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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001019687-01-500102.txt : 20010503
<SEC-HEADER>0001019687-01-500102.hdr.sgml : 20010503
ACCESSION NUMBER: 0001019687-01-500102
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20010203
FILED AS OF DATE: 20010502
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HOT TOPIC INC /CA/
CENTRAL INDEX KEY: 0001017712
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-APPAREL & ACCESSORY STORES [5600]
IRS NUMBER: 770198182
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0130
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-28784
FILM NUMBER: 1619959
BUSINESS ADDRESS:
STREET 1: 18305 EAST SAN JOSE AVENUE
CITY: CITY OF INDUSTRY
STATE: CA
ZIP: 91748
BUSINESS PHONE: 6268394681
MAIL ADDRESS:
STREET 1: 18305 EAST SAN JOSE AVENUE
CITY: CITY OF INDUSTRY
STATE: CA
ZIP: 91768
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>hottopic_10k-020301.txt
<DESCRIPTION>HOT TOPIC, INC.
<TEXT>
<PAGE>
================================================================================
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 FEBRUARY 3, 2001
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.)
18305 E. SAN JOSE AVE. 91748
CITY OF INDUSTRY, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (626) 839-4681
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
--- ---
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
20,495,590 as of April 20, 2001.
The aggregate market value of Common Stock held by non-affiliates of
the registrant as of April 20, 2001 was approximately $622,088,000, 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 registrant's Definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on June 7, 2001, to be filed with the
Securities and Exchange Commission (the "SEC") no later than 120 days after
February 3, 2001, are incorporated by reference into Part III of this Form 10-K
(Items 10 through 13).
- ------------
*Excludes 544,089 shares of Common Stock held by directors and officers and
shareholders whose beneficial ownership exceeds 10% of the shares outstanding on
April 20, 2001. 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.
<PAGE>
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE
NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"),
INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS
OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS REGARDING THE EXTENT AND TIMING OF FUTURE REVENUES AND
EXPENSES AND CUSTOMER DEMAND, STATEMENTS REGARDING EXPECTED FINANCIAL RESULTS,
THE PROFITABILITY OF FUTURE SALES OF THE COMPANY'S PRODUCTS, NEW STORE OPENINGS
AND NEW STORE CONCEPTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT
ARE BASED ON INFORMATION AVAILABLE TO US AS OF THE DATE HEREOF AND WE ASSUME NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN OR UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, OR INDUSTRY RESULTS TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT LIMITED TO:
RELATIONSHIPS WITH MALL DEVELOPERS AND OPERATORS, THE AVAILABILITY OF CASH
AND/OR MALL SPACE FOR PLANNED EXPANSION, FLUCTUATIONS IN SALES AND STORE SALE
RESULTS, UNCERTAINTIES RELATED TO NEW STORE OPENINGS, NEW STORE CONCEPTS, MUSIC
AND FASHION TRENDS, COMPETITION FROM OTHER RETAILERS, SUCCESS OF JOINT VENTURES
AND RELATIONSHIPS WITH AND RELIANCE UPON THIRD PARTIES, UNCERTAINTIES GENERALLY
ASSOCIATED WITH SPECIALTY RETAILING, AND THE OTHER FACTORS REFERRED TO HEREIN
INCLUDING, BUT NOT LIMITED TO, THE ITEMS DISCUSSED IN PART I, ITEM 1 UNDER THE
CAPTION "CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS" AND IN PART II,
ITEM 7 UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
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 and television programs. The Company opened its
first store in 1989, and operated 274 stores as of February 3, 2001 in 45 states
across the United States. The Company opened 26, 40, 50, 54 and 62 additional
stores during fiscal 1996, 1997, 1998, 1999 and 2000 respectively. The Company
also occasionally relocates or expands smaller existing stores. During fiscal
2000 the Company expanded or relocated four stores, three of which were near the
end of the lease term. The Company plans to open approximately 65 new Hot Topic
stores in the fiscal year ending February 2, 2002 ("fiscal 2001"), 18 of which
were open as of April 20, 2001. In addition, the Company plans to test a second
retail concept in fiscal 2001 with the trade name Torrid(TM). Torrid will offer
a selection of apparel, lingerie, shoes and accessories centered around various
lifestyles for plus-size women between the ages of 15 and 30. The Company plans
to open six of the Torrid stores in fiscal 2001, one of which was opened on
April 18, 2001. The Company also maintains a website, www.hottopic.com, through
which it markets its Hot Topic stores, store concept and sells certain of its
merchandise. The Company's net sales via the Internet continued to increase in
fiscal 2000 to almost two percent of total sales. In addition, on April 18, 2001
the Company also launched a website related to its test concept Torrid at
www.torrid.com.
2.
<PAGE>
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 recent
years has been the success of MTV music network, which enables fans not only to
listen to the latest music and artists 24 hours a day, but also to experience a
full sight and sound package of appearance and attitude. According to industry
estimates, in 1999 MTV music network programming could be seen in more than 74
million households in the United States and in over 340 million households
worldwide. As a result, popular artists and fashions 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,
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.
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 1999 and is expected to grow to
approximately 40 million by 2008, representing a projected growth rate close to
twice the rate of the overall population. By 2010, there will be likely 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
$153 billion in 1999.
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:
o 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.
o 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 10,000 Stock Keeping
Units ("SKUs") in approximately 20 different product categories. The Company
believes its selection of music-licensed merchandise is the most extensive
assortment available in a single mall store. The Company complements its
licensed merchandise with a unique and eclectic assortment of music-influenced
3.
<PAGE>
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.
o 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 enables 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.
o 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
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 consistent markdown rates, which the Company believes are lower than
industry averages.
o 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. The Company has always focused on the lifestyle and values
of the youth generation. Hot Topic stores are designed with an industrial 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.
Late in fiscal 2000, the Company tested a new store design in two locations in
California. Continuing to focus on the world of music and musicians as
inspiration, the objective of the new design is to provide a more kinetic and
industrial-club feel, while portraying a less gothic appearance than the
Company's previous store design. This new look was inspired by the markets,
clubs and old warehouse districts in London where the Company's designers toured
and created this new "industrial club" theme. The majority of the 65 new Hot
Topic stores opening in fiscal 2001 will be built in this new design.
o 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
4.
<PAGE>
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.
o 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), MT2
(apparel), Morbid Metals (body jewelry), and Hot Topic label shoes. 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.
The Company's Torrid stores also have a line of private label under the trade
name Torrid(TM).
o TEST NEW RETAIL CONCEPT CALLED TORRID
The Company is starting a second retail concept in fiscal 2001 with the
trade name Torrid(TM). Torrid will offer a selection of apparel, lingerie, shoes
and accessories centered around various lifestyles for plus-size women between
the ages of 15 and 30. The selection will include clubwear, streetwear,
rockabilly and renaissance, the majority of which will be exclusive to the
store. The Company plans to open six of the Torrid stores in fiscal 2001, one of
which was opened on April 18, 2001. In addition, in fiscal 2001, a selected
assortment of Torrid products will be available for purchase on-line at
www.torrid.com.
STORE LOCATIONS
As of February 3, 2001, the Company operated 274 stores in both
metropolitan and middle markets in 45 states across the United States. The
following chart sets forth, as of April 20, 2001, the number of stores that Hot
Topic operates in each state and the cities in which those stores are located.1
5.
<PAGE>
<TABLE>
<CAPTION>
HOT TOPIC, INC. STORES BY STATE AS OF APRIL 20, 2001
<S> <C> <C> <C> <C> <C>
ARIZONA - 3 CONNECTICUT - 6 INDIANA - 6 MISSOURI - 4 NORTH DAKOTA - 1 TEXAS - 22
Phoenix Danbury Evansville Columbia Grand Forks Austin (2)
Tucson (2) Manchester Fort Wayne St .Louis (2) Beaumont
Milford Lafayette St. Peters OHIO - 7 Brownsville
CALIFORNIA - 46 Trumbull Mishawaka Cincinnati College Station
Arcadia Waterbury Muncie MONTANA - 1 Dayton Corpus Christi
Bakersfield Waterford Terre Haute Billings Elyria Dallas
Berkeley Mentor El Paso*
Brea (2) * DELAWARE - 1 KANSAS - 4 NEBRASKA - 2 North Olmstead Fort Worth
Capitola Wilmington Olathe Lincoln Niles Frisco
Carlsbad Topeka Omaha Parma Houston*
Cerritos FLORIDA - 13 Wichita (2) Humble
Chula Vista* Altamonte Springs NEVADA - 5 OKLAHOMA - 3 Irving
Citrus Heights Boynton Beach KENTUCKY - 3 Henderson Norman Katy
Concord Coral Springs Bowling Green Las Vegas (2) Oklahoma City (2) Laredo
Cupertino Jacksonville (2) Louisville Reno (2) Lewisville
Daly City Miami (2)* Paducah OREGON - 2 Lubbock
El Cajon Ocoee NEW HAMPSHIRE - 4 Portland (2) Mesquite
Escondido Orange Park* LOUISIANA - 3 Concord Plano
Fairfield Orlando Baton Rouge Manchester PENNSYLVANIA - 18 San Antonio (2)
Fresno St. Petersburg Metarie Nashua Altoona Woodlands
Glendale Tallahassee Monroe Salem Bensalem
Irvine* Tampa Camp Hill UTAH - 3
Laguna Hills MAINE - 1 NEW JERSEY - 10 Erie Orem
Lakewood GEORGIA - 5 Bangor Deptford Exton Salt Lake City
Milpitas Buford Eatontown Greensburg Sandy
Modesto Douglasville MARYLAND - 7 Elizabeth Harrisburg
Montclair Duluth Baltimore (2) Freehold King of Prussia VERMONT - 1
Montebello Kennesaw Columbia Mays Landing Lancaster Burlington
National City Macon Frederick Paramus Langhorne
Northridge Glen Burnie* Rockaway Media VIRGINIA - 3
Ontario HAWAII - 3 Hagerstown Toms River North Wales Dulles
Palm Desert Alea Towson Wayne Scranton Newport News
Palmdale Honolulu Woodbridge State College Springfield
Pleasanton Kahului MASSACHUSETTS - 6 W. Mifflin
Riverside Holyoke NEW MEXICO - 2 Wilkes-Barre WASHINGTON - 13
Sacramento IDAHO - 1 Marlborough Albuquerque (2) Williamsport Bellingham
San Diego (2)* Boise Natick York Burlington*
San Jose (2)* North Attleboro NEW YORK - 16 Everett
San Leandro IOWA - 4 Saugus Albany RHODE ISLAND - 1 Kennewick
Santa Ana Cedar Rapids Taunton Bay Shore Providence Lynnwood
Santa Monica Coralville Buffalo Olympia
Santa Rosa Des Moines MICHIGAN - 9 Clay SOUTH CAROLINA - 3 Puyallup
Thousand Oaks Sioux City Ann Arbor Johnson City Columbia* Seattle
Universal City Auburn Hills Lake Grove Greenville Silverdale
Valencia ILLINOIS - 10 Flint Massapequa North Charleston Spokane (2)
Ventura Aurora Grandville Middletown Tacoma
West Covina Bloomingdale Lansing New Hartford SOUTH DAKOTA - 2 Tukwila
Carbondale* Port Huron* Poughkeepsie Rapid City
COLORADO - 8 Champaign Portage Rochester Sioux Falls WEST VIRGINIA - 2
Broomfield Chicago Ridge Traverse City Staten Island Barboursville*
Colorado Springs (2) Joliet Troy Syracuse TENNESSEE - 6 Charleston
Denver Orland Park Victor Antioch
Fort Collins Rockford MINNESOTA - 7 West Nyack Clarksville WISCONSIN - 7
Littleton (2) Schaumburg* Bloomington White Plains Franklin Appleton
Westminister West Dundee Burnsville Goodlettsville Brookfield
Duluth NORTH CAROLINA - 7 Memphis Eau Claire
Mankato Cary Nashville Greendale
Minnetonka Concord Madison (2)
St. Cloud Fayetteville Wausau*
St. Paul Hickory
Pineville
Wilmington*
Winston
</TABLE>
1. An asterisk next to the city indicates that a store has been opened in such
city during fiscal 2001. As of April 20, 2001, the Company had opened 17 new Hot
Topic stores and one new Torrid store in fiscal 2001. The Company closed one Hot
Topic store at the end of its lease term during fiscal 2001 (Victorville,
California), with plans to reopen the store in February 2002.
6.
<PAGE>
EXPANSION STRATEGY
The following table provides a history of the Company's store expansion
over the last five fiscal years:
FISCAL YEAR
---------------------------------------------------
1996 1997 1998 1999 2000
---------------------------------------------------
(Number of stores)
Stores at beginning of year 42 68 108 158 212
New stores opened 26 40 50 54 62
---------------------------------------------------
Stores at end of year 68 108 158 212 274
---------------------------------------------------
All but two of the Company's stores are located in shopping malls. The
two non-mall stores are located in "street locations", one each in Denver,
Colorado and in Berkeley, California. The Company's expansion strategy is to
open stores in shopping malls and entertainment centers in both new and existing
markets throughout the United States. 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, the Company believes that its 12 to 22 year-old
target customers have similar fashion preferences throughout the United States.
The Company opened 62 new stores in fiscal 2000 and expanded or
relocated four existing stores. During fiscal 2001, the Company plans to open
approximately 65 new Hot Topic stores and six new Torrid stores, in addition to
expanding or relocating seven existing smaller Hot Topic stores. 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 the 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, consisting of its Chief Executive Officer and Chief
Operating Officer. The Company generally seeks potential store sites between
1,200 and 2,400 square feet. The average size of the Company's fiscal 2000
openings was 1,758 square feet. The Company's stores currently average
approximately 1,559 square feet.
STORE-LEVEL ECONOMICS
During fiscal 2000, the Company achieved average store net sales of
approximately $1,020,000 and average store net sales per square foot of
approximately $669. Store-level operating cash flow (defined as store operating
income before depreciation and excluding changes in working capital) for stores
open the entire year in fiscal 2000 were approximately $319,000, or 31% of
average net sales. Capital expenditures, including leasehold improvements,
furniture and fixtures and net of landlord construction allowances for the 62
stores opened in fiscal 2000 averaged approximately $179,000, initial gross
inventory requirements (which were partially financed by trade credit) averaged
$101,000, and pre-opening costs (which were expensed when incurred) averaged
$21,000. Inventory requirements vary at new stores depending on the season and
on current merchandise trends. In fiscal 2000, 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.
7.
<PAGE>
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, hats, 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. Approximately half
of the Company's products are music-licensed products, and the other half are
music-influenced products. A key strategy of the Company is to offer over 10,000
SKUs in 20 different product categories or "departments." On average, over 100
different licensed band t-shirts are carried in each store from current artists
such as Korn, Blink 182, Limp Bizkit, Deftones, Linkin Park, and Slip Knot as
well as rock and classic rock artists such as Pink Floyd, Nirvana, Pantera,
Metallica, Jimi Hendrix, The Doors, Beatles and Led Zeppelin. New items and
categories are regularly tested 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 2000, 1999 and
1998:
PERCENTAGE OF NET SALES
---------------------------------------
2000 1999 1998
---------------------------------------
Apparel, T-Shirts and Outerwear 51% 50% 50%
Gifts 15 16 19
Accessories 27 27 26
Intimate Apparel and Shoes 7 7 5
---------------------------------------
100% 100% 100%
The Company has five lines of private label merchandise to complement
and supplement 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 in both fiscal 2000 and fiscal
1999 Hot Topic brands accounted for approximately 25% of the Company's sales.
The Company's proprietary brands include Morbid Makeup (cosmetics), Morbid
Metals (body jewelry), Morbid Threads (men's and women's apparel and hosiery)
and MT:2 (men's and women's apparel). Shoes are also sold under the Hot Topic
label.
PURCHASING
The Company's purchasing staff consists of a Vice President, General
Merchandise Manager, two Divisional Merchandise Managers, nine Buyers and ten
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 solicits input from its store
employees, in order to draw from many different experiences and perspectives.
8.
<PAGE>
Approximately half of the Company's products are licensed products.
Artists typically license their likeness to a "master licensor". The master
licensor often retains the rights to market T-shirts and then may choose to
sub-license to manufacturers other categories of merchandise such as posters,
stickers and patches. 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 100 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 early shipments of
new releases, 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 2000, 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 the Arthur
Allocation software system implemented during fiscal 1999. Buyers determine SKU
reorder quantities by using a proprietary automated software program which
considers sales history, projected sales, planned inventories by store, store
demographics, geographic preferences, store openings and planned markdown dates.
Prior to the implementation of the Arthur Allocation system, the Company used
proprietary software developed by Hot Topic to allocate merchandise to each
store.
The Company's Vice President of Planning and Allocation along with
two directors of Planning and Allocation and 16 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 125,000 square feet, are located in City of Industry, 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.
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In March 2001, the Company entered into a lease for additional space
for future expansion of its headquarters and distribution facility in the City
of Industry, California. The additional 125,000 square feet is in the same
building as is its current headquarters and distribution center.
The original lease terms of the Company's headquarters and distribution
facility granted the Company the right of first refusal on the remaining 125,000
square feet of space in the building at 90% of the fair market lease rates for
such space. In February 2001, the Company was notified that the space would
become available in 2001 and was provided with comparable market lease rates.
The Company considered the terms and timing of leasing the additional space
against other possible alternatives and determined that it was in the Company's
best interest to lease the additional space under the negotiated terms. The
Company may sublease part of the additional space during part of fiscal 2001 but
believes it will begin utilizing all of the space in fiscal 2002. The Company
also believes that leasing the adjacent space is more efficient and cost
effective than its alternatives for expansion such as moving the entire facility
or acquiring additional separate space. The Company estimates that the operating
capacity gained from this additional space will allow for growth to up to 750
stores.
STORE OPERATIONS
Hot Topic's store operations are currently managed by six regional
managers and 46 district or area managers who each supervise approximately eight
stores. Individual stores are managed by a store manager and two or three
assistant managers. In addition to managers and assistant managers, a typical
store has approximately 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 frequenting
clubs, and are encouraged to communicate customer requests and their own
merchandise ideas to the buyers and 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.
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Store, district and area 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, a significant number of its
store managers have been promoted from within the Company.
STORE ENVIRONMENT
Hot Topic stores are designed with an industrial theme that
incorporates dense merchandising. The latest music releases are played on a
professional sound system to create a high-energy and fun shopping environment.
The Company has always focused on the lifestyle and values of the youth
generation. 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. Late in fiscal 2000, the Company tested a new
store design in two locations in California. Continuing a focus on the world of
music and musicians as inspiration, the objective of the new design is to
provide a more kinetic and "industrial club" feel, while portraying a less
gothic appearance than the Company's previous store design. This new look was
inspired by the markets, clubs and old warehouse districts in London where the
Company's designers toured and created this new "industrial club" theme. The
majority of the 65 new Hot Topic stores to open in fiscal 2001 will be built
with this new design.
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, PROMOTION AND INTERNET
The Company generally locates its stores in high traffic malls 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. During fiscal 2000 the Company sponsored a major touring rock festival
called "Ozzfest." As a co-sponsor and major participant, the Company's name was
associated with all promotional activities at each venue. The Company
appreciated the opportunity to sponsor a national music tour, which reached many
of its target customers. The Company is planning to enter into a similar
sponsorship at Ozzfest in fiscal 2001.
As a part of the Company's marketing strategy, the Company maintains a
website, www.hottopic.com., through which it markets its stores and merchandise.
During fiscal 1999, the site was re-launched with a focus on e-commerce. The
site also includes posting boards, customer surveys, a gift registry and content
features including artist news and tour schedules. The Company's net sales via
the Internet continued to increase in fiscal 2000 comprising almost two percent
of the Company's total sales. In addition, in fiscal 2001, a selected assortment
of Torrid products will be available for purchase on-line at www.torrid.com.
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,
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accounts payable and integrated financials. These systems operate on software
licensed from GERS Retail Systems ("GERS") running on an Oracle database
platform. 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 system. The
Company evaluates information obtained through daily polling to implement
merchandising decisions regarding reorders, markdowns and allocation of
merchandise.
During fiscal 1999, after completing an evaluation of its long-term
management information system needs, the Company selected the new GERS hardware
and software for its stores, office and distribution center. The Company
implemented the host hardware and software systems at its office and
distribution center during the second half of fiscal 2000 and plans to install
certain POS upgrades at its stores in fiscal 2001. The Company estimates the
hardware, software, modifications, training and implementation will cost
approximately $5 to $6 million. Of that total amount, approximately $.5 million
was spent in fiscal 1999, $2.1 million was spent in fiscal 2000 and
approximately $2.5 to $3.0 million will be spent to implement the point of sale
upgrades to existing stores in fiscal 2001.
TRADEMARKS
The Company has registered on the Principal Register of the United
States Patent and Trademark Office its retail store service mark Hot Topic(R)
and various trademarks for merchandise including Hot Topic(R), Morbid
Make-Up(R), Morbid Scents(R), Morbid Metals(R), Morbid Adornments(R),
Tragedy(R), Misery(R), MT: 2(R) and Morbid Threads(R). 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(TM), Morbid
Threads(TM), Torrid(TM), Torrid & Design(TM) and Torrid Flaming Heart Design(TM)
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. All other trademarks, tradenames and servicemarks
referenced herein are the property of their respective owners.
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, 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, Claire's Stores, Inc., Charlotte
Russe, Delias Inc., d.e.m.o., Gadzooks, Inc., Millers Outpost, Inc., Pacific
Sunwear of California, Inc., Spencer Gifts, Inc., Urban Outfitters, Inc., The
Wet Seal, 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 1,009 full-time and 2,367 part-time
employees as of April 20, 2001. Of the Company's 3,376 employees, 298 were
corporate headquarters and distribution center personnel and 3,078 were store
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employees. The number of part-time employees fluctuates with seasonal needs.
None of the Company's employees are covered by collective bargaining agreements.
The Company considers its employee relations to be good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company and their ages
at April 20, 2001 are as follows:
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------
Elizabeth M. McLaughlin 40 Chief Executive Officer, President and Director
Jerry Cook 48 Chief Operating Officer
Jim McGinty 38 Chief Financial Officer
Jay A. Johnson 55 Senior Vice President of Strategic Analysis and
Investor Relations
Cindy Levitt 40 Vice President, General Merchandise Manager
Marc R. Bertone 44 Vice President, Real Estate and Construction
Alain Krakirian 35 Vice President, Planning and Allocation
Darrell Kinsley 38 Vice President, Store Operations
Patricia A. Bodner 38 Vice President, hottopic.com
Sue McPherson 33 Vice President, Distribution Center
Karen Talley 43 Divisional Vice President and Divisional
Merchandise Manager
ELIZABETH M. MCLAUGHLIN has served as Chief Executive Officer of the
Company since August 2000 and President since February 2000, and has served on
the Board since May 2000. From June 1996 through February 2000, Ms. McLaughlin
served as Senior Vice President and General Merchandise Manager of the Company.
From May 1993 through May 1996, Ms. McLaughlin was the Company's Vice
President, Operations. Prior to joining the Company, Ms. McLaughlin held various
positions with Millers Outpost, a privately-held teen retailer, where she served
as Divisional Merchandise Manager, Director of Store Operations, and Director of
Financial Planning and Budgeting. Prior to joining Millers Outpost, Ms.
McLaughlin held various financial analyst and store positions with The Broadway.
Ms. McLaughlin holds a B.A. degree in Economics from the University of
California at Irvine.
JERRY COOK has been Chief Operating Officer since February 2001. Mr.
Cook has 25 years of experience in retail. From February 1999 until joining the
Company, he was the President and Chief Operating Officer of Travel 2000, Inc.
>From 1995 to April 1998, Mr. Cook was Senior Vice President, Operations for The
Bombay Company, Inc. and from 1989 to 1995, Mr. Cook was the Vice President,
Stores and the Vice President, General Merchandising Manager of Woman's World
Stores. Prior to 1989, he held management positions with Barnes & Noble/B
Dalton, The Gap Stores and the Limited, Inc.
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JIM MCGINTY joined Hot Topic in August 2000 as its Vice President,
Finance and was promoted to Chief Financial Officer in February 2001. >From July
1996 to July 2000, Mr. McGinty was Vice President-Controller at Victoria's
Secret Stores, the leading brand and largest specialty retailer in the Limited,
Inc. From 1984 to 1996, he held various financial and accounting positions
within the Structure and Express divisions of the Limited, Inc. Mr. McGinty
holds a B.S. degree in accounting from Miami University in Oxford, Ohio.
JAY A. JOHNSON has served as the Senior Vice President, Strategic
Analysis and Investor Relations since February 2001. He also is the Company's
Assistant Secretary. From May 1995 to February 2001, he was the Chief Financial
Officer and Assistant Secretary of the Company. 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.
CINDY LEVITT has been Vice President, General Merchandise Manager since
February 2000. Since 1989, Ms. Levitt has held senior buying positions at Hot
Topic. From June 1996 to February 2000, she served as the Divisional Merchandise
Manager, Apparel and Music.
MARC R. BERTONE has served as Vice President, Real Estate and
Construction, since August 1994. Mr. Bertone has 16 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 and is currently an inactive member.
ALAIN KRAKIRIAN has been Vice President, Planning and Allocation since
February 2000. From July 1997 through February 2000, Mr. Krakirian was the
Company's Director of Planning and Allocation. Mr. Krakirian was the Planning
Manager at Disney Stores from December 1996 to July 1997 and the Director of
Merchandise Planning and Allocation at Kids Mart from February 1996 to December
1996. From September 1991 to January 1996, Mr. Krakirian held various
merchandise control and planning positions at Clothestime Stores, including
Director of Merchandise Control and Information Office from October 1994 to
January 1996. Mr. Krakirian holds a B.S. degree in finance from the University
of LaVerne and an M.B.A. degree from Pepperdine University.
DARRELL KINSLEY has been Vice President, Store Operations since
February 2000. From June 1998 through February 2000, Mr. Kinsley was Regional
Director for the western United States. From February 1997 through June 1998, he
was Regional Director for the eastern United States. Mr. Kinsley joined the
Company in February 1995 as the District Manager for the eastern United States.
PATRICIA A. BODNER has been Vice President, hottopic.com since June
2000. Previously, Ms. Bodner was Chief Marketing Officer at allpets.com from
August 1999 through June 2000. Prior to allpets.com, Ms. Bodner held marketing
positions at Digital Lava Inc., a communications application services provider
for streaming media technology from May 1997 through July 1999. Between
September 1995 and January 1997, Ms. Bodner worked at Inscape, a multimedia
developer and publisher of CD-ROM games where she held various marketing
positions. Between June 1986 and September 1995, Ms. Bodner held various
marketing positions at companies including Bertelsmann Music Group, New Line
Cinema, and Warner Bros. Ms. Bodner holds a B.A. degree in French Studies from
the University of Wisconsin-Madison.
SUE MCPHERSON was promoted to Vice President, Distribution Center, in
February 2001 and was the Divisional Vice President, Distribution Center from
February 2000 to February 2001. Ms. McPherson joined the Company in 1989 as a
store employee in its first store while attending the University of Southern
California. From March 1995 to February 2000, she was the Director of the
Distribution Center. Ms. McPherson holds a B.S. degree in Business from the
University of Southern California.
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KAREN TALLEY has served as Divisional Vice President and Divisional
Merchandise Manager, Accessories since February 2000. Ms. Talley joined the
Company in 1993 as the Senior Accessory Buyer. She was the Company's Divisional
Merchandise Manager of Accessories from April 1996 to February 2000. Prior to
joining Hot Topic, Ms. Talley held buying positions at Jay Jacobs and Nordstrom.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
In addition to risks identified elsewhere in this Annual Report, the
Company is subject to other risks, including the following:
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. Sixty-two of the
Company's 274 stores opened as of February 3, 2001 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 71 stores, including six Torrid stores, during fiscal 2001, which
will result in a significant increase in the number of 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. In fiscal 2000, the Company entered
three new states. 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 and 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, its limited operating history at such time, its then unproven
store concept, and apprehension on the part of mall operators concerning the
Company's teenage customers. In fiscal 1999, a major mall developer asserted
that the Company had violated a "use clause" applicable to certain or all of the
Company's leases with that developer. As a result, the developer ceased ongoing
discussions relating to potential new Hot Topic stores and told the Company that
no new leases would be entered into. Upon notice of the alleged violation, the
Company adjusted its merchandise mix in stores leased from that developer (and
to a somewhat lesser extent, in all other stores) and took certain other actions
to ensure ongoing "use clause" compliance. These actions and continuing
discussions with the developer resulted in an amended "use clause" for all
leases with the developer. In early 2000, the Company satisfied the concerns of
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the developer and resumed discussions with the developer concerning potential
new stores for fiscal 2000 and beyond. During the first quarter of fiscal 2000,
the first such lease was executed with the developer for a new store that opened
in fiscal 2000. There can be no assurance that the Company will not face similar
resistance from mall operators or others in the future. If the Company's
relations with mall operators or developers are ever again strained, the Company
may not grow as planned, may not reach certain revenue levels and other targets,
and may suffer a decline in stock price. Any restrictions on the Company's
ability to expand to new store sites 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 1996, 1997,
1998, 1999 and 2000 were 8.9%, 2.2%, 0.4%, 22.8% and 16.7% respectively. The
Company's comparable store sales results were 24.1%, 21.8%, 15.3% and 11.2% for
the first, second, third and fourth quarters, respectively, of fiscal 2000 and
15.3%, 16.9%, 26.1% and 27.1% for the first, second, third and fourth quarters
of fiscal 1999. Past comparable store sales results are not an indicator 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, music videos, and MTV 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. The popularity of
particular types of music, artists, styles and brands is subject to change. The
Company's failure to anticipate, identify and react appropriately to changing
trends, could lead to, among other things, excess inventories and higher
markdowns, and poor customer acceptance of its new store design, 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. There can be no
assurance that the Company's new products and new store design will be met with
the same level of acceptance as in the past or that the failure of the new
products and/or new store design will not have an adverse material effect on the
Company business, results of operations and financial condition.
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,
deterioration in economic conditions in that region could particularly affect
the Company's business, results of operations and financial condition.
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Changes to Federal minimum wage laws in each of 1996 and 1997 raised
the mandatory minimum wage. California, Washington, Massachusetts and other
states have also enacted increases in state-required minimum wages that are
higher than the Federal requirements. The most recent increases took effect on
January 1, 2001 in California, Connecticut, Massachusetts and Washington. The
Company operated a total of 70 stores in those states as of April 20, 2001.
Statutory increases in Federal and state minimum wages could adversely affect
the Company's profitability. The recent state increases in minimum wage 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, back-to-school and
Halloween seasons, 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) and the
Halloween holiday. 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 first fiscal
quarter net sales. 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, 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. Its largest vendor, Changes
Manufacturing, supplied just under 5% of the Company's merchandise purchases in
fiscal 2000. 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 supplied by 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
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.
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NEW TORRID STORES AND ASSOCIATED RISKS
The Company's ability to expand into new concepts has not been tested.
Accordingly, the operation of its Torrid stores and the sale of Torrid
merchandise on line at www.torrid.com, are subject to numerous risks, including
unanticipated operating problems, lack of experience, lack of customer
acceptance, new vendor relationships and competition from existing and new
retailers. For example, it may be that the Company will not be able to generate
sufficient customer interest in Torrid stores and Torrid products, or that this
concept may not be able to support the store format. There can be no assurance
that the Company's Torrid stores or Torrid website will achieve sales and
profitability levels that justify the Company's investment in this new retail
format. Establishing and increasing the number of Torrid stores also involve
other risks that could have a material adverse effect on the Company, including
(i) the risk of diversion of management's attention from the Company's core
business and products, (ii) difficulties with the hiring, retention and training
of management and personnel for the Torrid stores, (iii) risks associated with
new vendors and (iv) difficulties with locating and obtaining favorable store
sites and acceptable lease terms. Risks inherent in any new concept are
particularly acute in the Company's case with respect to Torrid, because this is
the first significant new venture by the Company. The Company has traditionally
concentrated its expansion efforts on increasing the number of and sales in Hot
Topic stores.
UNCERTAINTIES REGARDING IMPLEMENTATION OF NEW MANAGEMENT INFORMATION
SYSTEM
During fiscal 1999, after completing an evaluation of its long-term
management information system needs, the Company selected new hardware and
software for its stores, office and distribution center. The Company implemented
the host hardware and software systems at its office and distribution center
during the second half of fiscal 2000 and plans to install certain point-of-sale
upgrades at its stores in fiscal 2001. If the new information systems and
software do not work effectively, the Company may experience delays or failures
in its operations. These delays or failures could adversely impact the
promptness and accuracy of the Company's transaction processing, financial
accounting and reporting and ability to properly forecast earnings and cash
requirements. The Company's current and planned systems, transaction processing,
procedures and controls may not be adequate to support future operations. To
manage growth of its operations and personnel, the Company may need to continue
to improve its operational and financial systems, transaction processing,
procedures and controls.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends largely on the efforts and abilities
of senior management, especially Elizabeth McLaughlin, the Company's Chief
Executive Officer and President, who has been with the Company since 1993. Due
to the retirement of the Company's founder, Orval Madden, and his resignation
from the Board in April 2001, the Company remains reliant on Elizabeth
McLaughlin and her senior management team. The Company has a $2,000,000,
key-person life insurance policy on Ms. McLaughlin. However, the sudden loss of
Ms. McLaughlin'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. Furthermore, there can be no assurance that
Ms. McLaughlin 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
The Company relies upon the United Parcel Service 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 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
18.
<PAGE>
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.
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, Charlotte Russe, Claire's Stores, Inc., Delias
Inc., d.e.m.o., Gadzooks, Inc., Millers Outpost, Inc., Pacific Sunwear of
California, Inc., Spencer Gifts, Inc., Urban Outfitters, Inc., The Wet Seal,
Inc., and, to a lesser extent, with music stores and mail order catalogs and
websites. 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 Company's 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
Amended and Restated Bylaws contain provisions that may have the effect of
delaying, deterring or preventing a takeover of the Company that shareholders
may consider being in their best interests. For instance, the Company's Amended
and Restated Articles of Incorporation and Amended and Restated 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.
19.
<PAGE>
ITEM 2. PROPERTIES
The Company leases all of the Company's existing store locations, with
lease terms expiring between 2001 and 2010. The leases for most of the existing
stores are for ten-year 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.
The Company's headquarters office and distribution center are located
in City of Industry, California, and are occupied under the terms of a lease
covering approximately 125,000 square feet. The lease is for a five-year term,
with two options to extend the lease, each for a three-year period. The annual
base rent for the initial five-year term is approximately $525,000. This lease
will terminate on August 1, 2001. Beginning August 1, 2001, the Company will
double the size of its leased office and distribution center space, and has
entered into an amended lease with its existing landlord. The amended lease is
for a five-year term (from the beginning of the original lease) with two options
to extend the lease, each for a three-year period. The initial five-year term
will expire in April 2004. The annual base rent for the initial five-year term
is approximately $1,131,900 including the additional space.
The original lease terms of the Company's headquarters and distribution
facility granted the Company the right of first refusal on the remaining 125,000
square feet of space in the building at 90% of the fair market lease rates for
such space. In February 2001, the Company was notified that the space would
become available in 2001 and was provided with comparable market lease rates.
The Company considered the terms and timing of leasing the additional space
against other possible alternatives and determined that it was in the Company's
best interest to lease the additional space under the negotiated terms. The
Company may sublease part of the additional space during part of fiscal 2001 but
believes it will begin utilizing all of the space in fiscal 2002. The Company
also believes that leasing the adjacent space is more efficient and cost
effective than its alternatives for expansion such as moving the entire facility
or acquiring additional separate space. The Company believes the property
covered by the amended lease will allow for growth of to up to 750 stores.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20.
<PAGE>
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". A two-for-one stock split of the Company's Common Stock
became effective December 27, 2000. The stock split was affected by way of a
stock dividend. The dividend was distributed to shareholders of record as of
December 14, 2000. This was the second two for one split for the Company, the
first split having occurred in December 1999. All share and per share amounts
have been restated to reflect the splits. 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.
2000 FISCAL YEAR QUARTERS HIGH LOW
------------------------------------
First Quarter $ 17 15/16 $ 7 15/16
Second Quarter $ 17 27/32 $ 11 25/64
Third Quarter $ 19 3/4 $ 13 3/4
Fourth Quarter $ 26 11/16 $ 14 9/16
1999 FISCAL YEAR QUARTERS HIGH LOW
------------------------------------
First Quarter $ 4 3/4 $ 3 3/16
Second Quarter $ 7 25/32 $ 4 1/4
Third Quarter $ 9 3/8 $ 5 61/64
Fourth Quarter $ 13 11/32 $ 8 19/32
On April 20, 2001, the last sales price of the Common Stock as reported on the
NASDAQ National Market was $31.18 per share. As of April 20, 2001, there were
approximately 194 holders of record of the Company's Common Stock. This number
does not reflect the actual number of beneficial holders of the Company's Common
Stock, which the Company believes to be in excess of 8,000 holders.
The Company has not paid any cash dividends since inception and does
not anticipate paying any cash dividends in the foreseeable future.
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 Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.
21.
<PAGE>
HOT TOPIC, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(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 $257,187 $168,949 $103,371 $ 70,532 $ 43,618
Cost of goods sold, including buying,
distribution and occupancy costs 154,298 103,998 65,855 44,417 27,049
--------- --------- --------- --------- ---------
Gross Margin 102,889 64,951 37,516 26,115 16,569
Selling, general and administrative expenses 67,917 44,749 29,077 19,862 12,846
--------- --------- --------- --------- ---------
Operating income 34,972 20,202 8,439 6,253 3,723
Interest income, net 1,925 933 931 901 382
--------- --------- --------- --------- ---------
Income before income taxes 36,897 21,135 9,370 7,154 4,105
Income taxes 13,652 7,634 3,367 2,611 1,535
--------- --------- --------- --------- ---------
Net income 23,245 $ 13,501 $ 6,003 $ 4,543 $ 2,570
Net income per share:
Basic $ 1.18 $ 0.73 $ 0.31 $ 0.24 $ 0.18
Diluted $ 1.09 $ 0.69 $ 0.30 $ 0.23 $ 0.16
Weighted average shares
outstanding
Basic 19,779 18,534 19,268 18,762 14,512
Diluted 21,379 19,594 19,824 19,760 15,596
SELECTED OPERATING DATA:
Number of stores at year end 274 212 158 108 68
Comparable stores sales increase (decrease) 16.7% 22.8% 0.4% 2.2% 8.9%
Average sales per square foot $ 669 $ 623 $ 542 $ 565 $ 578
Average sales per store (000s) $ 1,020 $ 909 $ 772 $ 769 $ 748
BALANCE SHEET DATA:
Working capital $ 61,253 $ 37,564 $ 28,432 $ 29,230 $ 29,247
Total assets 118,646 89,022 58,764 51,953 44,033
Long-term obligations including current portion 123 231 120 161 48
Shareholders' equity $ 99,291 $ 67,278 $ 48,749 $ 44,736 $ 39,069
</TABLE>
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 274 stores in 45 states across the United States as of
February 3, 2001. The Company opened 26 stores during fiscal 1996, most of which
were 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, 50 stores during fiscal 1998, both in existing markets and in
6 additional states; 54 stores during fiscal 1999, both in existing markets and
in 4 additional states; and; 62 stores during fiscal 2000, both in existing
markets and 3 additional states.
22.
<PAGE>
The Company operates on a 52 or 53-week fiscal year, which ends on the
Saturday nearest to January 31. Fiscal 2000 was a 53-week year. Fiscal 1998 and
1999 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:
FISCAL YEAR
---------------------------------
2000 1999 1998
---------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying,
distribution & occupancy costs 60.0% 61.6% 63.7%
Gross margin 40.0% 38.4% 36.3%
Selling, general and administrative expenses 26.4% 26.4% 28.1%
Operating income 13.6% 12.0% 8.2%
Interest income, net 0.7% 0.6% 0.9%
Income before income tax 14.3% 12.6% 9.1%
Provision for income taxes 5.3% 4.6% 3.3%
Net income 9.0% 8.0% 5.8%
Number of stores at year end 274 212 158
Comparable store sales increase 16.7% 22.8% 0.4%
23.
<PAGE>
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales increased approximately $88.3 million, or 52%, to $257.2
million in fiscal 2000 from $168.9 million in fiscal 1999. Net sales for the 62
stores opened during fiscal 2000 and for those stores not yet qualifying as
comparable stores contributed $62.8 million of the net sales increase.
Comparable store sales increased 16.7% in fiscal 2000 and contributed $25.5
million of the increase in net sales. The average store volume increased to
$1,020,000 from $909,000 in fiscal 1999. The sales mix in fiscal 2000 saw a
slight shift toward apparel and T-shirts, with this category contributing
approximately 51% of net sales in 2000 as compared to approximately 50% in 1999.
Gross margin increased approximately $38.0 million to $102.9 million in
fiscal 2000 from $64.9 million in fiscal 1999. As a percentage of net sales,
gross margin increased to 40.0% in fiscal 2000 from 38.4% in fiscal 1999. The
increase, as a percentage of sales, reflected the leveraging of occupancy
expense achieved from the significant increase in the average store sales volume
and an increase in merchandise margin. Merchandise margin increased
approximately 1.0%, as a percentage of sales compared to the prior year,
principally from an average higher initial markup and lower markdowns, shrinkage
and freight, all as a percentage of sales.
Selling, general and administrative expenses increased approximately
$23.2 million to $67.9 million during fiscal 2000 from $44.7 million during
fiscal 1999. As a percentage of net sales, selling, general and administrative
expense was 26.4% for fiscal 2000, the same percentage as in fiscal 1999. Many
of the fiscal 2000 selling, general and administrative expenses decreased as a
percent of net sales due to the operating leverage achieved through the
Company's larger store base and higher average store sales volume. This leverage
was off-set by higher performance based bonuses, development costs for the new
Torrid concept, higher store management payroll, increased benefit coverage and
continued investment in management infrastructure.
Operating income increased approximately $14.8 million to $35.0 million
during fiscal 2000 from $20.2 million during fiscal 1999. As a percentage of net
sales, operating income increased significantly to 13.6% in fiscal 2000 from
12.0% in fiscal 1999, principally from the larger store base, higher average
store sales and higher margins. Operating income on an average per store basis
was approximately $142,000 in fiscal 2000, up 30% from last year's $109,000.
Net interest income increased by $1.0 million to $1.9 million or 0.7%
of sales during fiscal 2000, from $0.9 million or 0.6% of sales during fiscal
1999, principally a result of higher average cash balances.
The Company's effective tax rate was 37.0% in fiscal 2000 and 36.1% in
fiscal 1999. The variance from an expected rate of approximately 40% in both
fiscal 2000 and 1999 is a result of a significant portion of each fiscal year's
interest income being non-taxable.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased approximately $65.5 million, or 63%, to $168.9
million in fiscal 1999 from $103.4 million in fiscal 1998. Net sales for the 54
stores opened during fiscal 1999 and for those stores not yet qualifying as
comparable stores contributed $44.7 million of the net sales increase.
Comparable store sales increased 22.8% in fiscal 1999 and contributed $20.8
million of the increase in net sales. The average store volume increased to
$909,000 from $772,000 in fiscal 1998. The sales mix in fiscal 1999 was
approximately the same as the mix in fiscal 1998, with apparel and T-shirts
contributing approximately 50% of net sales in each fiscal year.
24.
<PAGE>
Gross margin increased approximately $27.4 million to $64.9 million in
fiscal 1999 from $37.5 million in fiscal 1998. As a percentage of net sales,
gross margin increased to 38.4% in fiscal 1999 from 36.3% in fiscal 1998. The
increase, as a percentage of sales, reflected the leveraging of occupancy
expense achieved from the significant increase in the average store sales volume
and an increase in merchandise margin. Merchandise margin increased
approximately 0.4% compared to the prior year, principally from an average
higher initial markup and lower merchandise markdowns, as a percentage of sales.
Selling, general and administrative expenses increased approximately
$15.6 million to $44.7 million during fiscal 1999 from $29.1 million during
fiscal 1998, but decreased as a percentage of net sales to 26.4% in fiscal 1999
from 28.1% in fiscal 1998. 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 and to a reduction in the store payroll and operating expenses as a
percentage of sales due to the operating leverage achieved from the higher
average store sales.
Operating income increased approximately $11.8 million to $20.2 million
during fiscal 1999 from $8.4 million during fiscal 1998. As a percentage of net
sales, operating income increased significantly to 12.0% in fiscal 1999 from
8.2% in fiscal 1998, principally from the larger store base, higher average
store sales and higher margins.
Interest income, net, of $933,000 during fiscal 1999 was approximately
the same as the $931,000 during fiscal 1998.
The Company's effective tax rate was 36.1% in fiscal 1999 and 35.9% in
fiscal 1998. The variance from an expected rate of approximately 40% in both
fiscal 1999 and 1998 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, back-to-school, Halloween
seasons, 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) and the Halloween holiday,
(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 first fiscal quarter net
sales.
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
25.
<PAGE>
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.
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.
<TABLE>
<CAPTION>
FISCAL YEAR 2000 FISCAL YEAR 1999
----------------------------------------- -----------------------------------------
(In thousands, except selected FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
operating and per share data) -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $44,839 $51,718 $72,203 $88,427 $28,286 $32,779 $47,964 $59,920
Gross Margin 16,769 19,287 29,210 37,623 9,746 11,413 19,019 24,773
Operating income 3,456 4,578 11,165 15,772 781 1,638 6,576 11,207
Net income $ 2,443 $ 3,121 $ 7,317 $10,364 $ 635 $ 1,152 $ 4,306 $ 7,408
Net income per share:
Basic $ 0.13 $ 0.16 $ 0.37 $ 0.51 $ 0.03 $ 0.06 $ 0.23 $ 0.40
Diluted $ 0.12 $ 0.15 $ 0.34 $ 0.48 $ 0.03 $ 0.06 $ 0.22 $ 0.36
Weighted average shares outstanding:
Basic 19,441 19,732 19,795 20,147 18,484 18,478 18,572 18,602
Diluted 21,016 21,294 21,426 21,784 18,848 19,264 19,678 20,588
SELECTED OPERATING DATA:
Comparable store sales increase 24.1% 21.8% 15.3% 11.2% 15.3% 16.9% 26.1% 27.1%
Stores open at end of period 224 247 267 274 168 184 198 212
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During the last three fiscal years, the Company's primary uses of cash
have been to finance store openings, purchase merchandise inventories, and in
fiscal 1999, to expand the headquarters and distribution facility. In fiscal
2000, an additional significant use of capital was used to secure the hardware
and software related to the host computer systems implemented during the third
quarter. The Company has satisfied its cash requirements exclusively from cash
flows from operations.
Cash flows provided by operating activities were $19.7 million, $25.8
million, and $9.3 million in fiscal 2000, 1999 and 1998, respectively. The
decrease in cash flows from operating activities in fiscal 2000 was primarily
attributable to the timing of the payment of estimated 2000 income tax
liabilities and the payment of February 2001 rents (payment required prior to
the fiscal 2000 year end of February 3, 2001).
Cash flows used in investing activities were $16.7 million, $15.8
million and $9.3 million in fiscal 2000, 1999 and 1998, respectively. Cash flows
used in investing activities relate primarily to store openings and, in 2000,
approximately $2.6 million was used for the hardware and software related to the
26.
<PAGE>
new system implementation, and in 1999, $4.2 million was used for equipment and
leasehold improvements for the Company's new headquarters office and
distribution facility. The Company opened 62, 54 and 50 stores in fiscal 2000,
1999 and 1998, respectively.
Cash flows provided by (used in) financing activities were $8.7
million, $5.0 million and ($2.1) million in fiscal 2000, 1999 and 1998,
respectively. Cash flows related to the exercise of stock options represented
$8.8 million of the fiscal year 2000 financing activities.
The Company anticipates that it will spend approximately $20 million on
capital expenditures in fiscal 2001. Of that amount, approximately $13 to $15
million is needed for the construction of the planned 65 Hot Topic stores and 6
Torrid stores in fiscal 2001. During fiscal 2000, the Company's average capital
expenditures to open a store, including leasehold improvements and furniture and
fixtures, totaled approximately $179,000. The average initial gross inventory
for the new 2000 stores was approximately $101,000 (which was partially financed
by trade credit) and pre-opening costs averaged approximately $21,000 for these
stores. The Company expects the average total costs associated with opening a
store to increase moderately to approximately $200,000 in fiscal 2001 as a
result of the implementation of a new store design that was tested in two new
stores in the fourth quarter of fiscal 2000. Pre-opening costs are expensed as
incurred. 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, and 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.
During fiscal 1999, after completing an evaluation of its long-term
management information system needs, the Company selected new hardware and
software for its stores, office and distribution center. The Company implemented
the host hardware and software systems at its office and distribution center
during the third quarter of fiscal 2000 and plans to install certain point of
sale upgrades at its stores in fiscal 2001. During fiscal 2000, the Company
spent approximately $2.1 million for the hardware, software, modifications,
training and implementation of the host system. The Company presently estimates
the point of sale upgrades and currently planned enhancements and modifications
to the host system will cost approximately $2.5 to $3.0 million, substantially
all of which will be spent in fiscal 2001.
The Company believes that its existing cash balances and cash generated
from operations will be sufficient to fund its operations and planned expansion
through at least 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks relevant to 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.
27.
<PAGE>
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 and Key Employees" in Part
I, Item 1 hereof for information regarding the Company's executive officers.
The information required by this item with respect to directors is
incorporated by reference to the information appearing under the caption
"Election of Directors," contained in the Company's Definitive Proxy Statement
which will be filed with the SEC within 120 days of fiscal year-end pursuant to
Regulation 14A in connection with the solicitation of proxies for the Company's
Annual Meeting of Shareholders to be held on June 7, 2001 (the "2001 Proxy
Statement").
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 2001
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 2001 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 2001
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated 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 February 3, 2001 and January 29, 2000....... F-2
---
Consolidated Statements of Operations for the years ended February 3, 2001,
January 29, 2000 and January 30, 1999................................ F-3
---
Consolidated Statements of Shareholders' Equity for the years ended
February 3, 2001, January 29, 2000 and January 30, 1999.............. F-4
---
Consolidated Statements of Cash Flows for the years ended February 3,
2001, January 29, 2000 and January 30, 1999.......................... F-5
---
Notes to Consolidated Financial Statements.................................... F-6
---
</TABLE>
28.
<PAGE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are
not required, are not applicable, or the information is included in the
consolidated financial statements or notes thereto.
(a)(3) EXHIBITS
The exhibits listed under Item 14(c) hereof are filed with, or
incorporated by reference into, this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
During the quarter ended February 3, 2001, the Company filed
one report on Form 8-K. On December 1, 2000, the Company filed a report on Form
8-K reporting, under Item 5, the announcement that its Board of Directors
approved a two-for-one stock split to be implemented as a 100% stock dividend to
each of the Company's shareholders of record as of December 14, 2000.
(c) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws.
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)
10.7 401(k) Defined Contribution Plan of Registrant, effective as
of August 1, 1995. (1)
10.8 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. (2)
10.9 Guaranty of Lease, dated December 10, 1998, entered into
between the Registrant and Majestic Realty Co. and Patrician
Associates, Inc. (2)
10.10 First Amendment to Industrial Real Estate Lease, dated March
19, 2001, by and between Majestic - Fullerton Road, LLC, PFG
Fullerton Limited Partnership, and Hot Topic Administration,
Inc.
29.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
10.11 Employment Agreement dated January 22, 2001, between the
Registrant and Elizabeth McLaughlin.
10.12 Employment Offer Letter dated January 12, 2001, between the
Registrant and Jerry Cook.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney is contained on the signature page.
- ------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form SB-2
(No. 333-5054-LA) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended January 30, 1999 and incorporated herein by reference
(10.8 and 10.9).
(d) FINANCIAL STATEMENT SCHEDULES
Reference is made to Item 14(a)(2).
30.
<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 Industry,
County of Los Angeles, State of California, on the 27th day of April 2001.
HOT TOPIC, INC.
By: /s/ Elizabeth M. McLaughlin
---------------------------
Elizabeth M. McLaughlin
Chief Executive Officer,
President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Elizabeth M. McLaughlin and Jim McGinty,
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/ ELIZABETH M. MCLAUGHLIN Chief Executive Officer, President April 27, 2001
- ----------------------------------- and Director (PRINCIPAL EXECUTIVE
Elizabeth M. McLaughlin OFFICER)
/s/ JIM MCGINTY Chief Financial Officer (PRINCIPAL April 27, 2001
- ----------------------------------- FINANCIAL AND ACCOUNTING OFFICER)
Jim McGinty
/s/ ROBERT M. JAFFE Chairman of the Board April 27, 2001
- -----------------------------------
Robert M. Jaffe
/s/ EDGAR F. BERNER Director April 27, 2001
- -----------------------------------
Edgar F. Berner
/s/ CORRADO FEDERICO Director April 27, 2001
- -----------------------------------
Corrado Federico
/s/ ANDREW SCHUON Director April 27, 2001
- -----------------------------------
Andrew Schuon
/s/BRUCE A. QUINNELL Director April 27, 2001
- -----------------------------------
Bruce A. Quinnell
</TABLE>
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.
and subsidiaries as of February 3, 2001 and January 29, 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended February 3, 2001. These 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hot
Topic, Inc. and subsidiaries at February 3, 2001 and January 29, 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 3, 2001 in conformity with accounting
principles generally accepted in the United States.
/S/ Ernst & Young LLP
----------------------
Ernst & Young
Los Angeles, California
March 9, 2001
<PAGE>
<TABLE>
Hot Topic, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
February 3, 2001 January 29, 2000
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 51,287,698 $ 39,549,654
Inventory 21,335,515 15,366,745
Prepaid expenses and other 5,552,600 1,580,433
Deferred tax asset 943,742 721,161
------------- -------------
Total current assets 79,119,555 57,217,993
Leaseholds, fixtures and equipment, net 39,165,998 31,721,478
Deposits and other 100,662 82,986
Deferred tax asset 259,845 -
------------- -------------
Total assets $118,646,060 $ 89,022,457
============= =============
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 6,632,140 $ 6,215,011
Accrued payroll and related expenses 10,093,360 8,452,469
Accrued sales and other taxes payable 1,103,150 637,623
Federal and state income taxes payable - 4,288,815
Current portion of obligations under capital leases 37,691 59,736
------------- -------------
Total current liabilities 17,866,341 19,653,654
Deferred rent 1,403,576 1,104,709
Capital lease obligations, less current portion 84,869 170,767
Deferred tax liability - 815,796
Shareholders' equity:
Common shares, no par value;
50,000,000 shares authorized; 20,293,855 and 19,321,688
shares issued and outstanding at February 3, 2001 and
January 29, 2000, respectively 49,429,508 40,667,571
Deferred compensation - (6,727)
Retained earnings 49,861,766 26,616,687
Total shareholders' equity 99,291,274 67,277,531
------------- -------------
Total liabilities and shareholders' equity $118,646,060 $ 89,022,457
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Years ended
-----------
February 3, January 29, January 30,
2001 2000 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 257,187,317 $ 168,948,553 $ 103,370,683
Cost of goods sold, including buying,
distribution and occupancy costs 154,298,004 103,998,031 65,854,559
-------------- -------------- --------------
Gross margin 102,889,313 64,950,522 37,516,124
Selling, general and administrative expenses 67,917,723 44,748,988 29,077,124
-------------- -------------- --------------
Operating income 34,971,590 20,201,534 8,439,000
Interest income (1,955,414) (964,826) (951,119)
Interest expense 30,025 32,086 20,296
-------------- -------------- --------------
Income before income taxes 36,896,979 21,134,274 9,369,823
Provision for income taxes (Note 6) 13,651,900 7,633,600 3,366,900
-------------- -------------- --------------
Net income $ 23,245,079 $ 13,500,674 $ 6,002,923
============== ============== ==============
Net income per share:
Basic $ 1.18 $ 0.73 $ 0.31
============== ============== ==============
Diluted $ 1.09 $ 0.69 $ 0.30
============== ============== ==============
Shares used in computing net income
per share:
Basic 19,778,706 18,533,704 19,268,096
Diluted 21,379,418 19,594,724 19,823,188
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<CAPTION>
Common Shares Total
----------------------------- Deferred Retained Shareholders'
Shares Amount Compensation Earnings Equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1998 19,038,424 $ 37,700,992 ($ 78,511) $ 7,113,090 $ 44,735,571
Exercise of stock options 444,308 388,728 - - 388,728
Employee stock purchase plan 14,992 49,500 - - 49,500
Repurchase common stock (880,000) (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 18,617,724 35,675,752 (42,619) 13,116,013 48,749,146
Exercise of stock options 964,192 4,187,278 - - 4,187,278
Employee stock purchase plan 15,772 60,469 - - 60,469
Repurchase common stock (276,000) (1,064,863) - - (1,064,863)
Amortization of deferred compensation - - 35,892 - 35,892
Tax benefit from exercise of options - 1,808,935 - - 1,808,935
Net income - - - 13,500,674 13,500,674
------------- ------------- ------------- ------------- -------------
Balance at January 29, 2000 19,321,688 40,667,571 (6,727) 26,616,687 67,277,531
Exercise of stock options 959,910 4,767,049 - - 4,767,049
Employee stock purchase plan 12,257 143,170 - - 143,170
Amortization of deferred compensation - - 6,727 - 6,727
Tax benefit from exercise of options - 3,851,718 - - 3,851,718
Net income - - - 23,245,079 23,245,079
------------- ------------- ------------- ------------- -------------
Balance at February 3, 2001 20,293,855 $ 49,429,508 - $ 49,861,766 $ 99,291,274
============= ============= ============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Years ended
--------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,245,079 $ 13,500,674 $ 6,002,923
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,645,306 5,890,519 4,069,200
Deferred rent 298,867 360,998 234,889
Deferred compensation 6,727 35,892 35,892
Deferred taxes (1,298,222) (422,800) 124,198
Loss on disposal of fixed assets 501,427 10,072 -
Changes in operating assets and liabilities:
Inventory (5,968,770) (4,920,119) (2,810,030)
Prepaid expenses and other current assets (3,972,167) (140,147) (782,537)
Deposits and other assets (17,676) 3,936 (46,397)
Accounts payable 417,129 4,028,549 480,803
Accrued payroll and related expenses 1,712,434 4,601,036 1,409,150
Accrued sales and other taxes payable 465,527 254,881 118,883
Income taxes payable (4,288,815) 2,580,813 488,804
------------- ------------- -------------
Net cash provided by operating activities 19,746,846 25,784,304 9,325,778
INVESTING ACTIVITIES
Purchases of property and equipment (16,662,796) (15,763,802) (9,274,002)
------------- ------------- -------------
Net cash used in investing activities (16,662,796) (15,763,802) (9,274,002)
FINANCING ACTIVITIES
Payments on capital lease obligations (107,943) (36,541) (31,689)
Repurchase common shares - (1,064,863) (2,968,565)
Proceeds from employee stock purchases and
exercise of stock options, including related tax benefit 8,761,937 6,056,682 943,325
------------- ------------- -------------
Net cash provided by (used in) financing activities 8,653,994 4,955,278 (2,056,929)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 11,738,044 14,975,780 (2,005,153)
Cash and cash equivalents at beginning of year 39,549,654 24,573,874 26,579,027
------------- ------------- -------------
Cash and cash equivalents at end of year $ 51,287,698 $ 39,549,654 $ 24,573,874
============= ============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 30,245 $ 32,086 $ 20,296
============= ============= =============
Cash paid during the year for income taxes $ 17,399,328 $ 3,674,209 $ 2,245,212
============= ============= =============
Capital lease obligations entered into for equipment $ - $ 171,885 $ -
============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
February 3, 2001
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 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.
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 year ended February 3, 2001 is a 53-week year.
The years ended January 29, 2000 and January 30, 1999 were 52-week years.
REVENUE RECOGNITION
Retail merchandise sales are recognized at the point of sale less estimated
sales returns.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which prescribes the use of the liability method
to compute the difference between the tax basis of assets and liabilities and
the related financial reporting amounts using currently enacted tax laws and
rates.
NET INCOME PER SHARE
Net income per share has been computed in accordance with Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings per Share" (see Note 5). A
two-for-one stock split became effective December 27, 2000. All share and per
share amounts have been restated to reflect the split.
F-6
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, the investment of cash
equivalents is 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.
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 that
indicate that their carrying value may not be recoverable. At February 3, 2001,
the Company believes there has been no impairment of the value of such assets.
F-7
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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".
NEW ACCOUNTING PRONOUNCEMENT
Effective in 2001, accounting for gains or losses resulting from changes in the
value of derivatives would be changed depending on the use of the derivative and
whether they qualify for hedge accounting. The adoption of this new requirement
is not expected to have a material impact on the financial position or results
of operations of the Company.
2. LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are summarized as follows:
February 3, January 29,
2001 2000
------------- -------------
Furniture, fixtures and equipment $ 31,299,751 $ 25,396,222
Leasehold improvements 29,135,468 21,419,124
------------- -------------
60,435,219 46,815,346
Less accumulated depreciation and amortization (21,269,221) (15,093,868)
------------- -------------
$ 39,165,998 $ 31,721,478
============= =============
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. The retail space leases provide for rents based upon the greater of
the minimum annual rental amounts or 5% 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 February 3, 2001, January 29, 2000 and
January 30, 1999 was $16,093,011, $10,364,345 and $7,505,514, respectively,
including contingent rentals of $2,694,146, $1,221,200 and $293,759,
respectively.
F-8
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
LEASES (CONTINUED)
The Company leases certain equipment under capital lease obligations. Cost and
accumulated depreciation of equipment under capital leases were $159,560 and
$53,282, respectively, at February 3, 2001, $291,151 and $49,440, respectively,
at January 29, 2000 and $168,930 and $49,137, respectively, at January 30, 1999.
Annual future minimum lease payments under operating and capital leases as of
February 3, 2001 are as follows:
Operating Capital
Fiscal year Leases Leases
- ------------ ------------- -------------
2002 $ 15,402,097 $ 45,211
2003 15,397,604 86,123
2004 15,276,081 -
2005 14,819,341 -
2006 14,593,500 -
Thereafter 45,952,654 -
------------- -------------
Total minimum lease payments $121,441,277 $ 131,334
============= =============
Less amounts representing interest - 8,774
------------- -------------
Present value of future minimum capital lease
payments - 122,560
Less amounts due in one year - 37,691
------------- -------------
Long-term portion of obligations under capital
leases - $ 84,869
============= =============
4. SHAREHOLDERS' EQUITY
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
F-9
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
generally expire ten years from the date of grant. An aggregate of 7,220,000
shares of common stock may be issued pursuant to the plans. During fiscal 2000,
the Plan was amended to increase the aggregate number of shares of common stock
authorized for issuance by 1,900,000 shares. As of February 3, 2001, 1,725,320
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 600,000 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.
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 2000,
1999 and 1998: 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 0.84 for 2000, 0.80 for 1999 and 0.79 for 1998; and a
weighted average expected life of the option of 5 years. The weighted average
fair value of options granted during the year are $11.23, $5.01 and $3.67 per
share for fiscal 2000, 1999 and 1998, respectively.
F-10
<PAGE>
Hot Topic, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
Years Ended
----------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
-------------- -------------- --------------
Pro forma net income $ 20,671,693 $ 11,303,530 $ 4,495,809
Pro forma earnings per share
Basic $ 1.05 $ 0.61 $ 0.24
Diluted $ 0.97 $ 0.60 $ 0.23
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
February 3, 2001 January 29, 2000 January 30, 1999
-------------------------- -------------------------- --------------------------
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 2,653,124 $ 4.84 2,796,604 $ 5.12 2,249,240 $ 4.11
Granted 1,060,100 $ 11.23 1,024,400 $ 3.69 1,146,352 $ 5.41
Exercised (959,910) $ 4.97 (964,192) $ 4.35 (444,308) $ 0.88
Canceled (253,572) $ 4.46 (203,688) $ 5.22 (154,680) $ 4.81
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at end of
year 2,499,742 $ 7.53 2,653,124 $ 4.84 2,796,604 $ 5.12
============ ============ ============ ============ ============ ============
Exercisable at end of
year 512,013 $ 5.23 546,284 $ 5.44 785,140 $ 4.28
</TABLE>
Exercise prices for options outstanding as of February 3, 2001 ranged from $1.25
to $15.78. Of the 2,499,742 options outstanding at February 3, 2001, 705,775
have exercise prices ranging from $1.25 to $5.00, 738,367 have exercise prices
ranging from $5.25 to $6.97, 885,600 have exercise prices ranging from $8.38 to
$13.44 and 170,000 have exercise prices ranging from $14.63 to $15.78. 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:
February 3, January 29, January 30,
2001 2000 1999
------------ ------------ ------------
Basic EPS Computation:
Numerator $23,245,079 $13,500,674 $ 6,002,923
Denominator:
Weighted average common
shares outstanding 19,778,706 18,533,704 19,268,096
------------ ------------ ------------
Total shares 19,778,706 18,533,704 19,268,096
------------ ------------ ------------
Basic EPS $ 1.18 $ 0.73 $ 0.31
============ ============ ============
Diluted EPS Computation:
Numerator $23,245,079 $13,500,674 $ 6,002,923
Denominator:
Weighted average common
shares outstanding 19,778,706 18,533,704 19,268,096
Incremental shares from assumed
conversion of options 1,600,712 1,061,020 555,092
------------ ------------ ------------
Total shares 21,379,418 19,594,724 19,823,188
------------ ------------ ------------
Diluted EPS $ 1.09 $ 0.69 $ 0.30
============ ============ ============
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:
February 3, January 29, January 30,
2001 2000 1999
------------- ------------- -------------
Current:
Federal $ 13,092,892 $ 6,873,075 $ 2,770,434
State 1,847,868 1,183,325 472,268
------------- ------------- -------------
14,940,760 8,056,400 3,242,702
Deferred:
Federal (1,069,096) (393,151) 127,057
State (219,764) (29,649) (2,859)
------------- ------------- -------------
(1,288,860) (422,800) 124,198
------------- ------------- -------------
Total income tax expense $ 13,651,900 $ 7,633,600 $ 3,366,900
============= ============= =============
Significant components of the Company's deferred tax assets and liabilities:
February 3, January 29,
2001 2000
------------ ------------
Current deferred tax assets:
Accrued vacation and other $ 345,876 $ 227,759
Inventory 650,928 445,380
State taxes 98,903 258,895
Other liabilities (151,965) (196,373)
------------ ------------
Total deferred tax assets 943,742 735,661
Valuation allowance for deferred
tax assets - (14,500)
------------ ------------
Net current deferred tax assets 943,742 721,161
Noncurrent deferred tax assets (liabilities):
Depreciation (76,357) (1,176,467)
Deferred rent 336,202 360,671
------------ ------------
Total noncurrent deferred tax assets
(liabilities) 259,845 (815,796)
------------ ------------
Net deferred tax (liability) asset $ 1,203,587 ($ 94,635)
============ ============
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:
February 3, January 29, January 30,
2001 2000 1999
---------- ---------- ----------
Statutory federal rate 35.0% 35.0% 34.0%
Permanent differences (1.3) (1.3) (2.9)
State and local taxes, net of federal
benefit 2.7 2.8 3.3
Change in valuation allowance and
other items 0.6 (0.4) 1.5
---------- ---------- ----------
Effective income tax rate 37.0% 36.1% 35.9%
========== ========== ==========
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, maintained 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 25% 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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>2
<FILENAME>hottopic_bylaws.txt
<DESCRIPTION>AMENDED AND RESTATED BYLAWS
<TEXT>
================================================================================
AMENDED AND RESTATED BYLAWS
OF
HOT TOPIC, INC.
DATED SEPTEMBER 23, 1996
================================================================================
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I OFFICES......................................................................1
Section 1. Principal Office...............................................1
Section 2. Other Offices..................................................1
ARTICLE II MEETINGS OF SHAREHOLDERS.....................................................1
Section 1. Place of Meeting...............................................1
Section 2. Annual Meeting.................................................1
Section 3. Special Meeting................................................3
Section 4. Notice of Shareholders' Meetings...............................3
Section 5. Manner of Giving Notice; Affidavit of Notice...................4
Section 6. Quorum.........................................................4
Section 7. Adjourned Meeting; Notice......................................4
Section 8. Voting.........................................................5
Section 9. Waiver of Notice or Consent by Absent Shareholders.............5
Section 10. Shareholder Action by Written Consent Without a Meeting........6
Section 11. Proxies........................................................6
Section 12. Inspectors of Election.........................................6
ARTICLE III DIRECTORS....................................................................7
Section 1. Powers.........................................................7
Section 2. Number and Qualification of Directors..........................7
Section 3. Election and Term of Office of Directors.......................8
Section 4. Vacancies......................................................8
Section 5. Place of Meetings and Meetings by Telephone....................8
Section 6. Annual Meeting.................................................9
Section 7. Other Regular Meetings.........................................9
Section 8. Special Meetings...............................................9
Section 9. Quorum.........................................................9
Section 10. Waiver of Notice...............................................9
Section 11. Adjournment...................................................10
Section 12. Notice of Adjournment.........................................10
Section 13. Action Without Meeting........................................10
Section 14. Fees and Compensation of Director.............................10
Section 15. Removal Without Cause.........................................10
ARTICLE IV COMMITTEES...................................................................10
Section 1. Committees of Directors.......................................10
Section 2. Meetings and Action of Committees.............................11
ARTICLE V OFFICERS.....................................................................11
Section 1. Officers......................................................11
Section 2. Election of Officers..........................................11
Section 3. Subordinate Officers..........................................11
Section 4. Removal and Resignation of Officers...........................11
Section 5. Vacancies in Offices..........................................12
Section 6. Chairman of the Board.........................................12
Section 7. President.....................................................12
Section 8. Vice President................................................12
Section 9. Secretary.....................................................12
<PAGE>
Section 10. Chief Financial Officer.......................................13
Section 11. Excessive Compensation........................................13
ARTICLE VI RECORDS AND REPORTS..........................................................13
Section 1. Maintenance and Inspection of Share Register..................13
Section 2. Maintenance and Inspection of Bylaws..........................14
Section 3. Maintenance and Inspection of Other Corporate Records.........14
Section 4. Inspection by Directors.......................................14
Section 5. Annual Report to Shareholders.................................14
Section 6. Financial Statements..........................................15
Section 7. Annual Statement of General Information.......................15
ARTICLE VII GENERAL CORPORATE MATTERS...................................................15
Section 1. Record Date for Purposes Other than Notice and Voting.........15
Section 2. Checks, Drafts, Evidences of Indebtedness.....................16
Section 3. Corporate Contracts and Instruments; How Executed.............16
Section 4. Certificate for Shares........................................16
Section 5. Lost Certificates.............................................17
Section 6. Representation of Shares of Other Corporations................17
Section 7. Construction and Definitions..................................17
ARTICLE VIII AMENDMENTS.................................................................17
Section 1. Amendment by Shareholders.....................................17
Section 2. Amendment by Directors........................................17
ARTICLE IX INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.................18
Section 1. Director......................................................18
Section 2. Officers, Employees and Other Agents..........................18
Section 3. Determination by the Corporation..............................18
Section 4. Good Faith....................................................18
Section 5. Expenses......................................................19
Section 6. Enforcement...................................................19
Section 7. Non-Exclusivity of Rights.....................................20
Section 8. Survival of Rights............................................20
Section 9. Insurance.....................................................20
Section 10. Amendments....................................................20
Section 11. Employee Benefit Plans........................................20
Section 12. Saving Clause.................................................20
Section 13. Certain Definitions...........................................20
</TABLE>
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
HOT TOPIC, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The board of directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside this state, and the corporation has one or more business offices
in this state, the board of directors shall fix and designate a principal
business office in the State of California.
SECTION 2. OTHER OFFICES. The board of directors may at any time
establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETING. Meetings of shareholders shall be held at
any place within or outside the State of California designated by the board of
directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
SECTION 2. ANNUAL MEETING. The annual meeting of the shareholders shall
be held each year on a date and at a time designated by the board of directors.
If this day shall be a legal holiday, then the meeting shall be held on the next
succeeding business day, at the same hour. At each annual meeting, directors
shall be elected and other proper business may be transacted.
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (i) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the board
of directors, (ii) otherwise properly brought before the meeting by or at the
direction of the board of directors, or (iii) otherwise properly brought before
the meeting by a shareholder. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the secretary of the corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days in advance of the date specified in the corporation's proxy
statement released to shareholders in connection with the previous year's annual
meeting of shareholders; provided, however, that in the event that no annual
1.
<PAGE>
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the shareholder to be timely must
be so received a reasonable time before the solicitation is made. A
shareholder's notice to the secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the corporation's books, of the shareholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the shareholder, (iv) any material interest of the
shareholder in such business and (v) any other information that is required to
be provided by the shareholder pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a
proponent of a shareholder proposal. Notwithstanding the foregoing, in order to
include information with respect to a shareholder proposal in the proxy
statement and form of proxy for a shareholders' meeting, shareholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph. The chairman of the annual meeting shall, if the facts
warrant, determine and declare at the meeting that business was not properly
brought before the meeting and in accordance with the provisions of this
paragraph, and, if he should so determine, he shall so declare at the meeting
that any such business not properly brought before the meeting shall not be
transacted.
Only persons who are nominated in accordance with the procedures set
forth in this paragraph shall be eligible for election as directors. Nominations
of persons for election to the board of directors of the corporation may be made
at a meeting of shareholders by or at the direction of the board of directors or
by any shareholder of the corporation entitled to vote in the election of
directors at the meeting who complies with the notice procedures set forth in
this paragraph. Such nominations, other than those made by or at the direction
of the board of directors, shall be made pursuant to timely notice in writing to
the secretary of the corporation in accordance with the provisions of the
preceding paragraph. Such shareholder's notice shall set forth (i) as to each
person, if any, whom the shareholder proposes to nominate for election or re
election as a director: (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the shareholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
director if elected); and (ii) as to such shareholder giving notice, the
information required to be provided pursuant to the preceding paragraph. At the
request of the board of directors, any person nominated by a shareholder for
election as a director shall furnish to the secretary of the corporation that
information required to be set forth in the shareholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
2.
<PAGE>
set forth in this paragraph. The chairman of the meeting shall, if the facts
warrant, determine and declare at the meeting that a nomination was not made in
accordance with the provisions of this paragraph, and if he should so determine,
he shall so declare at the meeting, and the defective nomination shall be
disregarded.
SECTION 3. SPECIAL MEETING. Special meetings of the shareholders may be
called at any time by the board of directors, the chairman of the board, the
president, a vice president, the secretary or by one or more shareholders
holding not less than one-tenth (1/10th) of the voting power of the corporation.
Except as next provided, notice shall be given as for the annual meeting.
Upon receipt of a written request addressed to the chairman, president,
vice president or secretary, mailed or delivered personally to such office by
any person (other than the board) entitled to call a special meeting of
shareholders, such officer shall cause notice to be given, to the shareholders
entitled to vote, that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of such request. If such notice is not given
within twenty (20) days after receipt of such request, the persons calling the
meeting may give notice thereof in the manner provided by these bylaws or apply
to the Superior Court as provided in Section 305(c) of the Corporations Code of
California. Such person's notice delivered to such office shall set forth as to
each matter such person proposes to bring before the special meeting (i) a brief
description of the business desired to be brought before the special meeting and
the reasons for conducting such business at the special meeting, (ii) the name
and address, as they appear on the corporation's books, of the person proposing
such business, if applicable, (iii) the class and number of shares of the
corporation which are beneficially owned by the person, if applicable, (iv) any
material interest of the person in such business and (v) any other information
that is required to be provided by the shareholder pursuant to Regulation 14A
under the 1934 Act.
SECTION 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings
shall be sent or otherwise given in accordance with Section 5 of this Article II
not less than ten (10) nor more than sixty (60) days before the date of the
meeting. The notice shall specify the place, date and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted, or (ii) in the case of the annual meeting, those matters which the
board of directors, at the time of giving the notice, intends to present for
action by the shareholders. The notice of any meeting at which directors are to
be elected shall include the name of any nominee or nominees whom, at the time
of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the articles of incorporation, pursuant to Section 902 of that
Code, (iii) a reorganization of the corporation, pursuant Section 1201 of that
Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900
of that Code, or (v) a distribution in dissolution other than in accordance with
the rights of outstanding preferred shares, pursuant to Section 2007 of that
Code, the notice shall also state the general nature of that proposal.
3.
<PAGE>
SECTION 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices or reports shall be deemed to have been duly
given without further mailing if these shall be available to the shareholder on
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the corporation giving the notice, and shall be filed and
maintained in the minute book of the corporation.
SECTION 6. QUORUM. The presence in person or by proxy of the holders of
a majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
SECTION 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual
or special, whether or not a quorum is present, may be adjourned from time to
time by the vote of the majority of the shares represented at that meeting,
either in person or by proxy, but in the absence of a quorum, no other business
may be transacted at that meeting, except as provided in Section 6 of this
Article II.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set for the original meeting, in which case the board of directors shall
set a new record date. Notice of any such adjourned meeting shall be given to
each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of sections 4 and 5 of this Article II. At any
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
4.
<PAGE>
SECTION 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Sections 702 to 704, inclusive,
of the Corporations Code of California (relating to voting shares held by a
fiduciary, in the name of a corporation or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by the Corporations Code of
California or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of the shareholder's
shares) unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which that shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
So long as the corporation has equity securities qualified for trading
on the Nasdaq National Market: (A) cumulative voting shall no longer be
available to the shareholders, (B) the immediately preceding paragraph shall no
longer be applicable, (C) the third sentence of the first paragraph of this
Section 8 shall read, "Any shareholder may vote part of the shares in favor of
the proposal and refrain from voting the remaining shares or vote them against
the proposal, but, if the shareholder fails to specify the number of shares
which the shareholder is voting affirmatively, it will be conclusively presumed
that the shareholder's approving vote is with respect to all shares that the
shareholder is entitled to vote", and (D) the parenthetical reference in the
first paragraph of this Section 8, "(other than the election of directors),"
shall no longer be applicable.
SECTION 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions at any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice, a consent to holding of the meeting or an approval of the
minutes. The waiver of notice or consent need not specify either the business to
be transacted or the purpose of any annual or special meeting of shareholders,
5.
<PAGE>
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 4 of this Article II,
the waiver of notice or consent shall state the general nature of the proposal.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
SECTION 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. No
action shall be taken by the shareholders of the corporation, except at an
annual or special meeting of the shareholders called in accordance with these
bylaws.
(a) RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of or
to vote at any meeting, the board of directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days
before the date of any such meeting, and in this event only shareholders of
record on the date so fixed are entitled to notice or to vote, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date, except as otherwise provided in the Corporations Code of
California. If the board of directors does not so fix a record date, the record
date for determining shareholders entitled to notice of or to vote at a meeting
of shareholders shall be at the close of business on the business day next
preceding the day an which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held.
SECTION 11. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Sections 705(e) and 705(f) of the Corporations Code of California.
SECTION 12. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
6.
<PAGE>
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a quorum
and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. Subject to the provisions of the Corporations Code
of California and any limitations in the articles of incorporation and these
bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS.
(a) The number of directors of the corporation shall be not
less than six (6) nor more than eleven (11) and the exact number of directors
shall be fixed within these limits from time to time by approval of the board of
directors. The indefinite number of directors may be changed, or a definite
number fixed without provision for an indefinite number, by a duly adopted
amendment to the articles of incorporation or by an amendment to this bylaw duly
adopted by the vote of holders of sixty-six and two-thirds percent (66-2/3%) of
7.
<PAGE>
the outstanding shares entitled to vote. No amendment may change the stated
maximum number of authorized directors to a number greater than two (2) times
the stated minimum number of directors minus one (1).
SECTION 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting by the shareholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
SECTION 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director. Each director so elected shall hold office until the
next annual meeting of the shareholders and until a successor has been elected
and qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation, or removal of any director, or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be voted for at that
meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors.
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
SECTION 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular
meetings of the board of directors may be held at any place within or outside
the State of California that has been designated from time to time by resolution
of the board. In the absence of such a designation, regular meetings shall be
held at the principal executive office of the corporation. Special meetings of
the board shall be held at any place within or outside the State of California
that has been designated in the notice of the meeting or, if not stated in the
notice or there is no notice, at the principal executive office of the
corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another, and all such directors shall
be deemed to be present in person at the meeting.
SECTION 6. ANNUAL MEETING. Immediately following each annual meeting of
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and the transaction of
other business. Notice of this meeting shall not be required.
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SECTION 7. OTHER REGULAR MEETINGS. Other regular meetings of the board
of directors shall be held without call at such time as shall from time to time
be fixed by the board of directors. Such regular meetings may be held without
notice.
SECTION 8. SPECIAL MEETINGS. Special meetings of the board of
directors for any purpose or purposes may be called at any time by the chairman
of the board, the president, any vice president, the secretary or any two
directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. In the event that the notice
is mailed, it shall be deposited in the United States mail at least four (4)
days before the time of the holding of the meeting. In the event that the notice
is delivered personally or by telephone or telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight (48)
hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not
specify the purpose of the meeting, or the place of the meeting if the meeting
is to be held at the principal executive office of the corporation.
SECTION 9. QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article III. Every act or decision done or made
by a majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the board of directors, subject to
the provisions of Section 310 of the Corporations Code of California (as to
approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of that Code (as to
appointment of committees) and Section 317(e) of that Code (as to
indemnification of directors). A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required quorum
for that meeting.
SECTION 10. WAIVER OF NOTICE. The transaction of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting, before or at its commencement, the lack
of notice to that director.
SECTION 11. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any meeting to another time and place.
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SECTION 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four (24) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner specified
in Section 8 of this Article III, to the directors who were not present at the
time of the adjournment.
SECTION 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and effect
as a unanimous vote of the board of directors. Such written consent or consents
shall be filed with the minutes of the proceedings of the board.
SECTION 14. FEES AND COMPENSATION OF DIRECTOR. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
board of directors. This Section 14 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee or otherwise, and receiving compensation for those services.
SECTION 15. REMOVAL WITHOUT CAUSE. Any or all of the directors may be
removed without cause if the removal is approved by the outstanding shares
entitled to vote.
ARTICLE IV
COMMITTEES
SECTION 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two (2) or more directors,
to serve at the pleasure of the board. The board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided in
the resolution of the board, shall have all the authority of the board, except
with respect to:
(a) the approval of any action which, under the Corporations
Code of California, also requires shareholders' approval or approval of the
outstanding shares;
(b) the filling of vacancies on the board of directors or any
committee;
(c) the fixing of compensation of the directors for serving on
the board or any committee;
(d) the amendment or repeal of bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
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(f) a distribution to the shareholders of the corporation,
except at a rate or in a periodic amount or within a price range determined by
the board of directors;
(g) the appointment of any other committees of the board of
directors or the members of these committees.
SECTION 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Section 5 (place of meetings),
Section 7 (regular meetings), Section 8 (special meetings and notice), Section 9
(quorum), Section 10 (waiver of notice), Section 11 (adjournment), Section 12
(notice of adjournment) and Section 13 (action without meeting), with such
changes in the context of those bylaws as are necessary to substitute the
committee and its members for the board of directors and its members, except
that the time of regular meetings of committees may be determined either by
resolution of the board of directors or by resolution of the committee; special
meetings of committees may also be called by resolution of the board of
directors; and notice of special meetings of committees shall also be given to
all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall be a
president, a secretary and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article V. Any number of offices may be
held by the same person.
SECTION 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen by the board of
directors, and each shall serve at the pleasure of the board, subject to the
rights, if any, of an officer under any contract of employment.
SECTION 3. SUBORDINATE OFFICERS. The board of directors may appoint,
and may empower the president to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the bylaws or as
the board of directors may from time to time determine.
SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the board of directors, at any regular
or special meeting of the board, or, except in case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
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Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
SECTION 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.
SECTION 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is no president, the chairman of the board shall in addition be
the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 7 of this Article V.
SECTION 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and the officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or these bylaws.
SECTION 8. VICE PRESIDENT. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for each of them,
respectively, by the board of directors or the bylaws, and the president or the
chairman of the board.
SECTION 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
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and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by these bylaws or by
law to be given, and shall keep the seal of the corporation, if one be adopted,
in safe custody, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these bylaws.
SECTION 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall at all reasonable times be open to inspection by any directors.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the board of directors. He shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all of his transactions as chief financial officer and of the financial
condition of the corporation, and shall have the powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
SECTION 11. EXCESSIVE COMPENSATION. If the Internal Revenue Service
disallows as a business deduction to the corporation any part of the salary or
other compensation paid by it to any officer, director or employee as being
excessive compensation, that part disallowed shall be repaid to the corporation
by the officer, director or employee, unless the board of directors declares
otherwise.
ARTICLE VI
RECORDS AND REPORTS
SECTION 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The
corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either be appointed and as determined by
resolution of the board of directors, a record of its shareholders, giving the
names and addresses of all shareholders and the number and classes of shares
held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five (5) days' prior
written demand on the corporation, and (ii) obtain from the transfer agent of
the corporation, on written demand and on the tender of such shareholders' names
and addresses, a list of who are entitled to vote for the election of directors,
and their shareholdings, as of the most recent record date for which that list
has been compiled or as of a date specified by the shareholder after the date of
demand. This list shall be made available to any such shareholder by the
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transfer agent on or before the later of five (5) days after the demand is
received or the date specified in the demand as the date as of which the list is
to be compiled. The record of shareholders shall also be open to inspection on
the written demand of any shareholder or holder of a voting trust certificate,
at any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate. Any inspection and copying under this Section 1 may be made in
person or by an agent or attorney for the shareholder or holder of a voting
trust certificate making the demand.
SECTION 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office, or if its principal executive office is
not in the State of California, at its principal business office in this state,
the original or a copy of the bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in this state,
the Secretary shall, upon the written request of any shareholder, furnish to
that shareholder a copy of the bylaws as amended to date.
SECTION 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places designated by the board of directors or,
in the absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written demand of any shareholder or holder
of a voting trust certificate, at any reasonable time during usual business
hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney, and shall include he right to copy
and make extracts. These rights of inspection shall extend to the records of
each subsidiary corporation of the corporation.
SECTION 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.
SECTION 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the Corporations Code of California
is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the board of directors from issuing annual or other periodic reports
to the shareholders of the corporation as they consider appropriate.
SECTION 6. FINANCIAL STATEMENTS. A copy of any annual financial
statement and any income statement of the corporation for each quarterly period
of each fiscal year, and any accompanying balance sheet of the corporation as of
the end of each such period, that has been prepared by the corporation shall be
kept on file in the principal executive office of the corporation for twelve
(12) months and each such statement shall be exhibited at all reasonable times
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to any shareholder demanding an examination of any such statement or a copy
shall be mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the chief financial
officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request. If
the corporation has not sent to the shareholder an annual report which is
available for the last fiscal year, this report shall likewise be delivered or
mailed to the shareholder within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual or quarterly
income statement which it has prepared, and a balance sheet as of the end of
that period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
SECTION 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation
shall, by the end of the calendar month of the anniversary date of its
incorporation each year, file with the Secretary of State of the State of
California, on the prescribed form, a statement setting forth the authorized
number of directors, the number of any vacancies on the board, the names and
complete business or residence addresses of all incumbent directors, the names
and complete business or residence addresses of the chief executive officer,
secretary and chief financial officer, the street address of its principal
executive office, if the principal executive office is not in this state, the
principal business office in this state, and the general type of business
constituting the principal business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
ARTICLE VII
GENERAL CORPORATE MATTERS
SECTION 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the board of
directors may fix, in advance, a record date, which shall not be more than sixty
(60) days before any such action, and in that case only shareholders of record
on the date so fixed are entitled to receive the dividend, distribution,
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allotment, rights or to exercise the rights, as the case may be, notwithstanding
any transfer of any shares on the books of the corporation after the record date
so fixed, except as otherwise provided in the Corporations Code of California.
If the board of directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
SECTION 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money, notes or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as from time to
time determined by resolution of the board of directors.
SECTION 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board
of directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
SECTION 4. CERTIFICATE FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation may be issued to each shareholder
when any of these shares are fully paid, and the board of directors may
authorize the issuance of certificates or shares as partly paid provided that
these certificates shall state the amount of consideration to be paid for them
and the amount paid. All certificates shall be signed in the name of the
corporation by the chairman of the board or vice chairman of the board or the
president or vice president and by the chief financial officer or an assistant
treasurer or the secretary or any assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In the event that any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed on a certificate shall have ceased to be that officer, transfer
agent or registrar before that certificate is issued, it may be issued by the
corporation with the same effect as if that person were an officer, transfer
agent or registrar at the date of issue.
Notwithstanding any provision in these bylaws to the contrary, the
board of directors of the corporation may issue, record and transfer its shares
of capital stock by electronic or other means not involving any issuance of
certificates, including provisions for notice to purchasers in substitution for
the required statements on certificates required by the Corporations Code of
California, and as may be required by the California Commissioner of Corporation
in administering the California Corporate Securities Law of 1968, which has been
(1) approved by the United States Securities and Exchange Commission, (2) is
authorized in any statute of the United States or (3) is in accordance with
Division 8 (commencing with Section 801) of the California Commercial Code. If
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the board of directors implements the provisions of this paragraph, the
provisions shall not become effective as to previously issued and outstanding
certificated shares until the certificates therefor have been surrendered to the
corporation.
SECTION 5. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificate for shares shall be issued to replace an old certificate unless
the latter is surrendered to the corporation and canceled at the same time. The
board of directors may, in case any share certificate or certificate for any
other security is lost, stolen or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
SECTION 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman
of the board, the president, any vice president or any other person authorized
by resolution of the board of directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority granted to these officers to vote or
represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
SECTION 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
Corporations Code of California shall govern the construction of these bylaws.
Without limiting the generality of this provision, the singular number includes
the plural, the plural number includes the singular and the term "person"
includes both a corporation and a natural person.
ARTICLE VIII
AMENDMENTS
SECTION 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these bylaws may be amended or repealed by the vote of a majority of the
outstanding shares entitled to vote; provided, however, that (i) if the articles
of incorporation of the corporation set forth the number of authorized directors
of the corporation, the authorized number of directors may be changed only by an
amendment of the articles of incorporation, and (ii) Article II, Sections 2, 3,
8 and 10, Article III, Sections 2 and 4 and this Article VIII, Section 1 of
these bylaws may be altered, amended or repealed by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the outstanding shares of
the outstanding shares entitled to vote.
SECTION 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 1 of this Article VIII, bylaws other than a
bylaw or an amendment of a bylaw changing the authorized number of directors may
be adopted, amended or repealed by the board of directors.
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ARTICLE IX
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS
SECTION 1. DIRECTOR. The corporation shall indemnify its directors to
the fullest extent not prohibited by the Corporations Code of California;
provided, however, that the corporation may limit the extent of such
indemnification by individual contracts with its directors; and, provided,
further, that the corporation shall not be required to indemnify any director in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the corporation or its directors, officers,
employees or other agents unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the board of directors
of the corporation or (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation under
the Corporations Code of California.
SECTION 2. OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall
have power to indemnify its officers, employees and other agents as set forth in
the Corporations Code of California.
SECTION 3. DETERMINATION BY THE CORPORATION. Promptly after receipt of
a request for indemnification hereunder (and in any event within 90 days
thereof), a reasonable, good faith determination as to whether indemnification
of the director is proper under the circumstances because such director has met
the applicable standard of care shall be made by:
(a) a majority vote of a quorum consisting of directors who
are not parties to such proceeding;
(b) if such quorum is not obtainable, by independent
legal counsel in a written opinion; or
(c) approval or ratification by the affirmative vote of a
majority of the shares of this corporation represented and voting at a duly held
meeting at which a quorum is present (which shares voting affirmatively also
constitute at least a majority of the required quorum) where the shares owned by
the person to be indemnified shall not be considered entitled to vote thereon.
SECTION 4. GOOD FAITH.
(a) For purposes of any determination under this bylaw, a
director shall be deemed to have acted in good faith and in a manner he
reasonably believed to be in the best interests of the corporation and its
shareholders, and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his conduct was unlawful, if his action
is based on information, opinions, reports and statements, including financial
statements and other financial data, in each case prepared or presented by:
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(1) one or more officers or employees of the
corporation whom the director believed to be reliable and competent in the
matters presented;
(2) counsel, independent accountants or other persons
as to matters which the director believed to be within such person's
professional competence; and
(3) a committee of the Board upon which such director
does not serve, as to matters within such committee's designated authority,
which committee the director believes to merit confidence; so long as, in each
case, the director acts without knowledge that would cause such reliance to be
unwarranted.
(b) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in the best interests of the
corporation and its shareholders or that he had reasonable cause to believe that
his conduct was unlawful.
(c) The provisions of this Section 4 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the
Corporations Code of California.
SECTION 5. EXPENSES. The corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any director in connection with such proceeding upon receipt of an
undertaking by or on behalf of such person to repay said amounts if it shall be
determined ultimately that such person is not entitled to be indemnified under
this bylaw or otherwise.
SECTION 6. ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors under
this bylaw shall be deemed to be contractual rights and be effective to the same
extent and as if provided for in a contract between the corporation and the
director. Any right to indemnification or advances granted by this bylaw to a
director shall be enforceable by or on behalf of the person holding such right
in the forum in which the proceeding is or was pending or, if such forum is not
available or a determination is made that such forum is not convenient, in any
court of competent jurisdiction if (i) the claim for indemnification or advances
is denied, in whole or in part, or (ii) no disposition of such claim is made
within ninety (90) days of request therefor. The claimant in such enforcement
action, if successful in whole or in part, shall be entitled to be paid also the
expense of prosecuting his claim. The corporation shall be entitled to raise as
a defense to any such action (other than an action brought to enforce a claim
for expenses incurred in connection with any proceeding in advance of its final
disposition when the required undertaking has been tendered to the corporation)
that the claimant has not met the standards of conduct that make it permissible
under the Corporations Code of California for the corporation to indemnify the
claimant for the amount claimed. Neither the failure of the corporation
(including its board of directors, independent legal counsel or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the
Corporations Code of California, nor an actual determination by the corporation
19.
<PAGE>
(including its board of directors, independent legal counsel or its
shareholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
SECTION 7. NON-EXCLUSIVITY OF RIGHTS. To the fullest extent permitted
by the corporation's articles of incorporation and the Corporations Code of
California, the rights conferred on any person by this bylaw shall not be
exclusive of any other right which such person may have or hereafter acquire
under any statute, provision of the articles of incorporation, bylaws,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding office. The corporation is specifically authorized to enter into
individual contracts with any or all of its directors, officers, employees or
agents respecting indemnification and advances, to the fullest extent permitted
by the Corporations Code of California and the corporation's articles of
incorporation.
SECTION 8. SURVIVAL OF RIGHTS. The rights conferred on any person by
this bylaw shall continue as to a person who has ceased to be a director and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
SECTION 9. INSURANCE. The corporation, upon approval by the board of
directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this bylaw.
SECTION 10. AMENDMENTS. Any repeal or modification of this bylaw shall
only be prospective and shall not affect the rights under this bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
SECTION 11. EMPLOYEE BENEFIT PLANS. The corporation shall indemnify the
directors and officers of the corporation who serve at the request of the
corporation as trustees, investment managers or other fiduciaries of employee
benefit plans to the fullest extent permitted by the Corporations Code of
California, and any other applicable laws.
SECTION 12. SAVING CLAUSE. If this bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director to the fullest extent
permitted by any applicable portion of this bylaw that shall not have been
invalidated, or by any other applicable law.
SECTION 13. CERTAIN DEFINITIONS. For the purposes of this bylaw, the
following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement and appeal of any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative.
20.
<PAGE>
(b) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding, including expenses of
establishing a right to indemnification under this bylaw or any applicable law.
(c) The term the "corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(d) References to a "director," "officer," "employee" or
"agent" of the corporation shall include, without limitation, situations where
such person is serving corporation as a director, officer, employee, trustee or
agent of another corporation, partnership, joint venture, trust or other
enterprise.
21.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>3
<FILENAME>ex10-10.txt
<DESCRIPTION>EXHIBIT 10.10
<TEXT>
FIRST AMENDMENT TO INDUSTRIAL REAL ESTATE LEASE
This FIRST AMENDMENT TO INDUSTRIAL REAL ESTATE LEASE ("FIRST AMENDMENT"), is
made and entered into as of March 19, 2001 (the FIRST AMENDMENT DATE"), by and
between MAJESTIC-FULLERTON ROAD, LLC, a California limited liability company and
PFG FULLERTON LIMITED PARTNERSHIP, an Iowa limited partnership (collectively, as
"LANDLORD"), and HOT TOPIC ADMINISTRATION, INC., a California Corporation (as
"TENANT').
RECITALS:
A. Tenant and Majesty Realty Co., a California Corporation and Patrician
Associates, Inc., a California corporation predecessor-in-interest to
Landlord entered into that certain Industrial Real Estate Lease (the
"LEASE"), dated December 10, 1998, whereby Landlord leased to Tenant
and Tenant leased from Landlord approximately 125,000 square feet of
space (the "EXISTING PROPERTY") in the building commonly known as 18305
East San Jose Avenue, City of Industry, California.
B. Tenant desires to expand the Existing Property to include that certain
adjacent space which is in the Project, consisting of approximately
125,000 square feet ("EXPANSION SPACE") in the building commonly known
as 18305 East San Jose Avenue, City of Industry, California, as
delineated on Exhibit "A" attached hereto and made a part hereof.
C. The parties desire to amend the Lease on the terms and conditions set
forth in this First Amendment.
AGREEMENT:
NOW, THEREFOR, in consideration of the foregoing recitals and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. TERMS. All undefined terms when used herein shall have the same
respective meanings as are given such terms in the Lease unless
expressly provided otherwise in this First Amendment.
2. PROPERTY.
2.1 TENANT'S ACCEPTANCE OF THE PROPERTY. Effective as of August 1,
2001 ("EXPANSION SPACE COMMENCEMENT Date"), the "Property"
shall contain approximately 250,000 square feet of space in
the Project and shall consist of the Existing Property and the
Expansion Space. Tenant shall accept the Property in its
presently existing, "as is" condition and Landlord has made no
representation or warranty with regard to the condition of the
Property of the Property or the suitability thereof for
Tenant's business, nor shall Landlord be obligated to provide
or pay for any improvement work or services related to the
improvement of the Property; provided, however, Landlord, at
its sole cost and expense, shall, at such time as is mutually
agreeable to Landlord and Tenant, remove the presently
existing demising wall as set forth on Exhibit "A" attached
hereto ("LANDLORDS WORK"). Landlord shall use Landlord's
standard building materials and finishes in the construction
of Landlords Work. Since Tenant may be occupying a portion of
the Property pursuant to the Lease; as amended by this First
Amendment, 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 a
portion 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 and Tenant's property
away from the area Landlord is conducting Landlord's Work).
<PAGE>
Tenant hereby agrees that the performance of Landlord's Work
shall in no way constitute a constructive eviction of Tenant
not entitle Tenant to, if any, abatement of rent. 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 Landlords Work, nor shall
Tenant be entitled to any compensation or damages from
Landlord for loss of the use of whole or any part of the
Property, for loss of or damage to Tenant's personal property,
merchandise, fixtures or improvements, or for any
inconvenience or annoyance resulting form Landlord's Work or
for Landlord's actions in connection with Landlord's Work.
2.2 RESTORATION OF THE DEMISING WALL. Prior to the termination of
this Lease, Tenant, at Tenant's sole cost and expense, shall
restore the above referenced demising wall.
3. RENT.
3.1 BASE RENT. Effective as of the Expansion Space Commencement
Date, the monthly Base Rent for the Property shall be
NINETY-FOUR THOUSAND THREE HUNDRED TWENTY-FIVE AND NO/100
DOLLARS ($94,325.00).
3.2 PREPAID RENT. Concurrent with Tenant's execution and delivery
of this First Amendment, Tenant shall deliver to Landlord a
check payable to Landlord in the amount of FIFTY THOUSAND FIVE
HUNDRED SEVENTY-FIVE AND NO/100 DOLLARS ($50,757.00), which
amount represents the first month's rent due for the Expansion
Space.
3.3 TENANT'S SHARE. Effective as of the Expansion Space
Commencement Date, Section 1.12(b)(iv) is deleted in its
entirely and the following is substituted in place thereof:
"Tenant's Initial Pro Rata Share of Common Area
Expenses is 100%."
3.4 LANDSCAPE FEE. Effective as of the Expansion Space
Commencement Date, the Landscape Fee shall commence at an
amount equal to ONE THOUSAND TWO HUNDRED FIFTY AND NO/100
DOLLARS ($1,250.00); provided however Landlord and Tenant
acknowledge that such amount may be adjusted in accordance to
the terms of Article 16 of the Lease, as amended by this First
Amendment.
4. SECURITY DEPOSIT. Concurrently with Tenant's execution and delivery of
this First Amendment, Tenant shall deposit with Landlord an additional
Security Deposit in an amount equal to FIFTY THOUSAND FIVE HUNDRED
SEVENTY-FIVE AND NO/100 DOLLARS ($50,575.00) as additional security for
the performance by Tenant of its obligation under the Lease, as amended
by this First Amendment.
5. DELETIONS. Effective as of the Expansion Space Commencement Date,
Article 17 of the Lease are hereby deleted and shall be of no further
force or effect.
6. BROKERS. The parties recognize that the only brokers involved in the
negotiation of this First Amendment are Majestic Realty Co. and The
Staubach Company and agree that Landlord shall be solely responsible
for the payment of any "Brokerage Commission" to such broker. Each
party represents and warrants to the other that they have not dealt
with any other broker in connection with the negotiation and
consummation of this First Amendment and they each know of no other
real estate broker, agent or finder who is, or might be, entitled to a
commission or compensation in connection with this First Amendment.
Each party agrees to indemnify and defend the other party against, and
hold the other party harmless from, any and all claims, demands,
losses, liabilities, damages, lawsuits, judgments, and costs and
expenses (including, without limitation, reasonable attorneys' fees and
costs) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of the indemnifying party's
dealings with any other real estate broker or agent.
7. NO OTHER MODIFICATIONS. Except as otherwise provided herein, all other
terms and provisions of the Lease shall remain in full force and
effect, unmodified by this First Amendment.
8. BINDING EFFECT. The provisions of this First Amendment shall be binding
upon and inure to the benefit of the heirs, representatives, successors
and permitted assigns of the parties hereto.
9. AUTHORITY. The parties represent and warrant that they have the
requisite authority to bind the entity on whose behalf they are
signing.
<PAGE>
10. COUNTERPARTS. This First Amendment may be executed in any number of
original counterparts. Any such counterpart, when executed, shall
constitute an original of this First Amendment, and all such
counterparts together shall constitute one and the same First
Amendment.
IN WITNESS WHEREOF, the parties have entered into this First Amendment
as of the date first set forth above.
"LANDLORD" "TENANT"
MAJESTIC-FULLERTON ROAD, LLC, HOT TOPIC ADMINISTRATION, INC.
a California limited liability company a California corporation
By: MAJESTIC REALTY CO., By: /s/ Betsy McLaughlin
a California corporation, its sole member
Its: BETSY MCLAUGHLIN, PRESIDENT
By: By: /s/ Marc Bertone
--------------------------------- -----------------------------
Its: Its: MARC BERTONE, VICE
PRESIDENT
--------------------------- ------------------------
PFG FULLERTON LIMITED PARTNERSHIP,
an Iowa limited partnership
By: PATRICIAN ASSOCIATES, INC.,
a California corporation, its general partner
By:
-------------------------------
Its:
--------------------------
By:
-------------------------------
Its:
-------------------------
GUARANTOR HEREBY ACKNOWLEDGES AND AGREES TO THE TERMS OF THIS FIRST AMENDMENT TO
INDUSTRUAL REAL ESTATE LEASE AS OF THE DATE FIRST SET FORTH ABOVE.
HOT TOPIC, INC.
a California corporation
By: /s/ Betsy McLaughlin
--------------------------------
Its: BETSY MCLAUGHLIN, PRESIDENT
By: /s/ Marc Bertone
--------------------------------
Its: MARC BERTONE, VICE PRESIDENT
-------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>4
<FILENAME>hottopic_empagmt.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - ELIZABETH MCLAUGHLIN
<TEXT>
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into
effective as of January 22, 2001 (the "Effective Date"), by and between Hot
Topic, Inc., a California corporation (the "COMPANY"), and Elizabeth McLaughlin
("EXECUTIVE"), with reference to the following facts. The Company and the
Executive are hereinafter collectively referred to as the "PARTIES," and
individually referred to as a "PARTY."
A. The Company desires assurance of the continued association and
services of Executive in order to retain Executive's experience, skills,
abilities, background and knowledge, and is willing to engage Executive's
services on the terms and conditions set forth in this Agreement.
B. Executive desires to be in the employ of the Company, and is willing
to accept such employment upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the Parties agree as follows:
1. EMPLOYMENT.
1.1 The Company hereby employs Executive, and Executive hereby
accepts employment by the Company, upon the terms and conditions set forth in
this Agreement, for the period commencing the Effective Date and ending January
30, 2003 (the "TERM"). On January 30, 2003, and on January 30 of each year
thereafter, the Term shall automatically be extended by one (1) year unless
written notice has been provided by either Party pursuant to Section 4.1(d)
below no fewer than ninety (90) days prior to the date of such automatic renewal
(a "NON-RENEWAL NOTICE"). Notwithstanding anything herein to the contrary: (a)
either Party may terminate Executive's employment under this Agreement at any
time, with or without cause, subject to the terms and conditions of Section 4
below and (b) the Parties may mutually agree to extend the Term of this
Agreement beyond that which is provided for herein at any time so long as it is
in writing and executed by Executive and an authorized representative of the
Board of Directors of the Company (the "BOARD").
1.2 Executive shall have the title of Chief Executive Officer
and President and shall serve in such other capacity or capacities as the Board
may from time to time prescribe. Executive shall report to the Board. Executive
shall relinquish the title of President if and when the Board and Executive
determine that it is necessary to appoint another individual as President in
order to attract or retain such individual as a senior officer of the Company
and such relinquishment of the title of President shall not constitute "good
reason" under Paragraph 5.4(b) hereof.
1.3 Executive shall do and perform all services, acts or
things necessary or advisable to manage and conduct the business of the Company
and which are normally associated with the position of Chief Executive Officer,
consistent with the bylaws of the Company and as required by the Board.
<PAGE>
1.4 The employment relationship between the Parties shall be
governed by the policies and practices established by the Board, except that
when the terms of this Agreement differ from or are in conflict with the
Company's policies or practices, this Agreement shall control.
1.5 Unless the Parties otherwise agree in writing, during the
Term of this Agreement, Executive shall perform the services Executive is
required to perform pursuant to this Agreement at the Company's headquarters
offices located in California; provided, however, that the Company may from time
to time require Executive to travel temporarily to other locations in connection
with the Company's business.
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.
Executive's entire business time, attention, energies, skills, learning
and best efforts shall be devoted to the performance of Executive's duties;
provided, however, that this Section 2 shall not be construed as preventing
Executive from participating in social, civic or professional associations or
engaging in passive outside investment activities which may require a limited
portion of time and effort to manage, consistent with any Company, Board of
Director or employment policies, so long as such activities do not interfere
materially with Executive's performance of her duties nor compete, in any way,
with the products or services offered (or intended for offer) by or through the
Company; and provided, Farther, that in the event the Board, in good faith,
shall ever determine that such activities so compete (or are likely to so
compete), then Executive agrees to terminate such activities within a reasonable
time promptly upon the request of the Board.
3. COMPENSATION OF EXECUTIVE.
3.1 For all services rendered by Executive to the Company, the
Company shall pay/provide to Executive the following (collectively, the
"COMPENSATION PACKAGE"):
(a) base compensation in the amount of $400,000 per
annum (the "BASE SALARY");
(b) such periodic bonuses as may be earned in
accordance with the bonus parameters established by the Board (or any committee
of the Board which is appointed to consider matters relating to compensation)
and communicated to Executive in writing, with the bonus parameters for the year
ended January 30, 2002 to be as set forth in Exhibit A attached hereto (the
"BONUS PLAN") and the bonus parameters (but not necessarily the resulting bonus)
for subsequent years during the Term being no less favorable to Executive than
those set forth in Exhibit A;
(c) such grants of equity-based compensation ~ option
grants to purchase common stock of the Company), if any, as may be earned in
accordance with the equity award parameters established by the Board (or any
committee of the Board which is appointed to consider matters relative to
equity-based compensation) and communicated to Executive in writing, with the
equity award parameters for the year ended January 30, 2002 to be as set forth
in Exhibit B attached hereto (the "OPTION PLAN") and the equity-based
compensation parameters
2
<PAGE>
(but not necessarily the resulting equity-based compensation) for subsequent
years during the Term being no less favorable to Executive than those set forth
in Exhibit B;
(d) such medical and life insurance and participation
in other benefit plans (the "BENEFITS PACKAGE"), to be set forth on Exhibit C;
and
(e) an annual amount of vacation days consistent with
amounts available for other executive employees of the Company.
3.2 The Base Salary may be adjusted upward from time to time
in the sole discretion of the Board (or any committee of the Board which is
appointed to consider matters relating to compensation). Compensation under the
Compensation Package shall be paid to Executive less required deductions for
Social Security, withholding taxes and other authorized deductions and at times
when employees of the Company normally receive their compensation.
4. TERMINATION.
4.1 TERMINATION BY THE COMPANY. Executive's employment with
the Company may be terminated under the following conditions:
(a) DEATH OR DISABILITY. Executive's employment with
the Company shall terminate effective upon the date of Executive's death or
Complete Disability (as defined in Section 5.4(a) below).
(b) FOR CAUSE. The Company may terminate Executive's
employment under this Agreement for "Cause" (as defined in Section 5.4(c) below)
by delivery or written notice to Executive specifying the cause or causes relied
upon for such termination. Any notice of termination given pursuant to this
Section 4.1(b) shall effect termination as of the date specified in such notice
or, in the event no date is specified, on the last day of the month in which
such notice is delivered or deemed delivered as provided in Section 11 below.
(c) WITHOUT CAUSE. The Company may terminate
Executive's employment under this Agreement at any time and for any reason by
delivery of no fewer than 90 days' written notice of such termination to the
Executive. Any notice of termination given pursuant to this Section 4.1(c) shall
effect termination as of the date specified in such notice or, in the event no
date is specified, on the last day of the third month following the month in
which such notice is delivered or deemed delivered as provided in Section 11
below.
(d) NON-RENEWAL NOTICE. The Company may terminate
this Agreement by providing Executive with a Non-Renewal Notice no fewer than 90
days prior to the date of automatic renewal, as provided in Section 1.1 above.
4.2 TERMINATION BY EXECUTIVE. Executive may terminate her
employment with the Company (a) for "Good Reason" (as defined in Section 5.4(b)
below) by delivery of no fewer than 45 days' written notice to the Company
specifying the "Good Reason" relied upon by Executive for such termination,
provided that such notice is delivered within sixty (60) days following the
occurrence of any event or events constituting Good Reason or (b) by submitting
a
3
<PAGE>
written resignation effective 90 days thereafter at any time during the Term
without Good Reason.
4.3 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES.
Executive's employment pursuant to this Agreement may be terminated, at any time
upon a mutual agreement in writing of the Parties. Any such termination of
employment shall have the consequences specified in such agreement.
5. COMPENSATION UPON TERMINATION.
5.1 DEATH OR COMPLETE DISABILITY. If Executive's employment
shall be terminated by death or Complete Disability as provided in Section
4.1(a), the Parties shall have no obligation to one another under this Agreement
other than the Company shall pay Executive her accrued Base Salary and accrued
and unused vacation benefits earned through the date of termination at the rate
in effect at the time Executive's employment is deemed terminated.
5.2 FOR CAUSE OR WITHOUT GOOD REASON. If the Company
terminates Executive's employment for Cause or Executive terminates her
employment hereunder without Good Reason, the Parties shall have no obligation
to one another under this Agreement other than the Company shall pay Executive
her accrued Base Salary and accrued and unused vacation benefits earned through
the date of termination at the rate in effect at the time Executive's employment
is deemed terminated.
5.3 WITHOUT CAUSE, FOR GOOD REASON OR PURSUANT TO NON-RENEWAL
NOTICE. If Executive shall terminate Executive's employment with the Company for
Good Reason or the Company shall terminate Executive's employment without Cause
or the Company provides Executive with a Non-Renewal Notice prior to the date of
automatic renewal as provided in Section 1.1, then Executive shall immediately
upon such termination of employment become a consultant to the Company and shall
be entitled to the following: (a) Executive's accrued but unpaid Base Salary and
accrued and unused vacation earned through the date of termination of
employment, with all such payments subject to standard deductions and
withholdings; (b) an amount equal to Executive's Base Salary in effect at the
time of termination, payable over twelve (12) months in accordance with the
Company's standard payroll policies in effect at the time of termination, less
any amounts that Executive at any time actually receives directly or indirectly
from employment or consulting services performed during the Consulting Period
and (c) continuation of the Benefits Package and continued vesting of all
unvested stock options for the twelve (12) month period of payment provided in
subparagraph (b). Executive shall remain a consultant to the Company for a
period of twelve (12) months immediately following such employment termination
(the "CONSULTING PERIOD"). As a consultant, Executive's duties shall include
those matters reasonably requested by the Board, but which shall not interfere
(as to time required) with the opportunity to maintain other employment
consistent with this Section 5.3, and which shall not require in excess of ten
(10) hours per month of Executive's time. Payment of the amounts and provision
of the benefits described in this Section 5.3 shall be conditioned upon
Executive executing and delivering to the Company a form of release in form
attached as Exhibit ID hereto(the "RELEASE") and, if Executive is then serving
as a member of the Board of Directors of the Company, Executive's resignation as
a Director. During the Consulting Period under this section 5.3, Executive
agrees that Executive shall not:
4
<PAGE>
(a) Induce or attempt to include any person who is an
employee, agent or consultant of the Company to leave the employ of the Company;
or
(b) Take any other action materially inimical to the
interests of the Company.
5.4 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "COMPLETE DISABILITY" shall mean the inability of
Executive to perform Executive's duties under this Agreement because Executive
has become permanently disabled within the meaning of any policy of disability
income insurance covering employees of the Company then in force. In the event
the Company has no policy of disability income insurance covering employees of
the Company in force when Executive becomes disabled, the term "COMPLETE
DISABILITY" shall mean the inability of Executive to perform Executive's duties
under this Agreement by reason of any incapacity, physical or mental, which the
Board, based upon medical advice or an opinion provided by a licensed physician
acceptable to the Board, determines to have incapacitated Executive from
satisfactorily performing all of Executive's usual services for the Company for
a period of at least one hundred twenty (120) days during any twelve (12) month
period (whether or not consecutive). Based upon such medical advice or opinion,
the determination of the Board shall be final and binding and the date such
determination is made shall be the date of such Complete Disability for purposes
of this Agreement.
(b) "GOOD REASON" for Executive to terminate
Executive's employment hereunder shall mean the occurrence of any of the
following events without Executive's consent:
(i) The regular assignment to Executive of
duties materially inconsistent with the position and status of Executive as set
forth in this Agreement;
(ii) A substantial alteration in the nature,
status or prestige of. Executive's responsibilities as set forth in this
Agreement or a change in Executive's title or reporting level from that set
forth in this Agreement;
(iii) The relocation of the Company's
executive offices or principal business location to a point more than fifty (50)
miles from its location within the state of California as of the Effective Date;
(iv) A failure by the Company to obtain from
any successor, before the succession takes place, an agreement to assume and
perform all of the terms and conditions of this Agreement;
(v) A reduction by the Company of
Executive's Base Salary as initially set forth herein or as the same may be
increased from time to time, except for across-the-board salary reductions
approved by sixty-six and two-thirds percent (66 2/3 %) of the Board similarly
affecting all management personnel of the Company;
5
<PAGE>
(vi) Any action by the Company (including
the elimination of benefit plans without providing substitutes thereof or the
reduction of Executive's benefits thereunder) that would substantially diminish
the aggregate value of Executive's Benefits Package as they exist at such time;
or
(vii) The creation by the Board of a work
environment that is openly hostile or designed to elicit or encourage
Executive's resignation.
(c) "FOR CAUSE" shall mean occurrence of the
following during the Term hereof:
(i) Executive's (1) willful or reckless and
(2) repeated failure satisfactorily to perform Executive's job duties under this
Agreement after written notice to Executive and no less than a 90 day period
within which prospectively to cure such failure to perform provided such failure
to perform is subject to cure with the passage of time;
(ii) Failure by the Executive to comply with
all material applicable laws in performing Executive's job duties or in
directing the conduct of the Company's business;
(iii) Failure by the Executive to comply
with reasonable policies of the Company or of instructions given in writing to
the Executive by the Board;
(iv) Commission by the Executive of any
felony or intentionally fraudulent act against the Company, or its employees,
agents or customers, that demonstrates Executive's untrustworthiness or lack of
integrity or intentional appropriation for Executive's personal use or benefit
of any material funds or properties of the Company not authorized by the Board
to be so used or appropriated; or
(v) Commission by the Executive of any
material securities law violation or breach of the company's insider trading
policies;
(vi) Commission by Executive of any crime
involving moral turpitude.
6. CHANGE OF CONTROL.
6.1 In the event of a Change of Control of the Company, as
defined, all of Executive's unvested options that are not fully vested shall
become fully vested immediately prior to effectiveness of such Change of Control
whether or not Executive's employment terminates as a result of such Change of
Control. For purposes of this Section 6, a Change of Control shall mean:
(a) The acquisition by any individual, entity, or
group (within the meaning of Section 13 (d) (3) or 14 (d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule l3d-3 promulgated under the
Exchange Act) of thirty percent (30%) or more of either (A) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or (B) the combined voting power of the then outstanding voting securities of
the
6
<PAGE>
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); or
(b) Individuals who, as of the date hereof,
constitute the Board of Directors (the "Incumbent Board') cease for any reason
to constitute at least two thirds of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by Company stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board of Directors; or
(c) Consummation of a reorganization, merger or
consolidation, or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination") unless, following such Business
Combination, (A) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the Company
or all substantially all of The Company's assets either directly or through one
or more subsidiaries) in substantially the same proportions as theft ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be (with
respect to this subsection (A), such calculation shall be made with respect to
all considerations received in exchange for, or as a consequence of, a Business
Combination); or (B) no Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, thirty percent (30%) or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination; and (C) at least
two-thirds of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination;
(d) Approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company; or
(e) Occurrence of any of the events listed in 6(a)
through 6(d) above in respect of any subsidiary (meaning any entity over which
the Company has voting control) of the Company that, immediately prior to the
relevant event, constituted at least fifty percent (50%) of
7
<PAGE>
The Company's consolidated assets or, for the fiscal year prior to the event,
contributed at least fifty percent (50%) or more of the Company's consolidated
revenues.
7. PAYMENT LIMITATIONS.
All payments to Executive hereunder shall be reduced by applicable
local, state and federal withholding requirements. Should any payments hereunder
be determined by the Company's independent public accounting firm to be in
excess of federal or state Golden Parachute limitations (currently Internal
Revenue Code Section 2800) after having taken all steps reasonably that may be
taken by the Company to avoid such characterization, then Executive and the
Company hereby agree that such payments shall be modified so as to be one dollar
less than such Golden Parachute limitations. If the determination is made after
the payment(s) have been made by the Company, then Executive shall promptly
refund the overpayment to Employer.
8. CONFIDENTIALITY AND INVENTIONS.
Executive recognizes that the Company has and shall continue to have
and develop information, knowledge and rights regarding inventions, confidential
information, products, services, future plans, business affairs, processes,
trade secrets, technical matters, customer lists, experimental designs and items
of intellectual property. Executive agrees to execute and deliver the
Proprietary Information and Inventions Agreement in use at the date hereof
(which is incorporated herein by reference).
9. RESOLUTION OF DISPUTES.
Any controversy, claim, action or dispute arising out of relating to
this Agreement, shall be heard by a referee pursuant to the provisions of
California Code of Civil Procedure ss.ss.638 through 645.1, inclusive, according
to the following procedures:
(a) The parties shall agree upon a single referee who shall
then try all issues, whether of fact or law, and report a finding and judgment
thereon, If the parties are unable to agree upon a referee within ten (10) days
of a written request to do so by any party, then any party may thereafter seek
to have a referee appointed pursuant to California Code of Civil Procedure
ss.ss.638 and 640;
(b) The parties agree that the referee shall have the power to
decide all issues of fact and law and report his/her decision thereon, and to
issue all legal and equitable relief appropriate under the circumstances of the
controversy before him/her; provided, however, that to the extent the referee is
unable to issue and/or enforce any such legal and equitable relief, either party
may petition the court to issue and/or enforce such relief on the basis of the
referee`s decision;
(c) The California Evidence Code rules of evidence and
procedure relating to the conduct of the hearing examination of witnesses and
presentation of evidence shall apply;
8
<PAGE>
(d) Any party desiring a stenographic record of the hearing
may secure a court reporter to attend the hearing; provided, the requesting
party notifies the other parties of the request and pays for the costs incurred
for the court reporter;
(e) The referee shall issue a written statement of decision
which shall be reported to the court in accordance with California Code of Civil
Proceduress.643 and mailed promptly to the parties;
(f) Judgment may be entered on the decision of the referee in
accordance with California Code of Civil Proceduress.644, and the decision may
be excepted to, challenged and appealed according to law;
(g) The parties shall promptly and diligently cooperate with
one another and the referee, and shall perform such acts as may be necessary to
obtain a prompt and expeditious resolution of the dispute or controversy in
accordance with the terms hereof; and
(h) The cost of such proceeding, including but not limited to
the referee's fees, shall initially be borne equally by the parties to the
dispute or controversy. However, the prevailing party in such proceeding shall
be entitled, in addition to all other costs, to recover its contribution for the
cost of the reference and its reasonable attorneys' fees as items of recoverable
costs.
10. SECTION HEADINGS.
The section headings or captions in this Agreement are for convenience
of reference only and do not form a part hereof, and do not in any way modify,
interpret or construe the intent of the Parties or affect any of the provisions
of this Agreement.
11. SURVIVAL.
The obligations and rights imposed upon the Parties by the provisions
of this Agreement which relate to acts or events subsequent to the termination
of this Agreement shall survive the termination of this Agreement and shall
remain fully effective thereafter.
12. SEVERABILITY.
Should any one or more of the provisions of this Agreement or of any
agreement entered into pursuant to this Agreement be determined to be illegal or
unenforceable in any relevant jurisdiction, then such illegal or unenforceable
provision shall be modified by the proper court, if possible, but only to the
extent necessary to make such provision enforceable, and such modified provision
and all other provisions of this Agreement and of each other agreement entered
into pursuant to this Agreement shall be given effect separately from the
provision or portion thereof determined to be illegal or unenforceable and shall
not be affected thereby; provided, however, that any such modification shall
apply only with respect to the operation of this Agreement in the particular
jurisdiction in which such determination of illegality or unenforceability is
made.
9
<PAGE>
13. NOTICES.
All notices or demands of any kind required or permitted to be given by
the Company or Executive under this Agreement shall be given in writing and
shall be personally delivered (and receipted for) or mailed by certified mail,
return receipt requested, postage prepaid, addressed as follows:
13.1 If to the Company:
Chairman of the Board
Hot Topic, Inc.
18305 East San Jose Avenue
City of Industry, California 91784
13.2 If to Executive:
At the address set forth on the Company's payroll
records.
Any such written notice shall be deemed received when personally
delivered or three (3) days after its deposit in the United States mail as
specified above. Either Party may change its address for notices by giving
notice to the other Party in the manner specified in this Section 11.
14. WAIVER.
The failure of either Party to enforce any provision of this Agreement
shall not be construed as a waiver of any such provision, nor prevent such Party
thereafter from enforcing such provision or any other provision of this
Agreement. The rights granted to the Parties herein are cumulative and the
election of one shall not constitute a waiver of such Party's right to assert
all other legal remedies available under the circumstances.
15. PARTIES IN INTEREST.
Nothing in this Agreement, whether express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
persons other than the Parties and the successors, assigns and affiliates of the
Company, nor is anything in this Agreement intended to relieve or discharge the
obligation or liability of any third person to any Party, nor shall any
provision give any third person any right of subrogation or action over or
against any Party.
16. ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of
Executive and Executive's heirs, executors, personal and legal representatives,
successors and assigns. Because of the unique and personal nature of Executive's
duties under this Agreement, Executive may not assign this Agreement or delegate
Executive's responsibilities hereunder. This Assignment shall be binding upon
and inure to the benefit of the Company and its successors, assigns and legal
representatives.
10
<PAGE>
17. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
principles thereof
18. ENTIRE AGREEMENT.
Except for the Proprietary Information and Inventions Agreement, this
Agreement contains the entire agreement of the Parties and no representation,
inducement, promise or agreement, oral or otherwise, between the Parties not
embodied herein shall be of any force or effect. No modification, termination or
attempted waiver shall be valid unless in writing and signed by the Party
against whom or which such modification, termination or waiver is sought to be
enforced.
19. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective Date.
THE COMPANY
Hot Topic, Inc.
By: /s/ Robert M. Jaffe
------------------------
Its: Chairman
----------------------
EXECUTIVE:
/s/ Elizabeth McLaughlin
---------------------------
Elizabeth McLaughlin
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>5
<FILENAME>ex10-12.txt
<DESCRIPTION>EXHIBIT 10.12
<TEXT>
HOT TOPIC 18305 E. San Jose Ave.
EVERYTHING ABOUT THE MUSIC City of Industry, CA 91748
Office: 626-839-4681
Fax: 626-839-4686
Email: hottopic.com
- --------------------------------------------------------------------------------
January 12, 2001
Jerry Cook
1900 Belwood
Okemos, Michigan 48864
RE: EMPLOYMENT TERMS
Dear Jerry:
Hot Topic, Inc. (the "Company") is pleased to offer you the position of Chief
Operating Officer, pursuant to the terms of this letter agreement ("Agreement").
1. DUTIES
You will be expected to perform various duties consistent with your position.
You will report to the Company's Chief Executive Officer ("CEO"), unless
otherwise assigned by the Company. You will work at our facility located in the
City of Industry.
2. BASE SALARY
Your base salary will be $300,000 per year, less payroll deductions and all
required withholdings, which will be subject to annual review. You will be paid
semi-monthly and you will be eligible for the following standard Company
benefits: medical insurance, vacation, sick leave, holidays, 401k plan and
Employee Stock Purchase Plan. Details about these benefit plans are available
for your review. In addition, the Company plans to obtain a long-term disability
policy subject to the satisfaction of the certain underwriting criteria. The
Company may modify benefits from time to time, as it deems necessary.
3. BONUS
In addition to your base salary, you will be eligible to earn an annual
performance bonus ("Bonus") pursuant to the Company's EBIT Plan, as approved by
the Board of Directors. Your target Bonus under the Plan will be fifty percent
of your base salary based upon achievement of the goals set forth in the Plan.
Assuming continuous employment, the Bonus will be awarded in the first quarter
of the Company's fiscal year. You must be employed on the date the Bonus is
awarded to be eligible for the Bonus. The Bonus will not be pro-rated in the
event your employment is terminated with or without Cause (as defined below)
prior to the date on which the Bonus is awarded.
<PAGE>
4. AUTOMOBILE ALLOWANCE
The Company will pay for you to have a Company leased automobile of your choice,
provided that the value of the automobile does not exceed $60,000. The Company
will also reimburse you for expenses including gas, insurance and maintenance
for the automobile.
5. STOCK OPTIONS
Upon commencement of employment and subject to approval of the Company's Board
of Directors, you will be granted an Incentive Stock Option under the Company's
1996 Equity Incentive Plan to purchase 50,000 shares of the Company's Common
Stock (the "Stock Option"). The Stock Option will be governed by and granted
pursuant to a separate Stock Option Agreement. The exercise price per share of
the Stock Option will be equal to the fair market value of the Common Stock
established on the date of grant, subject to approval by the Board of Directors.
The Stock Option will be subject to vesting over four (4) years so long as you
continue to be employed with the Company, according to the following schedule:
twenty-five percent (25%) of the shares subject to the Stock Option will vest on
the last day of the twelfth full calendar month of your employment after the
date of grant and the remaining shares subject to the Stock Option will vest in
equal installments at the end of each monthly period thereafter for three (3)
years.
If you have questions regarding the tax implications of the Stock Option or any
part of your compensation package, please consult with your own tax advisor.
6. TERMINATION
The Company may terminate your employment at any time and for any or no reason,
with or without Cause (as defined herein) or advance notice, by giving written
notice of such termination. Similarly, you may terminate your employment with
the Company at any time at your election, in your sole discretion, for any or no
reason upon two weeks notice to the Company during which time you shall provide
reasonable transition assistance to the Company. The Company reserves the right
to ask you to expedite your resignation date and to leave prior to the end of
the two weeks notice period. The at-will nature of your employment relationship
may not be modified except by a written agreement with the CEO of the Company.
If the Company terminates your employment without Cause (as defined herein),
then upon your furnishing to the Company an executed release and waiver of
claims (a form of which is attached hereto as Exhibit A), you shall be entitled
to receive severance payments in the form of continuation of your base salary
and medical insurance benefits that are in effect at the time of your
termination, subject to standard payroll deductions and withholdings, for six
(6) months (the "Severance Period"). If you voluntarily resign or your
employment is terminated for Cause (as defined herein), all compensation and
benefits will cease immediately and you will receive no additional payments from
the Company other than your accrued base salary and accrued and unused vacation
benefits earned through the date of your termination.
<PAGE>
For purposes of this Agreement, "Cause" shall mean (i) willful misconduct by
you, including, but not limited to, dishonesty which materially and adversely
reflects upon your ability to perform your duties for the Company, (ii) your
conviction of, or the entry of a pleading of guilty or nolo contendere by you
to, any crime involving moral turpitude or any felony, (iii) fraud, embezzlement
or theft against the Company, (iv) a material breach by you of any material
provision of any employment contract, assignment of inventions, confidentiality
and/or nondisclosure agreement between you and the Company, or (v) your willful
and habitual failure to attend to your duties as assigned by the CEO of the
Company, after written notice to Executive and no less than a 90 day period to
cure such failure provided such failure to perform is subject to cure with the
passage of time
7. CHANGE OF CONTROL
Following a Change in Control (as defined herein) the vesting of your Stock
Options will be immediately accelerated such that one hundred percent (100%) of
the Stock Options shall be vested and exercisable. For purposes of this
Agreement, Change of Control is defined as follows: (i) a sale of all or
substantially all of the assets of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation and in which beneficial
ownership of securities of the Company representing at least fifty percent (50%)
of the combined voting power entitled to vote in the election of Directors has
changed; (iii) an acquisition by any person, entity or group within the meaning
of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor
provisions (excluding any employee benefit plan, or related trust, sponsored or
maintained by the Company or subsidiary of the Company or other entity
controlled by the Company) of the beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of Directors.
8. COMPANY POLICY
As a Company employee, you will be expected to abide by Company rules and
regulations and acknowledge in writing that you have read the Company's Employee
Handbook which will govern the terms and conditions of your employment. The
Company's Employee Handbook may be modified from time to time at the sole
discretion of the Company.
9. PROPRIETARY INFORMATION AGREEMENT
As a condition of employment, you will be required to sign and comply with the
attached Proprietary Information Agreement attached hereto as Exhibit B, which
prohibits unauthorized use or disclosure of the Company's proprietary
information, among other things.
In your work for the Company, you will be expected not to use or disclose any
confidential information, including trade secrets, of any former employer or
other person to whom you have an obligation of confidentiality. Rather, you will
be expected to use only that information which is generally known and used by
persons with training and experience comparable to your own, which is common
knowledge in the industry or otherwise legally in the public domain, or which is
otherwise provided or developed by the Company. During our discussions about
your proposed job duties, you assured us that you would be able to perform those
duties within the guidelines just described. You agree that you will not bring
onto Company premises any unpublished documents or property belonging to any
former employer or other person to whom you have an obligation of
confidentiality.
<PAGE>
10. ENTIRE AGREEMENT
This Agreement, together with Exhibits attached hereto and the stock option
documents referred to herein, forms the complete and exclusive statement of the
terms of your employment with the Company. The employment terms in this
Agreement supersede any other agreements or promises made to you by anyone,
whether oral or written.
11. GOVERNING LAW
This Agreement will be governed by and construed according to the laws of the
State of California. You hereby expressly consent to the personal jurisdiction
of the state and federal courts located in Los Angeles, California for any
lawsuit filed there against you by the Company arising from or related to this
Agreement. In the event of any litigation arising out of or relating to this
Agreement, its breach or enforcement, including an action for declaratory
relief, the prevailing party in such action or proceeding shall be entitled to
receive his or its damages, court costs, and all out-of-pocket expenses,
including attorneys fees. Such recovery shall include court costs, out-of-pocket
expenses, and attorneys fees on appeal, if any.
12. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon your heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns.
As required by law, this offer is subject to satisfactory proof of your right to
work in the United States.
Sincerely,
/s/ Betsy McLaughlin
- -----------------------------
Betsy McLaughlin
Chief Executive Officer
Accepted:
/s/ Jerry Cook
- -----------------------------
Jerry Cook
- -----------------------------
Date
Attachment: Exhibit A: Waiver and Release
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in
Section 5 of the Agreement dated ___________, to which this form is attached, I,
JERRY COOK, hereby furnish Hot Topic, Inc. (the "Company"), with the following
release and waiver ("Release and Waiver").
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, successors, assigns affiliates and
Benefit Plans, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising at any time prior
to and including my employment termination date with respect to any and all
claims including, but not limited to, claims relating to my employment and the
termination of my employment, claims pursuant to any federal, state or local law
relating to employment, including, but not limited to, discrimination claims,
claims under the California Fair Employment and Housing Act, and the Federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for
wrongful termination, breach of the covenant of good faith, contract claims,
tort claims, and wage or benefit claims, including but not limited to, claims
for salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
I also acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND
TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against the
Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under the ADEA, that this Release and Waiver is knowing and
voluntary, and that the consideration given for this Release and Waiver is in
addition to anything of value to which I was already entitled as an executive of
the Company. I further acknowledge that I have been advised, as required by the
Older Workers Benefit Protection Act, that: (a) the Release and Waiver granted
herein does not relate to claims which may arise after this Release and Waiver
is executed; (b) I have the right to consult with an attorney prior to executing
this Release and Waiver (although I may choose voluntarily not to do so); and if
I am over 40 years of age upon execution of this Release and Waiver: (c) I have
twenty-one (21) days from the date of termination of my employment with the
Company in which to consider this Release and Waiver (although I may choose
voluntarily to execute this Release and Waiver earlier); (d) I have seven (7)
days following the execution of this Release and Waiver to revoke my consent to
this Release and Waiver; and (e) this Release and Waiver shall not be effective
until the seven (7) day revocation period has expired.
Date: By: /s/ Jerry Cook
----------------------- -------------------------------
JERRY COOK
<PAGE>
EXHIBIT B
HOT TOPIC, INC.
EMPLOYEE PROPRIETARY INFORMATION AGREEMENT
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>hottopic_exh23-1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-13875, No. 333-58173, No. 333-43992), 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
9, 2001 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
February 3, 2001.
/s/ Ernst & Young LLP
----------------------
Los Angeles, California
April 27, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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