FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PACIFIC MERCANTILE BANCORP
(Exact name of registrant as specified in its charter)
California 6712 33-0898238
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
450 Newport Center Drive, Suite 100
Newport Beach, California 92660
(949) 644-8040
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
RAYMOND E. DELLERBA
450 Newport Center Drive, Suite 100
Newport Beach, California 92660
(949) 644-8040
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
BEN A. FRYDMAN, ESQ. JOHN J. HALLE, ESQ.
Stradling Yocca Carlson & Rauth Stoel Rives LLP
660 Newport Center Drive, Suite 1600 900 S.W. Fifth Avenue, Suite 2600
Newport Beach, California 92660 Portland, Oregon 97204-1268
(949) 725-4000 (503) 224-3380
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Approximate date of commencement of the proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_]
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Title of Each
Class of Securities to be Proposed Maximum Aggregate Amount of
Registered Offering Price(1) Registration Fee
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Common Stock, without par
value(2)......................... $47,437,500 $12,523.50
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) under the Securities Act.
(2) Includes 450,000 shares issuable upon exercise of Underwriter's over-
allotment option.
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+The information in this preliminary prospectus is not complete and may be + +changed. These securities may not be sold until the registration statement + +filed with the Securities and Exchange Commission becomes effective. This + +preliminary prospectus is not an offer to sell these securities nor does it + +seek offers to buy these securities in any jurisdiction where the offer or + +sale is not permitted. + |
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MARCH 28, 2000
3,000,000 Shares
[LOGO OF PACIFIC MERCANTILE BANCORP APPEARS HERE]
Pacific Mercantile Bancorp
Common Stock
We are offering 3,000,000 shares of our common stock with this prospectus. We expect that the public offering price will be between $12.50 and $15.00 per share. Prior to this offering, there has been no public market for our shares. We have applied for quotation of our shares on the NASDAQ National Market under the symbol "PMBC."
Prior to completion of this offering we will be issuing, as our initial issuance of shares, a total of 3,720,162 shares of our common stock in exchange for all of the outstanding shares of Pacific Mercantile Bank, a California state chartered bank. As a result of that issuance and exchange of shares, Pacific Mercantile Bank will become our sole subsidiary.
Pacific Mercantile Bank's shares are quoted on the NASDAQ OTC Bulletin Board under the symbol "PQBH." However, trading in its shares has been limited and sporadic. The last reported sale price, on March 27, 2000, was $10 1/16 per share, adjusted for a two-for-one stock split of the Bank's shares that will become effective on April 14, 2000.
Investing in the shares involves a high degree of risk.
See "Risk Factors" beginning on page 8.
Per Share Total
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Initial public offering price....................... $ $
Underwriting discount............................... $ $
Proceeds before expenses............................ $ $
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We estimate the cash expenses will be approximately $812,500 and will include a non-accountable expense allowance to the managing underwriter equal to 1% of the gross offering proceeds. We have also agreed to issue a warrant to the managing underwriter, the terms of which are described under the heading "Underwriting."
The underwriters may purchase up to an additional 450,000 shares from us at the public offering price, less underwriting discount, within 45 days from the date of this prospectus, to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. It is unlawful for any person to state otherwise.
Paulson Investment Company, Inc.
The date of this Prospectus is , 2000.
[Photographs/Graphics]
[On reverse of 1st page]
TABLE OF CONTENTS
Page
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Prospectus Summary.................................................... 4
The Offering.......................................................... 6
Summary Financial Data................................................ 7
Risk Factors.......................................................... 8
Forward Looking Statements............................................ 18
The Holding Company Reorganization.................................... 18
Use of Proceeds....................................................... 19
Trading History....................................................... 19
Dividend Policy....................................................... 19
Capitalization........................................................ 20
Dilution.............................................................. 21
Selected Financial Data............................................... 22
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 23
Business.............................................................. 31
Management............................................................ 49
Principal Shareholders................................................ 56
Description of Capital Stock.......................................... 57
Shares Eligible for Future Sale....................................... 58
Underwriting.......................................................... 59
Legal Matters......................................................... 62
Experts............................................................... 62
Where You Can Find More Information................................... 62
Index to Consolidated Financial Statements............................ F-1
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You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If any one provides you with different or inconsistent information, you should not rely on it. Information contained on our Web site does not constitute a part of this prospectus. The information in this prospectus may only be accurate as of the date appearing on the cover page of this prospectus, regardless of the time this prospectus is delivered or our common stock is sold.
We are not, and the underwriters are not, making an offer to sell the shares in any jurisdiction where the offer or sale is not permitted. No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or the possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside of the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable in that jurisdiction.
Information regarding historical growth in the use of the Internet and online banking services is derived from published reports. Information regarding the demographics of Orange County is derived from data published by the U.S. Bureau of the Census. Data regarding the banking industry was derived from the FDIC Institution Directory.
Pacific Mercantile Bank(TM) and PMB Internet Bank(TM) are trademarks of Pacific Mercantile Bancorp. All other brand names or trademarks appearing in this prospectus are the property of their respective owners.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information you should consider before purchasing our shares. Therefore, you should read the prospectus in its entirety, including the financial statements and related footnotes appearing elsewhere in this prospectus. References to "we," "us," "our" and the "Bancorp" generally refer to Pacific Mercantile Bancorp and our sole subsidiary, Pacific Mercantile Bank, on a consolidated basis, and the term "Bank" generally refers to Pacific Mercantile Bank.
PACIFIC MERCANTILE BANCORP
On the completion of this offering we will own Pacific Mercantile Bank, a California state chartered commercial bank, which will be our sole subsidiary. The Bank, which is based in Orange County, California, offers to its customers, primarily small and medium size businesses and professional firms:
. the best attributes of a community bank, which are personalized and responsive service; and
. the added flexibility and convenience of conducting, reliably and securely, an increasing number of banking and other financial transactions, 24 hours per day, 7 days per week, at our Internet Web site, www.pmbank.com.
The Bank commenced operations in March 1999 in response to the consolidation of the banking industry, particularly in Southern California, where the number of locally based banks has declined by nearly 50% since 1985, and the recent rapid growth in electronic commerce that has made it possible for banking to be conducted over the Internet. We believe that, due primarily to that consolidation, small and medium size businesses and professional firms are increasingly being overlooked and underserved by large regional and out-of- state banks. Therefore, we believe that we have an opportunity to attract such customers from those larger banks by offering higher levels of personal, more responsive service. At the same time, we believe that the wide range of business banking services, such as Internet banking and automated clearinghouse origination services, that we can offer to this segment of the banking market gives us an advantage in competing with other independent and community banks, many of which do not currently offer such services and cannot cost-effectively develop them.
We have grown rapidly during our first year of operations. As of March 15, 2000, our assets and our deposits had grown to $115,100,000 and $98,800,000, respectively, and we had a total of 1,600 deposit customers, of which approximately 700 were conducting at least some of their banking transactions with us over the Internet. Business customers accounted for approximately 80% of our deposits.
Our Internet banking system enables our customers to conduct many of their commercial banking and other financial transactions with us online, making it more convenient and less expensive for them to bank with us. We launched our Internet banking system in April 1999, and since then we have increased the range of online banking services that are available to our customers and the number of online banking transactions that they can conduct. Those online services and transactions, which have been designed to address the special needs of small and medium size businesses and professional firms, include:
. opening bank accounts, viewing account activity and the front and back sides of checks drawn on their accounts, and printing bank statements;
. processing credit card payments and originating and processing payments by electronic debit or electronic checks;
. paying bills and payroll, transferring funds between accounts at the Bank and ordering cash, which may be delivered by armored car; and
. downloading, on a secure basis, information regarding their banking transactions from our Web site into their computerized accounting systems, thereby making it easier for our business customers to record and manage cash transactions.
We believe that our Internet banking system, infrastructure and capabilities position us to capitalize on the growth of the Internet and provide us with a competitive advantage over a large proportion of the banks with which we compete. According to the FDIC, as of June 1999, although approximately 30% of the 3,000 federally insured banks and thrift institutions in the United States had Web sites, only about 635 of those banks and thrift institutions offered their customers the ability to conduct online banking transactions at their Web sites.
An important element of our strategy is to focus our marketing efforts on small and medium size businesses, professional firms and individuals, many of which desire "relationship banking" and make their decisions when selecting a bank primarily on the basis of the breadth, convenience, responsiveness and timeliness of the services offered and, to a lesser extent, on the cost of those services. We believe this strategy differentiates us from many Internet- only banks that, due to a lack of a local presence or a lack of experience in providing business banking services, focus primarily on attracting consumers who are more rate and cost sensitive and who, therefore, are more willing to change banks based primarily on rate and pricing considerations.
We believe our strategy, with its focus on business customers, requires a local presence as well as an Internet presence to offer personalized services to our customers. The Bank currently operates two branch banking offices, located in Newport Beach and San Clemente, California, where we provide a full range of on-site commercial banking services to our customers, most of whom currently are located in Orange County. According to government statistics, Orange County is the seventh most affluent county in the United States among counties with populations in excess of 1,000,000, but it has only one locally headquartered bank per 306,772 people in the county, as compared to one locally headquartered bank per 109,752 people in California as a whole and per 31,845 people in the nation.
We also plan to extend our market areas by establishing "express business banking offices" designed primarily to serve the needs of the business customer. These offices will be smaller in size and less costly to establish than traditional branch banking offices because our computer and Internet banking systems will make it possible to process banking transactions remotely, eliminating the necessity of maintaining recordkeeping and other administrative functions at those offices. Additionally, our Internet banking system enables our business customers to obtain account information and process a growing number of banking transactions from their office computers, reducing the volume of transactions that must be processed at these offices.
We intend to take advantage of opportunities that may arise to acquire other community banks in selected communities, located both within and in states contiguous to California, which have experienced a consolidation of banks and which have demographics similar to those in Orange County, particularly in terms of the number of small and medium size businesses located there. Our strategy will be to retain the local identities and the local managements of the community banks we may acquire in order to provide continuity of service to their customers, and then add new services, including Internet banking services, that will be attractive to their customers.
Our principal executive offices are located at 450 Newport Center Drive, Suite 100, Newport Beach, California 92660, telephone (949) 644-8040. Our Web site is located at www.pmbank.com. Information contained on our Web site is not a part of this prospectus.
The Bancorp was organized in January 2000 for the sole purpose of becoming the parent holding company of the Bank. This will be accomplished prior to the completion of this offering by means of a merger in which the Bancorp will issue, as its initial issuance of shares, a total of 3,720,162 shares of common stock to the shareholders of the Bank in exchange for all of their Bank shares, thereby making the Bank our sole subsidiary. Prior to that merger, we will have only nominal assets and we will not have conducted any business operations. All financial and other data in this prospectus gives retroactive effect to this merger and our resulting acquisition of the Bank as if they had occurred at the inception of the Bank in May 1998 and to a two-for-one stock split of the Bank's outstanding shares that is to become effective on April 14, 2000.
THE OFFERING
Shares Offered.......................... 3,000,000 shares of common stock
Offering Price.......................... $13.75 per share of common stock,
which is the mid-point of the price
range of $12.50 to $15.00 set forth
on the cover page of this prospectus
Common Stock Outstanding:
Before the Offering.................. 3,720,162 shares
After the Offering................... 6,720,162 shares
Use of Proceeds......................... To contribute capital to the Bank to
fund increases in earning assets, to
open additional banking offices and
for other general corporate purposes,
including possible acquisitions of
other banks.
Proposed NASDAQ National Market Symbol.. PMBC
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The 3,720,162 shares of common stock that will be outstanding prior to this offering will be issued, as our initial share issuance, to the shareholders of Pacific Mercantile Bank in exchange for their shares of Bank stock.
The 6,720,162 shares that will be outstanding after the offering will include the shares offered by this prospectus, but will exclude:
. a total of 660,806 shares that will be subject to outstanding stock options, with a weighted average exercise price of $5.18 (both as adjusted for the Bank's stock split):
. a total of 345,800 shares that will have been set aside for future stock options;
. any shares that may be sold in this offering as a result of the exercise of the underwriter's overallotment option; and
. 300,000 shares that will be subject to underwriters' warrants that will be issued on completion of this offering and will be exercisable beginning one year thereafter, at a price equal to 120% of the public offering price set forth on the cover page of this prospectus.
Summary Financial Data
The summary financial information presented below is derived from the Bancorp's audited financial statements for the periods indicated. The summary financial information should be read in conjunction with the Bancorp's financial statements and other related information included elsewhere in this prospectus.
Inception
Year Ended (May 29, 1998)
December 31, to December 31,
1999(1) 1998(1)
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Statement of Operations Data:
Total interest income........................... $ 2,100,100 $ 2,600
Total interest expense.......................... 880,000 --
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Net interest income............................. 1,220,100 2,600
Provision for loan losses....................... 750,000 --
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Net interest income after provision for loan
losses......................................... 470,100 2,600
Non-Interest income............................. 131,600 --
Non-Interest expense............................ (3,351,300) (243,600)
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Loss before income taxes........................ (2,749,600) (241,000)
Income tax expense.............................. (600) (1,200)
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Net loss........................................ $(2,750,200) $ (242,200)
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Basic and diluted loss per share outstanding.... $ (1.12) N/A
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Basic and diluted weighted average number of
shares outstanding............................. 2,466,114 N/A
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At December 31, 1999
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Actual As Adjusted(2)
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Balance Sheet Data:
Cash and cash equivalents(3).................... $38,498,200 $76,048,200
Total loans (net of allowance for loan
losses)(4)..................................... 47,043,200 47,043,200
Total assets.................................... 91,165,400 128,715,400
Total deposits.................................. 74,500,200 74,500,200
Total shareholders' equity...................... 16,018,400 53,568,400
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(2) Reflects our receipt of the estimated net proceeds from the sale of 3,000,000 shares of our common stock offered by this prospectus at an assumed public offering price of $13.75 and the application of the estimated proceeds described in "Use of Proceeds."
(3) Cash and cash equivalents include cash and due from other banks and federal funds sold and, on an as adjusted basis, the net proceeds of this offering.
(4) Includes $2,700,000 of loans held for sale as of December 31, 1999.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the specific factors listed below, together with the cautionary statement that follows this section and the other information included in this prospectus, before purchasing shares in this offering. If the possibilities described as risks below actually occur, our operating results and financial condition would likely suffer, and the trading price of our common stock could fall, causing you to lose some or all of your investment in the shares we are offering.
The shares we offer are not savings accounts, deposits or other obligations of a bank. The shares are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
We have a limited operating history, and our future performance is difficult to predict.
We commenced our banking operations on March 1, 1999. As a result, we have a limited operating history, which makes it difficult to predict our future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in the new and rapidly evolving market for electronic banking. To address these risks, we must, among other things, build our customer base, respond to competitive developments, continue to attract, retain and motivate qualified employees, and continue to upgrade our technologies, products and services. We cannot assure you that we will succeed in addressing these risks.
We have incurred losses to date and we expect to incur additional losses.
We have incurred a cumulative operating loss since our inception through December 31, 1999 of $2,992,400, and we expect to incur operating losses for at least the next six months. Our business model requires that we increase loans, deposits and revenues substantially in order to achieve sustained profitable operations. However, even if we substantially increase loans, deposits and revenues, we cannot assure you that our operations will achieve or sustain profitability. Further, even if we achieve profitability in our current locations, we may find it difficult to achieve or maintain profitability in other locations into which we may expand and the lack of profitability of such other locations may cause our overall business to sustain losses.
We have grown rapidly since we commenced operations and expect rapid growth to continue.
Since we began operations in March 1999, we have grown rapidly, reaching total assets of $115,100,000 and total deposits of $98,800,000 as of March 15, 2000. Our business plan calls for continued rapid growth that will require substantial changes in all of our operating systems, including physical facilities and equipment, accounting and other computer systems, personnel, regulatory compliance systems and management structures. Such changes will make substantial demands on the time and attention of management and will require us to predict accurately the nature and timing of, and to prepare effectively for, the changes necessary to support our growth. The failure to prepare appropriately and on a timely basis for growth could cause us to experience inefficiencies or failures in our service delivery systems, regulatory problems, an erosion in customer confidence, unexpected expenses or other problems. Moreover, various facilities, services or other resources that we may require to support growth may not be available to us on a timely or cost- effective basis, or at all. We cannot assure you that we will be able to adequately manage our growth.
Our industry is competitive.
Larger Financial Institutions Dominate Our Primary Service Areas. Large multi-regional and multi-state banks dominate the commercial banking industry in California and, more specifically, in the Bank's primary service areas in Southern California. By virtue of their larger capital, such institutions are able to make larger loans than the Bank can make and are able to amortize some of their fixed costs over a larger revenue base. They also have broader networks of banking locations, are geographically diversified and are able to provide certain services or products for their customers, such as trust and investment services and international banking
services, which we are not equipped to offer directly. Increasingly, these large banks are affiliated with other financial services providers, such as investment banks, stock brokerages and insurance companies, and can offer their customers a broader range of financial services as well as cross-market to potential customers who approach their affiliated financial services companies for financial services other than banking. As a result of these advantages, some individual and business customers may prefer to establish or maintain banking relationships with the large multi-regional and multi-state banks. Some of these large banks are established under federal law and are therefore exempt from California state regulations applicable to the Bank.
Competition with other Independent and Community Banks. For a variety of reasons, including the recent formation of our Bank, we may find it difficult to attract customers who have established relationships with other independent or community banks in our service areas, and we may have to incur substantial marketing or infrastructure expenses to attract those customers.
Competition from Other Financial Service Businesses. In addition to commercial banks, we compete with traditional and nontraditional financial institutions and investment companies, such as savings and loan associations, credit unions, stock brokerage firms, insurance companies and money market and mutual funds, in obtaining deposits, making loans and providing other financial services. Many of those businesses are larger and have more financial resources and market presence than we do, offer a number of financial services that we are unable to provide and are subject to less government regulation than we are as a banking institution. We cannot assure you that we will be successful in competing with these other financial institutions.
We expect the competition for online banking services to intensify.
Although, the market for electronic banking has only recently begun to develop, it is growing rapidly as many banks and other financial services businesses migrate their businesses onto the Internet. As a result, we expect that competition will intensify in the future. Our ability to compete successfully depends upon:
. customer service and satisfaction;
. our market presence;
. the capacity, reliability and security of our computer and network infrastructure;
. ease of access to and navigation of the Internet;
. the timing of introductions of new products and services by our competitors;
. the competitiveness of our pricing policies; and
. industry and general economic trends.
If we cannot provide a high level of personal service, responsiveness and convenience to our customers, maintain a strong market presence, introduce new products and serve customers on a timely, secure and convenient basis via the Internet, our overall performance and financial results may suffer over time. For all of these reasons, we cannot assure you that our efforts to compete with other banks and financial services companies will be successful.
We cannot be sure that the nature or timing of the Internet banking services we propose to offer will be appropriate in light of customer needs and preferences.
We have invested substantial time and resources in the development and implementation of Internet banking services on the assumption that the provision of these services will afford us a competitive advantage over banks that do not provide such services or that provide inferior services. Although Internet banking is growing rapidly, customer behavior and preferences in this area have not been definitively established. Many customers may choose not to engage in Internet banking for a variety of reasons, including unfamiliarity with the Internet and related equipment, security concerns or subjective preferences. Although the
technology to support electronic banking and funds transfer has been widely available to bank customers for at least a decade, many customers still elect to write checks and make deposits without using these capabilities. We will compete for those customers who elect to use Internet banking services with a large number of banks and other financial services companies that have developed or purchased electronic banking and fund transfer systems. If their systems are perceived by our existing or potential customers as being more user-friendly or more secure, or as offering superior features when compared to our Internet banking services, we may not succeed in attracting and retaining online customers in sufficient numbers to make our Internet banking services profitable or justify the costs of providing these services.
Our success depends on the volume and the quality of loans that we are able to make.
We need to increase loan volume. Interest earned on loans generally exceeds the interest that can be earned on investments and other interest-earning assets of a bank. Our success, like that of other banks, is therefore substantially dependent on our ability to increase our loan business. We cannot assure you that we will succeed in doing so. Banks are subject to lending limits that restrict the total amounts they can loan to any one borrower, or a group of related borrowers, ranging from 15% to 25% of a bank's shareholders' equity. As a result, we will be at a disadvantage when competing with larger banks for the business of borrowers who are seeking loans in excess of our lending limits because, in such cases, we will have to find other banks to join with us in making such loans. Larger banks also may be able to offer better lending terms than we can offer to prospective loan customers. Our success in competing for loans depends on:
. the quality of service we provide to borrowers, especially the length of time it takes for us to approve and process loans;
. the terms of the loans that we offer, such as interest rates, loan fees, interest rate adjustment provisions, loan maturities and loan-to-value ratio limitations;
. the size of the loans that we are able to offer; and
. general economic factors such as the interest rate environment.
A deterioration of economic conditions in Southern California in the future could adversely affect our financial performance. The risk of nonpayment of loans is inherent in the banking business, and our operating results will depend, in large measure, on whether we are able to limit losses on the loans that we make. We focus our business in Southern California. In the early 1990's, the Southern California economy experienced an economic recession that increased the level of delinquencies and losses for many of the region's financial institutions. Another economic slow-down or recession in Southern California could have the following consequences, any of which could hurt our operating results or cause us to incur losses:
. loan delinquencies may increase;
. problem assets and foreclosures may increase;
. claims and lawsuits may increase; and
. demand for our products and services may decline.
Collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers' borrowing power, reducing the value of assets associated with problem loans and reducing collateral coverage of our existing loans.
Loan loss reserves may not cover actual loan losses. The failure or inability of borrowers to repay their loans is an inherent risk in the banking business. We try to limit that risk by carefully underwriting the loans we make and, in many cases, by requiring borrowers to collateralize their loans with real estate, equipment,
their inventories or accounts receivable, that we would seek to sell to recover amounts due us in the event of a failure or the inability of the borrower to repay the loan. Additionally, like other banks, we have established an allowance for estimated losses that we may incur on our loans (which in the banking industry are referred to as non-performing loans). This allowance is created by a charge which reduces income and is regularly reviewed and periodically increased based on judgments and estimates periodically made by our management as to the growth of the Bank's loan portfolio, anticipated changes in economic conditions in our service area and in the financial condition of our borrowers, which are the principal factors that affect the ability of borrowers to repay their loans. We base these allowances on estimates of the following:
. industry standards;
. historical experience with and the growth of our loans;
. evaluation of current and predicted economic conditions;
. regular reviews of the quality, mix and size of the overall loan portfolio;
. regular reviews of delinquencies; and
. the quality of the collateral underlying our loans.
If the volume of non-performing loans were to exceed the estimates used to establish our allowance for loan losses, we will have to increase that allowance by additional charges that would reduce our operating income and could weaken our financial condition. In that event we also would have less cash and we could be subjected to regulatory sanctions or restrictions which would adversely affect our ability to make future loans.
In addition,the value of the properties and other assets that collateralize the loans we make could decline after we make those loans, due to changing economic conditions, the imposition of government regulations or use restrictions or the discovery of adverse environmental conditions on those properties. If such a decline in value were to occur, we would have to charge income to reduce the value at which those properties are carried on our financial statements. We also might have difficulty finding buyers that are willing to purchase those properties and, even if we find buyers, the prices at which we will be able to sell those properties may not be sufficient to offset our losses on the non-performing loans. Additionally, if we acquire such properties upon foreclosure of non-performing loans, we could incur liability for any adverse environmental conditions that might exist on the properties.
Environmental laws could force the Bank to pay for environmental problems.
The cost of cleaning up or paying damages and penalties associated with environmental problems could increase our operating expenses. When a borrower defaults on a loan secured by real property, the Bank may purchase the property in foreclosure or accept a deed to the property surrendered by the borrower. We may also take over the management of commercial properties whose owners have defaulted on loans. We also lease properties where our branches and other facilities are located. While we have lending, foreclosure and facilities guidelines intended to exclude properties with an unreasonable risk of contamination, hazardous substances may exist on some of the properties that we occupy or that we may acquire from any borrowers. We face the risk that environmental laws could force us to clean up the properties at our expense. It may cost much more to clean a property than the property is worth. We could also be liable for pollution generated by a borrower's operations if we take a role in managing those operations after a default. We may also find it difficult or impossible to sell contaminated properties and, in such event, would have to charge income to reduce the value at which those properties are carried on our financial statements.
We are exposed to risks of natural disasters.
A major earthquake could result in material loss to the Bank. Our operations are concentrated in Southern California, especially Orange County, California is an earthquake-prone region. Unlike a bank with operations that are more geographically diversified, we are vulnerable to greater losses if an earthquake, fire, flood or other
natural catastrophe occurs in Southern California. We have a disaster-recovery plan with offsite data processing resources located in Austin, Texas and Phoenix, Arizona. However, our properties and most of the real and personal property securing loans in our portfolios are in Southern California. Many of our borrowers could suffer uninsured property damage, experience interruption of their businesses or lose their jobs after an earthquake. Those borrowers might not be able to repay their loans, and the collateral for loans could decline significantly in value.
Changes in interest rates, national monetary policies and economic conditions could adversely affect our operating results.
Our ability to achieve and sustain profitability is substantially dependent on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest we must pay on deposits and other interest-bearing liabilities. Like most depository institutions, our interest income is affected by a number of factors outside of our control, including changes in market rates of interest, which are affected by national monetary policies adopted by the Board of Governors of the Federal Reserve System (commonly known as the Federal Reserve Board), changes in economic conditions nationally and in our service area in particular and our ability to increase interest rates on loans that we make in response to increases in the rates of interest we must pay to attract and maintain deposits that we need to be able to make loans and investments. While our cost of funds is variable over relatively short periods, many of our loans have terms of several years and bear either fixed rates of interest or are subject to limits on changes in the variable interest rates they bear. Accordingly, our ability to react to changes in interest rates to maintain our net interest income may be limited. Additionally, increases in market rates of interest may make it more difficult for prospective borrowers to qualify for loans that we offer, which could result in a reduction in our loan volume and in our interest income. Increases in market rates of interest also can adversely affect the value and the marketability of a bank's interest-earning assets.
The market for Internet banking is new and evolving.
The market for Internet banking services is relatively new, is rapidly evolving and is characterized by an increasing number of competitors who have introduced or developed such services. Some of those competitors are substantially larger than we are and have greater brand name recognition than we have. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for Internet banking are subject to a high level of uncertainty. Moreover, security and other critical issues concerning the commercial use of the Internet, including reliability, cost, ease of use and access and quality of service, are not fully resolved and may impact the growth of Internet use. While we believe that Internet banking offers advantages over traditional branch and personal computer or PC-based home banking, we cannot assure you that Internet banking will come into widespread use.
Our success depends in part on the continued growth of online commerce.
Market acceptance of Internet banking is substantially dependent upon the adoption of the Internet for general commerce and financial services transactions. The use of the Internet to conduct banking transactions, particularly by businesses and consumers that have historically relied upon traditional banking services, requires the acceptance of new ways of conducting business and exchanging information. We cannot assure you that Internet banking will gain acceptance from such individuals and businesses. Also, if we or another provider of Internet financial services were to suffer damage from a physical break-in, security breach or other disruptive problem caused by the Internet or by other users, such an event could lead our Internet customers to terminate their use of our Internet banking services or their relationships with our Bank and could deter prospective customers from establishing banking relationships with us, which would make it more difficult for us to successfully implement our business strategy and achieve profitability.
In addition, the Internet may not be accepted as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development
of enabling technologies and performance improvements. To the extent that the Internet continues to experience significant growth in the number of users or frequency of use, or requires an increase in its bandwidth requirements, we cannot assure you that the infrastructure for the Internet will be able to support the demands placed upon it. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and adversely affect usage of the Internet generally and us in particular. The Internet also could lose its viability due to delays in the development or the adoption of new standards and protocols required to handle increased levels of Internet activity, or due to the increased governmental regulation.
For example, PC-based home banking systems have been marketed in the past by other banking companies and have not enjoyed widespread consumer use or demand. Accordingly, our assumption that there will be increased consumer acceptance of Internet banking services may prove to be incorrect.
If use of the Internet does not continue to grow or grows more slowly than expected, if the infrastructure for the Internet does not effectively support growth that may occur, or if the Internet does not become a viable commercial marketplace, our business, our operating results and financial condition could be harmed, possibly to a significant extent.
Our success depends in part on our ability to provide comprehensive financial services.
Our business strategy depends in part on our ability to offer secure, convenient, cost-effective and comprehensive financial services on the Internet. The growth and expansion of the banking services that we offer place significant demands on our management and operational and financial resources. Successful implementation of our Internet banking strategy will depend on our ability to:
. increase significantly the number of customers using the Bank for their financial service requirements;
. offer new products and provide new financial services that meet changing customer requirements;
. develop new strategic alliances with other Internet service providers in order to market our services and to offer additional services to our customers on the Internet;
. update our computer systems and network infrastructure to take advantage of new technological developments which would facilitate and simplify the use of the Internet to conduct banking and other financial transactions; and
. hire and train additional qualified personnel who have experience maintaining the information and processing systems that we use to provide banking services over the Internet.
We cannot assure you that we will succeed in developing and bringing new products and services to market in a timely manner or that we will be able to accomplish these other tasks.
Our computer and network systems may be vulnerable to unforeseen problems and security risks.
The computer systems and network infrastructure that we use to provide automated and Internet banking services could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure, earthquakes (which are more prevalent in California than in other parts of the country) and similar catastrophic events. Any damage or failure that causes an interruption in our banking services could harm our business, operating results and financial condition.
In addition, our operations are dependent on our ability to protect our computer systems and network infrastructure from damage that could occur from physical break-ins, security breaches and other disruptive problems caused by the Internet or other Internet users. Computer break-ins and security breaches could jeopardize the security of information stored in and transmitted through such computer systems and network infrastructure, which may result in significant liability to the Bank. Other disruptions due to problems on the Internet or actions of Internet users could make it difficult for our customers to access and retrieve information
and conduct banking transactions at our Web site. In either case, problems of this nature could lead existing customers to terminate their banking relationships with us and could make it more difficult for us to attract new Internet banking customers, which could undermine our business strategy. Although we intend to continue to implement the latest security technology and establish operational procedures to prevent such disruptions and damage, there is no assurance that these security measures will be successful.
Our operations could be disrupted by a change in service providers.
Our Internet banking operations are dependent on essential technical and customer service support from a number of third party service providers, including Fiserve and Q-Up Systems. Our Internet operations could be disrupted if any of those service providers were to be unable to perform under, or terminate, their contracts with us, because acceptable alternatives may take time to implement, may be unavailable or may increase our costs.
We are unable to predict whether we will be able to increase the number of our customers.
It is sometimes difficult to convince prospective customers to transfer their deposit accounts and business from their existing banks, even when they are unhappy with the service they are receiving from those banks. Such transfers generally involve unavoidable inconveniences and disruptions. Also, some prospective customers may choose to remain at their existing banks to obtain specialized services that we may not be able to offer or because their existing banks have greater market presence or longer histories of operations that do we. In addition, if competing banks or other financial services providers offer Internet banking services comparable to those we offer, or other financial services or products that we do not provide, it is possible that we could lose some of our customers to those other banks or providers. Customers who experience difficulties in accessing or conducting banking transactions at our Web site may terminate their banking relationships with us, even if those difficulties arise from operational features of the Internet over which we have no control or are the result of the inexperience of the customer.
We depend to a great extent on key personnel.
Our success depends to a great extent on the continued availability of Raymond E. Dellerba, President and Chief Executive Officer, John J. McCauley, Chief Operating Officer and Chief Credit Officer, John P. Cronin, Chief Technology Officer, and Daniel L. Erickson, Chief Financial Officer. In addition to their skills and experience as bankers or their experience with the procurement, operation and maintenance of computer systems used in providing Internet banking services, these officers provide us with extensive community ties upon which our competitive strategy is partially based. We do not maintain key-man life insurance on these executives other than Mr. Dellerba. As a result, the loss of the services of any of these officers could harm our business strategy. In order to achieve the expansion we intend to pursue, we will be required to attract and retain other key employees in a variety of positions. Competition for such employees is intense and is particularly so in our current markets and other markets we have targeted, which are experiencing a high level of economic prosperity. We cannot assure you that we will be able to retain our existing key employees or to attract or retain a sufficient number of additional qualified employees to meet our business requirements.
Government regulation may impair our operations or restrict our growth.
Both the Bancorp and the Bank are subject to extensive supervision and regulation by federal and state regulatory agencies. The primary objective of those agencies is to protect depositors and other customers of the Bank and not the shareholders, whose respective interests will often differ. The regulatory agencies have the legal authority to impose restrictions which they believe are needed to protect depositors and customers of banking institutions, even if they will restrict the ability of the banking institution to expand its business and
introduce new financial products and services. Aspects of our operations that are affected by bank regulatory agencies include:
. the capital we must maintain;
. the kinds of activities in which we can engage;
. the kinds and amounts of investments we can make;
. the locations of our offices;
. how much interest we can pay on demand deposits;
. insurance of our deposits and the premiums we must pay for this insurance; and
. how much cash we must set aside as reserves for deposits.
Due to the complex and technical nature of many of the government regulations to which banks and bank holding companies are subject, inadvertent violations can occur. In such event, the Bank would be required to correct, or implement measures to prevent a recurrence of, such violations. If more serious violations were to occur, the regulatory agencies may limit our activities or growth, fine us or ultimately put us out of business. Bank regulation can hinder our ability to compete with financial services companies that are not regulated or are less regulated.
Regulation of the Bank. The Bank conducts its business under a bank charter issued by the California Department of Financial Institutions (known as the "DFI"). The Bank also is member of the Federal Reserve Bank of San Francisco and its deposits are insured by the Federal Deposit Insurance Corporation (known as the "FDIC"). As a result, it is subject to supervision and regulation by the DFI and the Board of Governors of Federal Reserve System (known as the "Federal Reserve Board") and, to a lesser extent, the FDIC. The regulations and policies of these agencies affect most aspects of the Bank's business and prescribe permissible types of loans and investments, the amount of required reserves, the requirements for branch offices, the permissible scope of the Bank's activities, the amount of capital it must maintain and various other requirements. In addition, as part of their regular examinations of the Bank, the DFI and Federal Reserve Board consider and make recommendations with respect to the efficacy of lending, investment and other policies established and implemented by the Bank, the quality of the loans in the Bank's loan portfolio, the adequacy of the allowance for loan losses and the adequacy of the Bank's capital. If the DFI or the Federal Reserve Board conclude that the Bank's operations or assets are not in compliance with applicable standards, they have the authority to impose a wide range of remedial measures on the Bank, including the ability to limit the Bank's financial activities, to require the Bank to take certain corrective actions or, ultimately, to take over the Bank and liquidate the Bank's assets. In taking any of these actions, the DFI and the Federal Reserve Board will act in the interests of the Bank's depositors, and will consider the interests of our shareholders only to the extent the interests of the depositors are not affected. The Bank is also subject to certain reporting requirements of the DFI and the Federal Reserve Board.
Regulation of Pacific Mercantile Bancorp. As the holding company for the Bank, we are subject to regulation by the Federal Reserve Board under the Bank Holding Company Act. The Act requires, among other things, the prior approval of the Federal Reserve Board before a bank holding company may acquire substantially all of the assets or more than five percent of the voting shares of any bank. Additionally, a bank holding company may not engage in any business other than owning and operating banks and businesses that have been determined by the Federal Reserve Board to be closely related to banking. We also will be required to file annual reports and other information with the Federal Reserve Board regarding our business operations and those operations are subject to periodic examinations by the Federal Reserve Board.
Other Regulatory Requirements. In conducting various aspects of our business, we are also subject to various laws and regulations relating to commercial transactions generally, such as the Uniform Commercial Code, and electronic funds transfer rules embodied in Regulation E promulgated by the Federal Reserve Board. Due to the expansion of Internet banking, it is possible that any of these or other government agencies could revise existing regulations or adopt new regulations governing or affecting our ability to conduct our business over the Internet. It is also possible that Congress or individual states could enact laws regulating Internet
banking. Congress has held hearings on whether to regulate providers of services and transactions over the Internet. If enacted, such laws, rules and regulations could harm our business, operating results and financial condition by restricting the services we can provide or increasing the costs of providing banking services over the Internet.
Banking Regulations Could Discourage Changes in our Ownership. Before anyone can acquire enough voting stock to exercise control over a bank holding company like the Bancorp, bank regulatory agencies must approve the acquisition. A shareholder must apply for regulatory approval to own 10% or more of our common stock, unless the shareholder can show that he or she will not actually exert control over us. In no case can a shareholder own more than 25% of our common stock without applying for regulatory approval. These regulations could delay and possibly discourage a potential acquiror who would have been willing to pay a premium price to amass a large block of our common stock. That in turn could decrease the value of our common stock and the price that you will receive if you sell your shares in the future.
We may have the need for additional capital in the future.
We anticipate that our existing capital resources and the net proceeds from the sale of shares in this offering will satisfy our foreseeable capital requirements. However, the funds generated by this offering could be insufficient to fund our future operating requirements. In that event, we would have to raise additional funds through public or private financings or, in the alternative, curtail our growth and reduce our assets. Our ability to raise additional capital in the future when we need it will depend on conditions in the capital markets, which are outside of our control and on our financial performance. We may not be able to complete such additional financings at all or on favorable terms. Additional equity financings would result in the dilution of your ownership interests in the Bancorp. Also, if adequate capital cannot be obtained, the Bancorp and the Bank will be subject to increased regulatory supervision and the imposition of restrictions on our growth and our business, which could result in increases in operating expenses and reductions in revenues that would harm our operating results.
We may be subject to liability risks that are not covered by insurance.
We are subject to a variety of liability risks that can arise from the Bank's operations. We currently maintain a general commercial and umbrella liability policy covering claims of up to $6,000,000. In addition, the FDIC insures deposits to a maximum of $100,000 per depositor. If a successful claim were brought against us in excess of any available insurance coverage, our business, operating results and financial condition could be materially adversely affected.
We may engage in business combinations that may dilute shareholders, divert management attention, or cause integration difficulties.
Our management may elect to pursue our growth strategy by acquiring or combining with other banks or related businesses. Such combinations may be structured as stock or cash transactions or as a combination of the two. Business combinations are extremely time consuming and expensive and, in the case of bank acquisitions, subject to extensive regulatory control. We cannot assure you that any business combinations will be consummated. In addition, business combinations can cause substantial dilution in the investment of the existing shareholders and can result in a significant drop in our stock price if market perceptions of the combination are not favorable. Following a business combination, it is necessary to integrate the two businesses, which is always time consuming and often difficult. Many business combinations are a result of intensely competitive bidding and our management may find itself under severe pressure to increase our bid for a particular business. For financing or legal reasons, we may be required to divest ourselves of certain assets in order to consummate a business combination or to increase leverage by borrowing. Any such events could have an adverse impact on our short term operating results and, therefore, on our stock price. We cannot assure you that any business combination we may attempt to consummate will have a positive effect on our business or financial condition.
We do not intend to pay cash dividends.
We do not intend to pay cash dividends in the foreseeable future, as we expect to apply any earnings to developing and expanding our business. Our ability to pay dividends is also restricted by government regulations that apply to us and to the Bank. See "Dividend Policy."
Quoted prices for the Bank's common stock may not be a reliable indicator of the value of our shares.
The Bank's shares are quoted on the NASDAQ OTC Bulletin Board and trade on an infrequent basis in the over-the-counter market. Prices quoted on the NASDAQ OTC Bulletin Board do not necessarily reflect actual market transactions. Moreover, the limited trading activity in the Bank's shares, combined with the lack of market research on the Bank, means that the prices quoted on the NASDAQ OTC Bulletin Board are not necessarily based on, and do not necessarily correspond to, established criteria of value, such as earnings, assets or prospects for our business, and are therefore not necessarily indicative of the prices at which our shares will trade following our acquisition of the Bank and completion of this offering.
Our shares will be subject to stock price volatility.
The trading price of our common stock could be subject to significant fluctuations in response to a variety of factors, many of which are not directly related to our future performance and many of which are beyond our ability to control. Factors that may affect the trading price of our common stock include quarterly variations in our actual or anticipated operating results, changes in market or economic conditions generally or within the markets in which we operate, changes in national monetary policies or in market rates of interest, changes in banking regulations, competitive developments and changes in investor perceptions of the attractiveness of certain industries or certain types of investments. We cannot assure you that the market price of our common stock will not decline below the price at which we sell shares in this offering. In recent years, significant price and volume fluctuations have occurred in stock prices that often have been unrelated or disproportionate to the operating performance of the affected companies.
We may be unable to sustain an active trading market for our common stock.
We have applied for the listing of our common stock on the NASDAQ National Market. However, we cannot assure you that such listing will be obtained or, whether or not such a listing is obtained, that an active trading market for our common stock will develop or be sustained following completion of this offering. Continued active trading in our stock is likely to depend on a number of factors, including the quality and quantity of research coverage on our common stock, the number and quality of marketmakers quoting our stock and our ability to develop and maintain an active and effective shareholder relations program. We cannot assure you that the elements required to sustain an active trading market in our common stock will be present at any time after the offering.
A significant number of shares are eligible for sale which could depress our stock price.
The ability of existing shareholders to freely sell a significant number of their shares could cause the trading price of our stock to decline. After this offering, there will be 6,720,162 shares of our common stock outstanding, of which approximately 55% will be held by existing stockholders and will become eligible for resale in the public trading market shortly after completion of this offering. Existing shareholders owning a total of 523,047 of our shares have agreed not to sell those shares for a period of 180 days after the date of this prospectus without the prior written consent of Paulson Investment Company, Inc. Upon expiration of the 180-day lock-up period, those shares will become available for sale in the public market (subject to certain volume restrictions imposed by federal securities laws). On the first anniversary of this offering, an additional 300,000 shares, which may be acquired on exercise of underwriters warrants to be issued in connection with this offering, will become eligible for sale. See "Shares Eligible for Future Sale" for additional information the number of shares that will be eligible for sale in the public market following this offering.
You will incur dilution.
If you purchase shares of our common stock in this offering, you will incur immediate dilution in the pro forma per share net tangible book value of those shares. We estimate this dilution to be approximately $5.78 per share, or approximately 42%, assuming an offering price of $13.75 per share. If options to purchase our common stock are exercised by the persons holding those options, you will suffer further dilution. See "Dilution" for a description of how dilution has been calculated.
FORWARD-LOOKING STATEMENTS
This prospectus, including without limitation the "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" sections hereof, contains
statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934. These forward-looking statements involve a number of
risks and uncertainties. The following, in addition to the risk factors
described above, are among the factors that could cause actual results to
differ materially from the forward-looking statements:
. business conditions and growth of the banking industry and general economy;
. growth in the use of the Internet, particularly for online banking transactions;
. lower than expected customer deposits;
. lower than expected loan demand;
. lower than expected spread between interest earning assets and interest bearing liabilities;
. competitive factors, including increased competition, new product or service offerings by competitors and price pressures;
. the availability of third party services at reasonable prices; and
. our ability to enhance our Internet and computer banking systems to take advantage of improvements in technology.
THE HOLDING COMPANY REORGANIZATION
We were incorporated on January 7, 2000 to acquire and thereby to become the parent holding company for the Bank. Prior to completion of this offering, we will acquire the Bank by means of a merger as a result of which the Bank will become our wholly-owned subsidiary and the Bank's shareholders will become our shareholders, owning the same number and percentage of our shares as they had owned in the Bank (the "Holding Company Reorganization"). Prior to that merger, we will have only nominal assets and will not have conducted any business.
All financial information included herein has been restated as if the Holding Company Reorganization was effective for all periods presented. Additionally, per share data, and the number of our common shares outstanding for all periods presented, give retroactive effect to a two-for-one stock split of the Bank's outstanding shares that will become effective on April 14, 2000.
The Bank's Board of Directors decided to establish the Bancorp as the parent holding company of the Bank because they believe that a bank holding company will have greater flexibility in financing the capital requirements of the Bank, acquiring other banks and financial service businesses and increasing the variety of financial services that we can offer to customers.
The Holding Company Reorganization has been approved by the Bank's shareholders and by the Federal Reserve Board and the California Commissioner of Financial Institutions. The only remaining approval that is required is from the FDIC, and we expect to receive that approval within the next 30 days.
USE OF PROCEEDS
The net proceeds to us from the sale of the shares in this offering will be approximately $37,550,000 million, assuming an initial public offering price of $13.75 per share, an underwriting discount of $2,887,500 and offering expenses of $812,500. We intend to use these net proceeds as follows:
Amount Percentage
----------- ----------
Capital contribution to the Bank........................ $27,550,000 73.4%
General corporate purposes of the Bancorp, including
acquisitions of other banks and funding of working
capital requirements.................................... 10,000,000 26.6%
----------- -----
$37,550,000 100.0%
=========== =====
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The capital contribution to the Bank will increase its single borrower loan limits which will enable it to offer larger loans to its customers. The proceeds from that capital contribution will be used primarily to fund loans and interest earning investments, to conduct additional marketing programs, to enhance the functionality of the Bank's Internet and computerized banking systems, to add new products and services and to fund the costs of establishing additional branch offices. We also may use a portion of the proceeds to acquire other banks to extend our service area when opportunities to do so present themselves. However, at this time we are not in discussions or negotiations with any prospective acquisition candidates.
The allocations of the net proceeds set forth in the table above represent our current estimate of the amounts we will spend on each of the above categories and are subject to change at our discretion based on actual results of operations and capital requirements. The actual use of the net proceeds of this offering may vary substantially from that set forth above.
Pending the uses of the net proceeds that are retained at the Bancorp, we intend to invest those proceeds in short term, interest bearing investment grade securities.
TRADING HISTORY
The Bancorp has recently been organized to become the parent holding company for the Bank, and there has been no trading in the Bancorp's shares. We have applied for quotation of our shares on the NASDAQ National Market under the symbol "PMBC" effective on the commencement of this offering.
The Bank's shares have been quoted on the NASDAQ OTC Bulletin Board since January 14, 2000. However, trading has been limited and sporadic and prices quoted do not necessarily represent actual transactions. Between that date and March 27, 2000, the sales prices of the Bank's shares have ranged from a low of $7.25 to a high of $13.9375 and the most recent sale during that period took place on March 27, 2000 at a price of $10.0625. All of these prices have been adjusted to give retroactive effect to the Bank's two-for-one stock split that will become effective on April 14, 2000. Current bid and asked quotations for the Bank's shares on the NASDAQ OTC Bulletin Board do not yet reflect and have not yet been adjusted for that stock split.
DIVIDEND POLICY
We currently intend to retain any future earnings to increase our capital and finance the growth and development of our business. We therefore do not anticipate paying any cash dividends in the foreseeable future. For the foreseeable future, the Bank will be the only source of funds from which dividends can be paid. Regulations of federal and state government agencies that have supervisory authority over the Bank place limits on the ability of the Bank to pay cash dividends.
CAPITALIZATION
The following table sets forth our capitalization as if the Holding Company Reorganization had occurred as of December 31, 1999 and on an as adjusted basis to give effect to the sale of shares in this offering at an assumed offering price of $13.75 per share and the receipt of the net proceeds from that sale.
At December 31, 1999
------------------------
As
Actual Adjusted
----------- -----------
Shareholders' equity:
Preferred shares, no par value; 2,000,000 shares
authorized; no shares issued or outstanding........ $ -- $ --
Common shares, no par value; 10,000,000 shares
authorized and 3,720,162 shares issued and
outstanding (actual); 20,000,000 shares authorized
and 6,720,162 shares issued and outstanding (as
adjusted).......................................... 19,019,200 56,569,200
Accumulated deficit................................. (2,992,400) (2,992,400)
Accumulated comprehensive loss...................... (8,400) (8,400)
----------- -----------
Total shareholders' equity......................... $16,018,400 $53,568,400
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Common shares outstanding excludes 725,906 shares reserved for issuance pursuant to our stock option plan, which includes options outstanding on December 31, 1999 to purchase a total of 380,106 of our shares at a weighted average exercise price of $4.00 per share. In January 2000, options were granted covering 280,700 additional shares at an exercise price of $6.75 per share.
DILUTION
Our pro forma net tangible book value as of December 31, 1999, which gives retroactive effect to the Holding Company Reorganization and the Bank's two- for-one stock split, as if they had occurred on December 31, 1999, was approximately $16,018,400, or $4.31 per share of common stock. Net tangible book value per share represents the amount of our pro forma total tangible assets less total liabilities, divided by the number of shares of our common stock that would have been outstanding as of December 31, 1999 had the Holding Company Reorganization and the Bank's two-for-one stock split become effective on that date.
The dilution in our pro forma net tangible book value per share represents the difference between the per share amount paid for shares sold in this offering, and the net tangible book value per share immediately after completion of this offering. After giving effect to the sale of 3,000,000 shares of common stock in the offering at an assumed public offering price of $13.75 per share, and deducting the anticipated underwriting discount and commission and estimated offering expenses payable by us, our pro forma net tangible book value would have been $53,568,400, or $7.97 per share, at December 31, 1999. This will represent an immediate increase in our net tangible book value of $3.66 per share to existing stockholders and an immediate dilution or reduction in the net tangible book value of $5.78 per share to investors purchasing common stock in this offering. These changes are illustrated in the following table:
Initial public offering price per common share................. $13.75
Net tangible book value per share at December 31, 1999....... $4.31
Increase per share attributable to new investors............. $3.66
-----
Net tangible book value per common share after this offering... $ 7.97
------
Dilution per common share to new investors..................... $ 5.78
======
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The following table compares the number of Bancorp shares that will be owned by the existing shareholders of the Bank who will become our shareholders on completion of the Holding Company Reorganization, together with the effective prices they paid for such shares, with the number of Bancorp shares to be purchased and the prices that will be paid for such shares in this offering, assuming that the offering price per share will be $13.75:
Total
Shares Purchased(1)(2) Consideration(3) Average
------------------------ ------------------- Price Paid
Number Percent Amount Percent Per Share(3)
------------ ----------- ----------- ------- -----------
Existing shareholders... 3,720,162 55.4% $19,361,900 31.9% $ 5.20
New investors........... 3,000,000 44.6% 41,250,000 68.1% $13.75
------------ --------- ----------- -----
Total................. 6,720,162 100.00% $60,611,900 100.0%
============ ========= =========== =====
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(2) The number of shares excludes a total of 380,106 shares that will be issuable on exercise of currently outstanding stock options that are exercisable at a weighted average price of $4.00 per share (as adjusted for the stock split). To the extent that these options are exercised, there will be further dilution to new investors.
(3) Does not reflect any deductions of any underwriting discounts and commissions or other offering expenses payable to the underwriters.
SELECTED FINANCIAL DATA
The following selected financial data for the periods presented is derived from the Bancorp's financial statements, including the accompanying notes, that have been audited by Arthur Andersen LLP, independent public accountants, and that are included elsewhere in this prospectus. The selected financial data gives retroactive effect to the Holding Company Reorganization, which will become effective prior to the completion of this offering. The selected financial data should be read together with those audited financial statements and the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Inception
Year Ended (May 29, 1998)
December 31, to December 31,
1999 1998(1)
------------ ---------------
Statement of Operations Data:
Total interest income........................... $ 2,100,100 $ 2,600
Total interest expense.......................... 880,000 --
----------- ---------
Net interest income............................. 1,220,100 2,600
Provision for loan losses....................... 750,000 --
----------- ---------
Net interest income after provision for loan
losses......................................... 470,100 2,600
Non-Interest income............................. 131,600 --
Non-Interest expense............................ (3,351,300) (243,600)
----------- ---------
Loss before income taxes........................ (2,749,600) (241,000)
Income tax expense.............................. (600) (1,200)
----------- ---------
Net loss ....................................... $(2,750,200) $(242,200)
=========== =========
Net loss per share, basic and diluted........... $ (1.12) N/A
=========== =========
Weighted average number of shares outstanding
basic and diluted.............................. 2,466,114 N/A
=========== =========
At December 31,
-----------------------------
1999 1998
------------ ---------------
Balance Sheet Data:
Cash and cash equivalents(2).................... $38,498,200 $ 177,300
Total loans (net of allowance for loan
losses)(3)..................................... 47,043,200 --
Total assets.................................... 91,165,400 340,000
Total deposits.................................. 74,500,200 --
Total shareholders equity (deficit)............. 16,018,400 (242,200)
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(2) Cash and cash equivalents include cash and due from other banks and federal funds sold.
(3) Includes $2,700,000 of loans held for sale, at December 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For accounting purposes, the inception of the Bancorp is deemed to have occurred on May 29, 1998, the date when the organizers of the Bank established an organizing committee to file necessary applications for regulatory approvals and begin preparations for the opening of the Bank. Pursuant to those regulatory approvals, the Bank was incorporated in November 1998 and it received its charter, completed the initial issuance and sale of its shares and commenced banking operations on March 1, 1999. As a result, prior to March 1, 1999, the Bank had no shares outstanding and generated no revenues from operations. During the period from May 29, 1998 to February 28, 1999, our expenses consisted of the portion of our organizational expenses and start up costs that, under generally accepted accounting principles, were required to be expensed, rather than capitalized. Due to the absence of operations during the period from inception to December 31, 1998, the following discussion will focus on our operating results in the fiscal year ended, and our financial condition as of, December 31, 1999.
For the year ended December 31, 1999, we sustained a net loss of $2,750,200, or $1.12 per share. Contributing to that loss was a provision, or charge to income, of $750,000 to establish the Bank's allowance for possible loan losses, and non-interest expenses of $3,351,300, which includes $210,000 of non- recurring organizational and start-up costs that were expensed during the two months ended February 28, 1999. The provision for possible loan losses, coupled with our non-interest expenses, more than offset our net interest income of $1,220,100, earned during the ten months from commencement of our banking operations to December 31, 1999.
Overview
Since 1999 was the first year of our operations, our results of operations were more significantly affected by startup and other non-recurring costs than we would expect will be the case in future periods. Moreover, we expect to realize further growth in subsequent periods that will alter the nature of our operations. Accordingly, our 1999 results are not necessarily indicative of our results in future periods.
Results of Operations
Net Interest Income. Net interest income, the major source of operating income of the Bancorp, represents the difference between interest earned from interest earning assets and the interest paid on interest bearing liabilities. Net interest income, when expressed as a percentage of total average interest earning assets, is referred to as the net interest margin.
Net interest income for the year ended December 31, 1999 was $1,220,100 and included $65,400 of interest earned on the proceeds of the sales of shares in two public stock offerings completed by the Bank in 1999 while those proceeds were held in an escrow account pending completion of those offerings. The Bancorp net interest margin for the year ended December 31, 1999 was 3.95% (excluding the interest on those escrow accounts).
At December 31, 1999, approximately 42% of the Bancorp's assets were invested in federal funds and approximately 48% in gross loans. Typically, as a bank grows, the mix of earning assets shifts out of lower earning federal funds into higher earning loans, thereby increasing net interest margins. We expect loans to increase in absolute dollars during the current fiscal year. However, due to the increase in our assets that will result from the receipt of the proceeds of this offering, we expect that loans will decline as a percentage of total assets during the current fiscal year.
Provision For Loan Losses. During the year ended December 31, 1999, the Bancorp made a provision for loan losses of $750,000 in order to create its allowance for loan losses. At December 31, 1999, that allowance represented 1.6% of the Bank's gross loans.
Noninterest Income. Noninterest income consists of service charges on deposit accounts, mortgage banking income and other noninterest income. The Bank's mortgage banking division offers conforming and non-conforming, agency quality, residential first and home equity mortgage loans. Fee income is generated from loan processing fees, yield spread premium and origination fee income.
Noninterest Expense. Total noninterest expense for the year ended December 31, 1999 was $3,351,300, of which salaries and employee benefits represented $1,836,500. Other operating expense primarily consisted of stationary and supplies, advertising and messenger services and check charges for customers. For the 12 months ended December 31, 1999, noninterest expense, as a percentage of average interest earning assets, was 9.61%.
Quarterly Results of Financial Operations
The following table sets forth certain unaudited quarterly statements of operations data for the four quarters in the year ended December 31, 1999. This information has been derived from our unaudited financial statements, which, in our opinion, have been prepared on the same basis as our audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
Quarter Ended
-------------------------------------------
March
31, June 30, September 30, December 31,
------- -------- ------------- ------------
Total interest income............... $64,700 $387,500 $651,600 $ 996,300
Total interest expense.............. 6,400 199,800 291,400 382,400
Net interest income................. 58,300 187,700 360,200 613,900
Provision for loan losses........... 30,000 90,000 130,000 500,000
Non-Interest expense................ 398,200 584,000 974,600 1,394,500
Loss before income taxes............ 368,200 484,900 704,800 1,191,700
Net loss............................ 368,200 485,700 704,800 1,191,500
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Since we commenced operations on March 1, 1999, the first quarter includes only one month of actual operations. The increase in the loss in the third quarter as compared to the second quarter was due primarily to increases in salaries and employee benefit expense associated with the opening of our San Clemente banking office and the addition of a mortgage banking division. The increase in the loss in the fourth quarter as compared to the prior two quarters was due primarily to increases in salaries and employee benefit expense and a $500,000 provision made to increase our allowance for loan losses. During the fourth quarter our assets grew to $91,165,400 from $58,463,100 at September 30, 1999 and our loans grew to $47,043,200 from $16,911,500 at September 30, 1999. As a result, during the fourth quarter we continued to add personnel needed to manage that growth and we increased our allowance for possible loan losses to maintain that allowance at approximately 1.5% of loans outstanding.
Financial Condition
Assets. The Bancorp's assets totaled $91,165,400 at December 31, 1999. The following table sets forth information regarding the Bank's average balance sheet, yields on interest earning assets, interest expense on interest bearing liabilities, the interest rate spread and the interest rate margin for the year ended December 31, 1999. The average yields and rates represent the annualized rates. Average balances are calculated based on average daily balances.
Average Interest Average
Balance Earned/Paid Yield/Rate
----------- ----------- ----------
Interest earning assets:
Short-term investments.................... $24,140,500 $1,283,800 5.32%
Securities available for sale............. 926,200 56,500 6.10%
Loans..................................... 9,801,400 759,800 7.75%
----------- ---------- ----
Total earning assets.................... 34,868,100 2,100,100 6.02%
---------- ----
Non-Interest earning assets................. 2,435,400
-----------
Total assets.............................. $37,303,500
===========
Interest bearing liabilities:
Interest bearing checking accounts........ $ 740,500 15,400 2.08%
Money market and savings accounts......... 10,155,000 448,500 4.42%
Certificates of deposit................... 8,618,600 416,100 4.83%
----------- ---------- ----
19,514,100 880,000 4.51%
---------- ----
Non-Interest bearing liabilities............ 9,485,600
-----------
Total liabilities......................... 28,999,700
Shareholders' equity........................ 8,303,800
-----------
Total liabilities and shareholders'
equity................................... $37,303,500
===========
Net interest earning........................ $1,220,100
==========
Interest rate spread........................ 1.51%
====
Net interest margin......................... 3.50%
====
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Loans Held for Sale. Loans intended for sale in the secondary market totaled $2,700,000 at December 31, 1999 and are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Loans. Loans outstanding at December 31, 1999 were located in Southern California, the primary market areas being Orange and Los Angeles Counties. The greatest concentration was in real estate loans and commercial loans, which represent 61% and 24% of the portfolio, respectively. The Bank purchased 13 real estate loans in November and December of 1999 from a third party with a par value of $19,394,900 at a premium of $290,900. The loans were recently originated, have terms of 10 to 30 years, are primarily variable rate and are secured by multi-family real estate. Commercial loans are primarily secured by real property and other business assets.
The loan portfolio consisted of the following at December 31, 1999:
Real estate loans............................................... $30,653,600
Commercial loans................................................ 10,471,600
Construction loans.............................................. 90,600
Consumer loans.................................................. 3,815,200
-----------
45,031,000
Allowance for loan losses..................................... (750,000)
Deferred loan origination costs, net.......................... 62,200
-----------
Loans, net.................................................. $44,343,200
===========
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The following table sets forth the maturity and repricing distribution of the Bank's loan portfolio (excluding consumer loans) at December 31, 1999:
Over One
Year
One Year Through Over Five
or Less Five Years Years Total
----------- ---------- --------- -----------
Real estate loans
Floating rate................. $ 51,700 $1,520,500 $617,300 $ 2,189,500
Fixed rate.................... 24,462,900 4,001,200 -- 28,464,100
Commercial loans
Floating rate................. 1,149,800 1,701,400 301,300 3,152,500
Fixed rate.................... 7,319,100 -- -- 7,319,100
Construction loans
Floating rate................. -- -- -- --
Fixed rate.................... 90,600 -- -- 90,600
----------- ---------- -------- -----------
$33,074,100 $7,223,100 $918,600 $41,215,800
=========== ========== ======== ===========
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Allowance for Loan Losses. The risk that borrowers will fail or be unable to repay their loans is an inherent part of the banking business. In order to recognize on a timely basis, to the extent practicable, losses that can result from such failures, banks establish reserves or an "allowance" for possible loan losses by means of periodic charges to income known as "provisions for loan losses" which, when made, are recorded as a current expense. Loans are charged against the allowance for loan losses when management believes that collection of the carrying amount of the loans has become unlikely. Periodic additions are made to the allowance (i) to replenish and thereby maintain the adequacy of the allowance following the incurrence of loan losses, and (ii) to increase the allowance in response to increases in the volume of outstanding loans and deteriorations in economic conditions or in the financial condition of borrowers. The Bank, like other banks, evaluates the adequacy of, and make provisions in order to maintain or increase, its allowance for possible loan losses on a quarterly basis. As a result provisions for possible loan losses will represent a recurring expense in future periods.
The allowance for loan losses at December 31, 1999 was $750,000, which represented 1.6% of the Bank's outstanding loans at that date. We carefully monitor changing economic conditions, the loan portfolio by category, our borrowers' financial condition and the history of the portfolio in determining the adequacy of the allowance for loan losses. We are not currently aware of any information leading us to believe that there will be material deterioration in our loan portfolio, and believe that the Bank's allowance for loan losses at December 31, 1999 is adequate to provide for losses inherent in the portfolio. However, that allowance was established on the basis of estimates developed primarily from historical industry loan loss data, because the Bank commenced operations in March 1999 and, therefore, lacked historical data relating to the performance of loans in its loan portfolio. As a result, ultimate losses may vary from the estimates used to establish the allowance. Additionally, as the volume of the Bank's loans increase, additional provisions for loan losses will be required to maintain the allowance for loan losses at levels we deem adequate. In addition, if economic conditions were to deteriorate, it would become necessary to increase the provision to an even greater extent.
The Bank also evaluates loans for impairment, where principal and interest is not expected to be collected in accordance with the contractual terms of the loan agreement. The Bank measures and reserves for impairment on a loan by loan basis using either the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. As of December 31, 1999 the Bank had no loans classified as impaired. The Bank excludes from its impairment calculations smaller, homogeneous loans such as consumer installment loans and lines of credit. Also, loans that experience insignificant payment delays or payment shortfalls are generally not considered impaired.
A summary of the Bank's transactions in the allowance for loan losses for the year ended December 31, 1999 is as follows:
Balance, December 31, 1998..................................... $ --
Provision for loan losses...................................... 750,000
Recoveries..................................................... --
Amounts charged off............................................ --
--------
Balance, December 31, 1999..................................... $750,000
========
Ratio of the allowance for loan losses to loans outstanding at
December 31, 1999............................................. 1.6%
Ratio of the allowance for loan losses to nonaccrual loans at
December 31, 1999............................................. 0.0%
Ratio of net charge-offs to average loans...................... 0.0%
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The following table sets forth the allocation of the allowance for loan losses by loan category as of December 31, 1999:
Real estate loans............................................... $127,000
Commercial loans................................................ 43,400
Consumer loans.................................................. 60,000
Unallocated..................................................... 519,600
--------
Balance, December 31, 1999...................................... $750,000
========
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While management has allocated the allowance to various loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety.
Nonperforming Assets. At December 31, 1999, the Bank had no nonaccrual loans, restructured loans or loans which were considered impaired.
Deposits. Total deposits were $74,500,200 at December 31, 1999 which includes $21,782,100 of certificates of deposit of $100,000 or more.
At December 31, 1999, the scheduled maturities of time deposits of $100,000 or more are as follows:
2000.......................................................... $21,594,600
2001.......................................................... 187,500
-----------
$21,782,100
===========
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Liquidity
Our liquidity needs are actively managed to insure sufficient funds are available to meet the ongoing needs of our customers. We project the future sources and uses of funds and maintain sufficient liquid funds for unanticipated events. The primary sources of funds include payments on loans, the sale or maturity of investments and the growth in deposits. The primary uses of funds includes funding new loans, making
advances on existing lines of credit, purchasing investments, funding deposit withdrawals and paying operating expenses. The Bank maintains funds in overnight federal funds and other short-term investments to provide for short term liquidity needs.
Cash flow from financing activities, primarily representing increases in deposits and proceeds from the sale of common stock, totaled $93,049,400 for the year ended December 31, 1999. Net cash used in operating activities, primarily representing the net loss for the year, totaled $1,636,200. Net cash used in investing activities, primarily representing increases in loans, totaled $53,092,300.
At December 31, 1999, liquid assets, which included cash and due from banks, federal funds sold, interest bearing deposits with financial institutions and unpledged securities available for sale (excluding Federal Reserve Bank stock) totaled $41,371,800, or 45% of total assets.
Although we do not have any material commitments to make capital expenditures, we anticipate that we will experience a substantial increase in our capital expenditures along with our working capital needs as a result of our anticipated growth in operations, infrastructure and personnel. However, we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
Investments and Investment Policy
The Bank's investment policy, as established by its Board of Directors, is to provide for the liquidity needs of the Bank and to generate a favorable return on investments without undue interest rate risk, credit risk or asset concentrations.
The Bank is authorized to invest in obligations issued or fully guaranteed by the United States government, certain federal agency obligations, certain time deposits, certain municipal securities and federal funds sold. It is the Bank's policy that there will be no trading account. The weighted average maturity of U.S. government obligations, federal agency securities and municipal obligations cannot exceed five years. Time deposits must be placed with federally insured financial institutions, cannot exceed $100,000 to any one institution and must have a maximum maturity of twenty-four months.
Securities available for sale are those that we intend to hold for an indefinite period of time but that may be sold in response to changes in liquidity needs, changes in interest rates, changes in prepayment risks and other similar factors. The securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income.
The following is a summary of the major components of securities available for sale and a comparison of carrying values, estimated fair values, gross unrealized gains and losses and maturities at December 31, 1999:
Estimated
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Agency Securities:
Less than one year................. $ 750,000 $ -- $(2,100) $ 747,900
One to five years.................. 1,492,000 -- (6,300) 1,485,700
Federal Reserve Bank Stock......... 435,200 -- -- 435,200
---------- ----- ------- ----------
$2,677,200 $ -- $(8,400) $2,668,800
========== ===== ======= ==========
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The weighted average yield is 6.0% for securities maturing less than one year, 6.3% for securities maturing in one to five years and 6.0% for Federal Reserve Bank stock.
Asset/Liability Management
The objective of asset/liability management is to reduce the Bank's exposure to interest rate fluctuations. We seek to achieve this objective by matching the Bank's interest sensitive assets and liabilities, and maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. Generally, if rate sensitive assets exceed rate sensitive liabilities, the net interest income will be positively impacted during a rising rate environment and negatively impacted during a declining rate environment. When rate sensitive liabilities exceed rate sensitive assets, the net interest income will generally be positively impacted during a declining rate environment and negatively impacted during a rising rate environment. However, because interest rates for different asset and liability products offered by depository institutions respond differently to changes in the interest rate environment, the gap is only a general indicator of interest rate sensitivity.
The following table sets forth information concerning the Bank's rate sensitive assets and rate sensitive liabilities as of December 31, 1999. Such assets and liabilities are classified by the earlier of maturity or repricing date in accordance with their contractual terms. Certain shortcomings are inherent in the method of analysis presented in the following table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees and at different times to changes in market interest rates. Rates on some assets and liabilities change in advance of changes in market rates of interest, while rates on other assets or liabilities may lag behind changes in market rates of interest. Also, loan prepayments and early withdrawals of certificates of deposit could cause the interest sensitivities to vary from those which appear in the table.
Over Three Over One
Three Through Year Over Non-
Months Twelve Through Five Interest
or Less Months Five Years Years Bearing Total
----------- ----------- ----------- ----------- ------------ -----------
Assets
Interest-bearing
deposits in other
financial
institutions........... $ 1,188,000 $ 198,000 $ -- $ -- $ -- $ 1,386,000
U.S. Govt. Agency
Securities............. -- 747,900 1,485,700 -- -- 2,233,600
Federal Reserve Bank
Stock.................. -- -- -- 435,200 -- 435,200
Federal Funds Sold...... 35,967,000 -- -- -- -- 35,967,000
Loans................... 29,773,200 8,130,000 7,611,000 1,529,000 -- 47,043,200
Non-interest earning
assets................. -- -- -- -- 4,100,400 4,100,400
----------- ----------- ----------- ----------- ------------ -----------
Total assets........... $66,928,200 $ 9,075,900 $ 9,096,700 $ 1,964,200 $ 4,100,400 $91,165,400
----------- ----------- ----------- ----------- ------------ -----------
Liabilities and
Stockholders' Equity:
Noninterest-bearing
deposits............... $ -- $ -- $ -- $ -- $ 16,607,800 $16,607,800
Interest-bearing
deposits............... 55,054,400 2,428,000 410,000 -- -- 57,892,400
Other liabilities....... -- -- -- -- 646,800 646,800
Stockholders' equity.... -- -- -- -- 16,018,400 16,018,400
----------- ----------- ----------- ----------- ------------ -----------
Total liabilities and
Stockholders equity.... $55,054,400 $ 2,428,000 $ 410,000 $ -- $ 33,273,000 $91,165,400
----------- ----------- ----------- ----------- ------------ -----------
Interest rate
sensitivity gap........ $11,873,800 $ 6,647,900 $ 8,686,700 $ 1,964,200 $(29,172,600) $ --
=========== =========== =========== =========== ============ ===========
Cumulative interest rate
Sensitivity gap........ $11,873,800 $18,521,700 $27,208,400 $29,172,600 $ --
=========== =========== =========== =========== ============
Cumulative % of rate
sensitive assets in
maturity period........ 73.41% 83.37% 93.35% 95.50% 100.00%
=========== =========== =========== =========== ============
Rate sensitive assets to
rate sensitive
liabilities............ 1.22 3.74 22.19 N/A N/A
=========== =========== =========== =========== ============
Cumulative ratio........ 1.23 1.32 1.47 1.50 N/A
=========== =========== =========== =========== ============
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At December 31,1999, the Bank's rate sensitive balance sheet was shown to be in a positive gap position. This implies that our earnings would be increased in the short-term if interest rates rise and reduced in the short term if interest rates fall. However, as noted above, this may not necessarily be the case depending on how quickly rate sensitive assets and liabilities react to interest rate changes.
Market Risk
Market risk is the risk of loss to future earnings, to fair values of assets or to future cash flows that may result from changes in the price or value of a financial instrument. The value of a financial instrument may change as a result of changes in interest rate and other market conditions. Market risk is attributed to all market risk sensitive financial instruments, including loans, investment securities, deposits and borrowings. We do not engage in trading activities or participate in foreign currency transactions for our own account. Accordingly, our exposure to market risk is primarily a function of our asset and liability management activities and of changes in market rates of interest. Changes in rates can cause or require increases in the rates we pay on deposits that may take effect more rapidly or may be greater than the increases in the interest rates we are able to charge on loans and the yields that we can realize on our investments. The extent of that market risk depends on a number of variables including the sensitivity to changes in market interest rates and the maturities of our interest earning assets and our deposits. See "Asset/Liability Management."
Capital Resources
On March 1, 1999, the Bank sold 2,090,628 shares of its common stock for approximately $8,298,300 in an initial public offering, net of approximately $64,200 in related expense. In November 1999, the Bank completed a second offering in which it sold a total of 1,629,534 shares for approximately $10,720,900, net of approximately $278,500 in related expense. The foregoing share numbers give retroactive effect to the Bank's two-for-one stock split.
The Bank is required to comply with risk-based capital standards promulgated by the bank regulatory authorities. Under federal regulations, the Bank is currently required to maintain a minimum ratio of total capital to risk- weighted assets of eight percent, of which at least four percent must consist of Tier 1 capital (consisting primarily of common stock and retained earnings, less intangibles). In addition, federal regulations require banks generally to have a minimum leverage capital ratio of at least four percent to be considered "adequately capitalized." We believe that, as of December 31, 1999, the Bank meets all capital adequacy requirements to which it is subject.
To be Well Capitalized Under
Prompt Corrective
Actual For Capital Adequacy Purposes Action Provisions
----------------- --------------------------------- ----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ---------------------- ---------- -----------------------
Total Capital to Risk
Weighted Assets....... $16,717,000 30.2% $4,422,500 (greater than or =)8.0% $5,528,200 (greater than or =)10.0%
---------------------- -----------------------
Tier I Capital to Risk
Weighted Assets........ 16,026,800 29.0% 2,211,300 (greater than or =)4.0% 3,316,900 (greater than or =) 6.0%
---------------------- -----------------------
Tier I Capital to
Average Assets......... 16,026,800 24.3% 2,632,400 (greater than or =)4.0% 3,290,500 (greater than or =) 5.0%
---------------------- -----------------------
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We intend to retain any earnings to support our future growth and, therefore, we do not intend to pay dividends for at least the foreseeable future. In addition, the Bank has agreed with the FDIC to maintain a Tier 1 Capital to Average Assets ratio of at least eight percent until February 28, 2002.
BUSINESS
Overview
Prior to the completion of this offering we will own Pacific Mercantile Bank, which will be our sole subsidiary. The Bank is a California state chartered commercial bank and is a member of the Federal Reserve System. The FDIC insures its deposits. The Bank, which commenced operations on March 1, 1999, seeks to meet the banking requirements of small and medium size businesses and professional firms, as well as individuals, by providing:
. a broad range of banking and financial service products, more typical of larger banks, in order to gain a competitive advantage over independent or community banks that do not provide the same range or breadth of services that we are able to provide to our customers;
. a high level of personal service and responsiveness, more typical of independent and community banks, giving the Bank a competitive advantage over large out-of-state and other large multi-regional banks that are unable or, due to the expense involved, are unwilling, to provide that same level of personal service to this segment of the banking market; and
. the added flexibility, convenience and efficiency of conducting banking transactions with us over the Internet, which further differentiates the Bank from its competitors and will enable us to reduce the costs of providing service to our customers.
The Bank has achieved rapid growth in its first year of operations. During 1999, it opened two banking offices in Orange County, California, one in Newport Beach in March and the other in San Clemente in August. In April 1999, the Bank launched its Internet Web site, at www.pmbank.com, where customers are able to conduct, more conveniently and less expensively, many of their commercial banking and other financial transactions with us, 24 hours a day, 7 days a week, using a computer equipped with a current industry standard Web browser. As of March 15, 2000 our assets had grown to $115,100,000, deposits to $98,800,000, and we were serving a total of 1,600 deposit customers, of which approximately 700 were conducting at least some of their banking transactions with us over the Internet. Business customers accounted for approximately 80% of our deposits.
We also believe that, by offering a broad selection of banking and financial services via the Internet, we are positioned to capitalize on the growing use of the Internet to conduct financial and banking transactions. According to a number of published reports, approximately 5 million households in the United States are believed to have conducted online banking transactions in 1999 and that number is expected to grow to more than 10 million by 2001. At the same time the FDIC reports that, although approximately 30% of the 3,000 federally insured banks and thrift institutions in the United States had Web sites, only about 635 of those banks and thrift institutions offered their customers the ability to conduct online banking transactions at their Web sites.
We also plan to expand our market area geographically by acquiring other independent banks in Southern California and in major metropolitan areas of other western states that have undergone banking consolidations similar to the one that has occurred in California. We also plan to open "express business banking offices" to establish a physical presence, offer traditional business and consumer banking services, and market our Internet banking services in new communities within and outside of Orange County. These offices, which will range in size from 2,000, to 3,000 square feet (as compared to 4,000 to 7,000 square feet for a traditional branch banking office), are expected to cost roughly one-half of the cost of establishing and operating a traditional branch banking office. Because our computer and Internet systems make it possible to conduct an increasing number of banking transactions from remote locations, we believe that we can provide responsive and convenient business and consumer banking services from these offices to customers within a 25 mile radius of their locations.
Industry Background
The Banking Environment. During the period from 1970 to 1985, independent or community banks headquartered in Southern California grew in number from 56 to 214, which included 46 banks that were headquartered in Orange County. Independent and community banks offered an alternative to larger multi-regional and multi-state banks, particularly for small and medium size businesses and professional firms who desired to obtain, and were willing to pay for, personalized and more responsive banking services.
By contrast, as of December 31, 1999, the number of independent or community banks headquartered in Southern California had declined to 139, of which only eight were headquartered in Orange County, due principally to a consolidation that took place over roughly a five year period, from 1994 to 1999, in which the large multi-regional and large out-of-state banks acquired numerous independent and community banks in Southern California. For a number of reasons, such as disruptions occasioned by the process of integrating the acquired banks into their operations, their lack of familiarity with the local communities in which the acquired banks had operated and a focus on cutting expenses to justify the acquisition prices they had paid for the acquired banks, these larger multi-regional and multi-state banks have been unable or unwilling to continue the level of personal service that many of the acquired banks had provided to their small and medium size business customers, leaving many of them overlooked and underserved.
Additionally, during the past five years many larger California-based banks have been acquired or have merged with large out-of-state banks and are, as a result, now headquartered in other states. These include Bank of America, which was acquired by Nations Bank, based in North Carolina; Wells Fargo Bank, which merged with Norwest Bancorp, based in Minnesota; American Savings Bank and Great Western Savings Bank, both of which were merged into Washington Mutual Bank, based in the state of Washington; and Western Bancorp, which was acquired by U.S. Bancorp, based in Minnesota. Similar consolidations have taken place in Arizona, Nevada, Oregon and the state of Washington.
We believe one of the effects of this consolidation has been a deterioration in the quality and responsiveness of the banking services that are provided to small and medium size businesses, by both large out-of-state banks and the independent and community banks that survived the consolidation. We believe that these conditions have created an opportunity for us to capture a meaningful share of this segment of the banking market from the large out-of- state banks and also from local community banks by offering to customers a wide range of innovative products and services and the added convenience of Internet banking services designed to meet the special needs of small and medium size businesses.
Location of the Bank and Demographics of the Bank's Service Area. We chose to locate our headquarters and initial banking offices in Orange County, California for a number of reasons. Orange County has a population of 2.8 million, with a business community comprised of numerous small and medium size businesses and service and professional firms that operate in a diverse number of industries. According to the U.S. Bureau of Census, Orange County is the sixth largest in population and the seventh most affluent county of the counties in the United States with populations of more than 1,000,000 people. Additionally, the demographics indicate that the Orange County community is underserved by the independent segment of the banking industry. There is only one locally headquartered bank in Orange County per 306,772 people. By comparison, there is one locally headquartered bank per 109,752 people in California as a whole and one locally headquartered bank per 31,845 people in the United States. Orange County is also centrally located within Southern California, contiguous to three of the fastest growing counties, in terms of population, in the region: Los Angeles County to the north, San Diego County to the south and Riverside County to the east. In each of those counties there are areas that have demographics similar to those in Orange County and, because of their proximity, offer us attractive expansion opportunities. See "Strategy."
The Internet Banking Opportunity. With the emergence of the Internet as a globally accessible, fully interactive medium, many businesses, including many small-to-medium size businesses that comprise our core
market, are increasingly conducting business electronically, via the Internet. Most businesses are equipped with, and their managements are familiar and comfortable with using, computers to accomplish a growing number of tasks, including completing commercial transactions via the Internet that can be accomplished less expensively and more conveniently than in person or by telephone or mail.
In addition to its use as a general commercial medium, the Internet has rapidly emerged as an innovative means of providing financial services. As finance-related Web sites continue to grow in popularity, many companies are increasingly offering a variety of financial services, including credit cards, brokerage services, insurance products and banking services, via the Internet.
The Internet also offers banks the opportunity to extend their customer base beyond the practical geographical limitations of traditional branch banking which require banks to open new offices in order to extend their service areas and attract new customers. Customers are able to access a variety of banking services and conduct numerous banking transactions, by connecting to a bank's Web site via their personal computers at any time, day or night, without regard to geographic distances or limitations. The Internet also offers banks a lower cost alternative to provide banking services to customers who are comfortable using the Internet for commercial and financial transactions.
Internet Demographics. We believe that the demographics of Internet users will facilitate the growth of Internet banking. Internet users tend to be young and mobile and thus more inclined to be comfortable with and receptive to the convenience of online commercial transactions. Additionally, they tend to be business managers or professionals with limited amounts of discretionary time and therefore are attracted to the convenience of "one-stop shopping" for a full range of financial services. As a result, we believe that, as these individuals move into financial and other management positions with their businesses or firms, they will insist on the convenience of being able to conduct their business banking transactions over the Internet, resulting in additional growth opportunities for banks equipped to provide such services. We believe these demographics suggest a growing market for the convenience and lower cost services that we are able to provide our business customers, as well as consumers, via the Internet.
Strategy
Our strategy is:
. to offer personalized and responsive service combined with the added convenience and flexibility of Internet banking services;
. to increase the variety of banking products and services that we offer our customers in order to gain a competitive advantage over independent and community banks; and
. to take advantage of our lower cost automated and Internet banking systems to expand geographically into areas where the business and banking demographics are similar to those of Orange County.
We intend to implement our strategy in the following ways.
Broad Selection of Products and Services. We offer a broad selection of products and services primarily suited to the needs of our business customers that are typically available only from larger multi-regional and out-of-state banks.
Internet Banking Services. We offer customers the ability to access a number of banking products and services through our Web site, www.pmbank.com, and to conduct a number of banking transactions that in the
past could only be accomplished in person, over the telephone or by mail. Our Internet banking services provide customers with the convenience of banking at any time, day or night, seven days per week, using any personal computer that is equipped with a current industry standard Web browser.
Greater Convenience and Accessibility to the Bank. We seek to provide our customers with a higher level of convenience and access than can be obtained either from large multi-regional and large out-of-state banks or from many other independent banks, through a combination of full service branch banking offices, express business banking offices that we intend to establish as part of our expansion strategy, and Internet banking services that enable customers to choose the ways in which, and the times at which, they will conduct banking transactions with us. In addition, our Web site has been designed to be easy- to-use and to expedite our customers' banking transactions.
High-Quality Service and Customer Satisfaction. We continually seek ways to enhance customer satisfaction and provide a level of customer service generally found only at independent and community banks. For example, we work with business customers to design deposit and loan products that address their specific requirements. We also offer special and discounted banking services to their employees, including direct payroll deposit services, that will enable their employees to transact banking transactions at reduced costs to them. We also offer a number of services, such as electronic bill payment and ATM and debit cards, without charging our customers for those services. We also emphasize responsive, courteous customer service and utilize a fully-trained dedicated staff who respond promptly to inquiries and requests for assistance from existing and potential customers.
Increase Loan Originations and Volume while Maintaining Loan Quality. A bank generally realizes higher yields on the loans it makes than from other interest earning assets, such as investments. As a result, we intend to increase the marketing of our loan products and, with the increase in capital that will occur as a result of this offering, to make larger loans than the Bank is currently able to make. At the same time, to minimize loan losses, we will follow the strategy of maintaining a conservative loan mix consisting of commercial and other business loans and, to a lesser extent, home equity, construction and consumer loans, with an emphasis on high credit quality.
Achieve Cost Reductions by Increasing the Use of our Internet Banking Services by Bank Customers. Independent and community banks generally incur a higher level of non-interest expense than larger banks due to the higher level of personal service they provide to their customers. We intend to encourage and assist our customers to make use of our Internet banking services, because those services can be provided at a lower cost than services offered through a traditional branch banking system. We believe that if we can realize such cost savings, we will gain a competitive cost advantage over competing independent and community banks that do not offer, or offer fewer, Internet banking services than we offer.
Technological Advantage. As a new bank, we were able to acquire the most technologically current information and transaction processing systems for the Bank and for our Internet banking operations. For example, we believe we are one of the first banks to offer customers the ability to view the front and back, and to print copies, of their paid checks at or from our Website. We believe that many established banks with which we compete continue to be reluctant to replace older systems with newer ones, due to the cost of acquiring the new systems, the problems of intergrating new systems with existing ones and the added costs of having to write off their investments in existing computer systems. We also have installed the latest available security devices and measures to assure the secure transmission of confidential information over public networks.
Outsource Certain Operational Functions to Internet Service Providers. To enhance the flexibility and scalability of our Internet banking operations, we outsource certain principal operational functions to leading Internet service providers. In each of these relationships, we benefit from the service provider's expertise and economies of scale while retaining the flexibility to take advantage of changes in available technology without affecting customer service. We can also respond more easily to growth because these third-party service
providers have the capacity to process a high volume of transactions. Finally, these service providers offer us additional security, in that they operate redundant systems that can be accessed to process our banking transactions in the event that any of our primary systems is disabled by a natural disaster or by a power or telecommunications failure.
Geographic Expansion. We believe that succeeding in our target segment of the banking market requires establishing long term relationships with customers and that having an accessible local office is and will continue to be important for a significant number of our business banking customers. Therefore, we intend to seek and exploit opportunities to expand our business geographically into other metropolitan areas, within Southern California and possibly also in other western states, where the demographics are similar to those in Orange County. We intend to accomplish that expansion primarily in the following ways:
Express Business Banking Offices. We intend to establish "express business banking offices" that will range in size from 2,000 to 3,000 square feet, as compared to the 4,000 to 7,000 square feet common to traditional branch banking offices, that we believe can be constructed and equipped for approximately one-half the cost of a traditional branch banking office. At those offices, customers will be able to conduct a number of banking transactions conveniently, whether in-person, over the Internet or at ATMs installed at those offices. Our customers also will be able to meet with account managers who will have ready access at any time of day to the customer's banking records and data and will be able to print loan documents prepared at the Bank's administrative offices via our secure local area computer network and Internet bank servers.
Bank Acquisitions. We intend to seek opportunities to acquire, on a selective basis, other independent or community banks that will enable us to expand our market areas and introduce our Internet banking services to a larger number of customers. We intend to use shares of our stock as the primary currency for such acquisitions and we believe that our commitment to personalized and responsive service, combined with our Internet capabilities, will give us a competitive advantage over other banks competing to acquire well managed local independent or community banks. In addition, to preserve the competitive advantages of the community banks that we may acquire, our strategy will be to preserve the local identities of those banks and retain their local management personnel involved in providing services to their customers, while taking advantage of opportunities to achieve economies in the administration of those banks.
We will need to obtain approvals from federal and state government banking agencies to establish new banking offices or to acquire other banks in the future. These will include approvals from government agencies in states outside of California where we may propose to open new banking offices or acquire existing banks.
Products and Services
We offer a broad range of traditional and Internet banking products and services designed to meet the banking needs of small and medium size businesses as well as those of individuals. We believe that our products and services are more comparable to those that are available from large multi-regional and out- of-state banks and include some services that are not typically provided by other independent or community banks. The products and services we offer include the following.
Deposit Products. The Bank offers a number of different types of deposit accounts, including non-interest demand and interest bearing checking accounts; money market accounts, savings accounts and certificates of deposit. As of February 29, 2000, our deposits totaled $90,000,000, of which approximately 80% were attributable to business customers. Those deposits included:
Average Account Total of Account
Type of Deposit Account Balance Balances
----------------------- --------------- ----------------
Non-interest bearing checking accounts..... $ 32,500 $24,300,000
Interest bearing transaction accounts(1)... $ 64,600 $40,400,000
Certificates of Deposit(2)................. $166,500 $25,300,000
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Totals................................... $ 59,000 $90,000,000
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(2) Time certificates of deposits in varying denominations under and over $100,000.
Loan Products. The Bank offers a diverse line of loan products, including commercial loans and credit lines, SBA guaranteed business loans, accounts receivable and inventory financing, real estate mortgage and real estate construction loans and consumer loans. We also have established a mortgage loan division, which originates and purchases residential mortgages that, for the most part, qualify for resale to long-term investors in the secondary residential mortgage market. Our mortgage loan products include conforming and non-conforming agency-quality one-to-four family first mortgages, investor- quality home equity second mortgages and investor-quality home equity lines of credit secured by second trust deeds or mortgages. In most instances the Bank funds these loans at the time of origination and sells the loans to investors in the secondary market within 30 days of funding. The Bank earns loan origination and processing fees and, prior to their resale, interest income on such loans.
The following table sets forth the types and amount of the Bank's loans that were outstanding as of February 29, 2000:
At February 29,
Type of Loan 2000
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Real estate loans.......................................... $34,600,000(1)
Residential mortgage loans................................. 5,500,000
Commercial loans........................................... 19,800,000
Consumer loans............................................. 3,300,000
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Total.................................................... $63,200,000
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Business Services. The Bank offers various financial services directed primarily at our business banking customers, including:
. merchant bankcard services to process credit card payments made by their customers;
. automated clearinghouse origination services that enable any businesses that charge that for their services or products on a monthly or other periodic basis to obtain payment from their customers through an automatic, pre-authorized debit from their customers bank accounts anywhere in the United States;
. electronic check origination and processing that allows businesses, including Internet retailers, to accept payment from their customers in the form of an electronic check that the Bank is able to debit electronically from any bank in the United States; and
. financial management tools, including multiple account control, account analysis, transaction security and verification, wire transfers, universal bill payment, payroll and lockbox services.
Convenience Banking Services. The Bank offers a number of services and products that make it more convenient to conduct banking transactions with us, such as our Internet banking system, ATM's, phone banking, night drop services and armored car services to order and receive cash without having to travel to our banking offices.
Automated Clearinghouse Origination Services. The Federal Reserve operates an automated or "electronic" clearing house system (which is commonly referred to as "ACH") which enables businesses, with the authorization of their customers, to obtain payments of their charges by electronically debiting the banking accounts of their customers, wherever they may be located in the United States. ACH services enable businesses that sell products or services to customers to reduce their costs and improve their cash flow by:
. eliminating the need to issue monthly invoices; and
. substituting electronic checks, that can be processed and paid to them almost instantaneously, in place of paper checks from their customers that must be prepared and mailed and then processed through the Federal Reserve's traditional clearing house system, thereby significantly shortening the time to receive payments from their customers.
Businesses that use ACH services include insurance companies (to collect insurance premiums), lenders (to collect monthly mortgage or automobile payments) and health or fitness and other clubs (to collect monthly fees or dues).
However, for a business to be able to use ACH services, it must have a banking relationship with a bank that has the computer systems and that is authorized by the Federal Reserve to originate ACH charges or "credits." While virtually all banks can receive ACH debits made against the accounts of their customers, there are a limited number of banks, particularly among independent and community banks, that have requested to become authorized by the Federal Reserve, and have the computer systems necessary, to originate ACH debits for their business customers. The Bank has qualified with the Federal Reserve to do so and originates ACH transactions for a number of its customers.
We have also been retained to provide similar ACH services to clients of eFunds Corporation, which provides a number of automated collection services primarily to businesses that sell their products to consumers in person, by mail or over the Internet. Among the methods of collection that eFunds employs is an "electronic debit" process by which a consumer that buys products from any eFunds' client may authorize the charges on a per transaction basis to be paid by means of an electronic debit or "electronic check" that can be transmitted electronically to and charged against the consumer's bank account at any U.S. based bank via a privately established automated clearing house system. Like the Federal Reserve's automated clearing house system, these automated payment services enable businesses to improve their cash flow and reduce expenses by reducing their dependence on paper checks and credit cards for payment and enabling them to receive payments from their customers generally within about two- to-three business days following the transactions which generate the electronic debits.
The Bank acts as an originating depository financial institution for a number of eFunds' clients, electronically debiting the bank accounts of customers of those clients, receiving the resulting payments from those customers and transfering those payments to banks designated by those eFunds clients who utilize this service. Neither eFunds' clients nor the consumers need to have accounts with the Bank to avail themselves of this service and the Bank generates interest earnings on the funds received as a result of the debits pending their electronic transmission to eFunds' clients. We believe that, currently, there are only about 30 banks in the United States that have qualified to participate as originating depository financial institutions in this program, most of which are much larger multi-regional and out-of-state banks. The Bank can offer this service to its own business customers and, as a result, we believe that the Bank's capabilities enable it to offer a relatively unique service not provided by the independent and community banks with which it competes.
Internet Banking Services
Banking transactions that customers can conduct and banking products and services that customers can access at our Web site include:
(1) establishing business and consumer checking and savings accounts and purchasing and renewing certificates of deposit;
(2) transferring funds between accounts;
(3) printing bank statements and viewing the front and back of their paid checks;
(4) submitting loan applications;
(5) transferring funds from credit lines to, and making loan payments from, their deposit accounts;
(6) paying bills, payroll and taxes electronically;
(7) ordering cash through our Web site and having the funds delivered to them by armored car;
(8) utilizing business cash management services, including currency converters for international transactions and electronic wire transfers;
(9) merchant banking services, including credit card processing, automated clearing house originations and electronic check processing; and
(10) a number of consumer and personal banking services, including financial planning for home buying and financing, retirement planning and discount brokerage services offered through a strategic alliance with UVest Financial Services Group, Inc., an online discount securities brokerage firm.
Opening an Account. Our customers can access our Web site and our Internet banking services through any Internet service provider by means of an acceptable secure Web browser such as Netscape's Navigator (Version 4.0 or higher) or Microsoft's Internet Explorer (Version 4.0 or higher). When customers access our menu of products and services at our Web site, they can open a new account, review the history and status of an existing account, and engage in any of several different types of banking transactions.
To apply for a new account, a customer completes an online account application, prints out that application and mails it to the Bank. A customer also may apply for a new account by calling the Bank's toll-free telephone number, 1-877-450-BANK.
Security. Our ability to provide our customers with secure financial services over the Internet is of paramount importance. We believe our Internet systems, services and software meet the highest standards of bank security. The following are among the security measures that are in place:
. Encrypted Transactions. All banking transactions and Internet communications are encrypted so that sensitive information is not available on the Internet in a form that can be read or easily deciphered. Encryption of Internet communications is accomplished through the use of the Netscape SSL (Secure Sockets Layer) technology. SSL is the standard for encryption on the Internet and is currently used by Netscape's Navigator (Version 4.0 or higher) and Microsoft's Internet Explorer (Version 4.0 or higher).
Messages between our bank mainframe computer system, where all transactions are processed and data is maintained, and our Internet server, and between our Internet server and the customers Web browser, are encrypted using DES encryption. DES is a symmetric key algorithm and is highly secure because it is not susceptible to standard ciphertext attacks.
. Secure Logon. To eliminate the possibility that a third party may download the Bank's or any customer's password file, user identification and passwords are stored behind a secure firewall on the Web server. Additionally, passwords are variable length strings of five to eight alpha-numeric characters, which makes the chance that a password can be randomly guessed less than one in one trillion.
. Firewalls. All of our Internet banking services are routed from our Internet server through a firewall. The firewall is a combined software and hardware product that precisely defines, controls and limits the access to "internal" computers from "outside" computers across a network. Use of this firewall means that only authenticated Bank customers or administrators may send or receive transactions through it, and the firewall itself is immune to penetration from the Internet. In other words, the firewall is a mechanism used to protect the Bank's computers from unauthorized access through the Internet by customers or by third parties.
. Physical Security. All servers and network computers reside in secure facilities. Currently, computer operations supporting the Bank's Internet operations are based in Newport Beach, California and at the offices of Fiserv, in Van Nuys, California where the Bank's mainframe computer is based. Only employees with proper identification may enter the primary server area at the Bank. Access to the Bank server console requires further password identification.
. Service Continuity. To avoid interruptions in our Internet banking services, we intend to install Internet servers at our other full service banking offices, such as in our San Clemente office, which can process Internet transactions not only from customers of that office, but also customers of our other offices, in the event the servers at those other offices become disabled. In the unlikely event that our customers are prevented from accessing their accounts over the Internet, they will retain access to their funds through a number of different means, including making in-person withdrawals at any of our branch banking offices or ATM's or by armored car; making deposits in person, by mail or at the Bank's ATM's and getting information and assistance from Bank employees by telephone. Additionally, Fiserv, which hosts our mainframe bank computer, has the ability to transfer data electronically to a second computer system located at a remote site, so that in the event of a natural disaster that affects Southern California, the Bank will continue to be able to process banking transactions via its computer system without any significant interruptions. Additionally, the Bank is working with Q-Up Systems, which provides Internet transaction processing software and services to the Bank, to establish a second location equipped with Internet servers that can enable our customers to continue conducting Internet banking transactions with us in the event that our Internet servers in Southern California were to become disabled.
. Monitoring. All customer transactions on the Bank's Internet server in Newport Beach produce one or more entries into transactional logs. The Bank recognizes that it is critical to monitor these logs for unusual or fraudulent activity. Bank personnel review these logs regularly, and any abnormal or unusual activity will be noted and appropriate action will be taken by the Bank. We believe that, ultimately, vigilant monitoring is the best defense against fraud.
We believe the risk of fraud presented by providing Internet banking services is not materially different from the risk of fraud inherent in any banking relationship. We believe that potential security breaches can arise from any of the following circumstances:
. misappropriation from the user of the user's account number or password;
. penetration of the Bank's server by an outside "hacker;"
. fraud committed by a new customer in completing his or her application with us; and
. fraud committed by an employee of the Bank or one of its service providers.
Both traditional banks and Internet banks are vulnerable to these types of fraud. By establishing the security measures described above, we believe the Bank has minimized its vulnerability to the first three types of fraud. To counteract fraud by employees and service providers, we have established internal procedures and policies designed to ensure that, as in any bank, proper control and supervision is exercised over employees and service providers.
Additionally, the adequacy of our security measures are reviewed periodically by the Federal Reserve Board and the California Department of Financial Institutions, which are the federal and state government agencies with supervisory authority over the Bank. We also retain the services of third party computer security firms to conduct tests of our Internet banking and computer systems to identify potential threats to the security of our systems and to recommend additional actions that we can take to improve our security measures.
Express Business Banking Offices
Following completion of this offering, the Bank intends to apply for government approvals to open two express business banking offices within the next 12 months. Each express business banking office will be configured, equipped and staffed to meet the banking needs of small and medium size businesses, professional firms and individuals that are located within a 25 mile radius. These offices will range in size from 2,000 to 3,000 square feet, which is approximately half the size of a traditional branch banking office, and as a result are expected to require only about half the investment that is typically required to establish and operate a traditional branch banking office. These express business banking offices will be:
. equipped with ATM machines and a business conference room, with video conferencing capability, that will be located in the entry area of the office and can be accessed at any time of day or night, seven days per week, by business and individual customers using ATM or other identification cards, but which for security reasons are separated from and, except during normal business hours, will not be accessible to, the area of the office where in-person banking transactions are conducted;
. configured with a concierge and a new accounts desk and up to three teller windows equipped with secure automated cash machines that will eliminate the need for a traditional bank vault;
. equipped with computer terminals where customers can conduct their banking transactions with us via the Internet; and
. configured with three to four offices for use by account managers and loan officers, who can retrieve customer account data and loan documentation prepared at the Bank's administrative offices via computer linked to the Bank's local area network or Internet system.
We believe that express business banking offices will enable us to penetrate new market areas and give us the presence we need to help attract business customers to the Bank in those areas. Additionally, the lower costs of establishing and operating such offices, as compared to a traditional branch banking office, should decrease the time within which such offices can become profitable.
Our Database, Transaction Processing and Internet Service Providers
We have established service relationships with leading providers of network infrastructures, computerized transaction processing systems and Web based financial products and services. Those providers include:
Fiserv. Fiserv hosts and maintains our mainframe computer on which all the Bank's financial and accounting data is stored and all banking transactions are processed. Fiserv provides similar services to numerous other banks and depository institutions and has the computing capacity to be able to meet our computer processing needs as we grow. To protect the Bank against interruptions in service that could occur in the event of a natural disaster or a power or telecommunications outage affecting Southern California, Fiserv has arranged for processing of the Bank's transactions and the maintenance of accounting records to continue at another mainframe computer located outside of California.
Q-Up Systems. Q-Up Systems provides us with the software needed to enable our customers to process banking transactions with us over the Internet. As Internet banking transactions are processed the data regarding those transactions is transmitted, electronically and securely, to the Bank's mainframe computer hosted by Fiserv, thereby automatically updating account information for those deposit or loan accounts for which transactions have been processed. We are currently working with Q-Up Systems to establish a remote site, outside of California, to locate a redundant Internet banking system that can become operational in the event that our Internet banking system in Southern California were to become disabled.
UVEST Financial Services Group, Inc. We have an agreement with UVEST Financial Services Group, Inc., an online discount securities brokerage firm. Under that agreement, our customers can access UVest's Web site from the Bank's Web site in order to purchase and sell securities. Information regarding those transactions are maintained on the Bank's computer system and are accessible to customers via the Bank's Web Site. The Bank also receives a fee from UVEST on securities transactions that it processes for the Bank's customers.
Marketing
In marketing the Bank's services, we emphasize:
. the Bank's identity as an independent and community-based bank, managed by bank officers and employees who live in, and therefore have personal ties to, the communities where our offices are located;
. our commitment to providing competent, personalized and responsive banking services to our customers; and
. the breadth of the banking services we are able to provide to our customers, with particular focus on the convenience and flexibility of our Internet banking services.
We believe that the first two of these attributes differentiate us from larger multi-regional and out-of-state banks and that the third attribute differentiates us from many independent and community banks.
The Bank markets its services primarily by means of localized promotional activities, personalized service, and personal contacts with potential customers by our executive officers, directors, employees and shareholders, as well as by direct mail and media advertising directed primarily at local businesses in our market areas.
Increased Marketing of Internet Services. We have registered our Web site with many of the most popular Internet search engines, such as Yahoo! and Alta Vista, to facilitate access to our Internet Web site. However, because we are focused on attracting small and medium size local business customers, we do not presently intend to use banner advertising or to enter into joint marketing arrangements with other Internet e-commerce companies to market our Internet banking services. Instead, at least initially, we intend to market those services primarily in those markets where we have established a physical presence and to selected businesses outside of those markets who want to use our services and are willing to maintain a volume of deposits and to regularly conduct a number of banking transactions with us that will justify the cost of providing services to them.
We intend to increase our marketing to build greater awareness of our Internet banking services, initially in Southern California, in order to attract new customers and expand our service areas. Initially, those marketing programs will primarily take the form of print and direct mail campaigns to businesses in our target market.
Once we have expanded our markets geographically into additional communities, either through establishing additional full service regional banking offices or local express business banking offices, we will consider establishing joint marketing relationships with selected Internet e-commerce companies that offer non-financial business-related services to the business communities that we serve.
Competition
Competitive Conditions in the Traditional Banking Environment. The banking business in California generally, and in the Bank's service area in particular, is highly competitive with respect to both loans and deposits and is dominated by a relatively small number of large multi-regional and large out-of-state banks which have offices operating over wide geographic areas. The Bank competes for deposits and loans with such banks as well as with savings and loan associations, credit unions, mortgage companies, money market and other mutual funds, stock brokerage firms, insurance companies, and other traditional and nontraditional financial institutions. The Bank also competes for customers' funds with governmental and private entities issuing debt or equity securities or other forms of investments which may offer different and potentially higher yields than those available through bank deposits.
Major financial institutions that operate throughout California and that have offices in the Bank's service areas include Wells Fargo Bank, Bank of America, Union Bank, Sanwa Bank California, Washington Mutual Savings Bank, Comerica Bank and California Federal Savings. With the exception of Union Bank, all of these banks are now headquartered outside of California. Independent banks or financial institutions with offices in the Bank's service area include, among others, City National Bank, Imperial Bank, Manufacturers Bank, Downey Savings and Eldorado Bank.
The large banks and some of the independent institutions have the financial capability to conduct extensive advertising campaigns and to shift their resources to regions or activities of greater potential profitability. Many of them also offer diversified financial services which are not presently offered directly by the Bank. The larger banks also have substantially more capital and higher lending limits.
In order to compete with the financial institutions operating in the Bank's service areas, we rely on the Bank's independent status to provide flexible and greater personalized service to customers. The Bank emphasizes personal contacts with potential customers by the Bank's executive officers, directors and employees; develops local promotional activities; and seeks to develop specialized or streamlined services for customers. To the extent customers desire loans in excess of the Bank's lending limit or services not offered by the Bank, the Bank attempts to assist customers in obtaining such loans or other services through participations with other banks or assistance from the Bank's correspondent banks or third party vendors.
Competitive Conditions in Internet Banking. The market for electronic banking services is rapidly evolving. There are a number of banks that offer services exclusively over the Internet, such as Net.B@nk and First Internet Bank, and others who are affiliated with existing banks, such as Wingspan.com, that market their services nationwide. There are also a large number of existing banks that are beginning to offer Internet banking services; however, we believe that few of these banks offer the comprehensiveness of Internet banking services that the Bank is able to offer. However, many of the larger of these banks do have greater market presence and greater resources to market their Internet banking services than the Bank. Additionally, new competitors and competitive factors are likely to emerge, particularly in view of the rapid development of Internet commerce.
The Bank also competes for customer funds with the numerous and growing number of securities brokerage firms that offer online trading and investments, which provide an alternative to deposit products offered by the Bank. The Bank has entered into an agreement with UVEST Financial Services Group in order to offer, through UVEST, online discount securities brokerage services to its customers via the Bank's Web site. See "Our Internet Service Providers-- UVEST Financial Services Group, Inc."
Existing and future state and federal legislation could significantly affect the cost of doing business, range of permissible activities and competitive balance among major and smaller banks and other financial institutions. We cannot predict the impact such developments may have on commercial banking in general or on the business of the Bank in particular.
Supervision and Regulation
General. Both federal and state law extensively regulate bank holding companies. This regulation is intended primarily for the protection of depositors and the FDIC's deposit insurance fund and not for the benefit of our shareholders. Set forth below is a summary description of the material laws and regulations which will relate to our operations. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the financial services industry have been discussed and evaluated by Congress. These proposals include legislation to expand the insurance activities of banks. We cannot predict whether any of these proposals, or any form of them, will be introduced in the next Congress and become law. Consequently, we cannot presently determine what effect, if any, they may have on us.
The Bancorp. Upon the completion of the Holding Company Reorganization, we will be a registered bank holding company subject to regulation under the Bank Holding Company Act. We will be required to file with the Federal Reserve Board periodic reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act, and will be subject to Federal Reserve Board examinations.
The Federal Reserve Board may require us to terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates if the Federal Reserve Board determines that the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of our banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of a bank holding company's debt, including authority to impose interest ceilings and reserve requirements on such debt. The Federal Reserve Board may also require us to file written notice and obtain approval prior to purchasing or redeeming our equity securities.
Under the Bank Holding Company Act and related regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Federal Reserve Board will require us to maintain capital at or above stated levels. See "Capital Standards" below.
We must obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities, or of substantially all of the assets, of any bank or bank holding company. The Federal Reserve Board must also give advance approval for our merger or consolidation with another bank holding company.
We will be prohibited by the Bank Holding Company Act from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries, except in statutorily prescribed instances. However, we may, subject to the prior approval of the Federal Reserve Board, engage in, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both.
We will also be a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Bancorp will be subject to examination by, and may be required to file reports with, the California Commissioner of Financial Institutions.
We have applied to have our securities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. As such, we will be subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Securities Exchange Act.
The Bank. As a California chartered bank, the Bank is subject to primary supervision, periodic examination and regulation by the California Commissioner of Financial Institutions. As a member of the Federal Reserve Bank of San Francisco, the Bank also is subject to regulation by the Federal Reserve Board, which is its primary federal banking regulator. To a lesser extent, the Bank is also subject to regulations promulgated by the FDIC. If, as a result of an examination of the Bank, the Federal Reserve Board should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the Federal Reserve Board has various remedies available. These remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate the Bank's deposit insurance, which would result in a revocation of the Bank's charter. The California Commissioner of Financial Institutions has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain capital at or above stated levels.
Dividends and Other Transfers of Funds. Dividends from the Bank will constitute our principal source of cash. The Bancorp is a legal entity separate and distinct from the Bank. The Bank will be subject to various statutory and regulatory restrictions on its ability to pay cash dividends to the Bancorp. In addition, the California Commissioner of Financial Institutions and the Federal Reserve Board have the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if the payment is deemed to constitute an unsafe or unsound practice.
The Federal Reserve Board and the California Commissioner of Financial Institutions also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the future financial condition of the Bank and other factors, that the Federal Reserve Board or the Commissioner could assert that the payment of dividends or other payments might, under some circumstances, constitute an unsafe or unsound practice. Further, the Federal Reserve Board has established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under its jurisdiction. Compliance with the standards set forth in those guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Bancorp may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with limited exceptions, making capital distributions if, after the transaction, the institution would be undercapitalized. See "Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "Capital Standards" for a discussion of these additional restrictions on capital distributions.
The Bank is subject to restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Bancorp or other Bank affiliates, the purchase of, or investments in, our stock or other securities, the taking of such securities as collateral for loans and the purchase of our assets or
those of other Bank affiliates. Such restrictions prevent the Bank's affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Bancorp or any other affiliate are limited, individually, to 10% of the bank's capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20% of the Bank's capital and surplus. California law also imposes restrictions with respect to transactions involving the Bancorp and other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law.
Capital Standards. The Federal Reserve Board has adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from zero percent for assets with low credit risk, such as U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans.
The Federal Reserve Board, as well as other federal bank agencies, require a minimum ratio of qualifying total capital to risk-adjusted assets of eight percent and a minimum ratio of Tier 1 capital to risk-adjusted assets of four percent. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be three percent. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The Bank has agreed with the FDIC to maintain a Tier 1 Capital to Average Assets ratio of at least eight percent until February 28, 2002.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including; those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios:
. well capitalized;
. adequately capitalized;
. undercapitalized;
. significantly undercapitalized; and
. critically undercapitalized.
At December 31, 1999, the Bank exceeded the required ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to the following:
. internal controls, information systems and internal audit systems,
. loan documentation,
. credit underwriting,
. asset growth,
. earnings, and
. compensation, fees and benefits.
In addition, the federal banking agencies also have adopted safety and soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution is expected to:
. conduct periodic asset quality reviews to identify problem assets;
. estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses;
. compare problem asset totals to capital;
. take appropriate corrective action to resolve problem assets;
. consider the size and potential risks of material asset concentrations; and
. provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk.
These guidelines also establish standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.
FDIC Deposit Insurance. The FDIC's Bank Insurance Fund insures the Bank's deposit accounts up to the maximum amount permitted by law. The FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the Federal Deposit Insurance Corporation or the institution's primary regulator. California does not permit commercial banks to operate without FDIC insurance. As a result, termination of FDIC insurance of a California bank will result in its closure.
The Federal Deposit Insurance Corporation charges an annual assessment for the insurance of deposits, which as of December 31, 1998, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act, at January 1, 1997, banks began paying, in addition to their normal deposit insurance premium as a member of the Bank Insurance Fund, an amount equal to approximately 1.3 basis points per $100 of insured deposits toward the retirement of the Financing Corporation bonds issued in the 1980s to assist in the
recovery of the savings and loan industry. Members of the Savings Association Insurance Fund, by contrast, pay, in addition to their normal deposit insurance premium, approximately 6.4 basis points. Under the Paperwork Reduction Act, the FDIC is not permitted to establish Savings Association Insurance Fund assessment rates that are lower than comparable Bank Insurance Fund assessment rates. Beginning no later than January 1, 2000, the rate paid to retire the Financing Corporation Bonds will be equal for members of the Bank Insurance Fund and the Savings Association Insurance Fund. The Paperwork Reduction Act also provided for the merging of the Bank Insurance Fund and the Savings Association Insurance Fund by January 1, 1999 provided there were no financial institutions still chartered as savings associations at that time. However, as of January 1, 1999, there were still financial institutions chartered as savings associations. Should the insurance funds be merged before January 1, 2000, the rate paid by all members of this new fund to retire the Financing Corporation Bonds would be equal.
Interstate Banking and Branching. The Bank Holding Company Act permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to conditions including nationwide- and state-imposed concentration limits. The Bank also has the ability, subject to certain restrictions, to acquire by acquisition or merger branches outside California. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to laws of the states in which they are located. Consolidations of and competition among banks has increased as banks have begun to branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments. The Bank is subject to fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act activities. The Community Reinvestment Act generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. A bank may be subject to substantial penalties and corrective measures for a violation of fair lending laws. The federal banking agencies may take compliance with those laws and Community Reinvestment Act obligations into account when regulating and supervising other activities.
A bank's compliance with its Community Reinvestment Act obligations is based on a performance-based evaluation system which bases Community Reinvestment Act ratings on an institution's lending service and investment performance. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve Board will review the assessment of each subsidiary bank of the applicant bank holding company, and those records may be the basis for denying the application.
Comprehensive Bank Reform Litigation. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "Gramm Act"). The Gramm Act is expected to have a major impact on cross-industry mergers, customer privacy and lending to lower-income communities. The Gramm Act repeals the Glass Steagal Act of 1937, which separated commercial and investment banking, and eliminates the Bank Holding Company Act's prohibition on insurance underwriting activities. The Gramm Act allows both holding company subsidiaries and national bank operating subsidiaries to offer a wide range of new financial services, including insurance or securities sales. However, real estate development and insurance underwriting would be restricted to affiliates and cannot be performed by bank operating subsidiaries. State laws will govern insurance sales, but states cannot discriminate against national banks by preventing national banks from conducting insurance activities that nonbanks may conduct. The Gramm Act bars a bank holding company from merging with insurance or securities firms, or embarking on new powers, if any of its banks earned less than a "satisfactory" CRA rating in its most recent examination. The Gramm Act also provides that customers will have the right to prevent banks from sharing information with third parties. The Gramm Act is expected to further increase competition in providing financial services.
Properties
The Bank subleases from an unaffiliated third party approximately 9,500 square feet of ground floor office space, and leases an additional 1,550 square feet of upper floor office space, at 450 Newport Center Drive,
Suite 100, Newport Beach, California, which is the location of the Bank's headquarters and main banking office. The ground floor sublease expires on June 30, 2001. The upper floor lease expires December 31, 2000. The Bank also subleases from an unaffiliated third party approximately 4,190 square feet of office space at 501 N. El Camino Real, San Clemente, which is the location of the Bank's southern Orange County banking office. The San Clemente sublease expires January 31, 2006.
Employees
As of March 15, 2000, we employed 46 persons on a full-time equivalent basis. None of our employees is covered by a collective bargaining agreement. We believe our employee relations are excellent.
Legal Proceedings
Neither we nor the Bank is a party to any material legal proceedings.
MANAGEMENT
Executive Officers and Directors
The following table lists our directors and executive officers:
Name Age Position
---- --- --------
Raymond E. Dellerba.. 52 President, Chief Executive Officer and Director
John J. McCauley..... 52 Executive Vice President, Chief Operating Officer,
Chief Credit Officer and Director
Daniel L. Erickson... 55 Executive Vice President and Chief Financial Officer
John P. Cronin....... 50 Executive Vice President and Chief Technology
Officer
George H. Wells...... 65 Chairman and Director
Richard M. Torre..... 54 Vice Chairman and Director
Ronald W. Chrislip... 48 Director
Julia M. DiGiovanni.. 81 Director
Warren T. Finley..... 68 Director
John Thomas, M.D..... 50 Director
Robert E. Williams... 57 Director
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Background and Business Experience of Directors and Executive Officers
The following is a brief description of the principal occupation and recent business experience of each of our executive officers and directors:
Raymond E. Dellerba is the President and Chief Executive Officer, and also serves as a member of the Boards of Directors, of the Bancorp and the Bank. Mr. Dellerba has worked in the bank industry for more than 25 years. He served as the President and Chief Operating Officer and as a director of Eldorado Bank, and as Executive Vice President and a director of Eldorado Bancorp, based in Tustin, California, from February 1993 to June 1997 and as President and Chief Executive Officer of Belvedere Bancorp from July 1997 to December 1997. Mr. Dellerba has a Bachelor of Science degree in management, and a Masters of Business Administration with emphasis in organizational management and finance from Pepperdine University. Additionally, he has completed post graduate work at the University of Pennsylvania, Wharton School of Business Administration, with certificates issued in "Integrating Finance and Marketing" and in "Mergers and Acquisitions." Mr. Dellerba is presently teaching an evening class in "Strategic Management and Business Policies" at California State University, Fullerton.
John J. McCauley is an Executive Vice President and a director of the Bancorp. He also serves as Executive Vice President, Chief Operating Officer and the Chief Lending Officer, and is a director, of the Bank. Mr. McCauley has more than 25 years of experience in the banking industry, most recently serving as Executive Vice President of Administration for Eldorado Bank, Tustin, California, from September 1991 to July 1997. Mr. McCauley holds a Masters of Business Administration in Banking and Finance from Golden Gate University, San Francisco, California.
Daniel L. Erickson, who is a certified public accountant, is an Executive Vice President and also is the Chief Financial Officer and Cashier of the Bancorp and the Bank. Prior to joining the Bank in 1998, Mr. Erickson held a number of key management positions with other banks in southern California, including Senior Vice President and Chief Financial Officer of Republic Bank from 1997 through October 1998, Senior Vice President and Chief Financial Officer of Marathon National Bank from 1993 to 1997 and Vice President and Chief Financial Officer of Commercial Center Bank from 1987 to 1993. Mr. Erickson graduated from the University of South Dakota with a Bachelor of Science degree in Accounting and also has earned a graduate certificate from the Stonier Graduate School of Banking at Rutgers University.
John P. Cronin is the Chief Technology Officer for both the Bancorp and the Bank. He joined the Bank in 1998. From 1996 to 1997, he was Executive Vice President-Retail Banking of CenFed Bank and President of CenFed Investments and from 1995 to 1996 he was Senior Vice President-Retail Banking of Eldorado Bank. He received a Bachelors Degree in Political Science from the University of California at Los Angeles.
George H. Wells is the Chairman and a member of the Boards of Directors of the Bancorp and the Bank. Mr. Wells is a private investor. Mr. Wells was a founding director of Eldorado Bank in 1972 and served as its Chairman and as Chairman of its parent holding company, Eldorado Bancorp, from 1979 to 1997, when Eldorado Bank was sold. Prior to becoming a private investor, Mr. Wells held various executive positions with Technology Marketing Incorporated, including Chairman, President, Treasurer and Chief Financial Officer, which at the time was a publicly owned computer development services and software company. Mr. Wells holds a Bachelor of Science degree in Electrical Engineering from Pennsylvania State University.
Richard M. Torre is the Vice Chairman and a member of the Boards of Directors of both the Bancorp and the Bank. He is also Chairman of the Acquisition and Branching Committee of the Bank. Mr. Torre is Chairman and CEO and a director of Global Capital Markets, Inc., an investment banking and financial intermediary company that he established in 1994. From 1992 to 1996, Mr. Torre also served as Chairman and board member of Business Council Credit Union, a $100 million credit union. Mr. Torre holds a Bachelor of Science degree from Fordham University.
Ronald W. Chrislip is a director of both the Bancorp and the Bank. Mr. Chrislip has been an attorney in private practice in the City of Santa Ana, California since 1976. Mr. Chrislip also has a law office in San Clemente, California. Mr. Chrislip received his undergraduate degree from the University of California at Irvine and his law degree from Western State University College of Law.
Julia M. DiGiovanni is a director of both the Bancorp and the Bank. Mrs. DiGiovanni is, and for more than the past five years has been, a private investor. She also served as a director of Eldorado Bank, a California state- chartered Bank based in central Orange County, California, and its parent corporation, Eldorado Bancorp, from October 1995 until 1997, when Eldorado Bank was acquired by Commerce Security Bancorp. Mrs. DiGiovanni also served as a member of the board of directors of Mariners Bank, a state chartered bank based in San Clemente, California, from 1991 until 1995, when that Bank was acquired by Eldorado Bank.
Warren T. Finley is a director of both the Bancorp and the Bank. Mr. Finley also is the Chairman of the Management and Incentive Committee of the Bank. Mr. Finley is an attorney who is, and for more than 35 years has been, engaged in the private practice of law in Orange County, California. Mr. Finley also served as a director of Eldorado Bank and its parent holding company, Eldorado Bancorp, from 1972 to 1997, when that Bank was acquired by Commerce Security Bancorp. Mr. Finley earned an undergraduate degree and a masters of business administration from Stanford University and his law degree from the University of Southern California.
John Thomas, M.D. is a director of both the Bancorp and the Bank. Dr. Thomas is a licensed physician who is, and for more than the past 15 years, has been engaged in the private practice of medicine, specializing in the practice of radiation oncology. He also serves as, and for more than the past 7 years has been, the Medical Director of the San Clemente Tumor Medical Center. He is a Diplomate of the American board of Radiology and a Clinical Assistant Professor at the University of Southern California School of Medicine and is a member of the Standards Committee for the American College of Radiation Oncology. Dr. Thomas graduated from the Institute of Medicine and Pharmacy in Cluj, Rumania.
Robert E. Williams is a director of both the Bancorp and the Bank and also serves as the Chairman of the Audit Committee of the Board of Directors of the Bancorp. Mr. Williams is, and for more than 20 years has been, a certified public accountant, with Robert E. Williams Accountancy Corporation, a firm that he established in 1978. Mr. Williams holds a Bachelor of Arts degree in accounting from California State College at Fullerton.
Committees of the Board of Directors
The Board of Directors of the Bank has established the following committees to review and supervise various aspects of the Bank's operations. Following the completion of the Holding Company Reorganization, the Board of Directors of the Bancorp will continue these committees at the Bancorp level.
. The Audit Committee, which is made up entirely of outside directors, provides oversight of the Bancorp's audit and compliance programs and coordinates audit matters with the Bank's independent auditors. Robert E. Williams is the chairman of the Audit Committee.
. The Management and Incentive Committee has the authority to approve the salaries and grants of bonuses and options to our management, and oversees the development and implementation of compensation and benefit programs that are designed to enable the Bancorp and the Bank to retain existing, and attract new, management personnel and thereby remain competitive with other financial institutions in its market areas. Mr. Finley serves as chairman of this committee.
The Board of Directors of the Bank has established the following committees to review and supervise various aspects of the Bank's operations. Following the completion of the Holding Company Reorganization, these committees will continue at the Bank level.
. The Executive Committee develops and oversees the implementation of a number of our policies and procedures, including policies and procedures relating to our growth, the adequacy of the Bank's facilities, procedures designed to maintain compliance with regulatory requirements and capital adequacy and capital enhancement policies. The members of the Executive Committee also serve as the members of the Bank's Asset/Liability Committee and, in that capacity, develop and oversee the implementation of the Bank's asset/liability policies which are designed to insure that the Bank has, at all times, adequate funds to meet the cash requirements of its business and to preserve the Bank's net interest margins.
. The Loan Committee is responsible for establishing loan policies and for reviewing loans proposed to be made by the Bank. This committee also reviews, on a regular basis, the Bank's existing loan portfolio to identify potential risks, monitor the management of those risks by the Bank's lending officers and assist the Board to determine the amount of the allowance that the Bank needs to maintain against the possibility of loan losses. Mr. McCauley is the chairman of the Loan Committee.
. The Acquisition and Branching Committee is responsible for reviewing possible acquisition and branching opportunities and making recommendations with respect to such opportunities to the full board of directors. Mr. Torre serves as chairman of this committee.
Remuneration of Executive Officers and Directors
The following table sets forth information concerning the annual cash compensation paid to each of the executive officers of the Bank for services in all capacities rendered to the Bank in 1999. No compensation was paid to any officers by the Bancorp in 1999.
Long Term
Annual Compensation Compensation
-------------------- Awards Securities
Name and Principal Position Salary Bonus Underlying Options(#)
--------------------------- ---------- --------- ---------------------
Raymond E, Dellerba, President and
CEO................................ $ 120,000 $ 15,000 125,530
John J. McCauley, Executive Vice
President, Chief Operating Officer
and Chief Credit Officer........... $ 100,000 7,500 36,586
Daniel L. Erickson, Executive Vice
President and Chief Financial
Officer............................ $ 92,500 3,000 10,000
John P. Cronin, Executive Vice
President and Chief Technology
Officer............................ $ 90,000 3,500 13,066
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The Bank paid to Messrs. Dellerba and McCauley consulting fees in the amount of $10,000 and $5,000, respectively, for services rendered by them prior to November 1, 1998 in connection with the organization of the Bank, and cash compensation to Messrs. Dellerba, McCauley, Erickson and Cronin in the amounts of $20,000, $16,667, $10,278 and $14,167, respectively, for services rendered by them during the period from November 1, 1998 to December 31, 1998.
In addition to the compensation set forth above and the provisions of Mr. Dellerba's employment contract set forth below, each executive officer receives health and life insurance benefits and other incidental job-related benefits. In addition, Mr. Dellerba's heirs are entitled to receive one-half of the benefit payable upon his death under the key-man life insurance policy we maintain on Mr. Dellerba. Also, automobiles are provided to Mr. Dellerba and Mr. McCauley for use on Bank business. The Bank also has granted stock options to the officers named above, as further described below under the heading "Stock Option Plan."
The Bank has employment or severance agreements with the following executive officers:
Raymond E. Dellerba. We entered into a multi-year employment contract with
Mr. Dellerba under which he is employed as our President and Chief Executive
Officer. The initial term of the employment contract ends on April 23, 2002,
and renews automatically for additional successive one year periods through the
year 2013 unless earlier terminated by either party. The employment contract
calls for a base salary of $120,000 in 1999, and thereafter an annual base
salary equal to the median peer salary for comparable positions in the Western
United States, as reported by an independent index. The employment contract
calls for a bonus for 1999 ranging from 35% to 150% of Mr. Dellerba's base
salary, with target bonus of 75% (50% of the bonus shall be based on
Mr. Dellerba's achievement of agreed-upon objectives, and 50% based on budget
or other measures of Bank's success within the areas of Mr. Dellerba's
responsibility). Thereafter, the annual bonus shall be equal to the greatest of
(1) 35% of the relevant base salary, (2) 3.5% of the Bank's pre-tax profits for
the related calendar year, or (3) an amount calculated with reference to a
formula, which shall relate on a percentage basis to the Bank's pre-tax
profits, such formula to be determined in good faith by the Bank, Mr. Dellerba
and an independent compensation consultant. The employment contract also calls
for Mr. Dellerba to receive equity compensation, as follows: (1) participation
in the Bank's established equity compensation plans based on a rate (as
compared to the Bank's other employees entitled to so participate, as a group)
equal to one to six (for example, if the Bank issued 60,000 options to its
executives as a group, Mr. Dellerba would receive 10,000 options); (2)
following the calendar year in which the Bank first achieves a return on assets
(as defined) of at least one percent, Mr. Dellerba shall receive fully vested
options to purchase an amount of shares equal to 0.5% of the Bank's shares then
outstanding or subject to outstanding options at an exercise price equal to the
then-current fair market value of such shares; and (3) a vesting schedule of 60
equal monthly installments for Mr. Dellerba's currently outstanding options.
All of Mr. Dellerba's options shall vest upon our initial public offering, a
change in control (as defined), or Mr. Dellerba's termination without cause (as
defined) or resignation for good reason (as defined). For the year in which the
Bancorp consummates its initial public offering, Mr. Dellerba will be entitled
to a one-time bonus equal to one percent of the increase in the Company's
shareholders equity that occurs during such year (other than increases
attributable to earnings of the Company in such year). In the event of a sale
of the Bancorp to or a merger with a third party during the term of
Mr. Dellerba's employment and, if he was terminated without cause or he
resigned for good reason, for two years thereafter, Mr. Dellerba shall receive
one percent of the gross proceeds of the related transaction. Mr. Dellerba
shall also receive the use of a company-paid automobile, two club memberships,
health and life insurance benefits and the standard employee health, welfare
and other benefit plans. The employment contract also contains a provision
that, if the Bank hires an executive at a compensation level that exceeds that
then payable by us to Mr. Dellerba, Mr. Dellerba's compensation and benefits
under the employment contract shall be adjusted upward to be at least equal to
those of the other executive. Upon Mr. Dellerba's reaching the age of 65, he
shall become eligible to receive 180 monthly payments, as follows: 60 monthly
payments of $75,000 each, then 60 monthly payments of $100,000 each, then 60
monthly payments of $125,000 each. Mr. Dellerba's right to receive these
payments vests at a rate equal to 1.5 monthly payments for each month of
service under his employment contract, subject to accelerated partial vesting
if Mr. Dellerba is terminated without cause. In the event Mr. Dellerba dies,
whether before or
after age 65, the monthly payments shall be made to Mr. Dellerba's heirs. Mr. Dellerba, or his heirs, may elect to receive any remaining monthly payments in a lump sum.
Messrs. McCauley, Erickson and Cronin. We plan to enter into severance agreements with Mr. McCauley, the Bank's Chief Operating Officer, Mr. Erickson, the Bank's Chief Financial Officer and Mr. Cronin, our Bank's Chief Technology Officer. Under those agreements, if any of them is terminated without cause, or there occurs a change of control (as defined therein) of the Bank that leads to an adverse change in the executive officer's position with us, or in the executive officer's salary or benefits, then the affected officer would be entitled to receive the following severance compensation: Mr. McCauley--six months in the case of a termination without cause or twelve months in the case of a change of control; Mr. Cronin--six months in the case of a termination without cause or twelve months in the case of a change of control; and Mr. Erickson--six months in the case of either a termination without cause or a change of control.
Stock Option Grants in 1999
Potential
Individual Grants Realizable Value
---------------------------------------------------------- at Assumed Annual
Number of Rates of
Securities Percent of Stock Price
Underlying Total Options Appreciation for
Options Granted to Option Term(4)
Granted Employees in Exercise Price -----------------
Name (#)(2) Fiscal Year (Per Share)(2)(3) Expiration Date 5% 10%
---- ---------- ------------- ----------------- --------------- -------- --------
Raymond E. Dellerba(1).. 125,530 32.6% $4.00 March 1, 2009 $315,781 $800,250
John J. McCauley(1)..... 36,586 7.0% 4.00 March 1, 2009 92,030 233,222
Daniel Erickson(1)...... 10,000 1.8% 4.00 March 1, 2009 25,156 63,750
John P. Cronin(1)....... 13,066 3.5% 4.00 March 1, 2009 32,864 83,283
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(2) Adjusted for the Bank's two-for-one stock split which will become effective prior to completion of this offering.
(3) The exercise price of our options are equal to the fair market value of the underlying shares of stock on the date of grant.
(4) Potential realizable value is based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term of the options. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. Potential realizable values are computed by multiplying the number of shares of common stock subject to a given option by the exercise price, as determined by our Board of Directors, assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire ten-year term of the option and subtracting from that result the aggregate option and exercise price.
In January 2000, Messrs. Dellerba, McCauley, Erickson and Cronin were granted options to purchase 90,000, 10,000, 2,000, and 10,000 additional shares of common stock, respectively, at an exercise price of $6.75 per share (retroactively adjusted for the Bank's two-for-one stock split that will become effective on April 14, 2000). On that same date non-employee directors were granted options to purchase an aggregate of 96,000 additional shares, also at an exercise price of $6.75 per share.
Aggregate Option Exercises in 1999 and Year-End Option Values
The following table sets forth the number and value of shares of common stock underlying the unexercised options held by the Named Executive Officers. No options were exercised during 1999.
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 1999(1)(2) December 31, 1999(1)(2)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Raymond E. Dellerba........ 25,106 100,424 $69,042 $276,166
John J. McCauley........... -- 36,586 -- 100,612
Daniel Erickson............ -- 10,000 -- 27,500
John P. Cronin............. -- 13,066 -- 35,932
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(2) Mr. Dellerba's options become exercisable in 60 approximately equal installments, but shall become fully exercisable on completion of this offering. The options held by Mssrs. McCauley, Erickson and Cronin become exercisable in five equal annual installments commencing March 2, 2000.
Compensation of Directors
Non-employee directors receive fees of $500 for each board meeting, and $100 for each committee meeting, that they attend, up to a maximum of $600 per month. The chairman of the board of directors also receives an additional stipend of $100 per month for the additional responsibilities he has as chairman.
Stock Option Plan
Effective March 2, 1999, the Bank's Board of Directors adopted a stock option plan which provides for the grant of options to directors, officers and other key employees of the bank, entitling them to purchase shares of common stock of the Bank. As of December 31, 1999, options to purchase a total of 380,106 shares of the Bancorp common stock had been granted and options to purchase an additional 345,800 shares were available for future grant.
Prior to the consummation of this offering, as a result of the Holding Company Reorganization the Option Plan will be assumed by the Bancorp and thereafter the then outstanding options to purchase Bank common stock will be converted into options to purchase a like number of shares of common stock of the Bancorp, at the same exercise price per share. Options that may be granted thereafter shall represent the right to purchase shares of common stock of the Bancorp.
The Option Plan provides for the granting of "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonstatutory options to directors, officers and employees of the Bancorp and the Bank, except that incentive stock options may not be granted to non-employee directors. The purpose of the Plan is to provide participants with an opportunity to acquire an equity interest in the Bancorp that will give them incentive to continue to provide services to the Bancorp. The Option Plan is administered by the Management and Incentive Committee of the Board of Directors, which has sole discretion and authority, consistent with the provisions of the Option Plan, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options granted under the Option Plan.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1999, the Management and Incentive Committee of Board of Directors established the levels of compensation for our executive officers. Mr. Dellerba, who is the President and Chief Executive Officer of the Bancorp and the Bank, is a member of that Committee and participated in its deliberations regarding executive compensation for the other officers of the Bank. Mr. Dellerba did not, however, participate in the deliberations of that Committee with respect to his compensation.
Limitations on Directors' Liability and Indemnification
The Articles of Incorporation of the Bancorp and the Articles of Incorporation of the Bank provide that, pursuant to California law, their directors shall not be liable for monetary damages for breach of their fiduciary duty in their capacities as directors of the Bancorp or the Bank. This provision in our Articles of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under California law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Bancorp or the Bank for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under California law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.
The respective Articles of Incorporation of the Bancorp and the Bank further provide that the Bancorp and the Bank will indemnify their respective directors and officers, and may indemnify its employees and other agents, to the fullest extent permitted by law. In addition, in January 2000, the shareholders of the Bank approved Indemnification Agreements that the Bank entered into with its officers and directors and also authorized the Bancorp to enter into similar agreements with its officers and directors.
In January 2000, the Bank's shareholders approved indemnification agreements entered into by the Bank with its directors and executive officers and authorized the Bancorp to enter into similar agreements with its directors and officers. These agreements require the Bank and will require the Bancorp, among other things, to indemnify their respective directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from actions not taken in good faith or in a manner the indemnitee believed to be opposed to the best interests of the Bancorp or the Bank, or in the case of a shareholder derivative action, opposed to the best interests of the Bancorp and its shareholders), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, against an undertaking by the indemnified party to repay such advances if it is ultimately determined that he or she is not entitled to indemnification, and to obtain directors' insurance if available on reasonable terms. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. We believe that our Articles of Incorporation and the indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
We also have obtained directors and officers liability insurance for our directors and officers.
CERTAIN TRANSACTIONS
The executive officers and directors of the Bancorp, and the entities with which they are associated, have engaged in banking transactions with the Bank in the ordinary course of its business. It is the policy of the Board of Directors that loans and commitments to loan included in such transactions will be made in accordance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with persons of similar creditworthiness that are not affiliated with us or the Bank and only if such loans do not present any undue risk of collectability.
It is possible that, on the basis of sound business practices and subject to the approval of the Board of Directors, we may select companies owned, operated or controlled by directors to provide certain products and services to us and the Bank. Any such purchases shall be made on reasonable competitive terms and prices and in accordance with applicable laws and regulations.
The directors advanced an aggregate of $470,000, without interest, to the Bank during the period from inception (May 29,1998) to December 1998 to fund organizational and pre-opening expenses. Such amounts were repaid to the organizing directors by the Bank on March 1, 1999 from the proceeds of its initial capital offering.
PRINCIPAL SHAREHOLDERS
Set forth below is information regarding the number of shares of the Bancorp's common stock that would have been beneficially owned as of February 29, 2000 by (i) any persons known by us to own beneficially five percent or more of the Bancorp's outstanding shares, and (ii) each of our executive officers and directors, after giving retroactive effect to the Bank's 2-for-1 stock split and the Holding Company Reorganization as if they had occurred prior to February 29, 2000.
Percent of Shares
Beneficially Owned
----------------------
Names and Addresses of Beneficial Shares Beneficially Before this After this
Owners(1) Owned(2) Offering Offering
--------------------------------- ------------------- ----------- ----------
Carroll David Cone Jr.............. 200,000 5.4% 3.0%
Raymond E. Dellerba................ 95,790(2)(3) 2.5 1.4
George H. Wells.................... 76,862(2)(4) 2.1 1.1
Ronald W. Chrislip................. 68,681(2)(5) 1.8 1.0
Julia M. DiGiovanni................ 66,681(2)(6) 1.8 1.0
John Thomas, M.D................... 68,681(2) 1.8 1.0
Richard M. Torre................... 68,681(2) 1.8 1.0
Robert E. Williams................. 68,681(2) 1.8 1.0
Warren T. Finley................... 19,481(2)(7) * *
John J. McCauley................... 33,317(2) * *
John P. Cronin..................... 20,613(2) * *
Daniel L. Erickson................. 10,250(2) * *
All officers and directors as a
group (11 persons)................ 597,718 16.0% 8.8%
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(1) Each Director's and Executive Officer's address is the address of the Bancorp, 450 Newport Center Drive, Suite 100, Newport Beach, California 92660.
(2) Includes the following number of shares that are currently exercisable or will become exercisable by April 29, 2000: Mr. Dellerba--29,290 shares; Mr. McCauley--7,316 shares; Mr. Cronin--2,614 shares; Mr. Erickson--2,000 shares; Mr. Wells--8,362 shares; and Mrs. DiGiovanni and Messrs. Chrislip, Thomas, Torre, Williams and Finley--4,182 shares each. Does not include options to purchase an aggregate of 280,700 shares of common stock granted to the officers and directors in January 2000 See "Management--Stock Option Plan."
(3) Does not include, and Mr. Dellerba disclaims beneficial ownership of, a total of 5,000 shares held in joint tenancy by Mr. Dellerba's mother and each of Mr. Dellerba's minor children.
(4) Does not include, and Mr. Wells disclaims beneficial ownership of, 12,500 shares owned by Mr. Wells' spouse.
(5) Does not include, and Mr. Chrislip disclaims beneficial ownership of 5,300 shares which are owned by certain family members (not residing with him).
(6) Does not include, and Mrs. DiGiovanni disclaims beneficial ownership of 3,000 shares which are owned by certain family members (not residing with her).
(7) Does not include, and Mr. Finley disclaims beneficial ownership of, 62,198 shares, which are owned by family members of Mr. Finley (not residing with him).
DESCRIPTION OF CAPITAL STOCK
The Bancorp's authorized capital stock currently consists of 2,000,000 shares of preferred stock, without par value, and 10,000,000 shares of common stock, without par value. As a result of the Bank's two-for-one stock split of its outstanding shares, prior to the consummation of the Holding Company Reorganization, the Bancorp will be increasing the authorized number of its shares of common stock, proportionately, to 20,000,000 shares. Prior to the completion of this offering a total of 3,720,162 shares of common stock of the Bancorp will be issued and outstanding and an additional 725,906 shares of common stock will be reserved for issuance on exercise of stock options. Up to 3,450,000 shares of common stock will be sold and issued in this offering and warrants to purchase 300,000 shares will be issued to the underwriters, leaving 11,803,932 shares of common stock and 2,000,000 shares of preferred stock available for future issuance. No shares of preferred stock have been issued, and we have no present plans to sell or issue shares of preferred stock. Set forth below is a description of the preferred stock and the common stock.
Preferred Stock
The Bancorp's Board of Directors has the authority, without further action by the shareholders, to issue up to 2,000,000 shares of preferred stock in one or more series, and to fix the rights, preferences and privileges thereof, including voting rights, terms of redemption, redemption prices, liquidation preference and number of shares constituting any series or the designation of such series. The purpose of the provisions of the Bancorp's articles of incorporation authorizing the issuance of preferred stock is to provide us with the flexibility to take advantage of opportunities to raise additional capital through the issuance of shares that address competitive conditions in the securities markets. The rights of the holders of the Bancorp's common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. Although it presently has no plans to do so, the Board of Directors, without stockholder approval, may issue preferred stock with voting or conversion rights which could adversely affect the voting power of the holders of our common stock. This provision may be deemed to have a potential anti-takeover effect, because the issuance of such preferred stock may delay or prevent a change of control of the Bancorp. Furthermore, shares of preferred stock, if any are issued, may have other rights, including economic rights, senior to our common stock, and, as a result, the issuance thereof could depress the market prices of the common stock. After the Holding Company Reorganization, the Bank will continue to have 2,000,000 authorized shares of preferred stock, with identical rights and preferences to those described above.
Common Stock
Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders, provided that shareholders may cumulate votes in the election of our directors (that is, to give any candidate, or any number of candidates, standing for election a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled). The candidates who receive the highest number of votes will be elected as directors.
Subject to the preference in dividend rights of any series of preferred stock which we may issue in the future, the holders of common stock are entitled to receive such cash dividends, if any, as may be declared by our board of directors out of legally available funds, which consist of our retained earnings or current earnings. However, our ability to pay dividends also will depend on the extent to which our capital exceeds minimum capital requirements under applicable laws and regulations, and upon the rate of growth of the Bank, which may require earnings to be retained to support such growth. Upon liquidation, dissolution or winding up, after payment of all debts and liabilities, including funds of depositors, and after payment of the liquidation preferences of any shares of preferred stock then outstanding, the holders of the common stock will be entitled to all assets that are legally available for distribution.
Other than the rights described above, the holders of common stock have no preemptive subscription, redemption, sinking fund or conversion rights and are not subject to further calls or assessments. The rights and preferences of holders of common stock will be subject to the rights of any series of preferred stock which we may issue in the future.
Transfer Agent and Registrar
The transfer agent and registrar for the shares of the Bancorp's common stock is U. S. Stock Transfer Corporation, Glendale, California.
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, the Bancorp's common stock was not listed on any stock exchange or automated or other inter-dealer trading or quotation system. The Bank's common stock has traded only on an infrequent basis on the NASDAQ OTC Bulletin Board. Future sales of substantial amounts of our common stock in the public market, following this offering, could adversely affect prevailing market prices and adversely affect our ability to raise additional capital at a time and price favorable to us.
Upon completion of this offering, we will have 6,720,162 shares of common stock outstanding, assuming no exercise of the underwriter's over-allotment option. Of these shares, the 3,000,000 shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by "affiliates" of the Bancorp as that term is used under the Securities Act of 1933. Of the 3,720,162 shares that will be held by the existing shareholders of the Bank, a total of 3,197,115 will become freely tradable without restriction 90 days after the date of this offering. The remaining 523,047 shares, which will be owned by officers or directors of the Bancorp, also will become saleable 90 days after the date of this offering, but sales of such shares will be subject to certain volume limitations and manner of sale restrictions contained in Rule 145 under the Securities Act of 1933, which is summarized below.
As a condition of the offering, all officers and directors will agree with the underwriters that they will not sell any common stock of the Bancorp owned by them for a period of 180 days after the effective date of this offering without the prior written consent of Paulson Investment Company, Inc. A total of 523,047 shares of common stock will be subject to this 180-day lock-up. Upon the expiration of the 180-day lock-up (or earlier upon the consent of Paulson), those shares will become eligible for sale subject to the volume and other restrictions of Rule 144.
In general, under Rule 145, any person (or persons whose shares are aggregated) who, at the time the Holding Company Reorganization was approved, was an affiliate of the Bank or who is an affiliate the Bancorp will be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock (approximately 67,200 shares immediately after this offering) or the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 145 are also subject to certain requirements as to the manner of sale, notice and availability of current public information about the Bancorp.
On completion of this offering, we will issue stock purchase warrants (the "Underwriters' Warrants"), that will entitle Paulson Investment Company, Inc., the representative of the underwriters for this offering ("Paulson"), to purchase a number of our shares of common stock (the "Warrant Shares") equal to 10% of the shares sold in this offering (exclusive of shares that may be sold pursuant to the underwriters' overallotment option). The per share purchase price of the Warrant Share will be equal to 120% of the per share public offering price set forth on the cover page of this prospectus. The Underwriters Warrants will be exercisable for a period of four years commencing one year after the date of this prospectus. We have granted Paulson certain registration rights which, if exercised, will enable Paulson to sell the Warrant Shares without restriction, commencing as early as one year following the completion of this offering.
We intend to file a registration statement on Form S-8 under the Securities Act to register shares of common stock reserved for issuance under our stock option plan, thus permitting the resale by non-affiliates of shares issued under the plan in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon filing which is expected on or shortly after the closing of this offering. At the time this offering is completed, options to purchase 380,106 shares of common stock will be outstanding under our stock option plan. Shares issuable upon the exercise of options held by persons subject to the lock-up agreements described above will be subject to the lock-up provisions thereof.
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms and conditions contained in an underwriting agreement with us, to purchase 3,000,000 shares from us at the price set forth on the cover page of this prospectus, in accordance with the following table:
Number of
Underwriter Shares
----------- ---------
Paulson Investment Company, Inc....................................
---------
Total............................................................ 3,000,000
=========
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Nature of Underwriting Commitment. The underwriting agreement provides that the underwriters are committed to purchase all the shares offered by this prospectus if any shares are purchased. This commitment does not apply to 450,000 shares subject to the over-allotment option granted by us to the underwriters to purchase additional shares in this offering.
Conduct of the Offering. We have been advised by Paulson Investment Company, Inc., that the underwriters propose to offer the shares of common stock to be sold in this offering directly to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain securities dealers at that price less a concession of not more than $ per share. The underwriters may allow, and those dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the shares of common stock are released for sale to the public, the offering price and other selling terms may be changed from time to time by the underwriters. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.
The underwriters have informed us that they do not expect to confirm sales of shares offered by this prospectus on a discretionary basis.
Overallotment Option. We have granted the underwriters an option, expiring 45 days after the date of this prospectus, to purchase up to 450,000 additional shares from us on the same terms as set forth in this prospectus with respect to the 3,000,000 shares offered hereby. The underwriters may exercise this option, in whole or in part, only to cover over-allotments, if any, in the sale of the shares offered by this prospectus.
Offering Discounts, Commissions and Expenses. The following table shows the per share and total underwriting discounts and commissions to be paid by us to the underwriters. These amounts are shown assuming no exercise and full exercise, respectively, of the underwriters' over-allotment option described above:
Total without Total with
Per Over-Allotment Over-Allotment
Share Option Option
----- -------------- --------------
Per share underwriting discounts and
commissions.......................... $ $ $
Total underwriting discount to be paid
by us................................ $ $ $
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The expenses of this offering, not including the underwriting discounts and commissions, are estimated to be approximately $812,500 and will be paid by us. Expenses of this offering, exclusive of the underwriting discounts and commissions, include the 1% nonaccountable expense allowance payable to Paulson Investment Company, Inc., the SEC filing fee, the NASD filing fee, NASDAQ listing fees, printing expenses, legal and accounting fees, transfer agent and registrar fees and other miscellaneous fees and expenses.
We have agreed that if this offering is successfully completed we will pay to Paulson Investment Company, Inc., a non-accountable expense allowance equal to one percent of the initial public offering price of the sale of the shares in this offering (including sales on exercise of the underwriters' over-allotment option.
Underwriters' Warrants. On completion of this offering, we will issue the Underwriters' Warrants to Paulson, entitling it to purchase from us up to ten percent of the number of shares sold in this offering, exclusive of the shares available pursuant to the over-allotment option. The per share purchase price of these shares will be equal to 120% of the offering price per share. These warrants are exercisable during the four-year period beginning one year from the date of issuance. These warrants, and the shares underlying the warrants, are not transferable for one year following the effective date of the registration, except to an individual who is an officer or partner of an underwriter, by will or by the laws of descent and distribution, and are not redeemable. We have granted Paulson certain registration rights which, if exercised, will enable Paulson to sell the Warrant Shares without restriction, commencing as early as one year following the date of this prospectus.
The holders of the underwriters' warrants will have, in that capacity, no voting, dividend or other shareholder rights. Any profit realized by the underwriters on the sale of the shares issuable upon exercise of the Underwriters' Warrants may be deemed to be additional underwriting compensation. The securities underlying the underwriters' warrants are being registered on the registration statement. During the term of the underwriters' warrants, the holders thereof are given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while the underwriters' warrants are outstanding. At any time at which the underwriters' warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms.
Indemnification. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect thereof.
Lock-up Agreements. We, our executive officers, and directors have agreed not to sell or transfer any shares of our common stock for six months after the date of this prospectus without first obtaining the written consent of Paulson Investment Company, Inc. Specifically, we and these other individuals have agreed not to, directly or indirectly:
. sell or offer to sell any shares of our common stock;
. grant any option to sell any shares of our common stock;
. engage in any short sale of our common stock;
. pledge or otherwise transfer or dispose of any shares of our common stock; or
. publicly announce an intention to do any of the foregoing.
These lock-up agreements apply to shares of our common stock and also to any options or warrants to acquire shares of our common stock, or securities exchangeable or exercisable for or convertible into shares of our common stock. These lock-up agreements apply to all such securities that are currently owned or later acquired either of record or beneficially by the persons executing the agreements. However, Paulson Investment Company, Inc. may, in its sole discretion and without notice, release some or all of the securities subject to these agreements at any time during the one year period. Currently, there are no agreements by Paulson Investment Company, Inc. to release any of the securities from the lock-up agreements during such six month period.
Our executive officers and directors have agreed that, for a period of one year from the date of this prospectus, they will notify Paulson Investment Company, Inc. before they sell our common stock under Rule 144 or Rule 145.
Prior to this offering, there has not been an active public market for our common stock. Consequently, the initial public offering price of the common stock will be determined by arms' length negotiation between the Bancorp and the underwriters. Among the factors to be considered in pricing the common stock are our results of operations, current financial condition and future prospects, the experience of management, the amounts of ownership to be retained by the current stockholders, the general condition of the economy, the banking industry and the securities markets, the demand for similar securities of companies considered comparable to us and other factors that we and the underwriters deem relevant.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect thereof.
Online Activities. A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters of this offering, member of the selling group or by persons with whom they may contract for such services. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representatives on the same basis as other allocations.
Stabilization and Other Transactions. The rules of the SEC generally prohibit the underwriters from trading in our common stock on the open market during this offering. However, the underwriters are allowed to engage in some open market transactions and other activities during this offering that may cause the market price of our common stock to be above or below that which would otherwise prevail in the open market. These activities may include stabilization, short sales and over-allotments, syndicate covering transactions and penalty bids.
. Stabilizing transactions consist of bids or purchases made by the lead representative for the purpose of preventing or slowing a decline in the market price of our common stock while this offering is in progress.
. Short sales and over-allotments occur when the representatives, on behalf of the underwriting syndicate, sell more of our shares than they purchase from us in this offering. In order to cover the resulting short position, the representatives may exercise the over-allotment option described above and/or they may engage in syndicate covering transactions.
. Syndicate covering transactions are bids for or purchases of our common stock on the open market by the representatives on behalf of the underwriters in order to reduce a short position incurred by the representatives on behalf of the underwriters.
. A penalty bid is an arrangement permitting the representatives to reclaim the selling concession that would otherwise accrue to an underwriter if the common stock originally sold by that underwriter was later repurchased by the representatives and therefore was not effectively sold to the public by such underwriter.
If the underwriters commence these activities, they may discontinue them at any time without notice. The underwriters may carry out these transactions on the NASDAQ National Market, in the over-the-counter market or otherwise.
Passive Market Making. Prior to the pricing of this offering, and until the commencement of any stabilizing bid, underwriters and dealers who are qualified market makers on the NASDAQ National Market may engage in passive market making transactions. Passive market making is allowed during the period when the SEC's rules would otherwise prohibit market activity by the underwriters and dealers who are participating in this offering. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for our common stock; but if all independent bids are lowered below the passive market
maker's bid, the passive market maker must also lower its bid once it exceeds specified purchase limits. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in our common stock during a specified period and must be discontinued when such limit is reached. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time.
LEGAL MATTERS
The validity of the issuance of the shares that we offer will be passed upon for the Bancorp by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Stoel Rives LLP, Portland, Oregon. Members of Stradling Yocca Carlson & Rauth own a total of 12,500 shares of Bancorp common stock.
EXPERTS
The financial statements and schedules included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission with respect to the shares offered by this prospectus. This prospectus does not contain all of the information included in the registration statement and the accompanying exhibits and schedules. For further information with respect to us and the shares, you should refer to the registration statement and the accompanying exhibits and schedules. Statements in this prospectus regarding the contents of contracts or other documents are not necessarily complete. In each instance you should refer to the copy of the contract or other document filed as an exhibit to the registration statement. Statements in this prospectus about these contracts and documents are qualified by reference to the exhibits.
You may inspect a copy of the registration statement and the accompanying exhibits and schedules without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and you may obtain copies of all or any part of the registration statement from these offices upon the payment of the fees prescribed by the Securities and Exchange Commission. You may obtain information on the operation of the public reference room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov.
We intend to furnish our shareholders with annual reports containing financial statements audited by our independent certified public accountants.
PACIFIC MERCANTILE BANCORP
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................. F-2
Consolidated Statements of Financial Condition............................ F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)...... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
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After the reorganization transaction discussed in Note 1 to Pacific Mercantile Bancorp's consolidated financial statements is effected, we expect to be in a position to render the following audit report.
/s/ Arthur Andersen LLP
January 28, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the Board of Directors and Stockholders of Pacific Mercantile Bancorp:
We have audited the accompanying consolidated statements of financial condition of Pacific Mercantile Bancorp (the Company) and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1999 and the period from inception (May 29, 1998) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Mercantile Bancorp and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999 and for the period from inception (May 29, 1998) to December 31, 1998 in conformity with accounting principles generally accepted in the United States.
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------
1999 1998
----------- ---------
ASSETS
------
Cash and Due from Banks................................ $ 2,531,200 $ 177,300
Federal Funds Sold..................................... 35,967,000 --
----------- ---------
Cash and cash equivalents............................ 38,498,200 177,300
----------- ---------
Interest Bearing Deposits with Financial Institutions.. 1,386,000 --
Securities Available for Sale, at fair value........... 2,668,800 --
Loans held for Sale, at lower of cost or market........ 2,700,000 --
Loans, net............................................. 44,343,200 --
Accrued Interest Receivable............................ 221,100 --
Premises and Equipment, net............................ 1,178,300 142,500
Other Assets........................................... 169,800 20,200
----------- ---------
Total assets....................................... $91,165,400 $ 340,000
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Deposits:
Noninterest bearing.................................. $16,607,800 $ --
Interest bearing..................................... 57,892,400 --
----------- ---------
Total deposits..................................... 74,500,200 --
Advances from Founders................................. -- 470,000
Accrued Interest Payable............................... 51,600 --
Other Liabilities...................................... 595,200 112,200
----------- ---------
Total liabilities.................................. 75,147,000 582,200
----------- ---------
Commitments and Contingencies (Note 11)
Stockholders' Equity (Deficit):
Preferred stock, no par value, 2,000,000 shares
authorized, none issued............................. -- --
Common stock, no par value, 20,000,000 shares
authorized, 3,720,162 shares issued and
outstanding......................................... 19,019,200 --
Accumulated deficit.................................. (2,992,400) (242,200)
Unrealized loss on securities available for sale, net
of tax.............................................. (8,400) --
----------- ---------
Total stockholders' equity (deficit)............... 16,018,400 (242,200)
----------- ---------
Total liabilities and stockholders' equity
(deficit)......................................... $91,165,400 $ 340,000
=========== =========
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
Inception
Year Ended (May 29, 1998)
December to December 31,
31, 1999 1998
----------- ---------------
Interest Income:
Loans, including fees........................... $ 759,800 $ --
Federal funds sold.............................. 1,173,300 --
Securities available for sale................... 56,500 --
Interest bearing deposits with financial
institutions................................... 45,100 --
Other........................................... 65,400 2,600
----------- ---------
Total interest income......................... 2,100,100 2,600
----------- ---------
Interest Expense:
Deposits........................................ 878,900 --
Other borrowings................................ 1,100 --
----------- ---------
Total interest expense........................ 880,000 --
----------- ---------
Net Interest Income............................... 1,220,100 2,600
Provision for Loan Losses......................... 750,000 --
----------- ---------
Net Interest Income after Provision for Loan
Losses........................................... 470,100 2,600
----------- ---------
Noninterest Income:
Service charges and fees........................ 14,900 --
Mortgage banking................................ 99,200 --
Other........................................... 17,500 --
----------- ---------
Total noninterest income...................... 131,600 --
----------- ---------
Noninterest expense:
Salaries and employee benefits.................. 1,836,500 108,800
Occupancy expense............................... 271,100 21,000
Equipment expense............................... 195,200 1,000
Professional fees............................... 377,300 74,100
Other operating expense......................... 671,200 38,700
----------- ---------
Total noninterest expense..................... 3,351,300 243,600
----------- ---------
Loss before Income Taxes.......................... (2,749,600) (241,000)
Income Tax Expense................................ 600 1,200
----------- ---------
Net Loss.......................................... $(2,750,200) $(242,200)
=========== =========
Net Loss per Share................................ $ (1.12) $ N/A
=========== =========
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Year Ended December 31, 1999 and the Period from Inception (May 29, 1998) to December 31, 1998
Unrealized
Preferred Stock Common Stock Loss on
---------------- --------------------- Securities
Number of Number of Accumulated Available
Shares Amount Shares Amount Deficit for Sale Total
--------- ------ --------- ----------- ----------- ---------- -----------
Balance, at inception
(May 29, 1998)......... -- $ -- -- $ -- $ -- $ -- $ --
Net loss............... -- -- -- -- (242,200) -- (242,200)
--- ----- --------- ----------- ----------- ------- -----------
Balance, December 31,
1998................... -- -- -- -- (242,200) -- (242,200)
Issuance of 3,720,162
shares of common stock,
net of offering
expenses............... -- -- 3,720,162 19,019,200 -- -- 19,019,200
Comprehensive loss:
Net loss............... -- -- -- -- (2,750,200) -- (2,750,200)
Change in unrealized
loss on securities
available for sale,
net of tax............ -- -- -- -- -- (8,400) (8,400)
-----------
Total comprehensive
loss................... (2,758,600)
--- ----- --------- ----------- ----------- ------- -----------
Balance, December 31,
1999................... -- $ -- 3,720,162 $19,019,200 $(2,992,400) $(8,400) $16,018,400
=== ===== ========= =========== =========== ======= ===========
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Inception
Year Ended (May 29, 1998)
December to December 31,
31, 1999 1998
----------- ---------------
Cash Flows From Operating Activities:
Net loss........................................ $(2,750,200) $(242,200)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 202,100 --
Provision for loan losses..................... 750,000 --
Accretion of discount on securities........... (2,000) --
Net change in accrued interest receivable..... (221,100) --
Net change in other assets.................... (149,600) (20,200)
Net change in accrued interest payable........ 51,600 --
Net change in other liabilities............... 483,000 112,200
----------- ---------
Net cash used in operating activities......... (1,636,200) (150,200)
----------- ---------
Cash Flows From Investing Activities:
Net increase in interest bearing deposits with
financial institutions......................... (1,386,000) --
Purchase of securities available for sale....... (2,675,200) --
Net increase in loans held for sale............. (2,700,000) --
Net increase in loans........................... (45,093,200) --
Increase in premises and equipment.............. (1,237,900) (142,500)
----------- ---------
Net cash used in investing activities......... (53,092,300) (142,500)
----------- ---------
Cash Flows From Financing Activities:
Net increase in deposits........................ 74,500,200 --
Proceeds from sale of common stock, net of
offering expenses.............................. 19,019,200 --
(Repayment of) advances from founders........... (470,000) 470,000
----------- ---------
Net cash provided by financing operations..... 93,049,400 470,000
----------- ---------
Net increase in cash and cash equivalents..... 38,320,900 177,300
Cash and Cash Equivalents, beginning of period.. 177,300 --
----------- ---------
Cash and Cash Equivalents, end of period........ $38,498,200 $ 177,300
=========== =========
Supplementary Cash Flow Information:
Cash paid for interest on deposits and other
borrowings..................................... $ 828,400 $ --
=========== =========
Cash paid for income taxes...................... $ 600 $ 1,200
=========== =========
|
The accompanying notes are an integral part of these consolidated financial statements.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Nature of Business and Significant Accounting Policies
Organization
The consolidated financial statements include the accounts of Pacific Mercantile Bancorp (the "Bancorp") and Pacific Mercantile Bank (the "Bank"). The Bancorp is a bank holding company and was incorporated on January 7, 2000 in the State of California. Pacific Mercantile Bank is a banking company which was formed on May 29, 1998, incorporated November 18, 1998 in the State of California and commenced operations on March 1, 1999. The Bank is chartered by the California Department of Financial Institutions (DFI) and is a member of the Federal Reserve Bank of San Francisco ("FRB"). In addition, its customers' deposit accounts are insured by the Federal Deposit Insurance Corporation ("FDIC").
Prior to completion of its public offering (see Note 16), Bancorp will acquire Pacific Mercantile Bank by means of a merger as a result of which Pacific Mercantile Bank will become a wholly-owned subsidiary of Bancorp and Pacific Mercantile Bank's shareholders will become Bancorp shareholders, owning the same number and percentage of Bancorp shares as they had owned in Pacific Mercantile Bank (the "Reorganization"). Prior to the Reorganization, Bancorp will have only nominal assets and will not have conducted any business. All financial information included herein has been restated as if the holding company reorganization was effective for all periods presented. Additionally, the number of common shares outstanding gives retroactive effect to a two-for- one stock split of the Bank's outstanding shares, and the authorized number of common shares gives retroactive effect to an increase therein that is proportionate to the increase in the number of outstanding shares as a result of that stock split, that will become effective prior to the completion of the Reorganization.
The Bank provides a full range of banking services to small and medium size businesses, professionals and the general public throughout Orange County and is subject to competition from other financial institutions. The operating results of the Bank may be significantly affected by changes in market interest rates and by fluctuations in real estate values in the Bank's primary service area. The Bank is regulated by the DFI, FRB and FDIC and undergoes periodic examinations by those regulatory authorities.
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 of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flow, cash and cash equivalents consist of cash on hand and due from banks and federal funds sold. Generally, federal funds are sold for a one-day period. Cash and cash equivalents amount to $38,498,200 and $177,300 as of December 31, 1999 and 1998, respectively.
Interest Bearing Deposits with Financial Institutions
Interest bearing deposits with financial institutions mature within one year and are carried at cost.
Securities Available for Sale
Securities available for sale are those that management intends to hold for an indefinite period of time and that may be sold in response to changes in liquidity needs, changes in interest rates, changes in prepayment risks and other similar factors. The securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Purchased premiums and discounts are recognized as interest income using the interest method over the term of the securities. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Loans Held for Sale
Loans intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at principal amounts outstanding, net of unearned income. Interest is accrued daily as earned, except where reasonable doubt exists as to collectibility, in which case accrual of interest is discontinued and the loan is placed on nonaccrual status. Loans are generally classified as impaired and placed on nonaccrual status when, in management's opinion, such principal or interest will not be collectible in accordance with the contractual terms of the loan agreement. Loans with principal or interest that is 90 days or more past due are then placed on nonaccrual status. Management may elect to continue the accrual of interest when the estimated net realizable value of the collateral is sufficient to recover both principal and accrued interest balances and such balances are in the process of collection.
Generally, interest payments received on nonaccrual loans are applied to principal. Once all principal has been received, additional interest payments are recognized as interest income on a cash basis. The allowance for loan losses is established through a provision for loan losses. Loans are charged against the allowance for loan losses when management believes that the collection of the carrying amount is unlikely. Because the Bank commenced operations in early 1999, management has no prior loss experience with its loan portfolio. Consequently, during the initial stages of operation, the allowance is being maintained at a level of 1.6% of outstanding loan balances. This allowance is based upon historical industry loan losses and management's evaluation of the Bank's loan portfolio quality. As management develops more history with the Bank's loan portfolio, it will maintain an allowance for loan losses based on evaluations of the collectibility of loans taking into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, prior loan loss experience and current economic conditions that may affect the borrowers' ability to pay.
The allowance is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Management believes that the allowance for loan losses is adequate as of December 31, 1999. In addition, the FDIC and the DFI, as an integral part of their examination processes, periodically review the Bank's allowance for loan losses. The agencies may require the Bank to recognize additions to the allowance based on their judgments on information available at the time of their examinations.
The Bank also evaluates loans for impairment, where principal and interest is not expected to be collected in accordance with the contractual terms of the loan agreement. The Bank measures and reserves for impairment on a loan by loan basis using either the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. As of December 31, 1999 the Bank has no loans classified as impaired. The Bank excludes from its impairment calculations smaller, homogeneous loans such as consumer installment loans and lines of credit. Also, loans that experience insignificant payment delays or payment shortfalls are generally not considered impaired.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Loan Origination Fees and Costs
All origination fees and related direct costs are deferred and amortized to interest income as an adjustment to yield over the respective lives of the loans using the effective interest method. As of December 31, 1999, approximately $62,200 of deferred loan costs were included in the related loan totals in the accompanying statements of financial condition.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization which is charged to expense on a straight-line basis over the estimated useful lives of the assets or, in the case of leasehold improvements, over the term of the leases, whichever is shorter. Maintenance and repairs are charged directly to expense as incurred. Improvements to premises and equipment that extend the useful lives of the assets are capitalized.
When assets are disposed of, the applicable costs and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in current operations. Rates of depreciation and amortization are based on the following estimated useful lives:
Furniture and equipment.... Three to ten years Leasehold improvements.. Lesser of the lease term or estimated useful life |
Income Taxes
Deferred income taxes and liabilities are determined using the asset and liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Loss Per Share
Basic loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares used in the loss per share computation for the year ended December 31, 1999 was 2,466,114. No shares were outstanding for the period from inception (May 29, 1998) to December 31, 1998.
Comprehensive Income
Components of comprehensive income include non-ownership related revenues, expenses, gains, and losses that under generally accepted accounting principles are included in equity but excluded from net income. The Bank had no components of comprehensive income in the period ended December 31, 1998.
Segment Disclosures
Based on the internal reporting of financial information, management currently believes that it operates with only one operating segment and has not included any segment disclosures herein.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was subsequently amended by SFAS No. 137 to defer the effective date of the
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
pronouncement from fiscal years beginning June 15, 1999 to fiscal years beginning June 30, 2000. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the purpose of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. Management believes that the adoption of SFAS No. 133 will not have a material impact on the Bank's results of operations or financial condition.
2. Interest Bearing Deposits with Banks
The Bank had interest bearing deposits with financial institutions of $1,386,000 at December 31, 1999. The Bank had no interest bearing deposits at December 31, 1998. The weighted average percentage yield of these deposits at December 31, 1999 was 5.70 %.
Interest bearing deposits with financial institutions at December 31, 1999 are scheduled to mature within one year.
3. Securities Available For Sale
The following is a summary of the major components of securities available for sale and a comparison of carrying values, estimated fair values, gross unrealized gains and losses and maturities at December 31, 1999:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
U.S Agency Securities:
Less than one year........... $ 750,000 $ -- $(2,100) $ 747,900
One to five years............ 1,492,000 -- (6,300) 1,485,700
Federal Reserve Bank Stock..... 435,200 -- -- 435,200
---------- ----- ------- ----------
$2,677,200 $ -- $(8,400) $2,668,800
========== ===== ======= ==========
|
At December 31, 1999, U.S. Agency securities with a carrying value of $746,000 were pledged to secure a discount line at the Federal Reserve Bank.
4. Loans and Allowance for Loan Losses
The loan portfolio consisted of the following at December 31, 1999:
Real estate loans............................................... $30,653,600
Commercial loans................................................ 10,471,600
Construction loans.............................................. 90,600
Consumer loans.................................................. 3,815,200
-----------
45,031,000
Allowance for loan losses..................................... (750,000)
Deferred loan origination costs, net.......................... 62,200
-----------
Loans, net.................................................. $44,343,200
===========
|
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
A summary of the Bank's transactions in the allowance for loan losses for the year ended December 31, 1999 is as follows:
Balance, December 31, 1998......................................... $ --
Provision for loan losses.......................................... 750,000
Recoveries......................................................... --
Amounts charged off................................................ --
--------
Balance, December 31, 1999......................................... $750,000
========
|
The following table sets forth the allocation of the allowance for loan losses by loan category as of December 31, 1999:
Real Estate loans.................................................. $127,000
Commercial loans................................................... 43,400
Consumer loans..................................................... 60,000
Unallocated........................................................ 519,600
--------
Balance, December 31, 1999......................................... $750,000
========
|
The Bank had no nonaccrual loans at December 31, 1999. The Bank had no loans with principal more than 90 days past due and not on nonaccrual status at December 31, 1999. At December 31, 1999, the Bank had no restructured loans and no loans were considered impaired.
The Bank purchased 13 loans in November and December of 1999 from a non- related entity with a par value of $19,394,900 at a premium of $290,900. The premium is being amortized over five years which is the estimated life of the loans. The loans are recently originated with terms of 10 to 30 years, primarily variable rate, and secured by multi-family real estate.
5. Premises and Equipment
The major classes of premises and equipment at December 31, 1999 and 1998 are as follows:
December 31, December 31,
1999 1998
------------ ------------
Furniture and equipment............................ $1,190,600 $131,100
Leasehold improvements............................. 189,800 11,400
---------- --------
1,380,400 142,500
Accumulated depreciation and amortization.......... (202,100) --
---------- --------
$1,178,300 $142,500
========== ========
|
The amount of depreciation and amortization included in operating expense was $202,100 for the year ended December 31, 1999. There was no depreciation for the period from inception (May 29, 1998) through December 31, 1998.
6. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 1999 was $21,782,100.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
At December 31, 1999, the scheduled maturities of time deposits of $100,000 or more are as follows:
2000......................................................... $21,594,600
2001......................................................... 187,500
-----------
$21,782,100
===========
|
7. Related Parties
The executive officers and directors of the Bank, and the companies with which they are associated, have banking transactions with the Bank in the ordinary course of business. In the opinion of management, all loans and commitments to loan included in such transactions have been made in accordance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with persons of similar creditworthiness that are not affiliated with the Bank, and only if such loans do not present any undue risk of collectibility.
The following is a summary of loan transactions with executive officers and directors of the Bank for the year ended December 31, 1999:
Balance, December 31, 1998......................................... $ --
New loans granted.................................................. 304,700
Principal repayments............................................... (85,700)
--------
Balance, December 31, 1999......................................... $219,000
========
|
8. Advances From Founders
The organizing directors advanced an aggregate of $470,000, without interest, to the Bank during the period from inception (May 29,1998) to December 1998 to fund organizational and pre-opening expenses. Such amounts were repaid to the organizing directors by the Bank on March 1, 1999 from the proceeds of its initial capital offering.
9. Income Taxes
Tax expense from inception (May 29, 1998) to December 31, 1998 represents $400 of current federal tax provision and $800 of current state tax provision. Tax expense for the year ended December 31, 1999 represents $600 of current state tax provision.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The components of the net deferred tax asset are as follows:
December 31, December 31,
1999 1998
------------ ------------
Deferred tax assets:
Allowance for loan
losses................. $ 255,000 $ --
Deferred organizational
and start-up expenses.. (16,500) 82,800
Net operating loss
carryforward........... 530,200 --
State taxes............. 210,200 26,700
Other accrued expenses.. 155,800 --
----------- ---------
Total deferred taxes...... 1,134,700 109,500
Valuation allowance....... (1,134,700) (109,500)
----------- ---------
Net deferred taxes........ $ -- $ --
=========== =========
|
The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
Period from
Inception
Year Ended (May 29, 1998)
December 31, to December 31,
------------ ---------------
1999 1998
------------ ---------------
Federal statutory tax rate...................... (34.0)% (34.0)%
Increase (decrease) resulting from:
State taxes................................... (7.6) (10.6)
Other accrued expenses........................ 0.4 --
Valuation allowance........................... 41.3 45.1
----- -----
Effective rate.................................. 0.1 % 0.5 %
===== =====
|
The Bank has established a valuation allowance of approximately $1,135,000 and $110,000 at December 31, 1999 and 1998, respectively. The valuation allowance has been established due to the Bank's limited operating history and management's inability to determine whether or not the deferred tax asset will be realizable in the future.
The Bank has a net operating loss carryforward of approximately $1,559,500 for federal income tax purposes which expires through 2019. In addition, the Bank has a net operating loss carryforward of approximately $1,558,900 for state franchise tax purposes which expires through 2006.
10. Shareholders' Equity
On March 1, 1999, the Bank sold 2,090,628 of its common stock that raised approximately $8,298,300 through an initial public offering, net of approximately $64,200 in related expense. Concurrent with the completion of the offering, the Bank received final approval from the DFI to commence operations and from the FDIC on its application for the insurance of its customers' deposit accounts. The Bank commenced operations on March 1, 1999.
On April 20, 1999, the Bank's Board of Directors authorized a 1.25 for 1.00 stock split, which was approved by the California Department of Financial Institutions (DFI) on May 21, 1999. Additionally,
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Pacific Mercantile Bank will effect a two-for-one stock split that will become effective prior to the completion of the offering (see Note 16). Share and per share data have been adjusted herein to give effect to the split.
In November 1999, the Bank completed a second offering in which it sold 1,629,532 shares of its common stock that raised approximately $10,720,900, net of approximately $278,500 in related expense.
Under California law, the directors of the Bank may declare distributions to shareholders subject to the restriction that the amount available for the payment of cash dividends shall be the lesser of retained earnings of the Bank or the Bank's net income for its last three fiscal years (less the amount of any distributions to shareholders made during such period). If the above test is not met, distributions to shareholders may be made only with the prior approval of the Commissioner of the California Department of Financial Institutions ("Commissioner") and in an amount not exceeding the greatest of a bank's retained earnings, a bank's net income for its last fiscal year or a bank's net income for its current fiscal year. If the Commissioner finds that the shareholders' equity of a bank is not adequate, or that the making by a bank of a distribution to shareholders would be unsafe or unsound for the bank, the Commissioner can order a bank not to make any distribution to shareholders.
The ability of the Bank to pay dividends is further restricted under the Federal Deposit Insurance Corporation Improvement Act of 1991 which prohibits a bank from paying dividends if, after making such payment, the bank would fail to meet any of its minimum capital requirements. Under the Financial Institutions Supervisory Act and Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989, federal banking regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of the Bank and other factors, that regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices. Therefore, the Bank's federal regulatory agency might prohibit the payment of dividends even though such payments would otherwise be technically permissible.
11. Commitments and Contingencies
The Bank leases certain facilities and equipment under various non-cancelable operating leases. Rent expense for the year ended December 31, 1999 and for the period from inception (May 29, 1998) through December 31, 1998 was $171,300 and $20,800, respectively.
Future minimum non-cancelable lease commitments are as follows:
2000.......................................................... $ 405,000
2001.......................................................... 223,300
2002.......................................................... 105,300
2003.......................................................... 94,500
2004.......................................................... 92,700
Thereafter.................................................... 104,600
----------
Total....................................................... $1,025,400
==========
|
In order to meet the financing needs of its customers in the normal course of business, the Bank is party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. At December 31, 1999, the Bank was committed to fund certain loans amounting to approximately $12,668,000.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments generally have fixed expiration dates; however, since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties.
The Bank is subject to legal actions normally associated with financial institutions. At December 31, 1999, the Bank had no pending contingencies that would be material to the financial condition or results of operations of the Bank.
The Bank is required to purchase stock in the Federal Reserve Bank in an amount equal to 6% of its capital, one-half of which must be paid currently with the balance due upon request.
12. Stock Option Plan
On March 2, 1999, the Bank's Board of Directors adopted a stock option plan (the "Option Plan"). The Option Plan provides for the granting of options to directors, officers and other key employees, entitling them to purchase shares of common stock of the Bank at a price per share equal to 100% of the fair market value of the Bank's shares on the date the option is granted. The Option Plan further provides that if the Bank sells or issues any additional shares of common stock (other than pursuant to the exercise of options under the Option Plan), the number of shares issuable pursuant to the Option Plan will be automatically increased by a number equal to 20% of the additional shares that are sold or issued. The Option Plan provides that the total number of shares for which options may be granted under the Option Plan shall be 725,906 shares.
On March 2, 1999, the Bank granted options to purchase a total of 363,334 shares of common stock of the Bank, at a price of $4 per share to directors, officers and other key employees of the Bank. Options outstanding under the Option Plan have been granted at prices equal to or above the market value of the stock on the date of grant, vest over a five year period, and expire 10 years after the grant date.
The status of the Bank's Option Plan as of December 31, 1999 is summarized below:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding, December 31, 1998............................ -- --
Granted................................................. 382,106 $4.00
Exercised............................................... -- --
Cancelled............................................... (2,000) $4.00
-------
Outstanding, December 31, 1999............................ 380,106 $4.00
=======
|
The Bank continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost for stock options is recognized for stock option awards granted at or above fair market value. Had compensation expense for the Bank's Option Plan been determined based upon the fair value at the grant
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
date for awards under the plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Bank's net loss and loss per share would have been reduced to the pro forma amounts indicated below.
Net loss: As reported............................................... $(2,750,200) Pro forma................................................. (2,820,200) Loss per share: As reported............................................... $ (1.12) Pro forma................................................. (1.15) |
The weighted average fair value of each option granted during the year ended December 31, 1999, estimated on the date of grant using the Black-Scholes option-pricing model ranged from $0.92 to $1.00. The fair value of the grants were estimated using the following assumptions: no dividend yield, no expected volatility, risk-free interest rates ranging from 5.27% to 5.81%, and an expected life of 5 years.
13. Regulatory Matters and Capital/Operating Plans
The Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can lead to certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bancorp's operating results or financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action that apply to all bank holding companies and FDIC insured banks in the United States, the Bancorp (on a consolidated basis) and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bancorp's and the Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bancorp (on a consolidated basis) and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 1999, based on the regulations, the Bank is categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios as of December 31, 1999 are also presented in the following table:
To be Well Capitalized
Under Prompt Corrective Action
Actual For Capital Adequacy Purposes Provisions
----------------- --------------------------------- ----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ---------------------- ---------- -----------------------
Total Capital to Risk
Weighted Assets....... $16,717,000 30.2% $4,422,500 (greater than or =)8.0% $5,528,200 (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets....... 16,026,800 29.0% 2,211,300 (greater than or =)4.0% 3,316,900 (greater than or =) 6.0%
Tier I Capital to
Average Assets........ 16,026,800 24.3% 2,632,400 (greater than or =)4.0% 3,290,500 (greater than or =) 5.0%
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PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
In addition, the Bank has agreed to maintain a Tier I Capital to Average Asset ratio of at least eight percent until March 1, 2002.
14. Fair Value of Financial Instruments
Fair value estimates are made at a discreet point in time based on relevant market information and information about the financial instruments. Because no active market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, prepayment assumptions, future expected loss experience and other such factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing on and off- balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include other real estate owned and premises and equipment.
The following methods and assumptions were used to estimate the fair value of financial instruments.
Cash and Cash Equivalents
The fair value of cash and cash equivalents approximates its carrying value.
Interest Bearing Deposits with Financial Institutions
The fair value of interest bearing deposits maturing within ninety days approximate their carrying values.
Securities Available for Sale
For investment securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held for Sale
The fair value of loans held for sale is based on commitments on hand from investors or prevailing market prices.
Loans
The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk.
Deposits
The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand at year-end. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the parties involved. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of these unrecorded financial instruments is estimated to approximate the notional amounts at December 31, 1999.
The estimated fair values and related carrying amounts of the Bank's financial instruments are as follows:
Carrying Estimated
Amount Fair Value
----------- -----------
Financial Assets:
Cash and cash equivalents........................ $38,498,200 $38,498,200
Interest bearing deposits with financial
institutions.................................... 1,386,000 1,386,000
Securities available for sale.................... 2,668,800 2,668,800
Loans held for sale.............................. 3,844,800 3,884,800
Loans, net....................................... 43,198,400 41,977,700
Financial Liabilities:
Noninterest bearing deposits..................... 16,607,800 16,607,800
Interest bearing deposits........................ 57,892,400 57,660,300
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In all cases, the estimated fair values of the Bank's financial instruments are equal to their respective book values at December 31, 1998.
15. Parent Company Information
Bancorp has only nominal assets and will not have conducted any business through January 28, 2000.
16. Subsequent Event (unaudited)
The Bancorp intends to offer for sale, during the second quarter ending June 30, 2000, 3,000,000 shares of its common stock in a public offering to be registered under the Securities Act of 1933. The Bancorp expects that the proceeds of this public offering, net of underwriting discounts and commissions and other expenses, will total approximately $38 million. In conjunction with the offering, Bancorp expects to issue to Paulson Investment Company, Inc., the representative of the underwriters, warrants to purchase 300,000 shares of Bancorp common stock at an exercise price per share equal to 120% of the common stock public offering price per share.
[PHOTOGRAPHS/GRAPHICS]
Until , 2000, all dealers effecting transactions in our securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
3,000,000 Shares
[LOGO OF PACIFIC MERCANTILE BANCORP APPEARS HERE]
Pacific Mercantile Bancorp
Common Stock
PROSPECTUS
Paulson Investment Company, Inc.
, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered hereunder. All of the amounts shown are estimates except for the SEC registration fee and the NASD filing fee.
To be Paid by
the Registrant
--------------
SEC registration fee....................................... $12,523.50
NASD filing fee............................................ *
NASDAQ National Market application fee..................... *
Printing and engraving expenses............................ *
Legal fees and expenses.................................... *
Accounting fees and expenses............................... *
Transfer agent and registrar fees.......................... *
Miscellaneous.............................................. *
----------
Total.................................................... $ *
==========
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Item 14. Indemnification of Directors and Officers
(a) As permitted by the California General Corporation Law ("CGCL"), the Registrant's Articles of Incorporation eliminate the liability of its directors for monetary damages to the fullest extent permissible under the CGCL and in excess of that otherwise permitted under the CGCL. The Registrant's Bylaws provide for a similar indemnity to directors and officers of the Registrant to the fullest extent authorized by the CGCL.
(b) Pursuant to the authority contained in the Registrant's Bylaws, the Registrant maintains liability insurance covering all of the Registrant's officers and directors.
Item 15. Recent Sales of Unregistered Securities
The Bancorp will issue a total of 3,720,162 shares of its common stock to the
former shareholders of Pacific Mercantile Bank (the "Bank") pursuant to the
terms of an Plan of Reorganization and Merger Agreement entered into as of
February 29, 2000, following approval of that Agreement and the transactions
contemplated thereby by the Bank's shareholders in January 2000. Pursuant to
that Agreement (i) the Bank will be merged with a new-formed wholly owned
subsidiary of the Bancorp, (ii) the Bank will be the surviving corporation in
that merger and, as a result thereof, will become a wholly owned subsidiary of
the Bancorp, and (iii) each of the 3,720,162 shares of common stock of the Bank
that will be outstanding at the time of that merger will be automatically
converted into one share of common stock of the Bancorp. The Bancorp has relied
on the exemption from registration under the Securities Act of 1933 provided by
Section 3(a)(12) for this transaction, which exempts equity securities issued
in connection with the acquisition by a holding company of a bank under Section
3(a) of the Bank Holding company Act of 1956.
II-1
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Warrant
2.1 Plan of Reorganization and Merger Agreement, dated as of February
29, 2000, between Pacific Mercantile Bank and PMSub
3.1 Articles of Incorporation of Pacific Mercantile Bancorp
3.2 Bylaws of Pacific Mercantile Bancorp
4.1 Specimen form of stock certificate for Common Stock
5.1* Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation
10.1 1999 Incentive Stock Option and Nonqualified Option Plan (the
"1999 Plan")
10.2 Form of Stock Option Agreement pertaining to the 1999 Plan
10.3* Employment Agreement, dated April 23, 1999, between Raymond E.
Dellerba and Pacific Mercantile Bank
10.4* Form of Severance Agreement to be entered into between the Bank
and John J. McCauley, John P. Cronin and Daniel L. Erickson,
respectively
10.5 Office Space Lease, dated December 8, 1999, between the Irvine
Company and Pacific Mercantile Bank
10.6 Sublease dated as of August 3, 1999, between Wells Fargo Bank,
N.A. and Pacific Mercantile Bank
10.7 Sublease, dated as of September 16, 1998, between Washington
Mutual Bank, FA, and Pacific Mercantile Bank
10.8 Standard Internet Banking System License Agreement, dated as of
January 29, 1999, between Q-UP Systems and Pacific Mercantile
Bank
10.9 ODFI--Originator Agreement for Automated Clearing House Entries,
dated as of February 16, 1999, between eFunds Corporation and
Pacific Mercantile Bank (Portions of this Exhibit are omitted
and were filed separately with the Secretary of the Commission
pursuant to the Registrant's application requesting confidential
treatment under Rule 406 of the Securities Act of 1933.)
11.1 Statement regarding computation of pro forma net income per share
23.1* Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in Exhibit 5.1 hereto)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (contained on the signature page of this
Registration Statement)
27.1 Financial Data Schedule
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(b) Financial Statement Schedules
All other schedules are omitted because they are not required under the related instructions, are inapplicable, or the information is included in the financial statements or the notes thereto.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been
II-2
advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, State of California, on the 28th day of March, 2000.
PACIFIC MERCANTILE BANCORP
/s/ Raymond E. Dellerba
By: _________________________________
Raymond E. Dellerba
President and Chief Executive
Officer
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POWER OF ATTORNEY
We, the undersigned directors and officers of Pacific Mercantile Bancorp, do hereby constitute and appoint Raymond E. Dellerba and Daniel L. Erickson, or either of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendments) to this Registration Statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond E. Dellerba President, Chief Executive March 28, 2000
____________________________________ Officer and Director
Raymond E. Dellerba (Principal Executive
Officer)
/s/ Daniel L. Erickson Executive Vice President and March 28, 2000
____________________________________ Chief Financial Officer
Daniel L. Erickson (Principal Financial and
Accounting Officer)
/s/ John J. McCauley Executive Vice President, March 28, 2000
____________________________________ Chief Operating Officer,
John J. McCauley Chief Credit Officer and
Director
/s/ George Wells Chairman of the Board and March 28, 2000
____________________________________ Director
George Wells
/s/ Richard M. Torre Vice Chairman of the Board March 28, 2000
____________________________________ and Director
Richard M. Torre
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Signature Title Date
--------- ----- ----
/s/ Ronald W. Chrislip Director March 28, 2000
____________________________________
Ronald W. Chrislip
/s/ Julia M. DiGiovanni Director March 28, 2000
____________________________________
Julia M. DiGiovanni
/s/ Warren T. Finley Director March 28, 2000
____________________________________
Warren T. Finley
/s/ John Thomas, M.D. Director March 28, 2000
____________________________________
John Thomas, M.D.
/s/ Robert E. Williams Director March 28, 2000
____________________________________
Robert E. Williams
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EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- ------------- ---
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Warrant
2.1 Plan of Reorganization and Merger Agreement,
dated as of February 29, 2000, between
Pacific Mercantile Bank and PMSUB and
3.1 Articles of Incorporation of Pacific
Mercantile Bancorp
3.2 Bylaws of Pacific Mercantile Bancorp
4.1 Specimen form of stock certificate for Common
Stock
5.1* Opinion of Stradling Yocca Carlson & Rauth, a
Professional Corporation
10.1 1999 Incentive Stock Option and Nonqualified
Option Plan (the "1999 Plan")
10.2 Form of Stock Option Agreement pertaining to
the 1999 Plan
10.3* Employment Agreement, dated April 23, 1999
between Raymond E. Dellerba and Pacific
Mercantile Bank
10.4* Form of Severance Agreement to be entered into
between the Bank and John J. McCauley, John
P. Cronin and Daniel L. Erikson, respectively
10.5 Office Space Lease, dated December 8, 1999,
between the Irvine Company and Pacific
Mercantile Bank
10.6 Sublease, dated as of August 3, 1999, between
Wells Fargo Bank, N.A. and Pacific Mercantile
Bank
10.7 Sublease, dated as of September 16, 1998,
between Washington Mutual Bank, FA, and
Pacific Mercantile Bank
10.8 Standard Internet Banking System Licensing
Agreement, dated as of January 29, 1999,
between Q-UP Systems and Pacific Mercantile
Bank
10.9 ODFI-Originator Agreement for Automated
Clearing House Entries, dated as of February
16, 1999, between eFunds Corporation and
Pacific Mercantile Bank (Portions of this
Exhibit are omitted and were filed separately
with the Secretary of the Commission pursuant
to the Registrant's application requesting
confidential treatment under Rule 406 of the
Securities Act of 1933.)
11.1 Statement regarding computation of pro forma
net income per share
23.1* Consent of Stradling Yocca Carlson & Rauth, a
Professional Corporation (included in Exhibit
5.1 hereto)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (contained on the signature
page of this Registration Statement)
27.1 Financial Data Schedule
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EXHIBIT 1.1
_____________ Shares of
Common Stock of
Pacific Mercantile Bancorp
_______________, 2000
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
811 SW Naito Parkway, Suite 200
Portland, Oregon 97204
Gentlemen:
Pacific Mercantile Bancorp, a California corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as Representative (the "Representative") an aggregate of ___________ shares (the "Firm Shares") of the Company's common stock ("Common Stock"). The respective number of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to grant to the Representative an option to purchase in aggregate up to ____________ additional Shares, identical to the Firm Shares (the "Option Shares"), as set forth below.
As the Representative, you have advised the Company (a) that you are authorized to enter into this Agreement for yourself as Representative and on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows:
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (File No. 333-_____) with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company does not own and never has owned a controlling interest in any other corporation or other business entity that has or ever has had any material assets, liabilities or operations. The Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification. Pacific Mercantile Bank, a _____________________ (the "Bank"), [insert representation re formation, organization, existence and authority of Bank.]
(c) The outstanding shares of each class or series of capital stock of the Company and the Bank have been duly authorized and validly issued and are fully paid and non-assessable and, except as disclosed in the Registration Statement, have been issued and sold by the Company or the Bank, as the case may be, in compliance in all material respects with applicable securities and banking laws; the Company is the sole record and beneficial owner (other than beneficial ownership of Bank stock resulting from ownership of Company stock) of all of the outstanding capital stock of the Bank and no person has any right, whether absolute or contingent, to purchase or otherwise acquire the power to vote or dispose of any capital stock of the Bank from the Bank or the Company; the issuance and sale of the Shares have been duly authorized by all necessary corporate action and,
when issued and paid for as contemplated herein, the Shares will be validly issued, fully paid and non-assessable; and no preemptive rights of shareholders exist with respect to any security of the Company or the issue and sale thereof. Except as set forth in the Registration Statement, neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company. Except for stock in the Bank, the Company does not own or have the right to acquire capital stock or other equity securities of any other person representing more that five percent of the equity of that person, or otherwise control any other person.
(d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. The Common Stock conforms and the Representative's Warrant will conform to the description thereof contained in the Registration Statement. The forms of certificates for the Shares conform to the requirements of the corporate law of California.
(e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representative, specifically for use in the preparation thereof.
(f) The [consolidated] financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly the [consolidated] financial position and the results of operations and cash flows of the Company at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein and in the Registration Statement, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data of the Company included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company.
(g) Arthur Andersen, LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or the Bank before any court or administrative agency or otherwise which if determined adversely to the Company or the Bank might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or the Bank or prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement.
(i) The Company or the Bank has good and marketable title to all properties and assets, tangible and intangible, reflected in the financial statements or described in the Registration Statement, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material. The Company's and the Bank's ownership and license rights in its patents, copyrights, trademarks, service marks, Web sites and other material technology and intellectual property is consistent with (i) the description thereof in the Registration Statement, and (ii) the business needs of the Company and the Bank. All of the leases and subleases under which the Company or the Bank holds properties are in full force and effect (with only such exceptions as are commonly accepted by prudent companies engaged in the commercial banking business in California) and the Company has not received notice of any claim that is materially adverse to the rights of the Company under any of such leases or subleases.
(j) The Company and the Bank have filed all federal, state, local and
foreign income tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by it to the
extent that such taxes have become due and are not being contested in good
faith. All tax liabilities have been adequately provided for in the
[consolidated] financial statements of the Company.
(k) Since the respective dates as of which information is given in the Registration Statement, as it may have been amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company or the Bank, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. Neither the Company nor the Bank has any material contingent obligations that are not disclosed in the Company's financial statements or elsewhere in the Prospectus included in the Registration Statement.
(l) Neither the Company nor the Bank is, nor, with the giving of
notice or lapse of time or both, will either be, in violation of or in default
under its [Articles of Incorporation or Bylaws] or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a party or
by which it, or any of its properties, is bound and which default is of material
significance in respect of the condition, financial or otherwise of the Company
or the Bank or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company or the Bank. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or the Bank is a party, or of the
[Articles of Incorporation or Bylaws] of the Company or the Bank or any order,
rule or regulation applicable to the Company or the Bank of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect.
(n) Each of the Company and the Bank holds all material patents, patent rights trademarks, trade names, copyrights, trade secrets, Web sites and licenses of any of the foregoing (collectively, "Intellectual Property Rights") that are necessary to the conduct of its businesses; there is no claim pending or, to the best knowledge of the Company, threatened against the Company or the Bank or any of their respective officers, directors or employees, in their capacities as such, alleging any infringement of Intellectual Property Rights, or any violation of the terms of any license relating to Intellectual Property Rights, nor does the Company know of any basis for any such claim. The Company knows of no material infringement by others of Intellectual Property Rights owned by or licensed to the Company or the Bank . Each of the Company and the Bank has obtained, is in compliance in all material respect with and maintains in full force and effect all material licenses, certificates, permits, orders or other, similar authorizations granted or issued by any governmental agency (collectively "Government Permits") required to conduct its business as it is presently conducted. No proceeding to revoke, limit or otherwise materially change any Government Permit has been commenced or, to the Company's best knowledge, is threatened against the Company, and the Company has no reason to anticipate that any such proceeding will be commenced against the Company. Except as disclosed or contemplated in the Prospectus, the Company has no reason to believe that any pending application for a Government Permit or any application that is anticipates will be required to conduct business described in the Prospectus will be denied or limited in a manner inconsistent with the Company's business plan as described in the Prospectus.
(o) Each of the Company and the Bank is in all material respects in compliance with all applicable Environmental Laws. The Company has no knowledge of any past, present or, as anticipated by the Company, future events, conditions, activities, investigation, studies, plans or proposals that (i) would interfere with or prevent compliance with any Environmental Law by the Company or the Bank or (ii) could reasonably be expected to give rise to any common law or other liability, or otherwise form the basis of a claim, action, suit, proceeding, hearing or investigation, involving the Company or the Bank and related to Hazardous Substances or Environmental Laws. Except for the prudent and safe use and management of Hazardous Substances in the ordinary course of the Company's or the Bank's business, (i) no Hazardous Substance is or has been used, treated, stored, generated, manufactured or otherwise handled on or at any Facility and (ii) to the Company's best knowledge, no Hazardous Substance has otherwise come to be located in, on or under any Facility. No Hazardous Substances are stored at any Facility except in quantities necessary to satisfy the reasonably anticipated use or consumption by the Company or the Bank, as the case may be. No litigation, claim, proceeding or governmental investigation is pending regarding any environmental matter for which the Company or the Bank has been served or otherwise notified or, to the knowledge of the Company, threatened or asserted against the Company or the Bank, or the officers or directors of the Company or the Bank in their capacities as such, or any Facility or the Company's or the Bank's business. There are no orders, judgments or decrees of any court or of any governmental agency or instrumentality under any Environmental Law which specifically apply to the Company or the Bank, any Facility or any of the Company's or the Bank's operations. Neither the Company nor the Bank has received from a governmental authority or other person (i) any notice that it is a potentially responsible person for any Contaminated site or (ii) any request for information about a site alleged to be Contaminated or regarding the disposal of Hazardous Substances. There is no litigation or proceeding against any other person by the Company or the Bank regarding any environmental matter. The Company has disclosed in the Prospectus or made available to the Underwriters and their counsel true, complete and correct copies of any reports, studies, investigations, audits, analyses, tests or monitoring in the possession of or initiated by the Company or the Bank pertaining to any environmental matter relating to the Company, the Bank, their respective past or present operations or any Facility.
For the purposes of the foregoing paragraph, "Environmental Laws" means any applicable federal, state or local statute, regulation, code, rule, ordinance, order, judgment, decree, injunction or common law pertaining in any way to the protection of human health or the environment, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any similar or comparable state or local law; "Hazardous Substance" means any hazardous, toxic, radioactive or infectious substance, material or waste as defined, listed or regulated under any Environmental Law; "Contaminated" means the actual existence on or under any real property of Hazardous Substances, if the existence of such Hazardous Substances triggers a requirement to perform any investigatory, remedial, removal or other response action under any Environmental Laws or if such response action legally could be required by any governmental authority; "Facility" means any property currently owned, leased or occupied by the Company or the Bank.
(p) Neither the Company nor the Bank nor, to the Company's best knowledge, any of their respective affiliates, has taken or intends to take, directly or indirectly, any action which is designed to cause or result in, or which constitutes or might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares.
(q) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder and will not become an Investment Company as a result of its receipt and investment of the proceeds from the sale of the Shares.
(r) The Company and the Bank maintain systems of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and all applicable banking regulations and to maintain accountability for Company or Bank assets and customer accounts; (iii) access to Company, Bank or customer assets is permitted only in accordance with management's general or specific authorization and applicable banking regulations; and (iv) the recorded accountability for assets is compared with existing Company, Bank and customer assets at reasonable intervals and appropriate action is taken with respect to any differences.
(s) The Company and/or the Bank carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries.
(t) Each of the Company and the Bank is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.
of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department.
(v) Each of the Company and the Bank is in material compliance with all laws, rules, regulations, orders of any court or administrative agency, operating licenses or other requirements imposed by any governmental body applicable to it, including, without limitation, all applicable laws, rules, regulations, licenses or other governmental standards applicable to the its business; and the conduct of the business of the Company or the Bank, as the case may be, as described in the Prospectus, will not cause the Company or the Bank to be in violation of any such requirements.
(w) The Representative's Warrants (as defined in Paragraph (d) of
Section 2 hereof) have been authorized for issuance to the Representative or its
designees and will, when issued, possess rights, privileges, and characteristics
as represented in the most recent form of Representative's Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Representative's Warrants, when issued and delivered against payment
therefor in accordance with the terms thereof, will be duly and validly issued,
fully paid, nonassessable and free of preemptive rights, and all corporate
action required to be taken for the authorization and issuance of the
Representative's Warrants, and the securities to be issued upon their exercise,
including, without limitation, the reservation of a sufficient number of shares
of Common Stock to cover such exercise in full, have been validly and
sufficiently taken.
(x) Except as disclosed in the Prospectus, neither the Company nor the Bank nor any of their respective officers, directors or affiliates have caused any person, other than the Underwriters, to be entitled to reimbursement of any kind, including, without limitation, any compensation that would be includable as underwriter compensation under the NASD's Corporate Financing Rule with respect to the offering of the Shares, as a result of the consummation of such offering based on any activity of such person as a finder, agent, broker, investment adviser or other financial service provider.
(y) Except as described in the Prospectus, the Company does not directly or indirectly control or have a material interest in any other business entity.
(z) The Shares have been approved for listing on the Nasdaq National Market ("NASDAQ") upon the effectiveness of the Registration Statement and the Company has satisfied all of the requirements of NASDAQ for such listing and for the trading of its Common Stock on NASDAQ.
(a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $____ per Share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, certified or bank cashier's checks drawn to the order of the Company, against either uncertificated delivery of Firm Shares or of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Such payment is to be made at the offices of the Representative at the address set forth on the first page of this agreement, at 7:00 a.m., Pacific time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) Except to the extent uncertificated Firm Shares are delivered at closing, the certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriters to purchase the Option
Shares at the price per Share as set forth in the first paragraph of this
Section 2. The Company may assign the obligation to deliver the Common Stock
component of the Option Shares to certain shareholders of the Company as more
fully described in the Prospectus; however, no such assignment shall affect the
obligation of the Company to deliver or cause to be delivered securities
representing the Option Shares as to which the option is exercised upon such
exercise. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 45 days after the date of this Agreement, by the
Representative to the Company setting forth the number of Option Shares as to
which the Underwriters are exercising the option, the names and denominations in
which the Option Shares are to be registered and the time and date at which
certificates representing such Shares are to be delivered. The time and date at
which certificates for Option Shares are to be delivered shall be determined by
the Representative but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The option with respect to the Option Shares
granted hereunder maybe exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. The Representative may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, or certified or bank cashier's check drawn to the order of the Company for the Option Shares to be sold by the Company in consideration either of uncertificated delivery of Option Shares or delivery of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Except to the extent uncertificated Option Shares are delivered at closing, the certificates for the Option Shares will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Option Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Option Closing Date.
(d) In addition to the sums payable to the Representative as provided elsewhere herein, the Representative shall be entitled to receive at the Closing, for itself alone and not as Representative of the Underwriters, as additional compensation for its services, purchase warrants (the "Representative's Warrants") for the purchase of up to ___________ Shares at a price of $____ per Share, upon the terms and subject to adjustment and conversion as described in the form of Representative's Warrants filed as an exhibit to the Registration Statement.
It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representative deems it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Representative will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representative for the Underwriters in the offering and sale of the Shares in accordance with an Agreement Among Underwriters entered into by you and the several other Underwriters.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representative containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representative may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may reasonably request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may reasonably request. The Company will deliver to the Representative at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representative may reasonably request.
(e) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of
which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances existing at the time the Prospectus is so delivered, be misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing Date, deliver to the Representative copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representative similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivatives of Common Stock (or agreement therefor) will be made for a period of one year after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder, or pursuant to contractual obligations existing on the date hereof or pursuant to employee benefit plans in effect on the date hereof, or with the prior written consent of the Representative, which consent will not be unreasonably withheld.
(i) The Company will use its best efforts to cause the listing of the
Shares on NASDAQ to remain in effect unless and until (i) such security expires;
(ii) such security is listed on another exchange of at least comparable
reputation; or (iii) the Company is no longer required to file reports under
Section 12 of the Exchange Act.
(j) The Company has caused each officer and director and each person who owns, beneficially or of record, 5% or more of the shares of the Common Stock outstanding immediately prior to the date hereof to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters ("Lockup Agreements"), pursuant to which each such person shall agree (A) not to offer, sell, sell short or otherwise dispose of any shares of
Common Stock or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivatives of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition) for a period of one year after the date of this Agreement, directly or indirectly, except with the prior written consent of the Representative; and (B) to give prior written notice to the Representative for a period of two years from the effective date of the Registration Statement, with respect to any sales of Common Stock of the Company pursuant to Rule 144 under the Securities Act or any similar rule.
(k) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in a manner that would require the Company to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock.
(n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company.
(a) The Representative shall be entitled to reimbursement from the Company, for itself alone and not as Representative of the Underwriters, to a non-accountable expense allowance equal to _% of the aggregate initial public offering price of the Firm Shares and any Option Shares purchased by the Underwriters. The Representative shall be entitled to withhold this allowance on the Closing Date related to the purchase of the Firm Shares or the Option Shares, as the case may be.
(b) In addition to the payment described in Paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of printing and delivering to, or as requested by, the Underwriters copies of
the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the NASDAQ listing application, the costs of due diligence
investigation of the principals of the Company, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fees and expenses (including any fees and disbursements) incident to securing
the required review
by the NASD Regulation, Inc.) of the underwriting terms and arrangements; the NASDAQ listing fee; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under state securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Company. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed Shares by the Underwriters to employees and persons having business relationships with the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and state securities or Blue Sky laws) except that, if this Agreement shall not be consummated, then the Company shall reimburse the several Underwriters for accountable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares.
The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of their covenants and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representative and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares.
(b) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Stradling, Yocca, Carlson & Rauth, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and
authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify would have a material adverse effect upon the business of the Company. [add comparable opinion with respect to the formation and organization of the Bank.
(ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the securities of the Company conform to the description thereof contained in the Prospectus; the certificates for the Common Stock are in due and proper form; the Firm Shares and the Option Shares, have been duly authorized and, upon issuance and delivery thereof as contemplated in this Agreement and the Registration Statement, will be validly issued, fully paid and non-assessable; no preemptive rights of shareholders exist with respect to any of the Shares or the issuance or sale thereof pursuant to any applicable statute or the provisions of the Company's Articles of Incorporation or Bylaws or, to such counsel's best knowledge, pursuant to any contractual obligation. The Representative's Warrants have been authorized for issuance to the Representative and will, when issued, possess rights, privileges, and characteristics as represented in the most recent form of Representative's Warrants filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Representative's Warrants when issued and delivered against payment therefor in accordance with the terms of the Representative's Warrants, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Representative's Warrants, and the securities to be issued upon their exercise, has been validly and sufficiently taken.
(iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein).
(vi) The statements under the captions "Shares Eligible for Future Sale", "Business - Supervision and Regulation" and "Description of Securities" in the Prospectus and in Items 24 and 26 of the Registration Statement, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or the Bank.
(ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of the Company, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound.
(x) This Agreement has been duly authorized, executed and delivered by the Company.
(xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD, as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act.
(xiii) The outstanding capital stock of the Bank consists solely of
___ shares of Common Stock, all of which were acquired by the Company in the
[describe transaction.] No person has any right, arising under the Bank's
[Articles of Incorporation or Bylaws or any applicable
law, rule or regulation to acquire capital stock of the Bank and, to such counsel's best knowledge, neither the Company nor the Bank has granted any such right.
[add intellectual property opinion and any banking opinions suggested by Loren Hansen]
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than California or Federal laws on local
counsel in such jurisdictions, provided that in each case such counsel shall
state that they believe that they and the Underwriters are justified in relying
on such other counsel. In addition to the matters set forth above, the opinion
of Stradling, Yocca, Carlson & Rauth shall also include a statement to the
effect that nothing has come to the attention of such counsel that has caused
them to believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein).
(c) The Representative shall have received from Stoel Rives LLP,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In rendering
such opinion Stoel Rives LLP may rely as to all matters governed other than by
Federal laws on the opinions of counsel referred to in Paragraph (b) of this
Section 6. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel that has caused them to believe that (i) the Registration Statement, or
any amendment thereto, as of the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to Rule
430A under the Act) and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statement, Stoel Rives LLP may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(d) The Representative shall have received at or prior to the Closing Date from Stoel Rives LLP a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Underwriters of the Shares under the state securities or Blue Sky laws of such jurisdictions as the Representative may reasonably have designated to the Company.
(e) The Representative, on behalf of the several Underwriters, shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of Arthur Andersen LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus.
(f) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the Bank or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or the Bank, whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representative may reasonably have requested.
(h) The Shares have been approved for listing upon notice of issuance on NASDAQ.
(i) The Lockup Agreements described in Section 4(j) are in full force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representative and to Stoel Rives LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof).
The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened.
(a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this
Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially prejudiced
by the failure to give such notice, but the failure to give such notice shall
not relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of the provisions of Section 8(a) or (b). In case any such proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay as incurred (or within 30 days of presentation) the fees and
expenses of the counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representative of the Underwriters, shall use reasonable efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from the Company such amounts as may be agreed upon and upon the
terms set forth herein, the Firm Shares or Option Shares, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representative, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of Shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of Firm Shares or Option Shares, as the case may be, with
respect to which such default shall occur exceeds 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the Company or you as the
Representative of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you, as Representative,
may determine in order that the required changes in the Registration Statement
or in the Prospectus or in any other documents or arrangements may be effected.
The term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters,
to Paulson Investment Company, Inc., 811 SW Naito Parkway, Portland, Oregon 97204, Attention: Chester L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2600, Portland, Oregon 97204, Attention: John J. Halle; if to the Company, to Pacific Mercantile Bancorp, at 450 Newport Center Drive, Suite 100, Newport Beach, California 92660, Attention: _________________; with copy to Stradling, Yocca, Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach, California 92660, Attention: Ben Frydman.
This Agreement may be terminated by you by notice to the Company as follows:
(a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company, the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce contracts for
the sale of the Shares, (iii) the Dow Jones Industrial Average shall have fallen
by 15 percent or more from its closing price on the day immediately preceding
the date that the Registration Statement is declared effective by the
Commission, (iv) suspension of trading in securities generally on the New York
Stock Exchange or the American Stock Exchange or limitation on prices (other
than limitations on hours or numbers of days of trading) for securities on
either such Exchange, (v) the enactment, publication, decree or other
promulgation of any statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects or
may materially and adversely affect the business or operations of the Company,
(vi) declaration of a banking moratorium by United States or New York State
authorities, (vii) any downgrading in the rating of the Company's debt
securities by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Exchange Act); (viii) the
suspension of trading of the Common Stock or the Warrants by the Commission or
NASDAQ, or (ix) the taking of any action by any governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion has a
material adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement has been and is made solely for the benefit of the Underwriters, the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase.
The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in the Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(b) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus.
The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of Oregon. All disputes relating to this Underwriting Agreement shall be adjudicated before a court located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction.
If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms.
Very truly yours,
Pacific Mercantile Bancorp
By: __________________________________
________________, ________________
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
By: ___________________________________
Authorized Officer
EXHIBIT 1.2
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
PACIFIC MERCANTILE BANCORP
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
__________ Shares of Common Stock
of
PACIFIC MERCANTILE BANCORP
Void after ____________, 2005
This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company (hereinafter defined) promises and agrees to sell and issue to the Warrantholder, at any time on or after ________________, 2001 and on or before ____________, 2005, up to ______ shares of the Company's common stock at the Exercise Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and conditions:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Cashless Exercise" means an exercise of Warrants in which, in lieu of payment of the Exercise Price, the Holder elects to receive a lesser number of Securities such that the value of the Securities that such Holder would otherwise have been entitled to receive but has agreed not to receive, as determined by the closing price of such Securities on the date of exercise or, if such date is not a trading day, on the next prior trading day, is equal to the Exercise Price with respect to such exercise. A Holder may only elect a Cashless Exercise if the Securities issuable by the Company on such exercise are publicly traded securities.
(c) "Closing Date" means the date on which the Offering is closed.
(d) "Commission" means the Securities and Exchange Commission.
(e) "Common Stock" means the common stock, without par value, of the Company.
(f) "Company" means Pacific Mercantile Bancorp, a California corporation.
(g) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses.
(h) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission.
(i) "Exercise Price" means the price at which the Warrantholder may purchase one Share upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $____ per Share.
(j) "Offering" means the public offering of Common Stock made pursuant to the Registration Statement.
(k) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate.
(l) "Registration Statement" means the Company's registration statement (File No. 333 -_____) as amended on the Closing Date.
(m) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act.
(n) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities.
(o) "Share" or "Shares" refers to one or more shares of Common Stock issuable on exercise of the Warrant.
(o) "Warrant Certificate" means a certificate evidencing the Warrant or a portion thereof.
(t) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(u) "Warrantholder's Expenses" means the sum of (i) the aggregate amount
of cash payments made to an underwriter, underwriting syndicate, or agent in
connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholder that
will be paid by the Company.
(v) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate.
elected a Cashless Exercise, such instructions shall so state. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or in accordance with the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased, if any. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price.
(a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of Shares for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of Shares for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a).
(b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of Shares obtainable upon the exercise of the Warrant. In any such case,
appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of Shares or other securities or property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such Shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such Shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of the
Company are distributed pro rata to holders of Common Stock, such number of such
securities will be distributed to the Warrantholder or his assignee upon
exercise of this Warrant as the Warrantholder or assignee would have been
entitled to if the portion of the Warrant evidenced by this Warrant Certificate
had been exercised prior to the record date for such distribution. The
provisions with respect to adjustment of the Common Stock provided in this
Section 3 will also apply to the securities to which the Warrantholder or his
assignee is entitled under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Shares or other Securities purchasable upon exercise of the Warrant.
will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant.
(a) The Company will register the Shares with the Commission pursuant to the Act so as to allow the unrestricted sale of the Shares to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Shares to the public during the Registration Period in those states in which the Shares were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Effective Date.
(b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Shares.
(c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at least 50
percent of the then outstanding Warrants, (i) furnish an opinion of the counsel
representing the Company for the purposes of the registration pursuant to this
Section 6, addressed to the Warrantholders and any Participating Underwriter,
(ii) furnish an appropriate letter from the independent public accountants of
the Company, addressed to the Warrantholders and any Participating Underwriter,
and (iii) make representations and warranties to the Warrantholders and any
Participating Underwriter. A request pursuant to this subsection (e) may be made
on three occasions. The documents required to be delivered pursuant to this
subsection (e) will be dated within ten days of the request and will be, in form
and substance, equivalent to similar documents furnished to the
underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances.
(b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue
(c) Promptly after receipt by an indemnified party under subparagraphs (a) or
(b) above of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
notify the indemnifying party of the commencement thereof; but the omission to
notify the indemnifying party will not relieve it from any liability that it may
have to any indemnified party otherwise than under subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation.
If to the Company:
Pacific Mercantile Bancorp
450 Newport Center Drive, Suite 100 Newport Beach, California 92660 Attention: _________________
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes.
Dated as of _______________, 1999
PACIFIC MERCANTILE BANCORP
Agreed and Accepted as of __________________, 2000
PAULSON INVESTMENT COMPANY, INC.
By:____________________________________________ Lorraine Maxfield, Senior Vice President -- Research
EXHIBIT 2.1
PLAN OF REORGANIZATION AND MERGER AGREEMENT
This Plan of Reorganization and Merger Agreement (the "Agreement") is entered into as of February 29, 2000, by and between PACIFIC MERCANTILE BANK (the "Bank") and PMBSUB ("Subsidiary"), and is joined in by PACIFIC MERCANTILE BANCORP (the "Holding Company") as a party to this Agreement, with reference to the following:
A. The Bank is a California banking corporation with its principal office in the city of Newport Beach, California. Subsidiary and Holding Company are corporations duly organized and existing under the laws of the State of California, with their principal offices in the city of Newport Beach, California.
B. As of the date hereof, the Bank's authorized capital stock consists of:
(i) 10,000,000 shares of common stock, no par value of which 1,860,081 shares
are issued and outstanding, and (ii) 2,000,000 shares of preferred stock, no par
value, of which no shares are issued or outstanding.
C. As of the date hereof, Subsidiary's authorized capital stock consists of 1,000 shares of common stock, without par value. Immediately prior to the Effective Date (as hereinafter defined), a total of 100 shares of such common stock will be issued and outstanding, all of which shares will be owned by Holding Company. As of the Effective Date the Subsidiary will not have conducted any business and will not have any liabilities or obligations, fixed or contingent, other than its obligations under this Agreement.
D. As of the date hereof, Holding Company's authorized capital stock consists of: (i) 10,000,000 shares of common stock, without par value, and (ii) 2,000,000 shares of preferred stock, without par value. Immediately prior to the Effective Date there will be authorized and reserved for issuance pursuant to this Agreement the number of shares of common stock required for the Holding Company to perform its obligations under Section 2 of this Agreement.
E. The Boards of Directors of the Bank and the Subsidiary, respectively, have approved and authorized the execution of this Agreement, which provides for the merger of the Subsidiary with and into the Bank under the laws of the State of California and in accordance with the terms and conditions of this Agreement (the "Merger"); and the Board of Directors, and the Bank as sole shareholder, of the Holding Company have approved this Agreement and have authorized the Holding Company to join in and be bound by this Agreement and to perform its obligations under this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual covenants, agreements and undertakings of the parties herein set forth and for the purpose of prescribing the terms and conditions of the Merger, the parties hereto agree as follows:
the necessity of any action on the part of the Bank, the Bancorp or any optionee. The price per share of Holding Company common stock at which an Assumed Option may be exercised shall be the same price per share that was applicable to the purchase of Bank common stock pursuant to the Existing Options, immediately prior to the Effective Date. Each Assumed Option, subject to such modification as set forth hereinafter, shall constitute a continuation of the Existing Option, on the same terms and conditions set forth in the 1999 Plan in each optionee's stock option agreement that formerly evidenced the right to purchase Bank common stock, except as follows: (i) shares of Holding Company Common Stock will be substituted for the shares of Bank common stock into which the existing options had been exercisable, (ii) the Holding Company shall be substituted for the Bank as the issuer of shares under the 1999 Plan and (iii) the Holding Company shall be authorized under the 1999 Plan to issue options to purchase Holding Company shares not only to directors, officers and key employees of the Bank, but also to directors, officers and key employees of the Holding Company and any other subsidiaries it may establish in the future. In addition, each option granted under the 1999 Plan on or after the Effective Date shall evidence the right to purchase shares of common stock of the Holding Company rather than shares of common stock of the Bank and the Plan shall be modified to so provide. In all other respects, the 1999 Plan shall be unchanged.
(a) Approval of this Agreement by the respective shareholders of the Bank, the Subsidiary and the Holding Company, if and to the extent required by applicable law;
(b) The obtaining of all other consents and approvals, on terms and conditions satisfactory to each of the parties hereto, and satisfying all other requirements, prescribed by law or
otherwise, which are necessary for the Merger described herein to be consummated, including without limitation, an approval from the Commissioner under Section 701 et seq. of the California Financial Code and from the Federal Reserve Bank of San Francisco under 12 U.S.C Section 18(a) (c) of the Bank Holding Company Act of 1956;
(c) Procuring all other consents or approvals, governmental or other, which in the opinion of counsel for the Bank are or may be necessary to permit or to enable the Surviving Corporation to conduct, from and after consummation of the Merger, all of the business and other activities in which the Bank will be engaged up to the time of such Merger, in the same manner and to the same extent as such businesses and other activities are then conducted; and
(d) Performance by each of the parties hereto of all obligations under this Agreement which are to be performed prior to the consummation of the Merger.
(a) The number of shares of common stock of the Bank voting against the Merger, makes its consummation inadvisable; or
(b) Any action, suit, proceeding or claim relating to the Merger, whether initiated or threatened, makes consummation of such Merger inadvisable; or
(c) Consummation of the merger described herein is inadvisable for any other reason;
then, this Agreement may be terminated by any of the parties hereto, whether before or after shareholder and other approvals have been obtained in satisfaction of the conditions precedent set forth in Section 4.1. Upon as such termination, this Agreement shall be void and of no further effect, and there shall be no liability by reason of this Agreement or the termination thereof on the part of any of the parties hereto or their respective directors, officers, employees, agents or shareholders.
(Signatures of the Parties follow on next page)
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Reorganization and Merger Agreement to be executed by their duly authorized officers as of the day and year first above written.
PACIFIC MERCANTILE BANK PMBSUB By: /s/Raymond E. Dellerba By: /s/Raymond E. Dellerba -------------------------------- ------------------------------ Raymond E. Dellerba, President Raymond E. Dellerba, President By: /s/Barbara Palermo By: /s/Barbara Palermo -------------------------------- ------------------------------ Barbara Palermo, Secretary Barbara Palermo, Secretary |
PACIFIC MERCANTILE BANCORP
By: /s/Raymond E. Dellerba -------------------------------- Raymond E. Dellerba, President By: /s/Barbara Palermo -------------------------------- Barbara Palermo, Secretary |
This MERGER AGREEMENT (the "Agreement") is made and entered into as of this __ day of February, 2000, by and between PACIFIC MERCANTILE BANK, a California banking corporation (the "Bank") and PMBSUB, a California corporation ("Subsidiary"), and PACIFIC MERCANTILE BANCORP, a California corporation (the "Holding Company").
A. The Bank is a California banking corporation, the authorized capital stock of which consists of: (i) ten million (10,000,000) shares of common stock, of which one million eight hundred sixty thousand eighty three (1,860,080) shares of common stock are issued and outstanding, and (ii) two million (2,000,000) shares of Preferred Stock, none of which are issued or outstanding.
B. Subsidiary is a California corporation with one thousand (1,000) shares of common stock authorized and one hundred (100) shares issued and outstanding, all of which are owned by the Holding Company.
C. Holding Company's authorized capital stock consists of (i) ten million (10,000,000) shares of common stock of which ten (10) shares are issued and outstanding; and (ii) two million (2,000,000) shares of Preferred Stock, none of which have been issued or are outstanding. As of the date hereof, 10 shares of the Holding Company's common stock were outstanding, all of which are held by directors of the Company (the "Directors' Shares").
D. A Plan of Reorganization and Merger Agreement (the "Reorganization Agreement") was entered into on February , 2000, by and among the Bank, the Subsidiary and the Holding Company, for the purpose of merging Subsidiary into the Bank in order to make the Bank a wholly-owned subsidiary of the Holding Company.
NOW, THEREFORE, in consideration of the promises and mutual covenants of the parties herein set forth and for the purpose of prescribing the terms and conditions of the merger, the parties agree as follows:
of the Surviving Corporation. The directors of the Surviving Corporation shall serve until the next annual meeting of stockholders of the Surviving Corporation or until such time as their successors are elected and have qualified.
stock of the Holding Company rather than shares of common stock of the Bank and the Plan shall be modified to so provide. In all other respects, the 1999 Plan shall be unchanged.
(a) the number of shares of common stock of the Bank voting against the merger makes consummation of such merger inadvisable; or
(b) any action, suit, proceeding or claim relating to the merger described herein, whether initiated or threatened, makes consummation of such merger inadvisable; or
(c) consummation of the merger described herein is advisable for any other reason; then this Agreement shall be terminated.
Upon any such termination, this Agreement shall be void and of no further effect, and there shall be no liability by reason of this Agreement or the termination thereof on the part of any of the parties hereto or any of their respective directors, officers, employees, agents or stockholders.
[remainder of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to be executed by their duly authorized officers as of the day and year first above written.
PACIFIC MERCANTILE BANK PACIFIC MERCANTILE BANCORP By: /s/ RAYMOND E. DELLERBA By: /s/ RAYMOND E. DELLERBA ------------------------------ ------------------------------ Raymond E. Dellerba, President Raymond E. Dellerba, President By: /s/ BARBARA PALERMO By: /s/ BARBARA PALERMO ------------------------------ ------------------------------ Barbara Palermo, Secretary Barbara Palermo, Secretary |
PMBSUB
By: /s/ RAYMOND E. DELLERBA ------------------------------ Raymond E. Dellerba, President By: /s/ BARBARA PALERMO ------------------------------ Barbara Palermo, Secretary |
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
PACIFIC MERCANTILE BANCORP
ARTICLE ONE: NAME
The name of this Corporation is: Pacific Mercantile Bancorp
ARTICLE TWO: PURPOSE
The purpose of this Corporation is to engage in any lawful act or activity for which a Corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.
ARTICLE THREE: AUTHORIZED SHARES
The Corporation is authorized to issue two classes of stock to be designated "Common Stock" and "Preferred Stock", respectively. The total number of shares that this Corporation is authorized to issue is twelve million (12,000,000) shares; ten million (10,000,000) shares shall be Common Stock, no par value per share, and two million (2,000,000) shares shall be Preferred Stock, no par value per share.
The Preferred Stock may be issued from time to time in one or more series by action of the Board of Directors of the Corporation alone. The Board of Directors of the Corporation is hereby authorized to determine the number of series into which the shares of Preferred Stock may be divided, and (except to the extent such matters are fixed by the Articles of Incorporation) to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the designation and number of shares constituting any series prior to the issue of shares of that series and to increase or decrease, within the limits stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series (but not below the number of shares of such series then outstanding), the number of shares of any such series subsequent to the issue of shares of that series.
ARTICLE FOUR: LIMITATION OF DIRECTORS' LIABILITY
The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.
ARTICLE FIVE: INDEMNIFICATION
This Corporation is authorized to indemnify the directors and officers of this Corporation to the fullest extent permissible under California law and in excess of that otherwise permitted under Section 317 of the California Corporations Code.
ARTICLE SIX: AGENT FOR SERVICE
The name and address in the State of California of the Corporation's initial agent for service of process is Ben A. Frydman, 660 Newport Center Drive, Suite 1600, Newport Beach, California 92660.
IN WITNESS WHEREOF, the undersigned has executed these Articles of Incorporation on January 5, 2000.
/s/ LAURA ST. CHARLES
--------------------------------------
Laura A. St. Charles, Incorporator
|
EXHIBIT 3.2
BYLAWS OF
PACIFIC MERCANTILE BANCORP,
a California Corporation
TABLE OF CONTENTS
Page
Article I. Offices................................................................................ 1
Section 1. Principal Executive Office....................................................... 1
Section 2. Other Offices.................................................................... 1
Article II. Meetings of Shareholders.............................................................. 1
Section 1. Place of Meetings................................................................ 1
Section 2. Annual Meetings.................................................................. 1
Section 3. Special Meetings................................................................. 2
Section 4. Quorum........................................................................... 3
Section 5. Adjourned Meeting and Notice Thereof............................................. 3
Section 6. Voting........................................................................... 3
Section 7. Validation of Defectively Called or Noticed Meetings............................. 3
Section 8. Action Without Meeting........................................................... 4
Section 9. Proxies.......................................................................... 4
Section 10. Inspectors of Election........................................................... 5
Article III. Directors............................................................................ 5
Section 1. Powers........................................................................... 5
Section 2. Number and Qualification of Directors............................................ 6
Section 3. Election and Term of Office...................................................... 7
Section 4. Vacancies........................................................................ 7
Section 5. Place of Meeting................................................................. 7
Section 6. Organization Meeting............................................................. 8
Section 7. Other Regular Meetings........................................................... 8
Section 8. Special Meetings................................................................. 8
Section 9. Action Without Meeting........................................................... 8
Section 10. Action at a Meeting: Quorum and Required Vote................................... 8
Section 11. Validation of Defectively Called or Noticed Meetings............................. 8
Section 12. Adjournment...................................................................... 9
Section 13. Notice of Adjournment............................................................ 9
Section 14. Fees and Compensation............................................................ 9
Section 15. Indemnification of Agents of the Corporation; Purchase of Liability Insurance.... 9
Article IV. Officers.............................................................................. 13
Section 1. Officers......................................................................... 13
Section 2. Election......................................................................... 13
Section 3. Subordinate Officers, Etc........................................................ 13
Section 4. Removal and Resignation.......................................................... 13
Section 5. Vacancies........................................................................ 13
Section 6. Chairman of the Board............................................................ 13
Section 7. President........................................................................ 13
Section 8. Vice President................................................................... 14
Section 9. Secretary........................................................................ 14
Section 10. Chief Financial Officer.......................................................... 14
Article V. Miscellaneous.......................................................................... 14
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Section 1. Record Date...................................................................... 14
Section 2. Inspection of Corporate Records.................................................. 15
Section 3. Checks, Drafts, Etc.............................................................. 15
Section 4. Annual Report to Shareholders.................................................... 15
Section 5. Contracts, Etc., How Executed.................................................... 16
Section 6. Certificate for Shares........................................................... 16
Section 7. Representation of Shares of Other Corporations................................... 17
Section 8. Inspection of Bylaws............................................................. 17
Section 9. Construction and Definitions..................................................... 17
Article VI. Amendments............................................................................ 17
Section 1. Power of Shareholders............................................................ 17
Section 2. Power of Directors............................................................... 17
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BYLAWS FOR THE REGULATION, EXCEPT
AS OTHERWISE PROVIDED BY STATUTE OR ITS
ARTICLES OF INCORPORATION, OF
PACIFIC MERCANTILE BANCORP,
a California corporation
Offices
Meetings of Shareholders
have been given him if sent by mail or other means of written communication addressed to the place where the principal executive office of the Corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said principal executive office is located.
All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or any transfer agent of the Corporation, shall be prima facie evidence of the giving of the notice.
Such notices shall specify:
(a) the place, the date, and the hour of such meeting;
(b) those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders;
(c) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election;
(d) the general nature of a proposal, if any, to take action with respect to approval of (i) a contract or other transaction with an interested director, (ii) amendment of the Articles of Incorporation, (iii) a reorganization of the Corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the Corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and
(e) such other matters, if any, as may be expressly required by statute.
When any shareholders' meeting, either annual or special, is adjourned for forty-five days or more, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place thereof at the meeting at which such adjournment is taken.
transaction of any business because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice, but not so included, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
Any other action which, under any provision of the California General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing,
(a) Notice of any proposed shareholder approval of (i) a contract or
other transaction with an interested director, (ii)
indemnification of an agent of the Corporation as authorized by
Section 15, of Article III, of these bylaws, (iii) a
reorganization of the Corporation as defined in Section 181 of
the General Corporation Law, or (iv) a distribution in
dissolution other than in accordance with the rights of
outstanding preferred shares, if any, without a meeting by less
than unanimous written consent, shall be given at least ten (10)
days before the consummation of the action authorized by such
approval; and
(b) Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 2 of Article II of these bylaws.
Unless, as provided in Section 1 of Article V of these bylaws, the Board of Directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. All such written consents shall be filed with the secretary of the Corporation.
Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the secretary of the Corporation.
revoked and continues in full force and effect until (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the Corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the Corporation before the vote pursuant thereto is counted; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it specifies therein the length of time for which such proxy is to continue in force.
The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law and shall include determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed.
The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence by the facts stated therein.
Directors
First--To select and remove all the officers, agents and employees of the Corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the Articles of Incorporation or the bylaws, fix their compensation and require from them security for faithful service.
Second--To conduct, manage and control the affairs and business of the Corporation, and to make such rules and regulations therefor not inconsistent with law, or with the Articles of Incorporation or the bylaws, as they may deem best.
Third--To change the principal executive office and principal office for the transaction of the business of the Corporation from one location to another as provided in Article I, Section 1, hereof; to fix and locate from time to time one or more branch offices of the Corporation within or without the State of California, as provided in Article I, Section 2, hereof; to designate any place within or without the State of California for the holding of any shareholders' meeting or meetings; and to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with applicable provisions of law.
Fourth--To authorize the issue of shares of stock of the Corporation from time to time, upon such terms as may be lawful.
Fifth--Subject to obtaining any permits or other approvals required under applicable laws or regulations to borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor.
Sixth--By resolution adopted by a majority of the authorized number of directors, to designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the Board, and to prescribe the manner in which proceedings of such committee shall be conducted. Unless the Board of Directors shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by any two members thereof; otherwise, the provisions of the bylaws with respect to notice and conduct of meetings of the Board shall govern. Any such committee, to the extent provided in a resolution of the Board, shall have all of the authority of the Board, except with respect to:
(a) the approval of any action for which the General Corporation Law or the Articles of Incorporation also require shareholder approval;
(b) the filling of vacancies on the Board or in any committee;
(c) the fixing of compensation of the directors for serving on the Board or on any committee;
(d) the adoption, amendment or repeal of the bylaws;
(e) the amendment or repeal of any resolution of the Board;
(f) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the Board; and
(g) the appointment of other committees of the Board or the members thereof.
Vacancies in the Board of Directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the shareholders. A vacancy in the Board of Directors created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares.
The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the chairman of the Board, the president, the secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office.
Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone or by telegraph or mail, charges prepaid, addressed to him at his address as it is shown upon the records of the Corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail in the place in which the principal executive office of the Corporation is located at least four days' prior to the time of holding the meeting. In case such notice is delivered, personally or by telephone or telegraph, as above provided, it shall be so delivered at least forty-eight hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such director.
notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting.
(a) For the purposes of this Section, "agent" means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "executive officer" means any person who is or was a director or an officer serving a chief policy making function, or is or was serving at the request of the Corporation as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director or officer serving a chief policy making function of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of the corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under subsection (d) or paragraph (3) of subsection (e) of this section.
(b) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this Corporation) by reason of the fact that such person is or was an executive officer of the Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. This Corporation may indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this Corporation) by reason of the fact that such person is or was an agent of the Corporation by a majority vote of a quorum consisting of directors who are not a party to such proceeding, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reason to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful.
(c) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this Corporation to procure a judgment in its favor by reason of the fact that such person is or was an executive officer of this Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of this Corporation and its shareholders. No indemnification shall be made under subsection (b) and/or (c):
(1) in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to this Corporation in the performance of such person's duty to this Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine;
(2) Of amounts paid in settling or otherwise disposing of a pending action without court approval; or
(3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval.
(d) To the extent that an agent or executive officer of this Corporation has been successful on the merits in defense of any proceeding referred to in subsection (b) or (c) or in defense of any claim, issue or matter therein, the agent or executive officer shall be indemnified against expenses actually and reasonably incurred by the agent or executive officer in connection therewith.
(e) Except as provided in subsection (d), any indemnification under this section shall be made by this Corporation only if authorized in the specific case, upon a determination that indemnification of the agent or executive officer is proper in the circumstances because the agent or executive officer has met the applicable standard of conduct set forth in subsection (b) or (c), by:
(1) A majority vote of a quorum consisting of directors who are not a party to such proceeding;
(2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinion;
(3) Approval or ratification by the affirmative vote of a majority of the shares of this Corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For such purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or
(4) The court in which such proceeding is or was pending upon application made by this Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by this Corporation.
(f) Expenses incurred in defending any proceeding may be advanced by the Corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent or executive officer to repay such amount if it shall be determined ultimately that the agent or executive officer is not entitled to be indemnified as authorized in this section.
(g) The indemnification provided by this section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the articles of this Corporation. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this section shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise.
(h) No indemnification or advance shall be made under this section, except as provided in subsection (d) or paragraph (3) of subsection (e), in any circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles, bylaws, a resolution of the shareholders or an agreement in effect at the time the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
(i) This Corporation may purchase and maintain insurance on behalf of any agent of this Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not this Corporation would have the power to indemnify the agent against such liability under the provisions of this section. The fact that this Corporation owns all or a portion of the shares of the company issuing a policy of insurance shall not render this subsection inapplicable if either of the following conditions are satisfied:
(1) If authorized in the Articles of Incorporation of this Corporation, any policy issued is limited to the extent provided by subdivision (d) of Section 204 of the California Corporations Code; or
(2) (i) The company issuing the insurance policy is organized, licensed, and operated in a manner that complies with the insurance laws and regulations applicable to its jurisdiction of organization,
(ii) The company issuing the policy provides procedures for processing claims that do not permit that company to be subject to the direct control of the Corporation that purchased that policy, and
(iii) The policy issued provides for some manner of risk sharing between the issuer and purchaser of the policy, on one hand, and some unaffiliated person or persons, on the other, such as by providing for more than one unaffiliated owner of the company issuing the policy or by providing that a portion of the coverage furnished will be obtained from some unaffiliated insurer or re-insurer.
(j) This Section 15 does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent of the Corporation as defined in subsection (a) of this Section. This Corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law.
Officers
Any officer may resign at any time by giving written notice to the Board of Directors or to the president, or to the secretary of the corporation, without prejudice, however, to the rights, if any, of the Corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
management usually vested in the office of president of a Corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the bylaws.
The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board of Directors required by the bylaws or by law to be given, and he shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the bylaws.
The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the bylaws.
Miscellaneous
A shareholder or shareholders holding at least 5 percent in the aggregate of the outstanding voting shares of the Corporation or who hold at least 1 percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the Corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the Corporation and to obtain from the transfer agent for the Corporation, upon written demand and upon the tender of its usual charges, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five business days after the demand is received or the date specified therein as the date as of which the list is to be compiled.
Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts.
A shareholder or shareholders holding at least five percent of the outstanding shares of any class of the Corporation may make a written request to the Corporation for an income statement of the Corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the Corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year. The Corporation shall use its best efforts to deliver on the statement to the person making the request within 30 days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the Corporation for 12 months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder.
The Corporation shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semiannual or quarterly income statement which it has prepared and a balance sheet as of the end of the period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the Corporation or the certificate of an authorized officer of the Corporation that such financial statements were prepared without audit from the books and records of the Corporation.
Any such certificate shall also contain such legend or other statement as may be required by Section 418 of the General Corporation Law, the Corporate Securities Law of 1968, the federal securities laws, and any agreement between the Corporation and the issuee thereof.
Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board of Directors or the bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment thereof.
No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and canceled at the same time; provided,
however, that a new certificate will be issued without the surrender and
cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction or theft; (3) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
Corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the Corporation; and (5) the owner satisfies
any other reasonable requirements imposed by the Corporation. In the event of
the issuance of a new certificate, the rights and liabilities of the
Corporation, and of the holders of the old and new certificates, shall be
governed by the provisions of Sections 8104 and 8405 of the California Uniform
Commercial Code.
Amendments
EXHIBIT 4.1
LU PACIFIC
-------------- [GRAPHIC] MERCANTILE --------------
BANCORP
COMMON STOCK COMMON STOCK
SEE REVERSE FOR STATEMENTS
INCORPORATED UNDER THE LAWS RELATING TO RIGHTS, PREFERENCES,
OF THE STATE OF CALIFORNIA PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP 0694553 10 8
--------------------------------------------------------------------------------
This Certifies that
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FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF
---=================== PACIFIC MERCANTILE BANCORP ====================---
transferable on the books of the Corporation in person or by duly authorized attorney on surrender of this certificate properly endorsed. This certificate shall not be valid until countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the signatures of its duly authorized officers.
Dated:
[CORPORATE SEAL]
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
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A statement of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares and upon the holders thereof as established, from time to time, by the Articles of Incorporation of the Corporation and by any certificate of determination, and the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon written request and without charge from the Secretary of the Corporation at its corporate headquarters.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .............. Custodian ..................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act .......................................
in common (State)
UNIF TRF MIN ACT -- .............. Custodian (until age ......)
(Cust)
................... under Uniform Transfers
(Minor)
to Minors Act .............................
(State)
Additional abbreviations may also be used though not in the above list.
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FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
_________________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
_______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated __________________________
X ________________________________________________________
X ________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ____________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
EXHIBIT 10.1
PACIFIC MERCANTILE BANK
1999 STOCK OPTION PLAN
This 1999 STOCK OPTION PLAN (the "Plan") is hereby established by Pacific Mercantile Bank, a California corporation (the "Company"), and adopted by its Board of Directors as of March 2, 1999.
Article 1.
Article 2.
For purposes of this Plan, the following terms shall have the meanings indicated:
(a) If the Common Stock is then listed or admitted to trading on a NASDAQ market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on such NASDAQ market system or principal stock exchange on which the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted on such day, then the Fair Market Value shall be the closing sale price of the Common Stock on such NASDAQ market system or such exchange on the next preceding day for which a closing sale price is reported.
(b) If the Common Stock is not then listed or admitted to trading on a NASDAQ market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of valuation.
(c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Administrator in good faith using any reasonable method of evaluation, which determination shall be conclusive and binding on all interested parties.
Article 3.
Article 4.
Article 5.
Article 6.
Option or in furtherance of the powers provided for herein; and (k) to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Any action, decision, interpretation or determination made in good faith by the Administrator in the exercise of its authority conferred upon it under the Plan shall be final and binding on the Company and all Optionees.
Article 7.
Article 8.
Article 9.
Article 10.
Article 11.
EXHIBIT 10.2
PACIFIC MERCANTILE BANK
Type of Option (check one): [_] Incentive [_] Nonqualified
This Stock Option Agreement (the "Agreement") is entered into as of ________________, 1999, by and between Pacific Mercantile Bank, a California corporation (the "Company"), and ____________________ (the "Optionee") pursuant to the Company's 1999 Stock Option Plan (the "Plan").
This Option shall be
On or After: Exercisable as to:
----------- ------------------------
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[To be Determined at the time of Grant]
No additional shares shall vest after the date of termination of Optionee's "Continuous Service" (as defined in Section 3 below), but this Option shall continue to be exercisable in accordance with Section 3 hereof with respect to that number of shares that have vested as of the date of termination of Optionee's Continuous Service. If the Option is granted prior to the approval of the Plan by the shareholders of the Company, then, notwithstanding anything in this Agreement to the contrary, this Option shall not become exercisable unless and until the Plan has been approved by the shareholders of the Company.
(a) the expiration of ten (10) years from the date of this Agreement;
(b) the expiration of three (3) months from the date of termination of Optionee's Continuous Service if such termination occurs for any reason other than permanent disability, death or voluntary resignation; provided, however, that if Optionee dies during such three-month period the provisions of Section 3(e) below shall apply;
(c) the expiration of one (1) month from the date of termination of Optionee's Continuous Service if such termination occurs due to voluntary resignation; provided, however, that if Optionee dies during such one-month period the provisions of Section 3(e) below shall apply;
(d) the expiration of one (1) year from the date of termination of Optionee's Continuous Service if such termination is due to permanent disability of the Optionee (as defined in Section 22(e)(3) of the Code);
(e) the expiration of one (1) year from the date of termination of Optionee's Continuous Service if such termination is due to Optionee's death or if death occurs during either the three-month or one-month period following termination of Optionee's Continuous Service pursuant to Section 3(b) or 3(c) above, as the case may be; or
(f) upon the consummation of a "Change in Control" (as defined in
Section 2.4 of the Plan), unless otherwise provided pursuant to Section 11
below.
As used herein, the term "Continuous Service" means (i) employment by either the Company or any parent or subsidiary corporation of the Company, or by a corporation or a parent or subsidiary of a corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies, which is uninterrupted except for vacations, illness (except for permanent disability, as defined in Section 22(e)(3) of the Code), or leaves of absence which are approved in writing by the Company or any of such other employer corporations, if applicable, (ii) service as a member of the Board of Directors of the Company until Optionee resigns, is removed from office, or Optionee's term of office expires and he or she is not reelected, or (iii) so long as Optionee is engaged as a consultant or service provider to the Company or other corporation referred to in clause (i) above.
(a) a written notice of exercise which identifies this Agreement and states the number of Shares then being purchased (but no fractional Shares may be purchased);
(b) a check or cash in the amount of the Exercise Price (or payment of the Exercise Price in such other form of lawful consideration as the Administrator may approve from time to time under the provisions of Section 5.3 of the Plan);
(c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by the Optionee in connection with the exercise of this Option (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other compensation payable to Optionee, or by the withholding of Shares issuable upon exercise of this Option or the delivery of Shares owned by the Optionee in accordance with Section 10.1 of the Plan, provided such arrangements satisfy the requirements of applicable tax laws); and
attempt to sell, pledge, assign, hypothecate, transfer or dispose of this Option in contravention of this Agreement or the Plan shall be void and shall have no effect. If the Optionee's Continuous Service terminates as a result of his or her death, and provided Optionee's rights hereunder shall have vested pursuant to Section 2 hereof, Optionee's legal representative, his or her legatee, or the person who acquired the right to exercise this Option by reason of the death of the Optionee (individually, a "Successor") shall succeed to the Optionee's rights and obligations under this Agreement. After the death of the Optionee, only a Successor may exercise this Option.
covered by this Option until the date of the issuance of a stock certificate or certificates to him or her for such Shares, notwithstanding the exercise of this Option.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
PACIFIC MERCANTILE BANK "OPTIONEE"
----------------------------------- -------------------------------------
(Signature)
Name:
------------------------------
Title:
----------------------------- -------------------------------------
(Type or print name)
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EXHIBIT 10.5
OFFICE SPACE LEASE
BETWEEN
THE IRVINE COMPANY
AND
PACIFIC MERCANTILE BANK
OFFICE SPACE LEASE
THIS LEASE is made as of the 8th day of December, 1999, by and between THE IRVINE COMPANY, hereafter called "Landlord," and PACIFIC MERCANTILE BANK, a California corporation, hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease.
1. Tenant's Trade Name: N/A
2. Premises: Suite No. 360 (the Premises are more particularly described in
Section 2.1).
Address of Building: 450 Newport Center Drive, Newport Beach, CA 92660
Project Description (if applicable): Newport Center Block 400
3. Use of Premises: General Office and for no other use.
4. Commencement Date: December 9, 1999
5. Lease Term: Twelve (12) months, plus such additional days as may be required to cause this Lease to terminate on the final day of the calendar month.
6. Basic Rent: Five Thousand One Hundred Ninety-Six Dollars ($5,196.00) per month.
Rental Adjustments: None
8. Floor Area of Premises: approximately 1,551 rentable square feet
9. Security Deposit: $5,715.00
10. Broker(s): SZ Real Estate Management Services
11. Plan Approval Date: N/A
12. Parking: Five (5) unreserved vehicle parking spaces.
13. Address for Payments and Notices:
LANDLORD TENANT
The Irvine Company Pacific Mercantile Bank
c/o PM Realty Group 450 Newport Center Drive
630 Newport Center Drive, Suite 100 Suite 360
Newport Beach, CA 92660 Newport Beach, CA 92660
Attn: Property Manager
with a copy of notices to:
THE IRVINE COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
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Attn: Vice President, Operations - Office Properties
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant rents from Landlord the premises shown in Exhibit A (the "Premises"), containing approximately the floor area set forth in Item 8 of the Basic Lease Provisions and known by the suite number identified in Item 2 of the Basic Lease Provisions. The Premises are located in the building identified in Item 2 of the Basic Lease Provisions (the "Building"), which is a portion of the project described in Item 2 (the "Project"). If, upon completion of the space plans for the Premises, Landlord's architect or space planner determines that the rentable square footage of the Premises differs from that set forth in the Basic Lease Provisions, then Landlord shall so notify Tenant and the Basic Rent (as shown in Item 6 of the Basic Lease Provisions) shall be promptly adjusted in proportion to the change in square footage. Within five (5) days following Landlord's request, the parties shall memorialize the adjustments by executing an amendment to this Lease prepared by Landlord.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises or the Building or the suitability or fitness of either for any purpose, except as set forth in this Lease. The taking of possession or use of the Premises by Tenant for any purpose other than construction shall conclusively establish that the Premises and the Building were in satisfactory condition and in conformity with the provisions of this Lease in all respects, except for those matters which Tenant shall have brought to Landlord's attention on a written punch list. The list shall be limited to any items required to be accomplished by Landlord under the Work Letter (if any) attached as Exhibit X, and shall be delivered to Landlord within thirty (30) days after the term ("Term") of this Lease commences as provided in Article III below. If there is no Work Letter, or if no items are required of Landlord under the Work Letter, by taking possession of the Premises Tenant accepts the improvements in their existing condition, and waives any right or claim against Landlord arising out of the condition of the Premises. Nothing contained in this Section shall affect the commencement of the Term or the obligation of Tenant to pay rent. Landlord shall diligently complete all punch list items of which it is notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name selected by Landlord from time to time for the Building and/or the Project as any part of Tenant's corporate or trade name. Landlord shall have the right to change the name, number or designation of the Building or Project without liability to Tenant.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in Item 5 of the Basic Lease Provisions. The Term shall commence ("Commencement Date") on the Commencement Date as set forth in Item 4 of the Basic Lease Provisions and shall end upon the expiration of the period set forth in Item 5 of the Basic Lease Provisions ("Expiration Date").
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset a Basic Rent for the Premises in the total amount shown (including subsequent adjustments, if any) in Item 6 of the Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be deemed to occur on the specified monthly anniversary of the Commencement Date, whether or not that date occurs at the end of a calendar month. The rent shall be due and payable in advance commencing on the Commencement Date and continuing thereafter on the first day of each successive calendar month of the Term, as prorated for any partial month. No demand, notice or invoice shall be required. An installment of rent in the amount of one (1) full month's Basic Rent at the initial rate specified in Item 6 of the Basic Lease Provisions shall be delivered to Landlord concurrently with Tenant's execution of this Lease and shall be applied against the Basic Rent first due hereunder; the next installment of Basic Rent shall be due on the first day of the second calendar month of the Term, which installment shall, if applicable, be appropriately prorated to reflect the amount prepaid for that calendar month.
SECTION 4.2. OPERATING EXPENSE INCREASE.
(a) Tenant shall compensate Landlord, as additional rent, for Tenant's proportionate shares of "Building Costs" and "Property Taxes," as those terms are defined below, incurred by Landlord in the operation of the Building and Project. Property Taxes and Building Costs are mutually exclusive and may be billed separately or in combination as determined by Landlord. Tenant's proportionate share
of Property Taxes shall equal the product of the rentable floor area of the Premises multiplied by the difference of (i) Property Taxes per rentable square foot less (ii) the Property Tax Base set forth in Item 7 of the Basic Lease Provisions. Tenant's proportionate share of Building Costs shall equal the product of the rentable floor area of the Premises multiplied by the difference of (i) Building Costs per rentable square foot less (ii) the Building Cost Base set forth in Item 7 of the Basic Lease Provisions. Tenant acknowledges Landlord's rights to make changes or additions to the Building and/or Project from time to time pursuant to Section 6.5 below, in which event the total rentable square footage within the Building and/or Project may be adjusted. For convenience of reference, Property Taxes and Building Costs may sometimes be collectively referred to as "Operating Expenses."
(b) Commencing prior to the start of the first full "Expense Recovery Period" of the Lease (as defined in Item 7 of the Basic Lease Provisions), and prior to the start of each full or partial Expense Recovery Period thereafter, Landlord shall give Tenant a written estimate of the amount of Tenant's proportionate shares of Building Costs and Property Taxes for the Expense Recovery Period or portion thereof. Tenant shall pay the estimated amounts to Landlord in equal monthly installments, in advance, with Basic Rent. If Landlord has not furnished its written estimate for any Expense Recovery Period by the time set forth above, Tenant shall continue to pay cost reimbursements at the rates established for the prior Expense Recovery Period, if any; provided that when the new estimate is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any accrued cost reimbursements based upon the new estimate. Landlord may from time to time change the Expense Recovery Period to reflect a calendar year or a new fiscal year of Landlord, as applicable, in which event Tenant's share of Operating Expenses shall be equitably prorated for any partial year.
(c) Within one hundred twenty (120) days after the end of each Expense Recovery Period, Landlord shall furnish to Tenant a statement setting forth the actual or prorated Property Taxes and Building Costs attributable to that period, and the parties shall within thirty (30) days thereafter make any payment or allowance necessary to adjust Tenant's estimated payments, if any, to Tenant's actual proportionate shares as shown by the annual statement. If Tenant has not made estimated payments during the Expense Recovery Period, any amount owing by Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance with Article XVI. If actual Property Taxes or Building Costs allocable to Tenant during any Expense Recovery Period are less than the Property Tax Base or the Building Cost Base, respectively, Landlord shall not be required to pay that differential to Tenant, although Landlord shall refund any applicable estimated payments collected from Tenant. Should Tenant fail to object in writing to Landlord's determination of actual Operating Expenses within sixty (60) days following delivery of Landlord's expense statement, Landlord's determination of actual Operating Expenses for the applicable Expense Recovery Period shall be conclusive and binding on Tenant.
(d) Even though the Lease has terminated and the Tenant has vacated the Premises, when the final determination is made of Tenant's share of Property Taxes and Building Costs for the Expense Recovery Period in which the Lease terminates, Tenant shall upon notice pay the entire increase due over the estimated expenses paid; conversely, any overpayment made in the event expenses decrease shall be rebated by Landlord to Tenant. However, in lieu thereof, Landlord may deliver a reasonable estimate of the anticipated reconciliation amount to Tenant prior to the expiration of the Term, in which event the appropriate party shall fund that amount by the termination date.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then Tenant's estimated share of Property Taxes or Building Costs, as
applicable, shall be increased for the month in which the increase becomes
effective and for all succeeding months by an amount equal to Tenant's
proportionate share of the increase. Landlord shall give Tenant written notice
of the amount or estimated amount of the increase, the month in which the
increase will become effective, Tenant's monthly share thereof and the months
for which the payments are due. Tenant shall pay the increase to Landlord as a
part of Tenant's monthly payments of estimated expenses as provided in paragraph
(b) above, commencing with the month in which effective.
(f) The term "Building Costs" shall include all expenses of operation and maintenance of the Building and the Project, together with all appurtenant Common Areas (as defined in Section 6.2), and shall include the following charges by way of illustration but not limitation: water and sewer charges; insurance premiums or reasonable premium equivalents should Landlord elect to self-insure any risk or deductible that Landlord is authorized to insure hereunder; license, permit, and inspection fees; heat; light; power; janitorial services; repairs; air conditioning; supplies; materials; equipment; tools; tenant services; programs instituted to comply with transportation management requirements; amortization of capital investments reasonably intended to produce a reduction in operating charges or energy conservation; amortization of capital investments necessary to bring the Building into compliance with applicable laws and building codes enacted subsequent to the completion of construction of the Building; labor; reasonably allocated wages and salaries, fringe benefits, and payroll taxes for administrative and other personnel directly applicable to the Building and/or Project, including both Landlord's personnel and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 6.4, 7.2, and 10.2 and Exhibits B and C below; and a reasonable overhead/management fee. It is understood that
Building Costs shall include competitive charges for direct services provided by
any subsidiary or division of Landlord. The term "Property Taxes" as used
herein shall include the following: (i) all real estate taxes or personal
property taxes, as such property taxes may be reassessed from time to time; and
(ii) other taxes, documentary transfer fees, charges and assessments which are
levied with respect to this Lease or to the Building and/or the Project, and any
improvements, fixtures and equipment and other property of Landlord located in
the Building and/or the Project, except that general net income and franchise
taxes imposed against Landlord shall be excluded; and (iii) any tax, surcharge
or assessment which shall be levied in addition to or in lieu of real estate or
personal property taxes, other than taxes covered by Article VIII; and (iv)
costs and expenses incurred in contesting the amount or validity of any Property
Tax by appropriate proceedings. A copy of Landlord's unaudited statement of
expenses shall be made available to Tenant upon request. The Building Costs may
be extrapolated by Landlord to reflect at least ninety-five percent (95%)
occupancy of the rentable area of the Building.
(g) Notwithstanding the foregoing, Landlord hereby agrees that Tenant shall not be obligated to reimburse Landlord for Operating Expenses accruing during the initial twelve (12) month Lease Term.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of the Basic Lease Provisions (the "Security Deposit"), to be held by Landlord as security for the full and faithful performance of Tenant's obligations under this Lease to pay any rent as and when due, including without limitation such additional rent as may be owing under any provision hereof, and to maintain the Premises as required by Sections 7.1 and 15.3 or any other provision of this Lease. Upon any breach of those obligations by Tenant, Landlord may apply all or part of the Security Deposit as full or partial compensation. If any portion of the Security Deposit is so applied, Tenant shall within five (5) days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. In no event may Tenant utilize all or any portion of the Security Deposit as a payment toward any rental sum due under this Lease. If Tenant fully performs its obligations under this Lease, the Security Deposit or any balance thereof shall be returned to Tenant or, at Landlord's option, to the last assignee of Tenant's interest in this Lease.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions. The parties agree that any contrary use shall be deemed to cause material and irreparable harm to Landlord and shall entitle Landlord to injunctive relief in addition to any other available remedy. Tenant shall not do or permit anything to be done in or about the Premises which will in any way interfere with the rights or quiet enjoyment of other occupants of the Building or the Project, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises or the Project. Tenant shall not allow occupancy of the Premises (exclusive of transient visitors) at a level in excess of four persons per one thousand usable square feet of the Premises. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any insurance policy(ies) covering the Building, the Project and/or their contents, and shall comply with all applicable insurance underwriters rules. Tenant shall comply at its expense with all present and future laws, ordinances and requirements of all governmental authorities that pertain to Tenant or its use of the Premises, including without limitation all federal and state occupational health and safety and handicap access requirements, whether or not Tenant's compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises. Tenant shall not generate, handle, store or dispose of hazardous or toxic materials (as such materials may be identified in any federal, state or local law or regulation) in the Premises or Project without the prior written consent of Landlord; provided that the foregoing shall not be deemed to proscribe the use by Tenant of customary office supplies in normal quantities so long as such use comports with all applicable laws. Tenant agrees that it shall promptly complete and deliver to Landlord any disclosure form regarding hazardous or toxic materials that may be required by any governmental agency. Tenant shall also, from time to time upon request by Landlord, execute such affidavits concerning Tenant's best knowledge and belief regarding the presence of hazardous or toxic materials in the Premises. Landlord shall have the right at any time to perform an assessment of the environmental condition of the Premises and of Tenant's compliance with this Section. As part of any such assessment, Landlord shall have the right, upon reasonable prior notice to Tenant, to enter and inspect the Premises and to perform tests, provided those tests are performed in a manner that minimizes disruption to Tenant. Tenant will cooperate with Landlord in connection with any assessment by, among other things, promptly responding to inquiries and providing relevant documentation and records. The reasonable cost of the assessment/testing shall be reimbursed by Tenant to Landlord if such assessment/testing determines that Tenant failed to comply with the requirements of this Section. In all events Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease from any release of hazardous or toxic materials caused by Tenant, its agents,
employees, contractors, subtenants or licensees. The foregoing covenants shall survive the expiration or earlier termination of this Lease.
SECTION 5.2. SIGNS. Landlord shall, upon request by Tenant and at Tenant's expense, affix and maintain a sign (restricted solely to Tenant's name as set forth herein or such other name as Landlord may consent to in writing) adjacent to the entry door of the Premises, together with a directory strip in any applicable lobby directory of the Building. The signage shall conform to the criteria for signs established by Landlord and shall be ordered through Landlord. Tenant shall not place or allow to be placed any other sign, decoration or advertising matter of any kind that is visible from the exterior of the Premises. Any violating sign or decoration may be immediately removed by Landlord at Tenant's expense without notice and without the removal constituting a breach of this Lease or entitling Tenant to claim damages.
ARTICLE VI. LANDLORD SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Landlord shall furnish to the Premises the utilities and services described in Exhibit B, subject to the conditions and payment obligations and standards set forth in this Lease. Landlord shall not be liable for any failure to furnish any services or utilities when the failure is the result of any accident or other cause beyond Landlord's reasonable control, nor shall Landlord be liable for damages resulting from power surges or any breakdown in telecommunications facilities or services. Landlord's temporary inability to furnish any services or utilities shall not entitle Tenant to any damages, relieve Tenant of the obligation to pay rent or constitute a constructive or other eviction of Tenant, except that Landlord shall diligently attempt to restore the service or utility promptly. Tenant shall comply with all rules and regulations which Landlord may reasonably establish for the provision of services and utilities, and shall cooperate with all reasonable conservation practices established by Landlord. Landlord shall at all reasonable times have free access to all electrical and mechanical installations of Landlord.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term, Landlord shall operate all Common Areas within the Building and the Project. The term "Common Areas" shall mean all areas within the Building and other buildings in the Project which are not held for exclusive use by persons entitled to occupy space, and all other appurtenant areas and improvements provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including without limitation parking areas and structures, driveways, sidewalks, landscaped and planted areas, hallways and interior stairwells not located within the premises of any tenant, common entrances and lobbies, elevators, and restrooms not located within the premises of any tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord and with all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with all rules and regulations as are prescribed from time to time by Landlord. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain or permit any use or occupancy, except as otherwise provided in this Lease or in Landlord's rules and regulations. Tenant shall keep the Common Areas clear of any obstruction or unauthorized use related to Tenant's operations. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or the accrual of prescriptive rights, or for any other reasonable purpose.
SECTION 6.4. PARKING. Parking shall be provided in accordance with the provisions set forth in Exhibit C to this Lease.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right to make alterations or additions to the Building or the Project, or to the attendant fixtures, equipment and Common Areas. No change shall entitle Tenant to any abatement of rent or other claim against Landlord, provided that the change does not deprive Tenant of reasonable access to or use of the Premises.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Subject to Article XI, Tenant at its sole expense shall make all repairs necessary to keep the Premises and all improvements and fixtures therein in the condition as existed on the Commencement Date (or on any later date that the applicable improvements may have been installed), excepting ordinary wear and tear. Notwithstanding Section 7.2 below, Tenant's maintenance obligation shall include without limitation all appliances, non-building standard lighting/electrical systems, and plumbing fixtures and installations located within or servicing only the Premises. All repairs shall be at least equal in quality to the original work, shall be made only by a licensed, bonded contractor approved in writing in advance by Landlord and shall be made only at the time or times approved by Landlord. Any contractor utilized by Tenant shall be subject to Landlord's standard
requirements for contractors, as modified from time to time. Landlord may impose reasonable restrictions and requirements with respect to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall apply to all repairs. Alternatively, should Landlord or its management agent agree to make a repair on behalf of Tenant and at Tenant's request, Tenant shall promptly reimburse Landlord as additional rent for all costs incurred (including the standard coordination fee of Landlord's management agent) upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Article XI,
Landlord shall provide service, maintenance and repair with respect to the
heating, ventilating and air conditioning ("HVAC") equipment of the Building
(exclusive of any supplemental HVAC equipment servicing only the Premises) and
shall maintain in good repair the Common Areas, roof, foundations, footings, the
exterior surfaces of the exterior walls of the Building, and the structural,
electrical, mechanical and plumbing systems of the Building except as provided
in Section 7.1 above. Landlord shall have the right to employ or designate any
reputable person or firm, including any employee or agent of Landlord or any of
Landlord's affiliates or divisions, to perform any service, repair or
maintenance function. Landlord need not make any other improvements or repairs
except as specifically required under this Lease, and nothing contained in this
Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Except as provided in Sections 11.1 and 12.1 below, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business arising from the making of any
repairs, alterations or improvements to any portion of the Building, including
repairs to the Premises, nor shall any related activity by Landlord constitute
an actual or constructive eviction; provided, however, that in making repairs,
alterations or improvements, Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the Premises.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or improvements to the Premises without the prior written consent of Landlord. Landlord's consent shall not be unreasonably withheld as long as the proposed changes do not affect the structural, electrical or mechanical components or systems of the Building, are not visible from the exterior of the Premises, and utilize only building standard materials. Landlord may impose, as a condition to its consent, any requirements that Landlord in its discretion may deem reasonable or desirable, including but not limited to a requirement that all work be covered by a lien and completion bond satisfactory to Landlord and requirements as to the manner, time, and contractor for performance of the work. Without limiting the generality of the foregoing, Tenant shall use Landlord's designated mechanical and electrical contractors for all work affecting the mechanical or electrical systems of the Building. Should Tenant perform any work that would necessitate any ancillary Building modification or other expenditure by Landlord, then Tenant shall promptly fund the cost thereof to Landlord. Tenant shall obtain all required permits for the work and shall perform the work in compliance with all applicable laws, regulations and ordinances, and Landlord shall be entitled to a supervision fee in the amount of five percent (5%) of the cost of the work. Under no circumstances shall Tenant make any improvement which incorporates asbestos-containing construction materials into the Premises. Any request for Landlord's consent shall be made in writing and shall contain architectural plans describing the work in detail reasonably satisfactory to Landlord. Landlord may elect to cause its architect to review Tenant's architectural plans, and the reasonable cost of that review shall be reimbursed by Tenant. Should the work proposed by Tenant modify the internal configuration of the Premises, then Tenant shall, at its expense, furnish Landlord with as-built drawings and CADD disks compatible with Landlord's systems. Unless Landlord otherwise agrees in writing, all alterations, additions or improvements affixed to the Premises (excluding moveable trade fixtures and furniture) shall become the property of Landlord and shall be surrendered with the Premises at the end of the Term, except that Landlord may, by notice to Tenant given at the time of Landlord's consent to the alteration or improvement, require Tenant to remove by the Expiration Date, or sooner termination date of this Lease, all or any alterations, decorations, fixtures, additions, improvements and the like installed either by Tenant or by Landlord at Tenant's request and to repair any damage to the Premises arising from that removal. Landlord may require Tenant to remove an improvement provided as part of the initial build-out pursuant to Exhibit X, if any, if and only if the improvement is a non-building standard item and Tenant is notified of the requirement prior to the build-out. Except as otherwise provided in this Lease or in any Exhibit to this Lease, should Landlord make any alteration or improvement to the Premises at the request of Tenant, Landlord shall be entitled to prompt payment from Tenant of the cost thereof, inclusive of the standard coordination fee of Landlord's management agent.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause any such lien to be released by posting a bond in accordance with California Civil Code Section 3143 or any successor statute. In the event that Tenant shall not, within thirty (30) days following the imposition of any lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other available remedies, the right to cause the lien to be released by any means it deems proper, including payment of or defense against the claim giving rise to the lien. All expenses so incurred by Landlord, including Landlord's attorneys' fees, shall be reimbursed by Tenant promptly following Landlord's demand, together with interest from the date of payment by Landlord at the maximum rate permitted by law until paid. Tenant shall give Landlord no less than twenty (20) days' prior notice in writing before commencing construction of any kind on the Premises so that Landlord may post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to protect the interests of Landlord in the Premises, to make repairs and renovations as reasonably deemed
necessary by Landlord, and to submit the Premises to prospective or actual purchasers or encumbrance holders (or, during the final twelve months of the Term or when an uncured Tenant default exists, to prospective tenants), all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Landlord shall at all times have and retain a key which unlocks all of the doors in the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises.
SECTION 7.6. SPACE PLANNING AND SUBSTITUTION. Landlord shall have the right, upon providing not less than forty-five (45) days written notice, to move Tenant to other space of comparable size in the Building or in the Project. The new space shall be provided with improvements of comparable quality to those within the Premises. Landlord shall pay the reasonable out-of-pocket costs to relocate and reconnect Tenant's personal property and equipment within the new space; provided that Landlord may elect to cause such work to be done by its contractors. Landlord shall also reimburse Tenant for such other reasonable out-of-pocket costs that Tenant may incur in connection with the relocation, including without limitation necessary stationery revisions, provided that a reasonable estimate thereof is given to Landlord within twenty (20) days following Landlord's notice. In no event, however, shall Landlord be obligated to incur or fund total relocation costs, exclusive of tenant improvement expenditures, in an amount in excess of two (2) months of Basic Rent at the rate then payable hereunder. Within ten (10) days following request by Landlord, Tenant shall execute an amendment to this Lease prepared by Landlord to memorialize the relocation. Should Tenant fail timely to execute and deliver the amendment to Landlord for any reason (including without limitation the inability of the parties to reach an agreement on the proposed relocation), or should Tenant thereafter fail to comply with the terms thereof, then Landlord may at its option elect to terminate this Lease upon not less than ninety (90) days prior written notice to Tenant. In the event of such termination, Tenant's obligation to pay Basic Rent during the final two (2) months of the Term shall be waived. Upon the effective date of any termination of this Lease, Tenant shall vacate the Premises in accordance with Section 15.3.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay before delinquency, all taxes and assessments levied against all personal property of Tenant located in the Premises. When possible Tenant shall cause its personal property to be assessed and billed separately from the real property of which the Premises form a part. If any taxes on Tenant's personal property are levied against Landlord or Landlord's property and if Landlord pays the same, or if the assessed value of Landlord's property is increased by the inclusion of a value placed upon the personal property of Tenant and if Landlord pays the taxes based upon the increased assessment, Tenant shall pay to Landlord the taxes so levied against Landlord or the proportion of the taxes resulting from the increase in the assessment.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Tenant may not, either voluntarily or by operation of law, assign,
sublet, encumber, or otherwise transfer all or any part of Tenant's interest in
this Lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1.(c). For purposes
of this Lease, references to any subletting, sublease or variation thereof shall
be deemed to apply not only to a sublease effected directly by Tenant, but also
to a sub-subletting or an assignment of subtenancy by a subtenant at any level.
No assignment (whether voluntary, involuntary or by operation of law) and no
subletting shall be valid or effective without Landlord's prior written consent
and, at Landlord's election, shall constitute a material default of this Lease.
Landlord shall not be deemed to have given its consent to any assignment or
subletting by any other course of action, including its acceptance of any name
for listing in the Building directory. To the extent not prohibited by
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the
"Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of itself and
its creditors, administrators and assigns waives the applicability of Section
365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for
the estate of the bankrupt meets Landlord's standard for consent as set forth in
Section 9.1(c) of this Lease. If this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all monies or other
considerations to be delivered in connection with the assignment shall be
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any person or entity to which this Lease is
assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to
have assumed all of the obligations arising under this Lease on and after the
date of the assignment, and shall upon demand execute and deliver to Landlord an
instrument confirming that assumption.
(b) If Tenant is a corporation, limited liability company, unincorporated association or partnership, the transfer of any stock or interest in the entity which results in a change in voting control shall be deemed an assignment within the meaning and provisions of this Article. In addition, any change in the status of the entity, such as, but not limited to, the withdrawal of a general partner, shall be deemed an assignment within the meaning of this Article.
(c) If Tenant or any subtenant hereunder desires to transfer an interest in this Lease, Tenant shall first notify Landlord and request in writing Landlord's consent to the transfer. Tenant shall also submit in writing to Landlord: (i) the name and address of the proposed transferee; (ii) the nature of any proposed subtenant's or assignee's business to be carried on in the Premises; (iii) the terms and provisions of any proposed sublease or assignment; (iv) evidence that the proposed assignee or subtenant will comply with the requirements of Exhibit D to this Lease; and (v) any other information requested by Landlord and reasonably related to the transfer. Except as provided in Subsection (d) of this Section, Landlord shall not unreasonably withhold its consent, provided: (1) the use of the Premises will be consistent with the provisions of this Lease and with Landlord's commitment to other tenants of the Building and Project; (2) any proposed subtenant or assignee demonstrates that it is financially responsible by submission to Landlord of all reasonable information as Landlord may request concerning the proposed subtenant or assignee, including, but not limited to, a balance sheet of the proposed subtenant or assignee as of a date within ninety (90) days of the request for Landlord's consent and statements of income or profit and loss of the proposed subtenant or assignee for the two-year period preceding the request for Landlord's consent; (3) any proposed subtenant or assignee demonstrates to Landlord's reasonable satisfaction a record of successful experience in business; (4) the proposed assignee or subtenant is neither an existing tenant of the Building or Project nor a prospective tenant with whom Landlord is then actively negotiating; and (5) the proposed transfer will not impose additional burdens or adverse tax effects on Landlord. If Landlord consents to the proposed transfer, then the transfer may be effected within ninety (90) days after the date of the consent upon the terms described in the information furnished to Landlord; provided that any material change in the terms shall be subject to Landlord's consent as set forth in this Section. Landlord shall approve or disapprove any requested transfer within thirty (30) days following receipt of Tenant's written notice and the information set forth above. Tenant shall pay to Landlord a transfer fee of Five Hundred Dollars ($500.00) if and when any transfer request submitted by Tenant is approved.
(d) Notwithstanding the provisions of Subsection (c) above, in lieu of consenting to a proposed assignment or subletting, Landlord may elect to (i) sublease the Premises (or the portion proposed to be subleased), or take an assignment of Tenant's interest in this Lease, upon the same terms as offered to the proposed subtenant or assignee (excluding terms relating to the purchase of personal property, the use of Tenant's name or the continuation of Tenant's business), or (ii) terminate this Lease as to the portion of the Premises proposed to be subleased or assigned with a proportionate abatement in the rent payable under this Lease, effective on the date that the proposed sublease or assignment would have become effective. Landlord may thereafter, at its option, assign or re-let any space so recaptured to any third party, including without limitation the proposed transferee identified by Tenant.
(e) Should any assignment or subletting occur, Tenant shall promptly pay or cause to be paid to Landlord, as additional rent, seventy-five percent (75%) of any amounts paid by the assignee or subtenant, however described and whether funded during or after the Lease Term, to the extent such amounts are in excess of the sum of (i) the Basic Rent payable by Tenant hereunder (or, in the event of a subletting of only a portion of the Premises, the Basic Rent allocable to such portion as reasonably determined by Landlord) and (ii) the direct out-of-pocket costs, as evidence by third party invoices provided to Landlord, incurred by Tenant to effect the transfer, which costs shall be amortized over the remaining Term of this Lease or, if shorter, over the term of the sublease. Upon request by Landlord, Tenant and all other parties to the transfer shall memorialize in writing the amounts to be paid pursuant to this paragraph.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant, or any successor-in-interest to Tenant hereunder, of its obligation to pay rent and to perform all its other obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3, for any act or omission by an assignee or subtenant. Each assignee, other than Landlord, shall be deemed to assume all obligations of Tenant under this Lease and shall be liable jointly and severally with Tenant for the payment of all rent, and for the due performance of all of Tenant's obligations, under this Lease. Such joint and several liability shall not be discharged or impaired by any subsequent modification or extension of this Lease. No transfer shall be binding on Landlord unless any document memorializing the transfer is delivered to Landlord and both the assignee/subtenant and Tenant deliver to Landlord an executed consent to transfer instrument prepared by Landlord and consistent with the requirements of this Article. The acceptance by Landlord of any payment due under this Lease from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any transfer. Consent by Landlord to one or more transfers shall not operate as a waiver or estoppel to the future enforcement by Landlord of its rights under this Lease. In addition to the foregoing, no change in the status of Tenant or any party jointly and severally liable with Tenant as aforesaid (e.g., by conversion to a limited liability company or partnership) shall serve to abrogate the liability of any person or entity for the obligations of Tenant, including any obligations that may be incurred by Tenant after the status change by exercise of a pre- existing right in this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Premises and shall be included in each sublease:
(a) Tenant hereby irrevocably assigns to Landlord all of Tenant's interest in all rentals and income arising from any sublease of the Premises, and Landlord may collect such rent and income and apply same toward Tenant's obligations under this Lease; provided, however, that until a default occurs in the performance of Tenant's obligations under this Lease, Tenant shall have the right to receive and collect the sublease rentals. Landlord shall not, by reason of this assignment or the collection of sublease rentals, be deemed liable to the subtenant for the performance of any of Tenant's obligations under the sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon receipt of a written notice from Landlord stating that an uncured default exists in the performance of Tenant's
obligations under this Lease, to pay to Landlord all sums then and thereafter due under the sublease. Tenant agrees that the subtenant may rely on that notice without any duty of further inquiry and notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have no right or claim against the subtenant or Landlord for any rentals so paid to Landlord. In the event Landlord collects amounts from subtenants that exceed the total amount then due from Tenant hereunder, Landlord shall promptly remit the excess to Tenant.
(b) In the event of the termination of this Lease, Landlord may, at its sole option, take over Tenant's entire interest in any sublease and, upon notice from Landlord, the subtenant shall attorn to Landlord. In no event, however, shall Landlord be liable for any previous act or omission by Tenant under the sublease or for the return of any advance rental payments or deposits under the sublease that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification executed without Landlord's consent or for any advance rental payment by the subtenant in excess of one month's rent. The general provisions of this Lease, including without limitation those pertaining to insurance and indemnification, shall be deemed incorporated by reference into the sublease despite the termination of this Lease.
(c) Tenant agrees that Landlord may, at its sole option, authorize a subtenant of the Premises to cure a default by Tenant under this Lease. Should Landlord accept such cure, the subtenant shall have a right of reimbursement and offset from and against Tenant under the applicable sublease.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit D. Evidence of that insurance must be delivered to Landlord prior to the Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide any or all of the following types of insurance, with or without deductible and in amounts and coverages as may be determined by Landlord in its discretion: "all risk" property insurance, subject to standard exclusions, covering the Building or Project, and such other risks as Landlord or its mortgagees may from time to time deem appropriate, and commercial general liability coverage. Landlord shall not be required to carry insurance of any kind on improvements, trade fixtures, furnishings, equipment, interior plate glass, signs and all items of personal property in the Premises, and shall not be obligated to repair or replace that property should damage occur. All proceeds of insurance maintained by Landlord upon the Building and Project shall be the property of Landlord, whether or not Landlord is obligated to or elects to make any repairs.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by law, Tenant shall defend, indemnify and hold harmless Landlord, its agents, lenders, and any and all affiliates of Landlord, from and against any and all claims, liabilities, costs or expenses arising either before or after the Commencement Date from Tenant's use or occupancy of the Premises, the Building or the Common Areas, or from the conduct of its business, or from any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, subtenants, vendors, contractors, invitees or licensees in or about the Premises, the Building or the Common Areas, or from any default in the performance of any obligation on Tenant's part to be performed under this Lease, or from any act or negligence of Tenant or its agents, employees, subtenants, vendors, contractors, invitees or licensees. Landlord may, at its option, require Tenant to assume Landlord's defense in any action covered by this Section through counsel reasonably satisfactory to Landlord.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord, its employees and agents for loss of or damage to any property, or any injury to any person, or loss or interruption of business or income, resulting from any condition including, but not limited to, fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Premises or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building, whether the damage or injury results from conditions arising in the Premises or in other portions of the Building. It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Should Tenant elect to receive any service from a concessionaire, licensee or third party tenant of Landlord, Tenant shall not seek recourse against Landlord for any breach or liability of that service provider. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises, the Building or the Project and of defects in any improvements or equipment.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building of which the Premises are a part is damaged as the result of an event of casualty, then subject to the provisions below, Landlord shall repair that damage as soon as reasonably possible unless: (i) Landlord reasonably determines that the cost of repair would exceed ten percent (10%) of the full replacement cost of the Building ("Replacement Cost") and the damage is not
covered by Landlord's fire and extended coverage insurance (or by a normal extended coverage policy should Landlord fail to carry that insurance); or (ii) Landlord reasonably determines that the cost of repair would exceed twenty-five percent (25%) of the Replacement Cost; or (iii) Landlord reasonably determines that the cost of repair would exceed ten percent (10%) of the Replacement Cost and the damage occurs during the final twelve (12) months of the Term. Should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in the "Casualty Notice" (as defined below), and this Lease shall terminate as of the date of delivery of that notice.
(b) As soon as reasonably practicable following the casualty event but not later than sixty (60) days thereafter, Landlord shall notify Tenant in writing ("Casualty Notice") of Landlord's election, if applicable, to terminate this Lease. If this Lease is not so terminated, the Casualty Notice shall set forth the anticipated period for repairing the casualty damage. If the anticipated repair period exceeds two hundred seventy (270) days and if the damage is so extensive as to reasonably prevent Tenant's substantial use and enjoyment of the Premises, then Tenant may elect to terminate this Lease by written notice to Landlord within ten (10) days following delivery of the Casualty Notice.
(c) To the extent and for the period that Landlord is entitled to reimbursement from the proceeds of rental interruption insurance carried by Landlord as part of Operating Expenses, the rental to be paid under this Lease shall be abated in the same proportion that the floor area of the Premises that is rendered unusable by the damage from time to time bears to the total floor area of the Premises.
(d) Notwithstanding the provisions of subsections (a), (b) and (c) of
this Section, the cost of any repairs shall be borne by Tenant, and Tenant
shall not be entitled to rental abatement or termination rights, if the damage
is due to the fault or neglect of Tenant or its employees, subtenants,
contractors, invitees or representatives. In addition, the provisions of this
Section shall not be deemed to require Landlord to repair any improvements,
fixtures and other items that Tenant is obligated to repair or insure pursuant
to Article VII, Exhibit D, or any other provision of this Lease; provided,
however, that if and to the extent Landlord receives insurance proceeds for
damage to interior leasehold improvements, as reasonably determined by Landlord
after first applying any proceeds to damage in areas other than tenant suites,
then Landlord shall, subject to the rights of any mortgagee or ground lessor,
make those excess proceeds available for repair of the affected leasehold
improvements.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the Premises is taken by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. In the event title to a portion of the Building or Project, other than the Premises, is taken or sold in lieu of taking, and if Landlord elects to restore the Building in such a way as to alter the Premises materially, either party may terminate this Lease, by written notice to the other party, effective on the date of vesting of title. In the event neither party has elected to terminate this Lease as provided above, then Landlord shall promptly, after receipt of a sufficient condemnation award, proceed to restore the Premises to substantially their condition prior to the taking, and a proportionate allowance shall be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of the taking and restoration. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for, the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to abatement of rent, and any award specifically attributable to a temporary taking of the Premises shall belong entirely to Tenant. A temporary taking shall be deemed to be a taking of the use or occupancy of the Premises for a period of not to exceed ninety (90) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking of the parking area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord may substitute reasonably equivalent parking in a location reasonably close to the Building; provided that if Landlord fails to make that substitution within ninety (90) days following the taking and if the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by written notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE
SECTION 13.1. SUBORDINATION. At the option of Landlord or any of its mortgagees/deed of trust beneficiaries, this Lease shall be either superior or subordinate to all ground or underlying leases, mortgages and deeds of trust, if any, which may hereafter affect the Building, and to all renewals,
modifications, consolidations, replacements and extensions thereof; provided, that so long as Tenant is not in default under this Lease, this Lease shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in the event of termination of any such ground or underlying lease, or the foreclosure of any such mortgage or deed of trust, to which this Lease has been subordinated pursuant to this Section. In the event of a termination or foreclosure, Tenant shall become a tenant of and attorn to the successor-in-interest to Landlord upon the same terms and conditions as are contained in this Lease, and shall promptly execute any instrument reasonably required by Landlord's successor for that purpose. Tenant shall also, within ten (10) days following written request of Landlord (or the beneficiary under any deed of trust encumbering the Building), execute and deliver all instruments as may be required from time to time by Landlord or such beneficiary (including without limitation any subordination, nondisturbance and attornment agreement in the form customarily required by such beneficiary) to subordinate this Lease and the rights of Tenant under this Lease to any ground or underlying lease or to the lien of any mortgage or deed of trust; provided, however, that any such beneficiary may, by written notice to Tenant given at any time, subordinate the lien of its deed of trust to this Lease. Tenant shall agree that any purchaser at a foreclosure sale or lender taking title under a deed in lieu of foreclosure shall not be responsible for any act or omission of a prior landlord, shall not be subject to any offsets or defenses Tenant may have against a prior landlord, and shall not be liable for the return of any security deposit not actually recovered by such purchaser or bound by any rent paid in advance of the calendar month in which the transfer of title occurred; provided that the foregoing shall not release the applicable prior landlord from any liability for those obligations. Tenant acknowledges that Landlord's mortgagees and successors-in-interest and all beneficiaries under deeds of trust encumbering the Building are intended third party beneficiaries of this Section.
SECTION 13.2. ESTOPPEL CERTIFICATE. Tenant shall, within ten (10) days following written notice from Landlord, execute, acknowledge and deliver to Landlord, in any form that Landlord may reasonably require, a statement in writing in favor of Landlord and/or any prospective purchaser or encumbrancer of the Building (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect) and the dates to which the rental, additional rent and other charges have been paid in advance, if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured defaults on the part of Landlord, or specifying each default if any are claimed, and (iii) setting forth all further information that Landlord may reasonably require. Tenant's statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Building or Project. In addition to Landlord's other rights and remedies, Tenant's failure to deliver any estoppel statement within the provided time shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance, and (iii) not more than one month's rental has been paid in advance.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default set forth in this Lease, the occurrence of any one or more of the following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent required to be made by Tenant, as and when due, where the failure continues for a period of three (3) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. For purposes of these default and remedies provisions, the term "additional rent" shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease.
(b) The assignment, sublease, encumbrance or other transfer of the Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord unless otherwise authorized herein.
(c) The discovery by Landlord that any financial statement provided by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially false.
(d) The failure or inability by Tenant to observe or perform any of the covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in any other subsection of this Section, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature of the failure is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences the cure within thirty (30) days, and thereafter diligently pursues the cure to completion.
(e) (i) The making by Tenant of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, if possession is not restored to Tenant within thirty (30) days; (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where the
seizure is not discharged within thirty (30) days; or (v) Tenant's convening of a meeting of its creditors for the purpose of effecting a moratorium upon or composition of its debts. Landlord shall not be deemed to have knowledge of any event described in this subsection unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant's insolvency. In the event that any provision of this subsection is contrary to applicable law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant:
(1) The worth at the time of award of the unpaid rent and additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which the unpaid rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by which the unpaid rent and additional rent for the balance of the Term after the time of award exceeds the amount of such loss that Tenant proves could be reasonably avoided;
(4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant's default, including, but not limited to, the cost of recovering possession of the Premises, commissions and other expenses of reletting, including necessary repair, renovation, improvement and alteration of the Premises for a new tenant, reasonable attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. The term "rent" as used in this Lease shall be deemed to mean the Basic Rent and all other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the twenty-four (24) month period immediately prior to default, except that if it becomes necessary to compute such rental before the twenty-four (24) month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As used in subparagraphs (1) and (2) above, the "worth at the time of award" shall be computed by allowing interest at the rate of ten percent (10%) per annum. As used in subparagraph (3) above, the "worth at the time of award" shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to possession of the Premises, in which event Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to protect the Landlord's interests under this Lease, shall not constitute a termination of the Tenant's right to possession of the Premises. In the event that Landlord elects to avail itself of the remedy provided by this subsection (ii), Landlord shall not unreasonably withhold its consent to an assignment or subletting of the Premises subject to the reasonable standards for Landlord's consent as are contained in this Lease.
(b) The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time. No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach or default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord's knowledge of the preceding breach or default at the time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy available to Landlord by virtue of the breach or default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant's estate shall not waive or cure a default under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord's right to recover the balance of the rent or pursue any other remedy available to it. Tenant hereby waives any right of redemption or relief from forfeiture under California Code of Civil Procedure Section 1174 or 1179, or under any other present or future law, in the event this Lease is terminated by reason of any default by Tenant. No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys to the Premises
prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not paid to Landlord within five (5) days of the date when due shall bear interest at the maximum rate permitted by law from the date due until fully paid. The payment of interest shall not cure any default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any rent due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge in the amount of two hundred and fifty dollars ($250.00) for each delinquent payment. Acceptance of a late charge by Landlord shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies.
(b) Following each second consecutive installment of rent that is not
paid within five (5) days following notice of nonpayment from Landlord, Landlord
shall have the option (i) to require that beginning with the first payment of
rent next due, rent shall no longer be paid in monthly installments but shall be
payable quarterly three (3) months in advance and/or (ii) to require that Tenant
increase the amount, if any, of the Security Deposit by one hundred percent
(100%). Should Tenant deliver to Landlord, at any time during the Term, two (2)
or more insufficient checks, the Landlord may require that all monies then and
thereafter due from Tenant be paid to Landlord by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed at Tenant's sole cost and expense and without any abatement of rent or right of set-off. If Tenant fails to pay any sum of money, or fails to perform any other act on its part to be performed under this Lease, and the failure continues beyond any applicable grace period set forth in Section 14.1, then in addition to any other available remedies, Landlord may, at its election make the payment or perform the other act on Tenant's part. Landlord's election to make the payment or perform the act on Tenant's part shall not give rise to any responsibility of Landlord to continue making the same or similar payments or performing the same or similar acts. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all sums paid by Landlord and all necessary incidental costs, together with interest at the maximum rate permitted by law from the date of the payment by Landlord.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform the obligation within thirty (30) days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the thirty (30) day period and thereafter diligently pursues the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys' fees, and all other costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL/RIGHT TO ARBITRATE.
(a) LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHT TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
(b) SHOULD A DISPUTE ARISE BETWEEN THE PARTIES REGARDING ANY MATTER DESCRIBED ABOVE, THEN EXCEPT WITH RESPECT TO ACTIONS FOR UNLAWFUL OR FORCIBLE DETAINER EITHER PARTY MAY CAUSE THE DISPUTE TO BE SUBMITTED TO JAMS/ENDISPUTE OR ITS SUCCESSOR ("JAMS") IN THE COUNTY IN WHICH THE BUILDING IS SITUATED FOR BINDING ARBITRATION BEFORE A SINGLE ARBITRATOR. HOWEVER, EACH PARTY RESERVES THE RIGHT TO SEEK A PROVISIONAL REMEDY BY JUDICIAL ACTION. NO ARBITRATION ELECTION BY EITHER PARTY PURSUANT TO THIS SUBSECTION SHALL BE EFFECTIVE IF MADE LATER THAN THIRTY (30) DAYS FOLLOWING SERVICE OF A JUDICIAL SUMMONS AND COMPLAINT BY OR UPON SUCH PARTY CONCERNING THE DISPUTE. THE ARBITRATION SHALL BE CONDUCTED IN ACCORDANCE WITH THE RULES OF PRACTICE AND PROCEDURE OF JAMS AND OTHERWISE PURSUANT TO THE CALIFORNIA ARBITRATION ACT (CODE OF CIVIL PROCEDURE SECTIONS 1280 ET SEQ.). NOTWITHSTANDING THE FOREGOING, THE ARBITRATOR IS SPECIFICALLY DIRECTED TO LIMIT DISCOVERY TO THAT WHICH IS
ESSENTIAL TO THE EFFECTIVE PROSECUTION OR DEFENSE OF THE ACTION, AND IN NO EVENT SHALL SUCH DISCOVERY BY EITHER PARTY INCLUDE MORE THAN ONE NON-EXPERT WITNESS DEPOSITION UNLESS BOTH PARTIES OTHERWISE AGREE. THE ARBITRATOR SHALL, TO THE EXTENT APPLICABLE, FOLLOW THE SUBSTANTIVE LAW OF CALIFORNIA AND SHALL RENDER A REASONED WRITTEN DECISION WITHIN TWENTY DAYS FOLLOWING THE HEARING. THE ARBITRATOR SHALL APPORTION THE COSTS OF THE ARBITRATION, TOGETHER WITH THE ATTORNEYS' FEES OF THE PARTIES, IN THE MANNER DEEMED EQUITABLE BY THE ARBITRATOR, IT BEING THE INTENTION OF THE PARTIES THAT THE PREVAILING PARTY ORDINARILY BE ENTITLED TO RECOVER ITS REASONABLE COSTS AND FEES. JUDGMENT UPON ANY AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED BY ANY COURT HAVING JURISDICTION; PROVIDED THAT SUCH AWARD SHALL BE VACATED IN ACCORDANCE WITH THE CALIFORNIA ARBITRATION ACT SHOULD THE COURT DETERMINE, UPON TIMELY PETITION, THAT THE ARBITRATOR EXCEEDED HIS/HER POWERS BY RENDERING A DECISION INCONSISTENT WITH CALIFORNIA LAW OR THAT OTHER GOOD AND SUFFICIENT CAUSE FOR VACATION EXISTS.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further notice upon the expiration of the Term, and any holding over by Tenant after the expiration shall not constitute a renewal or extension of this Lease, or give Tenant any rights under this Lease, except when in writing signed by both parties. If Tenant holds over for any period after the expiration (or earlier termination) of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, commencing on the first (1st) day following the termination of this Lease. Any hold-over by Tenant shall be subject to all of the terms of this Lease, except that the monthly rental shall be two hundred percent (200%) of the total monthly rental for the month immediately preceding the date of termination, subject to Landlord's right to modify same upon thirty (30) days notice to Tenant. If Tenant fails to surrender the Premises upon the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claims made by any succeeding tenant relating to such failure to surrender. Acceptance by Landlord of rent after the termination shall not constitute a consent to a holdover or result in a renewal of this Lease. The foregoing provisions of this Section are in addition to and do not affect Landlord's right of re-entry or any other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of this Lease by Tenant, or a mutual termination of this Lease, shall terminate any or all existing subleases unless Landlord, at its option, elects in writing to treat the surrender or termination as an assignment to it of any or all subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear and repairs which are Landlord's obligation excepted, and shall remove or fund to Landlord the cost of removing all wallpapering and voice and/or data transmission cabling installed by or for Tenant, together with all personal property and debris, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal, which repair shall include the patching and filling of holes and repair of structural damage, provided that Landlord may instead elect to repair any structural damage at Tenant's expense. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or offset, in lawful money of the United States to Landlord at its address set forth in Item 13 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of rent pursuant to Section 4.1, all payments shall be due and payable within five (5) days after demand. All payments requiring proration shall be prorated on the basis of the number of days in the pertinent calendar month or year, as applicable. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered to the other party, at the address set forth in Item 13 of the Basic Lease Provisions, by personal service or electronic facsimile transmission, or by any courier or "overnight" express mailing service, or may be deposited in the United States mail, postage prepaid. Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. If any notice or other document is sent by mail, it shall be deemed served or delivered three (3) business days after mailing or, if sooner, upon actual receipt. The refusal to accept delivery of a notice, or the inability to deliver the notice (whether due to a change of address for which notice was not duly given or other good reason), shall be deemed delivery and receipt of the notice as of the date of attempted delivery. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to comply with the Rules and Regulations attached as Exhibit E, and any reasonable and nondiscriminatory amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises, Building, Project and/or Common Areas. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease or any other act or conduct by any other tenant, and the same shall not constitute a constructive eviction hereunder. One or more waivers by Landlord of any breach of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant's failure to keep and observe the Rules and Regulations shall constitute a default under this Lease. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease Provisions, and agree that Landlord shall be responsible for the payment of brokerage commissions to those broker(s) unless otherwise provided in this Lease. Each party warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and agrees to indemnify and hold the other party harmless from any cost, expense or liability (including reasonable attorneys' fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by the indemnifying party in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises, the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the date of the transfer, provided that Tenant is duly notified of the transfer. Any funds held by the transferor in which Tenant has an interest shall be turned over, subject to that interest, to the transferee. No holder of a mortgage and/or deed of trust to which this Lease is or may be subordinate shall be responsible in connection with the Security Deposit unless the mortgagee or holder of the deed of trust actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease requires, the words "Landlord" and "Tenant" shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.
SECTION 20.6. CONTROLLING LAW/VENUE. This Lease shall be governed by and interpreted in accordance with the laws of the State of California. Should any litigation be commenced between the parties in connection with this Lease, such action shall be prosecuted in the applicable State Court of California in the county in which the Building is located.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the
remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party's consent to any subsequent act. No breach of this Lease shall be deemed to have been waived unless the waiver is in a writing signed by the waiving party.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of rent.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises, the Building, and the Project, and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall have the right of quiet enjoyment and use of the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation, limited liability company or partnership, each individual executing this Lease on behalf of the entity represents and warrants that he is duly authorized to execute and deliver this Lease and that this Lease is binding upon the corporation, limited liability company or partnership in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of its organizational documents or an appropriate certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes.
SECTION 21.5. AMENDMENTS. No amendment or mutual termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any other tenant or apparent prospective tenant of the Building or Project, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease.
SECTION 22.2. REPRESENTATIONS BY TENANT. The application, financial statements and tax returns, if any, submitted and certified to by Tenant as an accurate representation of its financial condition have been prepared, certified and submitted to Landlord as an inducement and consideration to Landlord to enter into this Lease. The application and statements are represented and warranted by Tenant to be correct and to accurately and fully reflect Tenant's true financial condition as of the date of execution of this Lease by Tenant. Tenant shall during the Term promptly furnish Landlord with current annual financial statements accurately reflecting Tenant's financial condition upon written request from Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining financing for the Building, the lender shall request reasonable modifications in this Lease as a condition to the financing, Tenant will not unreasonably withhold or delay its consent, provided that the modifications do not materially increase the obligations of Tenant or materially and adversely affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of Landlord which would otherwise entitle Tenant to be relieved of its obligations hereunder or to terminate this Lease shall result in such a release or termination unless (a) Tenant has given notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Building whose address has been furnished to Tenant and (b) such beneficiary is afforded a reasonable opportunity to cure the default by Landlord, including, if necessary to effect the cure, time to obtain possession of the Building by power of sale or judicial foreclosure provided that such foreclosure remedy is diligently pursued.
SECTION 22.5. DISCLOSURE STATEMENT. Tenant acknowledges that it has read, understands and, if applicable, shall comply with the provisions of Exhibit F to this Lease, if that Exhibit is attached.
LANDLORD: TENANT:
THE IRVINE COMPANY PACIFIC MERCANTILE BANK
By /s/ Craig D. Brashier By /s/ John J. McCauley
------------------------------------ ------------------------------------
Craig D. Brashier, Vice President, Printed Name J. McCauley
Operations, Irvine Office Company, --------------------------
a division of The Irvine Company Title EVP
---------------------------------
By /s/ Vincent P. Hayes By /s/ Daniel L. Erickson
------------------------------------ ------------------------------------
Vicent P. Hayes Printed Name Daniel L. Erickson
Assistant Secretary --------------------------
Title EVP/CFO
---------------------------------
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EXHIBIT 10.6
SUBLEASE
(AU #90188)
By and Between
WELLS FARGO BANK, N.A.
and
PACIFIC MERCANTILE BANK
Subleased Premises Known As
501 N. El Camino Real
San Clemente, California
Page
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1. Basic Sublease Provisions; Definitions............................. 1
1.1 Building.................................................... 1
1.2 Subleased Premises.......................................... 1
1.3 Area of Subleased Premises.................................. 1
1.4 Subtenant's Percentage Share................................ 1
1.5 Sublease Term............................................... 2
1.6 Rent Commencement Date...................................... 2
1.7 Basic Monthly Rent.......................................... 2
1.8 Rental Adjustments.......................................... 2
1.9 Permitted Use............................................... 2
1.10 Late Charges................................................ 2
1.11 Acceptance of Subleased Premises............................ 2
1.12 Address for Payment of Rent and Notices..................... 4
1.13 Security Deposit............................................ 4
1.14 Parking..................................................... 5
1.15 Brokers..................................................... 5
1.16 Tax ID Form................................................. 5
1.17 Option to Extend............................................ 5
1.18 Subtenant Improvement Allowance............................. 5
2. Demise; Conditions................................................. 5
2.1 Demise...................................................... 5
2.2 Conditions Precedent........................................ 5
2.3 Failure of Conditions....................................... 6
2.4 Compliance with Laws........................................ 6
3. Lease.............................................................. 7
3.1 Incorporation By Reference; Assumption...................... 7
3.2 Assumption of Lease Obligations............................. 7
3.3 No Assumption by Sublandlord................................ 7
3.4 Performance Directly to Landlord............................ 7
3.5 Landlord Default; Consents.................................. 7
3.6 Termination of Lease........................................ 7
4. Covenant Of Quiet Enjoyment........................................ 8
5. Hazardous Substances............................................... 8
5.1 Definitions................................................. 8
5.2 Compliance with Environmental Laws.......................... 8
5.3 Response to Environmental Claims............................ 9
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Page
----
6. Artwork............................................................. 9
7. Indemnity........................................................... 9
8. Attorneys' Fees..................................................... 9
9. No Encumbrance...................................................... 9
10. Assignment and Subletting........................................... 10
10.1 Restriction on Assignment and Subletting..................... 10
10.2 Determining Factors.......................................... 10
10.3 Consents..................................................... 10
10.4 Profit Sharing............................................... 11
11. Alterations; Signs.................................................. 11
11.1 Alterations and Improvements By Subtenant..................... 11
11.2 Signs......................................................... 12
11.3 Disposition on Termination.................................... 12
12. Removal of Personal Property........................................ 12
13. Holding Over........................................................ 12
14. Liens............................................................... 13
15. Maintenance and Repairs............................................. 13
16. Insurance........................................................... 13
16.1 Coverage..................................................... 13
16.2 Policies..................................................... 14
16.3 Subrogation.................................................. 14
16.4 Primary Coverage............................................. 14
17. Events of Default................................................... 14
18. Remedies of Sublandlord on Default.................................. 15
18.1 Termination of Sublease...................................... 15
18.2 Continue Sublease in Effect.................................. 16
18.3 Other Remedies............................................... 16
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Page
----
19. Estoppel Certificates.............................................. 16
19.1 Obligation to Provide....................................... 16
19.2 Failure to Provide.......................................... 16
19.3 Financial Information....................................... 17
19.4 Sublandlord Estoppel........................................ 17
20. Real Estate Brokers............................................... 17
21. Miscellaneous...................................................... 17
21.1 Counterparts................................................ 17
21.2 Construction................................................ 17
21.3 Notices..................................................... 17
21.4 Governing Law............................................... 17
21.5 Exhibits.................................................... 18
21.6 Waiver of Trial by Jury..................................... 18
21.7 Prohibition on Solicitation of Sublandlord's Customers...... 18
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CONSENT OF LANDLORD
EXHIBIT A LEASE
EXHIBIT B DRAWING OF SUBLEASED PREMISES
EXHIBIT C TAX ID FORM
EXHIBIT D WORK LETTER AGREEMENT
SUBLEASE
(AU #90188)
THIS SUBLEASE, dated as of August 3, 1999 for reference purposes only, is entered into by and between WELLS FARGO BANK, N.A., a national banking association ("Sublandlord") and Pacific Mercantile Bank, a California banking corporation ("Subtenant").
A. Earl E. Miller and Karen L. Miller, Trustees of the Miller Family Trust ("Landlord") and First Interstate Bank of California, a California corporation, predecessor in interest to Sublandlord, as tenant, entered into a written lease dated October 10, 1995, a copy of which is attached hereto as Exhibit A ("Lease") covering premises described in Section 1.3 of the Lease.
B. Subtenant desires to sublet the entire premises described in the Lease from Sublandlord on the terms and conditions contained in this Sublease.
NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, Sublandlord and Subtenant agree as follows:
1.1 Building: 501 N. El Camino Real
-------- San Clemente, California 92672
1.2 Subleased Premises: The Subleased Premises is the entire premises
------------------
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leased to Sublandlord under the Lease as depicted on Exhibit B hereto.
1.8 Rental Adjustments:
------------------
Adjustment Date Adjusted Rent
--------------- -------------
Thirty-first (31st) month of Sublease Term $6,310.47
Sixty-first (61st) month of Sublease Term $6,783.76
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to all matters now or hereafter of record. Subtenant acknowledges that except as may be set forth in Section 4 herein, neither Sublandlord nor Sublandlord's agent has made any representation or warranty as to:
(i) the present or future suitability of the Subleased Premises for the conduct of Subtenant's business;
(ii) the physical condition of the Subleased Premises;
(iii) the expenses of operation of the Subleased Premises;
(iv) the safety of the Subleased Premises, whether for the use of Subtenant or any other person, including Subtenant's employees, agents, invitees or customers;
(v) the compliance of the Subleased Premises with any applicable laws, regulations or ordinances; or
(vi) any other matter or thing affecting or related to the Subleased Premises.
Sublandlord: Subtenant:
Wells Fargo Bank, N.A. Pacific Mercantile Bank
Corporate Properties Group 501 N. El Camino Real
333 S. Grand Avenue San Clemente, CA 92672
Suite 700, MAC #2064-072 Attn: Branch Manager
Los Angeles, CA 90071 Tel:__________________
Attn: Asset Manager
(AU #90188)
with a copy to: with a copy to:
Wells Fargo Bank, N.A. Pacific Mercantile Bank
Corporate Properties Group 450 Newport Center Drive
333 S. Grand Avenue Suite 100
Suite 700, MAC #2064-079 Newport Beach, CA 92660
Los Angeles, CA 90071 Attn: Chief Financial Officer
Attn: Real Estate Manager (949) 644-8040
(AU #90188)
with a copy to:
Ben A. Frydman, Esq.
Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive
Suite 1600
Newport Beach, CA 92660-6441
(949) 640-7035
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respect to the Deposit. Any deposit under the Lease which may be returned by the Landlord will be the property of Sublandlord.
Sublandlord under the Lease, the defaulting party will be liable to the non- defaulting party for all damage suffered by the non-defaulting party as a result of the termination.
(a) "Environmental Laws" means any and all laws, statutes, ordinances or regulations pertaining to health, industrial hygiene or the environment including, without limitation, CERCLA (Comprehensive Environmental Response Compensation and Liability Act of 1980) and RCRA (Resources Conservation and Recovery Act of 1976).
(b) "Hazardous Substances" means asbestos and any other substance, material or waste which is or becomes designated, classified or regulated as being "toxic" or "hazardous" or a "pollutant" or which is or becomes similarly designated, classified or regulated under any federal, state or local law, regulation or ordinance.
Hazardous Substances placed in, on, under or about the Subleased Premises by Subtenant or at Subtenant's direction to be removed and transported for use, storage or disposal in accordance and compliance with all applicable Environmental Laws.
(a) whether the proposed sublessee or assignee has a net worth sufficient to discharge its obligations under this Sublease;
(b) whether the proposed use of the Subleased Premises by the proposed sublessee or assignee is consistent with the Permitted Use set forth in Paragraph 1.9 of this Sublease;
(c) whether the experience and business reputation of the proposed sublessee or assignee is adequate to operate its business;
(d) whether Sublandlord's consent will result in a breach of the Lease or any other lease or agreement to which Sublandlord is a party affecting the Building or Subleased Premises; and
(e) whether the Landlord has consented in writing to the proposed assignment or subletting (in accordance with the standards set forth in the Lease).
Further, it shall not be deemed unreasonable for Sublandlord to withhold its consent to the assignment or subletting to a financial institution providing retail banking services.
(a) Within thirty (30) days following the date received by Subtenant from any assignee or sublessee, Subtenant will pay to Sublandlord as additional rent a percentage of any appreciated rent as follows: (i) if the rent payable by Subtenant to Sublandlord hereunder is less than the rent paid by Sublandlord to Landlord under the Lease, one hundred percent (100%) of the amount by which the rent payable by the assignee or sublessee to Subtenant exceeds the rent payable by Subtenant to Sublandlord under this Sublease until the rent paid by Subtenant to Sublandlord equals the amount paid by Sublandlord to Landlord under the Lease; and (ii) thereafter or if the rent payable by Subtenant hereunder is the same or greater than the rent paid by Sublandlord to Landlord under the Lease, fifty percent (50%) of the amount by which the rent payable by the assignee or sublessee to Subtenant throughout the Sublease Term exceeds the rent paid by Subtenant to Sublandlord under this Sublease. If the premises subleased is less than the entire Subleased Premises, the rent payable by Subtenant hereunder shall be prorated based upon the square footage of the premises subleased to the square footage of the entire Subleased Premises. If Subtenant receives a lump sum payment in connection with an assignment, the amount of the payment will be allocated between Subtenant and Sublandlord, in the same manner taking into account the total rents payable during the remaining terms of the Lease and Sublease.
(b) Notwithstanding the provisions set forth in subparagraph (a) above, Subtenant will not be obligated to pay Sublandlord any portion of appreciated rents until Subtenant has recovered any costs it has reasonably incurred in connection with the subletting of the Subleased Premises to any third party broker or for improvements to the Subleased Premises. Any costs to be deducted from appreciated rents will be submitted to Sublandlord and will be subject to Sublandlord's reasonable approval.
(c) The profit-sharing provision set forth in subparagraph (a) above is a freely negotiated agreement between Subtenant and Sublandlord respecting the allocation of appreciated rents. This covenant will survive the expiration of the Sublease Term.
with the Alterations) and diligently prosecuted to completion. Any contractor or other person making any Alterations must first be approved in writing by Sublandlord, and Sublandlord may require that all work be performed under Sublandlord's supervision.
any remedy at law or in equity to evict Subtenant and/or collect damages in connection with any holding over, and (ii) Subtenant will indemnify, defend and hold Sublandlord harmless from and against any and all liabilities, claims, demands, actions, losses, damages, obligations, costs and expenses, including, without limitation, attorneys' fees (including the allocated costs of Sublandlord's in-house attorneys) incurred or suffered by Sublandlord by reason of Subtenant's failure to surrender the Subleased Premises on the expiration of the Sublease Term or earlier termination of this Sublease.
(a) Comprehensive general liability insurance against any and all damages and liability, including attorneys' fees on account or arising out of injuries to or the death of any person or damage to property, however occasioned, in, on or about the Subleased Premises with at least a single combined liability and property damage limit of $2,000,000.
(b) Insurance on all plate or tempered glass in or enclosing the Subleased Premises, for the full replacement cost of such glass.
(c) Insurance adequate in amount to cover damage to the Subleased Premises including, without limitation, Subtenant's leasehold improvements, trade fixtures, furnishings, equipment, goods and inventory.
(d) Rent insurance in an amount equal to all rent and other sums or charges payable under this Sublease for a period of at least twelve (12) months commencing with the date of loss.
(e) Employer's liability insurance and worker's compensation insurance as required by applicable law.
(f) Any other insurance required under the Lease to the extent not covered in subsections (a)-(e) above.
(a) Subtenant abandons or vacates the Subleased Premises; or
(b) Subtenant fails to pay any installment of Basic Monthly Rent or Operating Expenses and Taxes, if applicable, as and when the same become due and payable, and such failure continues for more than five (5) days after Sublandlord gives written notice thereof to Subtenant; or
(c) Subtenant fails to pay any other sum or charge payable by Subtenant hereunder as and when the same becomes due and payable, and such failure continues for more than fifteen (15) days after Sublandlord gives written notice thereof to Subtenant; or
(d) Subtenant fails to perform or observe any other agreement, covenant, condition or provision of this Sublease to be performed or observed by Subtenant as and when performance or observance is due, and such failure continues for more than thirty (30) days after Sublandlord gives written notice thereof to Subtenant, or if the default cannot be cured within said thirty (30) day period and Subtenant fails within said period to commence with due diligence and dispatch the curing of such default or, having so commenced, thereafter fails to prosecute or complete with due diligence and dispatch the curing of such default; or
(e) Subtenant (i) files or consents by answer or otherwise to the filing against it of a petition for relief or reorganization or arrangement or any other petition in bankruptcy or liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction; (ii) makes an assignment for the benefit of its
creditors; (iii) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property; or (iv) takes action for the purpose of any of the foregoing; or
(f) A court or governmental authority of competent jurisdiction, without consent by Subtenant, enters an order appointing a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial portion of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding up or liquidation of Subtenant, or if any such petition is filed against Subtenant and such petition is not dismissed within sixty (60) days; or
(g) This Sublease or any estate of Subtenant hereunder is levied upon under any attachment or execution and such attachment or execution is not vacated within sixty (60) days.
(a) the worth at the time of award of the unpaid rent which had been earned at the time of termination; plus
(b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of the award exceeds the amount of such rental loss that Subtenant proves could have been reasonably avoided; plus
(c) the worth at the time of award of the amount by which the unpaid rent for the balance of the Sublease Term after the time of award exceeds the amount of such rental loss that Subtenant proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Sublandlord for all detriment proximately caused by Subtenant's failure to perform its obligations under this Sublease or which in the ordinary course of things would be likely to result therefrom (specifically including, without limitation, the unamortized portion of any brokerage commissions paid by Sublandlord for this Sublease, brokerage commissions and advertising expenses incurred for a new sublease, expenses of remodeling the Subleased Premises or any portion thereof for a new subtenant, whether for the same or a different use, and any special concessions made to obtain a new subtenant); and
(e) at Sublandlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time under the laws and judicial decisions of the State in which the Subleased Premises are located.
The term "rent" as used in this Paragraph 18.1 will be deemed to be and to mean
all sums of every nature required to be paid by Subtenant pursuant to the terms
of this Sublease, whether to Sublandlord or to others. As used in subparagraphs
(a) and (b) above, the "worth at the time of the award" will be computed by
allowing interest at the rate of 12% per annum. As used in subparagraph (c)
above, the "worth at the time of the award" will be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of the award plus one percent (1%). If Sublandlord terminates this
Sublease or Subtenant's right to possession, Sublandlord will use reasonable
efforts to mitigate Sublandlord's damages, and Subtenant will be entitled to
submit proof of Sublandlord's failure to mitigate as a defense to Sublandlord's
claims hereunder, if mitigation of damages by Sublandlord is required by
applicable law.
(iii) that not more than one month's rent has been paid in advance, or such failure may be considered by Sublandlord as a material default by Subtenant under this Sublease.
(Signature page follows)
IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this Sublease as of the date(s) set forth below.
SUBLANDLORD
Wells Fargo Bank, N.A., a national banking
association
By: /s/ Debra A. Broido
---------------------------------
Name: Debra A. Broido
-------------------------------
Title: Vice President
------------------------------
Date: 8/9/99
-------------------------------
By: /s/ Judy Fishman
---------------------------------
Name: Judy Fishman
-------------------------------
Title: Vice President
------------------------------
Date: 8/9/99
-------------------------------
|
SUBTENANT
Pacific Mercantile Bank, a California banking
corporation
By: /s/ John McCauley
---------------------------------
Name: John McCauley
-------------------------------
Title: Executive Vice President
------------------------------
Date: 8/5/99
-------------------------------
By: /s/ Raymond E. Dellerba
---------------------------------
Name: Raymond E. Dellerba
-------------------------------
Title: President & CEO
------------------------------
Date: 8-5-99
-------------------------------
|
Earl E. Miller and Karen L. Miller, Trustees of the Miller Family Trust ("Landlord"), hereby consents to the subletting of the Subleased Premises pursuant to the foregoing Sublease and represents and warrants to Sublandlord and Subtenant that no other consents to the foregoing Sublease are required, including, without limitation, the consent of any lender on the Subleased Premises. Landlord agrees that in the event of a default by Sublandlord as Tenant under the Lease, Landlord will provide concurrent notice of such default to Subtenant.
By: /s/ Earl E. Miller, Trustee ------------------------------------------------ Earl E. Miller, Trustee of the Miller Family Trust By: /s/ Karen L. Miller, Trustee ------------------------------------------------- Karen L. Miller, Trustee of the Miller Family Trust |
EXHIBIT 10.7
This Sublease, dated this 16th day of September, 1998, is entered into by and between WASHINGTON MUTUAL BANK, FA, successor in interest to GREAT WESTERN SAVINGS AND LOAN ASSOCIATION, ("Sublandlord"), and PACIFIC MERCANTILE BANK("Subtenant") as a Sublease under a lease dated April 25, 1991, entered into by and between The Irvine Company, as landlord (the "Landlord"), and Great Western Savings and Loan Association, as Tenant, as amended by that certain First Amendment to Lease dated February 20, 1996 (as amended, the "Master Lease"). A copy of the Master Lease is attached hereto as Exhibit "A". All terms not defined herein shall have the same meaning as in the Master Lease.
shall assist Subtenant in negotiating with Landlord to lease the premises following expiration of this Sublease.
in default, Sublandlord may use the Security Deposit, or any portion of it, to cure the default or to compensate the Sublandlord for all damage sustained by Sublandlord resulting from Subtenant's default. Subtenant shall immediately on demand pay to Sublandlord a sum equal to the portion of the Security Deposit expended or applied by Sublandlord as provided in this Section 4 so as to maintain the Security Deposit in the sum initially deposited with the Sublandlord. If Subtenant is not in default at the expiration or termination of this Sublease, Sublandlord shall return the Security Deposit to Subtenant. Sublandlord's obligations with respect to the Security Deposit are those of a debtor and not a trustee. Sublandlord may maintain the Security Deposit separate and apart from Sublandlord's general and other funds or may commingle the Security Deposit with Sublandlord's general and other funds. Sublandlord shall not be required to pay Subtenant any interest on the Security Deposit.
At the expiration of the Term of this Sublease, Subtenant may (and, at Landlord's option shall) remove from the Premises all Improvements and Subtenant's personal property and shall repair any damage and perform any restoration work caused by such removal.
(a) Article II.
(b) Section 4.2.
(c) Article V.
(d) Article VI (except that the term "Landlord" in Article VI shall mean the Landlord under the Master Lease, and not the Sublandlord).
(e) Article VII (except that the term "Landlord" as used in Article VII shall mean the Landlord under the Master Lease and not the Sublandlord).
(f) Articles VIII, IX and X.
(g) Articles XI and XII (except that the term "Landlord" in Articles XI and XII shall mean the Landlord under the Master Lease, and not the Sublandlord).
(h) Articles XIII, XIV, XV and XVII.
(i) Article XIX (except that the term "Landlord" as used in XIX shall
mean the Landlord under the Master Lease, and not the
Sublandlord).
(j) Articles XX, XXI and XXII.
(a) Sublandlord hereby irrevocably assigns to Landlord all of Sublandlord's interest in all Rent and income arising from this Sublease, and Landlord may collect such rent and income and apply same toward Sublandlord's obligations under the Master Lease; provided, however, until a default occurs in the performance of Sublandlord's obligations under the Master Lease, Sublandlord shall have the right to receive and collect the Rent under this Sublease. Landlord shall not, by reason of this assignment or the collection of sublease rentals, be deemed liable to
Subtenant for the performance of any of Sublandlord's obligations under this Sublease. Sublandlord hereby irrevocably authorizes and directs Subtenant, upon receipt of a written notice from Landlord stating that an uncured default exists in the performance of Sublandlord's obligations under the Master Lease, to pay to Landlord all sums then and thereafter due under this Sublease. Sublandlord agrees that Subtenant may rely on that notice without any duty of further inquiry and notwithstanding any notice or claim by Sublandlord to the contrary. Sublandlord shall have no right or claim against Subtenant or Landlord for any rentals so paid to Landlord.
(b) In the event of the termination of the Master Lease, Landlord may, at its sole option, take over Sublandlord's entire interest in this Sublease and, upon notice from Landlord, Subtenant shall attorn to Landlord. In no event, however, shall Landlord be liable for any previous act or omission by Sublandlord under this Sublease or for the return of any advance rental payments or deposits under this Sublease that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification executed without Landlord's consent or for any advance rental payment by Subtenant in excess of one month's rent.
the Premises, such notice, demand, request or other communication shall be in writing and shall be given to the other party by United States registered or certified mail, postage prepaid, return receipt requested,
if to Sublandlord:
Washington Mutual Bank, FA
Corporate Property Servicer
9301 Corbin Ave.
M/S N030101
Northridge, CA 91324
Attention: H. Arthur West
if to Subtenant:
or at such other address or addresses as Sublandlord, or Subtenant may from time to time designate by notice, demand, request or other communication hereunder.
Attached hereto and made a part hereof is Addendum I.
IN WITNESS WHEREOF, the undersigned have executed this Sublease as of the day and date first written above.
SUBLANDLORD:
WASHINGTON MUTUAL BANK, FA
By /s/ KENDALL BATEMAN __________________________________ Name: Kendall Bateman Title: First Vice President |
SUBTENANT:
PACIFIC MERCANTILE BANK (PROPOSED)
By /s/ RAYMOND E. DELLERBA __________________________________ Name: Raymond E. Dellerba Title: President & CEO (PROPOSED) |
ADDENDUM I TO SUBLEASE DATED 9-16-98
Notwithstanding any other provisions contained in this Sublease, in the event
(a) Sublessee or its successors or assignees shall become insolvent or bankrupt,
or if it or their interests under this Sublease shall be levied upon or sold
under execution or other legal process, or (b) the depository institution then
operating on the Premises is closed, or is taken over by any depository
institution supervisory authority ("Authority"), Sub-Lessor may, in either such
event terminate this Sublease only with the concurrence of any Receiver of
Liquidator appointed by such Authority; provided, that in the event this
Sublease is terminated by the Receiver of Liquidator, the maximum claim of Sub-
lessor for rent, damages, or indemnity for injury resulting from the
termination, rejection, or abandonment of the unexpired Sublease shall be law,
and in no event be an amount equal to all accrued and unpaid rent to the date of
termination.
EXHIBIT 10.8
Standard Internet Banking System Licensing Agreement
prepared for
Pacific Mercantile Bank, Newport Beach, CA
Q-UP Systems (QUP), a d.b.a. of Sage Systems Incorporated, grants to Pacific Mercantile Bank doing business at, 450 Newport Center Drive, Suite 100, Newport Beach, CA 92660-7610 (Client), a license to use QUP's Internet Banking System software and any additional module listed in Exhibit A. The license is non-exclusive and non-transferable and is limited to the conditions of this Agreement.
The Internet Banking System software, any additional module listed in Exhibit A, all of the peripheral attachments such as pertinent documentation and any future upgrades, will be hereafter referred to as "The System".
Client's title rights to The System consist only of the license to use The System as detailed by the terms of this Agreement. Otherwise, title to The System remains the sole possession of QUP. Client will have access to a complete copy of QUP's source code and any related updates and documentation for The System in the event that QUP should cease its business operations. The code will be stored in escrow.
Under the terms of this license Agreement, Client shall have no right to sub-license, sell, reproduce, manipulate the code or combine The System in any manner. Use of The System is restricted to processing the data needs of Client named in this Agreement only, which thus prohibits time-sharing or servicing The System on behalf of a third party.
A deposit as listed in Exhibit A is due upon execution of this Agreement. The remaining balance is due and payable upon receipt of an invoice from QUP subsequent to the Installation. Costs for The System are listed in Exhibit A.
Client must provide and have ready prior to the day of installation the following:
Client is responsible for acquiring Internet connectivity through an Internet Service Provider. Email, browsers, chat programs and other Internet services not directly related to The System are also the responsibility of the Client.
Client must install a line of communication (minimum required - ISDN line) from the demarcation point outside to the ultimate link inside Client's building. Client must certify in writing to QUP prior to installation that the line is connected and operating. Client bears all responsibility and all associated costs for the connection. QUP can advise Client on how to accomplish the communication line, if necessary. In the event that a failed communication line delays installation, Client will be responsible for the extra costs associated with the delay.
In order to fully test the communication line, a router must be installed. Client is responsible for installing the router. QUP can provide this service for the compensation of time, materials and travel expenses.
As Client has chosen to house The System on-site, Client is responsible for procurement of the minimum hardware requirements as listed in Exhibit A. At Client's request, QUP may provide turnkey assistance in the procurement of all of the necessary hardware with all bills being sent to Client.
QUP will provide the correct interface between Client's host computer system and The System. Client is responsible for providing the "Pull" files in the required formats to extract the necessary data from the host computer system to be utilized by The System. Provided that Client provides all required files in the correct format, QUP will assume responsibility for proper functioning of the interface and will cooperate fully with client to ensure continued proper functioning of this interface. Client, however, is responsible for any and all costs associated with providing the required "Pull" files for this interface, including any billing(s) by the Client's host vendor or other computer professionals employed by Client to facilitate such process.
Client will ship its server to QUP's Corporate Headquarters for preparation of installation. QUP will install and configure The System onto the WinNT 4.0 server, the router, secure access firewall software, and Verisign Security Digital ID. QUP will pre-test the server before delivery to ensure it is functioning properly. QUP will then deliver the secured, configured server to Client on the installation date agreed to by both parties.
Client must acknowledge and agree to accept the indirect responsibilities of operating and maintaining The System "in-house". For every subparagraph below, QUP can provide assistance at Client's request. However, QUP reserves the right to charge Client at standard service rates for any assistance that does not specifically relate to The System.
Q-UP Systems In-Bank License Agreement Page 2
Client assumes full responsibility for the server on which The System and the NT software platform rests. Troubleshooting issues that arise from the NT server should be addressed to the manufacturer of that server. QUP will provide at time of installation the appropriate contact number for assistance with the NT Server.
Client assumes full responsibility for the router. Troubleshooting issues arising over the router should be addressed to the manufacturer of that router. QUP will provide at time of installation the appropriate contact number for assistance with the router.
The System comes equipped with pre-installed, pre-configured tape back up software. Client is also provided with instructions that detail how the software works and needs to be maintained on a daily basis. Client must procure the tape drive, as noted in the hardware requirements in Exhibit A. QUP can assist Client on how to operate the tape back up, but it is Client's full responsibility to ensure daily completion of the tape back up procedure.
QUP will deliver and install The System. Client and QUP will mutually agree upon time and date for delivery at some point after the Agreement is executed and the deposit has been tendered, unless QUP executives and Client have made other arrangements. Installation includes testing The System to ensure that it is functioning properly and training of designated representatives.
Client must appoint one or more technical representatives to be present on the day of installation. Training includes educating Client's technical representatives about the day to day operations and general maintenance of The System. QUP will provide the Client's designated personnel with an Internal User's Guide that explains the utilities of The System. If Client wishes, QUP will also hold a general training session for customer representatives, tellers, etc to teach them how to use The System from the customer's perspective in order to help facilitate answers to possible questions from customers.
Client will receive a packet that includes operational guidelines, a back up installation diskette and procedural forms.
Client can reach QUP at its headquarters Monday through Friday, 8:00 a.m. to 5:00 p.m., CST to get assistance for The System. When upgrades are made to The System, QUP will contact Client to arrange for transfer of the enhanced files.
This Agreement may be terminated if either party fails in the performance
of any of its duties or obligations under this Agreement. In such an event,
the harmed party may terminate this Agreement by sending written notice to
the breaching party. A party receiving written notice of a harm has ninety
(90) days from receipt of written notice in which to remedy the Breach to
the reasonable satisfaction of the harmed party. If no cure has been
reached within ninety (90) days this Agreement automatically terminates. In
the event of termination, Client will uninstall The System and return all
marketing, operating, procedural and all other material information, and
other property relating to The System, to QUP within thirty (30) days of
termination.
Q-UP Systems In-Bank License Agreement Page 3
In the event that The System fails to substantially conform to either
the operational guidelines discussed in Section 10 of this Agreement or to
the Year 2000 limited warranty set out in Section 13 (a) at any time during
the initial term of this Agreement QUP will, at its sole option upon
receipt of written notice from Client received by QUP within a reasonable
time after such failure is or should have been known by Client of such
failure of The System to so substantially conform, either repair or replace
The System so that it thereafter substantially conforms to such operational
guidelines. In the event that QUP is unable to either so repair or replace
The System within a reasonable period of time after QUP's receipt of
written notice from the Client, QUP shall refund all amounts previously
paid by Client pursuant to this Agreement, this Agreement shall thereupon
terminate, and Client shall uninstall The System and return The System and
all marketing, operating, procedural and other material information
relating to The System to QUP within thirty (30) days of receiving said
refund from QUP. QUP's repair or replacement of The System or, in the
alternative, QUP's refund to Client of all funds paid pursuant to this
Section 13, constitutes Client's sole and exclusive remedy for any
applicable failure of The System to substantially conform to the
operational guidelines for The System.
QUP is responsible for the presence and continued operation of The System on Client's server.
QUP agrees to secure the stand-alone Web server that is responsible for the storage of data received from the bank's core system. This stand-alone server is equipped with industry standard security measures to protect it from intrusion and corruption. If Client links the stand-alone server to any other of its networks or PC's, Client is fully responsible for the connection, configuration and security components involved with the additional connection(s).
QUP SHALL NOT BE LIABLE TO CLIENT OR TO ANY THIRD PARTY FOR ANY BREACH OF SECURITY OR VIOLATION OF PRIVACY ISSUES THAT MAY OCCUR WITH RELATION TO THE SYSTEM. CLIENT SHALL DEFEND OR SETTLE, AT ITS OWN EXPENSE, ANY CLAIMS OR CAUSE OF ACTION OR PROCEEDING DUE TO A BREACH OF SECURITY OR VIOLATION OF PRIVACY.
QUP and Client agree that this Agreement, and the relationship it represents, requires the exchange of confidential information over the course of normal business. QUP and Client further agree that this confidential information is to be communicated and handled in the strictest of confidence. QUP and Client agree not to disclose any information about the other to third parties that is not already readily available to the public. In short, QUP and Client agree to treat each other's confidential business data with the same sensitivity and propriety as they would their own.
Client agrees that for the life of this licensing agreement Client will not
utilize any other software than The System for the settlement and
disbursement of electronic bill payments as they originate from The System.
Exclusive use of The System for originating, settling and disbursement of
electronic bill payments originating from The System is a condition of this
Agreement. All fees associated with Bill Payment are enumerated in Exhibit
A. To activate Bill Payment, Client must execute the Bill Payer Activation
Form- Attachment B, of this Agreement.
QUP will record the number of users per month and bill Client as per the Bill Pay fees listed in Exhibit A. Client will be invoiced and remittance is due by the 10th of the following month.
An annual license fee is to be paid to QUP at the amount listed in Exhibit
A. Client will receive thirty (30) days advance notice of any fee increase
prior to its effective date. Fees may increase annually, but are guaranteed
not to exceed 5% of the previous year's total.
Q-UP Systems In-Bank License Agreement Page 4
QUP agrees to maintain compliance with any new federal regulations that may require programming changes to the System. These required changes are to be covered under Client's annual license and maintenance agreement. Client agrees to accept financial responsibility for any costs (both hardware and software) associated with conforming to Federal banking regulations, with the exception of the programming changes mention above.
QUP has the sole right to copyright or trademark all components of The System, The System name and all logos associated with The System.
Requests by Client to modify The System will be taken and reviewed on a quarterly basis. QUP reserves the right to determine the schedule of changes for a given quarter.
The enforceability of this Agreement is subject to the laws of the State of Texas. Jurisdiction and venue for any action arising out of the relationship between QUP and Client shall exclusively be in state or federal court located in Travis County, Texas.
Once executed, this Agreement constitutes the complete understanding between Client and QUP as to the nature of their business relationship and thereon supercedes any previous agreements whether oral or written between the parties. This Agreement is executed when QUP receives the signed Agreement. This Agreement may be modified or supplemented only by a further execution of the change in writing by an authorized representative of both parties. This Agreement is binding on all heirs, successors and assignees of Client and QUP.
This Agreement extends to one year beyond the date named below (with signature). The Agreement renews automatically for additional one year periods unless either party notifies the other in writing of the desire to discontinue the Agreement sixty (60) days prior to the renewal date.
Please send notices to QUP Headquarters:
Q-UP Systems
8303 Mopac
B 450
Austin, Texas 78759
QUP strongly recommends that after installation Client wait 30 days before introducing The System to its customer base in order to fully test and fine-tune the interface between The System and Client's core software system.
Client is fully responsible for providing the data interface program that transfers data between The System and Client's Host System, as well as all associated costs related to the interface.
It is Client's responsibility, in conjunction with Client's check imaging vendor, to supply QUP with the required check image file format for images and indices, if available. QUP will write a check imaging interface to meet these file format specifications. In addition, Client, in conjunction with Client's check imaging vendor, is responsible for providing the application that retrieves and delivers the image files to the Web server, either through direct connection to the Web server or shared space on Client's Local Area Network (LAN).
See Exhibit B for specifics on product and services to be provided by QUP.
QUP hereby agrees to indemnify Client and hold Client harmless, subject to the limitation of liability stated in Section 13(d) of this Agreement, from and against any claims of infringement of any copyright or trade secret protected under the laws of the United States, including reasonable legal fees and expenses. QUP's obligation to so indemnify and hold harmless Client is expressly conditioned on Client notifying QUP in writing promptly after Client becomes aware of any such claim, and Client will allow QUP to control the proceedings. Client will cooperate fully with QUP during such proceedings. In the event any permanent injunction is entered prohibiting Client from utilizing all or any part of The System, QUP may but shall not be obligated to replace, in whole or in part, the subject of the injunction with substantially compatible and functionally equivalent software and/or items, or modify such software or other items to avoid infringement.
By signing this page, authorized parties of both Client and Q-UP agree to the terms and conditions set forth in the entire agreement.
Sage Systems, dba QUP Systems Pacific Mercantile Bank
By: Mr. L. D. Martin By: Mr. John P. Cronin
--------------------------------- -----------------------------
(print or type name) Mr. Daniel L. Erickson
-----------------------------
(print or type name)
Title: President Title: EVP
------------------------------ --------------------------
EVP
--------------------------
Date: 1-28-99 Date: 1-28-99
------------------------------- ---------------------------
/s/ John P. Cronin
---------------------------
/s/ L.D. Martin /s/ Daniel L. Erikson
------------------------------- ---------------------------
Q-UP Signature Client Signature
|
[Confidential treatment is being sought for certain portions of this Exhibit, as indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 406." Such omitted portions have been filed with the Securities and Exchange Commission.]
EXHIBIT 10.9
ODFI-ORIGINATOR AGREEMENT FOR AUTOMATED CLEARING
HOUSE ENTRIES
This Agreement, dated as of February 16, 1999 is between eFunds Corporation the ("Company") and Pacific Mercantile Bank, a state banking association ("Bank").
A. RECITALS
Company acts as agent for third party payees ("Payees") in connection with the collection of remittances due to Payees by consumers.
Company wishes to collect such remittances through Automated Clearing House ("ACH") debit Entries against the accounts of such consumers. Company also wishes, through ACH credit Entries, to transfer such funds after their receipt and crediting to Payee accounts at Bank to the accounts of Payees maintained at third-party financial institutions.
Bank is willing to act as an Originating Depository Financial Institution ("ODFI") with respect to such Entries.
Unless otherwise defined herein, capitalized terms shall have the meanings provided in the rules (the "Rules") of the National Automated Clearing House Association ("NACHA"). The term "Entries" shall have the meaning provided in the Rules shall mean debit and credit Entries unless otherwise specified and shall also mean the data received from Company hereunder from which Bank prepares Entries.
B. AGREEMENT
1. Transmittal of Entries by Company.
(a) Company may, as agent for Payees, from time to time and in accordance with
this Agreement and the Rules prepare and transmit to Bank debit Entries for the
collection of remittances due to such Payees. The total dollar amount of debit
Entries transmitted by Company to Bank on any one day shall not exceed
[*]. The aggregate total
[*] Omitted pursuant to Rule 406.
of debit Entries transmitted by Company to Bank during any 15-day period shall not exceed [*].
(b) Company may, as agent for Payees, from time to time and in accordance with this Agreement and the Rules prepare and transmit to Bank credit Entries for the transfer; of Payee funds from a Custodial Account (as defined below) of a Payee to an account of the Payee maintained at a third-party financial institution. The total dollar amount of credit Entries transmitted by Company to Bank on any one day shall not exceed [*]. The aggregate total of credit Entries transmitted by Company to Bank during any 15-day period shall not exceed [*].
2. Security Procedure.
Company and Bank shall comply with the security procedure requirements described in Schedule A when transmitting or receiving Entries.
3. Processing Entries.
Company shall be responsible for processing Entries so as to conform to the file specifications set forth in the Rules. Company shall transmit Entries to the location and in compliance with such formatting and other requirements as may be established by Bank from time to time.
4. Transmittal of Entries.
(a) Bank agrees to act as the ODFI with respect to Entries received or initiated on its behalf to the ACH.
(b) Bank shall transmit or cause to have transmitted by Company such Entries to the ACH by the deadline of the ACH set forth in Schedule B on the date such Entries are received from Company provided:
(i) the Entries received by ACH before [*] (the Cut-Off Hour") on a business day,
[*] Omitted pursuant to Rule 406.
(ii) the Effective Entry Date is one business day after such business day, and
(iii) the ACH is open for business on such business day. For purpose of this Agreement, a "business day" is a day on which Bank is open to the public for carrying on substantially all of its business other than a Saturday or Sunday. Entries shall be deemed received by Bank when received by Bank at the location specified by Bank in compliance with any related security procedure provided for herein.
(c) If any of the requirements of clause (i), (ii) or (iii) of Section 4 (b) is not met, Bank or Company shall use reasonable efforts to transmit such Entries to the ACH by the next deposit deadline of the ACH following the date such Entries are received, but shall not be liable for any delay in or failure to do so.
5. On-Us Entries.
In the case of an Entry received for debiting to an account maintained with Bank (an "On-Us Entry"), Bank shall debit the Receiver's account in the amount of such Entry on the Effective Entry Date contained in such Entry, provided the requirements set forth in clause (i) and (ii) of Section 4 (b) are met. If either of those requirements is not met, Bank shall use reasonable efforts to debit the Receiver's account in the amount of such Entry on the next business day following such Effective Entry Date, but shall not be liable for any delay in or failure to do so.
6. Rejection of Entries.
Notwithstanding any other provision of this Agreement to the contrary:
(a) Bank shall have the right to reject any specific Entry, at sole discretion of Bank and either for cause or without cause. Without limiting the generality of the foregoing, Bank shall be under no obligation to receive or transmit, or to act as an ODFI with respect to, any specific Entry submitted by Company to Bank if, in Bank's reasonable determination, to do so may or could result in any liability or loss to Bank.
(b) Company acknowledges that Bank may reject any Entry that:
(i) does not comply with the requirements of section (1) or (2),
(ii) which contains an Effective Entry Date more than one business day after the business day such Entry is received by bank, or
(iii) which constitutes a transaction that does not comply fully with all provisions of this Agreement, the Rules or federal or state law.
Bank shall also have the right to reject an "On-Us Entry" for any reason that such entry might be returned under the Rules. Bank shall have the right to reject any Entry if Company has failed to comply with its Company Account balance obligations under Section 10. Bank shall have the right to reject any credit Entry from a Custodial Account (as defined below) if, at the time of receipt of such Entry from Company, there are not finally and immediately available funds in the Custodial Account in amount equal to or exceeding the amount of the credit Entry.
7. Cancellation or Amendment by Company.
Company shall have no unilateral right to cancel or amend any Entry after its receipt by Bank. However, Bank shall us reasonable efforts to act on a request by Company for cancellation of an Entry if the request is received by Bank prior to transmitting the Entry to the ACH or, in the case of an On-Us Entry, prior to debiting a Receiver's account, provided such request complies with the security procedure set forth in Schedule A for cancellation of data, but shall have no liability if such cancellation is not effected.
8. Notice of Returned Entries.
Bank shall notify Company by telephone or electronic transmission of the receipt of an Entry returned from the ACH on the day of such receipt. Except for an Entry retransmitted by Company in accordance with the requirements of this Agreement, Bank shall have no obligation to re-transmit a returned Entry to the ACH if Bank complied with the terms of this Agreement with respect to the original Entry. In the event that Company is the
originator for the Bank, then return information will be transmitted to the Bank no later than the same day of receipt of the return.
9. The Custodial Accounts.
Company shall establish at Bank a custodial account (a "Custodial Account"). Company shall establish each such Custodial Account as an account at Bank and in a manner and form acceptable to Bank. Company shall supply or cause to be supplied to Bank all relevant documents, signature cards and account opening materials as may be required by Bank in connection with the establishment of each Custodial Account.
Bank agrees on the Settlement Date with respect to each debit Entry to credit funds received in settlement of the Entry to the Custodial Account to which such Entry relates, and Bank shall have the right to debit funds in a Custodial Account on the date any credit Entry with respect to that Custodial Account is transmitted by Bank to the ACH; provided, however, that Bank shall be entitled to rely on information received from Company for purposes of determining the proper Custodial Account to or from which such funds are to be credited (in the event of a debit Entry) or debited (in the event of a credit Entry); and provided, further, that if no Custodial Account has been established for the receipt of funds with respect to an Entry Bank shall be authorized to return such funds to the Receiver whose account was debited by the Entry.
Company, on behalf of itself and for each Payee, agrees that funds will remain on deposit in each Custodial Account for [*] after proceeds of a debit Entry have been credited to the Custodial Account.
10. Account Reconciliation
Entries (including On-Us Entries) transmitted by or for Bank will be reflected on a periodic statement provided by Bank to Company on each Custodial Account. Company agrees that Bank may, at the request of any Payee, provide copies of such statements directly to the Payee.
[*] Omitted pursuant to Rule 406.
Company agrees, on its behalf and on behalf of all Payees:
(i) that company will notify Bank promptly of any discrepancy between Company's or Payee's records and the information shown on any Custodial Account statement;
(ii) if Company fails to notify Bank of any such discrepancy within 30 days of receipt of a statement containing such information, Bank shall not be liable for any other losses to Company or the relevant Payee resulting from Company's failure to give such notice or any loss of interest with respect to an Entry shown on such statement; and
(iii) if Company fails to notify Bank of any such discrepancy within one year of receipt of such statement, Company and the relevant Payee shall be precluded from asserting such discrepancy against Bank.
Company Representations and Agreements; Indemnity.
Company warrants and represents to Bank, both at the time of this Agreement and at the time each Entry is transmitted by Company to Bank, that:
(i) Company is a corporation duly organized and in good standing under the laws of the state of California, that performance by Company under this Agreement will not result in any breach of any provision of Company's Articles of Incorporation or by-laws or any other agreement to which Company is a party, and that Company has and will maintain all licenses, permits and approvals required of Company as a condition of Company lawfully engaging in the activities in which it engages;
(ii) each person shown as the Receiver on an Entry has authorized the initiation of such Entry and the debiting of its account in the amount and on the Effective Entry Date shown on such Entry;
(iii) the Receiver's authorization and Company's actions with respect to such Receiver and the Receiver's account comply in all respects with federal and state consumer protection statutes, including without limitation the federal Electronic Fund Transfer Act and its implementing Regulation E of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and Company provided or caused to be provided a copy of the authorization to the Receiver;
(iv) such authorization is operative at the time of transmittal of the Entry by Bank to the ACH or, as to On-Us Entries, debiting of the Receiver's account by Bank as provided herein; and
(v) with respect to any Entry received by Bank from Company, Company has complied with all provision of the Rules applicable to the Entry.
Company further represents and warrants to Bank, both at the time of this Agreement and at the time each Entry is transmitted by Company to Bank, that:
(i) Company has entered into an agreement with each Payee ("Payee Agreements") that authorizes Company, as agent for such Payee, to collect remittances on behalf of the Payee, with receipt of monies due a Payee deemed to occur when funds are received in settlement of an Entry initiated on behalf of the Payee, whether such or not such funds are initially credited to the appropriate Custodial Account;
(ii) such Payee Agreement authorizes Company, as agent for the Payee, to initiate through ACH credit Entry transfers of funds from the Payee's Custodial Account to an account of such Payee at a third-party financial institution, and further authorizes Bank to debit the Custodial Account in the amount of the ACH credit Entry;
(iii) the terms and conditions of each Payee Agreement are consistent with the terms and conditions of this Agreement and authorize Company, as agent for
Payee, to engage in each action contemplated by Company under this Agreement and that, in so doing, Company's actions will be deemed those of such Payee;
(iv) the terms and conditions of each Payee Agreement authorize Company to direct Bank to transfer funds between Custodial Accounts to correct any error under which funds are initially credited to an incorrect Custodial Account: and
(v) Company, as agent of each, Payee, specifically authorized pursuant
to the Payee Agreement to bind each Payee to the provisions of Section 11
(b), 13 (b), 14 and 15
Company further agrees that, with respect to all Entries:
(i) Originator shall retain the original, or a microfilm copy or other legible copy, of all debit and credit Entry authorizations for a period of two years (or, if a longer period is required by the Rules, such longer period) after the termination or revocation of such authorization;
(ii) Company shall provide Bank with the original or a legible copy of a Receiver's authorization within 72 hours of Bank's request for the same;
(iii) Company shall perform its obligations under this Agreement in accordance with all-applicable laws and regulations.
(iv) Company shall be bound by and comply with the Rules as in effect from time-to-time.
Company shall indemnify Bank upon demand against any loss, liability or expense (including attorneys' fees and expenses) resulting from or arising out of any breach of any of the foregoing representations, warranties or agreements.
11. Liability; Limitations on Liability; Indemnity.
Bank shall be responsible only for performing the services expressly provided for in this Agreement, and shall be liable only for its negligence in performing those services. Bank
shall not be responsible for acts or omissions by Company (whether as principal or as agent of a Payee), including without limitation the amount, accuracy, timeless of transmittal or due authorization of any Entry received from Company, or by those of any other person, including without limitation the ACH, any ACH Operator, any Federal Reserve Bank or transmission or communications facility, any Receiver or RDFI (including without limitation the return of any Entry by such Receiver or RDFI), and no such person shall be deemed Bank's agent. Company agrees to indemnify Bank against any loss, Liability or expense (including attorneys' fees and expenses) resulting from or arising out of any claim of any person that Bank is responsible for any act or omission of Company or any other person described in this Section 13 (a).
In no event shall Bank be liable for any consequential, special, punitive or indirect loss or damage which Company or any Payee may incur or suffer in connection with the Agreement, including without limitation loss or damage from subsequent wrongful dishonor resulting from Bank's acts or omissions pursuant to this Agreement. Company represents and warrants that Company as agent for each Payee has the authority to bind each Payee to the limitations on liability contained in this Section 13 (b).
Without limiting the generality of the foregoing provisions, Bank shall be excused from failing to act or delay in acting if Bank receives inconsistent instructions from Company and/or a Payee, any of its authorized representatives or its agent, or if such failure or delay is caused by legal constraint, interruption or transmission or communication facilities, equipment failure, war, emergency conditions or other circumstances beyond Bank's control. In addition, Bank shall be excused from failing to transmit or delay in transmitting an Entry if such transmittal would result in Bank's having exceeded any limitation upon its intra-day net funds position established pursuant to present or future Federal Reserve Board guidelines or in Bank's otherwise violating any provision of any preset or future risk control program of the Federal Reserve Board or any rule or regulation of any other U.S., or state governmental or regulatory authority.
Subject to the foregoing limitations, Bank's liability for loss of interest resulting from its error or delay shall be calculated by using a rate equal to the average Federal Funds rate
at the Federal Reserve Bank of San Francisco, less reserve requirements, for the period involved. At Bank's option, payment of such interest may be made by crediting the Account resulting from or arising out of any claim of any person that Bank is responsible for any act or omission of Company or any other person described in Section 13 (a).
12. Compliance with Security Procedure.
If an Entry (or a request or cancellation or amendment of an Entry) received by Bank purports to have been transmitted or authorized by Company, it will be deemed Company's Entry (as principal and as agent for the Payee) and effective as Company's Entry or request (as principal and as agent for the Payee) even though the Entry (or request) was not authorized by Company or the Payee or the amount or Receiver of the Entry was other than the amount or Receiver intended by Company or the Payee, provided Bank acted in compliance with the security procedure referred to in Schedule A with respect to such Entry. If signature comparison is to be used as a part of that security procedure, Bank shall be deemed to have complied with that part of such procedure if it compares the signature accompanying a file of Entries (or request for cancellation or amendment of an Entry) received with the signature of an authorized representative of Company and, on the basis of such comparison, believes the signature accompanying such file to be that of such authorized representative.
If an Entry (or request for cancellation or amendment of an Entry) received by Bank was transmitted or authorized by Company, the Entry shall be deemed Company's Entry (as principal and as agent for Payee) and effective as Company's Entry (as principal and as agent for Payee), whether or not Bank complied with security procedure referred to in Schedule A with respect to that Entry and whether or not that Entry was erroneous in any respect or that error would have been detected if Bank had complied with such procedure.
13. Inconsistency of Name and Account Number.
Company acknowledges and agrees for itself and for each Payee that, if an Entry describes the Receiver inconsistently by name and account number, payment of the Entry
transmitted by Bank to the RDFI might be made by the RDFI (or by Bank) on the basis of the account number, even if it identifies a person different from the named Receiver, and that Company's and each Payee's obligations to Bank with respect to such Entry is not excused in such circumstances.
14. Notification of Change.
Bank shall notify Company of all notification of change received by Bank relating to Entries transmitted by Company by mail, phone or electronically no later than one business day after receipt thereof.
15. Payment of Services.
Company shall pay Bank the charges for the services provided for herein set forth in Schedule C attached hereto. Such charges do not include, and Company shall be responsible for payment of, any sales, use, excise, value added, utility or other similar taxes relating to the services provided for herein, and any fees or charges provided for in the agreement between Bank and Company with respect to the Company Account and each Custodial Account (the "Account Agreement").
16. Amendments.
From time-to-time, Bank may amend any of the terms and conditions contained in this Agreement, including without limitation, any cut-off time, any business day, and any part of Schedule A through C, each of which is attached hereto and made a part hereof. Such amendments shall become effective upon receipt of notice by Company or such later date as may be stated in Bank's notice to Company.
17. Notices, Instructions, Etc.
(a) Except as otherwise expressly provided herein, Bank shall not be required to act upon any notice or instruction received from Company or any other person, or to provide any notice or advice to Company or any other person with respect to any matter.
(b) Bank shall be entitled to rely on any written notice or other written communication believed by it in good faith to be genuine and to have been signed by an authorized representative of Company, and any such communication shall be deemed to have been signed by such person. The names and signatures of authorized representatives are set forth in Schedule C attached hereto and made a part hereof. Company may add or delete any authorized representative by written notice to Bank signed by at least two authorized representatives other than that being added or deleted. Such notice shall be effective on the second business day following the day of Bank's receipt thereof.
(c) Except as otherwise expressly provided herein, any written notice or other written communication required or permitted to be given under this Agreement shall be delivered, or sent by United States registered or certified mail, postage prepaid, or by express carrier, and, addressed as follows:
Pacific Mercantile Bank eFunds Corporation 450 Newport Center Drive Suite 100 1391 Warner Avenue Newport Beach, California 92660 Tustin, California 92780 |
------------------------------------------------------------------------------------------- Name: Daniel L. Erickson John P. Cronin Name: Larry L. Luckey ------------------------------------------------------------------------------------------- Signature: /s/ Daniel L. Erickson /s/ John P. Cronin Signature: /s/ Larry L. Luckey ------------------------------------------------------------------------------------------- Title: EVP/CFO EVP/CTO Title: C.O.O. ------------------------------------------------------------------------------------------- Date: 2/16/99 Date: Feb. 16, 1999 ------------------------------------------------------------------------------------------- |
unless another address is substituted by notice delivered or sent as provided herein. Except as otherwise expressly provided herein, any such notice shall be deemed given when received.
18. Data Retention.
Company shall retain data on file adequate to permit remaking of Entries for 7 years following the date of their transmittal by Bank or Automated Clearing House operator as provided herein, and shall provided such data to Bank upon its request.
19. Term and Termination.
The term of this Agreement shall begin on the effective date of the Agreement, which shall be the day a copy of the Agreement signed by Company is delivered to and executed by Bank, and shall end at 12:01 a.m., local time of Bank, on the first calendar day of the January next succeeding the effective date. Unless otherwise terminated by either party as set forth below, this Agreement shall renew for successive terms of one year each.
Bank or Company may terminate this Agreement at any time. Such termination shall be effective one month to the day following the day of Bank's or Company's receipt of written notice of such termination (unless Bank or Company otherwise specifically agrees to earlier termination) or such later date as is specified in that notice.
BECAUSE OF THE IMPORTANCE OF THE BUSINESS THAT E-FUNDS CORPORATION IS ENGAGED IN, THE BANK RECOGNIZES THAT ONGOING WORK CAN NOT BE TERMINATED CAPRICIOUSLY. THEREFORE, SUBJECT TO A VIOLATION OF GOVERNMENT REGULATION WHICH CAUSES BANK TO CEASE AND DECIST FROM AN ACTIVITY, BANK WILL CONTINUE TO PROCESS E-FUNDS CUSTOMER'S TRANSACTIONS FOR A PERIOD OF TIME NECESSARY FOR THOSE CUSTOMER'S AND eFUNDS TO SEEK OTHER ACCOMIDATIONS. DURING THIS PERIOD, ALL INCOME DERIVED BY SUCH PROCESSING WILL BE USED TO PAY ANY DEBTS OWED THE BANK BY E-FUNDS CORPORATION OR ITS CUSTOMERS BEFORE SUCH FUNDS ARE RELEASED TO E-FUNDS CORPORATION.
Any termination of this Agreement shall not affect any of Company's or Bank's obligations arising prior to such termination.
20. Entire Agreement.
This Agreement (including the schedules attached), together with the Account Agreement, is the complete and exclusive statement of the agreement between Bank and Company with respect to the subject matter hereof and supersedes any prior agreement(s) between Bank and Company with respect to such subject matter. In the event of any inconsistency between the terms of this Agreement and the Account Agreement, the terms of services provided herein in accordance with the terms of this Agreement would result in a violation of any present or future statute, regulation or government policy to which Bank is subject, and which governs or affects the transactions contemplated by this Agreement, then this Agreement shall be deemed amended to the extent necessary to comply with such statute, regulation or policy, and Bank shall incur no liability to Company as a result of such violation or amendment.
21. Assignment.
Except as specifically authorized under this Agreement, Company must notify Bank of any assignment of this Agreement or any of the rights or duties hereunder to any person or entity. Bank has the unilateral option of declining assignment and terminating this agreement.
22. Binding Agreement; Benefit.
This Agreement shall be binding upon an inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. This Agreement is not for the benefit of any other person, and no other person shall have any right against Bank or Company hereunder.
23. Headings.
Headings are used for reference purposes only and shall not be deemed a part of this Agreement.
24. Governing Law.
This Agreement shall be construed in accordance with and governed by the laws of the State of California and applicable federal law.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their duly authorized officers.
Pacific Mercantile Bank eFunds Corporation 450 Newport Center Drive Suite 100 1391 Warner Avenue Newport Beach, California 92660 Tustin, California 92780 |
------------------------------------------------------------------------------------------- Name: Daniel L. Erickson John P. Cronin Name: Larry L. Luckey ------------------------------------------------------------------------------------------- Signature: /s/ Daniel L. Erickson /s/ John P. Cronin Signature: /s/ Larry L. Luckey ------------------------------------------------------------------------------------------- Title: EVP/CFO EVP/CTO Title: C.O.O. ------------------------------------------------------------------------------------------- Date: 2/16/99 Date: Feb. 16, 1999 ------------------------------------------------------------------------------------------- |
Exhibit 11.1
Pacific Mercantile Bank
Statement Regarding Computation of Pro Forma Net Loss Per Share For the Year Ended to December 31, 1999
Actual:
Net loss $ (2,750,200)
==============
Weighted average shares 1,233,057
==============
Net loss per share $ (2.23)
==============
Pro forma:
Net loss $ (2,750,200)
==============
Weighted average shares 1,233,057
Shares issued in the reorganization 3,000,000
--------------
Pro forma shares issued and outstanding $ 4,233,057
==============
Pro forma net loss per share $ (0.65)
==============
|
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report (and all references to our Firm) included in or made part of this registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
March 27, 2000
|
| ARTICLE 9 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | DEC 31 1999 |
| PERIOD START | JAN 01 1999 |
| PERIOD END | DEC 31 1999 |
| CASH | 2,531 |
| INT BEARING DEPOSITS | 1,386 |
| FED FUNDS SOLD | 35,967 |
| TRADING ASSETS | 2,700 |
| INVESTMENTS HELD FOR SALE | 2,669 |
| INVESTMENTS CARRYING | 0 |
| INVESTMENTS MARKET | 0 |
| LOANS | 45,093 |
| ALLOWANCE | 750 |
| TOTAL ASSETS | 91,165 |
| DEPOSITS | 74,500 |
| SHORT TERM | 0 |
| LIABILITIES OTHER | 647 |
| LONG TERM | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 19,019 |
| OTHER SE | (3,001) |
| TOTAL LIABILITIES AND EQUITY | 91,165 |
| INTEREST LOAN | 760 |
| INTEREST INVEST | 1,275 |
| INTEREST OTHER | 65 |
| INTEREST TOTAL | 2,100 |
| INTEREST DEPOSIT | 879 |
| INTEREST EXPENSE | 1 |
| INTEREST INCOME NET | 1,220 |
| LOAN LOSSES | 750 |
| SECURITIES GAINS | 0 |
| EXPENSE OTHER | 3,351 |
| INCOME PRETAX | (2,750) |
| INCOME PRE EXTRAORDINARY | (2,750) |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (2,750) |
| EPS BASIC | (1.12) |
| EPS DILUTED | (1.12) |
| YIELD ACTUAL | 7.75 |
| LOANS NON | 0 |
| LOANS PAST | 0 |
| LOANS TROUBLED | 0 |
| LOANS PROBLEM | 0 |
| ALLOWANCE OPEN | 0 |
| CHARGE OFFS | 0 |
| RECOVERIES | 0 |
| ALLOWANCE CLOSE | 750 |
| ALLOWANCE DOMESTIC | 750 |
| ALLOWANCE FOREIGN | 0 |
| ALLOWANCE UNALLOCATED | 520 |