
Tenant's equipment, furniture, fixtures or other personal property located in
the Premises; (ii) to the extent and when Landlord requires Tenant and other
tenants of the Building to pay the same, upon, measured by or reasonably
attributable to the cost or value of any Alterations that exceed or are
different than the then Building-standard improvements; (iii) upon, or measured
by, any Rent and Additional Charges payable hereunder, including any gross
receipts tax; (iv) upon, with respect to or by reason of the development,
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises, or any portion thereof; or (v) upon this
Lease transaction, or any document by which Tenant creates or transfers any
interest or estate in the Premises. Impositions shall not include Real Estate
Taxes, franchise, transfer, inheritance, estate, or capital stock taxes,
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or income taxes measured by the net income of Landlord, or on any document by
which Landlord creates or transfers any interest or estate in the Complex (other
than a lease or occupancy agreement with Tenant), unless any such taxes are
levied or assessed against Landlord as a substitute for, in whole or in part,
any Imposition.
Land: The parcel of land shown as Lots 4, 5, 6, 7, 8,
14, 15 and 16 on that certain Parcel Map, filed February 13, 1981, at Page 6, in
Book 19, of Parcel Maps, of the Official Records of the City and County of San
Francisco, California.
Lease Rate: The lower of (i) the Prime Rate in effect
from time to time, plus three percent (3%), or (ii) the highest rate permitted
under applicable usury law.
Limited Alterations: Alterations which (i) affect the
structure of any portion of the Complex, (ii) affect the appearance of the
exterior of any portion of the Complex (including ceiling and lighting systems,
and window treatments or coverings, in the Premises), (iii) affect the
appearance of Common Areas on a Floor (other than Floors fully occupied by
Tenant), (iv) adversely affect the proper functioning of, or interfere with, the
Complex roof, walls, elevators, heating, ventilating, air conditioning,
electrical, plumbing, security, life safety or other Complex systems, or the use
and enjoyment by other tenants or occupants of the Complex of their premises, or
exceed Tenant's Percentage Share of the capacity which may then be available in
the Complex, (v) result in the imposition on Landlord of any requirement to make
any alterations or improvements to any portion of the Complex (including
handicap access and life safety requirements), other than in the Premises
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if Tenant performs such alterations or improvements at its cost or expense, or
(vi) increase the cost to clean, maintain or repair the Premises.
New Premises: Floors 2, 3, 6, 8, 9, 10, 13,
14, 17, and approximately 12,376 feet of Rentable Area on Floor 4
of the Building.
Phase I Report: Collectively, the Phase I
Environmental Assessment Report, prepared by Landlord's consultant, H+GCL, Inc.,
dated January 4, 1993; the Asbestos Survey Report, prepared by Landlord's
consultant, Hygienics Environmental Services, Inc., dated July 1994; the
Asbestos Survey Report, prepared by Landlord's consultant, H+GCL, dated January
1993; and an Asbestos Operations and Maintenance Program, prepared by Landlord's
consultant, H+GCL, Inc., dated May 1993.
Prime Rate: The rate charged by Wells Fargo
Bank to its most credit-worthy customers for loans making reference to such
prime rate.
Real Estate Taxes: Taxes, assessments and charges now
or hereafter levied or assessed upon, or with respect to, the Complex, or any
personal property of Landlord to the extent used in the operation thereof,
whether or not located therein, or Landlord's interest in the Complex or such
personal property, by any federal, state or local entity, including: (i) all
real property taxes and general and special assessments; (ii) charges, fees or
assessments for transit, public improvements, employment, job training, housing,
day care, open space, art, police, fire or other governmental services or
benefits to the Complex; (iii) service payments in lieu of taxes; (iv) any tax,
fee or excise on the use or occupancy of any part of the Complex; (v) any tax
assessment, charge, levy or fee for
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environmental matters or as a result of the imposition of mitigation measures,
such as parking taxes, employer parking regulations or fees or assessments as a
result of the treatment of the Complex, or any portion thereof or interest
therein, as a source of pollution or stormwater runoff; (vi) any other tax, fee
or excise, however described, that may be levied or assessed as a substitute
for, or as an addition to, in whole or in part, any other Real Estate Taxes; and
(vii) reasonable consultants' and attorneys' fees and expenses incurred in
connection with proceedings to contest, determine or reduce Real Estate Taxes to
the extent Tenant would be required to pay Escalation Charges for Real Estate
Taxes with respect to the year to which such fees and expenses relate. Real
Estate Taxes shall not include: (A) franchise, transfer, inheritance, estate or
capital stock taxes, or income taxes measured by the net income of Landlord,
unless any such taxes are levied or assessed against Landlord as a substitute
for, in whole or in part, any Real Estate Tax; (B) Impositions and all similar
amounts payable by tenants of the Complex under their leases; (C) special
assessments levied against the Complex for the construction of improvements
benefitting solely the Complex in connection with its initial construction, or
in connection with alterations, additions or improvements subsequently made by
Landlord to the Complex (except to the extent that such special assessments are
used to finance expenditures for capital improvements includable under this
Lease as a Building Operating Expense and/or Galleria Operating Expense); and
(D) penalties, fines, interest or charges due for late payment of Real Estate
Taxes by Landlord. If any Real Estate Taxes are payable, or may at the option of
the taxpayer be paid, in installments, such Real Estate Taxes shall, together
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with any interest that would otherwise be payable with such installment, be
deemed to have been paid in installments, amortized over the maximum time period
allowed by applicable law.
Rent: Base Rent and the Antenna Fee.
Rentable Area: The aggregate square footage
on each Building Floor within exterior Building walls, measured from the inside
surface of outer glass and extending the plane thereof into non-glass areas,
excluding elevator shafts and elevator machine rooms, public stairs, fire towers
and fire tower courts, and main telephone and electric switchboards (other than
telephone and electric switchboards leased by a tenant or comprising a special
installation by a tenant), with all air conditioning floors and other areas
containing Building equipment or enclosing common pipes, ducts or shafts,
apportioned to the leased space they serve. To calculate Rentable Area for a
partial Floor tenancy, (i) demising walls separating two (2) leased premises
shall be equally divided between such leased premises, (ii) corridor walls to
the finished corridor side shall be included in the Rentable Area of adjacent
leased space, and (iii) core areas (including the finished enclosing walls
thereof but excluding any part leased to a tenant), corridors (excluding the
enclosing walls thereof), and bathrooms shall be apportioned among each leased
premises on such Floor on the basis of the Rentable Area of each such leased
premises (exclusive of such core and corridor areas) in relation to the total
Rentable Area of all leased premises on such Floor (exclusive of such core and
corridor areas).
Rent Commencement Date: For each Floor
comprised in the Existing Premises, sixty (60) days after the Delivery Date
applicable to that Floor; and for each Floor
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comprised in the New Premises, ninety (90) days after the Delivery Date
applicable to that Floor.
Requirements: All laws, ordinances, rules,
regulations, orders and other governmental requirements, the requirements of any
independent board of fire underwriters, and any directive or occupancy
certificate issued pursuant to any law by any public officer or officers
applicable to the Complex.
Term: The term of this Lease, as determined for each
Floor in the Premises pursuant to Section 3.1 below.
Wattage Allowance: For each Floor in the Premises a
connected load of 4.5 watts per foot of Rentable Area contained in such Floor
for convenience power, and 1 kilowatt hour per month per foot of Rentable Area
in such Floor (or Galleria Rentable Area in the case of Floor 2) contained in
such Floor. "Lighting Wattage Allowance" means for each Floor in the Premises a
connected load of 1.5 watts per foot of Rentable Area in such Floor (or Galleria
Rentable Area in the case of Floor 2) contained in such Floor. The Wattage
Allowance does not apply to Building standard heating, ventilation and air
conditioning supplied by Landlord to the Premises under this Lease.
1.2. Basic Lease Information. The Basic Lease Information is
incorporated into and made a part of this Lease. Each reference in the Lease to
any Basic Lease Information shall mean the applicable information set forth in
the Basic Lease Information, except that in the event of any conflict between an
item in the Basic Lease Information and this Lease, this Lease shall control.
1.3. Effect of Certain Defined Terms. The parties acknowledge
that (i) the Rentable Area and Galleria Rentable Area of the Premises, the
Expansion Premises, the Building and the Galleria have been finally determined
by the parties as part of this Lease for
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all purposes, including the calculation of Tenant's Percentage Share and will
not, except as otherwise provided in this Lease, be changed; and (ii) the
percentage for allocation of Building Property Taxes and Galleria Property Taxes
is conclusive and binding on the parties.
2. Lease of Premises.
2.1. Premises. Landlord leases to Tenant and Tenant
leases from Landlord the Premises, together with the non-
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exclusive right to use, in common with others, the Common Areas, all subject to
the terms, covenants and conditions set forth in this Lease. Landlord reserves
from the leasehold estate hereunder (i) all exterior walls and windows bounding
the Premises, and (ii) all space located within the Premises in the core or
perimeter of the Building now designated or designed for vertical penetrations,
conduits, electric and all other installations for utilities, telecommunications
systems, and other Building systems serving the Complex, the use thereof and
access thereto, subject to the terms of this Lease, and the right to install,
remove or relocate any of the foregoing for service to any part of the Complex,
including the premises of other tenants of the Building.
2.2. Antenna and Antenna Area.
a. Option to Lease Antenna Area. On the
terms and conditions contained in this Section 2.2, Landlord hereby grants to
Tenant an option to lease one (1) of the Antenna Areas for the installation,
operation and maintenance of the Antenna for the reception and/or transmission
of Tenant's business communications. Notwithstanding the grant to Tenant of the
option to lease one of the Antenna Areas under this Section 2.2, Landlord shall
have the right, without prior notice or obligation to Tenant, to grant licenses
in or lease to third parties any or all of the Antenna Areas, except that, when
and if Landlord grants licenses in or leases all but the last Antenna Area to
third parties, then, if Landlord intends to grant a license in or enter into a
lease with respect to the last Antenna Area with a third party, Landlord shall,
prior to entering into such license or lease, so notify Tenant, and Tenant shall
have seven (7) Business Days after the receipt of Landlord's notice to
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exercise its option to lease the last Antenna Area in accordance with the terms
and conditions set forth in this Section 2.2.
b. Procedure to Exercise Option. Tenant may exercise
its option to lease one (1) of the Antenna Areas under this Section 2.2 at any
time during the Term by giving written notice of such exercise to Landlord,
except that if Landlord has given Tenant notice pursuant to Section 2.2.a above
that it intends to grant a license or enter into a lease for the last Antenna
Area and Tenant fails during the 7-Business Day period specified in Section
2.2.a to exercise the option to lease the last Antenna Area, then Tenant's
option to lease any of the Antenna Areas shall terminate unless any of the
Antenna Areas shall again become available during the Term, in which event
Tenant shall again have the option to lease such Antenna Area on the terms and
conditions of this Section 2.2, except that Landlord shall have no obligation to
notify Tenant of the availability of such Antenna Area, and Tenant, if it
desires, shall be solely responsible for inquiring of Landlord regarding the
availability of such Antenna Area. If Tenant duly exercises the option to lease
one of the Antenna Areas pursuant to this Section 2.2.b, such Antenna Area shall
automatically become part of the Premises on the date Landlord actually delivers
possession of the Antenna Area to Tenant pursuant to Section 2.2.e below, on all
the terms and conditions of this Lease, except that (i) the Antenna Fee shall
equal the fair market rent for the Antenna Area, (ii) Tenant's obligation to pay
the Antenna Fee shall commence thirty (30) days after the date Landlord actually
delivers possession of the Antenna Area to Tenant pursuant to Section 2.2.e
below, (iii) the Antenna Area shall not be included in calculating Tenant's
Percentage Share, and (iv) the lease of
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the Antenna Area shall terminate as of the earlier of (A) the date this Lease
terminates for the entirety of the Premises, or (B) the date the lease of the
Antenna Area terminates pursuant to this Section 2.2.
c. Conditions on Exercise. Tenant's exercise
of the option to lease an Antenna Area shall not be effective if, as of the date
of exercise, a monetary or other material default by Tenant then exists under
this Lease which Tenant has failed to cure after the giving of any applicable
notice and the expiration of any applicable cure period.
d. Determination of Fair Market Rent.
(i) Fair Market Rent Defined. As
used in this Section 2.2, "fair market rent" means the monthly rent charged for
antenna areas comparable to the Antenna Area as to which Tenant has exercised
its option hereunder, for the installation and operation of antennas similar to
the Antenna in the Building and Comparable Buildings, except that if Landlord
has received an offer for the grant of a license or lease for the last Antenna
Area pursuant to which Landlord has given notice of its intention to grant a
license in or lease such Antenna Area under Section 2.2.a above, Landlord shall
deliver to Tenant a true copy of such offer, fair market rent shall be the
amount which the third party has offered to pay to Landlord as a license fee or
rent for such Antenna Area, and such amount shall be conclusively binding on the
parties. Unless fair market rent is determined by such a third party offer, then
the determination of fair market rent shall take into account: (i) the length of
the Term and the length of the terms for such comparable antenna areas; (ii) the
rental structure under the licenses and/or leases for such comparable antenna
areas; (iii) the date the licenses or
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leases for such comparable antenna areas were entered into and the then market
conditions under which the license fee or rental structures under such licenses
or leases were negotiated in comparison with current market conditions, except
that no license or lease entered into more than one (1) year prior to the date
of Tenant's exercise of the option to lease an Antenna Area hereunder shall be
considered; and (iv) any other relevant terms or conditions in the licenses
and/or leases for such comparable antenna areas. Fair market rent shall be
determined for the Antenna Area as of the date the Antenna Area is added to the
Premises hereunder.
(ii) Determination of Fair Market Rent. Unless fair
market rent is conclusively determined by a third party offer pursuant to
Section 2.2.d(i) above, then within fifteen (15) days after receipt of Tenant's
notice of exercise of its option to lease an Antenna Area under this Section
2.2, Landlord shall deliver to Tenant Landlord's estimate of fair market rent,
and Landlord and Tenant shall thereupon negotiate in good faith for not more
than fifteen (15) days in an attempt to determine fair market rent for the
Antenna Area. If they are able to agree within such 15-day period, then the fair
market rent shall be the amount so agreed upon. If they are unable to agree on
fair market rent within such 15-day period, then within five (5) days after the
expiration of such 15-day period, the parties shall deliver to each other
concurrently at a mutually agreeable place and time their respective final
written estimates of fair market rent on which Landlord would be willing to
lease the Antenna Area to Tenant, and Tenant would be willing to lease the
Antenna Area from Landlord. If each party's final estimate of the fair market
rent is the same, then fair market rent shall
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equal such estimate. If one party's final estimate of fair market rent is ten
percent (10%), or less, higher than the other party's final estimate, then fair
market rent shall equal the average of the two (2) final estimates. In every
other case, fair market rent, based on the 2 final estimates, shall be
determined by arbitration as provided below in Section 31.16. Should the
determination of fair market rent not be completed or agreed upon prior to the
date upon which Tenant's obligation to pay the Antenna Fee commences, Tenant
shall pay the Antenna Fee equal to Landlord's final estimate of fair market rent
made pursuant hereto. If after determination of fair market rent, the Antenna
Fee is less than the amount previously paid by Tenant for such period, Landlord
shall pay the difference to Tenant within thirty (30) days after the date of
such determination, with interest thereon calculated from the date of each
payment of such Rent by Tenant at the Prime Rate plus 1%; and, if after
determination of fair market rent, the Antenna Fee is more than the amount
previously paid Tenant for such period, Tenant shall pay the difference to
Landlord within thirty (30) days after the date of such determination, with
interest thereon calculated from the date of each payment of such Rent by Tenant
at the Prime Rate plus 1%.
e. Delivery of Antenna Area. Landlord
shall deliver possession of the Antenna Area to Tenant five (5) days after the
date of Tenant's exercise of the option to lease such Antenna Area hereunder.
Landlord shall deliver the Antenna Area in its "as is" condition, without
obligation to make any alterations or improvements to the Antenna Area. If
Landlord, for any reason due to causes beyond the reasonable control of Landlord
(such as governmental regulations), cannot deliver the
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Antenna Area to Tenant by the delivery date herein specified, this Lease shall
not be void or voidable, and Landlord shall not be in default or liable to
Tenant for any loss or damage resulting therefrom. No such delay in delivery of
the Antenna Area for any reason whatsoever shall operate to extend the Term, but
in such event the lease of the Antenna Area shall commence on the actual date
that Landlord delivers possession of the Antenna Area to Tenant.
f. Installation, Operation and Maintenance of
Antenna. Tenant shall install, operate, maintain, repair, replace and/or remove
the Antenna in accordance with the applicable provisions of this Lease,
including provisions for the making of Alterations to the Premises and
compliance with applicable laws, ordinance, rules and regulations. Landlord, at
no cost to Landlord, shall cooperate with Tenant in connection with Tenant's
application for required permits and governmental approvals. In addition to
Landlord's right to review and approve the design and specifications of the
Antenna pursuant to the provisions for making of Alterations to the Premises
under this Lease, Landlord shall have the right to withhold approval of the
design and specifications for the Antenna if Landlord determines, in its sole
discretion, that the Antenna will adversely affect the appearance, structure or
proper function of any portion of the Complex (including visibility of the
Antenna from areas on the ground off-site from the Complex), or interfere with
the operation of other telecommunications equipment on the roof of the Complex,
or in any portion of the Complex. If Landlord withholds its approval, then
Tenant, at its option, may either revise the design and specifications and
resubmit them for Landlord's approval hereunder until Tenant obtains Landlord's
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approval hereunder, or revoke the exercise of its option to lease the Antenna
Area. If Tenant so revokes the exercise of its option to lease the Antenna Area
hereunder, then, as of the date of giving Landlord notice of such revocation,
the Antenna Area shall be deleted from the Premises and Tenant shall thereafter
have no further rights or obligations (except those that shall have accrued on
or prior to the effective date of revocation) with respect to the Antenna Area.
Tenant shall bear all costs and expenses of the installation, operation, and
maintenance of the Antenna. Tenant shall have the right to access the Antenna
Area to install, maintain, repair, replace or remove the Antenna, but only in
accordance with such reasonable rules and procedures as Landlord may from time
to time prescribe. Tenant shall repair any and all damage to the Complex,
including the roof of the Complex, caused by the installation, operation,
testing, maintenance, repair, replacement or removal of the Antenna. The Antenna
may only be located on the Antenna Area. After the initial emplacement of the
Antenna, Tenant shall have the right to replace the Antenna in accordance with
the applicable provisions of this Section 2.2.f for installation of the Antenna,
except that if Tenant makes no material change in the design and specifications
for the Antenna previously approved by Landlord under this Section 2.2.f,
Landlord shall not unreasonably withhold its approval of the replacement Antenna
hereunder, unless such change adversely affects the appearance, structure or
function of any portion of the Complex, or interferes with the operation of
other telecommunications equipment on the roof of the Complex, or in any other
portion of the Complex. Tenant shall have the right to install cables or other
installations for the transmission of Tenant's business communications to and
from
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the Antenna to other portions of the Premises in risers, conduits and shafts in
the Building up to but not exceeding Tenant's Percentage Share of the then
existing capacity of such risers, conduits and shafts, in the Building core on
each Floor of the Premises. Such cables or other installations shall be
installed, operated, tested, maintained, repaired, replaced and/or removed in
accordance with the applicable provisions of this Lease, including provisions
for the making of Alterations to the Premises and compliance with applicable
laws, ordinances, rules and regulations. The installation, operation,
maintenance, repair, replacement and/or removal of such cables or other
installations shall be subject to the rights of other tenants and occupants in
the Complex and such rules and procedures as Landlord may from time to time
reasonably prescribe. The performance of the work to install such cables or
installations shall not adversely affect the use, occupancy or quiet enjoyment
by other tenants or occupants of their premises in the Complex; and such cables
and installations shall not adversely affect the structure of the Complex, or
interfere with the operation of other telecommunications equipment or other
Building systems. Such cables and installations shall be subject to Landlord's
right to require Tenant to remove such cables and installations upon removal of
the Antenna from the Antenna Area under this Section 2.2 or on expiration of the
Term. Tenant shall have the right at any time after installation of the Antenna
to remove the Antenna, but upon such removal, the lease of the Antenna Area
hereunder shall terminate and Tenant shall have no further rights or obligations
(except those that shall have accrued on or prior to the effective date of
termination) with respect to the Antenna Area. In any event, Tenant shall remove
the Antenna from the
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Antenna Area on expiration of the Term or earlier expiration of this Lease.
g. Electrical Supply to Antenna. When and if Tenant
installs the Antenna hereunder, Landlord shall install, at its cost and expense,
a submeter to measure the electrical consumption of the Antenna, and Tenant
shall pay the cost of electric current as shown by such meter at Landlord's
actual cost for such electricity. Payments with respect to the electricity
consumed by the Antenna shall be in addition to Tenant's obligation to pay
Tenant's Percentage Share of Building Operating Expenses.
h. Disclaimer. Landlord makes no representation or
warranty to Tenant that the Antenna Area is fit for Tenant's intended use, nor
shall Landlord be responsible for any interference with the Antenna from other
telecommunication devices or equipment located on the roof of the Complex, other
areas of the Complex, or adjacent property. Tenant shall install, operate, test,
maintain and repair the Antenna in such a manner so as to minimize interference
with the operations of other telecommunication devices, including other antenna,
located in or on the Complex. Tenant shall cease operation of the Antenna upon
receipt of written notice from Landlord that the Antenna is interfering with
other telecommunication devices located in or on the Building or the Complex,
and Tenant shall not resume operation of its Antenna until Landlord is
satisfied, in its reasonable discretion, that the Antenna can be operated
without interfering with the operations of such other telecommunication devices.
During such period of ceased operations, the Antenna Fee for the Antenna Area
shall abate; and if such period of ceased operations continues for more than
one-
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hundred-eighty (180) days, then Landlord shall have the right to terminate the
lease of the Antenna Area hereunder and the right of Tenant to maintain the
Antenna in the Antenna Area (in which event, Tenant shall promptly remove the
Antenna at Tenant's sole cost and expense). Upon such removal, this Lease shall
terminate with respect to the Antenna Area.
2.3. Lease for Generator Area. On the terms and conditions
contained in this Section 2.3, Landlord hereby leases to Tenant the Generator
Area at the location established under this Section 2.3 for the installation,
operation, testing and maintenance of the Generator for the exclusive use by
Tenant to support an uninterrupted power supply (UPS) system. The Generator may
only be located in the Generator Area. Prior to installing the Generator
hereunder, Tenant shall notify Landlord of the Generator Area in which Tenant
shall place the Generator. The Generator Area so designated by Tenant shall be
part of the Premises for all purposes of this Lease, except with respect to
calculating Tenant's Percentage Share.
a. Installation, Operation and Maintenance of
Generator. Tenant shall have the right to pursue and obtain the necessary
permits and approvals from all governmental agencies having jurisdiction under
applicable laws, ordinances, rules, regulations, and codes, for the
installation, operation, testing and maintenance of the Generator in the
basement or roof of the Complex. Such permits and approvals shall specify the
location of the Generator Area and the design and specifications for the
Generator. Landlord, at no cost to Landlord, shall cooperate with Tenant in
connection with Tenant's application for such permits and approvals. Landlord
shall have the right to review and approve, in its sole discretion, the specific
location of the
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Generator Area if on the roof and in Landlord's reasonable discretion if in the
basement, and to review and approve the design and specifications for the
Generator established pursuant to such permits and approvals. Without limiting
the generality of Landlord's review and approval rights with respect to the
location of the Generator Area and the design and specifications for the
Generator, Landlord shall have the right to determine, in its sole discretion,
whether such location or design and/or specifications will adversely affect the
appearance or structure of the Complex, and Landlord shall have the right to
determine, in its reasonable discretion, whether such location or design and/or
specifications will interfere with the operation of any Building systems, or the
use, occupancy or quiet enjoyment of any portion of the Complex by other tenants
or occupants, or otherwise adversely affect the operation, maintenance or
quality of the Complex. If Landlord withholds its approval of either the
Generator Area or the design and specifications for the Generator, then Tenant
may, at its option, either (i) reapply for and obtain the necessary permits and
approvals for the installation, operation and maintenance of the Generator based
on a revised design and/or specifications, and resubmit for Landlord's approval
any new location of the Generator Area and/or revised design and specifications
for the Generator established pursuant to such new permits and approvals, or
(ii) terminate its rights and obligations (except for those which shall have
accrued on or prior to the termination date) under this Section 2.3. If Tenant
so obtains such permits and approvals and Landlord approves, in accordance with
the standards of this Section 2.3.a, the location of the Generator Area and the
design and specifications for the Generator, then Tenant may install,
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operate, test, maintain, repair, replace and/or remove the Generator in
accordance with the applicable provisions of this Lease, including provisions
for the making of Alterations to the Premises and compliance with applicable
laws, ordinances, rules, regulations and codes. Tenant shall bear all costs and
expenses of the installation, operation, testing and maintenance of the
Generator. Landlord, at no cost to Landlord, shall cooperate with Tenant in
connection with Tenant's application for required permits and governmental
approvals. Tenant shall have the right to access the Generator Area to install,
operate, test, maintain, replace or remove the Generator, but only in accordance
with such rules and procedures as Landlord may from time to time reasonably
prescribe, and shall repair any and all damage to the Complex, caused by the
installation, operation, testing, maintenance, repair, replacement or removal of
the Generator. After the initial emplacement of the Generator, Tenant shall have
the right to replace the Generator in accordance with the applicable provisions
of this Section 2.3.a for installation of the Generator, except that if Tenant
makes no material change in the design and specifications for the Generator
previously approved by Landlord under this Section 2.3.a, Landlord shall not
unreasonably withhold its approval of the replacement Generator hereunder,
unless such change adversely affects the appearance, structure or function of
any portion of the Complex, or interferes with the operation of Building
systems, or the use, occupancy or quiet enjoyment of any portion of the Complex
by other tenants or occupants, or otherwise adversely affect the operation,
maintenance or quality of the Complex. Tenant shall have the right to install
cables or other installations for the transmission of power to and from the
Generator to other portions
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of the Premises in risers, conduits and shafts in the Building up to but not
exceeding Tenant's Percentage Share of the existing capacity of such risers,
conduits and shafts in the Building core on each Floor of the Premises. Such
cables or other installations shall be installed, operated, tested, maintained,
repaired, replaced and/or removed in accordance with the applicable provisions
of this Lease, including provisions for the making of Alterations to the
Premises and compliance with applicable laws, ordinances, rules and regulations.
The installation, operation, maintenance, repair, replacement and/or removal of
such cables or other installations shall be subject to the rights of other
tenants and occupants in the Complex and such rules and procedures as Landlord
may from time to time reasonably prescribe. The performance of the work to
install such cables or installations shall not adversely affect the use,
occupancy or quiet enjoyment by other tenants or occupants of their premises in
the Complex; and such cables and installations shall not adversely affect the
structure of the Complex, or interfere with the operation of other Building
systems. Such cables and installations shall be subject to Landlord's right to
require Tenant to remove such cables and installations upon removal of the
Generator from the Generator Area under this Section 2.3 or on expiration of the
Term. Tenant shall have the right at any time after installation of the
Generator to remove the Generator, but upon such removal without replacement for
more than three (3) months, the lease for the Generator Area hereunder shall
terminate and Tenant shall have no further rights or obligations (except those
that shall have accrued on or prior to the effective date of termination) with
respect to the Generator Area. In any event, the lease for the Generator shall
terminate,
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and Tenant shall remove the Generator from the Generator Area, on expiration of
the Term or earlier expiration of this Lease.
b. Disclaimer. Landlord makes no representation
or warranty to Tenant that the Generator Area is fit for Tenant's intended use,
nor shall Landlord be responsible for any interference with the Generator from
other equipment located in the basement and/or on the roof of the Complex, in
any other area of the Complex.
2.4. Expansion of Premises. Landlord hereby grants to Tenant
the option to expand the Premises to include the Rentable Area on one or more of
the Floors comprised in the Expansion Premises upon the terms and conditions set
forth in this Section 2.4.
a. Notice and Procedure. Landlord shall notify Tenant
whenever, commencing with the commencement of the Term as to any Floor in the
Premises and during the Term, in Landlord's judgment, a Floor, or portion
thereof (references hereinafter contained to "such Floor" being deemed to
include such portions of such Floor) comprised in the Expansion Premises will be
available for delivery to Tenant ("Landlord's Expansion Notice"). In no event
shall Landlord give a Landlord's Expansion Notice more than one (1) year in
advance of the date such Floor will be so available. Landlord's Expansion Notice
shall set forth the proposed delivery date of such Floor. Tenant shall have
sixty (60) days after the date of Landlord's Expansion Notice to deliver to
Landlord Tenant's unconditional written notice of its election to exercise its
option with respect to the Floor in the Expansion Premises identified in
Landlord's Expansion Notice. The failure of Tenant so to exercise its option
with respect to such Floor in the Expansion Premises shall
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terminate Tenant's option to expand with respect to such Floor in the Expansion
Premises, but Tenant shall continue to have an option to expand the Premises on
such Floor in the Expansion Premises when and if such Floor again becomes
available in Landlord's judgment pursuant to this Section 2.4.a. If Tenant so
requests within ten (10) days after the date of Landlord's Expansion Notice,
Landlord shall provide to Tenant, within ten (10) days after Tenant's request,
Landlord's initial, non-binding estimate of the Base Rent for such Floor. If
Floors 15 and 16 in the Expansion Premises are available, Tenant may exercise
its option to expand with respect to both Floors or the 16th Floor only; and if
more than one of Floors 22 - 25 in the Expansion Premises are available, Tenant
may exercise its option to expand with respect to all such Floors or, if Tenant
exercises its option with respect to less than all such Floors, starting with
the lowest of such Floor or Floors in such portions of the Expansion Premises;
and if Floors in the Expansion Premises are available in both Floors 15-16 and
22-25, Tenant may exercise its option to expand with respect to all such Floors
or, if Tenant exercises its option with respect to less than all of such Floors,
Tenant shall exercise its option starting with Floor 16 (if available), then
Floor 15 (if available), and then the lowest of Floors 22-25 then available. The
effectiveness of Tenant's exercise of its option to expand as set forth in this
Section 2.4 is in each instance conditioned on the following as of the date of
delivery of Tenant's notice of its election to exercise such option: (i) Tenant
has not entered into an assignment of this Lease requiring Landlord's consent,
and Tenant (including Tenant's Affiliates) physically occupy at least sixty
percent (60%) of the Premises; (ii) no monetary or other material default
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by Tenant remains uncured after the giving of any applicable notice and the
expiration of any applicable cure period; and (iii) Tenant's net worth is not
less than Four Hundred Seventy-Five Million Dollars ($475,000,000.00), as
evidenced by Tenant's separate, unconsolidated audited financial statements,
with a clean and unqualified auditor's opinion, delivered to Landlord within
twenty (20) days after Landlord's request at any time after Tenant's notice of
exercise of Tenant's option to expand hereunder (which audited financial
statements shall have been issued not more than fifteen [15] months prior to the
applicable exercise date), except that if Tenant does not meet the conditions
specified in this clause (iii), Tenant may provide to Landlord Additional
Security in order to satisfy the conditions specified in this clause (iii).
b. Addition of Expansion Premises to Premises. The
Floor in the Expansion Premises as to which Tenant has duly exercised its option
to expand hereunder shall automatically become part of the Premises as of the
actual date of delivery of possession of such Floor to Tenant pursuant to this
Section 2.4, and on all the terms and conditions of this Lease, except that (i)
the Base Rent for such Floor shall be the higher of (A) fair market rent
determined in accordance with Section 2.4.c below, or (B) the Base Rent and
Escalation Charges for the 18th Floor then in effect (or, if the Delivery Date
for the 18th Floor has not yet occurred, the Base Rent and Escalation Charges
for the 18th Floor which would be in effect if the 18th Floor Delivery Date had
occurred, or which would have been in effect but for termination of this Lease
as to the 18th Floor pursuant to Section 2.6 below, if applicable), increased
thereafter by any increase in Base Rent for the 18th Floor as set forth in the
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Basic Lease Information (or which would have been in effect but for termination
of this Lease as to the 18th Floor pursuant to Section 2.6 below, if
applicable), with the same Base Year specified in the Basic Lease Information,
(ii) the Rent Commencement Date for such Floor shall be the date that is ninety
(90) days after the actual delivery of the Floor by Landlord to Tenant
hereunder, (iii) (A) if Tenant has exercised its right to expand the Premises on
a Floor in the Expansion Premises during the initial Term, then Landlord shall
provide to Tenant, in the same manner and subject to the terms and conditions of
Section 10.4 below, a Construction Allowance equal to the product obtained by
multiplying $0.292 (29.2(cent)) times the number of feet of Rentable Area
contained in such Floor times the number of months in the Term applicable to
such Floor (not exceeding, however, the amount of $35.00 times the number of
feet of Rentable Area contained in such Floor), and (B) if Tenant has exercised
its right to expand the Premises on any such Floor during an Extended Term, then
Landlord may, at its sole option, provide to Tenant a Construction Allowance as
a component of fair market rent determined in accordance with clause (iv) of
Section 2.4.c(i) below, and (iv) the Expiration Date for Floors 15 and 16 shall
be coterminous with the Expiration Date for Floors 10, 11, 12, 13, 14 and 17 of
the Premises, and the Expiration Date for Floors 22, 23, 24 and 25 shall be
coterminous with the Expiration Date for Floors 18, 19, 20 and 21 of the
Premises (or which would have been the Expiration Date but for termination of
this Lease as to any such Floor pursuant to Section 2.6 below, if applicable).
Upon the addition of a Floor in the Expansion Premises to the Premises
hereunder, Tenant's Percentage Share for such Expansion Premises shall be that
set forth in the Basic Lease Information
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for such Floor, prorated for partial Floors if applicable. Landlord shall
deliver the Expansion Premises to Tenant in their "as-is" condition, without
obligation to make any alterations or improvements to the Expansion Premises. If
Landlord for any reason whatsoever cannot deliver a Floor in the Expansion
Premises to Tenant by the proposed delivery date set forth in Landlord's
Expansion Notice, this Lease shall not be void or voidable and Landlord shall
not be in default or liable to Tenant for any loss or damage resulting
therefrom, except that (1) if the delay in delivery of such Floor is due to a
holdover occupancy in such Floor by a tenant or subtenant, Landlord shall
promptly undertake commercially reasonable efforts (including commencement of an
unlawful detainer proceeding or proceedings) in order to evict such holdover
occupant and deliver such Floor to Tenant hereunder; and (2) if the delay in
delivery of such Floor extends more than sixty (60) days beyond the proposed
delivery date set forth in Landlord's Expansion Notice, then for a period of
thirty (30) days after the expiration of such 60-day period, Tenant shall have
the right to terminate the exercise of its option to expand the Premises on such
Floor by giving written notice of such termination to Landlord within such
30-day period, but if Tenant fails to give such notice within such 30-day
period, then Tenant shall have no further right to terminate the exercise of its
option to expand the Premises with respect to such Floor and shall accept
delivery of such Floor when and if Landlord delivers such Floor to Tenant. No
delay in delivery of a Floor in the Expansion Premises for any reason whatsoever
shall operate to extend the Expiration Date or the Term. Landlord and Tenant
shall enter into any amendments to this Lease reasonably required by either
Landlord or Tenant to confirm that a Floor in
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the Expansion Premises has been added to the Premises, increasing Tenant's
Percentage Share, confirming the Base Rent, the Base Year, and the Rent
Commencement Date and Expiration Date applicable to such Floor, and such other
amendments as are reasonably required to implement the addition of the Expansion
Premises to the Premises.
c. Determination of Fair Market Rent.
(i) Fair Market Rent Defined. As used in
this Section 2.4, "fair market rent" means the annual base rent charged for full
floor space comparable to the Expansion Premises in Comparable Buildings taking
into account: (i) the length of the Term and the lease terms for such comparable
space; (ii) the rental structure under this Lease and the leases for such
comparable space, including any additional rental and all other payments and
escalations payable under this Lease and under leases of such comparable space,
and the Base Year under this Lease and the base year for such payments under
leases for such comparable space; (iii) the size, location and the Floor level
of the Expansion Premises compared with such comparable space and the views from
the Expansion Premises compared with the views from such comparable space; (iv)
tenant improvement allowances and other monetary concessions made to tenants for
such comparable space and the amount of any Construction Allowance made
available by Landlord pursuant to clause (iii) of Section 2.4.b above; (v) the
date the leases for such comparable space were entered into and the then market
conditions under which the rental structures under such leases were negotiated
in comparison with current market conditions, except that no lease entered into
more than one (1) year prior to the determination date for fair market rent
shall be considered;
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(vi) the quality of the ownership of the Building and Comparable Buildings;
(vii) the quality and financial strength of Tenant as compared with the quality
and financial strength of tenants under such leases; and (viii) any other
relevant terms or conditions in the leases for such comparable space. For
purposes of determining fair market rent, no lease of space in a Comparable
Building shall be utilized if such space contains material quantities of
asbestos, such as asbestos fireproofing or in-slab asbestos. Fair market rent
shall be determined for each Floor in the Expansion Premises as of the date such
Floor is added to the Premises hereunder.
(ii) Determination of Fair Market Rent.
If Landlord believes that fair market rent is higher than the Base Rent
determined pursuant to clause (i)(B) of Section 2.4.b above, then, within thirty
(30) days after receipt of Tenant's notice of exercise of its right to expand
under this Section 2.4, Landlord shall deliver to Tenant Landlord's estimate of
fair market rent. Landlord and Tenant shall thereupon negotiate in good faith
for not more than thirty (30) days in an attempt to determine fair market rent
for the Floor in the Expansion Premises as to which Tenant has exercised its
expansion option. If they are able to agree within such 30-day period, then the
fair market rent shall be the amount so agreed upon. If they are unable to agree
on fair market rent within such 30-day period, then within ten (10) days after
the expiration of such 30-day period, the parties shall deliver to each other
concurrently at a mutually agreeable place and time their respective final
written estimates of fair market rent on which Landlord would be willing to
lease to Tenant the Floor in the Expansion Premises as to which Tenant has
exercised its expansion option, and Tenant would
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be willing to lease such Floor from Landlord. If each party's final estimate of
the fair market rent is the same, then fair market rent shall equal such
estimate. If one party's final estimate of fair market rent is ten percent
(10%), or less, higher than the other party's final estimate, then fair market
rent shall equal the average of the two (2) final estimates. In every other
case, the fair market rent, based on the 2 final estimates, shall be determined
by arbitration as provided in Section 31.16 below, but in no event shall Base
Rent for any Floor in the Expansion Premises be less than the Base Rent
determined pursuant to clause (i)(B) of Section 2.4.b above, and the arbitrators
conducting the arbitration under Section 31.16 shall be so instructed. Should
the determination of fair market rent not be completed or agreed upon prior to
the date upon which Tenant's obligation to pay Base Rent commences for the Floor
in the Expansion Premises as to which Tenant has exercised its expansion option,
Tenant shall pay annual Base Rent equal to Landlord's final estimate of fair
market rent made pursuant hereto. If after determination of fair market rent,
the annual Base Rent is less than the amount previously paid by Tenant for such
period, Landlord shall pay the difference to Tenant within thirty (30) days
after the date of such determination, with interest thereon calculated from the
date of each payment of such Rent by Tenant at the Prime Rate plus 1%; and, if
after determination of fair market rent, the annual Base Rent is more than the
amount previously paid Tenant for such period, Tenant shall pay the difference
to Landlord within thirty (30) days after the date of such determination, with
interest thereon calculated from the date of each payment of such Rent by Tenant
at the Prime Rate plus 1%.
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d. Substitution of Termination Floors For Certain
Expansion Premises. If Tenant exercises its right to terminate this Lease with
respect to one or more Termination Floors pursuant to Section 2.6 below, then
such Termination Floors as to which such termination right has been exercised
shall be substituted for Floors 22 - 25 of the Expansion Premises in descending
order commencing with Floor 25, unless one of such Floors in the Expansion
Premises for which a Termination Floor has been substituted becomes available
pursuant to this Section 2.4 earlier than such Termination Floor.
e. Provisions Applicable to Expansion on Partial
Expansion Premises Floor. Notwithstanding anything to the contrary contained in
this Section 2.4, the provisions of this Section 2.4.e shall govern Tenant's
rights with respect to the exercise of its option to expand with respect to a
portion of a Floor in the Expansion Premises. If Tenant has exercised its option
to expand hereunder with respect to a portion of a Floor in the Expansion
Premises, then Tenant shall have the absolute obligation to accept delivery and
add to the Premises the balance of such Floor when and if the same becomes
available, and such balance of such Floor shall automatically become part of the
Premises as of the actual date of delivery of possession of such balance of such
Floor to Tenant pursuant to this Section 2.4.e, subject, however, to clauses (i)
- - (iv) of Section 2.4.b above, if Landlord can deliver the balance of such Floor
with at least three (3) years remaining in the Term applicable to such Floor.
Landlord shall give Tenant at least one hundred twenty (120) days prior written
notice of delivery of the balance of such Floor in accordance with the
foregoing. If for any reason Landlord cannot deliver the balance of such Floor
with at least three (3) years
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remaining in the Term applicable to such Floor, then such balance of such Floor
shall automatically be deleted from the Expansion Premises, and Tenant shall
have no further rights to expand the Premises to include such balance of such
Floor in the Premises under this Section 2.4.
2.5. Notice Right with Respect to Certain Floors. When and if
from time to time during the Term, the entire Rentable Area on any Floor in the
Building from the 26th Floor to the top Floor in the Building (the "High-Rise
Floors") becomes available for Lease, Landlord shall use good faith efforts so
to notify Tenant. Landlord shall have no liability to Tenant for any failure
from any cause whatsoever so to notify Tenant; and no other obligation than the
giving of notice hereunder and such notice shall not give rise to any rights in
Tenant or any duties or obligations of Landlord, such notice being solely for
informational purposes to Tenant. In addition to giving notice hereunder,
Landlord shall respond to inquiries from Tenant made by Tenant from time to time
regarding the availability for lease of High Rise Floors, but Landlord's
response to such inquiries shall not give rise to any rights in Tenant or any
duties or obligations of Landlord, such response being solely for informational
purposes to Tenant.
2.6. Limited Right of Termination with Respect to Certain
Floors. On the terms and conditions set forth in this Section 2.6, Landlord
grants to Tenant a one-time right to terminate this Lease as to three (3) Floors
then comprised in the Premises as determined pursuant to this Section 2.6 (the
"Termination Floors").
a. Exercise of Termination Rights. Tenant
shall have the right to exercise its termination right for one,
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two or all of the Termination Floors. In no event shall Tenant have any
termination right with respect to only a portion of any Termination Floor.
Tenant shall exercise its termination right hereunder, if at all, not earlier
than January 1, 2003, and not later than December 31, 2003. If Tenant exercises
its right to terminate this Lease with respect to one or more of the Termination
Floors, termination shall, subject to the conditions specified in Section 2.6.c
below, be effective twelve (12) months after the date Tenant exercises its
termination right hereunder (the "Termination Date"), and as of the Termination
Date, the Termination Floors as to which Tenant has exercised its termination
right hereunder shall automatically be deleted from the Premises, and all
rights, duties and obligations of the parties with respect to such Termination
Floors shall terminate and be of no further force or effect except for those
obligations which shall have accrued prior to the Termination Date. Landlord
shall promptly refund to Tenant any Rent paid by Tenant for any period after the
Termination Date, and shall promptly refund any Additional Charges after the
exact amount of such Additional Charges has been determined.
b. Limited Right to Substitute Floors.
Except as hereinafter provided for Executive Floors, Tenant shall exercise its
right to terminate this Lease as to the highest three (3) Floors in the Building
then comprised in the Premises. If, however, any one of such 3 Floors is an
Executive Floor, then Tenant shall have the right to except from such 3 Floors
up to two (2) such Executive Floors, and substitute the next Floor or Floors
immediately beneath the Executive Floor or Floors then comprised in the Premises
in lieu thereof.
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c. Termination Consideration. As consideration for
and a condition of Tenant's right to terminate this Lease with respect to one or
more of the Termination Floors, Tenant shall pay to Landlord an amount equal to
the sum of six (6) months installments of Base Rent for the Termination Floors,
plus the unamortized amount of the Construction Allowances for the Termination
Floors, plus the unamortized amount of all brokers' commissions paid by Landlord
with respect to the Termination Floors. Amortization hereunder shall be straight
line, based on the then remaining initial Term of this Lease, using the
Expiration Date when the Lease would otherwise terminate for each Termination
Floor; and the interest factor for such amortization shall be ten percent (10%)
per annum. Upon receipt by Landlord of Tenant's notice of exercise of its
termination right for one or more Termination Floors hereunder, Landlord shall
calculate the consideration due hereunder, and shall submit such calculation,
together with appropriate backup material, to Tenant. Tenant shall pay the
amount of the consideration as so calculated by Landlord due on account of the
exercise by Tenant of its termination right hereunder within thirty (30) days
after receipt of Landlord's calculation, and Tenant's failure to pay such amount
within such thirty (30) day period shall, at Landlord's written election, given
within thirty (30) days after the expiration of such 30-day period, render the
termination of this Lease as to the Termination Floors null and the Lease shall
remain in full force and effect with respect to the Termination Floors; and if
Tenant disputes the amount of such consideration, Tenant shall notify Landlord
on or before the due date for payment of such consideration, and if the parties
cannot resolve the dispute before such due date, Tenant shall pay the
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consideration as determined by Landlord without prejudice to Tenant's position,
and the dispute shall be resolved by arbitration in accordance with Section
31.17 below.
d. Construction Allowances. Tenant's exercise of
its right to terminate this Lease with respect to one or more of the Termination
Floors under this Section 2.6 shall terminate Tenant's right to receive payment
of any undisbursed Construction Allowances for such Termination Floors as to
which Tenant has so exercised its right, but shall not affect Tenant's right to
receive payment of any other remaining undisbursed Construction Allowances (or
credit the same against Rent and Additional Charges) pursuant to Section 10.4
below for other Floors then comprised in the Premises, subject, however, to the
terms and conditions specified in Section 10.4 with respect to the disbursement
and/or credit of such Construction Allowances thereunder.
2.7. Right of Termination with Respect to Floor 2 Galleria. On
the terms and conditions set forth in this Section 2.7, Landlord grants to
Tenant a one-time right to terminate this Lease as to Floor 2 Galleria. Tenant
may exercise its termination right hereunder by giving written notice of
termination to Landlord not earlier than thirty-six (36) months after the
Delivery Date for Floor 2 Galleria or later than forty-eight (48) months after
such Delivery Date. Termination of this Lease with respect to Floor 2 Galleria
shall be effective on the last day of the fifth (5th) year of the Term
applicable to Floor 2 Galleria. If Tenant exercises its right to terminate this
Lease with respect to Floor 2 Galleria hereunder, then, as consideration for,
and as a condition of, Tenant's right to terminate this Lease with respect to
Floor 2 Galleria, Tenant
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shall pay to Landlord an amount equal to the unamortized amount of the
Construction Allowance for Floor 2 Galleria, plus the unamortized amount of all
broker's commissions paid by Landlord with respect to Floor 2 Galleria.
Amortization hereunder shall be straight line, based on the then remaining
initial Term applicable to Floor 2 Galleria, using the Expiration Date when the
Lease would otherwise terminate for Floor 2 Galleria; and the interest factor
for such amortization shall be ten percent (10%) per annum. Upon receipt by
Landlord of Tenant's notice of exercise of its termination right for Floor 2
Galleria hereunder, Landlord shall calculate any consideration due hereunder,
and shall submit such calculation, together with appropriate backup material to
Tenant. Tenant shall pay the amount of the consideration as so calculated by
Landlord due on account of the exercise by Tenant of its termination right
hereunder within thirty (30) days after receipt of Landlord's calculation; and
if Tenant disputes the amount of such consideration, Tenant shall notify
Landlord on or before the due date for payment of such consideration, and if the
parties cannot resolve the dispute before such due date, Tenant shall pay the
consideration as determined by Landlord without prejudice to Tenant's position,
and the dispute shall be resolved by arbitration in accordance with Section
31.17 below. On or before termination of this Lease with respect to Floor 2
Galleria hereunder, Tenant shall effect such Alterations as are necessary in
order to close any doors or other points of access between Floor 2 Galleria and
Floor 2 Building.
3. Term.
3.1. Condition and Acceptance of Premises.
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a. Delivery of Premises; Term. Except as
hereinafter provided, and unless sooner terminated pursuant to the provisions of
this Lease, the "Term" of this Lease shall commence as to each Floor comprised
in the Premises on the Delivery Date applicable to such Floor set forth in the
Basic Lease Information and end as to such Floor on the applicable Expiration
Date set forth in the Basic Lease Information. Landlord shall deliver possession
of each Floor in the Premises to Tenant on each applicable Delivery Date, vacant
and free of any occupancies, without obligation to make any alterations or
improvements to such Floor, except that (i) Landlord shall before the Delivery
Date for Floor 2, and the Delivery Date for Floor 3, respectively, perform the
Landlord's Work in accordance with Exhibit B; (ii) other than Floors in the
Existing Premises and Floors in the New Premises occupied by Tenant on the date
immediately prior to the Delivery Date for such Floors pursuant to a sublease or
assignment of an existing lease for such Floors, each such Floor shall be
delivered to Tenant in its "as-is" condition as of the Lease Date, except for
(A) ordinary wear and tear occurring between the Lease Date and the Delivery
Date for such Floor, (B) alterations and additions made to such Floor after the
Lease Date but before the Delivery Date by existing tenants and subtenants
occupying such Floors pursuant to the leases of such tenants for such Floor,
except to the extent such alterations or additions exceed or are different than
then customary building standard installations in Class A office buildings
within the Downtown Financial District, and (C) damage or destruction to such
Floor occurring prior to the Delivery Date; and (iii) as to Floors in the
Existing Premises and Floors in the New Premises occupied by Tenant on the date
immediately
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prior to the Delivery Date for such Floors pursuant to a sublease or assignment
of an existing lease for such Floor, each such Floor shall be delivered to
Tenant in its "as-is" condition as of the Delivery Date, except for damage or
destruction to such Floor occurring prior to the Delivery Date. If a tenant or
subtenant of a Floor covered by clause (ii) has, after the Lease Date but before
the Delivery Date for such Floor, made alterations or additions exceeding or
different than the then customary building standard installations in Class A
office buildings within the Downtown Financial District, as specified in clause
(B) of clause (ii) above, Landlord shall so notify Tenant and Tenant shall have
the option exercised by written notice to Landlord given within 20 days after
receipt of Landlord's notice, to have Landlord remove (or cause removal of) such
alterations and additions that exceed or are different than then customary
building standard installations in Class A office buildings within the Downtown
Financial District, or accept delivery of the Floor with such alterations and
additions. If an event of damage or destruction occurs under clause (C) of
clause (ii) above, or under clause (iii) above, Landlord shall so notify Tenant
and, subject to any obligations which Landlord may have to repair or restore
such Floor pursuant to the lease or leases of existing tenants of such Floor (in
which event the provisions of clause (ii) above shall again apply), and except
for any obligation of Tenant to repair alterations on such Floor pursuant to the
lease or other occupancy agreement by which Tenant occupies such Floor, Tenant
shall have the option, exercisable by written notice to Landlord given within 30
days after the event of damage or destruction, to require Landlord to repair and
restore such Floor to its condition existing immediately prior to the date of
the event of
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damage or destruction and deliver such Floor to Tenant in such repaired and
restored condition, or require delivery of such Floor by Landlord in shell
condition before the installation by Tenant of its Alterations on such Floor
pursuant to Section 10.4. Nothing in clause (ii) or (iii) above shall affect or
limit Tenant's right to utilize the Construction Allowances for initial
Alterations to Floors pursuant to Section 10.4. If Landlord can deliver
possession of Floors 2, 3, 8, 9 and/or 10 in the Premises to Tenant before the
applicable Delivery Date, and Landlord elects so to deliver any or all of such
Floors, then Landlord shall so notify Tenant and Tenant shall accept delivery of
such Floor on the date of delivery thereof by Landlord, which date shall be no
sooner than ninety (90) days after the date of Landlord's notice, and such date
of delivery shall constitute the Delivery Date for such Floor. If Landlord can
deliver possession of up to two (2) Floors in the Premises (in addition to
Floors 2, 3, 8, 9 and 10) to Tenant before the applicable Delivery Date, and
Landlord elects so to deliver such Floor or Floors, then Landlord shall so
notify Tenant and Tenant shall accept delivery of such Floor or Floors on the
date which is twelve (12) months after the date of Landlord's notice, and such
date of delivery shall constitute the Delivery Date for such Floor. If Landlord
can deliver possession of a Floor in the Premises to Tenant before the
applicable Delivery Date, other than Floors 2, 3, 8, 9 and 10, and the foregoing
two (2) additional Floors, and Landlord desires to deliver such Floor or Floors
to Tenant, then Landlord shall so notify Tenant and Tenant may accept delivery
of such Floor on the date of delivery specified by Landlord in its notice to
Tenant, and such date of delivery shall constitute the Delivery Date for such
Floor. If Landlord, for any reason
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whatsoever, cannot deliver possession of a Floor in the Premises to Tenant by
the applicable Delivery Date, this Lease shall not be void or voidable, and
Landlord shall not be in default or liable to Tenant for any loss or damage
resulting therefrom, except that (1) if the delay in delivery of such Floor is
due to a holdover occupancy in such Floor by a tenant or subtenant, Landlord
shall promptly undertake commercially reasonable efforts (including commencement
of an unlawful detainer proceeding or proceedings) in order to evict such
holdover occupant and deliver such Floor to Tenant hereunder; and (2) if the
delay in delivery of such Floor extends more than one hundred twenty (120) days
beyond the Delivery Date, then for a period of thirty (30) days after the
expiration of such 120-day period, Tenant shall have the right to terminate this
Lease as to such Floor by giving written notice of such termination to Landlord
within such 30-day period, but if Tenant fails to give such notice within such
30-day period, then Tenant shall have no further right to terminate this Lease
as to such Floor and shall accept delivery of such Floor when and if Landlord
delivers such Floor to Tenant. In the event of a delay in delivery of possession
of a Floor in the Premises hereunder beyond the Delivery Date specified in the
Basic Lease Information, the Delivery Date for such Floor shall be the actual
date that Landlord delivers possession of the Floor to Tenant. No delay in
delivery of the Premises for any reason whatsoever shall operate to extend any
Expiration Date or the Term applicable to a Floor in the Premises. In connection
with the foregoing, (I) Tenant acknowledges that the tenants of the Building
identified in Exhibit C hereto have rights as set forth in Exhibit C to extend
the terms of their leases by which they currently occupy Floors 2, 3, 8, 9, 10,
13 and 17 comprised in
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the New Premises and if any such options to extend are exercised by any such
tenants, then Landlord shall be delayed in delivering such Floor beyond the
applicable Delivery Date for such Floor, and (II) Landlord warrants and
represents to Tenant that Exhibit C sets forth all rights of other tenants of
the Building to extend the terms of their leases with respect to the New
Premises. Upon request of Tenant, Landlord shall use commercially reasonable
efforts to ascertain from any such tenant its intentions with respect to whether
it will exercise its right to extend its term, but subject only to such efforts,
Landlord shall have no obligation of any kind or character to attempt to prevent
such tenant from exercising such option or terminate such option to extend.
Except for an amendment to the lease of any such tenant to delete its right to
extend its term or shorten the term, Landlord shall not agree with any such
tenant to any modification with respect to such tenant's right to extend its
term which would enlarge or extend such tenant's rights beyond those currently
possessed by such tenant as set forth in Exhibit C hereto.
b. Delivery of Partial Floor. If Landlord
is able to deliver part of a Floor comprising the Premises (but not the entire
Floor) as of the Delivery Date under the Basic Lease Information, then Landlord
shall notify Tenant. Tenant shall have the right, within thirty (30) days after
receipt of Landlord's notice, to elect to take such portion of such Floor as is
available for delivery and thereafter, if Tenant shall have elected to take
delivery of such portion, Landlord shall deliver, and Tenant shall accept
delivery of, the remaining portions of the Floor to Tenant as the same become
available for delivery of possession to Tenant. If Tenant elects to accept
partial
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delivery of a Floor hereunder, then Tenant shall have the right to utilize the
Construction Allowance, pursuant to the terms and conditions of Section 10.4, to
make initial Alterations to such portion of the Floor (including such
Alterations as may be necessary to create a multi-tenant Floor). In connection
with the provisions of this Section 3.1.b, Landlord has identified all Floors
comprised in the Premises which have multiple tenants, all of which are listed
on Exhibit D with the expiration dates of the leases of such tenants and whether
such tenants have any rights of extension of the term of their leases.
c. Scope of Premises and Tenant's Percentage
Share; Proration of Base Rent for Partial Floors. For all purposes under this
Lease, (i) references to the "Premises" shall mean only those Floors (including
Expansion Premises), or portions of Floors, delivered by Landlord to Tenant
pursuant to this Section 3.1 (or Section 2.4 above with respect to Expansion
Premises) as of the time in question and not deleted from the Premises pursuant
to Section 2.6 or 2.7 above, and (ii) unless otherwise specified in this Lease,
references to Tenant's Percentage Share shall mean the aggregate of all Tenant's
Percentage Shares shown on the Basic Lease Information applicable to the
Premises as of the time in question, prorated for partial Floors then comprised
in the Premises, if applicable. In addition, during such periods as a partial
Floor is comprised in the Premises, Base Rent applicable to such Floor shall be
prorated based on the ratio (expressed as a percentage) which the Rentable Area
contained in the partial Floor bears to the Rentable Area of such Floor.
3.2. Extension. Upon the terms and conditions specified in
this Section 3.2, Landlord grants to Tenant the
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right to extend the Term with respect to all or a portion of the Premises as
specified below for the two (2) Extended Terms.
a. Exercise and Notice. Tenant shall exercise its
right to extend the Term under this Section 3.2 for not less than those Floors
then comprised in the Premises within Floors 2 - 17, and if Tenant exercises its
right to extend the Term for additional Floors above Floor 17 then comprised in
the Premises, such exercise shall be made for such additional Floors in
ascending order, commencing with the next highest Floor of the Premises above
Floors 2 - 17. If Tenant exercises its right to extend the Term under this
Section 3.2 for less than all of the Floors then comprised in the Premises, the
Floors as to which Tenant does not exercise such right shall, as of the
expiration of the Term or Extended Term then in effect applicable to such
Floors, be automatically deleted from the Premises. If Tenant shall determine to
exercise its right to extend the Term (or Extended Term then in effect) for the
Premises under this Section 3.2, it shall do so by giving written notice to
Landlord of such exercise (the "Tenant Extension Notice") not earlier than
twenty-four (24) months nor later than twelve (12) months prior to the earliest
Expiration Date of the Term (or Extended Term then in effect) applicable to a
Floor within the Premises for which the Tenant Extension Notice is given. If
Tenant so exercises its right, then within ten (10) months prior to each
Expiration Date (as to the initial Term), or expiration date of the first
Extended Term, as applicable, for the affected Floors, Landlord shall notify
Tenant of the non-binding, proposed terms and conditions upon which Landlord
would be willing to lease to Tenant the affected Floors in the Premises for the
applicable Extended Term (the "Landlord's Proposal Notice"). Within thirty
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(30) days after receipt of Landlord's Proposal Notice, Tenant shall notify
Landlord whether Tenant desires to negotiate the terms and conditions upon which
the Premises would be leased to Tenant for the applicable Extended Term. The
failure of Tenant so to notify Landlord within such 30-day period shall
terminate Tenant's right with respect to the Extended Terms, and Tenant shall
have no further rights to extend the Term for any portion of the Premises.
b. Negotiation on Tenant Exercise. If, within the
30-day period specified in Section 3.2.a above, Tenant exercises its right to
negotiate, then promptly upon receipt of Tenant's exercise notice, Landlord and
Tenant shall negotiate in good faith for a period of ninety (90) days in an
attempt to agree upon the terms and conditions upon which the Premises would be
leased to Tenant for the applicable Extended Term.
c. Procedure on Failure to Agree After Negotiation.
If, for any reason whatsoever, in the sole discretion of either party and
without any liability for any failure to reach agreement, either party concludes
at the expiration of the 90-day period for negotiation under Section 3.2.b above
that any of the terms and conditions under negotiation are unacceptable to such
party, then the party so concluding shall promptly so notify the other party,
and Base Rent for the Extended Term shall be determined pursuant to this Section
3.2.c. Upon such failure of the parties to reach agreement with respect to the
first Extended Term, Base Rent for the first Extended Term shall be the higher
of (i) fair market renewal rent determined in accordance with Section 3.2.d
below, or (ii) the total of the Base Rent and Escalation Charges in effect for
each Floor in the Premises as of the day immediately
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preceding the date that the first Extended Term commences with respect to each
Floor, with the Base Year (other than for Floor 2 which has no Base Year) with
respect to each Floor being the calendar year in which the first Extended Term
commences with respect to each such Floor. Base Rent for the second Extended
Term shall be the higher of (A) fair market renewal rent determined in
accordance with Section 3.2.d below, or (B) the Base Rent in effect for the
first Extended Term increased (but not decreased) by any increase in the
Consumer Price Index (or substitute index as hereinafter provided) between the
date the first Extended Term commenced with respect to each Floor and the date
the second Extended Term commences with respect to each Floor, by reference to
the Consumer Price Index published for the month immediately prior to such dates
(as the same may subsequently be adjusted by the "Bureau"), with the Base Year
remaining unchanged from the first Extended Term. For purposes hereof, the
Consumer Price Index means The United States Department of Labor, Bureau of
Labor Statistics ("Bureau"), Consumer Price Index (All Urban Consumers, All
Items, 1982-1984 = 100) for the Metropolitan Area of which San Francisco,
California, is a part. If the Consumer Price Index is discontinued or revised,
the Consumer Price Index shall mean the index designated as the successor or
substitute index by the Bureau, or its successor agency, and if none is
designated, a comparable index as reasonably determined by Landlord, which would
likely achieve a comparable result to that achieved by the use of the Consumer
Price Index. If the base year 1982-1984 of the Consumer Price Index is changed,
then the conversion factor specified by the Bureau, or successor agency, shall
be utilized to determine the Consumer Price Index.
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d. Determination of Fair Market Renewal Rent.
(i) Fair Market Renewal Rent Defined. As used
in this Section 3.2, "fair market renewal rent" means the annual base rent for
the Floors in the Premises as to which Tenant has exercised its right to extend
the Term for an Extended Term which a landlord, under no compulsion to lease,
would rent the Premises for such Extended Term and a tenant, under no compulsion
to lease, would rent the Premises for such Extended Term, taking into account
all relevant considerations in accordance with then customary appraisal
practices and standards for determining fair market renewal rent utilized by
members of the Appraisal Institute (or its successor organization), with a then
current senior designation of MAI (or then comparable designation), currently
certified under the continuing education program, and having at least ten (10)
years experience in appraising commercial office properties in the Downtown
Financial District, and utilizing, to the extent necessary or appropriate in
accordance with the foregoing standard, comparable transactions in Comparable
Buildings (but not other buildings in the Downtown Financial District). For
purposes of determining fair market renewal rent, no renewal or extension of a
lease of space in a Comparable Building shall be utilized if such space contains
material quantities of asbestos, such as asbestos fireproofing or in-slab
asbestos. Fair market renewal rent shall be determined for each Floor as of the
date the Extended Term for such Floor commences.
(ii) Determination of Fair Market Renewal
Rent. If Landlord believes that fair market renewal rent is higher than the Base
Rent determined under clause (ii) or clause (B) of Section 3.2.c above, as
applicable, then within not
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less than six (6) months prior to the date the Extended Term shall commence with
respect to a Floor or Floors in the Premises, Landlord shall deliver to Tenant
Landlord's estimate of fair market renewal rent. Landlord and Tenant shall
thereupon negotiate in good faith for not more than thirty (30) days in an
attempt to determine fair market renewal rent for such Floor or Floors. If they
are able to agree within such 30-day period, then the fair market renewal rent
shall be the amount so agreed upon. If they are unable to agree on fair market
renewal rent within such 30-day period, then within ten (10) days after the
expiration of such 30-day period, the parties shall deliver to each other
concurrently at a mutually agreeable place and time their respective final
written estimates of fair market renewal rent on which Landlord would be willing
to lease to Tenant such Floor or Floors, and Tenant would be willing to lease
such Floor or Floors from Landlord. If each party's final estimate of the fair
market renewal rent is the same, then fair market renewal rent shall equal such
estimate. If one party's final estimate of fair market renewal rent is ten
percent (10%), or less, higher than the other party's final estimate, then fair
market renewal rent shall equal the average of the two (2) final estimates. In
every other case, the fair market renewal rent, based on the 2 final estimates,
shall be determined by arbitration as provided below in Section 31.16, except
that Base Rent for the first Extended Term shall never be less than the amount
specified in clause (ii) of Section 3.2.c above, and Base Rent for the second
Extended Term shall never be less than the amount specified in clause (B) of
Section 3.2.c above, and the arbitrators conducting the arbitration under
Section 31.16 shall be so instructed. Should the determination of fair market
renewal rent not be
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completed or agreed upon prior to the date upon which an Extended Term
commences, Tenant shall pay annual Base Rent equal to Landlord's final estimate
of fair market renewal rent made pursuant hereto. If after determination of fair
market renewal rent, the annual Base Rent is less than the amount previously
paid by Tenant for such period, Landlord shall pay the difference to Tenant
within thirty (30) days after the date of such determination, with interest
thereon calculated from the date of each payment of such Rent at the Prime Rate
plus 1%; and, if after determination of fair market renewal rent, the annual
Base Rent is more than the amount previously paid by Tenant for such period,
Tenant shall pay the difference to Landlord within thirty (30) days after the
date of such determination, with interest thereon calculated from the date of
each payment of such Rent at the Prime Rate plus 1%.
e. Conditions to Exercise. Tenant's right to extend
the Term for either Extended Term pursuant to this Section 3.2 is conditioned on
the following as of the date Tenant gives the Tenant Extension Notice: (i)
Tenant has not entered into an assignment of this Lease requiring Landlord's
consent, and Tenant (and its Affiliates) physically occupy at least sixty
percent (60%) of the Premises as to which Tenant has exercised the option for an
Extended Term; (ii) no monetary or other material default by Tenant remains
uncured after the giving of any applicable notice and the expiration of any
applicable cure period; and (iii) Tenant's net worth is not less than Four
Hundred Seventy-Five Million Dollars ($475,000,000.00), as evidenced by Tenant's
separate, unconsolidated audited financial statements with a clean and
unqualified opinion, delivered to Landlord by Tenant within twenty (20) days
after Landlord's
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request at any time after the date Tenant gives the Tenant Extension Notice
(which audited financial statements shall have been issued not more than fifteen
[15] months prior to the applicable exercise date), except that if Tenant does
not meet the conditions specified in this clause (iii), Tenant may provide to
Landlord Additional Security in order to satisfy the conditions specified in
this clause (iii).
f. Lease For Extended Term. If Tenant extends the
Term for an Extended Term in accordance with the provisions of this Section 3.2,
then Tenant shall continue to lease the Premises for such Extended Term on all
of the terms and conditions of this Lease, except that (i) Base Rent for an
Extended Term shall be the Base Rent determined pursuant to the applicable
provisions of this Section 3.2, and (ii) the Base Year for the first and second
Extended Term shall be the Base Year for the first Extended Term as determined
in accordance with this Section 3.2. Landlord and Tenant shall enter into any
amendments to this Lease reasonably required by either Landlord or Tenant to
confirm the terms and conditions upon which Tenant shall continue to lease the
Premises for such Extended Term, including the Base Rent, the new Expiration
Date based on the Extended Term, and such other amendments as are reasonably
required to implement such Extended Term.
4. Rent.
4.1. Obligation to Pay Rent. Tenant shall pay to Landlord the
Base Rent for each Floor in the Premises during the Term as set forth in the
Basic Lease Information commencing on the Rent Commencement Date as defined in
Section 1.1, except that: (i) if Tenant elects to accept delivery of a partial
Floor pursuant to Section 3.1.b above, the Rent Commencement Date shall
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apply to each portion of such Floor when possession is delivered to Tenant
pursuant to Section 3.1.b above and the Base Rent for such portion of the Floor
so delivered to Tenant shall equal the amount obtained by dividing the Base Rent
for such Floor specified in the Basic Lease Information by the Rentable Area of
such Floor and multiplying such quotient by the number of feet of Rentable Area
contained within the portion of such Floor delivered to Tenant pursuant to
Section 3.1.b above; (ii) if Tenant is delayed in construction of its initial
Alterations to a Floor, or partial Floor, comprised in the Premises after
delivery of possession of such Floor, or partial Floor, to Tenant pursuant to
Section 3.1 above on account of Landlord's failure to comply with or cause
compliance with Requirements pursuant to Section 8.1 below, then the Rent
Commencement Date for the affected Floor, or partial Floor, shall be extended
one (1) day for each day by which Tenant is delayed in making its initial
Alterations on account of such failure; (iii) if an event of damage or
destruction covered by Article 12 below, or a taking covered by Article 13
below, occurs after the Delivery Date for a Floor, but prior to the Rent
Commencement Date, then the unlapsed portion of the period between the Delivery
Date and the Rent Commencement Date for such Floor shall be tolled until
completion by Landlord of repair and restoration of the Premises pursuant to
Articles 12 or 13, as applicable, and such period shall resume and be added to
the applicable Rent and Escalation Charges abatement period for Tenant to repair
and restore Alterations pursuant to Articles 12 or 13 below; and (iv) whenever
(A) Base Rent and Escalation Charges abate on account of damage, destruction or
taking pursuant to Articles 12 or 13 below, (B) Tenant is granted as part of
such Rent and Escalation Charges abatement a period
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within which to repair and restore Alterations, and (C) Tenant is delayed in
construction of such Alterations on account of Landlord's failure to comply
with, or cause compliance with, Requirements pursuant to Section 8.1 below, the
period for such Rent and Escalation Charges abatement specified in Article 12 or
13, as applicable, shall be extended one (1) day for each day by which Tenant is
delayed in making such Alterations on account of such failure. Tenant shall also
pay to Landlord the Antenna Fee during the Term as applicable. Base Rent for
each Floor in the Premises shall be paid to Landlord, in advance, in equal
monthly installments, commencing on the Rent Commencement Date for each Floor in
the Premises, and thereafter on or before the first day of each calendar month
during the Term for each Floor in the Premises. The Antenna Fee shall be paid to
Landlord monthly in advance, commencing on or before the date determined
pursuant to Section 2.2 above, and thereafter on or before the first day of each
calendar month during the Term until termination of the Antenna lease pursuant
to Section 2.2. If the Rent Commencement Date and/or Expiration Date is other
than the first day of a calendar month, the installment of Base Rent for the
first and/or last fractional month of the Term shall be prorated on a daily
basis based on the actual number of days in the month.
4.2. Manner of Payment of Rent and Additional Charges. All
Rent and Additional Charges shall be paid by Tenant without notice, demand,
abatement, deduction or offset, except as otherwise specifically provided in
this Lease, in lawful money of the United States of America, and if payable to
Landlord, at Landlord's Address, or to such other person or at such other place
as Landlord may from time to time designate by notice to Tenant.
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4.3. Additional Charges. All Additional Charges other than
Escalation Charges, if payable to Landlord shall, unless otherwise specified in
this Lease, be due and payable thirty (30) days after Tenant's receipt of
Landlord's invoice therefor.
4.4. Late Payment of Rent and Additional Charges; Interest.
Tenant acknowledges that late payment by Tenant of any Rent or Additional
Charges will cause Landlord to incur administrative costs not contemplated by
this Lease, the exact amount of which are extremely difficult and impracticable
to ascertain based on the facts and circumstances pertaining as of the Lease
Date. Accordingly, if any Rent or Additional Charges are not paid by Tenant when
due, Tenant shall pay to Landlord, with such Rent or Additional Charges, a late
charge equal to four percent (4%) of such Rent or Additional Charges. In
addition, any Rent or Additional Charges, other than late charges, due Landlord
under this Lease, if not paid when due, shall also bear interest from the date
due until paid, at the Lease Rate. Notwithstanding the foregoing, from and after
the date Tenant elects to make payment of Base Rent and Escalation Charges by
wire transfer to Landlord's account, and only for so long as and during such
periods as Tenant makes payment by wire transfer, such late charge and interest
shall not be payable by Tenant with respect to Base Rent or Escalation Charges
until the expiration of three (3) Business Days after the date such Rent or
Escalation Charges is due for the first two (2) times during each calendar year
of the Term, and for the first time during each calendar year of an Extended
Term; but after such first two (2) or first (as the case may be) late payments
of such Rent or Escalation Charges by Tenant, any such Rent or Escalation
Charges not paid by Tenant when due shall be subject to the late charge and
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interest hereunder and Tenant shall be entitled to no grace period with respect
to the application thereof hereunder. The parties acknowledge that such late
charge and interest represent a fair and reasonable estimate of the
administrative costs and loss of use of funds Landlord will incur by reason of a
late Rent and Additional Charges payment by Tenant, but Landlord's acceptance of
such late charge and/or interest shall not constitute a waiver of Tenant's
default with respect to such Rent and Additional Charges or prevent Landlord
from exercising any other rights and remedies provided under this Lease.
4.5. Free Rent. Pursuant to the terms of that certain Seventh
Amendment to Office Lease, dated June 1, 1996, between Landlord and Tenant,
Tenant is to pay to Landlord the sum of Two Million Three Hundred Ninety-Three
Thousand Two Hundred Twenty-Nine and 64/100 Dollars ($2,393,229.64) (the
"Premium Rent"). During the final months of the last year (the "Free Rent
Period") of the initial Term applicable to each Floor of the Premises, Tenant's
obligation to pay Rent and Escalation Charges as to such Floor shall abate in an
amount equal to the product obtained by multiplying the Premium Rent actually
paid by Tenant, as such Premium Rent may be reduced (i) to reimburse Landlord
for any Rent and Escalation Charges payment defaults which may exist as of the
beginning of or during the Free Rent Period, and (ii) by any Free Rent
previously paid by Landlord to Tenant with respect to a Floor under clause (B)
below (the difference, if any, the "Free Rent"), times a fraction equal to the
Rentable Area contained in such Floor (or the Galleria Rentable Area, in the
case of Floor 2), divided by the Rentable Area and Galleria Rentable Area
contained in the Premises as of the date of the first abatement of Rent and
Escalation Charges as to a Floor
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hereunder. The Free Rent Period for a Floor shall commence on the date which is
closest, in Landlord's reasonable judgment, to relieve Tenant from the payment
of Rent and Escalation Charges as to such Floor through the end of the Term
applicable to such Floor. If Tenant does not receive the full benefit of the
Free Rent as of the Expiration Date for a Floor, then within ten (10) days after
Tenant vacates and surrenders such Floor in accordance with the terms of this
Lease, Landlord shall pay to Tenant an amount equal to the remaining Free Rent
allocable to such Floor. If the Free Rent Period for a Floor is longer than the
Free Rent allocable to such Floor, then Tenant shall resume paying Rent and
Escalation Charges as to such Floor upon the exhaustion of the Free Rent. If (A)
this Lease is terminated in whole pursuant to the terms of Sections 12.3, 12.5,
13.1 or 17.2, then Landlord shall pay to Tenant the sum equal to the then
aggregate Free Rent within ten (10) days after the termination of this Lease,
and if (B) this Lease is terminated in part pursuant to the terms of Sections
12.5, 13.1 or 17.2, then Landlord shall pay to Tenant within ten (10) days after
the partial termination of this Lease the sum equal to the product obtained by
multiplying the then aggregate Free Rent times a fraction equal to the Rentable
Area contained in such Floor (or the Galleria Rentable Area in the case of Floor
2), divided by the Rentable Area and Galleria Rentable Area contained in the
Premises immediately prior to the date of such partial termination. Landlord's
payment of the amounts due under either clause (A) or (B) above shall be a
condition of Landlord's right to terminate this Lease pursuant to Sections 12.3,
12.5, 13.1 or 17.2. If Landlord terminates this Lease on account of Tenant's
default, the amount of any remaining Free Rent not abated against Rent and
Escalation Charges
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hereunder shall be deducted from any damages awarded to Landlord on account of
such default.
5. Calculation and Payments of Escalation Charges. During each full or
partial calendar year of the Term applicable to each Floor in the Premises
subsequent to the Base Year for such Floor, Tenant shall pay to Landlord
Escalation Charges in accordance with the following procedures, terms and
conditions:
5.1. Payment of Estimated Escalation Charges. Subject to the
provisions of Section 5.5, during December of the Base Year and December of each
subsequent calendar year, or as soon thereafter as practicable, Landlord shall
give Tenant notice of its estimate of Escalation Charges due for the ensuing
calendar year, except that for Floor 2 of the Premises, Landlord shall give
Tenant notice of its estimate of Escalation Charges for Floor 2 prior to the
Rent Commencement Date for Floor 2 for the remainder of the calendar year in
which such Rent Commencement Date falls, and thereafter in December of each
subsequent calendar year, or as soon thereafter as practicable. On or before the
first day of each month during such ensuing calendar year (and for Floor 2,
commencing with the Rent Commencement Date for Floor 2, on or before the first
day of each month during the calendar year in which the Rent Commencement Date
falls, and thereafter on or before the first day of each month during each
ensuing calendar year), Tenant shall pay to Landlord in advance, in addition to
Base Rent and any Antenna Fee, one-twelfth (1/12th) of such estimated Escalation
Charges, unless such notice is not given in December, in which event Tenant
shall continue to pay on the basis of the prior calendar year's estimate until
the month after such notice is given, and subsequent payments by Tenant shall be
based on Landlord's notice. Within thirty (30)
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days after Landlord's notice, Tenant shall also pay the difference, if any,
between the amount previously paid for such calendar year and the amount which
Tenant would have paid through the month in which such notice is given, based on
Landlord's noticed estimate. If at any time Landlord reasonably determines that
the Escalation Charges for the current calendar year will vary from Landlord's
estimate, Landlord may not more than twice in any calendar year, by notice to
Tenant, revise its estimate for such calendar year, and subsequent payments by
Tenant for such calendar year shall be based upon such revised estimate. In
estimating Escalation Charges hereunder, Landlord shall act in a commercially
reasonable manner and shall base such estimates on the Complex's operating
history and reasonably projected future Building Operating Expenses, Galleria
Operating Expenses, and Real Estate Taxes.
5.2. Escalation Charges Statement and Adjustment. Within one
hundred twenty (120) days after the close of each calendar year, or as soon
thereafter as practicable, Landlord shall deliver to Tenant a statement of the
actual Escalation Charges for such calendar year, showing in reasonable detail
the Building Operating Expenses, Building Property Taxes, Galleria Operating
Expenses and Galleria Property Taxes comprising the actual Escalation Charges.
Each statement shall be broken down at least into the categories, as applicable,
set forth in Exhibit E. Such statement shall be certified by Landlord or its
agent as true and correct to the certifying party's knowledge. If Landlord's
statement shows that Tenant owes an amount less than the payments previously
made by Tenant for such calendar year, Landlord shall credit the difference
first against any sums then owed by Tenant to Landlord and then against the next
payment or
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payments of Rent and Additional Charges due Landlord, except that if a credit
amount is due Tenant after termination of this Lease, Landlord shall pay to
Tenant any excess remaining after Landlord credits such amount against any sums
owed by Tenant to Landlord. If Landlord's statement shows that Tenant owes an
amount more than the payments previously made by Tenant for such calendar year,
Tenant shall pay the difference to Landlord within thirty (30) days after
delivery of the statement. Landlord shall have the right, for a period of two
(2) years after the end of a calendar year to which a statement of actual
Escalation Charges issued hereunder pertains, to correct such statement and
deliver such corrected statement to Tenant and, subject to Tenant's rights under
Section 5.4 below and the other provisions and limitations contained in this
Article 5, Tenant shall pay any additional Escalation Charges shown to be due by
such corrected statement within thirty (30) days after receipt of Landlord's
corrected statement; upon expiration of such 2-year period, Landlord shall have
no further right to correct such statement of actual Escalation Charges, and
such statement shall be conclusive and binding on Landlord; and if Landlord
fails to render a statement for Escalation Charges with respect to a calendar
year within two (2) years after the end of such calendar year, Tenant shall have
no obligation to make any payment shown to be due with respect to such calendar
year on any statement of Escalation Charges thereafter delivered. All statements
hereunder shall be conclusive and binding on Tenant two (2) years after the
issuance of such statement by Landlord unless Tenant objects to any item
thereon, in which event, Tenant shall have the inspection and/or audit rights
specified in Section 5.4 below.
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5.3. Proration for Partial Year. If this Lease commences or
terminates as to a Floor (or portion of a Floor) other than on the first or last
day of a calendar year, respectively (other than due to Tenant's default), the
amount of Escalation Charges for such fractional calendar year for such Floor
(or portion of a Floor) shall be prorated on a daily basis based on the ratio
(expressed as a percentage) which the number of days elapsed in such fractional
calendar year bears to 365. Upon such termination, Landlord may, at its option,
calculate the adjustment in Escalation Charges prior to the time specified in
Section 5.2 above.
5.4. Tenant Audit Rights With Respect to Escalation Charges.
Landlord shall maintain such books and records as are necessary in order to
account properly for Building Operating Expenses, Building Property Taxes,
Galleria Operating Expenses and Galleria Property Taxes. Tenant shall have the
right, upon the terms and conditions specified in this Section 5.4, to inspect
and audit such books and records.
a. Audit Right and Procedures. Tenant shall have the
right to inspect and/or audit such books and records one (1) time with respect
to each calendar year during the Term, except that if Landlord issues a
corrected statement of Escalation Charges after issuance of its calendar year
statement of actual Escalation Charges pursuant to Section 5.2 above, then
Tenant shall have an additional one time right to inspect and/or audit such
books and records with respect to such corrected statement of Escalation
Charges. Tenant shall conduct any inspection or audit which Tenant is entitled
to conduct hereunder not later than two (2) years after the issuance of the
Escalation Charges statement as to which such inspection and/or audit right
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pertains, except that (i) any inspection or audit which Tenant conducts with
respect to a Base Year shall be conducted not later than two (2) years after the
issuance of the Escalation Charges statement for the calendar year immediately
succeeding such Base Year, and (ii) any inspection or audit which Tenant
conducts with respect to a corrected statement of Escalation Charges issued by
Landlord under Section 5.2 above shall be conducted not later than one (1) year
after the issuance of such corrected statement of Escalation Charges, or the
expiration of the 2-year period under clause (i) above if then longer than 1
year. If Tenant has the right to inspect and/or audit Landlord's books and
records hereunder and Tenant desires to exercise such right, then Tenant shall
give Landlord notice thereof at least ten (10) Business Days prior to the date
Tenant intends to conduct such inspection and/or audit. All inspections and
audits hereunder shall be conducted in the office where Landlord's books and
records are then kept, during regular business hours, except that if Landlord's
books and records are maintained by Landlord at a location other than the
Complex, Landlord shall, upon written request by Tenant, make such books and
records available for inspection and audit hereunder at the Building manager's
office in the Complex. Landlord shall give Tenant and its representatives
hereunder prompt and reasonable access to Landlord's books and records during
the course of conduct by Tenant of any inspection or audit hereunder, and shall,
at Tenant's expense, make copies of such books and records when and to the
extent requested by Tenant. Any inspection or audit hereunder shall be conducted
by (A) a reputable certified public accountant or accounting firm (a "CPA") with
experience in conducting inspections and/or audits of operating expenses in
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office buildings or (B) employees of Tenant. No Tenant employee or CPA so
designated by Tenant shall be compensated on a contingency basis on the results
of the inspection or audit, and Tenant shall be solely responsible for all costs
and expenses of any inspection or audit undertaken by Tenant hereunder,
including all costs of copying such books and records at Tenant's request,
except that if Tenant's audit concludes (or, in the event of a dispute between
the parties regarding the results of such audit, the final determination made in
any proceeding with respect to such dispute concludes) that Building Operating
Expenses and Galleria Operating Expenses for the calendar year in question were
overstated in the aggregate by more than three percent (3%) and Landlord's
statement for actual Escalation Charges for such calendar year was consequently
overstated, then Landlord shall reimburse Tenant for all reasonable costs and
expenses of Tenant's audit hereunder, and Landlord shall bear its costs
hereunder. Landlord shall have the right to designate a representative to be
present with any Tenant employee or CPA during such periods they are conducting
inspections and/or audits hereunder. If Tenant's audit shows that the amount of
Escalation Charges for the calendar year which is the subject of the audit was
under- or overstated, and Landlord does not dispute the results of such audit,
then, within thirty (30) days after Tenant concludes its audit hereunder, the
parties shall make such adjustments and payments as are necessary or appropriate
accurately to reflect the actual amount of such Escalation Charges actually due
Landlord for such calendar year. If Tenant's audit shows that the amount of
Escalation Charges for the calendar year which is the subject of the audit
actually paid by Tenant was overstated, and Landlord disputes such conclusion,
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then Tenant shall promptly supply to Landlord a copy of such portions of any
written report or analysis resulting from such inspection or audit which forms
the basis of Tenant's determination hereunder.
b. Confidentiality Requirements. Tenant shall keep
confidential as a trade or business secret all information resulting from any
inspection or audit undertaken by or on behalf of Tenant hereunder, and shall
impose by written agreement in the form attached hereto as Exhibit F-1, such
confidentiality requirement on any employee or third person conducting any
inspection or audit hereunder. Tenant may, however, disclose such information
(i) to the extent required by any applicable governmental law, ordinance, rule
or regulation; (ii) in any litigation or proceeding between the parties with
respect to any dispute between them regarding Escalation Charges (subject to
such protective orders to prevent disclosure and protect the confidentiality of
such information as may be available in accordance with applicable law, to which
Tenant hereby consents and shall not oppose); (iii) to the extent required by
judicial process (such as a subpoena duces tecum), after notice by Tenant to
Landlord of the receipt of such judicial process, and subject to Landlord's
right to seek such protective orders to prevent disclosure and protect the
confidentiality of such information as may be available in accordance with
applicable law (to which Tenant hereby consents and shall not oppose); (iv) if
such information is generally known to the public or is in the public domain,
other than on account of a breach by Tenant of its obligations under this
Section 5.4.b; or (v) to Tenant's executives, accountants, attorneys and other
agents and representatives (subject, however,
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to the imposition on such executives, accountants, attorneys and other agents
and representatives, by written agreement in the form attached as Exhibit F-1,
the confidentiality requirements of this Section 5.4.b).
c. Limits on Right. The right of Tenant to inspect or
audit Landlord's books and records hereunder shall not be transferrable to or
inure to the benefit of any sublessee of Tenant. In no event shall Tenant have
any rights of inspection or audit hereunder if, but only during the period that,
Tenant is in monetary default under this Lease and such default remains uncured
after the giving of any required notice and expiration of any applicable cure
period. Tenant's rights of inspection or audit hereunder shall, in each instance
as applicable, be reinstated when and if Tenant cures any such monetary default.
5.5. Certain Limitations With Respect to Estimates of
Escalation Charges. Notwithstanding anything to the contrary contained in this
Article 5, Landlord may not increase estimated Escalation Charges for a calendar
year by more than one hundred five percent (105%) of the amount of the actual
Escalation Charges for the preceding calendar year, except for those items
included in Escalation Charges which will increase by more than one hundred five
percent (105%) due to clearly ascertainable circumstances or actual knowledge of
Landlord on account of being fixed recurring costs, extraordinary non-recurring
costs or noncontrollable costs (such as rates charged by public utilities,
insurance premiums, Real Estate Taxes, planned capital improvements, salary or
wage increases under union contracts, or increases scheduled in, or on account
of renegotiation of, service contracts for the Complex). Until the Escalation
Charges
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for the preceding year is determined by Landlord, Landlord shall have the right
to base increases in estimated Escalation Charges, subject to the limitations of
this Section 5.5 and the provisions of Section 5.1, on the amount of the
estimated Escalation Charges for the preceding calendar year and when the actual
Escalation Charges is determined by Landlord for the preceding calendar year,
Landlord shall submit to Tenant the final calculation of estimated Escalation
Charges pursuant to the provisions of this Section 5.5 and the provisions of
Section 5.1, and the parties shall make such adjustments and payments as are
necessary or appropriate in order to reflect the amounts required to be paid by
Tenant on account of estimated Escalation Charges for the affected calendar
year. Landlord shall not collect as Building Operating Expenses and Galleria
Operating Expenses an amount that would reimburse Landlord for a sum in excess
of one hundred percent (100%) of actual Building Operating Expenses and Galleria
Operating Expenses in any calendar year. Landlord shall not recover any Building
Operating Expenses or Galleria Operating Expenses more than once.
5.6. Certain Limitations on Real Estate Taxes; Contest of Real
Estate Taxes; Contest of Impositions.
a. Limitations. Notwithstanding anything to the
contrary contained in this Lease, if the assessed value of the Complex (or any
portion thereof) is increased as part of Real Estate Taxes (under Article XIII A
of the California Constitution [commonly referred to as "Proposition 13"] or
otherwise) by reason of a conveyance or other "change in ownership" (as defined
in the California Revenue and Taxation Code) of the Complex (or any portion
thereof) during the period commencing as of September 1, 1999, through and
including August 31, 2002, then only after
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the end of the third year of the Term may Landlord include in Real Estate Taxes
the full amount of such increase in assessed value and, prior to the expiration
of such third year of the Term, Landlord may only include that portion of such
increase in assessed value in each of the first three (3) years of the Term, as
applicable, derived by multiplying such increase by a fraction, the numerator of
which is the number of years then elapsed in the Term minus one (1), and the
denominator of which is three (3). In addition to the foregoing, if any
Impositions are imposed upon Tenant during a Base Year, which Impositions are
enacted in lieu of then existing Real Estate Taxes, the amount of Real Estate
Taxes included in such Base Year shall be adjusted to include such Impositions
paid by Tenant directly.
b. Contest of Real Estate Taxes. In determining
whether to contest any Real Estate Taxes comprised in Escalation Charges,
Landlord shall act in a commercially reasonable manner, taking into account all
relevant factors in making such decision. Tenant may from time to time after
issuance of a notice of assessed value of the Complex for an ensuing tax year,
but before a right to contest such assessed value expires, inquire of Landlord
in writing whether Landlord intends to contest such assessed value. Landlord
shall respond to Tenant's request within five (5) Business Days after receipt of
such request. Landlord shall have no liability to Tenant, however, for damages,
costs and/or expenses of any kind or character on account of Landlord's
declination to contest any Real Estate Taxes comprised in Escalation Charges,
regardless of whether Landlord has acted in a commercially reasonable manner,
Tenant waives and relinquishes any claims or rights to such damages, costs and
expenses, and Tenant's sole remedy shall be an
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action or proceeding specifically to enforce Landlord's obligation hereunder to
act in a commercially reasonable manner, or enjoin Landlord's actions contrary
to such obligation. The cost of any contest of Real Estate Taxes shall be
included in Real Estate Taxes in accordance with the definition of Real Estate
Taxes set forth in Article 1.
c. Contest of Impositions. Tenant shall have the
right, upon the terms and conditions of this Section 5.6.c, to contest any
Impositions payable by Tenant under this Lease. If Tenant determines to contest
any such Impositions, Tenant shall so notify Landlord and either make payment of
such Impositions directly to the levying authority under protest prior to the
due date therefor, or if such Impositions are included in the tax bill to
Landlord and paid by Tenant to Landlord pursuant to Article 6 below, require
that Landlord make payment of such Impositions under protest. Tenant may
prosecute such contest in Tenant's name, or in Landlord's name if required by
applicable law, and Landlord shall cooperate with Tenant in prosecuting such
contest, executing such documents and instruments as may be necessary or
appropriate for Tenant to pursue such contest. Landlord's cooperation hereunder
shall, however, be without cost or expense to Landlord and Tenant shall bear all
costs and expense of any contest initiated and conducted by Tenant hereunder. If
at any time payment of any contested Impositions hereunder is required or
necessary in order to avoid termination or forfeiture of this Lease or the
interest of Landlord in the Complex, then Tenant shall promptly make such
payment, and if Tenant fails so to do, then Landlord shall have the right to
make such payment on behalf of Tenant and Tenant shall promptly reimburse
Landlord for all amounts paid by
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Landlord, together with interest at the Prime Rate plus 1% from the date
Landlord makes such payment until the date Tenant repays such amount to
Landlord. Upon completion of any contest of Impositions conducted by Tenant
hereunder, Tenant shall pay all amounts (including penalties, interest, fines
and increases in Impositions) determined to be due on account of such contest.
Tenant shall indemnify, defend, protect and hold Landlord harmless from and
against any and all liability, loss, claim, cause of action, damages, cost or
expense (including reasonable attorneys' fees) arising out of or in connection
with, or incurred by Landlord on account of, any contest of Impositions
conducted by Tenant hereunder.
5.7. Adjustment of Base Year Operating Expenses for Certain
Insurance Items. If Landlord elects not to carry earthquake insurance pursuant
to Section 14.2 below for a Base Year applicable to a Floor in the Premises (or
as to Floor 2, in the year in which the Rent Commencement Date falls for Floor
2), but after such Base Year (or as to Floor 2, after the year in which the Rent
Commencement Date falls) Landlord elects to take out and carry such earthquake
insurance, then the amount of Building Operating Expenses and Galleria Operating
Expenses for such Base Year (or as to Floor 2, in the year in which the Rent
Commencement Date falls for Floor 2), as applicable, shall be increased by an
amount equal to the actual premium which Landlord pays for such earthquake
insurance in the calendar year in which such earthquake insurance is taken out.
If, after Landlord elects to take out such earthquake insurance, Landlord elects
to discontinue such insurance, then the Building Operating Expenses and/or
Galleria Operating Expenses for the affected Base Years hereunder (or as to
Floor 2, the year in which the Rent
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Commencement Date falls) shall be reduced by the amount previously increased
pursuant to the preceding sentence. The adjustments to Base Year Building
Operating Expenses and/or Galleria Operating Expenses shall be effected in each
instance in which the circumstances specified in this Section 5.7 pertain.
5.8. Dispute Resolution. Any dispute between the parties with
respect to any matter under this Article 5 (including a dispute arising from any
inspection or audit conducted by Tenant pursuant to Section 5.4 above) shall be
resolved by arbitration pursuant to Section 31.17 below.
6. Impositions Payable by Tenant. Tenant shall pay all Impositions
prior to delinquency. If billed directly, Tenant shall pay such Impositions and
on Landlord's request concurrently present to Landlord satisfactory evidence of
such payments. If any Impositions are billed to Landlord or included in bills to
Landlord for Real Estate Taxes, then Landlord shall deliver Landlord's invoice
therefor at least forty (40) days prior to the delinquency date, and Tenant
shall pay all such amounts to Landlord not later than ten (10) days prior to the
delinquency date. Landlord shall pay any such Impositions billed to Landlord
prior to delinquency and, if Landlord fails to do so, Landlord shall pay any
penalties or interest thereon due on account of payment after the delinquency
date thereof. If applicable law prohibits Tenant from reimbursing Landlord for
an Imposition, but Landlord may lawfully increase the Base Rent to account for
Landlord's payment of such Imposition, the Base Rent payable to Landlord shall
be increased to net to Landlord the same return without reimbursement of such
Imposition as would have been received by Landlord with reimbursement of such
Imposition.
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7. Use of Premises.
7.1. Permitted Use. The Premises shall be used solely for the
Permitted Use and for no other use or purpose. For purposes of the Permitted Use
of photocopying facilities which may be located by Tenant on Floor 2 Building
and/or Floor 3 of the Premises, such photocopying facilities shall be limited to
reproduction of materials primarily for the in-house use of Tenant and its
Affiliates, and not for external distribution in volume or in bulk to third
persons. As ancillary uses included within the Permitted Use, Tenant shall have
the right to use the Premises, other than Floor 2 Galleria, for the following
purposes, subject to the space limitations specified with respect thereto and
compliance by Tenant with all other applicable provisions of this Lease,
including this Article 7 and provisions for the making of Alterations to the
Premises: computer rooms occupying not more than 18,590 feet of Rentable Area;
auditoriums and classrooms for training employees of Tenant and Tenant's
Affiliates occupying not more than 37,180 feet of Rentable Area; a cafeteria for
employees and guests of Tenant and Tenant's Affiliates occupying not more than
10,000 feet of Rentable Area; a branch securities brokerage office providing
services and/or advice to employees of Tenant and Tenant's Affiliates with
respect to the purchase and sale of, or investment in, securities and other
investment vehicles, occupying not more than 10,000 feet of Rentable Area; a
travel agency providing travel services, advice and sales for employees of
Tenant, Affiliates of Tenant, and other agents of Tenant, occupying not more
than 10,000 feet of Rentable Area (in addition to any travel agency constituting
a Permitted Use on Floor 2 Galleria); an outlet for the sale of clothing items
to employees of Tenant, employees of Tenant's
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Affiliates, and other agents of Tenant, bearing Tenant's logo and/or
identification or the logo and/or identification of Tenant's Affiliates,
occupying not more than 5,000 feet of Rentable Area; a fitness and exercise
center for employees of Tenant and Tenant's Affiliates, and other agents of
Tenant, occupying not more than 10,000 feet of Rentable Area; and trading floors
for the conduct by Tenant and Tenant's Affiliates of the purchase and sale of,
or investment in, securities and other investment vehicles occupying not more
than 74,360 feet of Rentable Area. All such uses ancillary to the Permitted Use
shall be located within Floors 2-15 of the Premises, and no such ancillary use
shall be permitted in any Floor of the Premises above Floor 15.
7.2. No Violation of Legal and Insurance Requirements. Tenant
shall not do or permit to be done, or bring or keep or permit to be brought or
kept, in or about the Premises, or any other portion of the Complex, anything
which (i) is prohibited by or will in any way, conflict with any Requirements
applicable to the Complex; (ii) would invalidate or be in conflict with the
provisions of any insurance policy carried by Landlord or Tenant on any portion
of the Complex or Premises, or any property therein; or (iii) would cause a
cancellation of any such insurance, increase the existing rate of or affect any
such Landlord's insurance, or subject Landlord to any liability or
responsibility for injury to any person or property, or give rise to any defense
in an insurer to any claim under, or result in a conflict with, any policies for
such insurance; or (iv) will in any way obstruct or interfere with the rights of
other tenants or occupants of the Complex, or injure or annoy them. Tenant shall
not bring onto any Floor of the Premises any furniture, fixtures
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and/or equipment, and/or make any Alterations to any Floor in the Premises, the
aggregate weight of which would exceed the specified live load capacity of such
Floor, unless Tenant appropriately increases the live load capacity of such
Floor pursuant to Section 10.5 below. If Tenant does or permits anything to be
done which increases the cost of any of Landlord's insurance, or which results
in the need, in Landlord's reasonable judgment, for additional insurance by
Landlord or Tenant with respect to any portion of the Complex or Premises, then
Landlord shall promptly notify Tenant upon acquiring knowledge of such
circumstance. Tenant shall either (A) cease the activity causing such
circumstance within ten (10) days after receipt of Landlord's notice or (B)
reimburse Landlord for any such additional premiums or costs, and/or procure
such additional insurance at Tenant's sole cost and expense. In any event, if
Tenant elects to cease such activity, Tenant shall reimburse Landlord for any
such additional premiums or costs that Landlord shall have incurred prior to
Tenant's cessation of such activity. Invocation by Landlord of such right shall
not limit or preclude Landlord from prohibiting Tenant's impermissible use that
gives rise to the additional insurance premium or requirement or from invoking
any other right or remedy available to Landlord under this Lease. Landlord
acknowledges in connection with the provisions of this Section 7.2 that, as of
the Lease Date, use and occupancy by Tenant of the Premises for the Permitted
Use (but not as to the uses ancillary thereto permitted under Section 7.1 above,
as to which Landlord makes no acknowledgement, representation or warranty) will
not violate any of the provisions of this Section 7.2.
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7.3. Compliance with Legal, Insurance and Life Safety Requirements.
Tenant, at its cost and expense, shall promptly comply with all Requirements
applicable to the Complex, the provisions of all recorded documents affecting
any portion of the Complex as of the Lease Date (including the Declaration of
Crocker Properties, Inc., regarding building electric lighting, recorded August
26, 1981, as modified by Amended and Restated Declaration, dated December 5,
1984, recorded December 5, 1984), all of which are listed in Exhibit G and all
reasonable life safety programs, procedures and rules implemented or promulgated
by Landlord. Notwithstanding the foregoing, Tenant shall not be required to make
any capital improvements pursuant to this Section 7.3 except to the extent they
are necessitated by (i) Tenant's use or occupancy of, or business conducted in,
the Premises under Requirements enacted, promulgated or imposed directly on
occupants of space in office buildings (as distinguished from Requirements
imposed generally on office buildings as such) or Tenant's particular use,
manner of use or occupancy of the Premises (as distinguished from general
corporate and administrative offices as such), (ii) any default by Tenant under
this Lease, (iii) Alterations, or (iv) the installation, operation and/or
maintenance of the Antenna and/or Generator. Tenant shall promptly furnish to
Landlord any notices received from any insurance company, inspection bureau or
governmental agency regarding any non-compliance under this Section 7.3, or
regarding any unsafe or unlawful conditions within the Complex. The judgement of
any court of competent jurisdiction, or the admission of Tenant in any action or
proceeding involving Tenant, whether or not Landlord is party thereto, that
Tenant is in non-compliance with respect to any
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matter specified in this Section 7.3 shall be conclusive of that fact.
7.4. No Nuisance. Tenant shall not (i) do or permit anything to be done
in or about the Premises, or any other portion of the Complex, which would
injure or annoy, or obstruct or interfere with the rights of, Landlord or other
occupants of the Complex, or others lawfully in or about the Complex; (ii) use
or allow the Premises to be used in any manner inappropriate for a Class A
office building, or for any improper or objectionable purposes; or (iii) cause,
maintain or permit any nuisance or waste in, on or about the Premises, or any
other portion of the Complex.
7.5. Compliance With Environmental Laws; Use of Hazardous Materials.
Without limiting the generality of Section 7.3 above, Tenant shall at all times
comply with all applicable provisions of Environmental Laws with respect to the
use and occupancy of the Premises or any portion of the Complex pursuant to this
Lease. Tenant shall not generate, store, handle, release or transport, or
otherwise use, or allow the generation, storage, handling, release or
transport, or other use of, Hazardous Materials in the Premises or transport
the same through the Complex, except that Tenant may use, store, handle and
transport Hazardous Materials as part of its business operation conducted
therein in the ordinary course as part of a Class A office building in the
Downtown Financial District, in accordance with the standards of this Article 7
(such as the use and storage of small quantities of office supplies which may
contain minor amounts of Hazardous Materials, the use of products containing
minor amounts of Hazardous Materials for the making of Alterations, the use of
products containing customary amounts of
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Hazardous Materials in the maintenance, operation and repair of the Premises, or
the use or storage of chemicals, such as chlorofluorocarbons [CFC's], in amounts
necessary for the operation of systems in the Premises such as ventilation and
air conditioning package units). In the event of a release of any Hazardous
Materials caused by the act or neglect of Tenant, Tenant shall promptly notify
Landlord and take such remedial actions as Landlord may deem necessary or
appropriate to abate, remediate and/or clean up the same to Landlord's sole
satisfaction. If so elected by Landlord by written notice to Tenant, Landlord
shall take such remedial actions on behalf of and at Tenant's sole cost and
expense. In any event, Landlord shall have the right, without liability to
Tenant, to direct and supervise Tenant's remedial actions and to specify the
scope thereof and specifications therefor. Tenant shall use, store, handle and
transport any Hazardous Materials hereunder in accordance with the applicable
requirements of Environmental Laws (including use by Tenant of its Environmental
Protection Agency manifest number), and shall notify Landlord of any notice of
violation of Environmental Laws which it receives from any governmental agency
having jurisdiction. As used herein, Tenant includes its employees, agents,
contractors, invitees, licensees and sublessees.
7.6. Cost of Handicap Access and Life-Safety Code Compliance.
Concurrently with the making of the initial Alterations to a Floor pursuant to
Section 10.4 below, Tenant shall make those Alterations, if any, to such Floor
as are required under applicable handicap access and/or life-safety laws,
ordinances, rules, regulations and codes (including the Americans with
Disabilities Act of 1990), to bring the Floors
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into compliance with such laws, ordinances, rules, regulations and codes, and
Tenant shall be entitled to reimbursement of the construction cost of such
Alterations (the "Code Compliance Costs") upon the terms and conditions set
forth in this Section 7.6. Upon completion of the effected Alterations, Tenant
shall present to Landlord an itemization (together with appropriate and adequate
supporting documentation) of the Code Compliance Costs. The amount of the Code
Compliance Costs for each Floor shall be amortized on a straight-line basis at
ten percent (10%) per annum over a twenty (20) year life, commencing with the
Delivery Date for each Floor. If this Lease terminates as to a Floor, in whole
or in part, for any reason prior to the last day of the last 20-year period for
which any Code Compliance Costs are being amortized hereunder, other than on
account of the default of Tenant under this Lease, then subject to the
conditions hereafter specified, (i) if this Lease terminates as to an entire
Floor, Landlord shall reimburse to Tenant the then remaining unamortized portion
of the Code Compliance Costs with respect to such Floor, or (ii) if this Lease
terminates as to only a portion of a Floor, Landlord shall reimburse to Tenant
the then remaining unamortized portion of the Code Compliance Costs with respect
to such Floor, pro-rata on the basis of the Rentable Area (or Galleria Rentable
Area if Floor 2) of such Floor. Landlord shall make reimbursement hereunder
within thirty (30) days after the date of termination of this Lease as to a
Floor. If Landlord terminates this Lease on account of Tenant's default, the
amount of any remaining unpaid Code Compliance Costs will be deducted from any
damages awarded to Landlord on account of such default.
8. Building Services.
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8.1. Maintenance of Complex. Landlord shall maintain and repair
the Complex (other than the Premises, and the premises of other tenants of the
Complex, to the extent Tenant and such tenants are obligated to maintain and
repair the same) in good order and condition, except for ordinary (but not
excessive) wear and tear and subject to Articles 12 and 13 in the case of damage
by casualty or condemnation. Any damage occasioned by the gross negligence or
willful misconduct of Tenant, or Tenant's employees, agents, contractors,
licensees or invitees, shall be repaired by Landlord at Tenant's expense.
Landlord's maintenance of, and provision of services to, the Building shall be
performed in a manner consistent with that of the Comparable Buildings.
Specifically, but without limiting the generality of the foregoing standard,
Landlord shall (except to the extent that such obligation is imposed on Tenant
under the applicable provisions of this Lease or imposed on other tenants of the
Complex under their leases and subject to reasonable rights of contest) comply
with all Requirements applicable to the Complex, including making all
alterations to the Premises or Complex required thereunder; to the extent such
obligation to comply with Requirements applicable to the Complex is imposed on
other tenants of the Complex under their leases, and the failure by such other
tenants to perform such obligations would interfere with the use or occupancy of
the Premises by Tenant, Landlord shall use commercially reasonable efforts to
cause such tenants to comply with such obligations; and Landlord shall use
commercially reasonable efforts to enforce obligations of other tenants of the
Complex to maintain and repair their premises. Landlord shall have the right in
connection with its maintenance of the Complex hereunder (i) to change the
arrangement and/or
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location of, or make alterations or additions to, any Common Area amenity,
Common Area installation or improvement, or other parts of the Complex, and (ii)
to utilize portions of the Common Areas from time to time for entertainment,
displays, product shows, leasing of kiosks or such other uses that in Landlord's
sole judgment tend to attract the public, so long as such uses do not
unreasonably interfere with or impair Tenant's access to or use or occupancy of
the Premises.
8.2. Building Standard Services. Landlord shall cause to be furnished
to Tenant: (i) tepid and cold water to those points of supply and in volumes
provided for general use of tenants in the Building; (ii) electricity not to
exceed the Wattage Allowance, on a monthly, non-cumulative basis, for lighting
and the operation of electrically powered office equipment in the Premises
during the period from 7:00 a.m. to 6:00 p.m. on weekdays, and 7:00 a.m. to noon
on Saturdays (except Building Holidays); (iii) heat, ventilation and air
conditioning to the extent reasonably required for the comfortable occupancy by
Tenant of the Premises during the period from 7:00 a.m. to 6:00 p.m. on weekdays
and 7:00 a.m. to noon on Saturdays (except Building Holidays); (iv) passenger
elevator service; (v) freight elevator service and adjacent loading dock use,
subject to then applicable Building standard procedures and scheduling; (vi)
lamp replacement for Building standard lights; (vii) restroom supplies; (viii)
window washing of the exterior Building windows (both inside and outside) at
least two (2) times per year at times determined by Landlord; (ix) janitor
service on a five (5) day per week basis (excluding Building Holidays), except
for portions of the Premises used for preparing or consuming food or beverages;
and (x) reasonable security for the Complex (but not
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individually for Tenant or the Premises), except that Landlord shall not be
liable in any manner for any unauthorized or criminal acts of others or for any
direct, consequential or other loss or damage related to any malfunction,
circumvention or other failure of such security service, including with respect
to any cooperation or coordination, or failure thereof, of security personnel
pursuant to Section 19.2.b below. Landlord may establish in the Premises or
other portions of the Complex such measures as it deems necessary or appropriate
to conserve energy, including automatic switching of lights and/or more
efficient forms of lighting.
8.3. Interruption or Unavailability of Services; Abatement of
Rent and Additional Charges. Except to the extent due to the gross negligence or
willful misconduct of Landlord, or its employees, agents or contractors, and
except for the foregoing, regardless of the cause of such failure, Landlord
shall not be in default hereunder or liable for any damages directly or
indirectly resulting from, no constructive or other eviction shall be construed
to have occurred, and Tenant shall not be relieved from any of its obligations
under this Lease (except for abatement of Rent and Additional Charges as
hereinafter provided), by reason of failure to furnish or delay in furnishing
any maintenance or services under this Article 8. Landlord shall use reasonable
efforts promptly to remedy any failure or interruption in the furnishing of such
maintenance or services, except that if Tenant is prevented from using the
Premises, or a portion thereof, for the Permitted Use due to any such failure or
interruption, Landlord shall employ such measures (including the use of premium
time) in order to cure such failure or interruption at the earliest feasible
time, and the cost of
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such measures shall be included in Building Operating Expenses and/or Galleria
Operating Expenses, as applicable. Landlord makes no warranty or representation
to Tenant regarding the adequacy or fitness of the heating, air conditioning or
ventilation equipment in the Complex or the Premises to maintain temperatures
that may be required for or because of any of Tenant's equipment which uses
other than the fractional horsepower normally required for standard office
equipment and Landlord shall have no liability for loss or damage suffered by
Tenant or others in connection therewith. Notwithstanding anything to the
contrary contained in this Section 8.3, upon any failure or interruption in the
furnishing of maintenance or services hereunder not due to the act or neglect of
Tenant, or any employee, agent, representative, contractor, licensee or invitee
of Tenant, which failure or interruption prevents Tenant from accessing, using
or occupying the Premises under this Lease, in whole or in part, Rent and
Additional Charges shall not be abated for the first five (5) consecutive
Business Days that such failure or interruption persists; but after the
expiration of such 5-day period, Rent and Additional Charges shall abate to the
extent such failure or interruption interferes with access to, or the use or
occupancy of, all or any part of the Premises under this Lease, until such
failure or interruption is remedied so as to permit access to, and/or the use
and occupancy of, the affected portion of the Premises. Such abatement shall be
based on the extent to which such failure or interruption interferes with access
to, or the use and occupancy of, the Premises; and if such failure or
interruption affects a Critical Area, and as a result of such failure or
interruption affecting such Critical Area Tenant is unable to conduct its
business in another portion
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or portions of the Premises, the Rent and Additional Charges abatement
provisions hereunder shall pertain to all portions of the Premises, including
the Critical Area, rendered unusable by Tenant in the conduct of its business as
a result of such failure or interruption to such Critical Area until such
failure or interruption is remedied so as to permit access to and/or the use and
occupancy of the Critical Area and other affected portions of the Premises.
8.4. Tenant's Use of Excess Electricity, Water, and Heating, Ventilation
and Air-Conditioning. Tenant shall not, without Landlord's prior consent,
install in the Premises (i) lighting, the aggregate monthly, non-cumulative
power usage of which exceeds the Lighting Wattage Allowance, or lighting,
equipment, and/or apparatus, the aggregate monthly, non-cumulative power usage
of which exceeds the Wattage Allowance, or which requires a voltage other than
120/208 volts single or three-phase, (ii) heat generating or heat sensitive
equipment, or (iii) supplementary air conditioning facilities (Landlord
consenting to Tenant's installation of such supplementary air conditioning
facilities if such facilities meet the other applicable requirements for
Landlord's consent pursuant to this Lease). Tenant shall not permit or allow
occupancy levels in excess of one person per one-hundred-seventy-five (175) feet
of Rentable Area on each Floor of the Premises. Upon Tenant's request, from time
to time and at any time during the Term, Landlord shall supply daily
supplemental air conditioning on a 24-hour a day basis throughout the Term, at
Tenant's cost and expense as provided in this Section 8.4, until Tenant notifies
Landlord in writing to discontinue such supplemental services. If, pursuant to
this Section 8.4, heat-generating equipment are
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installed or used in the Premises, or if the Premises or fixtures therein are
reconfigured by Alterations, and such equipment, occupancy levels or Premises
reconfiguration affects the temperature otherwise maintained by the Building air
conditioning system, or if equipment is installed in the Premises which requires
a separate temperature-controlled room, Landlord may, at Landlord's election
after notice to Tenant or shall upon Tenant's request, install supplementary air
conditioning facilities in the Premises, or otherwise modify the ventilating and
air conditioning serving the Premises, in order to maintain the temperature
otherwise maintained by the Building air conditioning system or to serve such
separate temperature-controlled room. Tenant shall pay the cost of any
transformers, additional risers, panel boards and other facilities if, when and
to the extent required to furnish power for, and all maintenance and service
costs of, any supplementary air conditioning equipment or facilities or modified
ventilating and air conditioning, or for lighting and/or equipment the power
usage of which exceeds the standards set forth in Section 8.2 above or to which
Landlord consents pursuant to this Section 8.4. The capital, maintenance and
service costs of such facilities and modifications shall be paid by Tenant as
Additional Charges. Landlord, at its election and at its expense, may also
install and maintain an electric current submeter and/or water submeter
(together with all necessary wiring and related equipment) at the Premises to
measure the power and/or water usage of such lighting or equipment; and
Landlord, at its election and at Tenant's expense, may also install and maintain
an electric current submeter or water submeter (together with all necessary
wiring and related
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equipment) at the Premises to measure the power and/or water usage of such
ventilation and air conditioning equipment.
8.5. Provision of Additional Services. If Tenant desires services in
additional amounts or at different times than set forth in Section 8.2 above, or
any other services that are not provided for in this Lease, Tenant shall make a
request for such services to Landlord with such advance notice as Landlord may
reasonably require. If Landlord provides such services to Tenant, then Tenant
shall pay (i) Landlord's then prevailing unit charge to provide heating,
ventilation and air conditioning, (ii) Landlord's actual cost to provide
electricity, and (iii) Landlord's actual cost to provide any other services plus
an administrative fee equal to twenty percent (20%) of such actual costs, not
exceeding, however, Two Hundred Fifty Dollars ($250.00) with respect to each
request from Tenant for such services. Landlord shall in all events provide
electricity for lighting and operation of electrically powered office equipment
in the Premises during the period from 6:00 p.m. to 7:00 a.m. on weekdays, noon
to midnight on Saturdays, all day Sundays, and on Building Holidays, on receipt
by Landlord from an authorized Tenant representative of a telephonic request
therefor at the management office for the Complex. Tenant shall make payment of
amounts due hereunder within thirty (30) days after Tenant's receipt of
Landlord's invoice.
8.6. Standards With Respect to Certain Services. The standards set
forth in this Section 8.6 shall govern the provision of certain Building
services delivered by Landlord under this Article 8.
a. Heating, Ventilation and Air Conditioning. The base Building
heat, ventilation and air conditioning system
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is designed to provide a maximum air volume (i) delivered to Floor 2 of the
Premises of 12,066 cubic feet per minute, (ii) delivered to Floor 3 of the
Premises of 3,000 cubic feet per minute, (iii) delivered to each of Floors 4-18
included in the Premises of 12,066 cubic feet per minute, and (iv) delivered to
each of Floors 19-25 included in the Premises of 13,050 cubic feet per minute,
and with the temperature of air at the point of delivery of 55(degree)
Fahrenheit. Subject to the foregoing minimum performance criteria, Tenant shall
be solely responsible for ambient air temperature within the Premises from the
point of delivery of air to the Premises in accordance with the foregoing
performance criteria.
b. Janitorial Specifications. Landlord has supplied to Tenant, and
Tenant has reviewed and approved, the specifications for janitorial service for
the Building currently utilized by Landlord, a copy of which is attached
hereto as Exhibit H (the "Janitorial Specifications"). Landlord shall use
commercially reasonable efforts to provide janitor service to the Premises in
accordance with the Janitorial Specifications, including responding in good
faith to any concerns or complaints Tenant may have with respect to Landlord
compliance with the Janitorial Specifications. Landlord shall have the right to
modify the Janitorial Specifications from time to time or at any time in order
to respond to requirements of union or other applicable contracts with respect
to the delivery of janitor service, or otherwise in connection with prevailing
market services, or the provision of janitor service to the Building in
accordance with the standard for operation and maintenance of the Complex
specified in this Article 8, but if Landlord intends to modify the Janitorial
Specifications, Landlord shall first
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deliver such proposed modified Janitorial Specifications to Tenant and, if so
requested by Tenant, shall meet and confer with Tenant with respect to any
concerns Tenant may have arising from such proposed modifications to the
Janitorial Specifications. Subject to such meet and confer requirement,
Landlord's decision with respect to modifications of the Janitorial
Specifications shall be conclusive and binding on Tenant, so long as such
modifications do not diminish the level of janitorial service specified in the
Janitorial Specifications set forth in Exhibit H.
c. Elevator Services. So long as Tenant leases at least one (1) Floor
in the lowrise elevator bank of the Building (serving Floors 2 - 15), or the
midrise elevator bank of the Building (serving Floors 15 - 25), Landlord shall
not dedicate to the exclusive use of any tenant of the Building use of any
passenger elevators in such elevator bank. Nothing in the foregoing shall,
however, limit Landlord's right to effect such exclusive dedication of an
elevator in the elevator bank serving the highrise portion of the Building above
Floor 25 to a tenant of the Building occupying space in such highrise portion of
the Building. Landlord shall not charge for freight elevator service, except for
the cost of a security guard stationed at the freight elevator when in use by
Tenant for its move in to the Premises after 6:00 p.m. and before 7:00 a.m. on
weekdays, after noon on Saturdays, all day Sundays and on Building Holidays.
d. Tenant's Share of Services. In addition to specific provisions of
this Lease with respect to utilization by Tenant of Tenant's Percentage Share of
Building utilities and appurtenant facilities in the core on each Floor of the
Premises (such as risers, conduits and shafts), Tenant shall at all times
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have the right to have allocated to Tenant Tenant's Percentage Share of such
utilities and appurtenant facilities, except that, to the extent that Tenant's
usage thereof exceeds the Building standard for such services pursuant to
Section 8.2 above, or other applicable provisions of this Lease, then the other
applicable provisions of this Article 8 and other applicable provisions of this
Lease shall govern Tenant's usage of such above Building standard utility usage
and use of appurtenant facilities.
8.7. Compliance With Environmental Laws; Use of Hazardous
Materials. Landlord shall at all times comply with all applicable provisions of
Environmental Laws with respect to the use and occupancy of any portion of the
Complex (except to the extent that Tenant is obligated for such compliance
pursuant to Section 7.5 above, and except to the extent such other tenants are
obligated for such compliance pursuant to their leases); and to the extent other
tenants of the Complex are obligated for such compliance pursuant to their
leases, Landlord shall use commercially reasonable efforts to cause compliance
by such tenants with such obligations. Landlord shall not generate, store,
handle, or otherwise use, Hazardous Materials in the Complex, except as part of
its business operation conducted therein in the ordinary course as part of Class
A office buildings in the Downtown Financial District in accordance with the
standards of this Article 8 (such as the use and storage of small quantities of
office supplies which may contain minor amounts of Hazardous Materials, the use
of products containing minor amounts of Hazardous Materials for the making of
alterations, the use of products containing customary amounts of Hazardous
Materials in the maintenance, operation and repair of
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the Complex, or the use or storage of chemicals, such as chlorofluorocarbons
[CFC's] in amounts necessary, for the operation of Building systems). In the
event of a release of any Hazardous Materials caused by the act or neglect of
Landlord, Landlord shall take such remedial actions as Landlord may deem
necessary or appropriate to abate, remediate and/or clean up the same to
Landlord's sole satisfaction; and in the event of a release of any Hazardous
Materials caused by the act or neglect of other tenants of the Complex (other
than Tenant, in which case the provisions of Section 7.5 above shall apply),
Landlord shall use commercially reasonable efforts to take such remedial actions
as Landlord may deem necessary or appropriate either to abate, remediate and/or
clean up the same to Landlord's satisfaction or enforce the obligation of such
tenants to perform the same in accordance with the terms of their leases. In
addition, if any Hazardous Materials are at any time present in a Floor
comprised in the Premises and such presence was not caused by Tenant, or its
employees, agents or contractors, Landlord shall remediate, abate and/or remove
such Hazardous Materials in conformance with the requirements of Environmental
Laws with respect to such Hazardous Materials, except that if such Hazardous
Materials are asbestos containing materials ("ACM"), then (i) if such ACM is in
floor tiles, Landlord shall remove such floor tiles and flash patch the floor
after such removal to make the floor level, and (ii) if such ACM is located in
other components of the Premises, Landlord shall encapsulate and/or remove
and/or make such ACM inaccessible in accordance with the applicable requirements
of Environmental Laws with respect to such ACM. Landlord shall use, handle,
store and transport any Hazardous Materials hereunder in accordance with the
applicable requirements of Environmental Laws
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(including use by Landlord of its Environmental Protection Agency manifest
number). Landlord warrants and represents to Tenant, based solely on the actual
knowledge of Agnes Wyman, the Building general manager, James G. Clifford, the
real estate broker negotiating this Lease, Joseph Dobronyi and Robert Hutchison,
as representatives of the joint venture partners of Landlord, as of the Lease
Date, that Landlord has no knowledge of the presence of any Hazardous Materials
within the physical improvements comprising the Complex (specifically excluding
the Land), other than as disclosed by the Phase I Report and except for the
Hazardous Materials referred to in this Section 8.7 permitted to be maintained
by Landlord in the Complex under this Section 8.7. As used herein, other than in
connection with the foregoing warranty and representation, Landlord includes its
employees, agents, and contractors.
9. Maintenance of Premises. Tenant shall, at all times during the
Term, at Tenant's cost and expense, keep the Premises in good condition and
repair, except for ordinary wear and tear, damage by casualty or condemnation,
and the maintenance and repair to be performed by Landlord pursuant to Section
8.1 above. Except as specifically set forth in this Lease, Landlord has no
obligation to alter, remodel, improve, repair, decorate or paint the Premises,
or any part thereof, or any obligation respecting the condition, maintenance and
repair of the Premises. Except as provided in Section 20.7 below, Tenant hereby
waives all rights, including those provided in California Civil Code Sections
1941 and 1942, or any successor statutes, to make repairs which are Landlord's
obligation under this Lease at the expense of Landlord or, except as otherwise
specifically provided in this Lease, to receive any setoff or abatement of Rent
and Additional Charges.
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10. Alterations to Premises.
10.1. Landlord Consent; Procedure. Tenant shall not make or permit
to be made any Alterations (including initial Alterations under Section 10.4
below) without Landlord's prior consent, which shall not be unreasonably
withheld in accordance with Section 31.8, except that (i) as to any Limited
Alterations, Landlord's consent may be withheld in Landlord's sole discretion,
except as hereinafter provided with respect to ceilings and lighting, (ii)
Tenant may make minor decorative or cosmetic improvements or alterations in the
Premises (such as hanging pictures, painting, carpeting, wall covering or
similar items) without first obtaining Landlord's prior consent, and (iii)
Tenant may make changes in the field to Alterations previously approved by
Landlord without first obtaining Landlord's prior consent so long as such field
change (A) is not a Limited Alteration, (B) is necessitated by field conditions
as encountered during the construction of the Alterations and is required to be
made in order to conform the Alterations to such condition, (C) is consistent
with the purpose and intent of plans and specifications for the Alterations
approved by Landlord, and so long as (D) the cost of such field change does not
exceed Five Thousand Dollars ($5,000.00) for a single field change, or Twenty
Thousand Dollars ($20,000.00) in the aggregate for all field changes, with
respect to the Alterations under construction. All Alterations shall be made in
accordance with Building standard procedures as then reasonably established by
Landlord and the provisions of this Article 10, except that (1) the limits of
liability of any commercial general liability insurance required to be carried
by Tenant's contractors shall not exceed the commercial general liability
insurance required to be carried by
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Tenant under Section 14.1 below, (2) except for review and approval by Landlord
of initial Alterations pursuant to Section 10.4, Landlord shall render any
approval of Alterations hereunder within five (5) Business Days after Tenant's
request for approval for Alterations affecting one (1) Floor or less in the
Premises, within ten (10) Business Days after Tenant's request for approval for
Alterations affecting more than 1 Floor in the Premises, but less than three (3)
Floors in the Premises, and fifteen (15) Business Days after Tenant's request
for approval of Alterations affecting 3 or more Floors in the Premises, and (3)
in the event of any inconsistency between the terms and provisions of this Lease
and the terms and provisions of the Building standard procedures, the terms and
provisions of this Lease shall control. In making any Alterations, Tenant shall
not be required to use then Building standard installations (such as lighting or
doors), subject, however, to Landlord's right to require removal of certain
Alterations pursuant to Section 10.3 below, except that (I) if Tenant changes or
replaces a ceiling on a Floor, Tenant shall make such change or replacement
throughout such Floor using a 2' x 2' fine line grid lay-in tile or similar
ceiling system, and (II) Tenant may use paracube or ceiling pendant-mounted
uplight lighting systems on a Floor, and if such lighting systems utilize light
fixtures or other lighting devices which are not flush with the ceiling, such
fixtures or devices shall be installed at least fifteen feet (15') away from the
perimeter walls of such Floor. Notwithstanding that such Alterations may
constitute Limited Alterations, if Tenant utilizes a 2' x 2' fine line grid
lay-in tile or similar ceiling system on each Floor of the Premises and/or a
paracube or uplight lighting system on a Floor, then Landlord shall
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not unreasonably withhold its consent to such Alterations hereunder, but any
other ceiling system or lighting system on a Floor (other than the then Building
standard lighting system) shall constitute a Limited Alteration as to which
Landlord may withhold its consent in its sole discretion. Tenant may perform its
Alterations during normal Building business hours so long as the performance of
such Alterations does not interfere with the use or occupancy of the Complex by
other tenants or Landlord's operation of the Complex, and does not produce noise
audible outside of the Premises, or fumes or odors.
10.2. General Requirements. All Alterations shall be made at
Tenant's cost and expense. Tenant shall be solely responsible for compliance
with all applicable Requirements in connection with all Alterations. Tenant
shall be responsible for the cost of any additional alterations required by
applicable Requirements to be made by Landlord to any portion of the Complex as
a result of Alterations. Tenant shall complete all Alterations with reasonable
effort as soon as possible after commencement of the work of constructing such
Alterations in order to cause the least disruption to Complex operations and
occupants. Upon completion of any Alterations, Tenant shall promptly supply to
Landlord as-built drawings and specifications showing the Alterations as made
and constructed in the affected portions of the Premises. In connection with
installing or removing Alterations, Tenant shall pay Landlord's reasonable,
actual, out-of-pocket costs incurred to review Tenant's plans, specifications,
working drawings, permit applications and permits, and in connection with
Landlord's response to, review of, or involvement in, field conditions, or
circumstances in the field, arising during the course of construction of
Alterations by Tenant, after notice by Landlord to Tenant of such
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circumstances. Landlord shall not charge a fee over and above such reasonable,
actual out-of-pocket costs. Landlord may also hire a third party to review
Tenant's plans, specifications and working drawings, permit applications and
permits, and applications by Tenant for payment of Construction Allowances under
Section 10.4 below, in which event Tenant shall reimburse Landlord for the fees
and costs charged by such third party. If Tenant requests that Landlord (or its
agent) administer construction, installation and/or removal of Alterations,
Landlord shall provide to Tenant a quotation for a fee payable to Landlord for
such services and, if Tenant approves the amount of such fee, then Landlord (or
its agent) shall, to the extent requested by Tenant, provide administration of
such construction, installation and/or removal of Alterations, and Tenant shall
pay the amount of such fee for such administration within thirty (30) days after
receipt of Landlord's notice therefor. Landlord shall, in connection with
Alterations hereunder, submit to Tenant from time to time statements and
invoices of Landlord's reasonable, actual out-of-pocket costs and fees and costs
of such third party incurred by Landlord, together with appropriate
documentation supporting and evidencing such costs and fees. Tenant shall pay
the amount of such statements within thirty (30) days after receipt thereof from
Landlord hereunder. If Tenant is delayed in making Alterations on account of
Landlord's failure to comply with, or cause compliance with, Requirements
pursuant to Section 8.1 above, then Landlord shall promptly, using all due
diligence, correct such failure (or cause such failure to be corrected) as soon
as possible in order to minimize any delay in the making by Tenant of such
Alterations.
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10.3. Ownership and Removal of Alterations. All Alterations shall become
part of the Complex and shall be Landlord's property from and after the
installation thereof, and may not be removed or changed without compliance with
the applicable provisions of this Article 10. If, on or before the date Landlord
approves Tenant's plans and specifications (or other documentation) for any
Alterations, Landlord notifies Tenant that Landlord reserves the right to
require Tenant to remove Alterations specified in Landlord's notice because they
exceed or are different than the then customary building standard installations
in Class A office buildings within the Downtown Financial District, then
Landlord, on notice given to Tenant, prior to the expiration of the Term or
termination of this Lease, may require Tenant to remove any or all such
Alterations at Tenant's cost and expense and restore the Premises to the
condition existing immediately prior to the installation of such Alterations.
In addition, if with respect to Floors 4 and/or 5 of the Existing Premises and
prior to the applicable Delivery Date, Landlord has notified Tenant on or before
the date Landlord approved Tenant's plans and specifications (or other
documentation) for any Alterations to such Existing Premises that Landlord
reserves the right to require Tenant to remove Alterations specified in
Landlord's notice and made by Tenant in such Existing Premises because they
exceed or are different than the then customary building standard installations
in Class A office buildings within the Downtown Financial District, then
Landlord, on notice given to Tenant, prior to the expiration of the Term or
termination of this Lease, may also require Tenant to remove any or all such
Alterations at Tenant's cost and expense and restore such Existing Premises to
the condition existing immediately prior to the installation of such
Alterations.
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Landlord and Tenant acknowledge that examples of the Alterations which exceed or
are different from such customary building standard installations are
installations such as raised floors, stairways, computer rooms, vaults, built-in
safes, kitchens exceeding one (1) kitchen on a Floor, air conditioning and
ventilation package units, private restrooms, and any non-Building standard
ceiling and lighting systems (except a 2' x 2' fine line grid lay-in tile or
similar ceiling system and/or a paracube or uplight lighting system as specified
in Section 10.1 above). In addition to the foregoing right of
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Landlord to require Tenant to remove Alterations, Tenant shall also remove all
Alterations (except for the ceiling and/or lighting system referred to in the
preceding sentence) comprised in any uses ancillary to the Permitted Use
instituted by Tenant in the Premises pursuant to Section 7.1 above, unless
Landlord waives in writing such removal requirement prior to the expiration of
the Term or earlier termination of this Lease as to the affected Floor or Floors
in the Premises. Prior to the expiration of the Term with respect to a Floor, or
earlier termination of this Lease with respect to a Floor, comprised in the
Premises, Tenant shall remove all cabling in under-floor duct systems and in
telecommunication closets in such Floor, except that Tenant shall have no
obligation of cable removal if this Lease expires or terminates (other than on
account of Tenant's default) on the same date with respect to all Floors then
comprised in the Premises. If Tenant fails to effect removal of Alterations to
the extent required pursuant to the foregoing provisions, then Landlord may
remove such Alterations and perform such restoration and Tenant shall reimburse
Landlord for Landlord's cost and expense incurred to perform such removal and
restoration. Tenant shall repair at its cost and expense all damage to the
Premises or Complex caused by the removal of any Alterations. Subject to the
foregoing provisions regarding removal, all Alterations (including any above
Building standard improvements to the Premises) shall at the expiration of the
Term or termination of this Lease remain on the Premises without compensation to
Tenant. All disputes with respect to Landlord's decision to require removal of
Alterations under this Section 10.3 shall be resolved by arbitration pursuant to
Section 31.17.
10.4. Landlord's Construction Allowance. Upon the terms and conditions
set forth in this Section 10.4, Landlord shall
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provide to Tenant the Construction Allowances for each Floor in the Premises set
forth in the Basic Lease Information.
a. Construction Allowances for Existing Premises. Subject to
the satisfaction of the conditions set forth in Section 10.4.b, and except as
provided in Section 10.4.c below, Landlord shall pay to Tenant a portion of the
Construction Allowances for the Existing Premises up to the sum of One Million
Dollars ($1,000,000.00) on or after January 2, 1998, which payment shall be paid
by Landlord to Tenant on account of monies advanced prior to January 2, 1998, by
Tenant on Landlord's behalf for Alterations to the Premises owned by Landlord
pursuant to the provisions of Section 10.3 above. Subject to the satisfaction of
the conditions set forth in Section 10.4.b, and subject to the provisions of
Section 10.4.c below, Landlord shall make such payment notwithstanding that the
Term has not yet commenced for any Floor in the Premises. After the date the
Term first commences for any Floor in the Existing Premises, Landlord shall pay
to Tenant such portions of the remaining amount of the Construction Allowances
for the Floors in the Existing Premises to the extent requested by Tenant
pursuant to Section 10.4.b below, provided that the conditions for disbursement
as set forth in Section 10.4.b have been satisfied and except as provided in
Section 10.4.c. Landlord's payment of the Construction Allowances for the
Existing Premises shall be made for certain Alterations which Tenant intends to
make, or has made (whether before or after the Lease Date), within the Existing
Premises, which include fees for architectural and engineering services and
construction and installation of Alterations.
b. Construction Allowances for Premises.
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(i) Payment of Construction Allowances. Except as provided
in Section 10.4.c below, and upon the terms and conditions specified in this
Section 10.4.b, Landlord shall provide to Tenant the Construction Allowances
with respect to each Floor in the Premises. Upon completion by Tenant of the
Alterations which Tenant makes to a Floor in the Premises in order to prepare
such Floor for use and occupancy, or continued use and occupancy, by Tenant for
the Permitted Use, Tenant shall submit to Landlord a statement setting forth all
costs and expenses incurred by Tenant for the design, construction and
installation of such Alterations on such Floor. Such statement shall be
accompanied by backup documentation adequate to evidence all such costs and
expenses (including contractor requisitions and requests for payment, invoices
and bills). Such statement shall also be accompanied by (i) a certificate of
Tenant's architect (or if none, an officer of Tenant) certifying that such
Alterations have been completed, (ii) final lien releases and waivers from all
contractors, subcontractors and suppliers performing work or supplying materials
for the Alterations, (iii) a certificate of final payment from all parties with
whom Tenant contracts directly for the design, construction and installation of
such Alterations, (iv) a notice of completion showing recording data filed in
accordance with applicable California mechanics' lien laws, (v) warranties (if
any are given to Tenant) against defects in workmanship, materials and
equipment, and (vi) a copy of the permits for such Alterations, signed by the
appropriate inspectors, indicating that such Alterations have been finally
approved. Upon approval by Landlord of Tenant's statement based thereon and all
the other documents and information supplied by Tenant, and subject to the
limitations on and provisions for payment set forth in Section 10.4.a with
respect
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to the Existing Premises, Landlord shall pay to Tenant the amount of costs and
expenses incurred by Tenant for the design, construction and installation of
such Alterations up to, but not exceeding, the Construction Allowance for the
Floor in the Premises on which such Alterations were constructed and installed,
except that, by written notice from Tenant to Landlord, Tenant may elect to
allocate the Construction Allowance for one or more other Floors in the Premises
to the Floor or Floors on which such Alterations are to be performed, and the
affected Construction Allowances shall be so reallocated for use by Tenant in
connection with the making of such Alterations. In no event, however, shall the
aggregate Construction Allowances available to Tenant hereunder exceed the
aggregate total thereof for all Floors in the Premises as specified in the Basic
Lease Information. Subject to the provisions of Section 10.4.c below, if the
costs and expenses incurred by Tenant for the design, construction and
installation of the Alterations on a Floor in the Premises is less than the
Construction Allowance applicable to such Floor, then Tenant shall have the
right, at its election, either (A) to apply the unused portion of such
Construction Allowance to other Floors, or (B) to apply the unused portion of
such Construction Allowance, up to but not exceeding an amount equal to Ten
Dollars ($10.00) per square foot of Rentable Area contained in such Floor,
against the Rent and Additional Charges otherwise payable by Tenant for such
Floor until the full amount of the Construction Allowance for such Floor has
been utilized.
(ii) Alternative Procedure for Disbursement of Construction
Allowances. Tenant may request Landlord to disburse the Construction Allowance
applicable to a Floor (subject to Tenant's reallocation rights under Section
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10.4.b(i) above) on a progress payments basis as costs and expenses are incurred
by Tenant for the design and construction of such Alterations. If Tenant makes
such request, then from time to time, but not more often than once every thirty
(30) days during the design and construction of such Alterations, Tenant shall
submit all of the information specified under Section 10.4.b(i) above applicable
to a final payment request (except that the architect's or Tenant's officer's
certificate shall pertain to the portion of the Alterations then completed, lien
releases and waivers shall be conditional and partial for each draw request,
with unconditional, partial lien releases with respect to the prior month's
payment with each subsequent payment request, a contractor's application for
payment shall be submitted in lieu of a certificate of final payment, and the
requirements of clauses (iv) - (vi) of Section 10.4.b(i) shall not apply). Upon
approval by Landlord of Tenant's information, Landlord shall make payments to
Tenant of the amounts requested by Tenant in accordance with the provisions of
Section 10.4.b(i) above, subject to the terms and conditions and limitations
therein specified with respect thereto. If so requested by Tenant, Landlord
shall make disbursements hereunder directly to Tenant's contractor, except that
no such disbursement shall create any contractual or other relationship between
Landlord and such contractor, Landlord shall have no obligation or liability to
such contractor, and Tenant's contract with such contractor shall so provide.
Upon completion by Tenant of such Alterations, Tenant shall apply for any final
amounts due in accordance with the procedures of Section 10.4.b(i) above.
(iii) Scope of Landlord Approval Right. In connection with
Landlord's right to approve Tenant's submittals under Sections 10.4.b(i) and
(ii) above, Landlord shall not
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withhold approval if (i) Tenant submits all required documentation and
information, and (ii) all such required documentation and information properly
evidences the information or matter to which it pertains.
(iv) Use of Construction Allowances.
Tenant shall have the right to use and apply the Construction Allowances for all
costs and expenses incurred by Tenant for the design, construction and
installation of Alterations as herein specified (including architectural,
engineering and consultants' fees) and for any other architectural, engineering
and consultants' fees, attorneys' fees, moving expenses, furniture, fixtures and
equipment, communication installations and signage for initial occupancy by
Tenant of the Premises; and, for purposes of this Section 10.4, reference to
"Alterations" and "all costs and expenses incurred by Tenant for the design,
construction and installation of such Alterations" shall be inclusive of all of
the foregoing items, costs and expenses.
c. Certain Conditions and Limitations on Construction
Allowances. Notwithstanding anything to the contrary contained in this Section
10.4, Tenant shall expend at least Fifteen Dollars ($15.00) per foot of Rentable
Area (or in the case of Floor 2, per foot of Galleria Rentable Area) of the
Construction Allowance for initial Alterations to all Floors of the New
Premises, and an average of Fifteen Dollars ($15.00) per foot of Rentable Area
of the Construction Allowance for initial Alterations to Floors 18-21 combined.
Landlord's obligation to disburse any Construction Allowance shall be
conditioned upon all of the following as of the date such disbursement is to be
made: (i) no monetary or other material default by Tenant remains uncured after
the giving of any required notice and the expiration of any
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applicable cure period; and (ii) Tenant's net worth as of the date of
disbursement is not less than One Hundred Seventy-Five Million Dollars
($175,000,000.00) as evidenced by Tenant's separate, unconsolidated audited
financial statements with a clean and unqualified auditor's opinion, delivered
to Landlord within 30 days after Landlord's request (which audited financial
statements shall have been issued not more than fifteen (15) months prior to the
applicable disbursement date), except that if Tenant does not meet the
conditions specified in this clause (ii), Tenant may provide to Landlord
Additional Security in order to satisfy the conditions specified in this clause
(ii). If either of the conditions specified in clauses (i) - (ii) do not
continue to be satisfied as of the date of disbursement of a Construction
Allowance, Landlord shall have no obligation to disburse such Construction
Allowance or any further Construction Allowances, except that if any default
under clause (i) is subsequently cured, notwithstanding the expiration of the
applicable grace period, then Tenant's right to payment of such Construction
Allowances and any future Construction Allowances, shall be reinstated, subject,
however, to continuing fulfillment of the conditions specified in clauses (i) -
(ii). If the only condition unfulfilled is the net worth test specified in
clause (ii) above, then Landlord shall have the right to disburse only that
portion of the Construction Allowances as Landlord in its sole discretion deems
prudent in relationship to Tenant's then net worth. If Landlord exercises such
right, then the monthly installments of Base Rent due from Tenant to Landlord
with respect to the Premises, for the period from the date Landlord exercises
such right until the end of the Term, shall be abated to the extent of the
amount equal to the amount of the undisbursed portion of the Construction
Allowances,
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amortized over the balance of the Term applicable to such Floors on a
straight-line basis, with interest at the Prime Rate plus 1%. If for any reason
Tenant fails to request payment of a Construction Allowance within twenty-four
(24) months after the last Delivery Date with respect to any Floor or partial
Floor in the Premises, then Landlord's obligation to make payment of such
Construction Allowance shall terminate and Tenant shall have no right to payment
of such Construction Allowance.
d. Dispute Resolution; Remedy for Failure of Landlord to
Pay Construction Allowances. Any disputes between the parties under this Section
10.4 (including a dispute pursuant to which Landlord fails to make payment of
any Construction Allowance) shall be resolved by arbitration pursuant to the
provisions of Section 31.17 below. Notwithstanding the foregoing, if the dispute
involves a claim by Tenant that it is entitled to payment of a Construction
Allowance, or portion thereof, and Landlord has failed or refused to make such
payment, then Landlord's right to initiate arbitration of such dispute, or
defend itself in such arbitration, shall be conditioned upon payment by Landlord
of the disputed amount into an escrow in trust on behalf of Landlord and Tenant,
with a national banking association designated by Landlord, with instructions to
disburse such amount in accordance with the final decision of the arbitrators
made pursuant to Section 31.17 below. Any interest accruing on such escrowed
funds shall be paid to the prevailing party as determined by the final decision
of the arbitrators made pursuant to Section 31.17. If Landlord fails to make
such deposit into escrow within thirty (30) days after Tenant's demand for
making such deposit, then Tenant shall have the right to offset the amount of
the unpaid Construction Allowance against Rent and Additional Charges otherwise
due and payable under
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this Lease until the full amount of such Construction Allowance has been offset
against Rent and Additional Charges.
e. Certain Other Requirements With Respect to Initial
Alterations to Premises. Subject to all applicable Requirements, Tenant shall
have the right to design and construct Alterations in phases on a fast-track
basis in order to complete such Alterations at the earliest feasible time, and
Landlord shall cooperate by approving plans and specifications as they are
produced and submitted by Tenant so that Tenant may commence construction of
Alterations before completion of all plans and specifications applicable to the
entirety of such Alterations, except that Landlord may withhold approvals or
other actions to the extent, in Landlord's reasonable judgment, the plans and
specifications are not sufficiently complete or such actions are premature with
respect to the actual design of or work of construction on such Alterations.
Notwithstanding anything to the contrary contained in this Lease or any then
applicable Building standard procedures for Alterations, any approval by
Landlord of initial Alterations under this Section 10.4 to three (3) Floors or
less at any one time shall be given or withheld within ten (10) Business Days
after Tenant's request for such approval, and otherwise within twenty (20)
Business Days after Tenant's request for such approval.
10.5. Right of Tenant to Make Certain Alterations to Complex.
Subject to the terms and conditions of this Section 10.5, Tenant shall have the
right to increase the live load capacity for each Floor in the Premises, and/or
to increase the supply of electricity to one or more Floors in the Premises by
the installation of additional panels, bus taps, wiring, risers and/or
transformers. In addition, Landlord may, in connection with rendering any
approvals with respect to such Alterations, require
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that Tenant remove such Alterations upon expiration of the Term or earlier
termination of this Lease and restore the affected portion of the Complex to its
original condition. Specifically, but without limiting the generality of the
foregoing, Landlord may require Tenant to remove wiring from risers installed by
Tenant hereunder.
11. Liens. Tenant shall keep the Premises and the Complex free from
any liens arising out of any work performed or obligations incurred by or for,
or materials furnished to, Tenant at Tenant's initiation pursuant to this Lease
or otherwise. Prior to the commencement of, and during the progress of, any
Alterations, Landlord shall have the right to post and keep posted on the
Premises any notices provided by law or which Landlord may deem to be proper for
the protection of Landlord, the Premises and the Complex from such liens. If
Tenant fails to keep the Premises and/or the Complex free of any lien pursuant
to this Article 11, then Landlord may, after first giving notice to Tenant of
its intent so to do, take such actions at the expense of Tenant that Landlord
deems necessary or appropriate in its sole discretion to prevent, remove or
discharge such liens.
12. Damage or Destruction.
12.1. Duration of Repair. If the Premises, or any other portion
of the Complex, are damaged or destroyed by fire or other casualty, Landlord
shall, as soon as possible after the date of such damage or destruction, but in
no event later than thirty (30) days after the date of such damage or
destruction, identify three (3) independent general contractors and/or
consultants (each of which shall be qualified and competent and experienced in
estimating the time and cost necessary to repair, and extent of, such damage or
destruction and the cost necessary to repair any
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Alterations also damaged or destroyed), and shall notify Tenant of the identity
of such three general contractors and/or consultants. Landlord's notice shall
include pertinent information with respect to the qualifications of each
identified general contractor and/or consultant to formulate an estimate for the
time required to repair such damage or destruction, and shall also disclose all
past business dealings between Landlord and such general contractors and/or
consultants during the 4-year period prior to such notice. Tenant shall, within
ten (10) days after receipt of Landlord's notice, designate by written notice to
Landlord which of the three general contractors and/or consultants identified in
Landlord's notice that Tenant desires to undertake the formulation of the
estimate of the time and cost necessary to repair, and extent of, such damage or
destruction, and the cost necessary to repair any Alterations also damaged or
destroyed. Upon receipt of Tenant's selection hereunder, Landlord shall retain
the designated general contractor and/or consultant, which general contractor
and/or consultant shall, as soon as possible after designation hereunder, but in
no event more than ninety (90) days after such damage, prepare a written report
setting forth such general contractor's and/or consultant's estimate of the time
and cost necessary to repair, and extent of, such damage or destruction and the
cost necessary to repair any Alterations also damaged or destroyed. Upon
completion of such written report, Landlord shall cause such general contractor
and/or consultant to deliver such report to Landlord and Tenant. For purposes of
this Article 12, "the time required to repair such damage or destruction" shall
include the time necessary to obtain all governmental permits and approvals to
effectuate such repair or reconstruction, and the time necessary to
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commence and complete the work of repair or reconstruction of such damage or
destruction.
12.2. Obligation to Repair. If the written report of the
general contractor and/or consultant prepared pursuant to Section 12.1 concludes
that (i) the time required to repair such damage or destruction is less than one
(1) year from the date of such damage or destruction, and (ii) less than forty
percent (40%) of the Complex is damaged or destroyed, and (iii) the damage or
destruction is covered by insurance carried by Landlord pursuant to this Lease
or otherwise, or would have been covered by insurance required to be carried by
Landlord pursuant to this Lease but for Landlord's failure so to do, or (iv) the
event of damage or destruction to the Premises and/or the Complex is not covered
by insurance and such insurance was not required to be carried or actually
carried by Landlord pursuant to this Lease or otherwise, and the cost of repair
of such damage or destruction is Ten Million Dollars ($10,000,000.00) or less,
then (A) Landlord shall promptly commence and prosecute with due diligence to
completion repair of the Premises, and/or the portion of the Complex necessary
for Tenant's use and occupancy of the Premises, to substantially the condition
existing immediately before such damage or destruction, as permitted by and
subject to then applicable laws, ordinances, rules and regulations; (B) this
Lease shall remain in full force and effect; and (C) Base Rent and Escalation
Charges shall abate for such part of the Premises rendered by such damage and
destruction unusable or inaccessible by Tenant in the conduct of its business
during the time such part is so unusable or inaccessible and for the earlier of
(1) ninety (90) days after the date of substantial completion of repair by
Landlord to enable Tenant to make Alterations, or (2) the date Tenant first
resumes
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the Permitted Use in the affected portion of the Premises, in the proportion
that the Rentable Area contained in the unusable or inaccessible part of the
Premises bears to the total Rentable Area of the Premises, except that if the
damage or destruction occurs to the Antenna Area, then only the Antenna Fee
shall abate until such Premises are restored for Tenant's use. There shall be no
abatement of Rent and Escalation Charges for any damage or destruction to the
Generator Area. For purposes of the Rent and Escalation Charges abatement
provisions of clause (C) above, if a portion of the Premises containing a
Critical Area is damaged or destroyed, and as a result of such damage or
destruction to such Critical Area Tenant is unable to conduct its business in
another portion or portions of the Premises, then the Rent and Escalation
Charges abatement provisions of clause (C) shall pertain to all portions of the
Premises (including the Critical Area) rendered unusable by Tenant in the
conduct of its business as a result of such damage or destruction to such
Critical Area until such Critical Area is repaired under this Article 12,
subject, however, to the provisions of clauses (1) and (2) of clause (C) above.
In addition, if any Critical Area is damaged or destroyed and Tenant so
requests, Landlord shall use premium time and expedited construction in order to
effect the repair of such Critical Area, and Tenant shall reimburse Landlord for
all costs and expenses incurred by Landlord for such premium time and expedited
construction, which reimbursement shall be made from time to time by Tenant to
Landlord within thirty (30) days after receipt by Tenant of Landlord's invoice
therefor.
12.3. Election on Certain Events. If (i) the written report of
the general contractor and/or consultant prepared pursuant to Section 12.1 above
concludes that (A) the time to
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repair such damage or destruction will exceed one (1) year from the date of such
damage or destruction, or (B) forty percent (40%) or more of the Complex is
damaged or destroyed, or (ii) the event of damage or destruction to the Premises
and/or the Complex is not covered by insurance and such insurance was not
required to be carried or actually carried by Landlord pursuant to this Lease or
otherwise, and the cost of repair of such damage or destruction exceeds Ten
Million Dollars ($10,000,000.00), then in any such case Landlord may elect,
within thirty (30) days after receipt of the written report of the general
contractor and/or consultant retained pursuant to Section 12.1, to terminate
this Lease, which election shall be made by written notice by Landlord to Tenant
and shall be effective thirty (30) days after the date of giving such notice. If
the written report of the general contractor and/or consultant prepared pursuant
to Section 12.1 above concludes that (1) (I) the time to repair such damage or
destruction will exceed one (1) year from the date of such damage or
destruction, or (II) forty percent (40%) or more of the Complex is damaged or
destroyed, and (2) the Premises, or a portion thereof, is damaged or destroyed
and such damage or destruction is of such extent and nature so as to
significantly impair Tenant's business use of or access to the Premises, as
reasonably determined by Tenant, then in any such case Tenant may elect within
thirty (30) days after receipt of the written report of the general contractor
and/or consultant retained pursuant to Section 12.1, to terminate this Lease,
which election shall be made by written notice by Tenant to Landlord and shall
be effective thirty (30) days after the date of giving such notice. If neither
party terminates this Lease pursuant to this Section 12.3 within the time
periods herein specified, then Landlord shall repair the Premises or the portion
of the Complex necessary for
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Tenant's use and occupancy of the Premises pursuant to the applicable provisions
of Section 12.2 above and Base Rent and Escalation Charges shall abate as
specified therein. If either party terminates this Lease, then this Lease shall
terminate as of the date of the event of damage or destruction, and all proceeds
of insurance maintained by Landlord shall be paid to Landlord, and all proceeds
of insurance maintained by Tenant shall be paid to Tenant, except for Tenant
insurance proceeds paid on account of Alterations paid for by Landlord (whether
through the Construction Allowances or otherwise) which insurance proceeds shall
be paid to Landlord.
12.4. Cost of Repairs. Landlord shall pay the cost for repair
of the Complex and all improvements in the Premises, other than Alterations, the
Antenna, and the Generator. Tenant shall pay the costs to repair Alterations,
the Antenna, and the Generator.
12.5. Damage at End of Term. Notwithstanding anything to
the contrary contained in this Article 12, if the Premises, or any portion
thereof, are damaged or destroyed by fire or other casualty within the last one
(1) calendar year of the Term applicable to that portion of the Premises damaged
or destroyed, and the time required to repair such damage or destruction is more
than ninety (90) days from and after the date of such damage or destruction,
then either Landlord or Tenant shall have the right, in either's sole
discretion, to terminate this Lease as it relates to the Premises so damaged or
destroyed by notice to the other given within thirty (30) days after the date of
such event. Such termination shall be effective on the date specified in the
terminating party's notice to the other party, but in no event later than the
end of such 30-day period. If the Complex is damaged or destroyed by fire or
other casualty within the last one
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(1) calendar year of the Term applicable to Floors 2-9, and the time required to
repair such damage or destruction is more than ninety (90) days from and after
the date of such damage or destruction, then either Landlord or Tenant shall
have the right, in either party's sole discretion, to terminate this Lease by
notice to the other given within thirty (30) days after the date of such event.
Such termination shall be effective on the date specified in the terminating
party's notice to the other party, but in no event later than the end of such
30-day period.
12.6. Proration of Rent and Additional Charges on Termination.
Upon termination of this Lease pursuant to this Article 12, Landlord shall
promptly refund to Tenant any Base Rent paid by Tenant for any period after the
date of such termination and shall promptly refund any Additional Charges after
the exact amount of such Additional Charges have been determined.
12.7. Waiver of Statutes. The respective rights and obligations
of Landlord and Tenant in the event of any damage to or destruction of the
Premises, or any other portion of the Complex, are governed exclusively by this
Lease. Accordingly, Tenant hereby waives the provisions of any law to the
contrary, including California Civil Code Sections 1932(2) and 1933(4) providing
for the termination of a lease upon destruction of the leased property.
13. Eminent Domain.
13.1. Effect of Taking. Except as otherwise provided in this
Article 13, if all or any part of the Premises is taken as a result of the
exercise of the power of eminent domain or condemned for any public or
quasi-public purpose, or if any transfer is made in avoidance of such exercise
of the power of eminent domain (collectively, "taken" or a "taking"), this Lease
shall terminate as to the part of the Premises so taken as of the
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effective date of such taking. On a taking of a portion of the Premises, Tenant
shall have the right to terminate this Lease by notice to Landlord given within
ninety (90) days after the effective date of such taking, if the portion of the
Premises taken is of such extent and nature so as to materially impair Tenant's
business use of the balance of the Premises, as reasonably determined by Tenant.
Such termination shall be operative as of the effective date of the taking.
Landlord may terminate this Lease on a taking of any material portion of the
Complex if Landlord reasonably determines that (i) such taking is of such extent
and nature as to render the operation of the remaining Complex economically
infeasible or to require a substantial alteration or reconstruction of such
remaining portion, or (ii) the amount of the award payable to Landlord under
Section 13.2 below, after deducting all costs and expenses incurred by Landlord
in connection with such taking, is not sufficient to restore the Complex, and
(iii) in either case (i) or (ii), Landlord terminates all of the leases in the
Building which Landlord has the right to terminate as a result of such taking of
the Complex. Landlord shall elect such termination by notice to Tenant given
within ninety (90) days after the effective date of such taking, and such
termination shall be operative as of the effective date of such taking. Upon a
taking of the Premises which does not result in a termination of this Lease, (A)
the Base Rent shall thereafter be reduced as of the effective date of such
taking in the proportion that the Rentable Area of the Premises so taken bears
to the total Rentable Area of the Premises, except that there shall be no
reduction in Rent attributable to a taking of the Antenna Area, unless Tenant is
deprived of the use and enjoyment of the Antenna Area, in which event only the
Antenna Fee shall be reduced or
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abated, and (B) each of Tenant's Percentage Shares as shown on the Basic Lease
Information shall be recalculated as of the effective date of such taking based
on the ratio of Rentable Area remaining in each Floor comprised in the Premises
as of the effective date of such taking bears to the total Rentable Area
remaining in the Building as of the effective date of such taking, except that
Tenant's Percentage Share for Floor 2 in the Premises shall be recalculated
based on Galleria Rentable Area. There shall be no reduction in Rent and
Escalation Charges as a result of any taking of the Generator Area.
13.2. Condemnation Proceeds. Except as hereinafter provided, in
the event of any taking, Landlord shall have the right to all compensation,
damages, income, rent or awards made with respect thereto (collectively an
"award"), including any award for the value of the leasehold estate created by
this Lease. No award to Landlord shall be apportioned and, subject to Tenant's
rights hereinafter specified, Tenant hereby assigns to Landlord any right of
Tenant in any award made for any such taking. Tenant may seek to recover, at its
cost and expense, as a separate claim, any damages or awards payable on a taking
of the Premises to compensate for the unamortized cost of any Alterations or
Tenant's personal property taken for interference with or interruption of
Tenant's business (other than goodwill), or for Tenant's removal and relocation
expenses.
13.3. Restoration of Premises and Complex. On a taking of the
Premises or Complex which does not result in a termination of this Lease,
Landlord and Tenant shall restore the Premises and/or Complex as nearly as
possible to the condition they were in immediately prior to the taking in
accordance with the applicable provisions and allocation of responsibility for
repair and
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restoration of the Premises and the Complex on damage or destruction pursuant to
Article 12 above.
13.4. Tenant Waiver. The rights and obligations of Landlord and
Tenant on any taking of the Premises or any other portion of the Complex are
governed exclusively by this Lease. Accordingly, Tenant hereby waives the
provisions of any law to the contrary, including California Code of Civil
Procedure Sections 1265.120 and 1265.130, or any similar successor statute.
14. Insurance.
14.1. Liability Insurance. Landlord, with respect to the Complex, at
its cost and expense but subject to reimbursement as Escalation Charges, and
Tenant, at its cost and expense with respect to the Complex, shall each maintain
or cause to be maintained, throughout the Term, a policy or policies of
commercial general liability insurance with limits of liability not less than
Ten Million Dollars ($10,000,000.00) combined single limit. Such coverage may be
provided by a combination of commercial general liability and excess umbrella
policies. Landlord may from time to time, on at least thirty (30) days' prior
written notice to Tenant, require Tenant to increase the limits of liability on
Tenant's liability insurance when and if Landlord determines such increase is
required adequately to protect the parties named as insureds or additional
insureds under such liability insurance, and the limits of liability for
liability insurance for comparable tenants in the Comparable Buildings; and if
Tenant disputes the propriety or basis of such increase, such dispute shall be
resolved by arbitration pursuant to Section 31.17 below. Each policy shall
contain coverage for contractual liability, personal injury liability, and
premises operations, coverage deleting liquor liability exclusions, and, as to
Tenant's
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insurance, fire legal liability (which liability need not be in the amount of
$10,000,000.00).
14.2. Landlord Casualty Insurance. Landlord shall maintain, or
cause to be maintained, at its cost and expense but subject to reimbursement as
Escalation Charges throughout the Term, a policy or policies of All Risk or
Special Form fire and casualty insurance insuring the full replacement cost of
the Complex (exclusive of foundations and excavations). If Landlord carries
earthquake insurance on the Complex, the amount of such insurance shall be based
on probable maximum loss with not less than a 5% deductible based on the full
replacement cost of the Complex.
14.3. Tenant Casualty Insurance. Tenant, at its cost and
expense, shall maintain or cause to be maintained throughout the Term, a policy
or policies of All Risk or Special Form fire and casualty insurance (including
sprinkler leakage and water damage coverage), insuring the full replacement cost
of all Alterations, the Antenna, the Generator and Tenant's moveable furniture,
equipment and trade fixtures and other personal property in the Premises.
Landlord (and any encumbrancer under Article 21 below whose name and address is
provided to Tenant by notice given pursuant to Article 27 below), shall be named
as a loss payee under such insurance. Tenant shall provide to Landlord in
connection with the initial issuance and the annual renewal of the policy or
policies of insurance carried by Tenant hereunder a certificate of the insurance
company issuing such policy that such policy provides full replacement cost
coverage to cover 100% of the actual cost which would be required to replace the
property covered by such insurance in the event of the occurrence of a risk
included within the coverage of such insurance.
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14.4. Form of Policies. All liability insurance required by
this Article 14 shall be issued on an occurrence basis; and all insurance
required by this Article 14 shall be issued by companies with a Best & Company
rating of A-, VIII or better. Any insurance policy under this Article 14 may be
maintained under a "blanket policy", insuring other parties and other locations,
so long as the amount and coverage required to be provided hereunder is not
thereby diminished. Each party shall provide to the other certificates of
insurance certifying that the policies contain the provisions required
hereunder. Each party shall deliver such certificates to the other no later than
one (1) Business Day prior to the first Delivery Date to occur hereunder or, as
to Tenant, such earlier date as Tenant or Tenant's contractors, agents,
licensees, invitees or employees first enter the Premises and, upon renewal, not
less than one (1) Business Day prior to the expiration of such coverage. All
liability insurance shall provide (i) that the other party, and its managing
agent, any constituent member of such party, and any encumbrancer (as defined in
Section 21.1 below) as requested by Landlord, is designated as an additional
insured without limitation as to coverage afforded under such policy; (ii) for
severability of interests or that acts or omissions of one of the insureds or
additional insureds shall not reduce or affect coverage available to any other
insured or additional insured; and (iii) that Tenant's insurance is primary and
noncontributing with any insurance carried by Landlord. Each party's insurance
shall provide that the insurer agrees not to cancel or alter the policy without
at least thirty (30) days prior written notice to all additional insureds or
loss payees. All deductibles under policies of insurance required to be carried
by either party under this Article 14 shall be commercially reasonable under the
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circumstances, subject to any deductibles specifically set forth in this
Article 14.
14.5. Tenant Right of Self-Insurance. Tenant shall have the
right to self-insure for any of the insurance required to be carried by Tenant
under this Article 14 if and so long as (i) the net worth of Tenant is Two
Hundred Million Dollars ($200,000,000.00), and (ii) the net current assets of
Tenant are not less than Fifty Million Dollars ($50,000,000.00), as shown by
Tenant's separate, unconsolidated audited financial statements delivered to
Landlord within thirty (30) days after written request from time to time while
such self-insurance is in effect (which audited financial statements shall have
been issued not more than fifteen [15] months prior to the applicable date).
Whenever Tenant elects to self-insure pursuant to this Section 14.5, Tenant
shall, for all purposes of this Lease (including Article 16 below), be deemed to
be carrying the insurance required to be carried by Tenant under this Article
14.
15. Waiver of Claims and Subrogation Rights. Landlord and Tenant, each
for itself, and, to the extent legally permissible and without affecting any
insurance maintained by such party, on behalf of its insurer, releases and
waives any right to recover against the other party for any liability for: (i)
loss or damage to property; (ii) any other direct or indirect loss or damage
caused by fire or other risks, which loss or damage would be covered by any "All
Risk" or "Special Form" policy of insurance or is otherwise insured; or (iii)
claims arising by reason of any of the foregoing, irrespective of any act or
neglect of such other party which may have contributed to such loss or damage.
Each party shall, to the extent such insurance endorsement is lawfully
available, obtain or cause to be obtained, for the benefit of the
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other party, a waiver of any right of subrogation which the insurer of such
party may acquire against the other party by virtue of the payment of any such
loss covered by such insurance.
16. Waiver of Liability and Indemnification.
16.1. Waiver and Release. Except to the extent due to the
negligence or willful misconduct of Landlord and except to the extent otherwise
provided in this Lease, Landlord shall not be liable to Tenant or Tenant's
employees, agents, contractors, licenses or invitees for, and Tenant waives as
against and releases Landlord from, all claims for loss or damage to any
property or injury, illness or death of any person in, upon or about the
Premises and/or any other portion of the Complex, arising at any time and from
any cause whatsoever (including such claims caused in whole or in part by the
act, omission, or neglect of other tenants, contractors, licensees, invitees or
other occupants of the Complex or their agents or employees). In no event shall
Landlord be liable to Tenant for, and Tenant waives as against and releases
Landlord from, all claims for consequential damages (including lost profits)
arising from any cause whatsoever, including the negligence of Landlord, but
excluding the gross negligence or willful misconduct of Landlord. The waiver and
release contained in this Section 16.1 extends to the officers, directors,
partners, employees, agents and representatives of Landlord.
16.2. Indemnification of Landlord. Except to the extent due to
the negligence or willful misconduct of Landlord, Tenant shall indemnify,
defend, protect and hold Landlord harmless of and from any and all loss, liens,
liability, claims, causes of action, damage, injury, cost or expense arising out
of or in connection with, or related to (i) the making of Alterations (other
than Alterations made by Landlord on behalf of Tenant), or (ii) injury
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to or death of persons or damage to property occurring or resulting directly or
indirectly from: (A) the use or occupancy of, or any occurrence in or the
conduct of business in, the Premises, including the use of the Antenna and/or
the Generator; (B) the use, generation, storage, handling, release, transport,
or disposal by Tenant or Tenant's employees, agents or contractors, of any
Hazardous Materials in or about the Premises or any other portion of the
Complex; (C) acts, neglect or omissions of Tenant, its officers, directors,
agents, employees, invitees or licensees, in or about any portion of the
Complex; (iii) the installation, operation, maintenance, repair, replacement or
removal of the Antenna in the Antenna Area, including any claims by third
parties that the installation, operation and/or maintenance of the Antenna
interferes with such third persons' telecommunication devices or equipment and
claims by third persons for bodily injury and/or property damage caused by the
installation, operation and/or maintenance of the Antenna; or (iv) the
installation, operation, maintenance, repair, replacement or removal of the
Generator in the Generator Area, including any claims by third parties that the
installation, operation and/or maintenance of the Generator interferes with such
third person's devices or equipment and claims by third persons for bodily
injury and/or property damage caused by the installation, operation and/or
maintenance of the Generator. Tenant's indemnity obligation includes reasonable
attorneys' fees and costs, reasonable investigation costs and all other
reasonable costs and expenses incurred by Landlord. Landlord shall have the
right to approve legal counsel proposed by Tenant for defense of any claim
indemnified against hereunder or under any other provision of this Lease, except
that if such counsel is appointed by an insurance company providing a defense to
Landlord and/or
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Tenant, then such counsel shall be deemed approved by Landlord. The
indemnification contained in this Section 16.2 shall extend to the officers,
directors, partners, members, employees, and agents of Landlord.
16.3. Indemnification of Tenant. Except to the extent due to
the negligence or willful misconduct of Tenant, Landlord shall indemnify,
defend, protect and hold Tenant harmless of and from any and all loss, liens,
liability, claims, causes of action, damage, injury, cost or expense arising out
of or in connection with, or related to (i) the making of Alterations by
Landlord on behalf of Tenant or the making of any other alterations or additions
by Landlord to the Complex, or any portion thereof, or (ii) injury to or death
of persons or damage to property occurring or resulting directly or indirectly
from: (A) acts, neglect or omissions of Landlord, its officers, directors,
agents, employees, invitees or licensees, in or about the Premises or any other
portion of the Complex; (B) the use, generation, storage, handling, release,
transport, or disposal by Landlord or Landlord's employees, agents or
contractors, of any Hazardous Materials in or about the Premises or any other
portion of the Complex; and (C) any other occurrence in or on the Complex,
excluding the Premises. Landlord's indemnity obligation includes reasonable
attorneys' fees and costs, reasonable investigation costs and all other
reasonable costs and expenses incurred by Tenant. Tenant shall have the right to
approve legal counsel proposed by Landlord for defense of any claim indemnified
against hereunder or under any other provision of this Lease, except that if
such counsel is appointed by an insurance company providing a defense to
Landlord and/or Tenant, then such counsel shall be deemed approved by Tenant.
The indemnification contained in this Section 16.3 shall extend to the
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directors, officers, partners, shareholders, members, employees, and agents of
Tenant.
17. Assignment and Subletting.
17.1. Compliance Required. Except as otherwise provided in
Section 17.9 below, Tenant shall not, directly or indirectly, voluntarily or by
operation of law, sell, assign or otherwise transfer this Lease, or any interest
herein (collectively, "assign" or "assignment"), or sublet the Premises, or any
part thereof, or permit the occupancy of the Premises by any person other than
Tenant (collectively, "sublease" or "subletting", the assignee or sublessee
under an assignment or sublease being referred to as a "transferee"), without
Landlord's prior consent given or withheld (i) reasonably in accordance with
Section 31.8, and (ii) in accordance, and in compliance, with the express
standards, conditions and provisions of this Article 17. Any assignment or
subletting made in violation of this Article 17 shall be void. As used herein,
an "assignment" includes any sale or other transfer in one or more transactions
of a majority of the voting stock of Tenant, if Tenant is a privately held
corporation, or any sale or other transfer in one or more transactions of a
majority of the beneficial interests in Tenant, if Tenant is any other form of
privately-held entity. Tenant acknowledges that the limitation on assignment and
subletting contained in this Article 17 are expressly authorized by California
Civil Code Section 1995.010, et seq., and are fully enforceable by Landlord
against Tenant.
17.2. Request by Tenant; Landlord Response. If Tenant desires
to effect an assignment or sublease, Tenant shall submit to Landlord a request
for consent together with the identity of the parties to the transaction, the
nature of the transferee's proposed
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business use for the Premises, the proposed documentation for and terms of the
transaction, and all other information reasonably requested by Landlord
concerning the proposed transaction, including financial information (certified
as accurate and complete by an authorized representative of the proposed
transferee), credit reports, and the general business history regarding the
transferee. Within twenty (20) days after the receipt of all such information
required by Landlord, or within thirty (30) days after the date of Tenant's
request to Landlord if Landlord does not request additional information,
Landlord shall, by notice to Tenant, either: (i) consent to the assignment or
sublease, subject to the terms of this Article 17; (ii) decline to consent to
the assignment or sublease; or (iii) terminate this Lease as to the affected
portion of the Premises as of the date specified by Tenant as the effective date
of the proposed assignment or sublease, in which event Tenant will be relieved
of all unaccrued obligations hereunder as to such portion as of such date, other
than those obligations which survive termination of this Lease. Notwithstanding
the provisions of this Section 17.2, Tenant shall have the right, each time
Tenant desires to assign this Lease or sublet a portion of the Premises and
prior to requesting Landlord's consent to an assignment or sublease, to notify
Landlord that Tenant desires to assign this Lease or sublet a portion of the
Premises. Tenant's notice shall set forth all material terms and conditions upon
which Tenant is willing to assign this Lease or sublet the affected portion of
the Premises. If Tenant gives Landlord such notice, then Landlord shall have the
right, by written notice to Tenant given within twenty (20) days after the
receipt of Tenant's notice, to terminate this Lease as to the Premises in the
case of an assignment, and the affected portion of the Premises in the case of a
sublease, in which event Tenant
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will be relieved of all unaccrued obligations hereunder as to such portion of
the Premises as of such date, other than those obligations which survive
termination of this Lease. If Landlord does not exercise such right of
termination hereunder within such 20-day period, then Tenant shall have the
right to attempt to enter into an assignment or sublease substantially upon the
terms set forth in Tenant's notice to Landlord hereunder for a period of two
hundred seventy (270) days after the expiration of such 20-day period. If,
within such 270-day period, Tenant does not enter into an assignment or sublease
substantially on the terms and conditions set forth in Tenant's notice to
Landlord hereunder, then Tenant shall, if it intends again to attempt to assign
or sublease the affected portion of the Premises, notify Landlord of such intent
and the material terms and conditions upon which Tenant intends to attempt to
assign or sublease the affected portion of the Premises, and Landlord shall once
again have the right to terminate this Lease in accordance with the foregoing
provisions. In addition, if during such 270-day period, Tenant effects a change
in the terms and conditions set forth in the notice to Landlord hereunder so
that Tenant is no longer attempting to assign or sublet substantially on the
terms and conditions set forth in Tenant's notice to Landlord, then Tenant shall
promptly after effecting such change so notify Landlord and Landlord shall have
the right to terminate this Lease in accordance with the foregoing provisions
for the 20-day period therein specified and if Landlord does not exercise such
right of termination within such 20-day period, then Tenant shall have a new
270-day period to attempt to assign or sublet in accordance with such changed
terms and conditions. For purposes hereof, "substantially on the terms and
conditions set forth in Tenant's notice to Landlord" means that Tenant enters
into
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an assignment or a sublease with a third person on economic terms and
conditions not more favorable to the transferee than the equivalent of ninety
percent (90%) of the economic terms and conditions set forth in Tenant's notice,
and without material deviation with respect to the other terms and conditions
set forth in Tenant's notice.
17.3. Conditions for Landlord Approval. Without limiting the
grounds on which it may be reasonable for Landlord to withhold its consent to an
assignment or sublease, Tenant acknowledges that Landlord may reasonably
withhold its consent in the following instances: (i) if Tenant is in monetary or
other material default under this Lease after the giving of any required notice
and the expiration of any applicable cure period; (ii) if the transferee is a
governmental or quasi-governmental agency, foreign or domestic; (iii) if the
transferee is an existing tenant in the Building and space comparable to the
space in the Premises is then available in the Building for lease to such
existing tenant; (iv) if in Landlord's reasonable judgment the transferee's
business use and/or occupancy of the Premises would not be consistent with
tenancies then in the Building; (v) in the case of a sublease, it would result
in more than three (3) separately demised occupancies on a Floor in the
Premises, including Tenant and subtenants; and (vi) in the case of an
assignment, if, in Landlord's reasonable judgment, the financial condition of
the transferee is not commensurate with the obligations of the transferee to be
performed under this Lease. If Landlord consents to an assignment or sublease,
the terms of such assignment or sublease transaction shall not be modified
without Landlord's prior written consent pursuant to this Article 17. Landlord's
consent to an assignment
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or subletting shall not be deemed consent to any subsequent assignment or
subletting.
17.4. Costs and Expenses. Unless Landlord terminates this Lease
as to the affected portion of the Premises pursuant to clause (iii) of Section
17.2 above, as a condition to the effectiveness of any assignment or subletting
under this Article 17 for which Landlord's consent is required, Tenant shall pay
to Landlord all reasonable out-of-pocket costs and expenses, including
attorneys' fees and disbursements, incurred by Landlord in evaluating Tenant's
requests for assignment or sublease, whether or not Landlord consents to an
assignment or sublease. If Landlord terminates this Lease as to the affected
portion of the Premises pursuant to clause (iii) of Section 17.2 above, then
Tenant shall have no liability for any costs or expenses under this Section
17.4.
17.5. Payment of Excess Rent and Other Consideration. Except as
otherwise provided in Section 17.9 below, Tenant shall also pay to Landlord,
promptly upon Tenant's receipt thereof, one hundred percent (100%) of any and
all rent, sums or other consideration (except sums paid for Tenant's personal
property sold or rented to the transferee), howsoever denominated, realized by
Tenant in connection with any assignment or sublease transaction in excess of
the Rent and Escalation Charges payable hereunder (prorated on a Rentable Area,
or Galleria Rentable Area as to Floor 2, basis to reflect the Rent and
Escalation Charges allocable to the portion of the Premises if a sublease),
after first deducting from or offsetting against such consideration Tenant's
out-of-pocket expenses incurred in connection with such assignment or sublease
(such as advertising and promotional expenses and attorneys' fees), any broker's
commission paid by Tenant in
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connection with such assignment or sublease, any tenant improvement period not
exceeding ninety (90) days, granted to a subtenant during which such subtenant
is not obligated to pay rent, any allowances, tenant improvements, rent
concessions or other monetary concessions made by Tenant in connection with such
assignment or sublease, and any costs or expenses paid by Tenant pursuant to
Section 17.4 above.
17.6. Assumption of Obligations; Further Restrictions on
Subletting. Each assignee shall, concurrently with any assignment, assume all
obligations of Tenant accruing under this Lease after the effective date of the
assignment. Each sublease shall be made subject to this Lease and all of the
terms, covenants and conditions contained herein; and the surrender of this
Lease by Tenant, or a mutual cancellation thereof, or the termination of this
Lease in accordance with its terms, shall not work a merger and shall, at the
option of Landlord, terminate all or any existing subleases or operate as an
assignment to Landlord of any or all such subleases. No sublessee shall have the
right further to sublet, but a sublessee shall have the right, subject to the
applicable provisions of this Article 17, to effect a partial or full assignment
of its sublease upon such terms and conditions as Tenant and such sublessee may
provide in the sublease. Any assignment by a sublessee of its sublease, whether
partial or in full, shall be subject to Landlord's prior consent in the same
manner as a sublease by Tenant. No sublease, once consented to by Landlord,
shall be modified without Landlord's prior consent. No assignment or sublease
shall be binding on Landlord unless Tenant or the transferee delivers to
Landlord a fully executed counterpart of the assignment or sublease which
contains the assumption by the assignee, or recognition by the sublessee, of the
provisions of
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this Section 17.6, but the failure or refusal of Tenant or a transferee to
deliver such instrument shall not release or discharge Tenant or such transferee
from the provisions and obligations of this Section 17.6.
17.7. No Release. No assignment or sublease shall release
Tenant from its obligations under this Lease, whether arising before or after
the assignment or sublease. The acceptance of Rent and Additional Charges by
Landlord from any other person shall not be deemed a waiver by Landlord of any
provision of this Article 17. On a default by any assignee of Tenant in the
performance of any of the terms, covenants or conditions of this Lease, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee. No consent by Landlord to any further assignments or
sublettings of this Lease, or any amendment or termination of this Lease, or
extension, waiver or modification of payment or any other obligations under this
Lease, or any other action by Landlord with respect to any assignee or
sublessee, or the insolvency, or bankruptcy or default of any such assignee or
sublessee, shall affect the continuing liability of Tenant for its obligations
under this Lease and Tenant waives any defense arising out of or based thereon,
including any suretyship defense of exoneration, except that (i) if this Lease
is terminated for any reason other than the default of a transferee of Tenant or
Tenant, Tenant's liability for unaccrued obligations under this Lease shall
terminate as of the date of termination of this Lease, and (ii) Tenant shall
have no liability for any amendments or modification of this Lease made after
the date Tenant assigns this Lease to an assignee. Landlord shall have no
obligation to notify Tenant or obtain Tenant's consent with respect to any of
the foregoing matters.
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17.8. No Encumbrance. Notwithstanding anything to the contrary
contained in this Article 17, Tenant shall have no right to encumber, pledge,
hypothecate or otherwise transfer this Lease, or any of Tenant's interest or
rights hereunder, as security for any obligation or liability of Tenant.
17.9. Certain Rights with Respect to Assignments and Subleases.
a. Right to Assign or Sublet without Landlord's Consent.
Notwithstanding the provisions of Section 17.1 above, the provisions of this
Article 17 shall not apply to the transfer of stock in Tenant so long as Tenant
is a publicly traded corporation whose stock is listed on a national or regional
stock exchange or over the counter stock exchange or to the issuance of stock in
Tenant in a public offering. Notwithstanding the provisions of Section 17.1
above, Tenant shall have the right to assign this Lease to, or sublet all or any
portion of the Premises to, or permit occupancy of the Premises by, an Affiliate
without Landlord's consent. The effectuation of any transaction shall be subject
to the limitations specified in clauses (i), (ii), (iv), (v) and (vi) of Section
17.3, and Sections 17.7 and 17.8, and require compliance with the provisions of
Section 17.6. Tenant shall not have an obligation to pay to Landlord the amounts
set forth in Sections 17.4 and 17.5 with respect to any such transaction.
b. Certain Rights to Sublet Without Landlord's Consent.
Notwithstanding the provisions of Section 17.1 above, upon the terms and
conditions specified in this Section 17.9.b, Tenant shall have the right to
sublet the Rentable Area contained in up to two (2) Floors within the Premises
without first obtaining Landlord's prior written consent. Tenant must sublease
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all the Rentable Area on a single Floor hereunder before subleasing Rentable
Area on the second Floor hereunder. If Tenant enters into a sublease of any
Rentable Area hereunder, Tenant shall, promptly after entering into such
sublease, notify Landlord of such sublease transaction, the identity of the
parties to the transaction, the nature of the transferee's use and occupancy of
the Premises, and the documentation for and terms of the transaction. Any
sublease made by Tenant hereunder shall be subject to the limitations specified
in clauses (i) - (v) of Section 17.3 above, and in Sections 17.7 and 17.8. Each
sublease entered into by Tenant hereunder shall also be subject to, and Tenant
and the sublessee shall as applicable comply with, the provisions of Section
17.6. Tenant shall not have an obligation to pay to Landlord the amounts set
forth in Sections 17.4 and 17.5 with respect to any sublease entered into
hereunder. The provisions of this Section 17.9.b shall not apply to Floor 2
Galleria.
c. Recapture with Respect to Certain Subletting.
Notwithstanding the provisions of Section 17.2 above to the contrary, and in
addition to Tenant's right to sublease two (2) Floors pursuant to Section 17.9.b
above without Landlord's consent, Tenant shall have the right to sublease up to
an additional 18,590 feet of Rentable Area in the Premises, as to which
subleases Landlord shall have no right to exercise its termination rights under
Section 17.2 (but shall have all other rights under this Article 17) so long as
the term of such sublease is for the shorter of (i) five (5) years, or (ii) if
the remainder of the Term then in effect is less than five (5) years, for the
remainder of such Term, minus six (6) months. Subject to the foregoing
limitation, Landlord's right to terminate this Lease on a sublease of a portion
of the Premises pursuant to Section 17.2 shall pertain to all
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subleases, other than those effectuated pursuant to Sections 17.9.a and 17.9.b
and this Section 17.9.c. The provisions of this Section 17.9.c shall not apply
to Floor 2 Galleria.
d. Non-disturbance of Certain Sublessees. If Tenant
subleases a portion of the Premises comprised in two (2) Floors or more, either
pursuant to Section 17.9.b above or otherwise pursuant to Landlord's consent
hereunder, Landlord shall, if so requested by Tenant, grant to such sublessee a
non-disturbance right in writing, if the following standards, terms and
conditions are met by the sublease transaction: (i) the sublease meets the
applicable terms and conditions of this Article 17; (ii) the sublessee agrees in
the event of a termination of this Lease, other than on account of damage or
destruction or taking covered by Articles 12 and 13 above, to attorn to Landlord
and assume all of Tenant's obligations under this Lease applicable to the
subleased premises, except as otherwise provided in clause (iii) below; (iii)
the sublessee agrees, in the event of a termination of this Lease from any
cause, other than on account of damage or destruction or taking covered by
Articles 12 and 13 above, to commence payment to Landlord upon such termination
of the higher of all rent and other amounts payable by such sublessee under its
sublease, or all Rent and Escalation Charges then and thereafter payable by
Tenant hereunder allocable to the subleased premises; (iv) that the sublessee
has agreed in writing that Landlord shall not be liable to the sublessee for any
default by Tenant under this Lease, regardless of whether such default results
in termination of this Lease; and (iv) if this Lease terminates on account of
damage or destruction or taking covered by Articles 12 and 13 above, Landlord
shall have the right, in its sole discretion, either to recognize the sublease
and such sublessee's rights thereunder and require the
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sublessee to attorn to Landlord, upon the terms and conditions specified in
clauses (i) - (iii) above, or terminate such sublease. If such standards, terms
and conditions are met, then the provisions of Section 17.6 with respect to
Landlord's termination rights shall not apply to such sublease.
18. Rules and Regulations. Tenant shall observe and comply, and shall
cause its sublessees, employees, agents, contractors, licensees and invitees to
observe and comply, with the Rules and Regulations of the Complex, a copy of
which are attached as Exhibit I, and, after notice thereof in accordance with
Article 27 of this Lease, with all reasonable modifications and additions
thereto from time to time promulgated in writing by Landlord. Landlord shall not
be responsible to Tenant, or Tenant's sublessees, employees, agents,
contractors, licensees or invitees, for non-compliance with any Rules and
Regulations of the Complex by any other tenant, sublessee, employee, agent,
contractor, licensee, invitee or other occupant of the Complex. Subject to the
foregoing limitation, Landlord shall not discriminate against Tenant in
enforcing the Rules and Regulations of the Complex. If there shall be any
conflict between any of the Rules and Regulations of the Complex and this Lease,
the terms and provisions of this Lease shall govern and prevail.
19. Entry of Premises by Landlord.
19.1. Right to Enter. After reasonable advance notice of not less
than twenty-four (24) hours (except in order to provide regularly scheduled or
other routine Building standard services or additional services requested by
Tenant, when no such notice shall be required and except for emergencies where
Landlord shall give notice to the extent feasible under the circumstances and,
in any event, as soon as possible after the occurrence of such
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emergency), Landlord and its authorized agents, employees, and contractors may
enter the Premises to: (i) inspect the Premises to determine Tenant's compliance
with its obligations hereunder; (ii) exhibit the same to Landlord
representatives, prospective purchasers or lenders; (iii) exhibit Floors within
the Premises to prospective tenants within eighteen (18) months prior to the
expiration of the Term or Extended Term then in effect for such Floor; (iv)
supply any services to be provided by Landlord hereunder; (v) prior to
commencement of and during the progress of Alterations, post notices of
non-responsibility or other notices permitted or required by law; (vi) make
repairs or perform maintenance in or to, the Premises, and improvements or
alterations required to be made or performed by Landlord under this Lease or
necessary to be performed by Landlord in any other portion of the Complex or for
other tenants of the Complex, including building systems; or (vii) perform a
Tenant obligation in accordance with the terms of Section 20.5 below. Entry to
the Premises under clauses (i), (ii), (iii), (v), and (vii) shall be effected
only during reasonable times during normal Building hours from 7:00 a.m. to 6:00
p.m. on weekdays, and 7:00 a.m. to noon on Saturdays (except Building Holidays);
and entry effected under clauses (iv) and (vi) shall be effected at reasonable
hours. Landlord may also grant access to the Premises to government or utility
representatives, and bring and use on or about the Premises such equipment, as
reasonably necessary to accomplish the purposes of Landlord's entry, subject
however to all the provisions and limitations of this Article 19. If Tenant so
elects, Tenant may require that any representative of Landlord or other person
entering the Premises pursuant to this Section 19.1 be accompanied at all times
by an authorized representative of Tenant (except in
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the case of an emergency, in which event only to the extent feasible under the
circumstances). Landlord shall have and retain keys with which to unlock all of
the doors in or to the Premises (excluding Tenant's vaults, safes and similar
secure areas designated in writing by Tenant in advance), and Landlord shall
have the right to use any and all means which Landlord may deem proper in an
emergency in order to obtain entry to the Premises, including secure areas. Keys
retained by Landlord hereunder shall be used solely for access to the Premises
to provide janitorial services and for access to the Premises in cases of an
emergency, including entry by Landlord's security personnel. Landlord shall
establish, and use commercially reasonable efforts to enforce, procedures to
ensure that any such keys are maintained in the exclusive possession and control
of Landlord and its designated representatives and are not lost or copied. When
not in use, keys retained by Landlord hereunder shall be kept in the office of
the general manager of the Complex, janitorial supervisor's office and/or fire
control center.
19.2. Certain Secure Areas; Cooperation with Tenant Security
Personnel.
a. Secure Areas. If Tenant designates by written
notice to Landlord any portion of the Premises as a "secure area", then Landlord
shall, in connection with any entry by Landlord effected pursuant to Section
19.1, abide by such rules, regulations and procedures as Tenant, in its sole
discretion, may from time to time establish with respect to entry to such secure
area, including limitation as to time of entry, purpose of entry (other than as
necessary for Landlord to perform its obligations under this Lease), and
controls by Tenant with respect to the conduct of such entry (including
accompaniment by designated representatives of
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Tenant). Landlord shall have no liability to Tenant to the extent designation of
a portion of the Premises as a secure area prevents or inhibits Landlord from
performing its obligations otherwise to be performed under this Lease with
respect to such secure area in the Premises. The provisions of this Section 19.2
shall not apply to emergency-required immediate access to the Premises, except
to the extent practicable under the circumstances.
b. Landlord's and Tenant's Security Personnel. Each
party's and its security personnel shall cooperate with the other party and its
security personnel in implementing the parties' respective security requirements
within or about the Premises and the Complex. Landlord's and Tenant's security
personnel shall communicate from time to time with respect to security issues
and give each to the other such notices as may be necessary or appropriate from
time to time, or at any time, under the circumstances with respect to
emergencies and other security-related matters as soon as possible after the
occurrence thereof.
19.3. Tenant Waiver of Claims. Landlord shall effect all
entries and perform all work hereunder in such manner as to minimize
interference with Tenant's use and occupancy of the Premises, including locating
and daily removing equipment from the Premises as necessary so to minimize
interference. So long as Landlord conforms to the foregoing requirement, Tenant
waives any claim for damages for any inconvenience to or interference with
Tenant's business, or any loss of occupancy or quiet enjoyment of the Premises,
or any other loss, occasioned by any entry effected or work performed under this
Article 19, and, subject to Section 8.3, Tenant shall not be entitled to any
abatement of Rent or Additional Charges by reason of the exercise of any such
right of entry or performance of such work. If Landlord fails to effect an
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entry or perform work hereunder in such manner as to minimize interference with
Tenant's use and occupancy of the Premises, then Tenant may pursue any claims it
may have for actual damages for any inconvenience to or interference with
Tenant's business, or any loss of occupancy or quiet enjoyment of the Premises,
or any other loss occasioned by such entry, but Tenant shall have no right to
claim any consequential damages on account thereof (including lost profits), and
Tenant specifically waives the right to make or assert a claim for such
consequential damages. No entry to the Premises by Landlord or anyone acting
under Landlord made in accordance with the terms of this Lease shall constitute
a forcible or unlawful entry into, or a detainer of, the Premises or an
eviction, actual or constructive, of Tenant from the Premises, or any portion
thereof.
19.4. Scope of Emergencies. For purposes of this Article 19, an
"emergency" means an occurrence or situation presenting imminent danger to the
health or safety of persons or damage to property, or criminal activity or
unauthorized entry into the Premises requiring response by Building security
personnel.
20. Default and Remedies.
20.1. Events of Default. The occurrence of any of the following
events shall constitute a default by Tenant under this Lease:
a. Non-Payment of Rent or Additional Charges. Failure to
pay any Rent or Additional Charges when due.
b. Unpermitted Assignment of Sublease. An assignment or
sublease made in contravention of any of the provisions of Article 17 above.
c. Abandonment. Abandonment of the Premises by Tenant for
more than one (1) year. For purposes hereof,
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"abandonment" means cessation by Tenant of the conduct of its business in the
Premises and removal from the Premises of the personal property, equipment and
furnishings used by Tenant in its business in the Premises, with the intent
never to return.
d. Other Obligations. Failure to perform or fulfill any
other obligation, covenant, condition or agreement under this Lease.
e. Bankruptcy and Insolvency. A general assignment by
Tenant for the benefit of creditors, the liquidation of Tenant, any action or
proceeding commenced by Tenant under any insolvency or bankruptcy act or under
any other statute or regulation for protection from creditors, or any such
action commenced against Tenant and not discharged within ninety (90) days after
the date of commencement; the employment or appointment of a receiver or trustee
to take possession of all or substantially all of Tenant's assets or the
Premises; the attachment, execution or other judicial seizure of all or
substantially all of Tenant's assets or the Premises, if such attachment or
other seizure remains undismissed or undischarged for a period of thirty (30)
days after the levy thereof; the admission by Tenant in writing of its inability
to pay its debts as they become due; or the filing by Tenant of a petition
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, the filing by Tenant of an answer admitting or failing timely to
contest a material allegation of a petition filed against Tenant in any such
proceeding or, if within ninety (90) days after the commencement of any such
proceeding against Tenant, such proceeding is not dismissed. For purposes of
this Section 20.1.e, "Tenant" means Tenant and any partner of Tenant, if Tenant
is a partnership,
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or any person or entity comprising Tenant, if Tenant is comprised of more than
one person or entity, or any guarantor of Tenant's obligations, or any of them,
under this Lease, but does not include an assignor of this Lease who is a
predecessor in interest to the then Tenant.
20.2. Notice to Tenant. Upon the occurrence of any default,
Landlord shall give Tenant notice thereof. If a time period is specified below
for cure of such default, then Tenant may cure such default within such time
period. The time periods provided below are exclusive of any other time periods
provided by law with respect to cure of any such default and Tenant hereby
waives any right under law now or hereinafter enacted to any other time period,
including the notices described in Code of Civil Procedure Sections 1161,
et seq.
a. Non-Payment of Rent or Additional Charges. For failure
to pay Rent or Additional Charges, within five (5) Business Days after
Landlord's notice to Tenant.
b. Other Obligations. For failure to perform any
obligation, covenant, condition or agreement under this Lease (other than
non-payment of Rent and Additional Charges, an assignment or subletting in
violation of Article 17 or Tenant's abandonment of the Premises) within twenty
(20) days after Landlord's notice to Tenant or, if the failure is of a nature
requiring more than 20 days to cure, then such additional period after the
expiration of such 20-day period as is necessary to effectuate cure in fact, but
only if Tenant commences cure within such 20-day period and thereafter
diligently pursues such cure to completion as soon as possible after the
expiration of such 20-day period, using reasonable good faith efforts and all
due diligence to effectuate cure.
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c. Assignment or Subletting. For an assignment or
sublease made in contravention of any other provisions of Article 17 above,
within twenty (20) days after Landlord's notice to Tenant.
d. No Cure Period. No cure period shall apply for any
other event of default specified in Section 20.1.
20.3. Remedies Upon Occurrence of Default. On the occurrence
of a default which Tenant fails to cure after notice and expiration of the time
period for cure, if any, specified in Section 20.2 above, Landlord shall have
the right either (i) to terminate this Lease and recover possession of the
Premises, or (ii) to continue this Lease in effect and enforce all Landlord's
rights and remedies under California Civil Code Section 1951.4 (by which
Landlord may recover Rent and Additional Charges as it becomes due, subject to
Tenant's right to assign pursuant to Article 17). Landlord may, without any
liability to Tenant for loss or damage thereto or loss of use thereof, store any
property of Tenant located in the Premises at Tenant's expense or otherwise
dispose of such property in the manner provided by law. If Landlord does not
terminate this Lease, Tenant shall in addition to continuing to pay all Rent and
Additional Charges when due, also pay Landlord's costs of attempting to relet
the Premises, any repairs and alterations necessary to prepare the Premises for
such reletting, and brokerage commissions and attorneys' fees incurred in
connection therewith, less the rents, if any, actually received from such
reletting. Notwithstanding Landlord's election to continue this Lease in effect,
Landlord may at any time thereafter terminate this Lease pursuant to this
Section 20.3.
20.4. Damages Upon Termination. If and when Landlord terminates
this Lease pursuant to Section 20.3, Landlord may
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exercise all its rights and remedies available under California Civil Code
Section 1951.2, including the right to recover from Tenant the worth at the time
of award of the amount by which the unpaid Rent and Additional Charges for the
balance of the Term after the time of award exceeds the amount of such Rent and
Additional Charges loss that the Tenant proves could have been reasonably
avoided. As used herein and in Civil Code Section 1951.2, "time of award" means
either the date upon which Tenant pays to Landlord the amount recoverable by
Landlord, or the date of entry of any determination, order or judgment of any
court or other legally constituted body determining the amount recoverable,
whichever occurs first.
20.5. Landlord's Right to Cure Defaults. If Tenant fails
to pay Rent and Additional Charges (other than Base Rent, Escalation Charges
and/or the Antenna Fee) required to be paid by it hereunder, or fails to perform
any other obligation under this Lease, and Tenant fails to cure such default
within the applicable cure period specified in Section 20.2 above, then Landlord
may, without waiving or releasing Tenant from any of its obligations or such
default, and after first giving notice to Tenant of Landlord's intent to
exercise its rights under this Section 20.5, make any such payment or perform
such other obligation on behalf of Tenant. All payments so made by Landlord, and
all costs and expenses incurred by Landlord to perform such obligations
(together with interest at the Lease Rate on all such payments, costs and
expenses calculated from the date of expenditure thereof until repaid by
Tenant), shall be due and payable by Tenant as Additional Charges within ten
(10) days after receipt of Landlord's demand therefor.
20.6. Waiver of Forfeiture. Tenant hereby waives Code of Civil
Procedure Section 1179, Civil Code Section 3275, and all similar
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laws now or hereinafter enacted, which would entitle Tenant to seek relief
against forfeiture in connection with any termination of this Lease under this
Article 20 or otherwise.
20.7. Landlord Default; Tenant's Right to Cure Landlord
Default. Landlord shall not be in default in the performance of any of its
obligations under this Lease unless and until Tenant gives notice of such
default to Landlord and any encumbrancer under Article 21 below, the name of
which has been previously furnished to Tenant, and Landlord or such encumbrancer
fails within twenty (20) days after the receipt of Tenant's notice to commence
cure of such default and thereafter use reasonable good faith efforts and all
due diligence to pursue such cure to completion. If Landlord is in default in
the performance of its obligations under this Lease after the expiration of the
notice and cure period specified in the first sentence of this Section 20.7, and
such default is a failure by Landlord to make repairs and/or comply with the
provisions of laws applicable to the Premises in accordance with such
obligations as are imposed on Landlord by this Lease so to do, then Tenant may,
without waiving or releasing Landlord from any of its obligations or such
default, and after first giving Landlord and any encumbrancer notice of Tenant's
intent to invoke its rights under this Section 20.7, perform such obligation on
behalf of Landlord, but only if the performance of such obligation would not
constitute a Limited Alteration if made by Tenant as an Alteration, and such
performance by Tenant does not interfere with the use, occupancy or quiet
enjoyment by other tenants of the Complex. If Landlord is in default in the
performance of its obligations under this Lease after the expiration of the
notice and cure period specified in the first sentence of this Section 20.7, and
such default is a failure by Landlord to provide electricity or
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ventilation or air conditioning to the Premises in accordance with the
applicable standards of Article 8, or such default is a failure by Landlord to
make repairs and/or comply with the provisions of laws applicable to the
Premises in accordance with such obligations as are imposed on Landlord by this
Lease so to do, and Tenant's performance of such obligation would constitute a
Limited Alteration if made by Tenant as an Alteration, and as a result of either
such default Tenant cannot use and occupy the Premises, and is in fact not doing
business in the Premises on account thereof, then Tenant may, without waiving or
releasing Landlord from any of its obligations or such default, and after first
giving Landlord and any encumbrancer notice of Tenant's intent to invoke its
rights under this Section 20.7, perform such obligation on behalf of Landlord.
All costs and expenses incurred by Tenant to perform such obligations (together
with interest at the Lease Rate) on all such costs and expenses calculated from
the date of expenditure thereof until repaid by Landlord), shall be due and
payable by Landlord promptly upon receipt of Tenant's demand therefor, but
Tenant shall have no right to offset any amounts claimed due by Tenant under
this Section 20.7 against Rent and Additional Charges otherwise payable under
this Lease.
20.8. Remedies Cumulative. The rights and remedies of the
parties under this Lease are cumulative and in addition to, and not in lieu of,
any other rights and remedies available to each party at law or in equity. A
party's pursuit of any such right or remedy shall not constitute a waiver or
election of remedies with respect to any other right or remedy. The rights and
remedies of Landlord under this Lease for failure of Tenant to pay Rent apply to
any failure of Tenant to pay Additional Charges as if such Additional Charges
constituted Rent under applicable law.
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21. Subordination, Attornment and Non-disturbance.
21.1. Landlord Right to Encumber; Subordination and
Attornment. Landlord shall have the right, at any time and from time to time, to
place on the Complex, or any part thereof or interest therein, or encumber the
Complex, or any part thereof or interest therein, with one or more ground leases
or underlying leases, mortgages, deeds of trust or any other security
instrument. Upon execution and delivery of an SNDA as hereinafter provided, this
Lease and all of Tenant's rights hereunder shall be subordinate to any such
ground lease or underlying lease, and the lien of any mortgage, deed of trust,
or any other security instrument now or hereafter so affecting or encumbering
the Complex, or any part thereof or interest therein, and to any and all
advances made on the security thereof or Landlord's interest therein, and to all
renewals, modifications, consolidations, replacements and extensions thereof
existing as of the date hereof (an "encumbrance", the holder of the beneficial
interest thereunder being referred to as an "encumbrancer"). An encumbrancer
may, however, subordinate its encumbrance to this Lease, and if an encumbrancer
so elects by notice to Tenant, this Lease shall be deemed prior to such
encumbrance. If any encumbrance to which this Lease is subordinate is
foreclosed, or a deed in lieu of foreclosure is given to the encumbrancer
thereunder, Tenant shall attorn to the purchaser at the foreclosure sale or to
the grantee under the deed in lieu of foreclosure; and if any encumbrance
consisting of a ground lease or underlying lease to which this Lease is
subordinate is terminated, Tenant shall attorn to the lessor thereof.
Subordination of this Lease and Tenant's attornment pursuant to this Section
21.1 shall only be effected by a written and recorded Subordination
Non-Disturbance and Attornment Agreement
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(an "SNDA") containing terms and conditions consistent with the provisions of
this Article 21 and otherwise consistent with then customary industry and
commercially reasonable practices of institutional encumbrancers. The SNDA shall
be executed and acknowledged by Landlord, Tenant and the encumbrancer thereunder
and recorded by Landlord at its cost and expense concurrently with the
encumbrance transaction to which it relates. No SNDA shall enlarge Tenant's
obligations or diminish Tenant's rights under this Lease, including use by
Landlord of insurance proceeds for repair of damage or destruction under Article
12, or use of an award made on a taking to restore the Premises and/or the
Complex under Article 13 above, and the right of Tenant to any award made in a
taking pursuant to Article 13 above. Tenant shall have no obligation to pay any
fees, costs or expenses of an encumbrancer or Landlord with respect to any SNDA
hereunder. Tenant shall execute, acknowledge and deliver in the form reasonably
requested by Landlord or any encumbrancer, any documents required to make this
Lease prior to the lien of any encumbrance, or to evidence such attornment.
21.2. Non-disturbance. If any encumbrance to which this Lease
is subordinate is foreclosed, or a deed in lieu of foreclosure is given to the
encumbrancer thereunder, or if any encumbrance consisting of a ground lease or
underlying lease to which this Lease is subordinate is terminated, this Lease
shall not terminate, and the rights and possession of Tenant under this Lease
shall not be disturbed if (i) no default by Tenant then exists under this Lease
beyond the giving of any applicable notice and the expiration of any applicable
cure period; and (ii) Tenant attorns to the purchaser, grantee, or successor
lessor as provided in Section 21.1 above or, if requested, enters into a new
lease for the balance of
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the Term upon the same terms and provisions contained in this Lease. Any
encumbrancer or successor-in-interest to an encumbrancer, as Landlord, shall,
however, not be bound by (A) any payment of Rent and Escalation Charges for more
than one (1) month in advance (other than Premium Rent), (B) any amendment or
modification of this Lease made without the written consent of such
encumbrancer, or (C) any breach of this Lease by any predecessor-in-interest to
such encumbrancer or to the successor-in-interest to such encumbrancer, except
to the extent such breach would constitute a breach by a successor to Landlord
pursuant to Section 22.1 below if not cured by such successor on account of
liabilities and obligations accruing after the transfer to such successor.
21.3. No Superior Encumbrances. Landlord warrants and
represents to Tenant that as of the Lease Date, there exists no liens or
encumbrances on the Complex superior to this Lease (other than liens for Real
Estate Taxes), which if enforced or foreclosed would result in the termination
of this Lease.
22. Sale or Transfer by Landlord; Lease Non-Recourse.
22.1. Release of Landlord on Transfer. Landlord may at
any time transfer, in whole or in part, its right, title and interest under this
Lease and in the Complex, or any portion thereof. If the original Landlord
hereunder, or any successor to such original Landlord, transfers (by sale,
assignment or otherwise) its right, title or interest in the Complex, the
original Landlord or such successor shall automatically be released from all
liabilities and obligations of the original Landlord or such successor under
this Lease accruing after such transfer provided such new owner assumes in
writing all such liabilities and obligations accruing after such transfer and
all such liabilities and obligations accruing after such transfer shall in all
events be
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binding upon the new owner. Tenant shall attorn to each such new owner. If in
connection with any transfer effected by the then Landlord hereunder, such
Landlord transfers to the new owner any security provided by Tenant to Landlord
for the performance of any obligation of Tenant under this Lease, then such
Landlord shall be released from any further responsibility or liability for such
security.
22.2. Lease Non-recourse to Landlord. Landlord shall never be
personally liable under this Lease, and Tenant shall look solely to (i)
Landlord's interest in the Complex, (ii) the proceeds of any insurance payable
to Landlord on account of damage or destruction to the Complex, or any award
made to Landlord on account of a taking pursuant to Article 13 above, and (iii)
cash revenue from the Project paid to Landlord and not then distributed to the
constituent members of Landlord, for recovery of any damages for breach of this
Lease by Landlord or on any judgment in connection therewith, except that
Landlord shall be personally liable under this Lease for any default in its
obligation to make payment of Construction Allowances pursuant to Section 10.4
above, unless Landlord pays the amount of any then unpaid Construction
Allowances into an escrow established with a national banking association
designated by Landlord with instructions to make payment thereof to Tenant in
accordance with the applicable requirements of Section 10.4, but any interest
accruing on such escrowed Construction Allowance funds shall, except in the
event of a dispute between the parties governed by Section 10.4.a, be paid to
Landlord. Such escrow shall be on terms and conditions consistent with the
applicable requirements of Section 10.4 for the disbursement of Construction
Allowances thereunder, and any agreement with, or instructions to, the escrow
holder shall
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specifically provide that Tenant may enforce its rights for disbursement of
Construction Allowances against such escrow holder in accordance with the
applicable provisions of this Lease, except that, if so specified in the
agreement with, or instructions to, such escrow holder, such escrow holder may
commence an action in interpleader with respect to any dispute regarding
disbursement of Construction Allowances, and deposits the amount in dispute with
the court in which such interpleader action is commenced in accordance with
applicable law, then such escrow holder shall be relieved and exonerated from
all further liability with respect to such dispute, and Landlord and Tenant
shall proceed with resolution of such dispute in accordance with the applicable
provisions of this Lease, including arbitration pursuant to Section 31.17,
subject, however, to the conditions thereon set forth in Section 10.4 above.
Payment by Landlord of Construction Allowances into an escrow hereunder shall
not relieve Landlord of its obligations with respect to the disbursement thereof
pursuant to Section 10.4 above, subject, however, to the limitations on personal
liability set forth in this Section 22.2. Except to the extent Landlord is
personally liable under this Section 22.2, none of the persons or entities
comprising or representing Landlord (whether partners, shareholders, officers,
directors, trustees, employees, beneficiaries, agents or otherwise) shall ever
be personally liable under this Lease for any such damages or judgment and
Tenant shall have no right to effect any levy of execution against any assets
(other than their interest in the Complex) of such persons or entities on
account of any such liability or judgment. Any judgment lien obtained by Tenant
for recovery of damages for breach of this Lease by Landlord shall attach to the
Complex in accordance with applicable law, regardless of the then identity of
the Landlord
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under this Lease at the time of attachment, or whether such then Landlord is
liable for such breach by a prior Landlord; any successor Landlord of a prior
Landlord, which prior Landlord has breached this Lease, waives any right to
contest or object to the attachment of any such judgment lien to the Complex on
the basis that such judgment lien is attributable to a breach by such prior
Landlord; if Tenant perfects any judgment lien on the Complex, then from and
after the date such judgment lien attaches to the Complex, Tenant shall have the
right to offset Rent and Additional Charges otherwise payable under this Lease
against the amount of such judgment until such judgment is satisfied in full,
upon which Tenant shall take such measures as are necessary or appropriate in
order to remove such judgment lien from the Complex; and any judgment lien
attaching to the Complex hereunder, and any levy of execution thereon, and any
attachment of proceeds under clauses (ii) or (iii) above, shall be subject and
subordinate to any encumbrance pursuant to Section 21.1 above, and the SNDA
thereunder shall so provide.
23. Estoppel Certificate.
23.1. Tenant's Certificate. On not less than ten (10) days'
prior notice by Landlord, Tenant shall execute, acknowledge, and deliver to
Landlord, certificates as specified by Landlord certifying: (i) that this Lease
is unmodified and in full force and effect (or, if there have been
modifications, that this Lease is in full force and effect, as modified, and
identifying each modification); (ii) each Delivery Date and each Expiration
Date; (iii) that Tenant has accepted the Premises then delivered to Tenant under
this Lease (or the reasons Tenant has not accepted the Premises); (iv) the
amount of the Base Rent and current Escalation Charges, if any, and the date to
which such Rent and Escalation
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Charges has been paid; (v) whether there are any existing defenses against the
enforcement of Tenant's obligations under this Lease; (vi) that no default of
Landlord is claimed by Tenant, except as to any defaults specified in the
certificate; and (vii) such other matters as may be reasonably requested by
Landlord.
23.2. Landlord's Certificate. On not less than ten (10) days
prior notice by Tenant that Tenant desires to enter into an assignment or
sublease, or that Tenant requires a certificate hereunder in connection with a
transaction (such as a public offering of shares or a transaction with an
Affiliate) which Tenant desires to undertake, Landlord shall execute,
acknowledge and deliver to Tenant certificates as specified by Tenant,
certifying (i) that this Lease is unmodified and in full force and effect (or,
if there have been modifications, that this Lease is in full force and effect,
as modified, and identifying each modification); (ii) each Delivery Date and
each Expiration Date; (iii) the amount of the Base Rent and current Escalation
Charges, if any, and the date to which such Rent and Escalation Charges has been
paid; (iv) whether there are any existing defenses against the enforcement of
Landlord's obligations under this Lease; (v) that no default of Tenant is
claimed by Landlord, except as to any defaults specified in the certificate; and
(vi) such other matters as may be reasonably requested by Tenant.
23.3. Effect of Certificate. Any Tenant certificate may be
relied upon by any prospective purchaser of any part or interest in the Complex
or encumbrancer (as defined in Section 21.1) and, at Landlord's request, Tenant
shall deliver such certificate to any such entity. In addition, at Landlord's
request, Tenant shall, if Tenant is not then a publicly traded entity listed on
a national or regional stock exchange or over the
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counter stock exchange, provide to Landlord for delivery to any such entity such
information as may reasonably be requested by any such entity. Any Landlord
certificate may be relied upon by any prospective transferee of Tenant's
interest under this Lease or sublease of a portion of the Premises, or a third
party to a transaction requiring such certificate pursuant to Section 23.2
above, and at Tenant's request, Landlord shall deliver such certificate to any
such transferee or third party. A party shall not be liable to the requesting
party or third person or entity requesting or receiving a certificate hereunder
on account of any information therein contained, notwithstanding the omission
for any reason to disclose correct and/or relevant information, but such party
shall be estopped with respect to the requesting party or such third person or
entity from asserting any right or obligation or utilizing any defense which
contravenes or is contrary to such information, except that no such certificate
shall waive a party's rights with respect to Escalation Charges, and no party
shall be estopped by such certificate with respect thereto. If a party fails or
refuses to give a certificate hereunder within the time period herein specified,
then the requesting party shall have the right to treat such failure or refusal
as a default by the other party.
24. No Light, Air, or View Easement. Nothing contained in this Lease
shall be deemed, either expressly or by implication, to create any easement for
light and air or access to any view. Any diminution or shutting off of light,
air or view to or from the Premises by any structure which now exists or which
may hereafter be erected, whether by Landlord or any other person, shall in no
way affect this Lease or Tenant's obligations hereunder, entitle
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Tenant to any reduction of Rent and Additional Charges, or impose any liability
on Landlord.
25. Holding Over. No holding over by Tenant shall operate to extend the
Term. If Tenant remains in possession of any part of the Premises after
expiration or termination of the Term applicable to such Premises or after the
expiration or termination of this Lease, (i) Tenant shall become a tenant at
sufferance upon all the applicable terms and conditions of this Lease, except
that Base Rent shall be increased to equal 125% of the Base Rent then in effect
for the first thirty (30) days after the applicable expiration or termination,
and thereafter Base Rent shall be increased to equal 200% of the Base Rent then
in effect; (ii) commencing thirty (30) days after the date of such expiration
or termination, Tenant shall indemnify, defend, protect and hold harmless
Landlord from any and all liability, loss, damages, costs or expense (including
loss of rent to Landlord, or additional rent payable by any tenant to whom
Landlord has leased all or part of the Premises, and reasonable attorneys' fees)
suffered or incurred by Landlord resulting from Tenant's failure timely to
vacate the Premises; and (iii) such holding over by Tenant shall constitute a
default by Tenant. Landlord's acceptance of Rent and/or Additional Charges if
and after Tenant holds over shall not convert Tenant's tenancy at sufferance to
any other form of tenancy or result in a renewal or extension of the Term of
this Lease.
26. Waiver. Failure of a party to declare a default by the other party
upon occurrence thereof, or delay in taking any action in connection therewith,
shall not waive such default, but a party shall have the right to declare such
default at any time after its occurrence. To be effective, a waiver of any
provision of this Lease, or any default, shall be in writing and signed by the
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waiving party. Any waiver hereunder shall not be deemed a waiver of subsequent
performance of any such provision or subsequent defaults. The subsequent
acceptance of Rent and/or Additional Charges hereunder, or endorsement of any
check by Landlord, shall not be deemed to constitute an accord and satisfaction
or a waiver of any preceding default by Tenant, except as to the particular Rent
and/or Additional Charges so accepted, regardless of Landlord's knowledge of the
preceding default at the time of acceptance of the Rent and/or Additional
Charges. No course of conduct between Landlord and Tenant, and no acceptance of
the keys to or possession of the Premises by Landlord before an applicable
Expiration Date shall constitute a waiver of any provision of this Lease or of
any default, or operate as a surrender of this Lease.
27. Notices. All notices, approvals, consents, demands and other
communications from one party to the other given pursuant to this Lease shall be
in writing and shall be made by hand delivery, by use of a nationally recognized
overnight courier service, such as Federal Express or Airborne Express, or by
deposit in the United States mail, certified, registered or Express, postage
prepaid and return receipt requested. Notices shall be addressed if to Landlord,
to Landlord's Address, and if to Tenant, to Tenant's Address. Landlord and
Tenant may each change their respective Addresses from time to time by giving
written notice to the other of such change in accordance with the terms of this
Article 27, at least ten (10) days before such change is to be effected. Any
notice given in accordance with this Article 27 shall be deemed to have been
given (i) on the date of hand delivery if sent by hand delivery or (ii) on the
earlier of the date of delivery or attempted delivery (as shown by the return
receipt or other delivery record) if sent by courier service or mailed.
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28. Authority; Tenant Financial Information; Confidentiality.
28.1. Authority. Each party, and each of the persons
executing this Lease on behalf of each party, represent and warrant that (i)
such party is a duly formed, authorized and existing corporation, partnership or
trust (as the case may be), (ii) such party is qualified to do business in
California, (iii) such party has the full right and authority to enter into this
Lease and to perform all of such party's obligations hereunder, and (iv) each
person signing on behalf of such party is authorized to do so. Each party shall
deliver to the other party, upon the other party's request, such certificates or
resolutions authorizing such party's execution and delivery of this Lease.
28.2. Tenant Financial Information; Confidentiality. If Tenant
is not then a publicly traded entity listed on a national or regional stock
exchange or over the counter stock exchange, Tenant shall deliver to Landlord,
within twenty (20) days after receipt of a written request from Landlord,
audited financial statements for Tenant issued not more than fifteen (15) months
prior to Landlord's request, and such other financial information regarding
Tenant, and its constituent members, as reasonably requested by Landlord.
Landlord shall utilize such financial information solely for the purpose of
evaluating Tenant's then credit standing in relationship to its obligations
under this Lease. Such financial information (and all additional financial
information derived therefrom) shall be held confidential by Landlord as a trade
or business secret, and Landlord shall impose by written agreement in the form
attached hereon as Exhibit F-2, such confidentiality requirement on any employee
or third person to whom Landlord delivers or discloses such financial
information. Landlord may, however, disclose such financial information (i) to
the extent required by any applicable
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governmental law, ordinance, rule or regulation, (ii) in any litigation or
proceeding between the parties with respect to any dispute between them
regarding this Lease (subject to such protective orders to prevent disclosure
and protect the confidentiality of such financial information as may be
available under applicable law, to which Landlord hereby consents and Landlord
shall not oppose), (iii) to the extent required by judicial process (such as a
subpoena duces tecum), after notice by Landlord to Tenant of the receipt of such
judicial process, and subject to Tenant's right to seek such protective orders
to prevent disclosure and protect the confidentiality of such financial
information as may be available in accordance with applicable law (to which
Landlord hereby consents and shall not oppose); (iv) if such financial
information is generally known to the public or is in the public domain, other
than on account of a breach by Landlord of its obligations under this Section
28.2, (v) to Landlord's executives, accountants, attorneys, and other agents and
representatives, subject however to the imposition on such executives,
accountants, attorneys and other agents and representatives by written agreement
in the form attached hereto as Exhibit F-2 of the confidentiality of this
Article 28, or (iv) to perspective transferees (subject however to the
impositions on such transferees of the written agreement in the form attached
hereto as Exhibit F-2 to impose the confidentiality requirements of this Article
28).
29. Parking. Landlord shall make available during the Term for the use
by Tenant, and its officers and employees, one (1) automobile valet parking
space for each 6,250 feet of Rentable Area contained in the Premises on the
lower level of the Building parking garage, and five (5) self-park center aisle
parking spaces
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on the service level of the Building parking garage, to be parked in tandem (or
such additional service level parking spaces as may, after the Lease Date,
become available, up to a total of fourteen [14] such spaces) such parking to be
available with full in and out privileges. In addition, if so requested by
Tenant, Landlord shall make available to Tenant on a terminable month-to-month
basis during the Term, to the extent then available, the number of additional
parking spaces in the Building parking garage so requested by Tenant. If the
total parking area or total number of spaces allocable to Building tenants in
the Building parking garage is required by law, ordinance, rule or regulation to
be reduced, the number of parking spaces for which parking is then made
available to Tenant shall be reduced in an amount proportionate to the reduction
in the total parking area in the Building parking garage. Tenant shall pay
Landlord for the parking spaces provided pursuant to this Section 29 at the
Building standard monthly (or longer term if available) parking rate or the
parking garage operator's standard monthly rate as adjusted and charged on a
non-discriminatory basis from time to time. Tenant's use of all other parking
spaces not allocated to Tenant hereunder shall be subject to availability. In
addition, if Tenant notifies Landlord that Tenant does not require all or any of
such allocated parking spaces, Landlord may thereafter rent such spaces not
required by Tenant to any other party. Tenant shall pay Landlord, or the parking
garage operator, for all parking spaces at the times and in the manner required
by Landlord or such parking garage operator with respect to the operation of the
Building parking garage.
30. Signage. Subject to any right of Pacific Telesis (another tenant of
the Building) to review and approve such signage, Landlord shall (i) provide
Tenant with signage in the
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lowrise elevator bank serving Floors 2 - 14 of the Building at the location and
of the design set forth in Exhibit J hereto if Tenant and its Affiliates then
physically occupy at least ten (10) Floors served by the lowrise elevator bank,
and (ii) provide Tenant with signage in the midrise elevator bank serving Floors
15 - 25 of the Building at the location and of the design set forth in Exhibit J
hereto if Tenant and its Affiliates then physically occupy at least nine (9)
Floors served by the midrise elevator bank. Tenant's signage in the lowrise
elevator bank and/or midrise elevator bank shall be non-exclusive to Tenant,
unless and so long as Tenant physically occupies all Floors served by the
lowrise elevator bank and/or midrise elevator bank, in which event with respect
to such elevator bank, Tenant's signage shall be exclusive, and no other tenant
or occupant of the Building shall have the right to place signage in such
elevator bank. If, at any time, Tenant or its Affiliates do not physically
occupy the required number of Floors in the lowrise and/or midrise of the
Building, then Tenant's signage rights hereunder shall be suspended (subject to
reinstatement if Tenant thereafter meets such requirements, but also subject to
any signage rights then reposing in any other tenant of the Complex), and
Landlord shall have the right at Tenant's cost and expense to remove Tenant's
signage or cause Tenant to effect such removal at Tenant's cost and expense.
Landlord shall install Tenant's sign hereunder at Tenant's cost and expense.
Tenant shall, however, be responsible for obtaining all necessary permits and
approvals from governmental authorities having jurisdiction for the design,
installation and maintenance of Tenant's sign hereunder. Tenant shall be
responsible for maintaining its sign hereunder unless otherwise elected by
Landlord, in which event Landlord shall maintain Tenant's sign at
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Tenant's cost and expense. Tenant shall reimburse Landlord for all costs and
expenses due from Tenant hereunder within thirty (30) days after receipt of
Landlord's invoice for such costs and expenses. For purposes of this Article 30,
Tenant may meet the requirement for physical occupancy of Floors both under this
Lease and under subleases with other tenants of the Building or by assignment of
leases of other tenants of the Building, as of the time in question. Tenant's
signage rights under this Article 30 are personal to the signatory Tenant of
this Lease, Charles Schwab & Co., Inc., and such Tenant's Affiliates, and may
not be assigned or transferred in any manner, including pursuant to Article 17,
except in connection with an assignment or sublease under Article 17 to an
Affiliate of such Tenant.
31. Miscellaneous.
31.1. No Joint Venture. This Lease does not create any
partnership or joint venture or similar relationship between
Landlord and Tenant.
31.2. Successors and Assigns. Subject to the provisions of
Article 17 regarding assignment, all of the provisions, terms, covenants and
conditions contained in this Lease shall bind, and inure to the benefit of, the
parties and their respective successors and assigns.
31.3. Construction and Interpretation. The words "Landlord"
and "Tenant" include the plural as well as the singular. If there is more than
one person comprising Tenant or Landlord, the obligations under this Lease
imposed on Tenant or Landlord, as the case may be, are joint and several.
References to a party or parties refers to Landlord or Tenant, or both, as the
context may require. The captions preceding the Articles, Sections and
subsections of this Lease are inserted solely for convenience of
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reference and shall have no effect upon, and shall be disregarded in connection
with, the construction and interpretation of this Lease. Use in this Lease of
the words "including", "such as", or words of similar import when following a
general matter, shall not be construed to limit such matter to the enumerated
items or matters whether or not language of non-limitation (such as "without
limitation") is used with reference thereto. All provisions of this Lease have
been negotiated at arm's length between the parties and after advice by counsel
and other representatives chosen by each party and the parties are fully
informed with respect thereto. Therefore, this Lease shall not be construed for
or against either party by reason of the authorship or alleged authorship of any
provision hereof, or by reason of the status of the parties as Landlord or
Tenant, and the provisions of this Lease and the Exhibits hereto shall be
construed as a whole according to their common meaning in order to effectuate
the intent of the parties under the terms of this Lease.
31.4. Severability. If any provision of this Lease, or the
application thereof to any person or circumstance, is determined to be illegal,
invalid or unenforceable, the remainder of this Lease, or its application to
persons or circumstances other than those as to which it is illegal, invalid or
unenforceable, shall not be affected thereby and shall remain in full force and
effect, unless enforcement of this Lease as so invalidated would be unreasonable
or grossly inequitable under the circumstances, or would frustrate the purposes
of this Lease.
31.5. Entire Agreement; Amendments. This Lease, together with
the Exhibits hereto, contain all the representations and the entire agreement
between the parties with respect to the subject matter hereof and any prior
negotiations, correspondence,
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memoranda, agreements, representations or warranties are replaced in total by
this Lease, and the Exhibits hereto. Neither Landlord nor Landlord's agents have
made any warranties or representations with respect to the Premises or any other
portion of the Complex, except as expressly set forth in this Lease and the
Exhibits hereto. This Lease may be modified or amended only by an agreement in
writing signed by both parties.
31.6. Governing Law. This Lease shall be governed by
and construed pursuant to the laws of the State of California.
31.7. Litigation Expenses. If either party brings any action
or proceeding against the other (including any cross-complaint, counterclaim or
third party claim) to enforce or interpret this Lease or otherwise arising out
of this Lease, the prevailing party in such action or proceeding shall be
entitled to its costs and expenses of suit and enforcing the judgment awarded to
it, including reasonable attorneys' fees.
31.8. Standards of Performance and Approvals. Unless otherwise
provided in this Lease, (i) each party shall act in a reasonable manner in
exercising or undertaking its rights, duties and obligations under this Lease
and (ii) whenever approval, consent or satisfaction (collectively, an
"approval") is required of a party pursuant to this Lease or an Exhibit hereto,
such approval shall not be unreasonably withheld or delayed. Unless provision is
made for a specific time period, approval (or disapproval) shall be given within
thirty (30) days after receipt of the request for approval. Nothing contained in
this Lease shall, however, limit the right of a party to act or exercise its
business judgment in a subjective manner with respect to any matter as to which
it has been (A) specifically granted such right, or (B) granted the right to act
in its sole discretion or sole
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judgment, whether "objectively" reasonable under the circumstances and any such
exercise shall not be deemed inconsistent with any covenant of good faith and
fair dealing implied by law to be part of this Lease. The parties have set forth
in this Lease their entire understanding with respect to the terms, covenants,
conditions and standards pursuant to which their obligations are to be judged
and their performance measured, including the provisions of Article 17 with
respect to assignments and sublettings. Whenever a party is required under this
Lease not to unreasonably withhold its approval as to any matter, then any
dispute between the parties regarding whether withholding such approval is
reasonable or unreasonable under the circumstances shall be resolved by
arbitration pursuant to Section 31.17 below.
31.9. Brokers. Landlord shall pay to Landlord's Broker and
Tenant's Broker a commission in connection with such Brokers' negotiation of
this Lease pursuant to a separate agreement or agreements between Landlord and
such Brokers. Other than such Brokers, Landlord and Tenant each represent and
warrant to the other that, to such party's knowledge, no broker, agent, or
finder has procured or was involved in the negotiation of this Lease and no such
broker, agent or finder is or may be entitled to a commission or compensation in
connection with this Lease. Landlord and Tenant shall each indemnify, defend,
protect and hold the other harmless from and against any and all liability,
loss, damage, claims, costs and expenses (including reasonable attorneys' fees)
resulting from a claim for a commission or compensation by reason of a broker,
agent or finder asserting that such broker, agent or finder is a procuring cause
for this Lease transaction as a result of having dealt with the indemnifying
party.
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31.10. Memorandum of Lease. Each party shall, upon request of
either party, execute, acknowledge and deliver a short form memorandum of this
Lease (and any amendment hereto) in form suitable for recording, and such
memorandum shall be recorded by the requesting party in the Official Records of
the City and County of San Francisco, California, at the requesting party's
expense. In no event shall this Lease be recorded by Tenant.
31.11. Quiet Enjoyment. Upon paying the Rent and Additional
Charges and performing all its obligations under this Lease, Tenant may
peacefully and quietly enjoy the Premises during the Term as against all persons
or entities claiming by or through Landlord, subject, however, to the provisions
of this Lease and any encumbrances as specified in Article 21.
31.12. Surrender of Premises. Upon the Expiration Date or
earlier termination of this Lease, Tenant shall quietly and peacefully surrender
the Premises to Landlord in the condition specified in Article 9 above and all
other applicable provisions of this Lease (including removal of Alterations
required to be removed under Article 10 above), and shall deliver to Landlord
any keys to the Premises, or any other portion of the Complex, and provide to
Landlord the combination or code of locks on all safes, cabinets, vaults and
security system that will remain in the Premises after the Expiration Date or
earlier termination of this Lease. On or before the Expiration Date or earlier
termination of this Lease, Tenant shall remove all of its personal property from
the Premises and repair at its cost and expense all damage to the Premises or
Complex caused by such removal. All personal property of Tenant not removed
hereunder shall be deemed, at Landlord's option, to be abandoned by Tenant and
Landlord may, without any liability to Tenant for loss or damage thereto or loss
of use thereof, store
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such property in Tenant's name at Tenant's expense to the extent required by
law, and if not so required, dispose of the same in any manner permitted by law.
31.13. Building Directory. Landlord shall reserve on the
Building directory, or in any computerized Building directory, up to the number
of Building Directory Spaces specified on the Basic Lease Information for
purposes of identifying Tenant's name, divisions and/or principal employees. As
Floors in the Premises are delivered to Tenant under this Lease, the parties
shall enter into a memorandum reflecting the number of Building Directory Spaces
allocated to such Floor. All costs for the initial strip or inputting of names
shall be borne by Landlord and all reasonable costs for replacement of such
strips or inputting shall be borne by Tenant.
31.14. Name of Building; Address. Tenant shall not use the
name of the Building or Complex for any purpose other than as the address of the
business conducted by Tenant in the Premises. Tenant shall, in connection with
all correspondence, mail or deliveries made to or from the Premises, use the
official Building address.
31.15. Exhibits. The Exhibits specified in the Basic
Lease Information are by this reference made a part hereof.
31.16. Arbitration of Fair Market Rent and Fair Market Renewal
Rent. Whenever under this Lease the determination of fair market rent or fair
market renewal rent (hereinafter collectively denominated "fair market rent",
but without affecting the definition of "fair market rent" or "fair market
renewal rent", as the case may be, with respect to the determination to be made
with respect thereto hereunder) is to be made by arbitration, such arbitration
shall be conducted in accordance with this Section
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31.16. The arbitration shall be conducted and determined in the City and County
of San Francisco, solely in accordance with the provisions of this Section
31.16. Within ten (10) days after the parties have exchanged their estimates of
fair market rent under the applicable provisions of this Lease, each party shall
designate an arbitrator to determine fair market rent hereunder. The parties'
arbitrators shall, within ten (10) days after their designation hereunder,
select a third arbitrator. If the parties' arbitrators are unable to agree upon
appointment of such third arbitrator within such 10-day period, then the parties
shall attempt to agree on and appoint such third arbitrator within five (5) days
after the expiration of such 10-day period. If the parties are unable to agree
on such third arbitrator within such 5-day period, then either party, on behalf
of both, may request appointment of such third arbitrator by the then head
official of the San Francisco office of the American Arbitration Association,
and neither party shall raise any objections as to the appointment made by such
official or as to such official's full power and jurisdiction to entertain the
application for and make the appointment. The arbitrators shall be members of
the Appraisal Institute (or its successor organization) with a then current
senior designation of MAI (or then comparable designation) currently certified
under the continuing education program, shall have at least ten (10) years
experience in appraising commercial office properties in the Downtown Financial
District and shall not then be engaged or have been engaged by either Landlord
or Tenant within the prior 5-year period preceding their appointment hereunder.
The arbitrators shall determine which of the two estimates submitted by the
parties pursuant to the applicable provisions of this Lease is closest to the
correct result in the
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arbitrators' opinion. The arbitrators shall have no power to select an
alternative position or a decision different from that proposed by either party.
The decision in which at least two (2) of the arbitrators concur shall be final
and binding upon the parties, absent fraud or gross error. Upon failure, refusal
or inability of an arbitrator to act, his or her successor shall be appointed in
the same manner as provided for original appointment. The party whose position
is not chosen by the arbitrators shall bear the fees and expenses of the
arbitrators. The attorneys' fees and expenses of counsel and consultants to the
respective parties shall be paid by the respective party engaging such counsel
or consultant. The arbitrators shall render their decision in writing, with
counterpart copies to each party, within thirty (30) days after the appointment
of the third arbitrator. The arbitrators shall have no power to modify the
provisions of this Lease.
31.17. Arbitration of Dispute. Whenever under this Lease the
determination of a matter or dispute (other than fair market rent) is to be made
by arbitration, such arbitration shall be conducted in accordance with this
Section 31.17 (or by such other alternative dispute resolution mechanism to
which the parties may agree to resolve such dispute), except that a party may
seek prohibitory injunctive relief with respect to any such matter or dispute
which is also subject to arbitration.
a. Selection of Arbitrators. By written notice to the
other party, a party shall request a meeting to be attended by the other party
for the purpose of resolving any such matter or dispute. At such meeting, the
parties shall attempt in good faith to resolve the matter or dispute. If the
matter or dispute is not resolved at such meeting, or if the meeting is not
held, either party may, within ten (10) days after the date of (or set for) such
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meeting, make a written request to resolve such dispute by arbitration.
b. Selection of Arbitrators. Within ten (10) days
after the date of receipt of such notice, each party shall select an arbitrator.
Such arbitrators shall meet within ten (10) days after selection for the purpose
of resolving the matter or dispute. If, within such 10-day period such
arbitrators are unable to resolve the matter or dispute, then within an
additional 5-day period after the expiration of such 10-day period, they shall
select a third neutral arbitrator. If such arbitrators are unable, within such
5-day period, to appoint the third arbitrator hereunder, the parties shall
jointly appoint such third arbitrator within an additional 5-day period. If the
parties are unable to appoint such third arbitrator within such additional 5-day
period, then either party may request appointment of such third arbitrator the
then head official of the San Francisco office of the American Arbitration
Association, and neither party shall raise any objections as to the appointment
made by such official or as to such official's full power and jurisdiction to
entertain the application for and make the appointment. Upon appointment of a
third arbitrator hereunder, a majority decision shall be final, conclusive and
binding on the parties, at any stage of the proceeding, absent fraud or gross
error. The arbitrators shall resolve the dispute solely in accordance with the
applicable provisions of this Lease with respect to the matter or dispute in
arbitration, and the arbitrators shall have no power to modify any of the
provisions of this Lease. If an arbitrator appointed hereunder dies, resigns,
refuses to act or becomes legally incapacitated, his or her replacement or
successor shall be appointed in like manner specified in this Section 31.17.b.
In any
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arbitration proceeding hereunder, each arbitrator shall have substantial
training and professional experience in the subject matter of the arbitration,
but shall not then be employed or engaged, or have been employed or engaged by a
party for at least five (5) years prior to the arbitration proceeding. The
losing party in the arbitration as determined by the arbitrators shall bear the
costs and expense of all arbitrators. The attorneys' fees and expenses of
counsel and consultants to the respective parties shall be paid by the
respective party engaging such counsel or consultant.
c. Decision; Effect of Decision. The arbitrators
shall render their decision in writing and as promptly as possible after the
designation of the last arbitrator, but in no event later than twenty (20) days
after the date of the designation of the last arbitrator. A copy of the decision
of the arbitrators shall be signed by at least a majority of the arbitrators and
given to each party in the manner provided in Article 27 for the giving of
notice. The decision of the arbitrators shall be final, conclusive and binding
on the parties, absent fraud or gross error. The decision of the arbitrators may
be entered as a judgment in a court of competent jurisdiction.
d. Procedural Rules. All arbitration under this
Section 31.17 shall be conducted in accordance with the applicable rules of the
American Arbitration Association, to the extent such provisions do not conflict
with the procedures herein set forth. Except as provided in this Section 31.17,
compliance with this Section 31.17 is a condition precedent to the commencement
by a party of judicial proceeding arising out of a matter or dispute which is
subject to arbitration hereunder. All statutes of limitation that would
otherwise be applicable shall
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apply to any arbitration proceeding hereunder. Any attorney-client privilege and
other protections against disclosure of confidential information, including any
protection afforded by the work product privilege for attorneys that could
otherwise be claimed by a party shall be available to and may be claimed by such
party in any arbitration proceeding hereunder. California Code of Civil
Procedure Section 1283.05, and any successor statute, shall apply to any and all
discovery matters in any arbitration proceeding hereunder. Neither party waives
any attorney-client privilege or any other privilege against disclosure of
confidential information by reason of anything contained in or done pursuant to
or in connection with this Section 31.17. All arbitration proceedings hereunder
shall be reported by a certified shorthand court reporter and written
transcripts of such proceedings shall be prepared and made available to the
parties. Any arbitration proceeding hereunder shall be conducted in the City and
County of San Francisco, California.
31.18. Survival of Obligations. The indemnity obligations of
the parties under this Lease, and any obligation of a party to make payment of
any sum to the other party or a third person, shall survive the termination or
expiration of this Lease. The provisions of this Section 31.18 govern solely the
obligations between the parties. The provisions of this Lease are for the
exclusive benefit of the parties and not for the benefit of any third person,
and this Lease does not confer any rights, express or implied, upon any such
third person.
31.19. Time of the Essence. Time is of the essence of this
Lease and of the performance of each of the provisions contained in this Lease.
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IN WITNESS WHEREOF, the parties have executed this Lease as of the
Lease Date.
LANDLORD: TENANT:
POST-MONTGOMERY ASSOCIATES, CHARLES SCHWAB & CO., INC.
a California general a California corporation
partnership
By: CUSHMAN & WAKEFIELD By: /S/ Luis E. Valencia
OF CALIFORNIA, INC. ____________________________
as agent for (Signature)
THE PRUDENTIAL INSURANCE Luis E. Valencia
COMPANY OF AMERICA, a ____________________________
general partner (Type or print name)
Its Executive Vice President
By: /S/ Kennard P. Perry ____________________________
_________________________
(signature)
By: /S/ Steven L. Scheid
Kennard P. Perry ___________________________
_________________________ (signature)
(type or print name)
Steven L. Scheid
Its Director, Asset Services ___________________________
_________________________ (type or print name)
By: UBS ASSET MANAGEMENT (NEW Its Executive Vice President
YORK) INCORPORATED and Chief Financial Officer
as agent for ___________________________
NLI PROPERTIES WEST, INC.,
a general partner
By: /S/ Joseph B. Dobronyi
____________________
(signature)
Joseph B. Dobronyi
____________________
(type or print name)
Its Vice President, Real Estate
____________________
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EXHIBIT A-1 THROUGH A-19
Floor Plans of Premises
<PAGE> 197
EXHIBIT A-20
Antenna Area
<PAGE> 198
EXHIBIT B
Landlord's Work for Floors 2 and 3
<PAGE> 199
EXHIBIT C
Existing Tenant Options
<PAGE> 200
EXHIBIT D
List of Multi-Tenant Floors
<PAGE> 201
EXHIBIT E
Categories for Escalation Charges Statement
<PAGE> 202
EXHIBIT F-1 and F-2
Confidentiality Agreements
<PAGE> 203
EXHIBIT G
List of Recorded Documents
<PAGE> 204
EXHIBIT H
Janitorial Specifications
<PAGE> 205
EXHIBIT I
Rules and Regulations of the Complex
<PAGE> 206
EXHIBIT J
Tenant's Signage
<PAGE> 1
EXHIBIT 10.165
THIRD AMENDMENT TO
REVOLVING SUBORDINATED LOAN AGREEMENT
This Third Amendment to Revolving Subordinated Loan Agreement ("this Third
Amendment") is made and entered into by and between The Charles Schwab
Corporation (the "Lender") and Charles Schwab & Co., Inc. (the "Organization")
as of this 12th day of December, 1995. Unless otherwise specified herein, all
capitalized terms herein shall have the meanings ascribed to them in the
Revolving Subordinated Loan Agreement dated as of September 29, 1988, as
amended by a First Amendment thereto dated as of April 18, 1990 and a Second
Amendment thereto dated as of November 1, 1991, both between the Lender and the
Organization (collectively, the "Agreement").
WHEREAS, the Organization and the Lender desire to amend the Agreement to
increase the permissible aggregate principal amount of loans outstanding at any
one time from $180,000,000 to $250,000,000.
NOW, THEREFORE, the Organization and the Lender hereby amend the Agreement as
follows:
1. The figure "$250,000,000" shall be and hereby is substituted
in place of the figure "$180,000,000" in the second paragraph of
paragraph "1." of the Agreement.
2. Contemporaneously with the execution hereof, the Organization
shall execute and deliver to the Lender a new promissory note in the
form attached hereto as Exhibit A (the "new Revolving Note"), which
new Revolving Note shall replace and supersede the Revolving Note
dated November 1, 1991 made and delivered by the Organization to the
Lender.
3. Contemporaneously with the execution hereof, the Lender and
the Organization shall execute a Roll-Over Attachment in the form
attached hereto as Exhibit B (the "Roll-Over Attachment"), pursuant to
which the Lender and the Organization agree that the Commitment
Termination Date and the Scheduled Maturity Date shall in each year,
without further action by either the Lender or the Organization, be
extended to September 29 of the following year, unless on or before
the day twelve months preceding the Scheduled Maturity Date then in
effect, the Lender shall notify the Organization in writing, with a
written copy to the New York Stock Exchange, Inc., that the Commitment
Termination Date and the Scheduled Maturity Date then in effect shall
not be extended. The Roll-Over Attachment shall become part of the
Agreement as amended by this Third Amendment.
<PAGE> 2
4. Except for the amendment expressly specified above, all other
provisions of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, this Third Amendment is executed as of December 12, 1995 at
San Francisco, California.
THE ORGANIZATION:
CHARLES SCHWAB & CO., INC.
By /s/ Christopher V. Dodds
------------------------------------
Christopher V. Dodds
Its Senior Vice President and Treasurer
THE LENDER:
THE CHARLES SCHWAB CORPORATION
By /s/ A. John Gambs
-------------------------------------
A. John Gambs
Its Executive Vice President - Finance
and Chief Financial Officer
-2-
<PAGE> 3
Exhibit A
REVOLVING NOTE
$250,000,000 Date: December 12, 1995
For value received, the undersigned Charles Schwab & Co., Inc.
("Organization") hereby promises to pay to the order of The Charles Schwab
Corporation ("Lender") the principal amount of each advance made by the Lender
to the Organization under the terms of a Revolving Subordinated Loan Agreement
between the Organization and the Lender dated as of September 29, 1988, as
amended by a First Amendment thereto between the Organization and the Lender
dated as of April 18, 1990, a Second Amendment thereto between the Organization
and the Lender dated as of November 1, 1991, and a Third Amendment thereto
between the Organization and the Lender dated as of December 12, 1995,
(collectively, the "Agreement"), as shown in the schedule attached hereto and
any continuation thereof, payable at such times as are specified in the
Agreement. The undersigned also promises to pay interest on the unpaid
principal amount of each advance from the date of such advance until such
principal is paid, at the rates per annum, and payable at such times, as are
specified in the Agreement. The Note shall be subject to the Agreement, and
all principal and interest payable hereunder shall be due and payable in
accordance with the terms of the Agreement. Terms defined in the Agreement are
used herein with the same meanings.
The maturity date of this Revolving Note shall be September 29, 1997.
The maturity date shall in each year, without further action by either the
Lender or the Organization, be extended to September 29 of the following year,
unless on or before the day twelve months preceding the maturity date then in
effect, the Lender shall notify the Organization in writing, with a written
copy to the New York Stock Exchange, Inc., that such maturity date shall not be
extended.
This Revolving Note replaces and supersedes the Revolving Note dated
November 1, 1991 in the maximum principal amount of $180,000,000, delivered by
the Organization to the Lender.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the undersigned has caused this Revolving Note to
be executed by its officer thereunto duly authorized and directed by
appropriate corporate authority.
Charles Schwab & Co., Inc.
By /s/ Christopher V. Dodds
--------------------------------
Christopher V. Dodds
Senior Vice President and Treasurer
-4-
<PAGE> 5
Exhibit B
ROLL-OVER ATTACHMENT
Additional provision for Revolving Subordinated Loan Agreement, as amended,
between The Charles Schwab Corporation ("Lender") and Charles Schwab & Co.,
Inc. ("Organization").
Principal Amount: $ 250,000,000
Date of Agreement: September 29, 1988
Date of First Amendment to Agreement: April 18, 1990
Date of Second Amendment to Agreement: November 1, 1991
Date of Third Amendment to Agreement: December 12, 1995
Pursuant to the roll-over provisions of the Agreement as amended, the
Commitment Termination Date in Paragraph 1 of the Agreement is September 29,
1996, and the Scheduled Maturity Date in Paragraph 1 of the Agreement is
September 29, 1997. The Commitment Termination Date and the Scheduled Maturity
Date shall in each year, without further action by either the Lender or the
Organization, be extended to September 29 of the following year, unless on or
before the day twelve months preceding the Scheduled Maturity Date then in
effect, the Lender shall notify the Organization, in writing, with a written
copy to the New York Stock Exchange, Inc., that the Commitment Termination Date
and the Scheduled Maturity Date then in effect shall not be extended.
THE ORGANIZATION:
CHARLES SCHWAB & CO., INC.
By /s/ Christopher V. Dodds
------------------------------------
Christopher V. Dodds
Its Senior Vice President and Treasurer
THE LENDER
THE CHARLES SCHWAB CORPORATION
By /s/ A. John Gambs
------------------------------------
A. John Gambs
Its Executive Vice President and Chief
Financial Officer
-5-
<PAGE> 1
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
Computation of Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET INCOME $233,803 $172,604 $135,343
==========================================================================================================
SHARES
PRIMARY:
Weighted-average number of common shares outstanding 173,976 172,285 169,953
Common stock equivalent shares related to option plans 5,425 6,191 5,253
- ----------------------------------------------------------------------------------------------------------
Weighted-average number of common and
common equivalent shares outstanding 179,401 178,476 175,206
==========================================================================================================
FULLY DILUTED:
Weighted-average number of common shares outstanding 173,976 172,285 169,953
Common stock equivalent shares related to option plans 5,598 6,577 5,388
- ----------------------------------------------------------------------------------------------------------
Weighted-average number of common and
common equivalent shares outstanding 179,574 178,862 175,341
==========================================================================================================
PRIMARY/FULLY DILUTED EARNINGS PER SHARE $ 1.30 $ .97 $ .77
==========================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS BEFORE TAXES ON INCOME
AND EXTRAORDINARY CHARGE $394,063 $277,104 $224,343 $206,272 $146,228
- --------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest expense - customer 368,462 321,225 178,067 114,609 140,819
Interest expense - other 57,410 35,998 20,169 17,943 18,712
Interest portion of rental expense 23,051 20,810 17,102 15,428 13,314
- --------------------------------------------------------------------------------------------------------------------------------
Total fixed charges (A) 448,923 378,033 215,338 147,980 172,845
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES ON INCOME,
EXTRAORDINARY CHARGE AND FIXED CHARGES (B) $842,986 $655,137 $439,681 $354,252 $319,073
================================================================================================================================
RATIO OF EARNINGS TO FIXED CHARGES (B) DIVIDED BY (A)* 1.9 1.7 2.0 2.4 1.8
================================================================================================================================
RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING
CUSTOMER INTEREST EXPENSE** 5.9 5.9 7.0 7.2 5.6
================================================================================================================================
</TABLE>
* The ratio of earnings to fixed charges is calculated in a manner consistent
with SEC requirements. For such purposes, "earnings" consist of earnings
before taxes on income, extraordinary charge and fixed charges. "Fixed
charges" consist of interest expense incurred on payables to customers,
subordinated borrowings, term debt, capitalized interest and one-third of
rental expense, which is estimated to be representative of the interest
factor.
** Because interest expense incurred in connection with payables to customers
is completely offset by interest revenue on related investments and margin
loans, the Company considers such interest to be an operating expense.
Accordingly, the ratio of earnings to fixed charges as adjusted reflects the
elimination of such interest expense as a fixed charge.
<PAGE> 1
EXHIBIT 13.1
The Charles Schwab Corporation
1996 Annual Report to Stockholders
(only those portions specifically incorporated by reference
into The Charles Schwab Corporation 1996 Annual Report on Form 10-K)
THE CHARLES SCHWAB CORPORATION
SELECTED FINANCIAL AND OPERATING DATA
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Rates
---------------------
Compounded Annual
5-Year 1-Year
1991-1996 1995-1996 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS (FOR THE YEAR)
Revenues
Commissions 22% 27% $ 954 $ 751 $ 546 $ 552 $ 441
Mutual fund service fees 42% 42% 311 219 157 99 63
Principal transactions 32% 34% 257 191 163 169 130
Interest revenue-net (1) 27% 21% 255 211 165 120 92
Other 23% 54% 74 48 34 25 24
- -----------------------------------------------------------------------------------------------------------------------------------
Total 27% 30% 1,851 1,420 1,065 965 750
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses excluding interest
Compensation and benefits 27% 29% 766 594 437 393 307
Communications 24% 28% 165 129 107 94 76
Occupancy and equipment 21% 18% 130 111 88 77 65
Depreciation and amortization 14% 43% 98 69 55 44 40
Advertising and market development 27% 59% 84 53 36 41 34
Commissions, clearance and floor brokerage 31% 5% 81 77 49 43 32
Other 26% 20% 133 109 69 66 50
- -----------------------------------------------------------------------------------------------------------------------------------
Total 25% 27% 1,457 1,142 841 758 604
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income
and extraordinary charge 35% 42% 394 278 224 207 146
Taxes on income 33% 53% 160 105 89 82 65
- -----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 36% 35% 234 173 135 125 81
Extraordinary charge-early retirement of debt 7
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 36% 35% $ 234 $ 173 $ 135 $ 118 $ 81
===================================================================================================================================
Primary/fully diluted earnings per share
Primary/fully diluted earnings before
extraordinary charge 36% 34% $ 1.30 $ .97 $ .77 $ .70 $ .46
Extraordinary charge-early retirement of debt .04
- -----------------------------------------------------------------------------------------------------------------------------------
Primary/fully diluted earnings per share 36% 34% $ 1.30 $ .97 $ .77 $ .66 $ .46
===================================================================================================================================
Dividends declared per common share 45% 29% $ .180 $ .140 $ .092 $ .064 $ .048
===================================================================================================================================
Weighted-average number of common and
common equivalent shares outstanding (2) 1% 179 178 175 178 176
===================================================================================================================================
OTHER (FOR THE YEAR)
Return on stockholders' equity 31% 31% 32% 37% 35%
Revenue growth 30% 33% 10% 29% 32%
Pre-tax profit margin 21.3% 19.5% 21.1% 21.4% 19.5%
After-tax profit margin 12.6% 12.2% 12.7% 12.2% 10.8%
Effective income tax rate 40.7% 37.7% 39.7% 39.7% 44.5%
===================================================================================================================================
OTHER (AT YEAR END)
Total assets 22% 31% $13,779 $10,552 $ 7,918 $ 6,897 $ 5,905
Borrowings 19% 15% $ 284 $ 246 $ 171 $ 185 $ 152
Stockholders' equity 34% 35% $ 855 $ 633 $ 467 $ 379 $ 259
===================================================================================================================================
</TABLE>
(1) Interest revenue is presented net of interest expense. Interest expense for
1992 through 1996 was (in millions): $159, $132, $198, $357 and $426,
respectively.
(2) Amounts shown are used to calculate primary earnings per share.
Certain prior years' revenues and expenses have been reclassified to conform to
the 1996 presentation.
1
<PAGE> 2
The Charles Schwab Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related investment
services for over 4.0 million active customer accounts(a). Customer assets
totaled $253.2 billion as of December 31, 1996. CSC's principal subsidiary,
Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 235
branch offices in 46 states, the Commonwealth of Puerto Rico and the United
Kingdom. Schwab served an estimated 52% of the discount brokerage market in
1996, up from 51% in 1995. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a
market maker in Nasdaq securities, provides trade execution services to
broker-dealers and institutional customers.
(CHART OMITTED)
The Company's strategy is to attract and retain customer assets by focusing
on a number of areas within the financial services industry - retail brokerage,
mutual funds, support services for independent investment managers, equity
securities market-making, electronic brokerage and 401(k) defined contribution
plans. To pursue its strategy and its objective of long-term profitable growth,
the Company plans to continue to leverage its competitive advantages. These
advantages include advertising and marketing programs that have created a
national brand, a broad range of products and services, diverse delivery systems
and an ongoing investment in technology.
(CHART OMITTED)
The Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as its products and services. One measure
of Schwab's success in this area was reflected in a 1996 consumer research
survey reported in FORTUNE Magazine. This survey ranked Schwab first among
brokerage firms for quality of management, quality of products and services, and
innovativeness.
The Company offers a broad range of products and services to meet customers'
investment and financial needs at prices that management believes represent
superior value. The Company is enhancing the ways in which it may help investors
by using the branch office network to assist investors in developing asset
allocation strategies and evaluating their investment choices. Branch staff
are also referring investors who desire additional guidance to independent
fee-compensated investment managers through the Schwab AdvisorSource(trademark)
service. During 1996, Schwab introduced SchwabPlan(trademark), a comprehensive
401(k) retirement plan offering. In addition, the Company is continuing to
enhance and broaden the Mutual Fund OneSource(registered trademark) service,
which provides customers with the ability to invest in over 620 mutual funds
from 70 fund families without incurring transaction fees.
The Company invests in diverse delivery systems that uphold the Company's
customer service standards. In addition to its branch office network, the
Company maintains four regional customer telephone service centers as well as
electronic brokerage channels. The electronic brokerage channels include
SchwabLink(registered trademark), a service for investment managers, TeleBroker
(registered trademark) - Schwab's touch-tone telephone trading service, and
PC-based online services such as StreetSmart(registered trademark), e.Schwab
(trademark), which provides flexible online brokerage services, and SchwabNOW!
(trademark), which provides information and trading services through the
Company's World Wide Web site. Schwab handled over 97 million calls and over
21 million trades during 1996, of which the electronic brokerage channels
handled over 65 million calls and over 9 million trades.
The Company's ongoing investment in technology is a key element in providing
fast and consistent customer service, and reducing processing costs. The Company
is a forerunner in placing technology in the hands of customers. A recent
example is VoiceBroker(trademark), which was introduced in the third quarter of
1996 as the first telephone-based service that uses voice recognition technology
to provide individual investors with real-time quotes.
The Company faces significant competition from full commission and discount
brokerage firms, as well as mutual fund companies. Increasingly, competition has
come from banks, software development companies, insurance companies and others
as they expand their product lines. A general trend of consolidation in
financial services has attracted new competitors and strengthened existing ones.
This competition may negatively impact the Company's revenue growth and profit
margin.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. Since
transaction-based revenues continue to represent a majority of the Company's
revenues, the Company may experience significant variations in revenues from
period to period.
The Company adjusts its expenses in anticipation of and in response to
changes in financial market conditions and customer trading patterns. Certain of
the Company's expenses (including variable compensation, portions of
communications, and commissions, clearance and floor brokerage) vary directly
with changes in financial performance or customer trading activity. Expenses
relating
__________________
(a) Accounts with balances or activity within the preceding twelve months.
2
<PAGE> 3
to the level of temporary employees, contractors, overtime hours, professional
services, and advertising and market development are adjustable over the short
term to help the Company achieve its financial objectives. Additionally,
developmental spending (e.g., branch openings, product and service rollouts, and
technology enhancements) is discretionary and can be altered in response to
market conditions. However, a significant portion of the Company's expenses such
as salaries and wages, occupancy and equipment, and depreciation and
amortization do not vary directly, at least in the short term, with fluctuations
in revenues or securities trading volumes. Given the nature of the Company's
revenues and expenses, and the economic and competitive factors discussed above,
the Company's earnings and common stock price may be subject to significant
volatility. The Company's results for any period are not necessarily indicative
of results for a future period.
In addition to historical information, this Annual Report contains
forward-looking statements that reflect management's objectives and expectations
as of the date hereof. These statements relate to, among other things, the
Company's strategy (see Description of Business), sources of liquidity (see
Liquidity and Capital Resources-Liquidity), capital expenditures and capital
structure (see Liquidity and Capital Resources-Cash Flows and Capital
Resources), and revenue growth, after-tax profit margin and return on
stockholders' equity (see Results of Operations and Looking Ahead). Achievement
of the objectives and expectations described in these statements is subject to
certain risks and uncertainties that could cause actual results to differ
materially from the expressed objectives and expectations. Important factors
that may cause such a difference are noted throughout this Annual Report and in
the Company's Annual Report on Form 10-K and include, but are not limited to:
the effect of customer trading patterns on Company revenues and earnings;
changes in technology, which can result in obsolescence of existing equipment
and/or significant investments in new technology; the effect of pricing, product
and service decisions by competitors and the intensifying of competition;
changes in revenues and profit margin due to cyclical securities markets and
interest rates; evolving regulation adversely affecting the Company; the
uncertainties of litigation; and a significant downturn in the securities
markets over a short period of time or a sustained decline in securities prices
and trading volumes.
(CHART OMITTED)
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
The securities markets experienced record trading volumes and price levels
during 1996, helping the Company to achieve record financial results. The
combined daily average share volume for the New York Stock Exchange and Nasdaq
reached an all time high of 956 million shares, a 28% increase over 1995. The
Standard & Poor's 500 Index (on a dividend reinvested basis) rose 23% during
1996.
The Company's financial performance in 1996 was supported by a number of
factors. Customer assets rose $71.5 billion, or 39%, to $253.2 billion and a
record 985,000 new customer accounts were opened. Trading activity reached
record levels as well, with daily average trades, which include revenue
trades(a) and Mutual Fund OneSource(registered trademark) trades, increasing
39% to 78,000. Revenues of $1,851 million in 1996 mark the Company's seventh
consecutive year of record revenues. The 30% increase in revenues from 1995
significantly exceeded management's long-term objective of 20%.
(CHART OMITTED)
This was the Company's sixth consecutive year of record earnings, which rose
35% to $234 million, or $1.30 per share, up from $173 million, or $.97 per
share, in 1995. While revenues grew 30%, the Company's operating-expense focus
kept the increase in expenses to 27%, even with a 59% increase in advertising
and market development spending. As a result, the Company's after-tax profit
margin for 1996 was 12.6%, which exceeded the 12.2% margin in 1995 and the
Company's long-term objective of 10%. Net income plus depreciation and
amortization increased 38% during 1996 to $332 million while capital
expenditures decreased $6 million in 1996 to $160 million.
(CHART OMITTED)
Return on stockholders' equity was 31% in 1996, significantly exceeding the
Company's long-term objective of 20%. The Company's Board of Directors declared
a cash dividend increase during 1996, raising the effective annual dividend rate
25% from the end of 1995.
(CHART OMITTED)
REVENUES
COMMISSIONS
The Company earns commission revenues by executing customer trades. These
revenues are affected by the number of customer accounts that traded, the
average number of commission-generating trades per account and the average
commission per trade. Commission revenues were $954 million in 1996, compared to
$751 million in 1995 and $546 million in 1994.
(CHART OMITTED)
__________________
(a) Includes all retail customer trades executed by Schwab that generate either
commission revenue or revenue from principal markups. Trades with
institutional customers are excluded.
3
<PAGE> 4
Substantially all of the Company's commission revenues are generated by
Schwab's agency trading activities. Schwab's retail agency commission revenues,
which exclude commissions from institutional customers, constituted
approximately 96% of Schwab's total commissions in each of the last three years.
Commissions earned on retail agency trades by Schwab totaled $890 million in
1996, compared to $711 million in 1995 and $523 million in 1994. The daily
average retail agency trade level was 50,400 in 1996, 38,000 in 1995 and 28,900
in 1994.
From 1994 to 1996, the total number of retail agency trades executed by
Schwab has increased over 75%, as shown in the table that follows, as Schwab's
customer base has grown. From 1995 to 1996, average commission per retail agency
trade decreased $3 mainly due to a higher proportion of retail agency trades
placed through electronic brokerage channels, which provide additional
commission discounts from Schwab's standard rates. From 1994 to 1995, average
commission per retail agency trade increased $1 mainly due to a higher
proportion of equity securities trades, which generate a higher average
commission per trade.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Retail Agency
Commission Revenues 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Customer accounts that traded
during the year (in thousands) 1,814 1,543 1,352
Average commission-generating
trades per account 7.1 6.3 5.4
Total trades (in thousands) 12,804 9,753 7,282
Average commission per trade $ 69.52 $72.88 $71.88
Total commission revenues (in millions) $ $890 $ 711 $ 523
============================================================================
</TABLE>
Attracting new customer accounts is important in generating commission
revenues. Schwab opened 985,000 new customer accounts during 1996, up 41% and
43%, respectively, over account openings of 698,000 in 1995 and 688,000 in 1994.
New accounts generated approximately 16%, 13% and 14% of Schwab's total
commission revenues during 1996, 1995 and 1994, respectively.
(CHART OMITTED)
MUTUAL FUND SERVICE FEES
The Company earns mutual fund service fees for record keeping and shareholder
services provided to third-party funds, and for transfer agent services,
shareholder services, administration and investment management provided to its
proprietary funds. These fees are based upon daily balances of customer assets
invested in third-party funds and upon the average daily net assets of its
proprietary funds. Revenues received from customer purchase and sale
transactions of mutual funds are included in commission revenues.
Mutual fund service fees were $311 million in 1996, compared to $219 million
in 1995 and $157 million in 1994. The increases from 1994 to 1996 were primarily
attributable to significant increases in customer assets in funds purchased
through Schwab's Mutual Fund OneSource(registered trademark) service and in
customer assets in Schwab's proprietary funds, collectively referred to as the
SchwabFunds(registered trademark).
At December 31, 1996, Schwab's Mutual Fund OneSource service enabled
customers to trade over 620 mutual funds in 70 well-known fund families without
incurring transaction fees. The service is particularly attractive to investors
who would otherwise execute mutual fund trades directly with multiple mutual
fund companies to avoid brokerage transaction fees, and to achieve investment
diversity among fund families. In addition, investors' record keeping and
investment monitoring are simplified through one consolidated statement. Fees
received by Schwab via the Mutual Fund OneSource(registered trademark) program
are based upon daily balances of customer assets invested in the participating
funds through Schwab and are paid by the funds and/or fund sponsors. Customer
assets held by Schwab that have been purchased through the Mutual Fund OneSource
service, excluding Schwab's proprietary funds, totaled $39.2 billion, $23.9
billion and $12.5 billion at the end of 1996, 1995 and 1994, respectively.
The SchwabFunds(registered trademark) include money market funds, equity
index funds, bond funds, asset allocation funds, which contain stocks, bonds
and cash equivalents, and funds that primarily invest in stock, bond and money
market funds. Schwab customers may elect to have cash balances in their
brokerage accounts automatically invested in certain SchwabFunds money market
funds. Customer assets invested in the SchwabFunds, substantially all of which
are in money, market funds, were $43.1 billion, $31.7 billion and $23.3
billion at the end of 1996, 1995 and 1994, respectively.
Additionally, customer assets invested in the Mutual Fund Marketplace
(registered trademark), excluding the Mutual Fund OneSource service, totaled
$35.4 billion, $26.1 billion and $18.5 billion at the end of 1996, 1995 and
1994, respectively. Schwab charges a transaction fee on trades placed in the
funds included in the Mutual Fund Marketplace (except on trades through the
Mutual Fund OneSource service) and these fees are recorded as commission
revenues.
PRINCIPAL TRANSACTIONS
Principal transaction revenues are primarily comprised of net gains from
market-making activities in Nasdaq securities. Factors that influence principal
transaction revenues include the volume of customer trades and market price
volatility. During 1996, a record 138 billion shares traded on Nasdaq and the
Nasdaq Composite Index increased 23%. As a market maker in Nasdaq securities,
M&S generally executes customer trades as principal. M&S business practices call
for competitively priced customer trade executions on the most favorable terms
under the circumstances, generally defined as the highest bid price on
4
<PAGE> 5
a sell order and the lowest offer price on a buy order reasonably available in
the market. Certain customer trades are executed on a negotiated basis.
Substantially all Nasdaq security trades originated by the customers of Schwab
are directed to M&S.
Principal transaction revenues were $257 million in 1996, compared to $191
million in 1995 and $163 million in 1994. The increase from 1995 to 1996 was
primarily due to higher trading volume handled by M&S. The increase from 1994 to
1995 was primarily due to higher trading volume handled by M&S, partially offset
by lower average revenue per principal transaction mainly due to the impact of
the July 1994 National Association of Securities Dealers (NASD) Interpretation
to its Rules of Fair Practice.
In August 1996, the Securities and Exchange Commission (SEC) adopted certain
new rules and rule amendments, known as the Order Handling Rules, which
significantly alter the manner in which orders related to both Nasdaq and listed
securities are handled. These rules became effective on January 20, 1997, with
respect to exchange-listed stocks and a limited number of Nasdaq securities, and
are being phased in with respect to additional Nasdaq securities during 1997.
The SEC has also issued for comment certain proposed rules by the NASD which, if
approved, would introduce a new system for processing orders in the Nasdaq
market. The proposed NASD rules, if approved, along with other potential
regulatory actions and improvements in technology, could impact the manner in
which business is currently conducted in the Nasdaq market. In addition, during
1994, the SEC commenced an investigation into the Nasdaq market and the
activities of broker-dealers, including M&S, who act as market makers in Nasdaq
securities. On August 8, 1996, the SEC issued a report of its investigation, and
the NASD consented to sanctions for failing to enforce compliance with its rules
and the federal securities laws. The SEC is continuing its investigation and has
stated that further enforcement proceedings have not been precluded. These new
rules, regulatory actions and changes in market customs and practices are
expected to have a material adverse impact on M&S' principal transaction
revenues, M&S' profit margin and on the manner in which M&S conducts its
business. See "Commitments and Contingent Liabilities" note in the Notes to
Consolidated Financial Statements regarding certain civil litigation relating to
various principal transaction activities.
INTEREST REVENUE, NET OF INTEREST EXPENSE
Interest revenue, net of interest expense (referred to as net interest
revenue), is the difference between interest earned on assets (mainly
investments and margin loans to customers) and interest paid on liabilities
(mainly customer cash balances). Net interest revenue is affected by changes in
the volume and mix of these assets and liabilities, as well as fluctuations in
interest rates.
Substantially all of the Company's net interest revenue is earned by Schwab.
In clearing its customers' trades, Schwab holds cash balances payable to
customers. In most cases, Schwab pays its customers interest on such cash
balances awaiting investment, and may invest these funds and earn interest
revenue. Schwab also may lend these funds to customers on a secured basis to
purchase qualified securities - a practice commonly known as "margin lending."
Pursuant to SEC regulations, customer cash balances that are not used for margin
lending are segregated into investment accounts that are maintained for the
exclusive benefit of customers.
When investing segregated customer cash balances, Schwab must adhere to SEC
regulations that restrict investments to U.S. government securities,
participation certificates and mortgage-backed securities guaranteed by the
Government National Mortgage Association, certificates of deposit issued by U.S.
banks and thrifts, and resale agreements collateralized by qualified securities.
Schwab's policies for credit quality and maximum maturity requirements are more
restrictive than these SEC regulations. In each of the last three years, resale
agreements accounted for over 87% of Schwab's investments in segregated customer
cash balances. The average maturities of Schwab's total investments in
segregated customer cash balances were 60 days, 48 days and 54 days in 1996,
1995 and 1994, respectively.
Net interest revenue was $255 million in 1996, compared to $211 million in
1995 and $165 million in 1994 as shown in the following table (in millions):
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
INTEREST REVENUE
Margin loans to customers $339 $283 $168
Investments, customer-related 313 264 185
Other 29 21 10
- -----------------------------------------------------------
Total 681 568 363
- -----------------------------------------------------------
INTEREST EXPENSE
Customer cash balances 368 321 178
Stock-lending activities 25 15 7
Borrowings 18 12 12
Other 15 9 1
- -----------------------------------------------------------
Total 426 357 198
- -----------------------------------------------------------
Net Interest Revenue $255 $211 $165
===========================================================
</TABLE>
The Company's interest-earning assets (principally investments and margin
loans to customers) are financed primarily by interest-bearing customer cash
balances. Other funding sources include noninterest-bearing customer cash
balances, proceeds from stock-lending activities, borrowings and stockholders'
equity. Average balances and interest rates on customer-related,
interest-earning assets and related funding sources are summarized as follows
(dollars in millions):
5
<PAGE> 6
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $ 5,883 $ 4,815 $ 3,957
Average interest rate 5.32% 5.88% 4.26%
Margin loans to customers:
Average balance outstanding $ 4,482 $ 3,221 $ 2,742
Average interest rate 7.57% 8.20% 6.74%
Average yield on earning assets 6.29% 6.81% 5.28%
FUNDING SOURCES (CUSTOMER-RELATED AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $ 8,377 $ 6,553 $ 5,472
Average interest rate 4.40% 4.90% 3.25%
Other interest-bearing sources:
Average balance outstanding $ 775 $ 457 $ 384
Average interest rate 4.37% 4.54% 3.21%
Average noninterest-bearing portion $ 1,213 $ 1,026 $ 843
Average interest rate on
funding sources 3.88% 4.26% 2.84%
SUMMARY:
Average yield on earning assets 6.29% 6.81% 5.28%
Average interest rate on funding sources 3.88% 4.26% 2.84%
- ---------------------------------------------------------------------------------------
Average net interest margin 2.41% 2.55% 2.44%
=======================================================================================
</TABLE>
The increase in net interest revenue from 1995 to 1996 was primarily due to
higher levels of average earning assets, partially offset by higher levels of
funding sources and a decrease in average net interest margin. The increase in
net interest revenue from 1994 to 1995 was primarily due to higher levels of
average earning assets and an increase in average net interest margin, partially
offset by higher levels of funding sources.
Since the Company establishes the rates paid on customer cash balances and
charged on margin loans, a substantial portion of its net interest margin is
managed by the Company. However, the margin is influenced by external factors
such as the interest rate environment and competition. To pay competitive yields
to customers in a lower interest rate environment, the Company's average net
interest margin declined from 1995 to 1996. As interest rates were higher in
1995 than in 1994, the Company's average net interest margin increased during
1995.
OTHER REVENUES
Other revenues include other brokerage fees (mainly minimum account balance
fees and proxy services fees), retirement plan services fees, and software
product sales and usage fees. These revenues were $74 million in 1996, compared
to $48 million in 1995 and $34 million in 1994. The increases from 1994 to 1996
represented higher other brokerage fees due to increased customer activity and
higher retirement plan services fees.
(CHART OMITTED)
EXPENSES
COMPENSATION AND BENEFITS
Compensation and benefits expense includes salaries and wages, variable
compensation, and related employee benefits and taxes. The Company provides its
employees with compensation programs that contain variable pay components that
are tied to the achievement of specified objectives relating to revenue growth,
profit margin and growth in customer assets. Therefore, a significant portion of
compensation and benefits expense will fluctuate with these measures.
Compensation and benefits expense was $766 million in 1996, compared to $594
million in 1995 and $437 million in 1994. Variable compensation as a percentage
of total compensation and benefits expense was 27% in 1996, 24% in 1995 and 23%
in 1994. Increases in compensation and benefits expense between 1994 and 1996
were generally the result of a greater number of employees. The Company had
full-time, part-time and temporary employees, and persons employed on a contract
basis that represented the equivalent of approximately 10,400 full-time
employees at the end of 1996, compared to approximately 9,200 and 6,500 at the
end of 1995 and 1994, respectively. Increases in variable compensation due to
revenue growth, increased profitability and growth in customer assets also
contributed to the increases in compensation and benefits expense from 1994 to
1996. Compensation and benefits expense as a percentage of revenues was 41% in
1996, 42% in 1995 and 41% in 1994.
(CHART OMITTED)
The Company encourages and provides mechanisms for employee ownership of the
Company's common stock through its profit sharing and employee stock ownership
plan, its stock option plans and an automatic investment plan. The Company's
overall compensation structure is intended to attract, retain and reward highly
qualified employees, and to align the interests of employees with those of
stockholders. To further this alignment and in recognition of the Company's
strong financial performance, the Company awarded all non-officer employees a
stock grant for the first time in 1996, the cost of which totaled $10 million.
At December 31, 1996, directors, management and employees, and their
respective families, trusts and foundations, owned, including stock held for
employees' benefit in the Company's profit sharing and employee stock ownership
plan, approximately 40% of the Company's outstanding common stock. In addition,
directors, management and employees held options to purchase common stock in an
amount equal to approximately 8% of the Company's outstanding common stock at
December 31, 1996.
6
<PAGE> 7
COMMUNICATIONS
Communications expense includes telephone, postage, and news and quotation
charges. This expense was $165 million in 1996, compared to $129 million in 1995
and $107 million in 1994. The increases from 1994 to 1996 primarily resulted
from higher customer transaction volumes and increased customer use of
StreetSmart(registered trademark) and TeleBroker(registered trademark).
Communications expense as a percentage of revenues was 9% in 1996, 9% in 1995
and 10% in 1994.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment expense includes the costs of leasing and maintaining
the Company's office space, four regional customer telephone service centers, a
primary data center and 235 branch offices. It also includes lease and rental
expenses on computer and other equipment. Occupancy and equipment expense was
$130 million in 1996, compared to $111 million in 1995 and $88 million in 1994.
Reflecting the Company's growth and commitment to customer service, it expanded
its primary data center and office space in 1996, expanded each of its regional
customer telephone service centers in 1995 and opened a regional customer
telephone service center in 1994. Schwab opened 9 new branch offices in 1996, 19
in 1995 and 10 in 1994.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes expenses relating to equipment and
office facilities, property, goodwill, leasehold improvements and other
intangibles. This expense was $98 million in 1996, compared to $69 million in
1995 and $55 million in 1994. The increases from 1994 to 1996 were primarily due
to newly acquired data processing-related assets which increased the Company's
customer service capacity. The amortization of goodwill and other intangibles
resulting from businesses acquired during 1995 totaled $10 million in 1996 and
$5 million in 1995.
ADVERTISING AND MARKET DEVELOPMENT
Advertising and market development expense includes television, print and
direct mail advertising expenses and related production, printing and postage
costs. This expense was $84 million in 1996, compared to $53 million in 1995 and
$36 million in 1994. The increases from 1994 to 1996 were primarily a result of
the Company's promotional spending for its new and expanded product and service
offerings such as Schwab's Mutual Fund OneSource(registered trademark) service,
e.Schwab(trademark) and Schwab's No-Annual-Fee IRA.
COMMISSIONS, CLEARANCE AND FLOOR BROKERAGE
Commissions, clearance and floor brokerage expense includes fees paid to
stock and option exchanges for trade executions, fees paid by M&S to
broker-dealers for orders received for execution and fees paid to clearing
entities for trade processing. This expense was $81 million in 1996, compared to
$77 million in 1995 and $49 million in 1994. The increases from 1994 to 1996
were primarily attributable to increases in the number of trades processed by
M&S and Schwab. The volume increase from 1995 to 1996 was partially offset by a
decrease in the average per share fee paid by M&S to broker-dealers for orders
received for execution.
PROFESSIONAL SERVICES
Professional services expense includes the cost of consultants engaged to
support product, service and systems development, and legal and accounting fees.
This expense was $52 million in 1996, compared to $41 million in 1995 and $22
million in 1994. The increases from 1994 to 1996 were primarily due to increases
in consulting fees relating to various development projects - including those
involving new and expanded products and services, systems development and
capacity expansion.
OTHER EXPENSES
Other expenses include those relating to travel and entertainment, errors and
bad debts, registration fees for employees and other miscellaneous expenses.
None of these specific categories totaled more than 25% of total other expenses.
These expenses were $80 million in 1996, compared to $69 million in 1995 and $47
million in 1994. The increases from 1994 to 1996 were primarily attributable to
a combination of higher transaction volumes and higher staffing levels.
Charitable contributions also contributed to the increase in 1995.
TAXES ON INCOME
The Company's effective income tax rate was 40.7% in 1996, 37.7% in 1995 and
39.7% in 1994. The effective income tax rate during 1995 was lower than 1996 and
1994 primarily due to the reversal of reserves associated with the Company's
U.S. Tax Court case with the Internal Revenue Service. This case was settled in
1995.
LIQUIDITY AND CAPITAL RESOURCES
CSC operates as a holding company, conducting virtually all business through
its wholly owned subsidiaries. The capital structure among CSC and its
subsidiaries is designed to provide each entity with capital and liquidity
consistent with its operations. A description of significant aspects of this
structure for CSC and its two principal subsidiaries, Schwab and M&S, follows.
LIQUIDITY
SCHWAB
Most of Schwab's assets are liquid, consisting primarily of short-term (i.e.,
less than 90 days) investment-grade, interest-earning investments (the majority
of which are segregated for the exclusive benefit of customers pursuant to
regulatory requirements), receivables from customers, and receivables from
brokers, dealers and clearing organizations. Customer margin loans are demand
loan obligations secured by readily marketable securities. Receivables from and
payables to brokers, dealers and clearing organizations
7
<PAGE> 8
primarily represent current open transactions, which usually settle or can be
closed out within a few business days.
Liquidity needs relating to customer trading and margin borrowing activities
are met primarily through cash balances in customer accounts, which totaled
$10.9 billion, $8.4 billion and $6.7 billion at December 31, 1996, 1995 and
1994, respectively. Earnings from Schwab's operations are the primary source of
liquidity for capital expenditures and investments in new services, marketing
and technology. Management believes that customer cash balances and operating
earnings will continue to be the primary sources of liquidity for Schwab in the
future.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$250 million subordinated revolving credit facility maturing in September 1998,
of which $210 million was outstanding at December 31, 1996. At year end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
maturing in 1998. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintained uncommitted, unsecured
bank credit lines totaling $495 million at December 31, 1996. The need for
short-term borrowings arises primarily from timing differences between cash flow
requirements and the scheduled liquidation of interest-bearing investments, or,
if applicable, the release of funds from required regulatory reserves. Schwab
used such borrowings for 5 days in 1996, 9 days in 1995 and 29 days in 1994,
with the daily amounts borrowed averaging $52 million, $24 million and $43
million, respectively. These lines were unused at December 31, 1996.
M&S
M&S' liquidity needs are generally met through earnings generated by its
operations. Most of M&S' assets are liquid, consisting primarily of receivables
from brokers, dealers and clearing organizations, cash and cash equivalents, and
marketable securities. M&S may borrow up to $35 million under a subordinated
lending arrangement with CSC. Borrowings under this arrangement qualify as
regulatory capital for M&S. This facility was unused at December 31, 1996.
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. Schwab and M&S are
subject to regulatory requirements that are intended to ensure the general
financial soundness and liquidity of broker-dealers. These regulations would
prohibit Schwab and M&S from repaying subordinated borrowings to CSC, paying
cash dividends, or making unsecured advances or loans to their parent or
employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of their minimum dollar amount
requirement of $1 million. At December 31, 1996, Schwab had $541 million of net
capital (10% of aggregate debit balances), which was $436 million in excess of
its minimum required net capital. At December 31, 1996, M&S had $6 million of
net capital (134% of aggregate debit balances), which was $5 million in excess
of its minimum required net capital. Management believes that funds generated by
the operations of CSC's subsidiaries will continue to be the primary funding
source in meeting CSC's liquidity needs and maintaining Schwab's and M&S' net
capital.
CSC has individual liquidity needs that arise from its issued and outstanding
$278 million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as
from the funding of cash dividends, common stock repurchases and acquisitions.
The Medium-Term Notes have maturities ranging from 1997 to 2005 and fixed
interest rates ranging from 5.32% to 7.72% with interest payable semiannually.
The Medium-Term Notes were rated A3 by Moody's Investors Service and BBB+ by
Standard & Poor's Ratings Group at December 31, 1996 and 1995.
In November 1996, a prospectus supplement covering the issuance of up to $150
million in Senior or Senior Subordinated Medium-Term Notes, Series A, was filed
with the SEC, bringing the aggregate principal amount of such notes available to
be issued to $196 million. These notes remained unissued at December 31, 1996.
CSC may borrow under its $250 million committed, unsecured credit facility
with a group of nine banks through June 1997. The funds are available for
general corporate purposes for which CSC pays a commitment fee on the unused
balance. The terms of this facility require CSC to maintain minimum levels of
stockholders' equity and Schwab and M&S to maintain minimum levels of net
capital, as defined. This facility was not used in 1996.
CASH FLOWS AND CAPITAL RESOURCES
Net income plus depreciation and amortization was $332 million during 1996,
up 38% from $241 million in 1995, allowing the Company to finance the majority
of its growth with internally generated funds. During 1996, the Company invested
$160 million in various capital expenditures, including $111 million for
equipment and office facilities relating to continued enhancements of its data
processing and telecommunications systems, and $49 million for an office
building to be used for the expansion of its operations.
(CHART OMITTED)
As has been the case in recent years, capital expenditures will vary from
period to period as business conditions change. While management retains
substantial flexibility to adjust capital expenditures as necessary, in general
the level of future expenditures will be influenced by the rate of growth in
customer assets and trading activities, staffing and facilities requirements,
and availability of relevant technology to support innovation in products and
services.
8
<PAGE> 9
Management currently anticipates that 1997 capital expenditures will be
approximately 20% lower than the 1996 level.
During 1996, the Company:
- Increased its outstanding Medium-Term Notes by
$38 million.
- Paid common stock dividends of $31 million.
- Repurchased 1,081,000 shares of its common stock for $28 million.
The Company monitors both the relative composition and absolute level of its
capital structure. The Company's stockholders' equity at December 31, 1996
totaled $855 million. In addition, the Company had borrowings of $284 million
that bear interest at a weighted-average rate of 6.45%. These borrowings,
together with the Company's equity, provided total financial capital of $1,139
million at December 31, 1996, up $260 million, or 30% from a year ago.
Management currently anticipates that the proportions of borrowings and
stockholders' equity in the Company's capital structure will remain comparable
to current levels.
SHARE REPURCHASES
The Company repurchased 1,081,000 shares of its common stock for $28 million
in 1996, 873,800 shares for $17 million in 1995 and 4,999,200 shares for $47
million in 1994. Since the inception of the repurchase plan in 1988, the Company
has repurchased 26,191,500 shares of its common stock for $146 million. At
December 31, 1996, authorization granted by the Company's Board of Directors
allows for the repurchase of an additional 1,371,000 shares. The Company will
continue to monitor opportunities to repurchase common stock in cases where the
Company believes stockholder value would be enhanced.
DIVIDEND POLICY
As a result of the Company's continued strong earnings growth, the Board of
Directors increased the quarterly dividend 25% to $.05 per share in 1996. Since
the initial dividend in 1989, the Company's dividends per share have been
increased nine times and have grown at a 47% compounded annual rate. The Company
paid common stock dividends of $.180 per share, $.140 per share and $.092 per
share in 1996, 1995 and 1994, respectively. While the payment and amount of
dividends are at the discretion of the Company's Board of Directors, the Company
has historically targeted its cash dividend at approximately 10% of net income
plus depreciation and amortization.
(CHART OMITTED)
LOOKING AHEAD
Management expects financial services to remain intensely competitive during
1997, as the industry's financial success and a general trend of consolidation
have attracted new competitors and strengthened existing ones. The Company
believes that it possesses a number of competitive advantages that will enable
it to pursue its strategy of attracting and retaining customer assets. As
described more fully in the Description of Business section above, these
competitive advantages include: a nationally recognized brand, a broad line of
products and services offered at prices that management believes represent
superior value, diverse delivery systems, and the willingness and skills
necessary to invest in technology intended to benefit customers and reduce
costs. Additionally, the Company's significant employee ownership aligns the
interests of management with those of stockholders.
While fundamentally cyclical financial markets may adversely impact the
Company's financial results, management believes that the above competitive
advantages, combined with recent trends affecting the characteristics and
behavior of individual investors, will enable the firm to pursue its objective
of long-term profitable growth. These trends include the advent of a new
generation of investors who are currently entering their peak savings years, as
well as the increased willingness of many individuals to assume greater control
over their financial affairs.
Capitalizing on and strengthening the Company's competitive advantages
requires significant operating expense outlays and, during certain years,
significant capital expenditures. Management believes that these ongoing
investments are critical to increasing the Company's market share and achieving
its long-term financial objectives, which include annual growth in revenues of
20%, a 10% after-tax profit margin and a return on stockholders' equity of 20%.
9
<PAGE> 10
The Charles Schwab Corporation
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Commissions $ 954,129 $ 750,896 $ 546,112
Mutual fund service fees 311,067 218,784 156,812
Principal transactions 256,902 191,392 162,595
Interest revenue, net of interest expense of $425,872 in 1996,
$357,223 in 1995 and $198,236 in 1994 254,988 210,897 164,708
Other 73,836 47,934 34,370
- --------------------------------------------------------------------------------------------------------------------
Total 1,850,922 1,419,903 1,064,597
- --------------------------------------------------------------------------------------------------------------------
EXPENSES EXCLUDING INTEREST
Compensation and benefits 766,377 594,105 437,064
Communications 164,756 128,554 106,682
Occupancy and equipment 130,494 110,977 87,641
Depreciation and amortization 98,342 68,793 54,556
Advertising and market development 83,987 52,772 36,401
Commissions, clearance and floor brokerage 80,674 77,061 49,344
Professional services 52,055 41,304 21,928
Other 80,174 69,233 46,638
- --------------------------------------------------------------------------------------------------------------------
Total 1,456,859 1,142,799 840,254
- --------------------------------------------------------------------------------------------------------------------
Income before taxes on income 394,063 277,104 224,343
Taxes on income 160,260 104,500 89,000
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 233,803 $ 172,604 $ 135,343
====================================================================================================================
Weighted-average number of common and
common equivalent shares outstanding* 179,401 178,476 175,206
====================================================================================================================
PRIMARY/FULLY DILUTED EARNINGS PER SHARE $ 1.30 $ .97 $ .77
====================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ .180 $ .140 $ .092
====================================================================================================================
</TABLE>
* Amounts shown are used to calculate primary earnings per share.
See Notes to Consolidated Financial Statements.
10
<PAGE> 11
The Charles Schwab Corporation
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 633,317 $ 454,996
Cash and investments required to be segregated under Federal
or other regulations (including resale agreements of $6,069,930 in 1996
and $4,409,869 in 1995) 7,235,971 5,426,619
Receivable from brokers, dealers and clearing organizations 230,943 141,916
Receivable from customers - net 5,012,815 3,946,295
Securities owned - at market value 127,866 113,522
Equipment, office facilities and property - net 315,376 243,472
Intangible assets - net 68,922 80,863
Other assets 153,558 144,325
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 13,778,768 $ 10,552,008
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts payable $ 225,136 $ 212,961
Payable to brokers, dealers and clearing organizations 877,742 581,226
Payable to customers 11,176,836 8,551,996
Accrued expenses and other 360,683 326,785
Borrowings 283,816 246,146
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 12,924,213 9,919,114
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares authorized; $.01 par value per share;
none issued
Common stock - 500,000 shares authorized in 1996 and 200,000 shares authorized
in 1995; $.01 par value per share; 178,459 shares issued in 1996 and 1995 1,785 1,785
Additional paid-in capital 200,857 180,302
Retained earnings 723,085 520,532
Treasury stock - 3,391 shares in 1996 and 4,427 shares in 1995, at cost (60,277) (50,968)
Unearned ESOP shares (5,517) (9,397)
Unamortized restricted stock compensation (8,658) (7,074)
Foreign currency translation adjustment 3,280 (2,286)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 854,555 632,894
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 13,778,768 $ 10,552,008
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE> 12
The Charles Schwab Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 233,803 $ 172,604 $ 135,343
Noncash items included in net income:
Depreciation and amortization 98,342 68,793 54,556
Stock compensation 26,693 3,307 2,130
Deferred income taxes (5,214) (6,975) 3,781
Other 4,526 302 1,569
Change in securities owned - at market value (14,344) (53,297) (25,189)
Change in other assets (2,396) (39,610) 1,189
Change in accrued expenses and other 48,964 141,431 40,908
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 390,374 286,555 214,287
- ------------------------------------------------------------------------------------------------------------------------------
Change in customer-related balances (excluding the effects of
businesses acquired):
Payable to customers 2,608,577 1,775,434 924,579
Receivable from customers (1,066,802) (1,011,008) (371,587)
Drafts payable 11,069 89,909 (6,001)
Payable to brokers, dealers and clearing organizations 292,699 285,363 (7,561)
Receivable from brokers, dealers and clearing organizations (81,517) (15,908) (14,412)
Cash and investments required to be segregated under
Federal or other regulations (1,796,722) (1,157,717) (530,147)
- ------------------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (32,696) (33,927) (5,129)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 357,678 252,628 209,158
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment, office facilities and property - net (159,812) (165,630) (31,534)
Cash payments for businesses acquired, net of cash received (4,709) (68,244)
Purchase of life insurance policies (39,628) (41,684)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (164,521) (273,502) (73,218)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 64,000 70,000 20,000
Repayment of borrowings (27,459) (2,781) (35,916)
Dividends paid (31,495) (24,249) (16,038)
Purchase of treasury stock (28,171) (17,345) (46,781)
Proceeds from loans on life insurance policies 38,297 41,299
Other 7,839 11,623 5,499
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (15,286) 75,545 (31,937)
- ------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 450 (706)
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 178,321 53,965 104,003
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 454,996 401,031 297,028
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 633,317 $ 454,996 $ 401,031
==============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE> 13
The Charles Schwab Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Note
Receivable
Common Stock Additional From Profit
-------------------- Paid-In Retained Treasury Sharing
Shares* Amount Capital Earnings Stock Plan
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 173,512 $ 595 $161,052 $253,692 $(23,153) $(13,013)
Net income 135,343
Dividends declared on common stock (16,038)
Purchase of treasury stock (5,000) (46,781)
Stock options exercised and restricted stock
compensation awards 2,384 4,293 11,966
Amortization of restricted stock
compensation awards
Collection on note receivable from
Profit Sharing Plan 1,467
Reclassification of note receivable from
Profit Sharing Plan 11,546
ESOP shares released for allocation 758 164
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 170,896 595 166,103 373,161 (57,968)
- --------------------------------------------------------------------------------------------------------------------------------
Net income 172,604
Dividends declared on common stock (24,249)
Purchase of treasury stock (874) (17,345)
Stock options exercised and restricted stock
compensation awards 4,010 12,809 24,345
Three-for-two stock split effected in the
form of a 50% stock dividend 297 (297)
Two-for-one stock split effected in the
form of a 100% stock dividend 893 (893)
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 1,390 206
Foreign currency translation adjustment
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 174,032 1,785 180,302 520,532 (50,968)
- --------------------------------------------------------------------------------------------------------------------------------
Net income 233,803
Dividends declared on common stock (31,495)
Purchase of treasury stock (1,081) (28,171)
Stock options exercised and restricted stock
compensation awards 2,117 10,180 18,862
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 10,375 245
Foreign currency translation adjustment
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 175,068 $1,785 $200,857 $723,085 $ (60,277)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unamortized Foreign
Unearned Restricted Currency
ESOP Stock Translation
Shares Compensation Adjustment Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 379,173
Net income 135,343
Dividends declared on common stock (16,038)
Purchase of treasury stock (46,781)
Stock options exercised and restricted stock
compensation awards $(4,892) 11,367
Amortization of restricted stock
compensation awards 189 189
Collection on note receivable from
Profit Sharing Plan 1,467
Reclassification of note receivable from
Profit Sharing Plan $(11,546)
ESOP shares released for allocation 1,372 2,294
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 1994 (10,174) (4,703) 467,014
- ---------------------------------------------------------------------------------------------------
Net income 172,604
Dividends declared on common stock (24,249)
Purchase of treasury stock (17,345)
Stock options exercised and restricted stock
compensation awards (3,511) 33,643
Three-for-two stock split effected in the
form of a 50% stock dividend
Two-for-one stock split effected in the
form of a 100% stock dividend
Amortization of restricted stock
compensation awards 1,140 1,140
ESOP shares released for allocation 777 2,373
Foreign currency translation adjustment $ (2,286) (2,286)
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (9,397) (7,074) (2,286) 632,894
- ---------------------------------------------------------------------------------------------------
Net income 233,803
Dividends declared on common stock (31,495)
Purchase of treasury stock (28,171)
Stock options exercised and restricted stock
compensation awards (5,068) 23,974
Amortization of restricted stock
compensation awards 3,484 3,484
ESOP shares released for allocation 3,880 14,500
Foreign currency translation adjustment 5,566 5,566
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ (5,517) $ (8,658) $ 3,280 $ 854,555
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Share amounts are presented net of treasury shares.
See Notes to Consolidated Financial Statements.
13
<PAGE> 14
THE CHARLES SCHWAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands Except Per Share and Option Price Amounts)
BASIS OF PRESENTATION
The consolidated financial statements include The Charles Schwab Corporation
(CSC) and its subsidiaries (collectively referred to as the Company). CSC is a
holding company engaged, through its subsidiaries, in securities brokerage and
related investment services. CSC's principal operating subsidiary, Charles
Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 235 branch
offices in 46 states, the Commonwealth of Puerto Rico and the United Kingdom.
Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq
securities, provides trade execution services to broker-dealers, including
Schwab, and institutional customers.
Certain items in prior years' financial statements have been reclassified to
conform to the 1996 presentation. All material intercompany balances and
transactions have been eliminated.
SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS recorded by Schwab and the related revenues and expenses
are recorded on a trade date basis for 1996 and 1995, and a settlement date
basis for years prior to 1995. M&S records principal transactions and the
related revenues and expenses on a trade date basis.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts in the
accompanying financial statements. Such estimates relate to useful lives of
equipment, office facilities, buildings and intangible assets, fair value of
financial instruments, allowance for doubtful accounts, future tax benefits and
legal reserves. Actual results could differ from such estimates.
COSTS associated with internally developed software, and acquisitions of new
customer accounts are expensed as incurred.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company considers the amounts
presented for financial instruments on the consolidated balance sheet to be
reasonable estimates of fair value.
CASH AND INVESTMENTS REQUIRED TO BE SEGREGATED UNDER FEDERAL OR OTHER
REGULATIONS consist primarily of securities purchased under agreements to resell
(Resale Agreements) and certificates of deposit. Resale Agreements are accounted
for as collateralized financing transactions and are recorded at their
contractual amounts. Certificates of deposit are stated at cost, which
approximates market.
RECEIVABLE FROM CUSTOMERS that remain unsecured or partially secured for more
than 30 days are substantially reserved for, and are stated net of allowance for
doubtful accounts of $6 million and $4 million at December 31, 1996 and 1995,
respectively.
EQUIPMENT, OFFICE FACILITIES AND PROPERTY: Equipment and office facilities are
depreciated on a straight-line basis over the estimated useful life of the
asset, generally three to seven years. Buildings are depreciated on a
straight-line basis over twenty years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset or
the life of the lease. Equipment, office facilities and property are stated at
cost net of accumulated depreciation and amortization of $270 million and $212
million at December 31, 1996 and 1995, respectively.
INTANGIBLE ASSETS, including goodwill and customer lists, are amortized on a
straight-line basis over three to fifteen years. Intangible assets are stated at
cost net of accumulated amortization of $175 million and $162 million at
December 31, 1996 and 1995, respectively.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date, while
revenues and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate component
of stockholders' equity.
DERIVATIVES: The Company's derivatives activities were limited to
exchange-traded option contracts to reduce market risk on inventories in Nasdaq
and exchange-listed securities. The notional amount of such derivatives was not
material to the Company's consolidated balance sheets at December 31, 1996 and
1995.
EARNINGS PER SHARE are calculated by dividing net income by the sum of the
weighted-average number of common shares outstanding during the year plus common
share equivalents. The weighted-average number of common shares outstanding
during 1996, 1995 and 1994 was (in thousands) 173,976, 172,285 and 169,953,
respectively. Common share equivalents from the dilutive effect of stock options
utilized in computing earnings per share in 1996, 1995 and 1994 were (in
thousands) 5,425, 6,191 and 5,253 for primary, and 5,598, 6,577 and 5,388 for
fully diluted, respectively.
CASH FLOWS: For purposes of reporting cash flows, the Company considers all
highly liquid investments (including Resale Agreements) with original maturities
of three months or less that are not required to be segregated under Federal or
other regulations to be cash equivalents.
NEW ACCOUNTING STANDARDS: Statement of Financial Accounting Standards (SFAS) No.
121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, was adopted by
14
<PAGE> 15
the Company in 1996. This standard prescribes the method for asset impairment
evaluation for long-lived assets and certain identifiable intangibles that are
either held and used or to be disposed of. The adoption of the standard did not
have an effect on the Company's financial position, results of operations,
earnings per share or cash flows.
The Company is required to adopt certain provisions of SFAS No. 125 -
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, in 1997. Certain other provisions of this standard have been
deferred by SFAS No. 127 - Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125, until 1998. This standard provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The adoption of the standard will not have a
material effect on the Company's financial position, results of operations,
earnings per share or cash flows.
ACQUISITIONS
During 1995, the Company completed several acquisitions. The largest
acquisition was ShareLink Investment Services plc, a retail discount securities
brokerage firm in the United Kingdom, for $60 million, net of cash received.
Because the acquisitions were accounted for using the purchase method of
accounting, the operating results of the acquired companies are included in the
consolidated results of the Company since the respective dates of acquisitions.
The historic results of the acquired companies are not included in periods prior
to such acquisitions. During 1996, additional payments relating to a 1995
acquisition were made.
SECURITIES OWNED
Securities owned are recorded at market value and consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
SchwabFunds(registered trademark) money
market funds $ 50,405 $ 33,620
Equity and other securities 39,156 38,821
Equity and bond mutual funds 38,305 41,081
- -----------------------------------------------------------
Total securities owned $127,866 $113,522
===========================================================
</TABLE>
The Company's positions in SchwabFunds money market funds arise from
certain overnight funding of customers' check-writing activities. Equity and
other securities include M&S' inventories in Nasdaq securities and Schwab's
inventories in exchange-listed securities relating to its specialist operations.
Equity and bond mutual funds include investments made by the Company to fund
obligations under its deferred compensation plan.
Securities sold, but not yet purchased of $24 million at both December 31,
1996 and 1995, consist primarily of equity and other securities, and are
recorded at market value in accrued expenses and other.
PAYABLE TO CUSTOMERS
The principal source of funding for Schwab's margin lending is cash balances
in customer Schwab One(registered trademark) brokerage accounts. At December
31, 1996, Schwab was paying interest at 4.5% on $9,392 million of cash balances
in Schwab One brokerage accounts, which were included in payable to customers.
At December 31, 1995, Schwab was paying interest at 4.7% on $7,292 million of
such cash balances.
BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Medium-Term Notes $278,000 $240,000
Other 5,816 6,146
- -----------------------------------------------------------
Total borrowings $283,816 $246,146
===========================================================
</TABLE>
At December 31, 1996, CSC had $278 million aggregate principal amount of
Senior Medium-Term Notes, Series A (Medium-Term Notes), with fixed interest
rates ranging from 5.32% to 7.72% and maturities ranging from 1997 to 2005 as
follows (in millions): 1997 - $28; 1998 - $40; 1999 - $40; 2000 - $48; 2001
- - $39; and thereafter - $83. The Medium-Term Notes carry a weighted-average
interest rate of 6.47%. The fair value of the Medium-Term Notes at December 31,
1996 and 1995, based on estimates of market rates for debt with similar terms
and remaining maturities, approximated their carrying amounts.
In November 1996, a prospectus supplement covering the issuance of up to $150
million in Senior or Senior Subordinated Medium-Term Notes, Series A, was filed
with the Securities and Exchange Commission (SEC), bringing the aggregate
principal amount of such notes available to be issued to $196 million. These
notes remained unissued at December 31, 1996.
For use in its brokerage operations, at December 31, 1996 and 1995, Schwab
maintained uncommitted, unsecured bank credit lines totaling $495 million and
$470 million, respectively. There were no borrowings outstanding under these
lines at December 31, 1996 and 1995.
CSC may borrow under its $250 million committed, unsecured credit facility
with a group of nine banks through June 1997. The funds are available for
general corporate purposes for which CSC pays a commitment fee on the unused
balance. The terms of this facility require CSC to
15
<PAGE> 16
maintain minimum levels of stockholders' equity and Schwab and M&S to maintain
minimum levels of net capital, as defined. This facility was not used in 1996.
TAXES ON INCOME
Income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $138,990 $ 96,742 $72,157
State 26,484 14,733 13,062
- -----------------------------------------------------------
Total current 165,474 111,475 85,219
- -----------------------------------------------------------
Deferred:
Federal (4,881) (6,818) 3,221
State (333) (157) 560
- -----------------------------------------------------------
Total deferred (5,214) (6,975) 3,781
- -----------------------------------------------------------
Total taxes on income $160,260 $104,500 $89,000
===========================================================
</TABLE>
The above amounts do not include the tax benefit from the exercise of stock
options, which for accounting purposes is credited directly to additional
paid-in capital. Such tax benefits reduced income taxes paid by $15 million, $22
million and $5 million for 1996, 1995 and 1994, respectively.
The temporary differences which created deferred tax assets and liabilities,
included in other assets, and accrued expenses and other, are detailed below:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation $19,872 $ 12,373
Reserves and allowances 12,733 9,403
Depreciation and amortization 934 8,880
State and local taxes (923) 2,029
- ------------------------------------------------------------
Total deferred assets 32,616 32,685
- ------------------------------------------------------------
Deferred Tax Liabilities:
Asset valuation differences (3,289) (11,694)
Other 816 (1,145)
- ------------------------------------------------------------
Total deferred liabilities (2,473) (12,839)
- ------------------------------------------------------------
Net deferred tax asset $30,143 $ 19,846
============================================================
</TABLE>
The Company determined that no valuation allowance against deferred tax
assets at December 31, 1996 and 1995 was necessary.
The effective income tax rate differs from the amount computed by applying
the Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal tax benefit 4.3 3.4 4.0
Other 1.4 (.7) .7
- ------------------------------------------------------------
Effective income tax rate 40.7% 37.7% 39.7%
============================================================
</TABLE>
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Company's stock option plans provide for granting officers, directors and
other key employees options and restricted stock awards.
Options are granted for the purchase of shares of common stock at not less
than market value on the date of grant, and expire within either eight or ten
years from the date of grant. In December 1996, the Board of Directors approved
a retroactive change to the vesting schedule (from a five-year to a four-year
period) for options granted after December 31, 1993. The options granted on or
before December 31, 1993 generally vest over a four-year period from the date of
grant of the option. A summary of option activity incorporating the new vesting
schedule follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 15,443 $ 9.29 17,418 $ 5.58 15,839 $ 4.15
Granted 1,415 $ 25.25 2,629 $ 23.94 3,695 $ 10.40
Exercised (1,892) $ 3.95 (3,858) $ 2.96 (1,928) $ 3.08
Canceled (613) $ 14.49 (746) $ 6.88 (188) $ 5.69
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 14,353 $ 11.35 15,443 $ 9.29 17,418 $ 5.58
======================================================================================================================
Exercisable at
end of year 9,236 $ 6.98 7,039 $ 4.57 7,995 $ 3.27
======================================================================================================================
Available for
future grant at
end of year 2,948 3,934 5,982
======================================================================================================================
Weighted-average
fair value of
options granted
during the year $11.18 $10.61
======================================================================================================================
</TABLE>
The fair value of each option granted during 1996 and 1995 is the estimated
present value at grant date using the Black-Scholes option-pricing model with
the following assumptions: (i) dividend yield of .75%, (ii) expected volatility
of 44%, (iii) risk-free interest rate of 6% and (iv) expected life of 5 years.
The following table summarizes information about options outstanding and
exercisable:
16
<PAGE> 17
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
December 31, 1996 of Options Life (in years) Price of Options Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2 to $10 7,599 5.6 $ 4.95 6,997 $ 4.55
$10 to $20 3,094 7.8 $11.07 1,651 $11.01
$20 to $31 3,660 8.9 $24.87 588 $24.64
- ------------------------------------------------------------------------------------------------------
$ 2 to $31 14,353 6.9 $11.35 9,236 $ 6.98
======================================================================================================
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 - Accounting
for Stock Issued to Employees, and related Interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized for
the Company's options. Had compensation expense for the Company's options been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123 - Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Net Income: As reported $233,803 $172,604
Pro forma $227,401 $168,296
==========================================================
Primary/Fully Diluted Earnings
Per Share: As reported $ 1.30 $ .97
Pro forma $ 1.27 $ .94
==========================================================
</TABLE>
The pro forma effect on net income for 1996 and 1995 is not representative of
the pro forma effect on net income in future years because it only takes into
consideration pro forma compensation expense related to grants made after
December 31, 1994.
Restricted stock awards are restricted from sale, and some vest based upon
the Company achieving certain financial measures. The market value of shares
associated with the restricted stock awards is recorded as unamortized
restricted stock compensation and is amortized to compensation expense over the
vesting periods, generally four years.
EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and employee stock ownership plan (the
Profit Sharing Plan), including a 401(k) salary deferral component, for eligible
employees who have met certain service requirements. The Company matches certain
employee contributions; additional contributions to this plan are at the
discretion of the Company. Total Company contribution expense was $36 million,
$32 million and $14 million for 1996, 1995 and 1994, respectively. The increase
from 1994 to 1995 was primarily due to changes in the way in which the Company
accounts for the employee stock ownership plan (ESOP) component of the Profit
Sharing Plan (described below).
In January 1993, the Profit Sharing Plan borrowed $15 million from the
Company to purchase over 2 million shares of the Company's common stock. The
note receivable from the Profit Sharing Plan had a balance of $5 million and $9
million at December 31, 1996 and 1995, respectively, bears interest at 7.9% and
is due in annual installments through 2007. As the note is repaid, shares are
released for allocation to eligible employees based on the proportion of debt
service paid during the year. In accordance with Statement of Position No. 93-6
- - Employers' Accounting for Employee Stock Ownership Plans (the Statement), the
Company recognizes as expense the fair value of shares released for allocation
to employees through the ESOP. Only released ESOP shares are considered
outstanding for earnings per share computations. Dividends on allocated shares
and unallocated shares are charged to retained earnings and compensation and
benefits expense, respectively. Compensation and benefits expense related to
shares released for allocation through the ESOP loan repayments was $14 million,
$2 million and $3 million in 1996, 1995 and 1994, respectively, for shares
purchased in 1993, and $2 million in 1994, for shares purchased prior to 1993.
The increase from 1995 to 1996 was primarily due to a greater number of shares
released for allocation. The unallocated shares are recorded as unearned ESOP
shares on the consolidated balance sheet. Under the "grandfather" provisions of
the Statement, the Company did not apply the Statement to shares purchased by
the ESOP prior to 1993.
The ESOP share information is as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Allocated shares:
Purchased prior to 1993 10,239 11,494
Purchased in 1993 and after 813 701
Shares released for allocation:
Purchased in 1993 and after 1,153 112
Unreleased shares:
Purchased in 1993 and after 797 1,364
- -----------------------------------------------------------
Total ESOP shares 13,002 13,671
===========================================================
Fair value of unreleased shares $25,510 $27,454
===========================================================
</TABLE>
During 1994, the Company, as the beneficiary, implemented a life insurance
program covering the majority of its employees. Under the program, the cash
surrender value of insurance policies is recorded net of policy loans in other
assets. At December 31, 1996 and 1995, policy loans with an interest rate of
8.00% and 8.96% totaled $81 million and $80 million, respectively.
REGULATORY REQUIREMENTS
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule) and each compute net capital under
the alternative method
17
<PAGE> 18
permitted by this Rule, which requires the maintenance of minimum net capital,
as defined, of the greater of 2% of aggregate debit balances arising from
customer transactions or a minimum dollar amount, which is based on the type of
business conducted by the broker-dealer. The minimum dollar amount for both
Schwab and M&S is $1 million. Under the alternative method, a broker-dealer may
not repay subordinated borrowings, pay cash dividends, or make any unsecured
advances or loans to its parent or employees if such payment would result in net
capital of less than 5% of aggregate debit balances or less than 120% of its
minimum dollar amount requirement. At December 31, 1996, Schwab's net capital
was $541 million (10% of aggregate debit balances), which was $436 million in
excess of its minimum required net capital and $279 million in excess of 5% of
aggregate debit balances. At December 31, 1996, M&S' net capital was $6 million
(134% of aggregate debit balances), which was $5 million in excess of its
minimum required net capital.
Schwab, M&S and ShareLink Limited, a subsidiary of ShareLink Investment
Services plc, had portions of their cash and investments segregated for the
exclusive benefit of customers at December 31, 1996, in accordance with
applicable regulations.
COMMITMENTS AND CONTINGENT LIABILITIES
The Company has noncancelable operating leases for office space and
equipment. Future minimum rental commitments under these leases at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
<S> <C>
1997 $ 61,289
1998 47,078
1999 41,568
2000 29,948
2001 29,167
Thereafter 183,613
===========================================================
</TABLE>
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense was $92
million, $79 million and $64 million for 1996, 1995 and 1994, respectively.
M&S has been named as one of thirty-three defendant market-making firms in a
consolidated class action, encaptioned In re: Nasdaq Market-Makers Antitrust
Litigation, which is pending in the United States District Court for the
Southern District of New York pursuant to an order of the Judicial Panel on
Multidistrict Litigation. On December 16, 1994, the plaintiffs filed a
consolidated amended complaint purportedly on behalf of certain persons who
purchased or sold Nasdaq securities during the period May 1, 1989 through May
27, 1994. On August 22, 1995, a second consolidated amended class action
complaint was filed. On November 26, 1996, a plaintiff class was certified by
the Court. The consolidated complaint generally alleges an illegal combination
and conspiracy among the defendant market makers to fix and maintain the spreads
between the bid and ask prices of certain Nasdaq securities. The consolidated
complaint does not set forth any specific amount of damages, although it
requests that the actual damages be trebled where permitted by statute. The
ultimate outcome of this consolidated action cannot currently be determined.
On July 16, 1996, the Department of Justice (DOJ) filed a civil action in the
United States District Court for the Southern District of New York, encaptioned
United States of America v. Alex Brown & Sons, Inc., et al., against M&S and
twenty-three other market makers in Nasdaq securities alleging violations of the
federal antitrust laws in connection with certain customs and practices. On July
16, 1996, the twenty-four market-maker defendants, including M&S, entered into a
Stipulation and Order resolving the civil action. Under the Stipulation, the
parties agreed that the defendants would not engage in certain types of
market-making activities and would take specific steps to assure compliance with
the agreement. No fines or damages were assessed. The Stipulation and Order is
subject to approval by the District Court. Certain parties have challenged
portions of the Stipulation and Order, and on January 14, 1997, the Court heard
arguments on whether the Stipulation and Order should be approved. If the Court
approves the Stipulation and Order, the civil action will be dismissed.
Between August 12, 1993 and November 17, 1995, Schwab was named as a
defendant in eleven class action lawsuits, five of which have been resolved
favorably to Schwab and six of which are still pending in state courts in
Illinois, Louisiana, Texas and California. The class actions purport to be
brought on behalf of customers of Schwab who purchased or sold securities for
which Schwab received payments from the market maker, stock dealer or other
third party who executed the transaction. The complaints generally allege that
Schwab failed to disclose and remit such payments to members of the class, and
generally seek damages equal to the payments received by Schwab. On June 30,
1995, a class was certified in Civil District Court for the Parish of Orleans in
Louisiana for Louisiana residents who purchased or sold securities through
Schwab between February 1, 1985 and February 1, 1995 for which Schwab received
monetary payments from the market maker or stock dealer who executed the
transaction. The class certification was affirmed by the Louisiana Court of
Appeals on February 29, 1996. On August 16, 1995, another class was certified in
Civil District Court for the Parish of Natchitoches in Louisiana for residents
of all states who purchased or sold securities through Schwab since 1985 for
which Schwab received monetary payments from the market maker or the third party
who executed the
18
<PAGE> 19
transaction. The class certification was affirmed by the Louisiana Court of
Appeals on December 2, 1996. The actions in Illinois and California are on
appeal by plaintiffs from rulings dismissing the complaints on the grounds that
the claims asserted are preempted by federal law. The action in Texas has been
stayed. The ultimate outcome of these actions cannot currently be determined.
There are other various lawsuits pending against the Company which, in the
opinion of management, will be resolved with no material impact on the Company's
financial position or results of operations.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
AND CREDIT RISK
Through Schwab and M&S, the Company loans customer securities temporarily to
other brokers in connection with its security lending activities. The Company
receives cash as collateral for the securities loaned. Increases in security
prices may cause the market value of the securities loaned to exceed the amount
of cash received as collateral. In the event the counterparty to these
transactions does not return the loaned securities, the Company may be exposed
to the risk of acquiring the securities at prevailing market prices in order to
satisfy its customer obligations. The Company mitigates this risk by requiring
credit approvals for counterparties, by monitoring the market value of
securities loaned on a daily basis and by requiring additional cash as
collateral when necessary.
The Company is obligated to settle transactions with brokers and other
financial institutions even if its customers fail to meet their obligations to
the Company. Customers are required to complete their transactions on settlement
date, generally three business days after trade date. If customers do not
fulfill their contractual obligations, the Company may incur losses. The Company
has established procedures to reduce this risk by requiring deposits from
customers for certain types of trades.
In the normal course of its margin lending activities, Schwab may be liable
for the margin requirement of customer margin securities transactions. As
customers write option contracts or sell securities short, the Company may incur
losses if the customers do not fulfill their obligations and the collateral in
customer accounts is not sufficient to fully cover losses which customers may
incur from these strategies. To mitigate this risk, the Company monitors
required margin levels daily and customers are required to deposit additional
collateral, or reduce positions, when necessary.
In its capacity as market maker, M&S maintains inventories in Nasdaq
securities on both a long and short basis. While long inventory positions
represent M&S ownership of securities, short inventory positions represent
obligations of M&S to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
losses or gains to M&S as market values of securities fluctuate. Also, Schwab
maintains inventories in exchange-listed securities on both a long and short
basis relating to its specialist operations and could incur losses or gains as a
result of changes in the market value of these securities. To mitigate the risk
of losses, long and short positions are marked to market daily and are
continuously monitored to assure compliance with limits established by the
Company. Additionally, the Company may purchase exchange-traded option contracts
to reduce market risk on these inventories.
Schwab enters into collateralized Resale Agreements principally with other
broker-dealers which could result in losses in the event the counterparty to the
transaction does not purchase the securities held as collateral for the cash
advanced and the market value of these securities declines. To mitigate this
risk, Schwab requires that the counterparty deliver to a custodian securities,
to be held as collateral, with a market value in excess of the resale price.
Schwab also sets standards for the credit quality of the counterparty, monitors
the market value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral where
deemed appropriate.
CONCENTRATIONS
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1996. As of December
31, 1996, approximately 27% of Schwab's total customer accounts were located in
California.
19
<PAGE> 20
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
CASH PAID:
Income taxes $145,113 $ 98,444 $ 75,530
===========================================================
Interest:
Customer cash balances $369,960 $319,645 $176,487
Stock-lending activities 24,302 14,106 7,029
Borrowings 16,931 11,131 11,632
Other 9,670 4,833 393
- -----------------------------------------------------------
Total interest $420,863 $349,715 $195,541
===========================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
BUSINESSES ACQUIRED:
Assets acquired $219,457
Liabilities assumed (138,204)
Other $ 4,709 (5,484)
- -----------------------------------------------------------
Cash payments 4,709 75,769
Cash received (7,525)
- -----------------------------------------------------------
Cash payments, net of
cash received $ 4,709 $ 68,244
===========================================================
</TABLE>
20
<PAGE> 21
MANAGEMENT'S REPORT
To Our Stockholders:
Management of the Company is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and the other financial
information presented in this report. To meet these responsibilities we maintain
a system of internal control that is designed to provide reasonable assurance as
to the integrity and reliability of the financial statements, the protection of
Company and customer assets from unauthorized use, and the execution and
recording of transactions in accordance with management's authorization. The
system is augmented by careful selection of our managers, by organizational
arrangements that provide an appropriate division of responsibility and by
communications programs aimed at assuring that employees adhere to the highest
standards of personal and professional integrity. The Company's internal audit
function monitors and reports on the adequacy of and compliance with our
internal controls, policies and procedures. Although no cost-effective internal
control system will preclude all errors and irregularities, we believe the
Company's system of internal control is adequate to accomplish the objectives
set forth above.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and necessarily include some amounts
that are based on estimates and our best judgments. The financial statements
have been audited by the independent accounting firm of Deloitte & Touche LLP,
whose audit included consideration of the internal control structure to the
extent necessary to render their opinion on the financial statements. We made
available to Deloitte & Touche LLP all the Company's financial records and
related data. We believe that all representations made to Deloitte & Touche LLP
during their audit were valid and appropriate.
The Board of Directors through its Audit Committee, which is comprised
entirely of nonmanagement directors, has an oversight role in the area of
financial reporting and internal control. The Audit Committee periodically meets
with Deloitte & Touche LLP, our internal auditors and Company management to
review accounting, auditing, internal control and financial reporting matters.
Charles R. Schwab
Chairman of the Board and Chief Executive Officer
Steven L. Scheid
Executive Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of The Charles Schwab Corporation:
We have audited the accompanying consolidated balance sheets of The Charles
Schwab Corporation and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Charles Schwab Corporation
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 1997
21
<PAGE> 22
The Charles Schwab Corporation
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Millions, Except Per Share Data and Ratios)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Weighted- Primary/
Average Fully Diluted
Expenses Common Earnings
Excluding Net Equivalent Per
Revenues (a) Interest Income Shares (b) Share
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 BY QUARTER
Fourth $ 482.3 $ 383.1 $ 59.7 179.9 $.33
Third DIVIDEND INCREASE 430.0 333.4 57.1 179.6 .32
Second 491.8 373.1 70.1 179.3 .39
First 446.8 367.2 46.9 178.9 .26
- -----------------------------------------------------------------------------------------------------------------
1995 BY QUARTER
Fourth $ 394.8 $ 332.4 $ 42.6 179.9 $.24
Third DIVIDEND INCREASE/STOCK SPLIT 385.5 307.5 47.2 179.7 .26
Second 342.7 269.4 44.4 178.1 .25
First DIVIDEND INCREASE/STOCK SPLIT 296.9 233.5 38.4 176.1 .22
- -----------------------------------------------------------------------------------------------------------------
1994 BY QUARTER
Fourth $ 270.4 $ 214.4 $ 33.8 175.2 $.19
Third 248.1 196.5 31.2 174.2 .18
Second 258.2 205.1 32.1 175.1 .18
First DIVIDEND INCREASE 287.9 224.3 38.2 176.4 .22
- -----------------------------------------------------------------------------------------------------------------
1993 BY QUARTER
Fourth $ 257.5 $ 212.3 $ 28.5 179.5 $.16
Third 238.8 191.1 22.2(d) 179.0 .12(d)
Second DIVIDEND INCREASE/STOCK SPLIT 232.4 180.4 31.6 177.9 .18
First 236.3 174.9 35.4 177.0 .20
- -----------------------------------------------------------------------------------------------------------------
1992 BY QUARTER
Fourth $ 193.5 $ 148.2 $ 25.2 173.5 $.15
Third 159.3 144.3 7.8 174.7 .04
Second DIVIDEND INCREASE 176.8 143.8 18.5 177.2 .10
First 219.9 167.0 29.7 177.5 .17
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Dividends
Declared Range Range
Per of Common of Price/
Common Stock Price Earnings
Share Per Share Ratio (c)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 BY QUARTER
Fourth $.050 $32.88-22.50 25-17
Third DIVIDEND INCREASE .050 26.88-19.88 22-16
Second .040 26.50-21.88 23-19
First .040 27.38-18.63 27-18
- -----------------------------------------------------------------------------------
1995 BY QUARTER
Fourth $.040 $26.68-16.63 28-17
Third DIVIDEND INCREASE/STOCK SPLIT .040 29.00-20.75 32-23
Second .030 22.88-14.75 27-18
First DIVIDEND INCREASE/STOCK SPLIT .030 16.50-11.04 21-14
- -----------------------------------------------------------------------------------
1994 BY QUARTER
Fourth $.023 $12.33-9.21 16-12
Third .023 10.29-8.46 14-11
Second .023 11.29-8.25 16-12
First DIVIDEND INCREASE .023 11.00-8.67 16-13
- -----------------------------------------------------------------------------------
1993 BY QUARTER
Fourth $.017 $12.79-9.58 19-15
Third .017 12.38-8.92 18-13
Second DIVIDEND INCREASE/STOCK SPLIT .017 9.67-6.81 17-12
First .013 8.28-5.53 17-11
- -----------------------------------------------------------------------------------
1992 BY QUARTER
Fourth $.013 $ 6.19-3.69 13- 8
Third .013 5.78-3.72 14- 9
Second DIVIDEND INCREASE .013 7.69-4.53 18-10
First .009 8.39-6.47 22-17
- -----------------------------------------------------------------------------------
</TABLE>
(a) Revenues are presented net of interest expense.
(b) Amounts shown are used to calculate primary earnings per share.
(c) Price/earnings ratio is computed by dividing the high and low market prices
by primary/fully diluted earnings per share for the 12-month period ended
on the last day of the quarter presented. The extraordinary charge in 1993
(described at right) has been excluded.
(d) Net income and primary/fully diluted earnings per share are net of the
effect of a $6.7 million ($.04 per share) extraordinary charge from the
early retirement of debt.
<PAGE> 23
THE CHARLES SCHWAB CORPORATION
CHART APPENDIX LIST
In this appendix, the following descriptions of certain charts in
portions of the Company's 1996 Annual Report to Stockholders that are omitted
from the EDGAR Version are more specific with respect to the actual numbers,
amounts and percentages than is determinable from the charts themselves. The
Company submits such more specific descriptions only for the purpose of
complying with the requirements for transmitting portions of this Annual Report
on Form 10-K electronically via EDGAR; such more specific descriptions are not
intended in any way to provide information that is additional to the information
otherwise provided in portions of the Company's 1996 Annual Report to
Stockholders.
EDGAR Chart Description
Version
Page Number
2 Bar chart titled "Active Schwab Customer Accounts" depicting
the number of active Schwab customer accounts at year end
1996, 1995, 1994, 1993 and 1992 (shown on the left axis) as
follows (millions of accounts) (bar labeled): 4.0, 3.4, 3.0,
2.5 and 2.0, respectively.
2 Stacked bar chart titled "Assets in Schwab Customer Accounts"
depicting the composition of assets in Schwab customer
accounts at year end 1996, 1995, 1994, 1993 and 1992 (shown on
the left axis) as follows (billions of dollars): Cash and
Equivalents $50.0, $37.9, $28.6, $20.1 and $15.6,
respectively; Mutual Fund Marketplace (registered trademark)
$78.3, $52.0, $32.2, $26.2 and $12.2, respectively; Stocks
(net of margin loans) $98.5, $71.6, $46.1, $39.5 and $29.6,
respectively; Fixed Income Securities $26.4, $20.2, $15.7,
$10.0 and $8.2, respectively; Assets in Schwab Customer
Accounts (bar labeled) $253.2, $181.7, $122.6, $95.8 and
$65.6, respectively.
3 Bar chart titled "Revenues" depicting the revenues for the
fiscal years 1996, 1995 and 1994 (shown on the left axis) as
follows (millions of dollars) (bar labeled): $1,851, $1,420
and $1,065, respectively.
3 Stacked bar chart titled "Schwab Customers' Daily Average
Trading Volume" depicting the composition of Schwab customers'
daily average trading volume for the fiscal years 1996, 1995
and 1994 (shown on the left axis) as follows (thousands of
trades): Commission and Other Trades 50.7, 38.3 and 29.2,
respectively; Mutual Fund OneSource (registered trademark)
Trades 27.3, 18.0 and 14.3, respectively; Schwab Customers'
Daily Average Trading Volume (bar labeled) 78.0, 56.3 and
43.5, respectively.
3 Bar chart titled "Net Income" depicting the net income for the
fiscal years 1996, 1995 and 1994 (shown on the left axis) as
follows (millions of dollars) (bar labeled): $234, $173 and
$135, respectively.
3 Pie chart titled "Composition of Revenues" depicting the
composition of revenues (percent of total) for the fiscal
years 1996, 1995 and 1994 as follows: Commissions 52%, 53% and
51%, respectively; Mutual Fund Service Fees 17%, 15% and 15%,
respectively; Principal Transactions 14%, 13% and 15%,
respectively; Net Interest Revenue 14%, 15% and 15%,
respectively; Other 3%, 4% and 4%, respectively.
3 Stacked bar chart titled "Commissions" depicting the
composition of commissions for the fiscal years 1996, 1995 and
1994 (shown on the left axis) as follows (millions of
dollars): Listed $423, $348 and $279, respectively; Nasdaq
$394, $283 and $169, respectively; Options $66, $53 and $39,
respectively; Other $71, $67 and $59, respectively;
Commissions (bar labeled) $954, $751 and $546, respectively.
<PAGE> 24
4 Bar chart titled "New Schwab Customer Accounts" depicting the
number of new Schwab customer accounts for the fiscal years
1996, 1995 and 1994 (shown on the left axis) as follows
(thousands of accounts) (bar labeled): 985, 698 and 688,
respectively.
6 Pie chart titled "Expenses Excluding Interest" depicting the
composition of expenses excluding interest (percent of total)
for the fiscal years 1996, 1995 and 1994 as follows:
Compensation and Benefits 53%, 52% and 52%, respectively;
Communications 11%, 11% and 13%, respectively; Occupancy and
Equipment 9%, 10% and 10%, respectively; Depreciation and
Amortization 7%, 6% and 6%, respectively; Advertising and
Marketing Development 6%, 5% and 4%, respectively;
Commissions, Clearance and Floor Brokerage 5%, 7% and 6%,
respectively; Other 9%, 9% and 9%, respectively.
6 Stacked bar chart titled "Compensation and Benefits" depicting
the composition of compensation and benefits for the fiscal
years 1996, 1995 and 1994 (shown on the left axis) as follows
(millions of dollars): Salaries and Wages $451, $355 and $273,
respectively; Variable Compensation $205, $144 and $101,
respectively; Other Benefits $110, $95 and $63, respectively;
Compensation and Benefits (bar labeled) $766, $594 and $437,
respectively.
8 Bar chart titled "Net Income Plus Depreciation and
Amortization" depicting the net income plus depreciation and
amortization for the fiscal years 1996, 1995 and 1994 (shown
on the left axis) as follows (millions of dollars) (bar
labeled): $332, $241 and $190, respectively.
9 Bar chart titled "Dividends Declared Per Common Share"
depicting the dividends declared per common share for the
fiscal years 1996, 1995 and 1994 (shown on the left axis) as
follows (bar labeled): $.180, $.140 and $.092, respectively.
<PAGE> 1
THE CHARLES SCHWAB CORPORATION
================================================================================
EXHIBIT 21.1
THE CHARLES SCHWAB CORPORATION
SUBSIDIARIES OF THE REGISTRANT
THE FOLLOWING IS A LISTING OF THE SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT:
SCHWAB HOLDINGS, INC., a Delaware corporation
CHARLES SCHWAB & CO., INC., a California corporation
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., a Delaware corporation
MAYER & SCHWEITZER, INC., a New Jersey corporation
THE FOLLOWING IS A LISTING OF CERTAIN OTHER SUBSIDIARIES OF THE REGISTRANT:
THE CHARLES SCHWAB TRUST COMPANY, a California corporation
SHARELINK, an England and Wales corporation
================================================================================
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-30260 on Form S-8, in Registration Statement No. 33-37485 on Form S-8, in
Registration Statement No. 33-45356 on Form S-8, in Registration Statement No.
33-54701 on Form S-8, in Registration Statement No. 33-61943 on Form S-3 and
in Registration Statement No. 333-12727 on Form S-3 of The Charles Schwab
Corporation of our reports dated February 21, 1997 appearing in and incorporated
by reference in this Annual Report on Form 10-K of The Charles Schwab
Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
San Francisco, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET OF THE COMPANY'S
1996 ANNUAL REPORT TO STOCKHOLDERS, WHICH ARE INCORPORATED HEREIN BY REFERENCE
TO EXHIBIT NO. 13.1 OF THIS REPORT, FOR THE PERIOD ENDED DECEMBER 31, 1996, 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,799,358
<RECEIVABLES> 5,243,758
<SECURITIES-RESALE> 6,069,930
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 127,866
<PP&E> 315,376
<TOTAL-ASSETS> 13,778,768
<SHORT-TERM> 225,136
<PAYABLES> 12,054,578
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 283,816
0
0
<COMMON> 1,785
<OTHER-SE> 852,770
<TOTAL-LIABILITY-AND-EQUITY> 13,778,768
<TRADING-REVENUE> 256,902
<INTEREST-DIVIDENDS> 680,860
<COMMISSIONS> 954,129
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 311,067
<INTEREST-EXPENSE> 425,872
<COMPENSATION> 766,377
<INCOME-PRETAX> 394,063
<INCOME-PRE-EXTRAORDINARY> 233,803
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,803
<EPS-PRIMARY> $1.30
<EPS-DILUTED> $1.30
</TABLE>
