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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM
_____________________________ TO ____________________________________
Commission File No. 0-28784
HOT TOPIC, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0198182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3410 POMONA BOULEVARD 91768
POMONA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 869-6373
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K ____.
The number of shares outstanding of the Registrant's Common Stock was
4,595,431 as of April 19, 1999.
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of April 19, 1999 was approximately $59,464,000, based on the
closing price on that date of Common Stock on the Nasdaq National Stock Market.*
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for the annual
meeting of stockholders to be held on June 1, 1999 to be filed with the
Securities and Exchange Commission (the "Commission") no later than 120 days
after January 30, 1999, are incorporated by Reference into Part III of this Form
10-K (Items 10 through 13).
Certain Exhibits filed with the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5054-LA), as amended, are incorporated by reference
into Part IV of this Form 10-K (Item 14).
____________
*Excludes 1,109,833 shares of Common Stock held by directors and officers and
shareholders whose beneficial ownership exceeds 10% of the shares outstanding on
April 19, 1999. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control with the Registrant.
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This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual future results could
differ materially from those statements. Factors that could cause or contribute
to such differences include, but are not limited to, those found in this Annual
Report on Form 10-K in Part I, Item 1 under the caption "Certain Risk Factors
Related to the Company's Business," in Part II, Item 7 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and additional factors discussed elsewhere in this Annual Report.
PART I
ITEM 1. BUSINESS
GENERAL
Hot Topic, Inc. ("Hot Topic" or the "Company") is a rapidly growing, mall-
based specialty retailer of music-licensed and music-influenced apparel,
accessories and gift items for young men and women principally between the ages
of 12 and 22. The Company believes teenagers throughout the United States have
similar fashion preferences, largely as a result of the nationwide influence of
MTV, music distribution, movies, television programs and fashion magazines. The
Company opened its first store in 1989, and operated 158 stores as of January
30, 1999 in 38 states across the United States. During fiscal 1995, the Company
significantly accelerated its store expansion program and opened 18 stores,
including its first stores in the Northeast and Midwest. The Company opened 26,
40 and 50 additional stores during fiscal 1996, 1997 and 1998, respectively, and
in fiscal 1996 relocated two existing stores. In fiscal 1998, the Company
opened its first "street stores," which are stores on street fronts rather than
in enclosed shopping malls. The Company plans to open approximately 45 new
stores in fiscal 1999, eight of which were opened as of April 19, 1999. The
Company also maintains a website, (www.hottopic.com) through which it markets
its stores and store concept and sells certain of its merchandise. The
Company's net sales via the Internet continue to increase significantly,
although the total sales are still modest. The company is working to redesign
the website which may effect its promotional activities and its Internet sales.
THE MARKET
The music-licensed apparel industry began in the 1960s with bootleggers
selling T-shirts at concert venues. Over the ensuing two decades, artists began
to realize the commercial potential of licensing their likenesses and logos to
T-shirt manufacturers and others who produced assorted merchandise. Management
believes that the single largest impact on the music industry during the last
decade has been the success of MTV, which enables fans not only to listen to the
latest music and artists 24 hours a day, but also to see a full sight and sound
package of appearance and attitude. According to industry estimates, in 1996
MTV programming could be seen in more than 60 million households in the United
States and in over 260 million households worldwide. It is also estimated that
viewers in over 23 million homes watch MTV every week. As a result, popular
artists and the fashions they wear are much more visible today than 30 years
ago. Management believes that this increased visibility has contributed to the
increase in demand for music-licensed and music-influenced apparel and
accessories.
Hot Topic's target customers are young men and women between the ages of 12
to 22 years old, who are passionate about music, music videos and music-inspired
fashion, and are avid MTV viewers. The Company believes its music-oriented
merchandise appeals to teenagers from diverse socio-economic backgrounds, and
that its customers are broadly representative of the teenage population in the
United States.
2.
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Teenagers represent both a growing part of the United States population and
an increasing source of purchasing power. According to the U.S. Department of
Commerce Bureau of the Census, the teenage population in the United States
reached approximately 31 million in 1998 and is expected to grow to
approximately 35 million by 2008, representing a projected growth rate close to
twice the rate of the overall population. By 2010, there likely will be more
teenagers in the United States than at any other time in history. The Company
also believes, based upon statistics released by an independent research firm,
that teenage spending has also been increasing annually, growing to an estimated
$111 billion in 1997.
BUSINESS STRATEGY
The Company's goal is to become the leading retailer of music-licensed and
music-influenced apparel and accessories for young men and women. The principal
elements of the Company's business strategy are as follows:
. FOCUS ON UNIQUE MUSIC-ORIENTED MERCHANDISE.
Management believes that fashions and products associated with popular
music artists have a significant influence on teenagers today, who often want to
emulate their favorite artists. The Company has developed a unique strategy
focused exclusively on offering music-licensed and music-influenced merchandise
in the mall environment. The Company believes most of the merchandise it offers
is not available elsewhere in the mall and is often hard to find other than at
alternative shopping venues in major metropolitan areas. Accordingly, the
Company believes it is well-positioned to capitalize on the growing teenage
population and demand for music related merchandise.
. OFFER "EVERYTHING ABOUT THE MUSIC."
The Company's stores are designed to serve as a headquarters for music-
licensed and music-influenced apparel, accessories and gift items. The
Company's slogan, "Everything About The Music," reflects the Company's broad
assortment of products, which currently consists of over 12,000 SKUs in 25
different product categories. The Company believes its selection of music-
licensed merchandise is the most extensive assortment available in one mall
store. The Company complements its licensed merchandise with a unique and
eclectic assortment of music-influenced apparel and accessories, and frequently
introduces new items and categories in response to changes in trends and demand.
The Company believes it has a history of being the first to offer the latest
music fashions, which, together with its assortment of merchandise, has made it
a destination store for teenagers seeking music-related products.
. PROMOTE MUSIC-INSPIRED CULTURE.
Hot Topic is committed to addressing the music-oriented lifestyles of its
customers by building a culture throughout the organization that reflects a
passion for music. Management diligently tracks alternative and rock music
trends by regularly monitoring new music, music video releases and radio station
air play, visiting nightclubs around the country and attending concerts. The
Company also actively solicits feedback from its employees and customers. The
Company believes these activities enable it to react quickly to emerging trends,
and provide it with a competitive advantage over retailers who do not devote the
time and resources necessary to anticipate these trends.
. ACTIVELY MANAGE MERCHANDISE MIX.
Hot Topic does not dictate fashion trends, but rather seeks to identify
music artists and releases that will have strong appeal and related products
that will generate strong demand. The Company has developed a disciplined
approach to buying and a proactive inventory management program around this
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strategy. The Company often tests new merchandise in a small number of stores
before chain-wide distribution, and orders a majority of its merchandise not
more than 60 days before delivery, enabling it to respond quickly to emerging
trends. In cases where it does not have return privileges with its vendors, Hot
Topic is aggressive in taking prompt markdowns to maintain a fresh merchandise
mix. By actively managing the mix of categories and products in its stores, the
Company believes it is able to capitalize on emerging trends and minimize its
dependence on any particular category. The Company believes that this approach
to managing its merchandise mix has contributed to its strong merchandise
margins and to consistent markdown rates which the Company believes are lower
than industry averages.
. CREATE AN ENTERTAINING STORE ENVIRONMENT.
The Company seeks to create a compelling shopping environment that brings
into the mall elements of the alternative urban shopping experience sought by
teenagers. Hot Topic stores are designed with an industrial warehouse theme
that incorporates dense merchandising and utilizes a professional sound system
playing alternative music releases to create a fun, high-energy store that teens
will consider "their place" to shop with friends. The Company believes that
this atmosphere enhances the Company's image as a source for music-inspired
fashion while encouraging customers to shop in its stores for longer periods of
time.
. EMPHASIZE CUSTOMER SERVICE.
Hot Topic trains its store associates to provide value-added, non-intrusive
customer service. Sales associates are taught to greet each customer, provide
information about new music and fashion trends and suggest merchandise that
matches the customer's lifestyle and music preferences. The Company strives to
give its teenage customers the same level of respect and attention that is
generally given to adult customers at other retail stores and to provide
friendly and informed customer service for parents. The Company believes that a
high level of product knowledge and a commitment to music fashion create high
credibility and differentiate the Company from other teenage focused retailers.
. DEVELOP PRIVATE LABEL PRODUCTS FOR MUSIC-ORIENTED LIFESTYLES.
The Company has developed private label product lines to complement and
supplement its other product offerings. The Company's private label product
lines include, among others, Morbid Threads (apparel and hosiery) and Morbid
Metals (body jewelry). The Company believes that these private label products
differentiate it from its competition and enhance customer loyalty through the
development of a unique brand image.
STORE LOCATIONS
As of January 30, 1999, the Company operated 158 stores in both
metropolitan and middle markets in 38 states across the United States. The
following chart sets forth, as of April 19, 1999, the number of stores that Hot
Topic operated in each state and the cities in which stores are located.
4.
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<TABLE>
<CAPTION>
ARIZONA-2 IDAHO-1 MICHIGAN-4 NEW MEXICO-2 SO. CAROLINA-1
<S> <C> <C> <C> <C>
Phoenix Boise* Troy Albuquerque(2) Greenville
Tucson Flint
ILLINOIS-5 Auburn NEW YORK-11 TENNESSEE-1
CALIFORNIA-33 West Dundee Traverse City* Buffalo Antioch
Bakersfield Bloomingdale Rochester
Los Angeles(13) Aurora MINNESOTA-5 Staten Island TEXAS-6
Fresno Joliet Bloomington Albany Lewisville
Palm Desert Orland Park St. Cloud Victor Austin
San Diego(5) Duluth Lake Grove San Antonio
San Francisco(5) INDIANA-4 St. Paul West Nyack Mesquite
Victor Valley Fort Wayne Mankato Johnson City Woodlands
Capitola Evansville Syracuse Corpus Christi*
Citrus Heights Lafayette MISSOURI-2 New Hartford
Modesto Terre Haute St. Peters Bay Shore UTAH-2
Sacramento St. Louis Salt Lake City
San Jose IOWA-1 St. Louis* NO. CAROLINA-1 Sandy
Berkeley Coralville NEBRASKA-2 Pineville
Lincoln VIRGINIA-1
COLORADO-6 KANSAS-2 Omaha OHIO-5 Springfield
Westminster Olathe Parma
Colorado Spr-(2) Wichita NEVADA-4 Dayton WASHINGTON-8
Littleton-(2) Las Vegas(3) No. Olmsted Bellingham
Denver KENTUCKY-1 Reno Mentor Kennewick
Louisville Cincinnati Seattle(2)
CONNECTICUT-5 NEW HAMPSHIRE-3 Silverdale
Elyria* Spokane(2)
Waterford LOUISIANA-2 Manchester OKLAHOMA-2 Tacoma
Manchester Metairie Nashua Oklahoma City
Danbury Monroe Salem Oklahoma City* WEST VIRGINIA-1
Waterbury Baton Rouge* Charleston
Milford MAINE-1 NEW JERSEY-8 OREGON-2
Bangor Mays Landing Portland(2) WISCONSIN-4
DELAWARE-1 Parmus Madison
Wilmington Rockaway PENNSYLVANIA-8 Appleton
MARYLAND-3 Toms River Philadelphia(3) Brookfield
FLORIDA-2 Towson Wayne West Mifflin Eau Claire
Altamonte Springs White Marsh Deptford Wilkes-Barre
Coral Springs Columbia Woodbridge Media
Eatontown York
GEORGIA-3 MASS.-6 Altoona
Duluth Boston(2)
Kennesaw Holyoke
Macon Marlborough
Saugus
Trunton
</TABLE>
5.
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1. References above to Los Angeles, San Diego, San Francisco, Boston, Las
Vegas, Philadelphia and Seattle in each case include the metropolitan area of
that city. An asterisk next to a city indicates that a store has been opened in
such city during fiscal 1999.
EXPANSION STRATEGY
The following table provides a history of the Company's store expansion
over the last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR
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1994 1995 1996 1997 1998
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(number of stores)
<S> <C> <C> <C> <C> <C>
Stores at beginning of year 18 24 42 68 108
New Stores opened 6 18 26 40 50
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Stores at end of year 24 42 68 108 158
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</TABLE>
All but two of the Company's stores are currently in shopping malls.
During fiscal 1998, the Company opened two "street location" stores, one each in
Denver, Colorado and in Berkley, California. The Company's expansion strategy
is to open stores in shopping malls in both new and existing markets throughout
the United States. The Company may open additional "street stores" in markets
that the Company believes can sustain a Hot Topic store outside the mall
environment, although the Company may elect not to aggressively expand its
"street store" concept. The Company believes it has developed a store concept
that is successful in both metropolitan and middle markets. Further, as a
result of the nationwide influence of MTV, music distribution, movies,
television programs and fashion magazines, the Company believes that its 12 to
22 year old target customers have similar fashion preferences throughout the
United States.
The Company opened 50 new stores in fiscal 1998 and plans to open
approximately 45 new stores during fiscal 1999. The Company selects and
evaluates potential store locations based on a variety of criteria including the
sales and square footage of the mall, sales of anchor stores, sales of teenage-
oriented stores, foot traffic, number of teenagers in trade area, median family
income and other factors relevant to the Company's unique merchandising
strategy. The Company looks at similar criteria for "street store" locations.
Model statements of operations are developed for each potential location and are
measured against target financial criteria. Hot Topic has a real estate
committee, including its Chief Executive Officer and three outside directors,
which reviews and approves all new store locations. The Company generally seeks
potential store sites between 1,200 and 2,000 square feet and its stores
currently average approximately 1,450 square feet.
STORE-LEVEL ECONOMICS
During fiscal 1998, the Company's 108 stores that were in operation for all
of the fiscal year generated average net sales of approximately $747,000 and
average net sales per square foot of approximately $538. These stores also
generated average store-level operating cash flow (defined as store operating
income before depreciation and excluding changes in working capital) of
approximately
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$203,000, or 27% of average net sales. Capital expenditures, including leasehold
improvements, furniture and fixtures and net of landlord construction allowances
for the 50 stores opened in fiscal 1998 averaged approximately $170,000, initial
gross inventory requirements (which were partially financed by trade credit)
averaged $65,000, and pre-opening costs (which were expensed in the periods the
stores opened) averaged $19,000. Inventory requirements vary at new stores
depending on the season and on current merchandise trends. In fiscal 1998, all
of the Company's stores generated positive store-level operating income, but
there can be no assurance this trend will continue. There also can be no
assurance that in the future the average store-level sales and operating cash
flow will not vary from historical results or that the total estimated capital
expenditures for new stores will not increase.
MERCHANDISING
The Company's stores are designed to serve as a headquarters for music-
licensed and music-influenced apparel, accessories and gift items. Music-
licensed merchandise includes T-shirts, caps, posters, stickers, patches,
postcards, books, CDs, videos and other items. Music-influenced merchandise
includes woven and knit tops, skirts, pants, shorts, jackets, shoes, costume
jewelry, body jewelry, sunglasses, cosmetics and gift items. The Company
estimates that approximately half of the Company's products are music-licensed
products, and half are music-influenced products. A key strategy of the Company
is to offer over 12,000 SKUs in 25 different product categories or
"departments." Within each category, the Company seeks to offer a broader
assortment of merchandise than is available at any other mall location. For
example, on average, over 100 different licensed band T-shirts are carried in
each store from alternative artists such as Korn, Blink 182, Limp Bizkit,
Deftones, Rage Against the Machine, Orgy, and others; and rock artists such as
the Pink Floyd, Rob Zombie, Pantera, Metallica, Jimi Hendrix, The Doors, the
Beatles, Led Zeppelin, and others. New items and categories are tested
regularly as customer demand and product trends evolve.
The Company does not dictate leading edge fashion, but quickly reacts to
changes in trends and demand to keep Hot Topic stores fresh and exciting.
Further, the Company strives to identify music artists and releases that will
have strong appeal, and to quickly acquire related music-licensed products and
music-influenced merchandise, featured on music videos or otherwise, associated
with such artists and releases.
The following table sets forth the Company's four major merchandise groups
as an approximate percentage of net sales for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
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1998 1997 1996
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<S> <C> <C> <C>
Apparel and T-Shirts 48% 47% 43%
Gifts 19 20 21
Accessories 26 25 26
Hosiery, Shoes, and Outerwear 7 8 10
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100% 100% 100%
</TABLE>
The Company has four lines of private label merchandise to complement and
supplement its current product offerings. The Company believes that Hot Topic
brands play an important part in differentiating its stores from those of its
competitors and provide the Company with higher margin opportunities as compared
to other merchandise. Management estimates that Hot Topic brands accounted for
approximately 20% of the Company's sales in both fiscal 1998 and 1997. The
Company's proprietary brands include Morbid Makeup (cosmetics), Morbid Metals
(body jewelry), Morbid Scents (incense and oils) and Morbid Threads (men's and
women's apparel and hosiery).
7.
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PURCHASING
The Company's purchasing staff consists of a General Merchandise Manager,
two Divisional Merchandise Managers, seven buyers, and seven assistant buyers.
The purchasing staff reflects the Company's culture in that its decisions and
actions are influenced by a passion for music. In determining which merchandise
to buy, the purchasing staff spends considerable time viewing music videos,
reviewing industry album sales, monitoring alternative radio station air play,
consulting with sales associates, reviewing customer requests, attending trade
shows and reading music and fashion industry periodicals. In addition, the
staff regularly visits nightclubs, and attends concerts and other events that
attract young people. The Company also conducts periodic customer focus groups
and intercept surveys, and consults with and solicits input from its store
employees, in order to draw from many different experiences and perspectives.
Approximately half of the Company's products are licensed products.
Artists typically license their likeness to a "master licensor", the largest of
these being divisions of major record companies such as Warner Electra Atlantic
Distribution, Universal Music and Video Distribution and Sony Music
Distribution. The master licensor often retains the rights to market T-shirts
and then may choose to sublicense to manufacturers other categories of
merchandise such as posters, stickers, patches and books. Some artists also
retain their licensing rights and negotiate directly with licensees. Hot Topic
buys its licensed merchandise from master licensors, licensees and directly from
artists. The Company currently purchases licensed T-shirts from over 30
companies and other licensed products from over 50 companies. Because of the
Company's knowledge of teenage consumers' music preferences and music-influenced
fashion, licensors often seek the Company's advice prior to licensing new
artists or product designs. As a result, the Company sometimes receives
accommodations such as pre-ticketing of orders, early shipments of merchandise,
exclusive merchandise and vendors' acceptance of returns.
The Company buys its unlicensed, music-influenced merchandise from a
variety of manufacturers. The Company actively searches for new vendors that
offer unique and timely music-influenced products. As a result, the Company at
any given time has many different vendors of different sizes, including some
from which it has not previously purchased. Most of the products purchased from
the Company's vendors are sold under the labels of the manufacturers, and some
are sold under Hot Topic's private labels.
In order to reduce fashion risk and maintain the ability to respond quickly
to emerging trends, Hot Topic buys a majority of its merchandise not more than
60 days in advance of delivery, and will often begin with small purchases for
testing prior to chain-wide distribution. The Company regularly monitors store
sales by merchandise classification, SKU, color and size to determine types and
amounts of products to purchase, to detect products and trends that are emerging
or declining, and to manage the product mix in its stores to respond to the
spending patterns of its customers. The Company also works with its vendors to
ensure that sources for new and private label products are maintained and
expanded.
During fiscal 1998, the Company had approximately 800 vendors, certain of
which have limited financial resources and production capabilities. No single
vendor accounted for more than 5% of the Company's merchandise purchases. The
Company believes that its relationships with its vendors are good.
ALLOCATION AND DISTRIBUTION OF MERCHANDISE
Allocation and distribution of the Company's inventory is addressed at the
store, merchandise classification and SKU levels using integrated third party
software. Most merchandise is ordered in bulk and then allocated to each store
based on inventory plans and SKU performance by using proprietary software
developed by Hot Topic. Buyers determine SKU reorder quantities by using a
proprietary
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automated software program which considers sales history, projected sales,
planned inventories by store, store demographics, geographic preferences, store
openings and planned markdown dates.
The Company's Director of Planning and Allocation and nine inventory
analysts work closely with the merchandise buyers and store personnel to meet
the requirements of individual stores for appropriate merchandise in sufficient
quantities. Hot Topic's headquarters and distribution facility, consisting of
approximately 45,000 square feet, is located in Pomona, California. All
merchandise is delivered by vendors to this facility, where it is inspected,
price marked, entered into the Company's allocation software system, picked and
boxed for shipment to the Company's stores. Merchandise is shipped to stores
each weekday, providing Hot Topic stores with a steady flow of reordered and new
merchandise. Minimal back stock is maintained in the Company's distribution
facility and at its stores, so that at all times almost all of the Company's
merchandise is available for sale on the floors of its stores. To accommodate
its planned expansion in fiscal 1999 and beyond, the Company has leased a larger
building to expand the capacity of its headquarters office and merchandise
distribution facility. Construction of the offices and installation of the
distribution equipment commenced in February 1999. The Company presently plans
to move from its existing facility into the new facility early in the Summer of
1999. The presently estimated cost of construction, equipment, fixtures and
furniture is approximately $4.0 to $4.5 million. The new facility has a
projected capacity of approximately 500 stores.
STORE OPERATIONS
Hot Topic's store operations are currently managed by four regional
managers and 30 district or area managers who each supervise approximately eight
stores. Individual stores are managed by a store manager and two or three
assistant managers. A typical store has approximately two full time and six to
ten part time sales associates, depending on the season. The hiring and
training of new employees are the responsibility of the store manager and
district manager, and the Company has established training and operations
procedures to assist them. Additionally, Hot Topic uses a customized, automated
telephone screening system licensed from a third party to help evaluate
potential new employees, which helps streamline the Company's interview and
hiring processes at the store level.
The Company strives to create a store environment that teenagers will
consider "their place" to shop with friends. Hot Topic seeks to hire sales
associates who fit the profile of its target customer -- energetic people who
are knowledgeable and passionate about music and music-inspired fashion. To
assist management in properly considering the preferences and opinions of its
target customers, selected sales associates accompany Hot Topic's buyers on
buying trips. Further, in return for feedback on fashion and other trends,
sales associates are reimbursed for the cost of attending concerts and clubs,
and are encouraged to communicate customer requests and their own merchandise
ideas to management. Hot Topic encourages its sales associates to dress and
accessorize themselves with the same fashionable merchandise that is sold in its
stores. Management believes its music-based culture and its interaction with
and respect for sales associates has led to associate turnover rates that the
Company believes are lower than the industry average.
The primary objective of sales associates is to provide superior, informed
customer service in order to maximize sales and minimize inventory shrinkage.
Store management is provided with daily store sales and weekly category sales
results so that performance can be measured against set goals. Postage-paid
"report cards" are provided in all stores for customers to grade performance and
make recommendations to Company management. The Company strives to give its
teenage customers the same level of respect and attention that is generally
given to adult customers at other retail stores. Associates are trained to
greet each customer, to inform the customer about new music fashion trends and
to suggest merchandise that matches the customer's lifestyle and music
preferences. Hot Topic also strives to provide friendly and informed customer
service for parents. The Company provides a listing of music artists' national
tour dates at each of its stores. The Company believes that its high level of
product knowledge and service differentiates Hot Topic from other teenage-
focused retailers.
9.
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Store and district managers are compensated with a base salary and may
qualify to receive a quarterly bonus based on sales and inventory shrinkage.
Additionally, district and area managers may also qualify to receive periodic
stock option grants, and certain employees are eligible to participate in the
Company's Employee Stock Purchase Plan. The Company believes that its continued
success is dependent in part on its ability to attract, retain and motivate
qualified employees. In particular, the success of the Company's expansion
program will be dependent on its ability to promote and/or recruit qualified
district and store managers. To date, the majority of its store managers have
been promoted from within the Company.
STORE ENVIRONMENT
Hot Topic stores are designed with an industrial warehouse theme that
incorporates dense merchandising, and the latest music releases are played on a
professional sound system to create a high-energy and fun shopping environment.
The Company believes this atmosphere enhances the Company's image as a source
for music-inspired fashion while encouraging customers to shop in its stores for
longer periods of time.
Stores are constructed and fixtured to maximize merchandising flexibility,
which enables the Company to highlight new product offerings and create a
compelling shopping environment. Bi-monthly planograms are developed to assist
store managers in displaying merchandise in an exciting and dynamic manner. In
addition, sales associates are encouraged to wear the Company's products, which
the Company believes contributes to the overall atmosphere of its stores.
MARKETING AND PROMOTION
The Company generally locates its stores in high traffic malls located
within areas of high teenage population and relies on existing customers, sales
associates, store design and exciting music to attract new customers to its
stores. Special artist events are run in conjunction with record companies and
licensed merchandise companies to promote new bands, music and movie releases.
Hot Topic has found these methods to be more effective than traditional media
advertising. The Company also maintains a website, (www.hottopic.com) through
which it markets its stores and store concept and sells certain of its
merchandise. The Company's net sales via the Internet continue to increase
significantly, although the total sales are still modest. The company is
working to redesign the website which may effect its promotional activities and
its Internet sales.
MANAGEMENT INFORMATION SYSTEMS
Hot Topic's information systems provide integration of store,
merchandising, distribution and financial systems. These systems include SKU
and classification inventory tracking, purchase order management, open to buy,
merchandise distribution, automated ticket making, general ledger, sales audit,
accounts payable, fixed asset management, payroll and integrated financials.
These systems operate on a Unix platform with a central IBM minicomputer and a
PC NT server network. Sales are updated daily in the merchandising reporting
systems by polling sales information from each store's point-of-sale ("POS")
terminals. The Company's POS system consists of registers providing price look-
up, time and attendance, e-mail and credit card and check authorization.
Through automated nightly two-way electronic communication with each store,
sales information, payroll hours and e-mail messages are uploaded to the host
system, and receiving, price changes and system maintenance are downloaded
through the POS devices. The Company evaluates information obtained through
daily polling to implement merchandising decisions regarding reorders, markdowns
and allocation of merchandise.
The Company is presently evaluating future long-term management information
system needs and the corresponding hardware and software upgrades at its stores
and its office and distribution center that may be necessary. The scope and
timing of such upgrades as well as the specific hardware and
10.
<PAGE>
software have not yet been fully identified and evaluated. However, the Company
presently estimates that the expenditures for management information system
upgrades in fiscal 1999 and fiscal 2000 will be approximately $3 million for
both years combined, which is substantially greater than such historical annual
expenditures.
YEAR 2000
The year 2000 issue exists because many computer applications currently use two-
digit date fields to designate a year. As the century date occurs, time-
sensitive software may recognize a date using "00" as the year 1900 rather than
that have the year 2000. This could result in the computer shutting down or
performing incorrect computations, leading to disruptions in normal business
processing.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing and implementation. During 1998, the
Company completed its assessment of all critical systems and developed a plan to
bring these systems into compliance. The Company has obtained information from
the vendors for its integrated store, merchandising, distribution and financial
systems as to required modifications and timing of those modifications to ensure
that the systems will be Year 2000 compliant. These efforts began in mid-1998
and are scheduled to be completed in the second and third quarters of fiscal
1999. Early in 1999, the hardware for these systems was tested and as required,
replacement hardware and operating systems were installed. The Company's plans
call for the testing of the vendor's revised software in first and second
quarters of fiscal 1999, and full implementation during the second and third
quarters of fiscal 1999. The cost of the Company's Year 2000 problem initiatives
is expected to be less than $100,000.
The Company does not have systems that interface directly with significant third
party vendors and has queried its significant suppliers of merchandise and
services that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their year 2000 resolution process in a timely fashion could have a
material impact on the Company. The effect of non-compliance by external agents
is not determinable.
The Company has not yet completed its contingency plan with respect to a worst
case scenario in the event of non-compliance by external agents. The Company
does not presently believe that an interruption in the supply of merchandise
would have a significant adverse impact on its operations since it purchases
merchandise from over 800 vendors, none of which historically supplies more than
approximately 5% of the Company's annual purchases. However, the Company may
increase inventory levels of certain merchandise late in calendar 1999 to offset
the risk that certain vendors may be adversely affected by Year 2000 issues.
The Company presently uses United Parcel Service ("UPS") to ship merchandise to
its stores. The Company has contacted UPS regarding Year 2000 compliance and
received written confirmation from UPS that UPS believes it will be fully
compliant by December 31, 1999.
While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material adverse effect on the Company.
11
<PAGE>
TRADEMARKS
The Company has registered on the Principal Register of the United States
Patent and Trademark Office its mark "Hot Topic" and the "Morbid Threads" mark
for clothing. Applications have been made for "Morbid Makeup," "Morbid Scents,"
"Morbid Metals," "Morbid Adornments," and "Rock Wall." Each federal
registration is renewable indefinitely if the mark is in use at the time of the
renewal. Applications have been made to register "Everything About the Music"
in the United States. The Company is not aware of any claims of infringement or
other challenges to the Company's right to use its marks in the United States.
The Company also has additional registrations and pending applications in
foreign jurisdictions.
COMPETITION
The teenage retail apparel and accessory industry is highly competitive and
the Company expects competition in its niche to increase. The Company competes
with other retailers for vendors and for teenage and college age customers,
suitable retail locations and qualified employees and management personnel. Hot
Topic currently competes with street alternative and vintage clothing stores
located primarily in metropolitan areas and with other mall-based teenage-
focused retailers such as The Buckle, Millers Outpost, Inc., Pacific Sunwear of
California, Inc., Spencer Gifts, Inc., Urban Outfitters, Inc., The Wet Seal,
Inc., Gadzooks, Inc. and, to a lesser extent, with music stores. Competition
from mail order catalogs of apparel and accessories targeting the teen customer
has increased in recent years. Many of the Company's competitors are larger and
have substantially greater financial, marketing and other resources than the
Company. The principal factors of competition in the Company's business are
merchandise selection, customer service, store location and price.
EMPLOYEES
The Company employed approximately 525 full-time and 1,128 part-time
employees at April 10, 1999. Of the Company's 1,653 employees, 124 were
corporate and distribution center personnel and 1,529 were store employees. The
number of part-time employees fluctuates with seasonal needs. None of the
Company's employees is covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at April 19, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Orval D. Madden........... 50 President, Chief Executive Officer and Director
Jay A. Johnson............ 53 Chief Financial Officer and Assistant Secretary
Elizabeth M. McLaughlin... 38 Senior Vice President, General Merchandise
Manager
Marc R. Bertone........... 42 Vice President, Real Estate and Construction
M. Reid Killen ........... 41 Vice President, Information Technology
Roger Shively ............ 51 Vice President, Human Resources
</TABLE>
12
<PAGE>
Orval D. Madden founded Hot Topic in 1988, and has been the Company's
President and Chief Executive Officer and a Director since its inception. Prior
to founding Hot Topic, Mr. Madden was a Senior Vice President of Federal
Department Stores' Children's Place and Accessory Place divisions, and was a
Divisional Vice President for Carter-Hawley-Hale Stores' Broadway and
Weinstock's Department Store divisions. In 1993, Mr. Madden was recognized as
regional California retailing "Entrepreneur Of The Year" in a competition
sponsored by Ernst & Young, Merrill Lynch, and Inc. Magazine.
Jay A. Johnson has been Chief Financial Officer and Assistant Secretary of
the Company since May 1995. From January 1993 to May 1995, he was Vice
President/Chief Financial Officer of Frame-n-Lens Optical, Inc., a national
optical retailer with approximately 300 stores. From July 1978 to July 1992,
Mr. Johnson held senior financial management positions at one manufacturing and
two retail companies. Mr. Johnson is a certified public accountant.
Elizabeth M. McLaughlin has been the Company's Senior Vice President,
General Merchandise Manager, since June 1998. From June 1996 through May 1998,
Ms. McLaughlin was the Company's Vice president, General Merchandise Manager and
from May 1993 through May 1996, Ms. McLaughlin was the Company's Vice President,
Operations. From 1985 to May 1993, she held various positions with Millers
Outpost including, Divisional Merchandise Manager. From 1978 to 1985, she held
various positions with The Broadway.
Marc R. Bertone has been Vice President, Real Estate and Construction, of
the Company since August 1994. Mr. Bertone has 15 years of leasing and legal
experience, and from November 1988 to August 1994, served as Vice President and
General Counsel for The Wet Seal, Inc., a specialty retailer. Mr. Bertone was
admitted to the California Bar in June 1982.
M. Reid Killen has been Vice President, Information Technology of the
Company since July 1998. From June 1994 to July 1998, Mr. Killen was Director
of Applications Development at The Gymboree Corporation. From September 1990
to May 1994, Mr. Killen was a Senior Business Analyst at The Gap, Inc.
Roger Shively has been Vice President, Human Resources of the Company since
July 1998. Mr. Shively served as the Vice President, Human Resources at Panda
Management Company from March 1997 to July 1998 and at CKE Restaurants, Inc.
from August 1991 to August 1994.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
In addition to risks identified else where in this Annual Report, the
Company is subject to other risks, including the following risk factors:
Implementation and Management of Aggressive Growth Strategy
The Company's net sales and net income have grown significantly during the
past several years, primarily as a result of the opening of stores and, to a
lesser extent, the introduction of new products and categories. Fifty of the
Company's 158 stores opened as of January 30, 1999 had been open for less than
one full year. The Company intends to continue to pursue an aggressive growth
strategy for the foreseeable future, and its future operating results will
depend largely upon its ability to open and operate stores successfully and to
manage a larger business profitably. The Company anticipates opening
approximately 45 stores during fiscal 1999, which will result in a significant
increase in the number of
13
<PAGE>
stores operated by the Company. Through fiscal 1994, all of the Company's stores
were located in the Western United States. In fiscal 1995, the Company expanded
into new markets by opening stores in the Northeastern and Midwestern regions of
the United States. The Company plans to continue to enter new markets in various
regions of the United States, and approximately one-half of its stores opened in
fiscal years 1996, 1997 and 1998 were in new markets. Operation of a greater
number of new stores and expansion into new markets may present competitive and
merchandising challenges that are different from those currently encountered by
the Company in its existing stores and markets. In addition, there can be no
assurance that the Company's expansion within its existing markets will not
adversely affect the individual financial performance of the Company's existing
stores or its overall results of operations or that new stores will achieve
sales and profitability levels consistent with existing stores. The Company will
need to continually evaluate the adequacy of its store management and management
information and distribution systems to manage its planned expansion. There can
be no assurance that the Company will anticipate all of the changing demands
that its expanding operations will impose on such systems, and the failure to
adapt its systems and procedures to such changing demands could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will successfully achieve
its expansion targets or, if achieved, that planned expansion will result in
profitable operations.
The Company's ability to open stores and the performance of such stores
will depend upon many factors, including, among others, the Company's ability to
identify and enter new markets, locate suitable store sites, negotiate
acceptable lease terms, hire and train store managers and sales associates and
obtain adequate capital resources on acceptable terms. Early in its history,
the Company encountered difficulties in leasing certain store sites. The
Company believes these difficulties were in part due to the Company's level of
capitalization and its limited operating history at such time. The Company also
believes these difficulties were in part due to the Company's new, unproven
store concept, and apprehension on the part of mall operators concerning the
Company's teenage customers. There can be no assurance that the Company will
not face resistance from mall operators or others in the future. Any
restrictions on the Company's ability to expand or to offer a broad assortment
of merchandise could have a material adverse effect on the Company's business,
results of operations and financial condition.
Fluctuations in Comparable Store Sales Results
A variety of factors affect the Company's comparable store sales including,
among others, the timing of releases of new music-related products, music and
fashion trends, the general retail sales environment, the Company's ability to
efficiently source and distribute products, changes in the Company's merchandise
mix and the Company's ability to execute its business strategy efficiently. The
Company's comparable store sales results have fluctuated significantly in the
past and the Company believes that such fluctuations may continue. The
Company's comparable store sales results for fiscal 1994, 1995, 1996, 1997 and
1998 were 20.3%, (0.9%), 8.9%, 2.2% and 0.4%, respectively. The Company's
comparable store sales results were 5.7%, 0.7%, 0.6% and 2.7% for the first,
second, third and fourth quarters, respectively, of fiscal 1997 and (0.6%),
2.0%, 9.5% and (5.9%) for the first, second, third and fourth quarters,
respectively, of fiscal 1998. Past comparable store sales results are no
indication of future results, and there can be no assurance that the Company's
comparable store sales results will not decrease in the future. The Company's
comparable store sales results could cause the price of the Common Stock to
fluctuate substantially.
Dependence on and Changes in Music and Fashion Trends
The Company's profitability is largely dependent upon (i) the continued
popularity of alternative and rock music and music videos among teenagers and
college age adults, (ii) the emergence of new artists and the success of music
releases and music-related products, (iii) the continuance of a significant
level of teenage spending on music-licensed and music-influenced products, and
(iv) the Company's ability to anticipate and keep pace with the music, fashion
and merchandise preferences of its customers.
14
<PAGE>
The popularity of particular types of music, artists, styles and brands is
subject to change. The Company's failure to anticipate, identify or react
appropriately to changing trends, as well as the making of music or fashion
misjudgments, could lead to, among other things, excess inventories and higher
markdowns, which could have a material adverse effect on the Company's business,
results of operations and financial condition, and on its image with its
customers.
Impact of Economic Conditions; Minimum Wage Rates
Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation and consumer confidence in future economic
conditions. The Company is also dependent upon the continued popularity of
malls as a shopping destination and the ability of mall anchor tenants and other
attractions to generate customer traffic for its stores. A decrease in mall
traffic would adversely affect the Company's growth, net sales, comparable store
sales results and profitability. In addition, a significant number of the
Company's stores are concentrated in the Western United States, and as a result
a deterioration in economic conditions in that region could particularly affect
the Company's business, results of operations and financial condition.
Changes to federal minimum wage laws in each of 1996 and 1997 raised the
mandatory minimum wage. California and other states have also enacted increases
in State required minimum wages that are higher than the Federal requirements.
Statutory increases in federal and state minimum wages could adversely affect
the Company's profitability. The recent federal and state increase and any
other such increases will raise minimum wages above current wage rates of
certain of the Company's employees, and competitive factors could require
corresponding increases in higher employee wage rates, any of which would
increase the Company's expenses and adversely affect results of operations.
Quarterly Results and Seasonality
The Company's quarterly results of operations have and are expected to
continue to fluctuate materially depending on, among other things, the timing of
store openings and related pre-opening and other startup expenses, net sales
contributed by new stores, increases or decreases in comparable store sales,
releases of new music and music-related products, shifts in timing of certain
holidays, changes in the Company's merchandise mix and overall economic
conditions. The Company's business is also subject to seasonal influences, with
heavier concentrations of sales during the Christmas holiday, the back-to-school
season and other periods when school is not in session. As is the case with
many retailers of apparel, accessories and related merchandise, the Company
typically experiences lower net sales and operating losses during the first
fiscal quarter. The Company has experienced quarterly losses in the past and
may experience such losses in the future. Because of these fluctuations in net
sales and net income (loss), the results of operations of any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year or any future quarter.
Dependence on Key Vendors
The Company's performance depends on its ability to purchase current music-
related merchandise in sufficient quantities at competitive prices. The Company
has many sources of merchandise, with the largest vendor supplying approximately
5% of the Company's merchandise purchases in fiscal 1998. Substantially all of
the Company's music-licensed products are available only from vendors that have
exclusive license rights. In addition, many of the Company's music-influenced
products are acquired from small, specialized vendors that create unique
products primarily for the Company. The Company's smaller vendors generally
have limited resources, production capacities and operating histories, and some
of the Company's vendors have limited the distribution of their merchandise in
the past. The Company has no long-term purchase contracts or other contractual
assurances of continued supply, pricing or access to new products. There can be
no assurance that the
15
<PAGE>
Company will be able to acquire desired merchandise in sufficient quantities on
terms acceptable to the Company in the future; or that any inability to acquire
suitable merchandise, or the loss of one or more key vendors, will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Dependence on Key Personnel
The Company's performance depends largely on the efforts and abilities of
senior management, particularly Orval Madden, the Company's President, Chief
Executive Officer and founder. The loss of Mr. Madden's services or the
services of other members of the management team could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company has a $500,000 key-man life insurance policy on Mr. Madden. There
can be no assurance that Mr. Madden and the Company's existing management team
will be able to manage the Company or its growth or that the Company will be
able to attract and retain additional qualified personnel as needed in the
future.
Uncertainties Regarding Distribution of Merchandise
To accommodate its planned expansion in fiscal 1999 and beyond, the Company
has leased a larger building to expand the capacity of its headquarters office
and merchandise distribution facility. Construction of the offices and
installation of the distribution equipment commenced in February 1999. The
Company presently plans to move from its existing facility into the new facility
early in the summer of 1999. The presently estimated cost of construction,
equipment, fixtures and furniture is approximately $4.0 to $4.5 million. The
new facility has a projected capacity of approximately 500 stores. The Company
anticipates that in fiscal 1999 the new headquarters office and distribution
facility will negatively impact the results of operations, as the Company will
be unable to leverage the higher occupancy costs for the larger facility.
Although the Company believes that it has carefully has planned the move, there
can be no assurance that the move to the new facility will not cause disruptions
that could materially adversely affect the Company's business, results of
operations and financial condition.
Further, the Company relies upon the United Parcel Service and Fedex for
its product shipments, including shipments to and from all of its stores, and
accordingly is subject to the risks, including employee strikes and inclement
weather, associated with United Parcel Service's and Fedex's ability to provide
delivery services to meet the Company's shipping needs. The Company is also
dependent upon temporary employees to adequately staff its distribution
facility, particularly during busy periods, such as during the Christmas season
and while multiple stores are opening. There can be no assurance that the
Company will continue to receive adequate assistance from its temporary
employees, or that there will continue to be sufficient sources of temporary
employees.
Failure to Authenticate Licensing Rights
The Company purchases licensed merchandise from a number of suppliers who
hold manufacturing and distribution rights under the terms of certain licenses.
The Company generally relies upon vendors' representations concerning
manufacturing and distribution rights and does not independently verify whether
these vendors legally hold adequate rights to licensed properties they are
manufacturing or distributing. If the Company acquires unlicensed merchandise,
it could be obligated to remove such merchandise from its stores, incur costs
associated with destruction of merchandise if the distributor is unwilling or
unable to reimburse the Company, and be subject to liability under various civil
and criminal causes of action, including actions to recover unpaid royalties and
other damages. Any of these results could have a material adverse effect on the
Company's business, results of operations and financial condition.
16
<PAGE>
Competition
The retail apparel and accessory industry is highly competitive. The
Company competes with other retailers for vendors and for teenage and college
age customers, suitable retail locations and qualified employees and management
personnel. Hot Topic currently competes with street alternative stores located
primarily in metropolitan areas and with other mall-based teenage-focused
retailers such as The Buckle, Millers Outpost, Inc., Pacific Sunwear of
California, Inc., Spencer Gifts, Inc., Urban Outfitters, Inc., The Wet Seal,
Inc., Gadzooks, Inc., and, to a lesser extent, with music stores. Competition
from mail order catalogs of apparel and accessories targeting the teen customer
has increased in recent years. Many of the Company's competitors are larger and
have substantially greater financial, marketing and other resources than the
Company. Direct competition with these and other retailers may increase
significantly in the future, which could require the Company, among other
things, to lower its prices and/or take other measures. Increased competition
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Price Volatility
The Common Stock is quoted on the Nasdaq National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the Company believes that factors such as quarterly fluctuations in the
financial results of the Company, fluctuations in the Company's comparable store
sales, announcements by other apparel, accessory and gift item retailers, the
trading volume of the Company's Common Stock in the public market, the condition
of the overall economy and the condition of the financial markets could cause
the price of the Common Stock to fluctuate substantially.
Anti-takeover Matters
The Company's Amended and Restated Articles of Incorporation and Bylaws
contain provisions that may have the effect of delaying, deterring or preventing
a takeover of the Company that shareholders may consider to be in their best
interests. For instance, the Company's Amended and Restated Articles of
Incorporation and Bylaws prohibit shareholder action by written consent and
include certain "fair price provisions." Additionally, the Board of Directors
has the authority to issue up to 10,000,000 shares of "blank check" preferred
stock having such rights, preferences and privileges as designated by the Board
of Directors without shareholder approval.
Influence of Existing Shareholders
As of March 1, 1999, the Company's executive officers, directors and their
affiliates beneficially owned approximately 26% of the Company's outstanding
shares of Common Stock. As a result, these shareholders, if acting together,
would be able to influence matters requiring approval by the shareholders of the
Company, including the election of a majority of the directors. The voting
power of these shareholders under certain circumstances could have the effect of
delaying or preventing a change in control of the Company. The Company has
entered into agreements with its executive officers and directors indemnifying
them against losses they may incur in legal proceedings arising from their
service to the Company.
ITEM 2. PROPERTIES
All of the Company's existing store locations are leased by the Company,
with lease terms expiring between 2001 and 2009. The leases for most of the
existing stores are for terms of ten years and provide for contingent rent based
upon a percent of sales in excess of specified minimums. Leases for future
stores will likely include similar contingent rent provisions.
17
<PAGE>
The Company's present headquarters office and distribution center are
located in Pomona, California, and are occupied under the terms of a lease
covering approximately 45,000 square feet. The lease is scheduled to expire in
September 1999.
To accommodate its planned expansion in fiscal 1999 and beyond, the Company
has leased a 125,000 square foot building to expand the capacity of its
headquarters office and merchandise distribution facility. The lease is for a
five year term with two options to extend the lease, each for a three year
period. Construction of the offices and installation of the distribution
equipment commenced in February 1999. The Company presently plans to move from
its existing facility into the new facility early in the summer of 1999. The
presently estimated cost of construction, equipment, fixtures and furniture is
approximately $4.0 to $4.5 million. The new facility has a projected capacity
of approximately 500 stores. The annual base rent for the initial five year
term is approximately $525,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "HOTT". The Company consummated its initial public offering in
September 1996 at a price of $18.00 per share. The following table sets forth,
for the periods indicated, the high and low "sales" prices of the shares of
Common Stock of the Company, as reported on the Nasdaq National Market. Such
quotations represent inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 HIGH LOW
--------- --------
<S> <C> <C>
First Quarter $29 3/4 $22 5/8
Second Quarter $28 7/8 $20
Third Quarter $23 $12
Fourth Quarter 25 1/8 $11 5/16
1997 HIGH LOW
--------- ---------
First Quarter $29 3/4 $17 1/2
Second Quarter $30 3/4 $15 1/2
Third Quarter $22 1/2 $15 1/8
Fourth Quarter $26 1/8 $16 3/16
</TABLE>
On April 1, 1999, the last sales price of the Common Stock as reported on
the Nasdaq National Market was $18.75 per share. As of April 1, 1999, there
were approximately 250 holders of record of the Company's Common Stock. This
number does not reflect the number of beneficial holders of the Company's Common
Stock, which the Company believes to be in excess of 800 holders.
18
<PAGE>
The Company has not paid any cash dividends since inception and does not
anticipate paying any cash dividends in the foreseeable future.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Annual Report on Form 10-K.
HOT TOPIC, INC. AND
SUBSIDIARIES
SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ -------------- --------------- -------------- -------------
(In thousands, except per share data, number of stores, comparable store
sales and sales per square foot)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $103,371 $70,532 $43,618 $23,632 $14,002
Cost of goods sold, including
buying, distribution and
occupancy costs 65,855 44,417 27,049 15,067 9,059
-------- ------- ------- ------- -------
Gross margin 37,516 26,115 16,569 8,565 4,943
Selling, general and
administrative expenses 29,077 19,862 12,846 7,981 4,527
-------- ------- ------- ------- -------
Operating income 8,439 6,253 3,723 584 416
Interest income, net 931 901 382 143 79
-------- ------- ------- ------- -------
Income before income taxes 9,370 7,154 4,105 727 495
Income taxes 3,367 2,611 1,535 291 203
-------- ------- ------- ------- -------
Net income $ 6,003 $ 4,543 $ 2,570 $ 436 $ 292
Net income per share:
Basic $1.25 $0.97 $0.71 $0.14 $0.11
Diluted $1.21 $0.92 $0.66 $0.14 $0.11
Weighted average shares outstanding
Basic 4,817 4,690 3,628 3,082 2,744
Diluted 4,956 4,940 3,899 3,135 2,759
SELECTED OPERATING DATA:
Number of stores at year end 158 108 68 42 24
Comparable stores sales
increase (decrease) 0.4% 2.2% 8.9% (0.9%) 20.3%
Average sales per square foot $ 542 $ 565 $ 578 $ 572 $ 571
Average sales per store (000s) $ 772 $ 769 $ 748 $ 705 $ 692
BALANCE SHEET DATA:
Working capital $ 28,432 $29,230 $29,247 $ 5,857 $ 4,087
Total assets 58,764 51,953 44,033 14,959 9,119
Long-term obligations,
including current potion 120 161 48 34 24
Redeemable preferred stock - - - 11,245 6,583
Shareholders' equity $ 48,749 $44,736 $39,069 $ 785 $ 1,004
</TABLE>
20.
<PAGE>
HOT TOPIC
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Hot Topic is a mall-based specialty retailer of music-licensed and music-
influenced apparel, accessories and gift items for young men and women
principally between the ages of 12 and 22. The Company opened its first store
in 1989, and operated 158 stores in 38 states across the United States as of
January 30, 1999. The Company opened 18 stores during fiscal 1995, including
its first 12 stores in the Midwest and Northeast; 26 stores during fiscal 1996,
most of which are in new markets in the Midwest and Northeast adjacent to
markets entered in fiscal 1995; 40 stores during fiscal 1997, both in existing
markets and in 12 additional states; and 50 stores during fiscal 1998, both in
existing markets and in 6 additional states.
The Company operates on a 52 or 53 week fiscal year which ends on the
Saturday nearest to January 31. Fiscal 1996, 1997 and 1998 were 52-week years.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
statement of operations data expressed as a percentage of net sales and certain
store data:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying, distribution &
occupancy costs 63.7% 63.0% 62.0%
------------ ----------- -----------
Gross margin 36.3% 37.0% 38.0%
Selling, general and
administrative expenses 28.1% 28.2% 29.5%
------------ ----------- -----------
Operating income 8.2% 8.8% 8.5%
Interest income, net 0.9% 1.3% 0.9%
------------ ----------- -----------
Income before income tax 9.1% 10.1% 9.4%
Provision for income taxes 3.3% 3.7% 3.5%
------------ ----------- -----------
Net income 5.8% 6.4% 5.9%
============ =========== ===========
Number of stores at year end 158 108 68
============ =========== ===========
Comparable store sales increase 0.4% 2.2% 8.9%
============ =========== ===========
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased approximately $32.9 million, or 46.6%, to $103.4
million in fiscal 1998 from $70.5 million in fiscal 1997. Net sales for the 50
stores opened during fiscal 1998 and for those stores not yet qualifying as
comparable stores contributed $32.7 million of the net sales increase.
Comparable store sales increased 0.4% in fiscal 1998 and contributed $200,000 of
the increase in net sales. Apparel and T-shirts increased to 48% of net sales
in fiscal 1998 from 47% of net sales in fiscal 1997.
21.
<PAGE>
HOT TOPIC
Gross margin increased approximately $11.4 million to $37.5 million in
fiscal 1998 from $26.1 million in fiscal 1997. As a percentage of net sales,
gross margin decreased to 36.3% in fiscal 1998 from 37.0% in fiscal 1997,
principally due to higher occupancy and distribution expenses, as a percentage
of sales.
Selling, general and administrative expenses increased approximately $9.2
million to $29.1 million during fiscal 1998 from $19.9 million during fiscal
1997, but decreased slightly as a percentage of net sales to 28.1% in fiscal
1998 from 28.2% in fiscal 1997. The decrease as a percentage of net sales was
primarily due to a reduction of corporate overhead expense as a percentage of
net sales due to the operating leverage achieved through the Company's larger
store base offset in part by an increase in store payroll expense and store
operating expenses.
Operating income increased approximately $2.2 million to $8.4 million
during fiscal 1998 from $6.2 million during fiscal 1997. As a percentage of net
sales, operating income decreased to 8.2% in fiscal 1998 from 8.8% in fiscal
1997, principally from the lower gross margin.
Interest income, net, increased slightly to $931,000 during fiscal 1998
from $901,000 during fiscal 1997.
The Company's effective tax rate was 35.9% in fiscal 1998 and 36.5% in
fiscal 1997. The variance from an expected rate of approximately 40% in both
fiscal 1998 and 1997 is a result of a significant portion of each fiscal year's
interest income being non-taxable.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased approximately $26.9 million, or 61.7%, to $70.5 million
in fiscal 1997 from $43.6 million in fiscal 1996. Net sales for the 40 stores
opened during fiscal 1997 and for those stores not yet qualifying as comparable
stores contributed $26.1 million of the net sales increase. Comparable store
sales increased 2.2% in fiscal 1997 and contributed $800,000 of the increase in
net sales. The increase in net sales in fiscal 1997 was principally
attributable to increased apparel and T-shirt sales. Apparel and T-shirts
increased to 47% of net sales in fiscal 1997 from 43% of net sales in fiscal
1996.
Gross margin increased approximately $9.5 million to $26.1 million in
fiscal 1997 from $16.6 million in fiscal 1996. As a percentage of net sales,
gross margin decreased to 37.0% in fiscal 1997 from 38.0% in fiscal 1996,
principally due to lower margin on the merchandise sold resulting from a shift
in the Company's product mix toward apparel categories.
Selling, general and administrative expenses increased approximately $7.0
million to $19.9 million during fiscal 1997 from $12.8 million during fiscal
1996, but decreased as a percentage of net sales to 28.2% in fiscal 1997 from
29.5% in fiscal 1996. The decrease as a percentage of net sales was primarily
due to a reduction of corporate overhead expense as a percentage of net sales
due to the operating leverage achieved through the Company's larger store base
offset in part by an increase in store payroll expense. The increase as a
percentage of net sales in store payroll expense was principally attributable to
increases in Federal and State minimum wage rates.
Operating income increased approximately $2.5 million to $6.2 million
during fiscal 1997 from $3.7 during fiscal 1996. As a percentage of net sales,
operating income increased to 8.8% in fiscal 1997 from 8.5% in fiscal 1996,
principally from the leveraging of selling, general and administrative expenses.
Interest income, net, increased approximately $519,000 to $901,000 during
fiscal 1997 from $382,000 during fiscal 1996, principally due to higher average
cash balances in fiscal 1997.
22.
<PAGE>
HOT TOPIC
The Company's effective tax rate was 36.5% in fiscal 1997 and 37.4% in
fiscal 1996. The variance from an expected rate of approximately 40% in both
fiscal 1997 and 1996 is a result of a significant portion of each fiscal year's
interest income being non-taxable.
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of store openings and related pre-
opening and other startup expenses, net sales contributed by new stores,
increases or decreases in comparable store sales, releases of new music and
music-related products, shifts in timing of certain holidays, changes in the
Company's merchandise mix and overall economic conditions.
The Company's business is also subject to seasonal influences, with heavier
concentrations of sales during the Christmas holiday, back-to-school season, and
other periods when schools are not in session. The Christmas holiday season
remains the Company's single most important selling season. The Company
believes, however, that the importance of the summer vacation and back-to-school
seasons (which affect operating results in the second and third quarters,
respectively) and, to a lesser extent, the spring break season (which affects
operating results in the first quarter), reduces somewhat the Company's
dependence on the Christmas holiday selling season. Furthermore, summer
vacation, spring break and the back-to-school season take place at somewhat
different times in different parts of the country, spreading the impact of these
events on the Company's sales over a longer period. As is the case with many
retailers of apparel, accessories and related merchandise, the Company typically
experiences lower net sales and operating losses during the first fiscal
quarter. The Company has experienced quarterly losses in the past and may
experience such losses in the future.
The following table sets forth certain statement of operations and
operating data for each of the Company's last eight fiscal quarters. The
quarterly statement of operations data and selected operating data set forth
below were derived from unaudited financial statements of the Company, which in
the opinion of management of the Company contain all adjustments (consisting
only of normal recurring adjustments) necessary for fair presentation thereof.
Results in any quarter are not necessarily indicative of results that may be
achieved for a full year.
23.
<PAGE>
HOT TOPIC
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1998
-------------------------------------- ----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
-------- -------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except selected operating and per share data)
STATEMENT OF
OPERATIONS DATA:
Net sales $11,188 $13,683 $18,753 $26,908 $17,314 $20,787 $28,708 $36,561
Gross margin 3,762 4,619 6,724 11,010 5,722 6,776 10,642 14,376
Operating income
(loss) (413) 117 1,600 4,949 (179) 318 2,587 5,713
Net income (loss) (110) 204 1,120 3,329 45 334 1,758 3,866
Net income (loss) per
share:
Basic ($0.02) $ 0.04 $ 0.24 $ 0.70 $ 0.01 $ 0.07 $ 0.36 $ 0.80
Diluted ($0.02) $ 0.04 $ 0.23 $ 0.67 $ 0.01 $ 0.07 $ 0.36 $ 0.79
Weighted average
shares outstanding:
Basic 4,607 4,683 4,723 4,749 4,778 4,811 4,831 4,848
Diluted 4,928 4,948 4,928 4,956 4,979 4,984 4,944 4,916
SELECTED OPERATING
DATA:
Comparable store
sales increase 5.7% 0.7% 0.6% 2.7% (0.6%) 2.0% 9.5% (5.9%)
Stores open at end of
period 81 94 104 108 123 133 145 158
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During the last three fiscal years, the Company's primary uses of cash have
been to finance store openings and purchase merchandise inventories. The
Company has satisfied its cash requirements principally from cash flows from
operations. In fiscal 1996, the Company received additional capital from
proceeds from its initial public offering of Common stock in September 1996.
The Company completed its initial public offering of 1,495,000 shares in
September 1996, and received net proceeds of approximately $24.3 million. The
proceeds were used for general corporate purposes and to increase working
capital.
Cash flows provided by operating activities were $9.3 million, $7.2
million, and $4.1 million in fiscal 1998, 1997 and 1996, respectively. The
increases in cash flows from operating activities in each of the fiscal years
was primarily attributable to increases in the company's net income.
Cash flows used in investing activities were $9.3 million, $8.9 million and
$5.9 million in fiscal 1998, 1997 and 1996, respectively. Cash flows used in
investing activities relate primarily to store openings and, in 1997,
approximately $750,000 was used to expanded the capacity and increased the
efficiency of the Company's distribution facility. The Company opened 50, 40
and 26 stores in fiscal 1998, 1997 and 1996, respectively.
Cash flows provided by financing activities were ($2.1) million, $1.1
million and $24.4 million in fiscal 1998, 1997 and 1996, respectively. In
January 1999, the company used $3.0 million to repurchase 220,000 shares of its
Common Stock. In March 1999, the Company's Board of Directors approved an
additional repurchase of up to an aggregate of 250,000 shares of its Common
Stock. In June 1996, the Company received net proceeds of $72,000 from the
exercise of warrants and in September 1996, the Company received $24.3 million
from its initial public offering.
The Company anticipates that it will spend approximately $8.5 to $9.5
million to open approximately 45 stores in fiscal 1999. During fiscal 1998, the
Company's average capital expenditures to open a store, including leasehold
improvements and furniture and fixtures, totaled approximately
24.
<PAGE>
$170,000. The average initial gross inventory for the new 1998 stores was
approximately $65,000 (which was partially financed by trade credit) and pre-
opening costs averaged approximately $19,000 for these stores. The Company
expects the average total costs associated with opening a store will be
approximately the same in fiscal 1999. Pre-opening costs are expensed in the
period in which the store opens. The actual costs that the Company will incur in
connection with opening future stores cannot be predicted with precision because
such costs will vary based upon, among other things, geographic location, the
size of the stores and the extent of the build-out required at the selected
sites. Initial inventory requirements vary at new stores depending on the season
and current merchandise trends.
To accommodate its planned expansion in fiscal 1999 and beyond, the Company
has leased a larger building to expand the capacity of its headquarters office
and merchandise distribution facility. Construction of the offices and
installation of the distribution equipment commenced in February 1999. The
Company presently plans to move from its existing facility into the new facility
early in the summer of 1999. Presently, the estimated cost of construction,
equipment, fixtures and furniture is approximately $4.0 to $4.5 million. The
new facility has a projected capacity of approximately 500 stores.
The Company is presently evaluating future long-term management information
system needs and the corresponding hardware and software upgrades at its stores
and its office and distribution center that may be necessary. The scope and
timing of such upgrades as well as the specific hardware and software have not
yet been fully identified and evaluated. However, the Company presently
estimates that the expenditures for management information system upgrades in
fiscal 1999 and fiscal 2000 will be approximately $3 million for both years
combined, which is substantially greater than such historical annual
expenditures.
The Company believes that its existing cash balances and cash generated
from operations will be sufficient to fund its operations and planned expansion
through the next 12 months.
INFLATION
The Company does not believe that inflation has had a material adverse
effect on net sales or results of operations. The Company has generally been
able to pass on increased costs related to inflation through increases in
selling prices.
YEAR 2000 COMPLIANCE
The year 2000 issue exists because many computer applications currently use
two-digit date fields to designate a year. As the century date occurs, time-
sensitive software may recognize a date using "00" as the year 1900 rather than
that have the year 2000. This could result in the computer shutting down or
performing incorrect computations, leading to disruptions in normal business
processing.
The Company's plan to resolve the Year 2000 issue involves the following
four phases: assessment, remediation, testing and implementation. During
1998, the Company completed its assessment of all critical systems and developed
a plan to bring these systems into compliance. The Company has obtained
information from the vendors for its integrated store, merchandising,
distribution and financial systems as to required modifications and timing of
those modifications to ensure that the systems will be Year 2000 compliant.
These efforts began in mid-1998 and are scheduled to be completed in the second
and third quarters of fiscal 1999. Early in 1999, the hardware for these
systems was tested and as required, replacement hardware and operating systems
were installed. The Company's plans call for the testing of the vendor's
revised software in first and second quarters of fiscal 1999, and full
implementation during the second and third quarters of fiscal 1999. The cost of
the Company's Year 2000 problem initiatives is expected to be less than
$100,000.
25.
<PAGE>
The Company does not have systems that interface directly with significant
third party vendors and has queried its significant suppliers of merchandise and
services that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their year 2000 resolution process in a timely fashion could have a
material impact on the Company. The effect of non-compliance by external agents
is not determinable.
The Company has not yet completed its contingency plan with respect to a
worst case scenario in the event of non-compliance by external agents. The
Company does not presently believe that an interruption in the supply of
merchandise would have a significant adverse impact on its operations since it
purchases merchandise from over 600 vendors, none of which historically supplies
more than approximately 5% of the Company's annual purchases. However, the
Company may increase inventory levels of certain merchandise late in calendar
1999 to offset the risk that certain vendors may be adversely affected by Year
2000 issues. The Company presently uses United Parcel Service ("UPS") to ship
merchandise to its stores. The Company has contacted UPS regarding Year 2000
compliance and received written confirmation from UPS that UPS believes it will
be fully compliant by December 31, 1999.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks disclosure pursuant to Item 7A are not material
and are therefore not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements of the Company listed in Item 14(a) are included
herein on pages F-1 through F-14 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers" in Part I, Item 1 hereof for
information regarding executive officers.
The information required by this item with respect to directors is
incorporated by reference from the information under the caption "Election of
Directors," contained in the Company's Definitive Proxy Statement which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the solicitation of proxies for the Company's Annual Meeting of
Shareholders to be held on June 1, 1999 (the "Proxy Statement").
26.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information appearing under the caption "Certain Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) Index to Consolidated Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-1
---
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998............... F-2
---
Consolidated Statements of Operations for the years ended January 30, 1999, January
31, 1998 and February 1, 1997........................................................ F-3
---
Consolidated Statements of Shareholders' Equity for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997................................................ F-4
---
Consolidated Statements of Cash Flows for the years ended January 30, 1999, January
31, 1998 and February 1, 1997........................................................ F-5
---
Notes to Consolidated Financial Statements............................................ F-6
---
</TABLE>
(a)(2) Index to Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable, or the information is included in the Financial statements or notes
thereto.
(a)(3) Index to Exhibits
See Index to Exhibits beginning on page 30.
The following management compensatory plans and arrangements are
required to be filed as exhibits to this Report on Form 10-K pursuant to Item
14(c):
27.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
Number DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
10.2 1996 Equity Incentive Plan (the "1996 Plan"). (1)
10.3 Form of Nonstatutory Stock Option Agreement of Registrant pursuant to the 1996
Plan. (1)
10.4 Form of Incentive Stock Option Agreement of Registrant pursuant to the 1996 Plan.
(1)
10.5 Non-Employee Directors' Stock Option Plan. (1)
10.6 Employee Stock Purchase Plan. (1)
10.11 Letter Agreement regarding Employment Terms, dated August 9, 1994, entered into
between Registrant and Elizabeth M. McLaughlin. (1)
10.15 401(k) Defined Contribution Plan of Registrant, effective as of August 1, 1995.
(1)
</TABLE>
____________
(1) Filed as an exhibit to Registrant's Registration Statement on Form SB-2
(No. 333-5054-LA) and incorporated herein by reference.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
The exhibits required by this Item are listed under Item 14(a)(3)
(d) Financial Statement Schedules
The financial statement schedules required by this Item are listed
under Item 14(a)(2).
28.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pomona,
County of Los Angeles, State of California, on the 22nd day of April, 1999.
HOT TOPIC, INC.
By: /s/ Orval D. Madden
---------------------
Orval D. Madden
President, Chief Executive Officer and Director
POWER OF ATTORNEY
Know all Men by These Presents, that each person whose signature appears
below constitutes and appoints Orval D. Madden and Jay A. Johnson, or either of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME POSITION DATE
- -------------------------------------------------- -------------------------------------- --------------------
<S> <C> <C>
/s/ ROBERT M. JAFFE Chairman of the Board April 22, 1999
- ----------------------------------------------------
Robert M. Jaffe
/s/ ORVAL D. MADDEN President, Chief Executive Officer April 22, 1999
- ----------------------------------------------------
Orval D. Madden and Director
(Principal Executive Officer)
/s/ JAY A. JOHNSON Chief Financial Officer and Assistant April 22, 1999
- ----------------------------------------------------
Jay A. Johnson Secretary
(Principal Financial and Accounting
Officer)
/s/ EDGAR F. BERNER Director April 22, 1999
- ----------------------------------------------------
Edgar F. Berner
/s/ STANLEY E. FOSTER Director April 22, 1999
- ----------------------------------------------------
Stanley E. Foster
/s/ CECE SMITH Director April 22, 1999
- ----------------------------------------------------
Cece Smith
/s/ CORRADO FEDERICO Director April 22, 1999
- ----------------------------------------------------
Corrado Federico
/s/ ANDREW SCHUON Director April 22, 1999
- ----------------------------------------------------
Andrew Schuon
/s/ BRUCE A. QUINNELL Director April 22, 1999
- ----------------------------------------------------
Bruce A. Quinnell
</TABLE>
29.
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Form of Amended and Restated Articles of Incorporation of Registrant. (1)
3.2 Form of amended and restated Bylaws, Registrant. (1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate. (1)
10.1 Form of Indemnity Agreement to be entered into between Registrant and its directors
and officers. (1)
10.2 1996 Equity Incentive Plan (the "1996 Plan"). (1)
10.3 Form of Nonstatutory Stock Option Agreement of Registrant pursuant to the 1996
Plan. (1)
10.4 Form of Incentive Stock Option Agreement of Registrant pursuant to the 1996 Plan.
(1)
10.5 Non-Employee Directors' Stock Option Plan. (1)
10.6 Employee Stock Purchase Plan. (1)
10.11 Letter Agreement regarding Employment Terms, dated August 9, 1994, entered into
between Registrant and Elizabeth M. McLaughlin. (1)
10.14 Industrial Real Estate Lease (Single Tenant Facility), dated June 30, 1994, entered
</TABLE>
30.
<PAGE>
<TABLE>
<S> <C>
into between Registrant and New England Mutual Life Insurance Company. (1)
10.15 401(k) Defined Contribution Plan of Registrant, effective as of August 1, 1995. (1)
10.18 Industrial Real Estate Lease (Multi-Tenant Facility), dated December 10, 1998,
entered into between Registrant's wholly owned subsidiary, Hot Topic
Administration, Inc. and Majestic Realty Co. and Patrician Associates, Inc.
10.19 Guaranty of Lease, dated December 10, 1998, entered into between the Registrant and
Majestic Realty Co. and Patrician Associates, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 30.
27.1 Financial Data Schedule.
</TABLE>
____________
(1) Filed as an exhibit to Registrant's Registration Statement on Form SB-2
(No. 333-5054-LA) and incorporated herein by reference.
31.
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Hot Topic, Inc.
We have audited the accompanying consolidated balance sheets of Hot Topic, Inc.
as of January 30, 1999 and January 31, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended January 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hot
Topic, Inc. and subsidiaries at January 30, 1999 and January 31, 1998, and the
results of its consolidated operations and its consolidated cash flows for each
of the three years in the period ended January 30, 1999 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Los Angeles, California
March 12, 1999
F-1
<PAGE>
Hot Topic, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $24,573,874 $26,579,027
Inventory 10,446,626 7,636,596
Prepaid expenses and other 1,440,286 657,749
Deferred tax asset (Note 6) 321,825 338,679
-----------------------------------
Total current assets 36,782,611 35,212,051
Leaseholds, fixtures and equipment, net (Note 2) 21,895,132 16,700,270
Deposits and other 86,922 40,525
-----------------------------------
Total assets $58,764,665 $51,952,846
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,186,462 $ 1,705,659
Accrued payroll and related expenses 4,035,805 2,626,655
Accrued sales and other taxes payable 382,742 263,859
Federal and state income taxes payable 1,715,559 1,351,956
Current portion of obligations under capital leases 29,629 34,407
-----------------------------------
Total current liabilities 8,350,197 5,982,536
Deferred rent (Note 3) 743,711 508,822
Capital lease obligations, less current portion (Note 3) 89,908 126,759
Deferred tax liability (Note 6) 831,703 599,158
Shareholders' equity (Note 4):
Common shares, no par value; 50,000,000 shares authorized;
4,654,431 and 4,759,606 shares issued and outstanding
at January 30, 1999 and January 31, 1998, respectively 35,675,752 37,700,992
Deferred compensation (42,619) (78,511)
Retained earnings 13,116,013 7,113,090
-----------------------------------
Total shareholders' equity 48,749,146 44,735,571
-----------------------------------
Total liabilities and shareholders' equity $58,764,665 $51,952,846
===================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Net sales $103,370,683 $70,531,592 $43,617,823
Cost of goods sold, including
buying, distribution and
occupancy costs 65,854,559 44,416,873 27,048,928
------------------------------------------------
Gross margin 37,516,124 26,114,719 16,568,895
Selling, general and
administrative expenses 29,077,124 19,861,808 12,845,602
------------------------------------------------
Operating income 8,439,000 6,252,911 3,723,293
Interest income (951,119) (917,348) (469,241)
Interest expense 20,296 16,787 87,516
------------------------------------------------
Income before income taxes 9,369,823 7,153,472 4,105,018
Provision for income taxes (Note
6) 3,366,900 2,610,800 1,534,600
------------------------------------------------
Net income $ 6,002,923 $ 4,542,672 $ 2,570,418
================================================
Net income per share:
Basic $1.25 $0.97 $0.71
================================================
Diluted $1.21 $0.92 $0.66
================================================
Shares used in computing net
income
per share:
Basic 4,817,024 4,690,490 3,627,975
Diluted 4,955,797 4,939,947 3,898,646
</TABLE>
See accompanying notes.
F-3
<PAGE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Total
Common Shares Deferred Retained Shareholders'
--------------------------------
Shares Amount Compensation Earnings Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at February 3, 1996 764,000 $ 785,462 - $ - $ 785,462
Issuance of common stock 1,495,397 24,268,160 - - 24,268,160
Accretion of preferred shares
redemption value - (528,363) - - (528,363)
Conversion of preferred stock 2,305,892 11,845,488 - - 11,845,488
Exercise of stock options 33,964 86,476 - - 86,476
Deferred compensation related to
grant of stock options - 143,560 (143,560) - -
Amortization of deferred compensation - - 29,157 - 29,157
Tax benefit from exercise of
options - 12,365 - - 12,365
Net income - - - 2,570,418 2,570,418
----------------------------------------------------------------------------------
Balance at February 1, 1997 4,599,253 36,613,148 (114,403) 2,570,418 39,069,163
Exercise of stock options 158,322 446,528 - - 446,528
Employee stock purchase plan 2,031 37,692 - - 37,692
Amortization of deferred compensation - - 35,892 - 35,892
Tax benefit from exercise of
options - 603,624 - - 603,624
Net income - - - 4,542,672 4,542,672
----------------------------------------------------------------------------------
Balance at January 31, 1998 4,759,606 37,700,992 (78,511) 7,113,090 44,735,571
Exercise of stock options 111,077 388,728 - - 388,728
Employee stock purchase plan 3,748 49,500 - - 49,500
Repurchase common stock (220,000) (2,968,565) (2,968,565)
Amortization of deferred
compensation - - 35,892 - 35,892
Tax benefit from exercise of
options - 505,097 - - 505,097
Net income - - - 6,002,923 6,002,923
---------------------------------------------------------------------------------
Balance at January 30, 1999 4,654,431 $35,675,752 $ (42,619) $13,116,013 $48,749,146
==================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,002,923 $ 4,542,672 $ 2,570,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,069,200 2,872,483 1,723,577
Deferred rent 234,889 189,816 73,226
Deferred compensation 35,892 35,892 29,157
Deferred taxes 124,198 104,238 209,253
Loss on disposal of fixed assets - 46,071 79,261
Changes in operating assets and liabilities:
Inventory (2,810,030) (2,699,378) (1,775,349)
Prepaid expenses and other current assets (782,537) 335,485 (376,962)
Deposits and other assets (46,397) (4,982) 322
Accounts payable 480,803 478,556 158,495
Accrued payroll and related expenses 1,409,150 792,152 854,492
Accrued sales and other taxes payable 118,883 54,077 54,148
Income taxes payable 488,804 492,687 474,353
-----------------------------------------------------
Net cash provided by operating activities 9,325,778 7,239,769 4,074,391
INVESTING ACTIVITIES
Purchases of property and equipment (9,274,002) (8,869,800) (5,889,793)
-----------------------------------------------------
Net cash used in investing activities (9,274,002) (8,869,800) (5,889,793)
FINANCING ACTIVITIES
Payments on capital lease obligations (31,689) (30,031) (41,610)
Proceeds from sale of common shares - - 24,268,160
Repurchase common shares (2,968,565) - -
Proceeds from employee stock purchases and
exercise of stock options, including related
tax benefit 943,325 1,087,844 170,840
-----------------------------------------------------
Net cash (used in) provided by financing activities (2,056,929) 1,057,813 24,397,390
-----------------------------------------------------
(Decrease) increase in cash and cash equivalents (2,005,153) (572,218) 22,581,988
Cash and cash equivalents at beginning of year 26,579,027 27,151,245 4,569,257
-----------------------------------------------------
Cash and cash equivalents at end of year $24,573,874 $26,579,027 $27,151,245
=====================================================
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 20,296 $ 16,787 $ 87,516
=====================================================
Cash paid during the year for income taxes $ 2,245,212 $ 1,415,012 $ 832,447
=====================================================
Capital lease obligations entered into for equipment $ - $ 142,990 $ 55,581
=====================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Hot Topic, Inc. (the Company) was incorporated in California in September 1988.
The Company sells music licensed and music influenced apparel, accessories and
gift items for young men and women through its retail stores. The Company
operates mall based retail stores throughout the western, mid-western,
southeastern and northeastern regions of the United States. The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts have been eliminated in consolidation.
On September 23, 1996, the Company completed an initial public offering (the
Offering) of 1,495,000 shares of common stock at a price of $18.00 per share.
The net proceeds to the Company, net of underwriting discounts and commissions
and offering expenses, were $24.3 million.
FISCAL YEAR
The Company's fiscal year is on a 52-53 week basis and ends on the Saturday
nearest to January 31. The fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 were 52 week years.
REVENUE RECOGNITION
Retail merchandise sales are recognized at the point of sale less estimated
sales returns.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of less than
three months when purchased to be cash equivalents. The Company is potentially
exposed to a concentration of credit risk when cash deposits in banks are in
excess of federally insured limits, and as a result of the investment of cash
equivalents at two financial institutions.
INVENTORY
Inventories and related cost of sales are accounted for by the retail method.
The cost of inventory is determined at the lower of the first-in, first-out
(FIFO) method or market.
F-6
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STORE PRE-OPENING COSTS
Costs incurred in connection with the opening of a new store are expensed as
incurred.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost or in the case of capitalized
leases, at the present value of future minimum lease payments. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets (3-10 years). Leasehold improvements are amortized using the straight-
line method over the shorter of the lease term or ten years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS No. 121). In accordance with SFAS No. 121, long-lived
assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. At January 30, 1999,
the Company believes there has been no impairment of the value of such assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principle Board Opinion No. 25,
"Accounting for stock issued to Employees".
F-7
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
-------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 17,709,670 $12,452,091
Leasehold improvements 14,725,529 10,726,666
-------------------------------
32,435,199 23,178,757
Less accumulated depreciation and
amortization (10,540,067) (6,478,487)
-------------------------------
$ 21,895,132 $16,700,270
===============================
</TABLE>
3. COMMITMENTS
LEASES
The Company has entered into lease agreements for retail and office space under
primarily noncancelable leases with terms ranging from three to approximately
ten years. In December 1998, a wholly-owned subsidiary of the Company entered
into a lease for a building for a new office and distribution facility. The
lease provides for a five year term and two three year lease extensions. The
retail space leases provide for rents based upon the greater of the minimum
annual rental amounts or 6% to 8% of annual sales volume. Certain of the leases
provide for increasing minimum annual rental amounts. Rent expense is recorded
evenly over the term of the lease. Accordingly, deferred rent, as reflected in
the accompanying balance sheets, represents the difference between rent expense
accrued and amounts paid under the terms of the lease agreement. Total rent
expense for the years ended January 30, 1999, January 31, 1998 and February 1,
1997 was $7,505,514, $5,138,226 and $3,272,996 respectively, including
contingent rentals of $293,759, $272,900 and $260,214, respectively.
F-8
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. COMMITMENTS (CONTINUED)
LEASES (CONTINUED)
The Company leases certain equipment under capital lease obligations. Cost and
accumulated depreciation of equipment under capital leases were $168,930 and
$49,137, respectively, at January 30, 1999; $186,489 and $41,243, respectively,
at January 31, 1998 and $55,581 and $6,338, respectively, at February 1, 1997.
Annual future minimum lease payments under operating and capital leases as of
January 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
Fiscal year LEASES LEASES
- ----------- --------------------------------------
<S> <C> <C>
1999 $ 8,665,722 $ 43,019
2000 8,768,706 72,890
2001 8,706,490 21,840
2002 8,603,086
2003 8,356,836 -
Thereafter 28,642,225 -
--------------------------------
Total minimum lease payments $71,743,065 137,749
================
Less amounts representing interest 18,212
----------------
Present value of future minimum capital lease payments 119,537
Less amounts due in one year 29,629
----------------
Long-term portion of obligations under capital leases $ 89,908
================
</TABLE>
F-9
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. SHAREHOLDERS' EQUITY
STOCK OPTIONS
Under the Company's long-term incentive plans (the Plans) the Company may grant
stock options to employees, directors or consultants of the Company as deemed
appropriate by the Board of Directors. The exercise price of options granted
under the Plan shall be determined by the Board of Directors at the date of
grant and shall not be lower than (i) 100% of the fair market value of the
Company's common stock on the date of grant for incentive stock options, (ii)
85% of the fair market value of the Company's common stock on the date of grant
for non-statutory stock options, and (iii) 110% of the fair market value of the
Company's common stock on the date of grant for persons possessing 10% or more
of the total combined voting power of all classes of stock of the Company.
Unless the Board of Directors declares otherwise, options vest over four years
and generally expire ten years from the date of grant. An aggregate of
1,330,000 shares of common stock may be issued pursuant to the plans. As of
January 30, 1999, 362,203 shares were available for future grants.
In June 1996, the Board of Directors adopted the Employee Stock Purchase Plan
(the Stock Purchase Plan). The Stock Purchase Plan provides for the issuance of
up to 150,000 shares of common stock to employees of the Company. Under the
Stock Purchase Plan, all eligible employees are granted identical rights to
purchase common stock for each Board-authorized offering under the Stock
Purchase Plan. Rights granted pursuant to any offering under the Stock Purchase
Plan terminate immediately upon cessation of an employee's employment for any
reason. In general, an employee may withdraw from participation in an offering
at any time during the purchase period for such offering. Rights granted under
the Stock Purchase Plan are not transferable and may be exercised only by the
person to whom such rights are granted. The initial offering under the Stock
Purchase Plan commenced October 24, 1996 and terminated December 31, 1996.
Subsequent offerings occur every six months commencing January 1, 1997.
F-10
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996: weighted-average risk-free interest rates of 6%; dividend yields
of 0%; weighted-average volatility factors of the expected market price of the
Company's common stock of 0.79 for 1998, 0.53 for 1997 and 0.35 for 1996; and a
weighted average expected life of the option of 5 years. The weighted average
fair value of options granted during the year is $14.67, $12.87 and $3.32 per
share for fiscal 1998, 1997 and 1996, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Pro forma net income $4,495,809 $3,888,986 $2,517,055
Pro forma earnings per share $ 0.92 $ 0.82 $ 0.66
</TABLE>
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 562,310 $16.43 399,122 $ 4.21 328,420 $2.72
Granted 286,588 $21.62 336,352 $24.37 112,666 $8.01
Exercised (111,077) $ 3.50 (158,322) $ 2.83 (33,964) $2.55
Canceled (38,670) $19.21 (14,842) $13.03 (8,000) $3.59
-------------------------- --------------------------- --------------------------
Outstanding at end of year 699,151 $20.45 562,310 $16.43 399,122 $4.21
========================== =========================== ==========================
Exercisable at end of year 196,285 $17.09 121,150 $ 4.07 195,278 $3.28
</TABLE>
Exercise prices for options outstanding as of January 30, 1999 ranged from $2.50
to $27.88. Of the 699,151 options outstanding at January 30, 1999, 106,589 have
exercise prices ranging from $2.34 to $8.00, 334,506 have exercise prices
ranging from $15.38 to $22.75 and 258,056 have exercise prices ranging from
$24.25 to $27.88. The weighted average remaining contractual life of those
options is 8 years.
F-11
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. NET INCOME PER SHARE
The Company computes net income per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Basic net income
per share is computed based on the weighted average number of common shares
outstanding for the period. Diluted net income per share is computed based on
the weighted average number of common and potentially dilutive common stock
equivalents outstanding for the period.
A reconciliation of the numerator and denominator of basic earnings per share
and diluted earnings per share for the year ended, is as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Basic EPS Computation:
Numerator $6,002,923 $4,542,672 $2,570,418
Denominator:
Weighted average common shares
outstanding 4,817,024 4,690,490 3,627,975
------------------------------------------
Total shares 4,817,024 4,690,490 3,627,975
------------------------------------------
Basic EPS $ 1.25 $ 0.97 $ 0.71
==========================================
Diluted EPS Computation:
Numerator $6,002,923 $4,542,672 $2,570,418
Denominator:
Weighted average common shares
outstanding 4,817,024 4,690,490 3,627,975
Incremental shares from assumed
conversion of options 138,773 249,457 270,671
------------------------------------------
Total shares 4,955,797 4,939,947 3,898,646
------------------------------------------
Diluted EPS $ 1.21 $ 0.92 $ 0.66
==========================================
</TABLE>
F-12
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Following is the composition of the provision for income taxes for the years
ended:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $2,770,434 $2,042,664 $1,021,150
State 472,268 463,898 304,197
------------------------------------------------------
3,242,702 2,506,562 1,325,347
Deferred:
Federal 127,057 89,336 204,132
State (2,859) 14,902 5,121
------------------------------------------------------
124,198 104,238 209,253
------------------------------------------------------
Total income tax expense $3,366,900 $2,610,800 $1,534,600
======================================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
-----------------------------
<S> <C> <C>
Current deferred tax assets:
Accrued vacation and other $ 230,496 $ 100,557
Inventory 291,499 212,663
State taxes 78,833 39,959
Other liabilities (264,503)
-----------------------------
Total deferred tax assets 336,325 353,179
Valuation allowance for deferred tax assets (14,500) (14,500)
-----------------------------
Net current deferred tax assets 321,825 338,679
Noncurrent deferred tax liabilities:
Depreciation (1,033,235) (716,965)
Deferred rent 201,532 117,807
-----------------------------
Total noncurrent deferred tax liabilities (831,703) (599,158)
-----------------------------
Net deferred tax (liability) asset $ (509,878) $(260,479)
=============================
</TABLE>
F-13
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Reconciliation of provision for taxes to statutory tax rate for the years ended:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
Permanent differences (2.9) (3.9) (2.4)
State and local taxes, net of
federal benefit 3.3 4.4 5.0
Change in valuation allowance
and other items 1.5 2.0 0.8
---------------------------------------------
Effective income tax rate 35.9% 36.5% 37.4%
=============================================
</TABLE>
7. EMPLOYEE BENEFIT PLAN
Effective January 1, 1995, the Company adopted the Hot Topic 401(k) Retirement
Savings Plan (the 401(k) Plan). All employees who have been employed by the
Company for at least one year of service (provided that such service represents
a minimum of 1,000 hours worked during the year) and are at least 21 years of
age are eligible to participate. Employees may contribute to the 401(k) Plan up
to 20% of their current compensation, subject to a statutorily prescribed annual
limit. The Company may in its discretion contribute certain amounts to eligible
employees' accounts. The Company has not made any contributions to the 401(k)
Plan.
F-14
<PAGE>
EXHIBIT 10.18
Southern California Chapter of the
[LOGO] Society of Industrial and Office Realtors, (R) Inc.
INDUSTRIAL REAL ESTATE LEASE
(MULTI-TENANT FACILITY)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: December 10, 1998
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): MAJESTIC REALTY CO. AND
PATRICIAN ASSOCIATES, Inc., both California corporations
Address of Landlord: 13191 Crossroads Parkway North, 6th Floor
City of Industry, CA 91746
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Hot Topic Administration,
Inc., a California corporation
Address of Tenant: 3410 Pomona Boulevard, Pomona, CA
Section 1.04. PROPERTY: The Property is part of Landlord's multi-tenant
real property development located at 18305 and 18385 E. San Jose Avenue, City of
Industry, California and described or depicted in Exhibit "A" (the "Project").
The Project includes the land, the buildings and all other improvements located
on the land and the common areas described in Paragraph 4.05(a). The Property is
(include street address, approximate square footage and description) that
approximately 125,000 square foot portion of an approximately 250,000 square
foot building and surrounding area in the Project as outlined in red on Exhibit
"A" attached hereto and made a part hereof and more commonly known as 18305 E.
San Jose Avenue, City of Industry, CA, subject to the right of adjoining
properties to use the area outlined in green labeled "Common Ingress and
Egress".
Section 1.05 LEASE TERM: five (5) years two (2) months BEGINNING ON March
1, 1999 or such other date as is specified in this Lease, and ENDING ON April
30, 2004
Section 1.06 PERMITTED USES: (See Article Five) Office, warehouse and
distribution of consumer products
Section 1.07 TENANT'S GUARANTOR: (If none, so state) Hot Topic, Inc., a
California corporation
Section 1.08 BROKERS: (See Article Fourteen) (If none, so state)
Landlord's Broker: Majestic Realty Co.
Tenant's Broker: The Staubach Company
Section 1.09 COMMISSION PAYABLE TO LANDLORD'S BROKER:(See Article
Fourteen) $ per separate agreement
Section 1.10 INITIAL SECURITY DEPOSIT: (See Section 3.03) $43,750.00
Section 1.11 VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) 206
Section 1.12 RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: FORTY-THREE THOUSAND SEVEN HUNDRED FIFTY AND NO/100----
Dollars ($43,750.00) per month for each month, as provided in
Section 3.01,
(b) OTHER PERIODIC PAYMENTS. (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04);
(iv) Tenant's Initial Pro Rata Share of Common Area Expenses 50% (See Section
4.05); (v) Impounds for Insurance Premiums and Property Taxes (See Section
4.08); (vi) Maintenance, Repairs and Alterations (See Article Six).
Section 1.13 LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) fifty percent (50%) of the Profit (the "Landlord's Share").
Section 1.14 RIDERS: The following Riders are attached to and made a part
of this Lease: (If none, so state)
Rider pages 1 through 11, Option to Extend Term Lease Rider, and Exhibits
"A", "B", "C", "D", "E", "F" and "G".
Initials: _____________
_____________
1
<PAGE>
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If Landlord does not deliver possession of the Property to Tenant within
sixty (60) days after the Commencement Date, Tenant may elect to cancel this
Lease by given written notice to Landlord within ten (10) days after the sixty
(60) -day period ends. If Tenant gives such notice, the Lease shall be cancelled
and neither Landlord nor Tenant shall have any further obligations to the other.
If Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rent and
all other charges specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
See Rider Section 2.05
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease by
Landlord and Tenant, Tenant shall pay Landlord the Base Rent in the amount
stated in Paragraph 1.12(a) above for the first month of the Lease Term. On the
first day of the second month of the Lease Term and each month thereafter,
Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction
or prior demand. The Base Rent shall be payable at Landlord's address or at such
other place as Landlord may designate in writing. See Rider Section 3.01
Initials: ______________
______________
2
<PAGE>
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease by Landlord and Tenant, Tenant shall
deposit with Landlord a cash Security Deposit in the amount set forth in Section
1.10 above. Landlord may apply all or part of the Security Deposit to any unpaid
rent or other charges due from Tenant or to cure any other defaults of Tenant.
If Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit.
(b) Each time the Base Rent is increased, Tenant shall deposit additional
funds with Landlord sufficient to increase the Security Deposit to an amount
which bears the same relationship to the adjusted Base Rent as the initial
Security Deposit bore to the initial Base Rent.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the
Property (including any fees, taxes or assessments against, or as a result of,
any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10) -day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent. Alternatively, Landlord may elect to bill Tenant in advance for such taxes
and Tenant shall pay Landlord the amount of such taxes, as Additional Rent, at
least ten (10) days but not more than thirty (30) days prior to delinquency.
Landlord shall pay such taxes prior to delinquency provided Tenant has timely
made such payments to Landlord. Any penalty caused by Tenant's failure to
timely make such payments shall also be Additional Rent owed by Tenant
immediately upon demand.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) JOINT ASSESSMENT. SEE RIDER SECTION 4.02(c)
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord
for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities, and services supplied to
the Property.
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Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be Three Million Dollars ($3,000,000) per
occurrence and shall be subject to periodic increase based upon increased
liability awards against Tenant. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05. if the matters giving rise to the indemnity
under Section 5.05 result from the negligence of Tenant. The amount and coverage
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
other obligation under this Lease. Landlord may also obtain comprehensive public
liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain policies of insurance covering loss of or damage to the Property
in the full amount of its replacement value. Such policy shall contain an
Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent, plus estimated real property taxes and insurance premiums.
Tenant shall be liable for the payment of any deductible amount under all of
Tenant's insurance policies maintained pursuant to this Section 4.04. and a
deductible not exceed Ten Thousand Dollars ($10,000) under Landlord's insurance
policies pursuant to this Section 4.04(b) Tenant shall not do or permit anything
to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). For insurance policies maintained by Landlord which cover improvements
on the entire Project, Tenant shall pay Tenant's prorated share of the premiums,
in accordance with the formula in Paragraph 4.05(e) for determining Tenant's
share of Common Area costs. If insurance policies maintained by Landlord cover
improvements on real property other than the Project, Landlord shall deliver to
Tenant a statement of the premium applicable to the Property showing in
reasonable detail how Tenant's share of the premium was computed. If the Lease
Term expires before the expiration of an insurance policy maintained by
Landlord, Tenant shall be liable for Tenant's prorated share of the insurance
premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy
of any policy of insurance which Tenant is required to maintain under this
Section 4.04. At least thirty (30) days prior to the expiration of any such
policy, Tenant shall deliver to Landlord a renewal of such policy. As an
alternative to providing a policy of insurance, Tenant shall have the right to
provide Landlord a certificate of insurance, executed by an authorized officer
of the insurance company, showing that the insurance which Tenant is required to
maintain under this Section 4.04 is in full force and effect and containing such
other information which Landlord reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to any
cancellation or material modification of such coverage.
(ii) If following three (3) days written notice from Landlord,
Tenant fails to deliver any policy, certificate or renewal to Landlord
required under this Lease within the prescribed time period or if any such
policy is cancelled or modified during the Lease Term without Landlord's
consent, Landlord may obtain such insurance, in which case Tenant shall
reimburse Landlord for the cost of such insurance within fifteen (15) days
after receipt of a statement that indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as set
forth in the most current issue of "Best Key Rating Guide". Landlord and
Tenant acknowledge the insurance markets are rapidly changing and that
insurance in the form and amounts described in this Section 4.04 may not be
available in the future. Tenant acknowledges that the insurance described
in this Section 4.04 is for the primary benefit of Landlord. If at any time
during the Lease Term, Tenant is unable to maintain the insurance required
under the Lease, Tenant shall nevertheless maintain insurance coverage
which is customary and commercially reasonable in the insurance industry
for Tenant's type of business, as that coverage may change from time to
time. Landlord makes no representation as to the adequacy of such insurance
to protect Landlord's or Tenant's interest. Therefore, Tenant shall obtain
any such additional property or liability insurance which Tenant deems
necessary to protect Landlord and Tenant.
See Rider Section 4.04(e)
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(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents or representatives
of the other, for loss of or damage to its property or the property of others
under its control. If such loss or damage is covered by any insurance policy in
force (whether or not described in this Lease) at the time of such loss or
damage. Upon obtaining the required policies of insurance, Landlord and Tenant
shall give notice to the insurance carriers of this mutual waiver of
subrogation.
See Rider Section 4.04(e)
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leasable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities,
Tenant acknowledges that such activities may result in inconvenience to Tenant.
Such activities and changes are permitted if they do not materially affect
Tenant's use of the Property or permanently decrease the number of vehicle
parking spaces allocated to Tenant pursuant to this Lease.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject
to such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such reasonable nondiscriminatory rules and
regulations and shall use its good faith effort to cause others who use the
Common Areas with Tenant's express or implied permission to abide by Landlord's
rules and regulations. At any time, Landlord may close any Common Areas to
perform any acts in the Common Areas as, in Landlord's judgement, are desirable
to improve the Project. Tenant shall not interfere with the rights of Landlord,
other tenants or any other person entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Property allocated to Tenant in
Section 1.11 of the Lease without paying any additional rent. Tenant's parking
shall not be reserved and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. Temporary parking of large delivery
vehicles in the Property may be permitted by the rules and regulations
established by Landlord. Vehicles shall be parked only in striped parking spaces
and not in driveways, loading areas or other locations not specifically
designated for parking. Handicapped spaces shall only be used by those legally
permitted to use them. If Tenant parks more vehicles in the parking area than
the number set forth in Section 1.11 of this Lease, such conduct shall be a
material breach of this Lease. In addition to Landlord's other remedies under
the Lease, Tenant shall pay a daily charge determined by Landlord for each such
additional vehicle.
See Rider Section 4.05 (c)
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas
in good order, condition and repair and shall operate the Project, in Landlord's
sole discretion, as a first-class industrial/commercial real property
development. Tenant shall pay Tenant's pro rata share (as determined below) of
all costs incurred by Landlord for the operation and maintenance of the Common
Areas. Common Area costs include, but are not limited to, costs and expenses
for the following: utilities, water and sewage charges; maintenance of signs
(other than tenants' signs); premiums for liability, property damage, fire and
other types of casualty insurance on the Common Areas and worker's compensation
insurance; all property taxes and assessments levied on or attributable to the
Common Areas and all Common Area improvements; all personal property taxes
levied on or attributable to personal property used in connection with the
common Areas; straight-line depreciation on personal property owned by Landlord
which is consumed in the operation or maintenance of the Common Areas; rental or
lease payments paid by Landlord for rented or leased personal property used in
the operation or maintenance of the Common Areas; fees for required licenses and
permits; repairing, resurfacing, repaving, maintaining, painting, lighting,
cleaning, refuse removal, security and similar items; Landlord may cause any or
all of such services to be provided by third parties and the cost of such
services shall be included in Common Area costs. Common Area costs shall not
include depreciation of real property which forms part of the Common Areas and
"Landlord's Work," as that term is defined in Section 6.07 of this Lease.
See Rider Section 4.05(d)
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(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata
share of all Common area costs (prorated for any fractional month) upon written
notice from Landlord that such costs are due and payable, and in any event prior
to delinquency, Tenant's pro rata share shall be calculated by dividing the
square foot area of the Property, as set forth in Section 1.04 of the Lease, by
the aggregate square foot area of the Project which is leased or held for lease
by tenants, as of the date on which the computation is made, Tenant's initial
pro rata share is set out in Paragraph 1.12(b). Any changes in the Common Area
costs and/or the aggregate area of the Project leased or held for lease during
the Lease Term shall be effective on the first day of the month after such
change occurs. Landlord may, at Landlord's election, estimate in advance and
charge to Tenant as Common Area costs, all real property taxes for which Tenant
is liable under Section 4.02 of the Lease, all insurance premiums for which
Tenant is liable under Section 4.04 of the Lease, all maintenance and repair
costs for which Tenant is liable under Section 6.04 of the Lease, and all other
Common Area costs payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Area costs shall be delivered monthly, quarterly
or at any other periodic intervals to be designated by Landlord. Landlord may
adjust such estimates at any time based upon Landlord's experience and
reasonable anticipation of costs. Such adjustments shall be effective as of the
next rent payment date after notice to Tenant. Within sixty (60) days after the
end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a
statement prepared in accordance with generally accepted accounting principles
setting forth, in reasonable detail, the Common Area costs paid or incurred by
Landlord during the preceding calendar year and Tenant's pro rata share. Upon
receipt of such statement, there shall be an adjustment between Landlord and
Tenant, with payment to or credit given by Landlord (as the case may be) so that
Landlord shall receive the entire amount of Tenant's share of such costs and
expenses for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of twelve
percent (12%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
required by any lender to whom Landlord has granted a security interest in the
Property, or if Tenant is more than ten (10) days late in the payment of rent
more than twice in any consecutive twelve (12) month period, Tenant shall pay
Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and
insurance premiums payable by Tenant under this Lease, together with each
payment of Base Rent. Landlord shall hold such payments in a non-interest
bearing impound account. If unknown, Landlord shall reasonably estimate the
amount of real property taxes and insurance premiums when due, Tenant shall pay
any deficiency of funds in the impound account to Landlord upon written request.
If Tenant defaults under this Lease, Landlord may apply any funds in the impound
account to any obligation then due under this Lease.
See Rider Section 4.09
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance, or
governmental regulation or order, which annoys or interferes with the rights of
tenants of the Project, or which constitutes a nuisance or waste. Tenant shall
obtain and pay for all permits, including a Certificate of Occupancy, required
for Tenant's occupancy of the Property and shall promptly take all actions
necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
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Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Property.
See Rider Section 5.04
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability to the extent
arising from: (a) Tenant's use of the Property; (b) the conduct of Tenant's
business or anything else done or permitted by Tenant to be done in or about the
Property, including any contamination of the Property or any other property
resulting from the presence or use of Hazardous Material caused or permitted by
Tenant; (c) any breach or default in the performance of Tenant's obligations
under this Lease; (d) any misrepresentation or breach of warranty by Tenant
under this Lease; or (e) other acts or omissions of Tenant related to the
Property. Tenant shall defend Landlord against any such cost, claim or liability
at Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any reasonable
legal fees or costs incurred by Landlord in connection with any such claim. As a
material part of the consideration to Landlord, Tenant assumes all risk of
damage to property or injury to persons in or about the Property arising from
any cause, and Tenant hereby waives all claims in respect thereof against
Landlord, except for any claim arising out of Landlord's active negligence or
willful misconduct. As used in this Section, the term "Tenant" shall include
Tenant's employees, agents, contractors and invitees, if applicable.
Section 5.06. LANDLORD ACCESS. Landlord or its agents may enter the
Property upon giving Tenant twenty-four (24) hours notice at all reasonable
times to show the Property to potential buyers, investors or tenants or other
parties, provided, however, Landlord does not need to give Tenant notice in the
case of an emergency; to do any other act or to inspect and conduct tests in
order to monitor Tenant's compliance with all applicable environmental laws and
all laws governing the presence and use of Hazardous Material; or for any other
purpose Landlord deems necessary. Landlord shall give Tenant prior notice of
such entry, except in the case of an emergency. During the last six (6) months
of the Lease Term, Landlord may place customary "For Sale" or "For Lease" signs
on the landscape area of the Property; provided however the foregoing shall not
preclude Landlord from attaching signs on the adjoining property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Except as provided in Section 6.07 of
the Rider, Tenant accepts the Property in its condition as of the execution of
the Lease, subject to all recorded matters, laws, ordinances, and governmental
regulations and orders. Except as provided herein, Tenant acknowledges that
neither Landlord nor any agent of Landlord has made any representation as to the
condition of the Property or the suitability of the Property for Tenant's
intended use. Tenant represents and warrants that Tenant has made its own
inspection of and inquiry regarding the condition of the Property and is not
relying on any representations of Landlord or any Broker with respect thereto.
If Landlord or Landlord's Broker has provided a Property Information Sheet or
other Disclosure Statement regarding the Property, a copy is attached as an
exhibit to the Lease.
See Rider Section 6.01
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or upon other portions of the Project, or from other sources or places;
or (d) any act or omission of any other tenant of the Project, Landlord shall
not be liable for any such damage or injury even though the cause of or the
means of repairing such damage or injury are not accessible to Tenant. The
provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's active negligence or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Section 6.04, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Landlord shall keep the
following in good order, condition and repair: the foundations, exterior walls
and roof of the Property (including painting the exterior surface of the
exterior walls of the Property not more often than once every five (5) years, if
necessary) and all components of electrical, mechanical, plumbing, heating and
air conditioning systems and facilities located in the Property which are
concealed or used in common by tenants of the Project. However, Landlord shall
not be obligated to maintain or repair windows, doors, plate glass or the
interior surfaces of exterior walls, Landlord shall make repairs under this
Section 6.03 within a reasonable time after receipt of written notice from
Tenant of the need for such repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease. Tenant waives the benefit of any statute in effect now or in
the future which might give Tenant the right to make repairs at Landlord's
expense or to terminate this Lease due to Landlord's failure to keep the
Property in good order, condition and repair.
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Sections 6.04 TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of
the Property (including structural, nonstructural, interior, systems, Tenant
Improvements and equipment) in good order, condition and repair (including
interior repainting and refinishing, as needed). If any portion of the Property
or any system or equipment in the Property which Tenant is obligated to repair
cannot be fully repaired or restored, Tenant shall promptly replace such portion
of the Property or system or equipment in the Property, regardless of whether
the benefit of such replacement extends beyond the Lease Term; but if the
benefit or useful life of such replacement extends beyond the Lease Term (as
such term may be extended by exercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term (as
extended), and Tenant shall be liable only for that portion of the cost which is
applicable to the Lease Term (as extended). Tenant shall maintain a preventive
maintenance contract providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and air conditioning
contractor. If any part of the Property or the Project is damaged by any act or
omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing
such damaged property, whether or not Landlord would otherwise be obligated to
pay the cost of maintaining or repairing such property. It is the intention of
Landlord and Tenant that at all times Tenant shall maintain the portions of the
Property which Tenant is obligated to maintain in an attractive, first-class and
fully operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, or diligently commence to rectify
and cure the same within ten (10) days after notice from Landlord (except that
no notice shall be required in the case of an emergency), Landlord may enter the
Property and perform such maintenance or repair (including replacement, as
needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for
all costs incurred in performing such maintenance or repair immediately upon
demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceed Ten Thousand Dollars ($10,000) in cost
cumulatively per twelve (12) month period and which are not visible from the
outside of any building of which the Property is part. After the Lease
Commencement Date and if Tenant's net worth is less than Twenty-four Million and
No/100 Dollars ($24,000,000.00). Landlord may require Tenant to provide
demolition and/or lien and completion bonds in form and amount satisfactory to
Landlord. Tenant shall promptly remove any alterations, additions, or
improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's
written request. All alterations, additions, and improvements shall be done in a
good and workmanlike manner, in conformity with all applicable laws and
regulations, and by a contractor approved by Landlord. Within sixty (60) days
after completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least twenty (20) days' prior
written notice of the commencement of any work on the Property, regardless of
whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon termination of the Lease,
Tenant shall surrender the Property to Landlord, broom clean and in the same
condition as received except for ordinary wear and tear which Tenant was not
otherwise obligated to remedy under any provision of this Lease. However, Tenant
shall not be obligated to repair any damage which Landlord is required to repair
under Article Seven (Damage or Destruction). In addition,it shall be in
Landlord's sole discretion whether or not Tenant shall remove the Tenant
Improvements, any alterations, additions or improvements (whether or not made
with Landlord's consent) prior to the expiration of the Lease and to restore the
Property to its prior condition, all at Tenant's expense. Notwithstanding the
foregoing, Tenant may request at the time it seeks Landlord's consent to an
alteration, addition or improvement, that Landlord state in writing at the time
it grants approval whether or not removal will be required at the expiration of
this Lease. Such request shall specifically cite this Lease provision and
Landlord's obligation to make such statement. All alterations, additions and
improvements which Landlord has not required Tenant to remove shall become
Landlord's property and shall be surrendered to Landlord upon the expiration or
earlier termination of the Lease, except that Tenant may remove any of Tenant's
machinery or equipment which can be removed without material damage to the
Property. Tenant shall repair, at Tenant's expense, any damage to the Property
caused by the removal of any such machinery or equipment. SEE RIDER SECTION
6.07.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01 PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the occurrence
of any damage to the Property. If the Property is only partially damaged (i.e.,
less than fifty percent (50%) of the Property is untenantable as a result of
such damage or less than fifty (50%) of Tenant's operations are materially
impaired) and if the proceeds received by Landlord from the insurance policies
described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs,
this Lease shall remain in effect and Landlord shall repair the damage as soon
as reasonably possible. Landlord may elect (but is not required) to repair any
damage to Tenant's fixtures, equipment, or improvements.
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(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord is obligated to maintain under Paragraph
4.04(b). Landlord may elect either to (i) repair the damage as soon as
reasonably possible, in which case this Lease shall remain in full force and
effect, or (ii) terminate this Lease as of the date the damage occurred.
Landlord shall notify Tenant within thirty (30) days after receipt of notice of
the occurrence of the damage whether Landlord elects to repair the damage or
terminate the Lease. If Landlord elects to repair the damage, Tenant shall pay
Landlord the "deductible amount" (if any) but not to exceed Ten Thousand Dollars
($10,000.00) in the aggregate for any one (i) occurrence under Landlord's
insurance policies and, if the damage was due to an act or omission of Tenant,
or Tenant's employees, agents, contractors or invitees, the difference between
the actual cost of repair and any insurance proceeds received by Landlord. If
Landlord elects to terminate this Lease, Tenant may elect to continue this Lease
in full force and effect, in which case Tenant shall repair any damage to the
Property and any building in which the Property is located. Tenant shall pay the
cost of such repairs, except that upon satisfactory completion of such repairs,
Landlord shall deliver to Tenant any insurance proceeds received by Landlord for
the damage repaired by Tenant. Tenant shall give Landlord written notice of such
election within ten (10) days after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last twelve (12)
months of the Lease Term and such damage will require more than thirty (30) days
to repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate the later of (i) the date the destruction occurred, and (ii) the date
Tenant ceases to do business at the Property. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or
damaged and Landlord or Tenant repairs or restores the Property pursuant to the
provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. Except for such possible
reduction in Base Rent, insurance premiums and real property taxes and other
periodic payments. Tenant shall not be entitled to any compensation, reduction,
or reimbursement from Landlord as a result of any damage, destruction, repair,
or restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code or
judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of eminent
domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than ten percent (10%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not obligated to repair any damage
for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
Initials: _______________
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ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant or from a sale of
substantially all of the stock or assets of Tenant ("Tenant's Affiliate"). In
such case, any Tenant's Affiliate shall assume in writing all of Tenant's
obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's Primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee. Landlord may consent to subsequent assignments
or modifications of this Lease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability under
this Lease.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section 9.01
shall set forth in writing the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and the rent and security
deposit payable under any proposed assignment or sublease), and any other
information Landlord deems relevant. Landlord shall have the right to terminate
this Lease or to withhold consent, if reasonable, or to grant consent, based on
the following factors: (i) the business of the proposed assignee or subtenant
and the proposed use of the Property; (ii) the financial worth and/or financial
stability of the proposed assignee or subtenant in light of the responsibilities
to be undertaken in connection with the assignment or sublease on the date the
consent is requested; (iii) Tenant's compliance with all of its obligations
under this Lease; and (iv) such other factors as Landlord may reasonably deem
relevant. If Landlord objects to a proposed assignment solely because of the net
worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign), all or a portion of the Property to the
proposed transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined below)
on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's
Share shall be paid by the assignee or subtenant to Landlord directly. The
"Profit" means (A) all amounts paid to Tenant for such assignment or
sublease, including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration paid for the
assignment or sublease, including fees under any collateral agreements,
less (B) costs and expenses directly incurred by Tenant in connection with
the execution and performance of such assignment or sublease for real
estate broker's commissions and costs of renovation or construction of
tenant improvements required under such assignment or sublease. Tenant is
entitled to recover such costs and expenses before Tenant is obligated to
pay the Landlord's Share to Landlord. The Profit in the case of a sublease
of less than all the Property is the rent allocable to the subleased space
as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and
Landlord may inspect Tenant's books and records to verify the accuracy of
such statement. On written request, Tenant shall promptly furnish to
Landlord copies of all the transaction documentation, all of which shall be
certified by Tenant to be complete, true and correct. Landlord's receipt of
Landlord's Share shall not be a consent to any further assignment or
subletting. The breach of Tenant's obligation under this Paragraph 9.05(b)
shall be a material default of the Lease.
(c) See Rider Section 9.05(c)
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
Initials: __________________
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ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02 DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property and rent payments are discontinued, or
if Tenant's vacation of the Property results in the cancellation of any
insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due; See Rider
Section 10.02 (b)
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30) -day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
it is physically impossible for Tenant to cure a breach of this Lease. The
notice required by this Article 10 is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for the
benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for
reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within sixty (60) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. If Tenant shall be served
with a demand for the payment of past due rent or any other charge, any payments
rendered thereafter to cure any default by Tenant shall be made only by
cashier's check. In such event, Landlord shall be entitled to recover from
Tenant all damages incurred by Landlord by reason of Tenant's default, including
(i) the worth at the time of the award of the unpaid Base Rent, Additional Rent
and other charges which Landlord had earned at the time of the termination; (ii)
the worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges which Landlord would have earned after
termination until the time of the award exceeds the amount of such rental loss
that Tenant proves Landlord could have reasonably avoided; (iii) the worth at
the time of the award of the amount by which the unpaid Base Rent, Additional
Rent and other charges which Tenant would have paid for the balance of the Lease
term after the time of award exceeds the amount of such rental loss that Tenant
proves Landlord could have reasonably avoided; and (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom, including, but
not limited to, any costs or expenses Landlord incurs in maintaining or
preserving the Property after such default, the cost of recovering possession of
the Property, expenses of reletting, including necessary renovation or
alteration of the Property, Landlord's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or payable. As used in
subparts (i) and (ii) above, the "worth at the time of the award" is computed by
allowing interest on unpaid amounts at the rate of fifteen percent (15%) per
annum, or such lesser amount as may then be the maximum lawful rate. As used in
subpart (iii) above, the "worth at the time of the award" is 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 Tenant has
abandoned the Property, Landlord shall have the option of (i) retaking
possession of the Property and recovering from Tenant the amount specified in
this Paragraph 10.03(a) or (iii) proceeding under Paragraph 10.03(b).
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due; Landlord shall have the remedy described in California Civil Code Section
1951.4 (lessor may continue lease in effect after lessee's breach and
abandonment and recover rent as it becomes due, if lessee has the right to
sublet or assign, subject only to reasonable limitations);
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Initials: _________________
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Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does
not cure within any applicable grace period, or within three (3) days after
written notice from Landlord if no grace period applies the Abated Rent shall
immediately become due and payable in full and this Lease shall be enforced as
if there were no such rent abatement or other rent concession. In such case
Abated Rent shall be calculated based on the full initial rent payable under
this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease;
the obtaining of relief from any stay in bankruptcy restraining any action to
evict Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Tenant shall cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease. Tenant shall execute
such further documents and assurances as such lender may require, in: the form
attached hereto as Exhibit "B" or such other form as is then required by
Landlord's lender, provided that Tenant's obligations under this Lease shall not
be increased in any material way (the performance of ministerial acts shall not
be deemed material), and Tenant shall not be deprived of its rights under this
Lease. Tenant's right to quiet possession of the Property during the Lease Term
shall not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default Landlord shall use
commercially reasonable efforts to provide Tenant with a nondisturbance
agreement in a commercially reasonable form from Landlord's presently existing
lender. If any ground lessor, beneficiary or mortgagee elects to have this Lease
prior to the lien of its ground lease, deed of trust or mortgage and gives
written notice thereof to Tenant, this Lease shall be deemed prior to such
ground lease, deed of trust or mortgage whether this Lease is dated prior or
subsequent to the date of said ground lease, deed of trust or mortgage or the
date of recording thereof. Tenant waives the provisions of any current or future
statute, rule or law which may give or purport to give Tenant any right or
election to terminate or otherwise adversely affect this Lease and the
obligations of the Tenant hereunder in the event of any foreclosure proceeding
or sale.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale. Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after written request the contents of the document shall
be deemed true and enforceable against Tenant, and third parties may rely
thereon.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request. Tenant shall execute, acknowledge and
deliver to Landlord a written statement in the form attached hereto as Exhibit
"C" or such other commercially reasonable form as is then required by Landlord's
lender, certifying: (i) that none of the terms or provisions of this Lease have
been changed (or if they have been changed, stating how they have been changed);
(ii) that this Lease has not been cancelled or terminated; (iii) the last date
of payment of the Base Rent and other charges and the time period covered by
such payment; (iv) that Landlord is not default under this Lease (or, if
Landlord is claimed to be in default, stating why); and (v) such other
representations or information with respect to Tenant or the Lease as Landlord
may reasonably request or which any prospective purchaser or encumbrancer of the
Property may require. Tenant shall deliver such statement to Landlord within
twenty (20) days after Landlord's request. Landlord may give any such statement
by Tenant to any prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbracer may rely conclusively upon such statement as true and
correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10)-day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been cancelled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under the Lease. In such event, Tenant shall be estopped from
denying the truth of such facts.
Initials ___________________
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Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord. Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement
is a true and accurate statement as of the date of such statement. All
financial statements shall be confidential and shall be used only for the
purpose set forth in this Lease.
SEE RIDER SECTION 11.05
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall reimburse
the other party (the "Nondefaulting Party") upon demand for any costs or
expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgement entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgement is entered, a reasonable sum as attorneys' fees and
cost. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
cost, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenants shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability,
provided that transferee assumes such liability, with respect to the obligations
of Landlord under this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all funds that Tenant
previously paid if such funds have not yet been applied under the terms of this
Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not be
in default under this Lease unless Landlord (or such ground lessor, mortgagee or
beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably requires
more than thirty (30) days to cure, Landlord shall not be in default if such
cure is commenced within such thirty (30) -day period and thereafter diligently
pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project
and all rents, profits and issues therefrom and neither the landlord nor its
partners, shareholders, officers or other principals shall have any personal
liability under the Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provisions of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04 INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Initials: __________________
__________________
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Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease
is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this Lease
shall be in writing and shall not be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
See Rider Section 13.06
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY; If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a copy of a general authorizing resolution of Tenant's Board
of Directors authorizing the execution of leases and agreements or other
evidence of such authority reasonably acceptable to Landlord. If Tenant is a
partnership, each person or entity signing this Lease for Tenant represents and
warrants that he or it is a general partner of the partnership, that he or it
has full authority to sign for the partnership and that this Lease binds the
partnership and all general partners of the partnership. Tenant shall give
written notice to Landlord of any general partner's withdrawal or addition.
Within thirty (30) days after this Lease is signed, Tenant shall deliver to
Landlord a copy of Tenant's recorded statement of partnership or certificate of
limited partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord or Tenant cannot perform any of
its obligations due to events beyond such applicable party's control except with
respect to rent obligation to be paid by Tenant pursuant to this Lease the time
provided for performing such obligations shall be extended by a period of time
equal to the duration of such events. Events beyond Landlord's or Tenant's
control include, but are not limited to, acts of God, war, civil commotion,
labor disputes, strikes, fire, flood or other casualty, shortages of labor or
material, government regulation or restriction and weather conditions.
Section 3.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall be binding upon
either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord and
Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered to
both Landlord and Tenant. Landlord shall pay a real estate commission to
Tenant's Broker pursuant to a separate agreement executed between Landlord and
Tenant's Broker prior to lease execution Landlord's Broker named in Section 1.08
above, if any, as provided in the written agreement between Landlord and
Landlord's Broker, or the sum stated in Section 1.09 above for services rendered
to Landlord by Landlord's Broker in this transaction. Landlord shall pay
Landlord's Broker a commission if Tenant exercises any option to extend the
Lease Term or to buy the Property, or any similar option or right which Landlord
may grant to Tenant, or if Landlord's Broker is the procuring cause of any other
lease or sale entered into between Landlord and Tenant covering the Property.
Such commission shall be the amount set forth in Landlord's Broker's commission
schedule in effect as of the execution of this Lease. If a Tenant's Broker is
named in Section 1.08 above, Landlord's Broker shall pay an appropriate portion
of its commission to Tenant's Broker if so provided in any agreement between
Landlord's Broker and Tenant's Broker. Nothing contained in this Lease shall
impose any obligation on Landlord to pay a commission or fee to any party other
than Landlord's Broker and Tenant's Broker.
Section 14.02. Protection of brokers. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
and Tenant's Broker shall have the right to bring a legal action to enforce
or declare rights under this provision. The prevailing party in such action
shall be entitled to reasonable attorneys' fees to be paid by the losing party.
Such attorneys' fees shall be fixed by the court in such action. This
Paragraph is included in this Lease for the benefit of Landlord's Broker and
Tenant's Broker.
Initials: ________________
________________
14
<PAGE>
Section 14.03 BROKER'S DISCLOSURE OF AGENCY. Landlord's Broker hereby
discloses to Landlord and Tenant and Landlord and Tenant hereby consent to
Landlord's Broker acting in this transaction as the agent of (check one):
xx Landlord exclusively or
--
[ ] both Landlord and Tenant.
Section 14.04. NO OTHER BROKERS. Tenant represents and warrants to
Landlord that the brokers named in Section 1.08 above are the only agents,
brokers, finders or other parties with whom Tenant has dealt and Tenant has no
knowledge of any other brokers who are or may be entitled to any commission or
fee with respect to this Lease or the Property.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on ------------, 19---- MAJESTIC REALTY CO., A California corporation
at---------------------------- By:/s/ [SIGNATURE ILLEGIBLE]^^
---------------------------
Its:__________________________
By:/s/ [SIGNATURE ILLEGIBLE]^^
---------------------------
PATRICIAN ASSOCIATES, INC., a California
corporation
By: /s/ Jon M Jacobson
--------------------------
Its: Vice President
-------------------------
By:/s/[SIGNATURE ILLEGIBLE]^^
---------------------------
Its: Vice President
------------------------
"TENANT"
Signed on December 21, 1998 HOT TOPIC ADMINISTRATION, INC., a California
--------------------
corporation
at Pomane, California By: /s/ ORVAL MADDEN
--------------------------- -------------------------------
Its: ORVAL MADDEN, PRESIDENT
-------------------------------
By: MARC R BERTONE
-------------------------------
Its: MARC R. BERTONE VICE PRESIDENT
------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION
OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS,(R) INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE SOUTHERN
CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS, (R) INC.,
ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR
AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS
LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO
ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL
COUNSEL.
Initials: _________________
_________________
15
<PAGE>
[LOGO OF SIOR APPEARS HERE]
OPTION TO EXTEND TERM
LEASE RIDER
This Rider is attached to and made part of that certain Lease (the "Lease")
dated September 8, 1998 between Majestic Realty Co. and Patrician Associates,
Inc., both California corporations as Landlord, and Hot Topic Administration,
Inc., a California Corporation, as Tenant, covering the Property commonly known
as 18305 E. San Jose Avenue, City of Industry, California (the "Property"). The
terms used herein shall have the same definitions as set forth in the Lease. The
provisions of this Rider shall supersede any inconsistent or conflicting
provisions of the Lease.
A. Option(s) to Extend Term.
1. Landlord hereby grants to Tenant two (2) option(s) (the "Option(s)")
to extend the Lease Term for additional term(s) of three (3) years each (the
"Extension(s)"), on the same terms and conditions as set forth in the Lease, but
at an increased rent as set forth below. Each Option shall be exercised only by
written notice delivered to Landlord at least one hundred eighty (180) days
before the expiration of the Lease Term or the preceding Extension of the Lease
Term, respectively. If Tenant fails to deliver Landlord written notice of the
exercise of an Option within the prescribed time period, such Option and any
succeeding Options shall lapse, and there shall be no further right to extend
the Lease Term. Each Option shall be exercisable by Tenant on the express
conditions that (a) at the time of the exercise, and at all times prior to the
commencement of such Extension, Tenant shall not be in default under any of the
provisions of this Lease and (b) Tenant has not been ten (10) or more days late
in the payment of rent more than a total of two (2) times during a twelve (12)
month period.
2. PERSONAL OPTIONS.
The Option(s) are personal to the Tenant named in Section 1.03 of the Lease
or any Tenant's Affiliate described in Section 9.02 of the Lease. If Tenant
subleases any portion of the Property or assigns or otherwise transfers any
interest under the Lease to an entity other than a Tenant Affiliate prior to the
exercise of an Option (whether with or without Landlord's consent), such Option
and any succeeding Options shall lapse. If Tenant subleases any portion of the
Property or assigns or otherwise transfers any interest of Tenant under the
Lease to an entity other than a Tenant Affiliate after the exercise of an Option
but prior to the commencement of the respective Extension (whether with or
without Landlord's consent), such Option and any succeeding Options shall lapse
and the Lease Term shall expire as if such Option were not exercised. If Tenant
subleases any portion of the Property or assigns or otherwise transfers any
interest of Tenant under the Lease in accordance with Article 9 of the Lease
after the exercise of an Option and after the commencement of the Extension
related to such Option, then the term of the Lease shall expire upon the
expiration of the Extension during which such sublease or transfer occurred and
only the succeeding Options shall lapse.
B. CALCULATION OF RENT.
The Base Rent during the Extension(s) shall be determined by one or a
combination of the following methods (INDICATE YOUR CHOICE UPON EXECUTION OF THE
LEASE):
2. Fair Rental Value Adjustment (Section B(2), below) [XX]
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<PAGE>
2. FAIR RENTAL VALUE ADJUSTMENT.
The Base Rent shall be increased on the first day of the first month(s) of
the first and second Extension(s) of the Lease Term (the "Rental Adjustment
Date(s)") to the "fair rental value" of the Property, determined in the
following manner:
(a) Not later than one hundred (100) days prior to any applicable Rental
Adjustment Date, Landlord and Tenant shall meet in an effort to negotiate in
good faith, the fair rental value of the Property as of such Rental Adjustment
Date. If Landlord and Tenant have not agreed upon the fair rental value of the
Property at least ninety (90) days prior to the applicable Rental Adjustment
Date, the fair rental value shall be determined by appraisal, as follows
(INDICATE YOUR CHOICE UPON EXECUTION OF THE LEASE):
Appraisal by Brokers.[XX]
(b) If Landlord and Tenant are not able to agree upon the fair rental
value of the Property within the prescribed time period, then Landlord and
Tenant shall attempt to agree in good faith upon a single appraiser or broker,
as indicated above, not later than seventy-five (75) days prior the applicable
Rental Adjustment Date. If Landlord and Tenant are unable to agree upon a
single appraiser/broker within such time period, then Landlord and Tenant shall
each appoint one appraiser or broker, as indicated above, not later than sixty-
five (65) days prior to the applicable Rental Adjustment bate. Within (10) days
thereafter, the two appointed appraisers/brokers shall appoint a third
appraiser or broker, as indicated above. If either Landlord or Tenant fails to
appoint its appraiser/broker- within the prescribed time period, -the single
appraiser/broker appointed shall determine the fair rental value of the
Property. If both parties fail to appoint appraisers/brokers within the
prescribed time periods, then the first appraiser/broker thereafter selected by
a party shall determine the fair rental value of the Property. Each party shall
bear the cost of its own appraiser or broker and the parties shall share
equally the cost of the single or third appraiser or broker, if applicable. If
appraisers are used, such appraisers shall have at least five (5) years'
experience in the appraisal of commercial/industrial real property in the area
in which the Property is located and shall be members of professional
organizations such as MAI or equivalent. If brokers are used, such brokers
shall have at least five (5) years' experience in the sales and leasing of
commercial/industrial real property in the area in which the Property is
located and shall be members of professional organizations such as the Society
of Industrial Realtors or equivalent.
(c) For the purposes of such appraisal, the term "fair market value" shall
mean the price that a ready and willing tenant would pay, as of the applicable
Rental Adjustment Date, as monthly rent to a ready and willing landlord of
property comparable to the Property if such property were exposed for lease on
the open market for a reasonable period of time and taking into account all of
the purposes for which such property may be used. If a single appraiser/broker
is chosen, then such appraiser/broker shall determine the fair rental value of
the Property. Otherwise, the fair rental value of the Property shall be the
arithmetic average of the two (2) of the three (3) appraisals which are closest
in amount, and the third appraisal shall be disregarded. In no event, however,
shall the Base Rent be reduced by reason of such computation. Landlord and
Tenant shall instruct the appraiser(s)/broker(s) to complete their determination
of the fair rental value not later than thirty (30) days prior to the applicable
Rental Adjustment Date. If the fair rental value is not determined prior to the
applicable Rental Adjustment Date, then Tenant shall continue to pay to Landlord
the Base Rent applicable to the Property immediately prior to such Extension,
until the fair rental value is determined. When the fair rental value of the
Property is determined, Landlord shall deliver notice thereof to Tenant, and
Tenant shall pay to Landlord, within (10) days after receipt of such notice,
the' difference between the Base Rent actually paid by Tenant to Landlord and
the new Base Rent determined hereunder.
Initials: ______________
______________
<PAGE>
RIDER TO INDUSTRIAL REAL ESTATE LEASE
-------------------------------------
This Rider ("RIDER") is made and entered into by MAJESTIC REALTY CO. and
PATRICIAN ASSOCIATES, INC., both California corporations (collectively,
"LANDLORD") and HOT TOPIC ADMINISTRATION, INC., a California corporation
("TENANT"), and is dated as of the date set forth on Section 1.01 of the
Industrial Real Estate Lease between Landlord and Tenant ("LEASE") to which this
Rider is attached. The promises, covenants, agreements and declarations made and
set forth herein are intended to and shall have the same force and effect as if
set forth at length in the body of the Lease. To the extent that the provisions
of this Rider are inconsistent with the terms and conditions of the Lease, the
terms and conditions of this Rider shall control.
SECTION 2.05 TENANT'S ENTRY INTO THE PROPERTY PRIOR TO COMMENCEMENT DATE:
-----------------------------------------------------------
Tenant shall have the right to access of the Property as of February 1,
1999 ("Early ENTRY DATE") for the purpose of installing and/or storing over
standard equipment or fixtures and preparing the Property for Tenant's use;
provided that: (i) this Lease has been fully executed and delivered; (ii)
Landlord has received the Security Deposit and third month's Base Rent; (iii)
the previous tenant of the Property's lease has expired and/or terminated and
such tenant has vacated the Property; (iv) Tenant and its agents do not
interfere with "Landlord's Work", as that term is defined in Section 6.07 of
------------
this Lease; (v) Tenant has obtained its insurance policies as set forth in
Section 4.04 of this Lease and Landlord is in receipt of Tenant's insurance
binder naming Landlord as additional insured; and (vi) all of the terms and
conditions of this Lease shall apply, other than Tenant's obligation to pay (a)
Base Rent, (b) Landlord's insurance premiums set forth in Section 4.04, (c)
------------
Landlord's "real property tax", (d) "Landscape Fee," as that term is defined in
Article 11 of this Lease and (e) Common Area costs which are not the result of
- ----------
Tenant's actions or omissions during this early entry period or Tenant
Improvements, as though the Commencement Date had occurred (although the
Commencement Date shall not actually occur until the occurrence of the same
pursuant to the terms of the third sentence of Section 2.01) upon such entry
------------
into the Property by Tenant. Tenant shall be responsible for payment of
utilities during this early entry period. Tenant shall hold Landlord harmless
from and indemnify, protect and defend Landlord against any loss or damage to
the Property and against injury to any persons caused by Tenant's actions or
anyone's actions who are directly or indirectly employed by the Tenant. Tenant
shall assume all risk of loss to Tenant's personal property, merchandise and
fixtures.
SECTION 3.01 TIME AND MANNER OF PAYMENT:
---------------------------
Provided that Tenant is not in default under the terms of this Lease,
Tenant shall be credited for the following payments due during the first and
second months of the Lease Term ("ABATEMENT PERIOD") commencing on the Lease
Commencement Date: (i) Base Rent credit in a total amount equal to Eighty-Seven
Thousand Five Hundred and No/100 Dollars ($87,500.00), (ii) Landlord's insurance
premiums set forth in Section 4.04, (iii) Landlord's "real property tax" and
------------
(iv) Landscape Fee, and (v) Common Area costs which are not the result of
Tenant's actions or omissions during the Abatement Period or Tenant
Improvements.
SECTION 4.02(c) JOINT ASSESSMENT.
----------------
If the Property is not separately assessed, Landlord shall reasonably
determine Tenant's share of the "real property tax" payable by Tenant under
Paragraph 4.02 from the assessor's worksheets or other reasonably available
information. Tenant shall pay such share to Landlord at least ten (10) days but
not more than thirty (30) days prior to delinquency. Tenant acknowledges if any
"Tenant Improvements," as that term is defined in the Tenant Work Letter
attached hereto, or any alterations made by Tenant or for Tenant, increase the
"real property tax," such increase shall be Tenant's sole cost and
responsibility and shall not be shared with Landlord or any other tenant of the
Project. Upon Tenant's request Landlord shall supply Tenant with a copy of the
Projects tax bill.
SECTION 4.04(e) LANDLORD'S INSURANCE:
---------------------
Landlord shall maintain (i) standard fire and extended coverage or all-risk
property on the Project, and all other improvements paid for by Landlord which
will remain in the Project upon the
Initials: ______________
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Rider - Page 1 of 11
<PAGE>
expiration or earlier termination of this Lease, in an amount and with such
deductible AS are acceptable to Landlord in Landlord's sole discretion; and (ii)
commercial general liability insurance against bodily injury, personal injury
and property damage to the combined single limit of One Million Dollars
($1,000,000) to one or more than one person as the result of one (1) accident or
occurrence.
SECTION 4.05(c) VEHICLE PARKING
---------------
Tenant shall have the right, at Tenant's sole cost and expense, to paint
"Reserved For Hot Topic" on the asphalt of Tenant's parking spaces ("PARKING
SIGN"). Upon the termination of this Lease, Tenant shall remove or paint over,
in such color approved by Landlord, the above referenced Parking Sign.
SECTION 4.05 COMMON AREAS: MAINTENANCE AND COSTS
-----------------------------------
Section 4.05(d) is hereby amended by adding the following at the end
thereof:
"Notwithstanding the foregoing, any Common Area costs that
is a capital expenditure shall be amortized (including
interest on the amortized cost) over its useful life as
Landlord shall reasonably determine."
SECTION 4.09 LANDLORD'S BOOKS AND RECORDS:
-----------------------------
In the event that Tenant disputes the amount of Additional Rent set forth
in any annual statement ("STATEMENT") delivered by Landlord, then within one (1)
year after receipt of SUCH Statement by Tenant (the "REVIEW PERIOD"), Tenant
shall have the right to notify Landlord in writing that it intends to cause an
independent certified public accountant (which accountant must be qualified and
experienced and must be employed by a firm which derives its primary revenues
from its accounting practice) to inspect and copy (provided Tenant signs
Landlord's confidentiality agreement, in such form as is commercially
reasonable) Landlord's accounting records relating to the Additional Rent owed
by Tenant for the calendar year covered by such Statement, at Landlord's office
during normal business hours ("TENANT'S REVIEW"). Landlord shall have the right
to reasonably approve the identity of the accountant used by Tenant for Tenant's
Review, which accountant must not be paid on a contingency fee basis. Tenant
shall provide Landlord with not less than two (2) weeks' prior written notice of
its desire to conduct Tenant's Review. In connection with the foregoing review,
Landlord shall furnish Tenant with such reasonable supporting documentation
relating to the subject Statement as Tenant may reasonably request, including
any previous audit conducted by Landlord with respect to the calendar year in
question. In no event shall Tenant have the right to conduct Tenant's Review if
Tenant is then in default under this Lease with respect to any of Tenant's
monetary obligations, including, without limitation, the payment by Tenant of
all Additional Rent described in the Statement which is the subject of Tenant's
Review, which payment, at Tenant's election, may be made under dispute. In the
event that Tenant shall fail to provide Landlord with written notification
within the Review Period following receipt of a particular Statement of Tenant's
desire to conduct a Tenant's Review, Tenant shall have no further right to
dispute the amount of Additional Rent set forth on such Statement. In the event
that following Tenant's Review, Tenant and Landlord continue to dispute the
amount of Additional Rent shown on Landlord's Statement and Landlord and Tenant
are unable to resolve such dispute, then either Landlord or Tenant shall cause a
final and determinative audit to be made by Landlord's accountant of the proper
amount of the disputed items and/or categories of Additional Rent to be shown on
such Statement (the "FINAL AWARD"). The results of such Final Award shall be
conclusive and binding upon both Landlord and Tenant. If the resolution of the
parties' dispute with regard to the Additional Rent shown on the Statement,
whether pursuant to Tenant's Review or the Final Award reveals an error in the
calculation of Tenant's Additional Rent to be paid for such calendar year, the
parties' sole remedy shall be for the parties to make appropriate payments or
reimbursements, as the case may be, to each other as are determined to be owing.
Any such payments shall be made within thirty (30) days following the resolution
of such dispute. At Landlord's election, the parties shall treat any
overpayments resulting from the foregoing resolution of such parties' dispute as
a credit against rent until such amounts are otherwise paid by Landlord. Tenant
shall be responsible for all costs and expenses associated with Tenant's Review
and any Final Award, provided that if the parties' final
Initials: _____________
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Rider - Page 2 of 11
<PAGE>
resolution of the dispute involves the overstatement by Landlord of Additional
Rent for such calendar year in excess of five percent (5%), then Landlord shall
be responsible for all reasonable, out-of-pocket costs and expenses associated
with Tenant's Review and any Final Award. This provision shall survive the
termination of this Lease to allow the parties to enforce their respective
rights hereunder.
SECTION 5.03 HAZARDOUS MATERIAL:
-------------------
5.03.1 DEFINITIONS.
-----------
A. "Hazardous Material" means any substance, whether solid,
liquid or gaseous in nature:
(i) the presence of which requires investigation or remediation
under any federal, state or local statute, regulation, ordinance, order, action,
policy or common law; or
(ii) which is or becomes defined as a "hazardous waste,"
"hazardous substance," pollutant or contaminant under any federal, state or
local statute, regulation, rule or ordinance or amendments thereto including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. section 9601 et seq.) and/or the Resource Conservation
and Recovery Act (42 U.S.C. section 6901 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. section 1801 et seq.), the Federal Water Pollution
Control Act (33 U.S.C. section 1251 et seq.), the Clean Air Act (42 U.S.C.
section 7401 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C.
section 2601 et seq.), and the Occupational Safety and Health Act (29 U.S.C.
section 651 et seq.), as these laws have been amended or supplemented; or
(iii) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic mutagenic, or otherwise hazardous or is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of the United States, the State of California or any
political subdivision thereof; or
(iv) the presence of which on the Property causes or threatens to
cause a nuisance upon the Property or to adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons on or about the
Property; or
(v) the presence of which on adjacent properties could
constitute a trespass by Tenant; or
(vi) without limitation which contains gasoline, diesel fuel or
other petroleum hydrocarbons; or
(vii) without limitation which contains polychlorinated biphenyls
(PCBs), asbestos or urea formaldehyde foam insulation; or
(viii) without limitation which contains radon gas.
B. "Environmental Requirements" means all applicable present and
future:
(i) statutes, regulations, rules, ordinances, codes, licenses,
permits, orders, approvals, plans, authorizations, concessions, franchises, and
similar items (including, but not limited to those pertaining to reporting,
licensing, permitting, investigation and remediation), of all Governmental
Agencies; and
(ii) all applicable judicial, administrative, and regulatory
decrees, judgments, and orders relating to the protection of human health or the
environment, including, without limitation, all requirements pertaining to
emissions, discharges, releases, or threatened releases of Hazardous Materials
or chemical substances into the air, surface water, groundwater or land, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of Hazardous Materials or chemical substances.
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Rider - Page 3 of 11
<PAGE>
C. "Environmental Damages" means all claims, judgments, damages,
losses, penalties, fines, liabilities (including strict liability),
encumbrances, liens, costs, and expenses (including the expense of investigation
and defense of any claim, whether or not such claim is ultimately defeated, or
the amount of any good faith settlement or judgment arising from any such claim)
of whatever kind or nature, contingent or otherwise, matured or unmatured,
foreseeable or unforeseeable (including without limitation reasonable attorneys'
fees and disbursements and consultants' fees) any of which are incurred at any
time as a result of the existence of Hazardous Material upon, about, or beneath
the Property or migrating or threatening to migrate to or from the Property, or
the existence of a violation of Environmental Requirements pertaining to the
Property and the activities thereon, regardless of whether the existence of such
Hazardous Material or the violation of Environmental Requirements arose prior
to. the present ownership or operation of the Property. Environmental Damages
include, without limitation:
(i) damages for personal injury, or injury to property or
natural resources occurring upon or off of the Property, including, without
limitation, lost profits, consequential damages, the cost of demolition and
rebuilding of any improvements on real property, interest, penalties and damages
arising from claims brought by or on behalf of employees of Tenant (with respect
to which Tenant waives any right to raise as a defense against Landlord any
immunity to which it may be entitled under any industrial or worker's
compensation laws);
(ii) fees, costs or expenses incurred for the services of
attorneys, consultants, contractors, experts, laboratories and all other costs
incurred in connection with the investigation or remediation of such Hazardous
Materials or violation of such Environmental Requirements, including, but not
limited to, the preparation of any feasibility studies or reports or the
performance of any cleanup, remediation, removal, response, abatement,
containment, closure, restoration or monitoring work required by any
Governmental Agency or reasonably necessary to make full economic use of the
Property or any other property in a manner consistent with its current use or
otherwise expended in connection with such conditions, and including without
limitation any attorneys' fees, costs and expenses incurred in enforcing the
provisions of this Lease or collecting any sums due hereunder;
(iii) liability to any third person or Governmental Agency to
indemnify such person or Governmental Agency for costs expended in connection
with the items referenced in subparagraph (ii) above; and
(iv) diminution in the fair market value of the Property
including without limitation any reduction in fair market rental value or life
expectancy of the Property or the improvements located thereon or the
restriction on the use of or adverse impact on the marketing of the Property or
any portion thereof.
D. "Governmental Agency" means all governmental agencies, departments,
commissions, boards, bureaus or instrumentalities of the United States, states,
counties, cities and political subdivisions thereof.
E. The "Tenant Group" means Tenant, Tenant's successors, assignees,
guarantors, officers, directors, agents, employees, invitees, permitees or other
parties under the supervision or control of Tenant or entering the Property
during the term of this Lease with the permission or knowledge of Tenant other
than Landlord or its agents or employees.
5.03.2 PROHIBITIONS.
------------
A. Other than normal quantities of general office supplies, material
handling systems lubrication and except as specified on Exhibit "D" attached
hereto, Tenant shall not cause, permit or suffer any Hazardous Material to be
brought upon, treated, kept, stored, disposed of, discharged, released,
produced, manufactured, generated, refined or used upon, about or beneath the
Property by the Tenant Group, or any other person without the prior written
consent of Landlord. From time to time during the term of this Lease, Tenant may
request Landlord's approval of Tenant's use of other Hazardous Materials, which
approval may be withheld in Landlord's sole discretion. Tenant shall, prior to
the Commencement Date, provide to Landlord for those Hazardous Materials
described on Exhibit "D" (a) a description of handling, storage, use and
disposal procedures, and
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(b) all "community right to know" plans or disclosures and/or emergency response
plans which Tenant is required to supply to local governmental agencies pursuant
to any Environmental Requirements.
B. Tenant shall not cause, permit or suffer the existence or the
commission by the Tenant Group, or by any other person, of a violation of any
Environmental Requirements upon, about or beneath the Property.
C. Tenant shall neither create or suffer to exist, nor permit the
Tenant Group to create or suffer to exist any lien, security interest or other
charge or encumbrance of any kind with respect to the Property, including
without limitation, any lien imposed pursuant to section 107(f) of the Superfund
Amendments and Reauthorization Act of 1986 (42 U.S.C. section 9607(l)) or any
similar state statute.
D. Tenant shall not install, operate or maintain any above or below
grade tank, sump, pit, pond, lagoon or other storage or treatment vessel or
device on the property without Landlord's prior written consent.
5.03.3 INDEMNITY.
---------
A. Tenant, its successors, assigns and guarantors, agree to indemnify,
defend, reimburse and hold harmless:
(i) Landlord; and
(ii) any other person who acquires all or a portion of the
Property in any manner (including purchase at a foreclosure sale) or who becomes
entitled to exercise the rights and remedies of Landlord under this Lease; and
(iii) the directors, officers, shareholders, employees, partners,
agents, contractors, subcontractors, experts, licensees, affiliates, lessees,
mortgagees, trustees, heirs, devisees, successors, assigns and invitees of such
persons, from and against any and all Environmental Damages which exist as a
result of the activities or negligence of the Tenant Group or which exist as a
result of the breach of any warranty or covenant or the inaccuracy of any
representation of Tenant contained in this Lease, or by Tenant's remediation of
the Property or failure to meet its obligations contained in this Lease.
B. The obligations contained in this Section 5.03 shall include, but
not be limited to, the burden and expense of defending all claims, suits and
administrative proceedings, even if such claims, suits or proceedings are
groundless, false or fraudulent, and conducting all negotiations of any
description, and paying and discharging, when and as the same become due, any
and all judgments, penalties or other sums due against such indemnified persons.
Landlord, at its sole expense, may employ additional counsel of its choice to
associate with counsel representing Tenant.
C. Landlord shall have the right but not the obligation to join and
participate in, and control, if it so elects, any legal proceedings or actions
initiated in connection with Tenant's activities. Landlord may also negotiate,
defend, approve and appeal any action taken or issued by any applicable
governmental authority with regard to contamination of the Property by a
Hazardous Material.
D. The obligations of Tenant in this paragraph shall survive the
expiration or termination of this Lease.
E. The obligations of Tenant under this paragraph shall not be
affected by any investigation by or on behalf of Landlord, or by any information
which Landlord may have or obtain with respect thereto.
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5.03.4 OBLIGATION TO REMEDIATE.
-----------------------
In addition to the obligation of Tenant to indemnify Landlord pursuant to
this Lease, Tenant shall, upon approval and demand of Landlord, at its sole cost
and expense and using contractors approved by Landlord, promptly take all
actions to remediate the Property which are required by any Governmental Agency,
or which are reasonably necessary to mitigate Environmental Damages or to allow
full economic use of the Property, which remediation is necessitated from the
presence upon, about or beneath the Property, at any time during or upon
termination of this Lease, of a Hazardous Material or a violation of
Environmental Requirements existing as a result of the activities or negligence
of the Tenant Group. Such actions shall include, but not be limited to, the
investigation of the environmental condition of the Property, the preparation of
any feasibility studies, reports or remedial plans, and the performance of any
cleanup, remediation, containment, operation, maintenance, monitoring or
restoration work, whether on or off the Property, which shall be performed in a
manner approved by Landlord. Tenant shall take all actions necessary to restore
the Property to the condition existing prior to the introduction of Hazardous
Material upon, about or beneath the Property, notwithstanding any lesser
standard of remediation allowable under applicable law or governmental policies.
5.03.5 RIGHT TO INSPECT.
----------------
Landlord shall have the right in its sole and absolute discretion, but not
the duty, to enter and conduct an inspection of the Property, including invasive
tests, at any reasonable time to determine whether Tenant is complying with the
terms of the Lease, including but not limited to the compliance of the Property
and the activities thereon with Environmental Requirements and the existence of
Environmental Damages as a result of the condition of the Property or
surrounding properties and activities thereon. Landlord shall have the right,
but not the duty, to retain any independent professional consultant (the
"Consultant") to enter the Property to conduct such an inspection or to review
any report prepared by or for Tenant concerning such compliance. The cost of
the Consultant shall be paid by Landlord unless such investigation discloses a
violation of any Environmental Requirement by the Tenant Group or the existence
of a Hazardous Material on the Property or any other property caused by the
activities or negligence of the Tenant Group (other than Hazardous Materials
used in compliance with all Environmental Requirements and previously approved
by Landlord), in which case Tenant shall pay the cost of the Consultant. Tenant
hereby grants to Landlord, and the agents, employees, consultants and
contractors of Landlord the right to enter the Property and to perform such
tests on the Property as are reasonably necessary to conduct such reviews and
investigations. Landlord shall use its best efforts to minimize interference
with the business of Tenant.
5.03.6 NOTIFICATION.
------------
If Tenant shall become aware of or receive notice or other communication
concerning any actual, alleged, suspected or threatened violation of
Environmental Requirements, or liability of Tenant for Environmental Damages in
connection with the Property or past or present activities of any person
thereon, including but not limited to notice or other communication concerning
any actual or threatened investigation, inquiry, lawsuit, claim, citation,
directive, summons, proceeding, complaint, notice, order, writ, or injunction,
relating to same, then Tenant shall deliver to Landlord within ten (I 0) days of
the receipt of such notice or communication by Tenant, a written description of
said violation, liability, or actual or threatened event or condition, together
with copies of any documents evidencing same. Receipt of such notice shall not
be deemed to create any obligation on the part of Landlord to defend or
otherwise respond to any such notification.
If requested by Landlord, Tenant shall disclose to Landlord the names and
amounts of all Hazardous Materials other than general office supplies refer-red
to in Section 5.03.2 of this Rider, which were used, generated, treated,
handled, stored or disposed of on the Property or which Tenant intends to use,
generate, treat, handle, store or dispose of on the Property. The foregoing in
no way shall limit the necessity for Tenant obtaining Landlord's consent
pursuant to Section 5.03.2 of this Rider.
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5.03.7 SURRENDER OF PREMISES.
---------------------
In the ninety (90) days prior to the expiration or termination of the Lease
Term, and for up to ninety (90) days after Tenant fully surrenders possession of
the Property, Landlord may have an environmental assessment of the Property
performed in accordance with Section 5.03.5 of this Rider. Tenant shall
perform, at its sole cost and expense, any clean-up or remedial work recommended
by the Consultant which is necessary to remove, mitigate or remediate any
Hazardous Materials and/or contamination of the Property caused by the
activities or negligence of the Tenant Group.
5.03.8 ASSIGNMENT AND SUBLETTING.
-------------------------
In the event the Lease provides that Tenant may assign the Lease or sublet
the Property subject to Landlord's consent and/or certain other conditions, and
if the proposed assignee's or sublessee's activities in or about the Property
involve the use, handling, storage or disposal of any Hazardous Materials other
than those used by Tenant and in quantities and processes similar to Tenant's
uses in compliance with the Rider, (i) it shall be reasonable for Landlord to
withhold its consent to such assignment or sublease in light of the risk of
contamination posed by such activities and/or (ii) Landlord may impose an
additional condition to such assignment or sublease which requires Tenant to
reasonably establish that such assignee's or sublessee's activities pose no
materially greater risk of contamination to the Property than do Tenant's
permitted activities in view of the (a) quantities, toxicity and other
properties of the Hazardous Materials to be used by such assignee or sublessee,
(b) the precautions against a release of Hazardous Materials such assignee or
sublessee agrees to implement, (c) such assignee's or sublessee 's financial
condition as it relates to its ability to fund a major clean-up and (d) such
assignee's or sublessee's policy and historical record respecting its
willingness to respond to the clean up of a release of Hazardous Materials.
5.03.9 SURVIVAL OF HAZARDOUS MATERIALS OBLIGATION.
------------------------------------------
Tenant's breach of any of its covenants or obligations under this Rider
shall constitute a material default under the Lease. The obligations of Tenant
under this Rider shall survive the expiration or earlier termination of the
Lease without any limitation, and shall constitute obligations that are
independent and severable from Tenant's covenants and obligations to pay rent
under the Lease.
5.03.10 LANDLORD'S HAZARDOUS MATERIALS OBLIGATIONS.
------------------------------------------
Landlord shall be solely responsible to remediate claims, judgments,
damages, penalties, fines, costs, liabilities and losses which arise as a result
of any contamination directly arising from the introduction of Hazardous
Materials into the Property by Landlord its agents, employees or contractors in
compliance with applicable law.
SECTION 5.04 SIGNS.
-----
Section 5.04 is hereby amended by adding the following at the end thereof:
"Notwithstanding the foregoing, subject to Landlord's prior written
approval, which shall not be unreasonably withheld, delayed or
conditioned, and provided all signs are in keeping with the quality,
design and style of the industrial park within which the Property is
located, Tenant, at its sole cost and expense, may install
identification signage in the Property; provided, however, that (i)
the size, color, location, materials and design of such sign shall be
subject to Landlord's prior written consent, which shall not be
unreasonably withheld, delayed or conditioned; (ii) such sign shall
comply with all applicable governmental rules and regulations; (iii)
such sign shall be personal to the Tenant named in Section 1.03 of
this Lease (the "Original Tenant"); (iv) such sign shall not be
painted directly on the building or attached or placed on the roof of
the building; (v) such sign shall only advertise Hot Topic
Administration, Inc. or Hot Topic; and (vi) Tenant's continuing
signage right shall be contingent upon the Original Tenant actually
occupying the entire Property. Tenant shall be responsible for all
costs incurred in connection with the design, construction,
installation, repair and maintenance of Tenant's sign(s). Upon the
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expiration or earlier termination of this Lease, Tenant shall cause
Tenant's sign(s) to be removed and shall repair any damage caused by
such removal. Any signs, notices, logos, pictures, names or
advertisements which are installed and that have not been separately
approved by Landlord may be removed by Landlord without notice by
Landlord to Tenant at Tenant's sole cost and expense."
SECTION 6.01 EXISTING CONDITIONS:
--------------------
Notwithstanding the foregoing, Landlord shall, at Landlord's expense,
repair the existing plumbing, lighting, air conditioning, heating, and
ventilating systems in the Property and the roof membrane, structure, foundation
and flooring (not including floor covering), if such are not in good operating
condition on the Commencement Date, except to the extent such repairs are
required (i) due to the negligence or willful misconduct of Tenant, or (ii) as a
result of alterations, additions or improvements to the Property made by Tenant
or for Tenant; provided, however, that Tenant gives Landlord written notice and
sets forth with specificity the nature and extent of such repair, within one (1)
year after the Commencement Date.
SECTION 6.07 LANDLORD'S WORK:
----------------
Landlord, at its sole cost and expense, shall one-time reslurry and
restripe the parking lot to provide 206 parking spaces as set forth on Exhibit A
---------
attached hereto and incorporated herein ("LANDLORD'S WORK"). Since Tenant may
be occupying the Property pursuant to this Lease while Landlord is performing
Landlord's Work, Landlord agrees that it shall use commercially reasonable
efforts to perform Landlord's Work in a manner so as to minimize interference
with Tenant's business. Tenant hereby acknowledges that, notwithstanding
Tenant's occupancy of the Property during the performance of Landlord's Work,
Landlord shall be permitted to perform Landlord's Work during normal business
hours, and Tenant shall provide a clear working area for Landlord's Work
(including, but not limited to, the moving of furniture, fixtures, automobiles
and Tenant's property away from the area Landlord is conducting Landlord's
Work). Tenant hereby agrees that the performance of Landlord's Work shall in no
way constitute a constructive eviction of Tenant nor entitle Tenant to any
abatement of rent payable pursuant to this Lease. Landlord shall have no
responsibility or for any reason be liable to Tenant for any direct or indirect
injury to or interference with Tenant's business arising from Landlord's Work,
nor shall Tenant be entitled to any compensation or damages from Landlord (i)
for loss of the use of whole or any part of the Property or of Tenant's personal
property or improvements resulting from Landlord's Work or Landlord's actions in
connection with Landlord's Work, or (ii) for any inconvenience or annoyance
occasioned by Landlord's Work or Landlord's actions in connection with
Landlord's Work.
SECTION 7.05 SUBSTANTIAL OR TOTAL DESTRUCTION:
---------------------------------
Notwithstanding anything to the contrary contained in this Lease, if there
is any damage or destruction to the Property the repair of which actually takes
a period beyond that date which is six (6) months from the date of the
occurrence of such damage (the "Outside Date"), then Tenant may, at Tenant's
option, terminate this Lease by delivering written notice of such termination to
Landlord, no later than thirty (30) days after the Outside Date.
Notwithstanding anything to the contrary contained in this Lease, if there is
any damage or destruction to the Property, Tenant shall have the right, at any
time and from time to time to require Landlord to deliver to Tenant a written
notice (the "Contractor Certificate") certifying to both Landlord and Tenant, in
the reasonable opinion of Landlord's contractor, the amount of time required to
repair or complete the repair of the Property. If in the Contractor Certificate
the contractor certifies that the repair of the Property will take a period in
excess of six (6) months from receipt of Tenant's request, then within fifteen
(I 5) days after the delivery of the Contractor Certificate to Tenant, Tenant
may, at Tenant's option, terminate this Lease by delivering written notice of
such termination to Landlord within such fifteen (15) day period.
Notwithstanding the foregoing, Tenant shall not have any right to terminate this
Lease under this Section 7.05 if the damage to the Property or Project was
caused by the acts or omissions of Tenant.
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SECTION 9.05 LANDLORD'S CONSENT:
-------------------
(c) If Landlord elects to terminate this Lease pursuant to Section 9.05(a),
Landlord may, if it elects, enter into a new lease covering the Property with
the intended assignee or sublessee on such terms as Landlord and such person may
agree or enter into a new lease covering the Property with any other person; in
such event, Tenant shall not be entitled to any portion of the profit, if any,
which Landlord may realize on account of such termination and reletting. From
and after the date of such termination of this Lease, Tenant shall have no
further obligation to Landlord hereunder, except for matters occurring or
obligations arising hereunder prior to the date of such termination and for such
obligations as set forth herein that survive the termination of this Lease.
SECTION 10.02(b) DEFAULTS:
---------
Add to Section 10.02(b) the following:
"provided, however, that Landlord shall provide Tenant with written notice of
such monetary default and if Tenant corrects such default within three (3) days
after receipt of such notice, such failure shall not constitute a default
hereunder. Notwithstanding the foregoing, Landlord shall only be required to
provide Tenant with two (2) late notices during any consecutive twelve (12)
month period;"
SECTION 11.05 TENANT'S FINANCIAL CONDITION:
----------------------------
Notwithstanding the foregoing, the Original Tenant shall only be required
to deliver to Landlord and Landlord's lender the most recent annual report and
10K filing of its "parent" corporation. Upon execution of this Lease, Tenant's
"parent" corporation is Hot Topic, Inc., a California corporation.
SECTION 13.06 NOTICES:
--------
Notwithstanding the foregoing, notices required or permitted under this
Lease may be sent by registered mail or delivered by a nationally recognized
overnight courier, postage prepaid.
ARTICLE FIFTEEN:
REVENUE AND EXPENSE ACCOUNTING:
Landlord and Tenant agree that, for all purposes (including any
determination under Section 467 of the Internal Revenue Code), rental income
will accrue to the Landlord and rental expenses will accrue to the Tenant in the
amounts and as of the dates rent is payable under the Lease.
ARTICLE SIXTEEN:
LANDSCAPE MAINTENANCE:
Notwithstanding the provisions of Sections 6.03 and 6.04, Landlord shall
maintain, at Tenant's expense, the landscaping of the Property and, if
applicable, the common areas. Such maintenance shall include gardening, tree
trimming, replacement or repair of landscaping, landscape irrigation systems and
similar items. Such maintenance shall also include sweeping and cleaning of
asphalt, concrete or other surfaces on the driveway, parking areas, yard areas,
loading areas or other paved or covered surfaces. In connection with Landlord's
obligations under this Article, Landlord may enter into a contract with a
landscape contractor of Landlord's choice to provide some (but not necessarily
all) of the maintenance services listed above. Tenant's pro-rata share of the
monthly cost of such contract, hereinafter referred to as the "Landscape Fee" is
currently SEVEN HUNDRED EIGHTY-NINE AND NO/100 DOLLARS ($789.00). Landlord shall
use its commercially reasonable efforts to maintain competitive contracts and
shall promptly notify Tenant of any increase in the Landscape Fee. Tenant
agrees to pay monthly to Landlord, as additional rent, the Landscape Fee.
Tenant shall make such payment together with Tenant's monthly rental payment,
without the necessity of notice from Landlord. It is the understanding of the
parties that the Landscape Fee only pertains to routine landscape maintenance on
the Property and that Landlord
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may incur expenses in addition to the Landscape Fee in meeting its obligations
set forth above. Tenant shall pay to Landlord, as additional rent, within ten
(10) days after demand therefore, the cost of such additional expenses.
ARTICLE SEVENTEEN:
RIGHT OF FIRST OFFER:
17.1 Right of First Offer. During the Lease Term, Landlord
--------------------
hereby grants to the Tenant named in the Summary and not any assignee, sublessee
or other transferee of Tenant's interest in this Lease ("ORIGINAL TENANT") a
one-time right of first offer with respect to the adjacent 125,000 rentable
square feet of space of the 250,000 square foot building located at 18385 E. San
Jose Avenue, City of Industry, California (the "EXPANSION SPACE"), as set forth
on Exhibit A-1 attached hereto. Notwithstanding the foregoing, such first offer
-----------
right of Tenant shall commence only following the expiration or early
termination of the existing lease of the Expansion Space (including any renewal
of such lease, whether or not such renewal is pursuant to an express written
provision in such lease, and regardless of whether any such renewal is
consummated pursuant to a lease amendment or a new lease), and such first offer
right shall be subordinate to all presently existing rights of all other present
tenants (as of September 3, 1998) of Landlord to lease the Expansion Space
(whether or not pursuant to rights of first offer, expansion options, must-take
requirements or otherwise), and regardless of whether such tenant's exercise of
such right is consummated in a new lease or a lease amendment (individually and
collectively, the "SUPERIOR RIGHT HOLDER") with respect to such Expansion Space.
Tenant's right of first offer shall be on the terms and conditions set forth in
this Article 17.
----------
17.2 Procedure for Offer. Landlord shall notify Tenant (the "FIRST
-------------------
OFFER NOTICE") when the Expansion Space or any portion thereof becomes available
for lease to third parties, provided that no Superior Right Holder wishes to
lease such space. Pursuant to such First OFFER Notice, Landlord shall offer to
lease to Tenant the then available Expansion Space. The First OFFER Notice
shall describe the space so offered to Tenant and shall set forth the "FIRST
OFFER RENT," as that term is defined in Section 17.4 below, and the other
economic terms upon which Landlord is willing to lease such space to Tenant.
17.3 Procedure for Acceptance. If Tenant wishes to exercise Tenant's
------------------------
right of first offer with respect to the space described in the First Offer
Notice, then within five (5) business days of delivery of the First Offer Notice
to Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to
exercise its right of first offer with respect to the entire space described in
the First Offer Notice on the terms contained in such notice. If Tenant does
not so notify Landlord within the first five (5) business day period, then
Landlord shall be free to lease the space described in the First Offer Notice to
anyone to whom Landlord desires on any terms Landlord desires. Notwithstanding
anything to the contrary contained herein, Tenant must elect to exercise its
right of first offer, if at all, with respect to all of the space offered by
Landlord to Tenant at any particular time, and Tenant may not elect to lease
only a portion thereof.
17.4 The Expansion Space Rent. The Base Rent payable by Tenant for
------------------------
the Expansion Space (the "FIRST OFFER RENT") shall be equal to the greater of
(i) the same rate at which Base Rent is payable by Tenant under the Lease as of
the "First Offer Commencement Date", as that term is defined in Section 17.6
------------
below, and (ii) ninety percent (90%) of the face or stated rent, including all
escalations, being quoted by Landlord for non-sublease, non-encumbered, non-
equity space comparable in size, location and quality to the Expansion Space in
the Building for the term as stated in the First Offer Notice.
17.5 Construction of the Expansion Space. Tenant shall take the
-----------------------------------
Expansion Space in its "as is" condition, and the construction of any
improvements in the Expansion Space shall comply with the terms of Section 6.05
------------
of this Lease.
17.6 Amendment to Lease. If Tenant timely exercises Tenant's right
------------------
to lease the Expansion Space as set forth herein, Landlord and Tenant shall
within fifteen (15) days thereafter execute an amendment for such Expansion
Space upon the terms and conditions as set forth in the First Offer Notice and
this Article 17. Tenant shall commence payment of rent for the Expansion
----------
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Space, and the term of the Expansion Space shall commence upon the date of
delivery of the Expansion Space to Tenant (the "FIRST OFFER COMMENCEMENT DATE")
and terminate on the date set forth in the First Offer Notice.
17.7 Termination of Right of First Offer. The rights contained in
-----------------------------------
this Article 17 shall be personal to the Original Tenant and may only be
- ---------------
exercised by Original Tenant if as of the date of the attempted exercise of the
right of first offer by Tenant and as of the scheduled date of delivery of such
Expansion Space to Tenant (i) Original Tenant occupies the entire property and
(ii) at least one (1) year of the Lease Term remains, including any extensions
of the Lease Term if Tenant has exercised the Option(s) as provided in the
Option to Extend Lease Term Rider. The right of first offer granted herein
shall terminate upon the failure by Tenant to exercise its right of first offer
with respect to the Expansion Space as offered by Landlord. Tenant shall not
have the right to lease the Expansion Space, as provided in this, Article 17,
----------
if, as of the date of the attempted exercise of the right of first offer by
Tenant, or as of the scheduled date of delivery of the Expansion Space to
Tenant, Tenant is in default under Us Lease or Tenant has previously been in
default under this Lease more than once.
ARTICLE EIGHTEEN
----------------
GUARANTY OF LEASE
-----------------
This Lease is subject to and conditioned upon Tenant delivering to
Landlord, concurrently with Tenant's execution and delivery of this Lease, a
Guaranty (the "Guaranty") in the form attached hereto as Exhibit "E", which
Guaranty shall be fully executed by and binding upon Hot Topic, Inc., a
California corporation, as guarantor. Tenant hereby expressly waives any and
all benefits under California Civil Code Section 2822(a) with respect to the
Guaranty, and agrees that Landlord (not Tenant) may designate the portion of
Tenant's Lease obligation that is satisfied by partial payment by Tenant.
ARTICLE NINETEEN
----------------
TELECOMMUNICATION EQUIPMENT
---------------------------
At any time during the Lease Term, Original Tenant may install, at Tenant's
sole cost and expense, for Tenant's sole use, telecommunication equipment upon
the roof directly above the Property for Tenant's use of up to 5 square feet of
space; provided however: (i) the physical appearance and location of any such
installation and the size of the equipment shall be subject to Landlord's
reasonable approval, and Landlord may require Tenant to install screening around
such equipment, at Tenant's sole cost and expense, as reasonably designated by
Landlord; (ii) Tenant shall maintain such equipment, at Tenant's sole cost and
expense; (iii) Tenant shall be responsible for any utilities related to the
operation of the telecommunication equipment; (iv) the telecommunication
equipment shall be subject to government rules and regulations and covenants,
conditions and restrictions; and (v) Tenant shall exercise its right to install
telecommunication equipment by giving Landlord prior written notice thereof and
Landlord and Tenant shall execute a Telecommunication Agreement in substantially
the form as EXHIBIT "G", attached hereto, covering the installation and
-----------
maintenance of such equipment, Tenant's indemnification of Landlord with respect
thereto, Tenant's obligation to remove such equipment upon the expiration or
earlier termination of this Lease, and other related matters.
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EXHIBIT 10.19
EXHIBIT E
---------
GUARANTY OF LEASE
-----------------
THIS GUARANTY OF LEASE (this "Guaranty") is made as of December 10, 1998,
by HOT TOPIC, INC., a California corporation, (the "Guarantor"), whose address
is 3410 Pomona Boulevard, Pomona, California, in favor of MAJESTIC REALTY CO.
AND PATRICIAN ASSOCIATES, INC., both California corporations, having an office
at 13191 Crossroads Parkway North, Sixth Floor, City of Industry, California
91746 ("Landlord").
WHEREAS, Landlord and Hot Topic Administration, Inc., a California
corporation ("Tenant") desire to enter into that certain Industrial Lease (the
"Lease") dated December 10, 1998 concerning the property located at 18305 East
San Jose Avenue, City of Industry, California;
WHEREAS, Guarantor has a financial interest in the Tenant; and
WHEREAS, Landlord would not execute the Lease if Guarantor did not execute
and deliver to Landlord this Guaranty.
NOW THEREFORE, for and in consideration of the execution of the foregoing
Lease by Landlord and as a material inducement to Landlord to execute said
Lease, Guarantor hereby absolutely, presently, continually, unconditionally and
irrevocably guarantees the prompt payment by Tenant of all rentals and all other
sums payable by Tenant under said Lease and the faithful and prompt performance
by Tenant of each and every one of the terms, conditions and covenants of said
Lease to be kept and performed by Tenant, and further agrees as follows:
1. It is specifically agreed and understood that the terms, covenants and
conditions of the Lease may be altered, affected, modified, amended,
compromised, released or otherwise changed by agreement between Landlord and
Tenant, or by course of conduct and Guarantor does guaranty and promise to
perform all of the obligations of Tenant under the Lease as so altered,
affected, modified, amended, compromised, released or changed and the Lease may
be assigned by or with the consent of Landlord or any assignee of Landlord
without consent or notice to Guarantor and that this Guaranty shall thereupon
and thereafter guaranty the performance of said Lease as so changed, modified,
amended, compromised, released, altered or assigned.
2. This Guaranty shall not be released, modified or affected by failure
or delay on the part of Landlord to enforce any of the rights or remedies of
Landlord under the Lease, whether pursuant to the terms thereof or at law or in
equity, or by any release of any person liable under the terms of the Lease
(including, without limitation, Tenant) or any other guarantor, including
without limitation, any other Guarantor named herein, from any liability with
respect to Guarantor's obligations hereunder.
3. Guarantor's liability under this Guaranty shall continue until all
rents due under the Lease have been paid in full in cash and until all other
obligations to Landlord have been satisfied, and shall not be reduced by virtue
of any payment by Tenant of any amount due under the Lease. If all or any
portion of Tenant's obligations under the Lease is paid or performed by Tenant,
the obligations of Guarantor hereunder shall continue and remain in full force
and effect in the event that all or any part of such payment(s) or
performance(s) is avoided or recovered directly or indirectly from Landlord as a
preference, fraudulent transfer or otherwise.
4. Guarantor warrants and represents to Landlord that Guarantor now has
and will continue to have full and complete access to any and all information
concerning the Lease, the value of the assets owned or to be acquired by Tenant,
Tenant's financial status and its ability to pay and perform the obligations
owed to Landlord under the Lease. Guarantor further warrants and represents that
Guarantor has reviewed and approved copies of the Lease and is fully informed of
the remedies Landlord may pursue, with or without notice to Tenant, in the event
of default under the Lease. So long as any of Guarantor's obligations hereunder
remains unsatisfied or owing to Landlord, Guarantor shall keep fully informed as
to all aspects of Tenant's financial condition and the performance of said
obligations.
5. Guarantor hereby covenants and agrees with Landlord that if a default
shall at any time occur in the payment of any sums due under the Lease by Tenant
or in the performance of any other obligation of Tenant under the Lease,
Guarantor shall and will forthwith upon demand pay
Initials: _______________
________________
Exhibit E - Page 1 of 5
<PAGE>
such sums, and any arrears thereof, to Landlord in legal currency of the United
States of America for payment of public and private debts, and take all other
actions necessary to cure such default and perform such obligations of Tenant.
6. The liability of Guarantor under this Guaranty is a guaranty of
payment and performance and not of collectibility, and is not conditioned or
contingent upon the genuineness, validity, regularity or enforceability of the
Lease or the pursuit by Landlord of any remedies which it now has or may
hereafter have with respect thereto, at law, in equity or otherwise.
7. Guarantor hereby waives and agrees not to assert or take advantage of
to the extent permitted by law: (i) ill notices to Guarantor, to Tenant, or to
any other person, including, but not limited to, notices of the acceptance of
this Guaranty or the creation, renewal, extension, assignment, modification or
accrual of any of the obligations owed to Landlord under the Lease and, except
to the extent set forth in Paragraph 9 hereof, enforcement of any right or
remedy with respect thereto, and notice of any other matters relating thereto,
(ii) notice of acceptance of this Guaranty; (iii) demand of payment,
presentation and protest; (iv) any right to require Landlord to apply to any
default any security deposit or other security it may hold under the Lease; (v)
any statute of limitations affecting Guarantor's liability hereunder or the
enforcement thereof; (vi) any right or defense that may arise by reason of the
incapability, lack or authority, death or disability of Tenant or any other
person; and (vii) all principles or provisions of law which conflict with the
terms of this Guaranty. Guarantor further agrees that Landlord may enforce this
Guaranty upon the occurrence of a default under the Lease, notwithstanding any
dispute between Landlord and Tenant with respect to the existence of said
default or performance of the obligations under the Lease or any counterclaim,
set-off or other claim which Tenant may allege against Landlord with respect
thereto. Moreover, Guarantor agrees that Guarantor's obligations shall not be
affected by any circumstances which constitute a legal or equitable discharge of
a guarantor or surety.
8. Guarantor agrees that Landlord may enforce this Guaranty without the
necessity of proceeding against Tenant or any other guarantor. Guarantor hereby
waives the right to require Landlord to proceed against Tenant, to proceed
against any other guarantor, to exercise any right or remedy under the Lease or
to pursue any other remedy or to enforce any other right.
9. (a) Guarantor agrees that nothing contained herein shall prevent
Landlord from suing on the Lease or from exercising any rights available to it
thereunder and that the exercise of any of the aforesaid rights shall not
constitute a legal or equitable discharge of Guarantor. Without limiting the
generality of the foregoing, Guarantor hereby expressly waives any and all
benefits under California Civil Code (S)(S) 2809, 2810, 2819, 2845, 2847, 2848,
2849 and 2850; and the second sentence of California Civil Code (S)2822(a). In
addition, Guarantor agrees that Landlord (not Tenant) shall have the right to
designate the portion of Tenant's obligations under the Lease that is satisfied
by a partial payment by Tenant.
(b) Guarantor agrees that Guarantor shall have no right of
subrogation against Tenant or any right of contribution against any other
guarantor hereunder unless and until all amounts due under the Lease have been
paid in full and all other obligations under the Lease have been satisfied.
Guarantor further agrees that, to the extent the waiver of Guarantor's rights of
subrogation and contribution as set forth herein is found by a court of
competent jurisdiction to be void or voidable for any reason, any rights of
subrogation Guarantor may have against Tenant shall be junior and subordinate to
any rights Landlord may have against Tenant, and any rights of contribution
Guarantor may have against any other guarantor shall be junior and subordinate
to any rights Landlord may have against such other guarantor.
(c) The obligations of Guarantor under this Guaranty shall not be
altered, limited or affected by any case, voluntary or involuntary, involving
the bankruptcy, insolvency, receivership, reorganization, liquidation or
arrangement of Tenant or any defense which Tenant may have by reason of order,
decree or decision of any court or administrative body resulting from any such
case. Landlord shall have the sole right to accept or reject any plan on behalf
of Guarantor proposed in such case and to take any other action which Guarantor
would be entitled to take, including, without limitation, the decision to file
or not file a claim. Guarantor acknowledges and agrees that any payment which
accrues with respect to Tenant's obligations under the Lease (including, without
limitation, the payment of rent) after the commencement of any such proceeding
(or, if any such payment ceases to accrue by operation of law by reason of the
commencement of such proceeding, such payment as would have accrued if said
proceedings had not been commenced) shall be included in Guarantor's obligations
hereunder because it is the intention of the parties that said obligations
Initials: _______________
_______________
Exhibit E - Page 2 of 5
<PAGE>
should be determined without regard to any rule or law or order which may
relieve Tenant of any of its obligations under the Lease. Guarantor hereby
permits any trustee in bankruptcy, receiver, debtor-in-possession, assignee for
the benefit of creditors or similar person to pay Landlord, or allow the claim
of Landlord in respect of, any such payment accruing after the date on which
such proceeding is commenced. Guarantor hereby assigns to Landlord Guarantor's
right to receive any payments from any trustee in bankruptcy, receiver, debtor-
in-possession, assignee for the benefit of creditors or similar person by way of
dividend, adequate protection payment or otherwise.
10. Any notice, statement, demand, consent, approval or other
communication required or permitted to be given, rendered or made by either
party to the other, pursuant to this Guaranty or pursuant to any applicable law
or requirement of public authority, shall be in writing (whether or not so
stated elsewhere in this Guaranty) and shall be deemed to have been properly
given, rendered or made only if hand-delivered or sent by first-class mail,
postage pre-paid, addressed to the other party at its respective address set
forth below, and shall be deemed to have been given, rendered or made on the day
it is hand-delivered or one day after it is mailed, unless it is mailed outside
of Los Angeles County, California, in which case it shall be deemed to have been
given, rendered or made on the third business day after the day it is mailed. By
giving notice as provided above, either party may designate a different address
for notices, statements, demands, consents, approvals or other communications
intended for it.
To Guarantor: Prior to Lease Commencement Date:
Hot Topic, Inc.
3410 Pomona Boulevard
Pomona, California 91768
After Lease Commencement Date:
c/o Hot Topic Administration
18305 E. San Jose Avenue
City of Industry, California 91744
To Landlord: Majestic Realty Co. and Patrician Associates
13191 Crossroads Parkway North
Sixth Floor
City of Industry, California 91746
Attention: Chief Financial Officer
11. Guarantor represents and warrants to Landlord as follows:
(a) No consent of any other person, including, without limitation,
any creditors of Guarantor, and no license, permit, approval or authorization
of, exemption by, notice or report to, or registration, filing or declaration
within any governmental authority is required by Guarantor in connection with
this Guaranty or the execution, delivery, performance, validity or
enforceability of this Guaranty and all obligations required hereunder. This
Guaranty has been duly executed and delivered by Guarantor, and constitutes the
legally valid and binding obligation of Guarantor enforceable against such
Guarantor in accordance with its terms.
(b) The execution, delivery and performance of this Guaranty will not
violate any provision of any existing law or regulation binding on Guarantor, or
any order, judgment, award or decree of any court, arbitrator or governmental
authority binding on Guarantor, or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which Guarantor is a party or
by which Guarantor or any of Guarantor's assets may be bound, and will not
result in, or require, the creation or imposition of any lien on any of such
Guarantor's property, assets or revenues pursuant to the provisions of any such
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking.
12. The obligations of Tenant under the Lease to execute and deliver
estoppel statements, as therein provided, shall be deemed to also require the
Guarantor hereunder to do and provide the same relative to Guarantor.
13. This Guaranty shall be binding upon each Guarantor, such Guarantor's
heirs, representatives, administrators, executors, successors and assigns AND
shall inure to the benefit of
Initials: ________________
________________
Exhibit E - Page 3 of 5
<PAGE>
and shall be enforceable by Landlord, its successors, endorsees and assigns. Any
married person executing this Guaranty agrees that recourse may be had against
community assets and against his separate property for the satisfaction of all
obligations herein guaranteed. As used herein, the singular shall include the
plural, and the masculine shall include the feminine and neuter and vice versa,
if the context so requires.
14. The term "Landlord" whenever used herein refers to and means the
Landlord specifically named in the Lease and also any assignee of said Landlord,
whether by outright assignment or by assignment for security, and also any
successor to the interest of said Landlord or of any assignee in the Lease or
any part thereof, whether by assignment or otherwise. So long as the Landlord's
interest in or to demised premises (as that term is used in the Lease) or the
rents, issues and profits therefrom, or in, to or under the Lease, are subject
to any mortgage or deed of trust or assignment for security, no acquisition by
Guarantor of the Landlord's interest in demised premises or under the Lease
shall affect the continuing obligations of Guarantor under this Guaranty, which
obligations shall continue in full force and effect for, the benefit of the
mortgagee, beneficiary, trustee or assignee under such mortgage, deed of trust
or assignment, of any purchaser at sale by judicial foreclosure or under private
power of sale, and of the successors and assigns of any such mortgagee,
beneficiary, trustee, assignee or purchaser.
15. The term "Tenant" whenever used herein refers to and means the Tenant
in the Lease specifically named and also any assignee or sublessee of said Lease
and also any successor to the interests of said Tenant, assignee or sublessee of
such Lease or any part thereof, whether by assignment, sublease or otherwise.
16. In the event of any dispute or litigation regarding the enforcement or
validity of this Guaranty, Guarantor shall be obligated to pay all charges,
costs and expenses (including, without limitation, reasonable attorneys' fees)
incurred by Landlord, whether or not any action or proceeding is commenced
regarding such dispute and whether or not such litigation is prosecuted to
judgment.
17. This Guaranty shall be governed by and construed in accordance with
the laws of California and in a case involving diversity of citizenship, shall
be litigated in and subject to the jurisdiction of the courts of California.
18. Every provision of this Guaranty is intended to be severable. In the
event any term or provision hereof is declared to be illegal or invalid for any
reason whatsoever by a court of competent jurisdiction, such illegality or
invalidity shall not affect the balance of the terms and provisions hereof,
which terms and provisions shall remain binding and enforceable.
19. This Guaranty may be executed in any number of counterparts each of
which shall be deemed an original and all of which shall constitute one and the
same Guaranty with the same effect as if all parties had signed the same
signature page. Any signature page of this Guaranty may be detached from any
counterpart of this Guaranty and re-attached to any other counterpart of this
Guaranty identical in form hereto but having attached to it one or more
additional signature pages.
20. No failure or delay on the part of Landlord to exercise any power,
right or privilege under this Guaranty shall impair any such power, right or
privilege, or be construed to be a waiver of any default or an acquiescence
therein, nor shall any single or partial exercise of such power, right or
privilege preclude other or further exercise thereof or of any other right,
power or privilege.
21. This Guaranty shall constitute the entire agreement between each
Guarantor and the Landlord with respect to the subject matter hereof. No
provision of this Guaranty or right of Landlord hereunder may be waived nor may
Guarantor be released from any obligation hereunder. except by a writing duly
executed by an authorized officer, director or trustee of Landlord.
22. The liability of Guarantor and all rights, powers and remedies of
Landlord hereunder and under any other agreement now or at any time hereafter in
force between Landlord and Guarantor relating to the Lease shall be cumulative
and not alternative and such rights, powers and remedies shall be in addition to
all rights, powers and remedies given to Landlord by law.
Initials: _______________
_______________
Exhibit E - Page 4 of 5
<PAGE>
IN WITNESS WHEREOF, Guarantor have executed this Guaranty as of the day and
year first above written.
HOT TOPIC, INC., a California corporation
By: /s/ Orval Madden
---------------------------------
Its: President
--------------------------------
By: /s/ Marc R. Bertone
---------------------------------
Its: Vice President
-------------------------------
Exhibit E - Page 5 of 5
Initials: __________________
__________________
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-13875), pertaining to the Non-Plan Options, the 1996 Equity
Incentive Plan, as amended, and the Non-Employee Directors' Stock Option Plan,
as amended, of our report dated March 12, 1999 with respect to the consolidated
financials statements of Hot Topic, Inc. included in the Annual Report on Form
10-K for the fiscal year ended January 30, 1999 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Los Angeles, California
April 26, 1999
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<PAGE>
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<MULTIPLIER> 1,000
<CURRENCY> $U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<EXCHANGE-RATE> 1
<CASH> 24,574
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,447
<CURRENT-ASSETS> 36,783
<PP&E> 17,710
<DEPRECIATION> 14,725
<TOTAL-ASSETS> 58,765
<CURRENT-LIABILITIES> 8,350
<BONDS> 0
0
0
<COMMON> 35,676
<OTHER-SE> 13,073
<TOTAL-LIABILITY-AND-EQUITY> 58,765
<SALES> 103,371
<TOTAL-REVENUES> 103,371
<CGS> 65,855
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 9,370
<INCOME-TAX> 3,367
<INCOME-CONTINUING> 6,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,003
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.21
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