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<SEC-DOCUMENT>0001019687-05-001017.txt : 20050414
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<ACCEPTANCE-DATETIME>20050413194102
ACCESSION NUMBER: 0001019687-05-001017
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20050129
FILED AS OF DATE: 20050414
DATE AS OF CHANGE: 20050413
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: 1934 Act
SEC FILE NUMBER: 000-28784
FILM NUMBER: 05749266
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>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>hottopic_10k-012905.txt
<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 JANUARY 29, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant as of July 30, 2004 was approximately $739,697,726 based on the
closing price on that date of the Registrant's Common Stock on the Nasdaq
National Stock Market. All outstanding shares of voting stock, except for shares
held by executive officers and members of the Board of Directors and their
affiliates are deemed to be held by non-affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the Registrant's Common Stock was
44,814,650 as of April 2, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on June 15, 2005 to be filed with the
Securities and Exchange Commission (the "SEC") no later than 120 days after
January 29, 2005, are incorporated by reference into Part III of this Form 10-K
(Items 10 through 13).
<PAGE>
HOT TOPIC, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE
YEAR ENDED JANUARY 29, 2005
TABLE OF CONTENTS
PART I PAGE
------
Item 1. Business 3
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
-------
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplemental Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
Item 9A. Controls and Procedures 37
Item 9B. Other Information 40
PART III
--------
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 40
Item 13. Certain Relationships and Related Transactions 40
Item 14. Principal Accountant Fees and Services 40
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules 40
2.
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
THIS REPORT CONTAINS VARIOUS 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"). THESE STATEMENTS INCLUDE, FOR EXAMPLE, STATEMENTS REGARDING OUR
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE, SUCH AS
THE EXTENT AND TIMING OF FUTURE REVENUES AND EXPENSES AND CUSTOMER DEMAND, OTHER
EXPECTED FINANCIAL RESULTS AND INFORMATION, 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 OF THIS REPORT. WE WILL NOT
NECESSARILY 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
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED. RISKS, UNCERTAINTIES AND OTHER FACTORS RELATED TO US ARE LOCATED, AMONG
OTHER PLACES, IN PART I, ITEM 1 UNDER THE CAPTION "CERTAIN RISKS 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
We are a mall-based specialty retailer operating the Hot Topic and Torrid
store concepts. Hot Topic stores sell a selection of music/pop culture-licensed
and music/pop culture-influenced apparel, accessories and gift items for young
men and women principally between the ages of 12 and 22. Torrid stores sell
apparel, lingerie, shoes and accessories designed for various lifestyles for
plus-size females between the ages of 15 and 29. We opened our first Hot Topic
store in 1989 and our first Torrid store in 2001. At the end of fiscal 2004 (the
fiscal year ended January 29, 2005), we operated 592 Hot Topic stores throughout
the United States and Puerto Rico, and 76 Torrid stores. We also sell
merchandise on two websites, www.hottopic.com ("hottopic.com") and
www.torrid.com ("torrid.com"), which reflect the Hot Topic and Torrid store
concepts and carry merchandise similar to that sold in the respective stores.
Throughout this report, the terms "our", "we" and "us" refer to Hot Topic, Inc.
and its subsidiaries.
We opened 91 Hot Topic and 24 Torrid stores during fiscal 2004. We also
occasionally relocate, expand, or close existing stores. During fiscal 2004, we
expanded or relocated ten stores. We plan to open approximately 65 new Hot Topic
stores and 45 Torrid stores in the fiscal year ending January 28, 2006 ("fiscal
2005"). As of March 9, 2005, five of these new Hot Topic stores and one of these
new Torrid stores were open.
THE MARKET
The music-licensed apparel industry essentially began in the 1960s with
bootleggers selling tee shirts at concert venues. Over the next two decades,
artists began to realize the commercial potential of licensing their likenesses
and logos to tee shirt manufacturers and others who produced assorted
merchandise. We believe that during recent years, the music industry has been
significantly impacted by the availability and accessibility of Internet and
digital technology and the continuing success of MTV and other music television
networks. These media enable 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. This is in stark contrast to past decades when the
vinyl record cover and a few magazines of modest circulation were the primary
source of young people's information about their music and favorite bands. The
growing importance of the Internet is illustrated in a recent U.S. Census Bureau
report, stating that 80% of America's school-age children have Internet access
either at home or at school, regardless of their ethnic group or household
income. MTV music television reached 86 million households in the United States
in December 2003, according to Viacom International, Inc., MTV's parent company.
3.
<PAGE>
As a result, both emerging and well-known artists, and the fashions they
inspire, are much more visible today than ever before. We believe that this
increased visibility has contributed to a rise in demand for music/pop
culture-licensed and music/pop culture-influenced apparel and accessories. We
believe teenagers throughout the United States have similar fashion preferences,
largely as a result of the nationwide influence of the Internet, MTV and other
music television networks, music distribution (including through the rapidly
growing avenue provided by digital music and "downloads"), movies and television
programs.
Hot Topic's target customers are young men and women between the ages of 12
and 22, who are passionate about music, music videos, pop culture trends and
music-inspired fashion. We believe our music/pop culture-influenced merchandise
appeals to teenagers from diverse socio-economic backgrounds and that our
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. The U.S. Census Bureau estimates that
the teenage population (ages 12-19) in the United States reached approximately
33 million in 2004, and by 2008, there are likely to be more teenagers in the
United States than at any other time in history. Teenage spending has also
increased annually. The average American teen spent approximately $91 a week in
2004 according to Teen Research Unlimited. In the past seven years, teenage
spending has grown an average of 5% per year, to $169 billion in 2004.
We developed the Torrid concept after analyzing customer feedback and
researching the market demographics. We concluded there was a significant
portion of young women consumers who were plus-size and unable to find and buy a
broad enough selection of "cool" fashion forward clothes in comparison to their
smaller sized friends. We launched Torrid in the first half of fiscal 2001, with
the opening of six locations across the country and a website, torrid.com.
Torrid's target customers are plus-size females ages 15 to 29, who are primarily
influenced by fashion trends, and also by pop culture. We believe the Torrid
assortment allows young customers wearing sizes 12 to 26 to match the style,
excitement and selection available at other non-plus-size junior retailers.
HOT TOPIC BUSINESS STRATEGY
Our goal for Hot Topic stores is to be a leading retailer of music/pop
culture-licensed and music/pop culture-influenced apparel, accessories and gift
items for young men and women. Elements of Hot Topic's business strategy
include:
o FOCUS ON UNIQUE MUSIC/POP CULTURE-ORIENTED MERCHANDISE
We believe that fashions and products associated with popular music artists
and pop culture trends have a significant influence on teenagers. We have
developed a unique strategy focused exclusively on offering music/pop
culture-licensed and music/pop culture-influenced merchandise in the mall
environment. Accordingly, we believe we are well positioned to capitalize on the
growing teenage population and demand for music/pop culture-influenced
merchandise.
o OFFER "EVERYTHING ABOUT THE MUSIC" AND POP CULTURE
Hot Topic stores are designed to serve as a headquarters for music/pop
culture-licensed and music/pop culture-influenced apparel, accessories and gift
items. Hot Topic's slogan, "Everything About The Music" and its ability to
relate and understand relevant pop culture trends are reflected in its broad
assortment of products. We believe Hot Topic's selection of music/pop
culture-licensed merchandise is the most extensive assortment available in a
single mall store. Hot Topic complements its licensed merchandise with a unique
and eclectic assortment of music/pop culture-influenced apparel and accessories,
and frequently responds to changes in trends and demand by introducing new items
and categories. We believe Hot Topic has a history of being the first to offer
the latest music/pop culture fashions, which has made Hot Topic a destination
store for teenagers.
4.
<PAGE>
o PROMOTE MUSIC-INSPIRED CULTURE
Hot Topic is committed to addressing the music-inspired lifestyles of its
customers by building a culture throughout the organization that reflects a
passion for music. We diligently track 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. We also actively
solicit feedback from our associates and customers. We believe these activities
allow us to react quickly to emerging trends, and provide a competitive
advantage over retailers who do not devote the time and resources necessary to
anticipate these trends.
o LISTEN TO THE CUSTOMER
Hot Topic does not dictate fashion trends, but rather seeks to identify
music artists, music and pop culture trends at their early stages and react
accordingly to keep its in-store product assortment current with those trends.
We have developed a disciplined approach to buying and a dynamic inventory
planning and allocation process to support our merchandise strategy. We
regularly test new merchandise in select Hot Topic stores before chain-wide
distribution. We also order a majority of our merchandise not more than 60 to 90
days before delivery, allowing us to respond quickly to emerging trends. We are
also aggressive in taking prompt markdowns to maintain a fresh merchandise mix.
By actively managing the mix of categories and products in Hot Topic stores, we
believe we are able to capitalize on emerging trends and minimize our dependence
on any one particular merchandise category. We believe this approach to managing
Hot Topic's merchandise mix has contributed to strong merchandise margins and
markdown rates that are lower than industry average.
o EMPHASIZE CUSTOMER SERVICE AND THE IN-STORE EXPERIENCE
Hot Topic store associates are trained to provide a value-added,
non-intrusive customer experience. Sales associates are encouraged to greet
customers, provide information about new music/fashion trends and suggest
merchandise that meets the customer's lifestyle and music preferences. Hot Topic
provides its teenage customers the same level of respect and attention that is
afforded to adult customers at other retail stores, while also providing
friendly and informed customer service for parents. We believe that a high level
of employee product knowledge and a commitment to music/fashion create
credibility and differentiate Hot Topic from other teenage-focused retailers.
We also seek to create an exciting and compelling shopping environment
focusing on the lifestyles of our core customer. Hot Topic stores are designed
with an industrial theme that incorporates dense merchandising and utilizes a
professional sound system playing alternative music to create a fun, high-energy
store that teens will consider "their place" to shop with friends. We believe
this atmosphere enhances Hot Topic's image as a source for music/pop
culture-inspired fashion while encouraging customers to shop in its stores for
longer periods of time.
TORRID BUSINESS STRATEGY
Our goal for Torrid stores is to become a leading specialty retailer of
fashion forward plus-size young women's apparel and accessories. Elements of
Torrid's business strategy include:
o FOCUS ON CURRENT FASHION TRENDS IN APPAREL AND ACCESSORIES THAT ALLOW
THE PLUS-SIZE CUSTOMER TO FEEL FEMININE, BEAUTIFUL, AND SEXY
5.
<PAGE>
Our Torrid merchandising team focuses on providing a fashion forward
merchandise assortment that reflects the influence of cutting edge fashion
trends and pop culture. These influences provide the inspiration for hip, trendy
apparel and accessories that our plus-size customer relates to. We believe that
Torrid is the first mall concept to offer a complete store assortment of fashion
forward apparel for plus-size young women.
o LISTEN TO THE CUSTOMER
Torrid does not dictate fashion trends, but rather listens to customers and
emphasizes current fashion direction, as well as pop culture influences, to
identify and keep current with emerging trends. These trends dictate a fashion
forward merchandise selection with strong customer appeal. Torrid, like Hot
Topic, seeks direct feedback at the grass-roots level from Torrid store
associates and customers. This feedback has a direct influence on future
purchases of Torrid merchandise.
o EMPHASIZE CUSTOMER SERVICE AND THE IN-STORE EXPERIENCE
We train Torrid store associates to provide one-on-one service to
customers. Because we believe that the plus-size customer has been previously
unable to find sufficient quantities and selections of fashionable apparel in
line with current trends like her friends buy and wear, Torrid's customer
service approach focuses on suggesting outfits and ensuring the correct fit.
Through a focus on customer service and a trendy fashion merchandise
offering, Torrid seeks to create a compelling shopping environment that the
younger plus-size female customer is looking for. We believe that the warm
reception, trendy fashion offerings, and helpful customer service by Torrid
associates help to create a welcoming and exciting environment that will be
attractive to, and preferred by, the Torrid customer.
STORE LOCATIONS
As of January 29, 2005, we operated 592 Hot Topic stores throughout the
United States and Puerto Rico and 76 Torrid stores in 25 states in both
metropolitan and middle markets. Between January 30, 2005 and March 9, 2005, we
opened an additional five Hot Topic stores and one Torrid store. The following
chart shows, as of March 9, 2005, the number of Hot Topic and Torrid stores we
operate in each state in which those stores are located:
6.
<PAGE>
<TABLE>
HOT TOPIC, INC.
STORES BY STATE
--------------------------------------------------------------------------------------------------------
HOT TOPIC STORES TORRID STORES TOTAL COMPANY
--------------------------------------------------------------------------------------------------------
OPEN AT NEW HT OPEN AT OPEN AT NEW TORRID OPEN AT OPEN AT
1/29/2005 FY05 TO DATE 3/9/2005 1/29/2005 FY05 TO DATE 3/9/2005 3/9/2005
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama 6 6 6
Alaska 3 3 3
Arizona 14 14 4 4 18
Arkansas 2 2 2
California 66 2 68 29 29 97
Colorado 11 11 1 1 12
Connecticut 7 7 7
Delaware 2 2 2
Florida 37 37 2 2 39
Georgia 12 12 1 1 13
Hawaii 4 4 4
Idaho 3 3 3
Illinois 17 17 2 2 19
Indiana 12 12 1 1 13
Iowa 9 9 9
Kansas 5 5 5
Kentucky 7 7 7
Louisiana 8 8 8
Maine 2 2 2
Maryland 14 14 2 2 16
Massachusetts 15 15 3 3 18
Michigan 23 23 2 2 25
Minnesota 12 12 1 1 13
Mississippi 2 2 2
Missouri 13 13 2 2 15
Montana 3 3 3
Nebraska 4 4 1 1 5
Nevada 5 5 2 2 7
New Hampshire 4 4 1 1 5
New Jersey 16 16 3 1 4 20
New Mexico 7 7 1 1 8
New York 28 28 5 5 33
North Carolina 12 1 13 13
North Dakota 3 3 3
Ohio 26 26 1 1 27
Oklahoma 7 7 7
Oregon 7 7 2 2 9
Pennsylvania 28 1 29 1 1 30
Rhode Island 1 1 1
South Carolina 6 6 6
South Dakota 2 2 2
Tennessee 15 15 2 2 17
Texas 49 49 5 5 54
Utah 8 8 8
Vermont 2 2 2
Virginia 14 14 14
Washington 18 18 1 1 19
West Virginia 4 4 4
Wisconsin 11 11 1 1 12
Wyoming 1 1 1
Puerto Rico 5 1 6 6
TOTAL 592 5 597 76 1 77 674
- --------------------------------------------------------------------------------------------------------------------------------
7.
</TABLE>
<PAGE>
EXPANSION STRATEGY
The following table provides a history of our store expansion:
FISCAL YEAR
------------------------------------------------
2000 2001 2002 2003 2004 2005
THROUGH
3-9-05
------------------------------------------------
(Number of stores)
Stores at beginning of year 212 274 352 445 554 668
Hot Topic stores opened 62 73 74 84 91 5
Hot Topic stores closed* (1) (2) (1)
Torrid stores opened 6 21 25 24 1
------------------------------------------------
Stores at end of year 274 352 445 554 668 674
------------------------------------------------
Hot Topic and Torrid stores
expanded or relocated 5 7 8 4 10 1
------------------------------------------------
* Victorville, CA store closed in fiscal 2001 and re-opened in the first
quarter of fiscal 2002, and is included in our current store count.
Parklane, NV and Bayfair, CA store leases expired in the fourth
quarter of fiscal 2002 and were not renewed. Cupertino, CA store lease
expired in the first quarter of fiscal 2004 and was not renewed.
Our expansion strategy is to open stores primarily in shopping malls and
selected entertainment centers in both new and existing markets throughout the
United States. We opened 91 new Hot Topic stores and 24 Torrid stores in fiscal
2004, and we also expanded or relocated ten existing stores. During fiscal 2005,
we plan to open approximately 65 new Hot Topic stores and 45 new Torrid stores.
Additionally, we plan to expand or relocate approximately 20 existing stores. We
have identified regional malls nationwide and in Puerto Rico for potential new
locations.
We evaluate potential store locations based on a variety of criteria
relevant to our merchandising strategy, including: the sales of the mall and
anchor stores, sales of teenage-oriented and plus-size stores, age demographics
in the trade area, median family income and other economic factors. We have a
real estate committee that meets regularly to evaluate and select store
locations. We generally seek potential store sites between 1,500 square feet and
2,000 square feet for Hot Topic stores, and between 2,200 square feet and 2,600
square feet for Torrid stores. Our Hot Topic stores currently average
approximately 1,700 square feet and our Torrid stores currently average
approximately 2,500 square feet.
STORE-LEVEL ECONOMICS
During fiscal 2004, we achieved average Hot Topic store net sales of
approximately $1,048,000 and average Hot Topic store net sales per square foot
of approximately $602. We cannot guarantee that these results will continue or
that future average store-level sales will not vary from historical results.
HOT TOPIC MERCHANDISING
Our Hot Topic stores serve as a headquarters for music/pop culture-licensed
and music/pop culture-influenced apparel, accessories and gift items. Music/pop
culture-licensed merchandise includes tee shirts, hats, posters, stickers,
patches, postcards, books, novelty accessories, compact discs and albums.
Music/pop culture-influenced merchandise includes woven and knit tops, skirts,
pants, shorts, jackets, shoes, costume jewelry, body jewelry, sunglasses,
cosmetics, leather accessories and gift items. Approximately half of Hot Topic's
products are music/pop culture-licensed and the other half are music/pop
culture-influenced products. A key strategy of our Hot Topic stores is to offer
a diverse product assortment. We have more than 20 distinct merchandise
categories or "departments." On average, over 120 different licensed band tee
8.
<PAGE>
shirts are carried in each store, from current artists such as Green Day, AFI,
Slipknot, Good Charlotte, ICP and Linkin Park to classic rock artists such as
The Ramones, Nirvana, Bob Marley, The Rolling Stones, Metallica and Led
Zeppelin. New items and categories are regularly tested to stay current with
customer demand and new product trends.
During fiscal 2004, 53% of Hot Topic's net sales were generated in apparel
categories and 47% of Hot Topic's net sales were produced in non-apparel
categories (including accessories, gifts, intimate apparel and shoes).
Our Hot Topic merchandising staff consists of a General Merchandise
Manager, Divisional Merchandise Managers, and a staff of buyers and assistant
buyers who manage the various product categories. The merchandising staff
reflects our culture in that its decisions and actions are influenced by music
and pop culture. In determining which merchandise to buy, the staff spends
considerable time viewing music videos, reviewing industry music sales,
monitoring alternative radio station air play, consulting with sales associates
(to draw from their different experiences and perspectives), reviewing customer
requests, attending trade shows and reading music and fashion industry
periodicals. In addition, the merchandising staff regularly visits nightclubs
and attends concerts and other events that attract young people.
Hot Topic has several lines of private label merchandise to complement and
supplement current product offerings. We believe that Hot Topic brands play an
important part in differentiating its stores from those of its competitors and
provide us with higher margin opportunities as compared to other merchandise. We
estimate that in fiscal 2004 our Hot Topic brands accounted for approximately
25% of our sales, the same percentage as in fiscal 2003. Our proprietary brands
include Ugly Shirt, Morbid Metals (body jewelry), Morbid Threads (men's and
women's apparel and hosiery) and MT:2 (men's and women's apparel). Some shoes
are also sold under the Hot Topic label.
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 to 90 days in advance of delivery. We also often begin with smaller test
purchases prior to chain-wide distribution. We regularly monitor store sales by
merchandise theme and classification, Stock Keeping Units (SKUs), 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 our
stores by responding to the spending patterns of our customers. We also develop
good relationships with our vendors because we understand their importance of
facilitating a quick response.
TORRID MERCHANDISING
Our Torrid stores serve a premier destination for current trends in fashion
apparel and accessories for plus-size young women. We believe that the Torrid
customer wants to wear the same types of merchandise as her smaller-sized peers.
Torrid's merchandise includes novelty tee shirts, fashion tops, pants, shorts,
skirts, dresses, jackets, swimwear, intimate apparel, shoes, hosiery,
accessories, gifts, and beauty products. Torrid apparel is sized 12 to 26. A
broad selection of merchandise comes from established branded vendors, including
Dickies, Paris Blues, Z Cavaricchi, LEI, Fine and Hot Kiss and more fashion
forward vendors, such as Tripp. Torrid works with these and other vendors to
monitor and maintain its own plus-size apparel fit specifications for young
women. We believe Torrid's selection of fashion items from these and similar
vendors gives the Torrid customer an opportunity to buy the same or similar
branded items that have been available to other young women of the same age who
are not plus-size. We research current fashion trends and customer requests and
then work with vendors to design and manufacture them for Torrid. The Torrid fit
specialist team works with the manufacturers' design teams to help ensure that
fit and quality standards are achieved and maintained.
During fiscal 2004, approximately 75% of Torrid's net sales were generated
in apparel categories and approximately 25% of Torrid's net sales were produced
in non-apparel categories (including accessories, gifts, intimate apparel and
shoes).
9.
<PAGE>
Our Torrid merchandising staff consists of a General Merchandise Manager, a
Divisional Merchandise Manager, a fit specialist team, and a staff of buyers and
assistant buyers who manage all product categories. The Torrid merchandising
staff's decisions and actions are influenced by customer and store associate
feedback. The merchandising staff spends considerable time visiting trendy young
fashion shopping areas and nightclubs, researching international fashion trends,
and attending trade shows and other events that attract young people. We also
believe that emerging fashion trends in the junior market and pop culture
influence Torrid's merchandising direction. The range of pop culture and music
artists that influence Torrid fashion is much broader than at Hot Topic,
consistent with the broader target customer base of females ages 15 to 29.
Approximately 40% of Torrid merchandise is purchased from established
branded vendors. The remaining 60% is Torrid's private label merchandise that
provides the customer with unique, fashion forward merchandise, often at more
competitive prices than branded merchandise. Private label merchandise also
often provides Torrid with higher margin opportunities as compared to other
merchandise. In order to reduce fashion risk and maintain the ability to respond
quickly to emerging trends, Torrid buys a majority of its merchandise not more
than 120 days, and many times less than 75 days, in advance of delivery. We
often begin with small purchases for testing.
PLANNING AND ALLOCATION OF MERCHANDISE
Planning and allocation of our inventory is done 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 store
inventory plans and SKU performance using JDA's Advanced Allocation software.
Buyers and inventory analysts 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.
Our headquarters and distribution facility located in the City of Industry,
California is approximately 250,000 square feet. Vendors deliver all merchandise
to this facility, where it is inspected, allocated, picked, prepared and boxed
for shipment to our stores and internet customers. We ship merchandise to stores
each weekday, providing our Hot Topic and Torrid stores with a steady flow of
new and reordered merchandise. Minimal back stock is maintained in our
distribution facility and at our stores, so that most of our merchandise is
available for sale on the selling floors of our stores. No single vendor
accounted for more than 7% of our merchandise purchases during fiscal 2004.
We have entered into a lease (with a purchase option) for an additional
distribution center facility in Tennessee, which we expect to be operational by
the end of the second quarter of fiscal 2005. We believe this second
distribution center will allow for us to accommodate our growth for many years.
We also expect improved delivery times to many of our stores, especially east
coast locations. The Tennessee distribution center will receive merchandise for
and ship merchandise primarily to stores in the eastern half of the country.
HOT TOPIC AND TORRID STORE OPERATIONS
Hot Topic and Torrid store operations are managed by separate teams of a
Vice President of Store Operations, regional directors and district managers. On
average, each district manager supervises approximately six to eight stores. A
store manager and two or three assistant managers manage individual stores. In
addition to managers and assistant managers, a typical store has approximately
six to ten part-time sales associates, depending on the season. The store
manager and district manager are responsible for the hiring and training of new
associates. We have established training and operating procedures to assist
field management in the supervision and training of all associates. We have also
designed a store manager training program, which is used to train externally
hired managers.
We strive to create a store environment that customers will consider "their
place" to shop with friends. We seek to hire sales associates who are like our
customers - energetic people who are knowledgeable and passionate about music
and pop culture-inspired fashion, as well as trendy fashion inspiration. We
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understand the importance of focusing on the preferences and opinions of our
target customers. So store associates, who have the closest and most frequent
contacts and interactions with our customers, from time to time accompany buyers
on buying trips. Additionally, in return for feedback on fashion and other
trends, we reimburse store associates for the cost of attending concerts. They
are also encouraged to directly communicate customer feedback as well as their
own merchandise and product ideas to the buyers and management. Our culture and
our direct interaction with and respect for sales associates are significant
factors in producing associate retention rates that we believe are higher than
the industry average.
The primary goal of the sales associate position is to provide superior,
informed customer service in order to maximize sales and minimize inventory
shrinkage. Store management receives daily store sales and category 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 us. We train associates to greet each customer, to inform the
customer about new music and fashion trends and to suggest merchandise that
matches the customer's lifestyle, music and fashion preferences and/or trends.
We believe that our associates' high level of product knowledge and customer
service differentiates us from other specialty retailers.
District managers, along with all members of the store teams, have a base
pay rate and may qualify to receive certain bonus payouts. District managers may
also qualify to receive stock option grants. All of our employees who meet
certain eligibility criteria are eligible to participate in our Employee Stock
Purchase Plan. We believe that our continued success is dependent in part on our
ability to attract, retain and motivate qualified associates. In particular, the
success of our growth will be dependent on our ability to promote and/or recruit
talented district and store managers. In order to ensure new stores have a
capable pool of candidates, we have assigned dedicated field recruiters to work
with each region's management team.
MARKETING, PROMOTION AND INTERNET
We generally open stores in high traffic malls in areas of high teenage and
young adult population, and we rely on existing customers, associates, store
design and exciting music to attract new customers to our stores. To further
promote Hot Topic stores, we sponsor various music events and conduct periodic
contests. For example, since 2000, we have co-sponsored a major summer rock
tour, Ozzfest (headlined by Ozzy Osbourne). As an Ozzfest sponsor, our name has
been associated with promotional activities at each venue. Torrid enhances its
image through visual advertising and promotion, with an emphasis on lifestyle
photography illustrating a young plus-size woman in various lifestyle activities
and fashions representative of the feminine, beautiful and/or sexy essence of
the brand. In the fourth quarter of fiscal 2004, Torrid began testing in a small
number of stores a customer loyalty program called Divastyle. In addition to our
broad selection of merchandise for sale, including some Internet-only items, our
websites offer merchandise, tour dates, contests, job postings, store locations
and community features such as band reviews and advice columns. Our net sales
from Internet operations rose by 25% in fiscal 2004 compared to fiscal 2003 and
contributed approximately 2.8% of total sales in fiscal 2004.
In fiscal 2004, we established the Hot Topic Foundation. The Foundation's
objective is to support programs and organizations that specifically focus on
encouraging and educating youth in music, creative writing, painting,
photography, and filmmaking. The Foundation has been funded through donations
from our employees, our company, and our customers. As of January 29, 2005,
$339,000 has been raised for the benefit of the Foundation. We are pleased with
the meaningful contributions the Foundation has made to school music programs
and other initiatives, and we believe these activities have a positive influence
on young people.
INFORMATION TECHNOLOGY
Our information systems provide integration of store, merchandising,
distribution, financial, and human resources. Software licensed from GERS Retail
Systems is used for SKU and classification inventory tracking, purchase order
management, open-to-buy, merchandise distribution, automated ticket making, and
sales audit. Our financial systems are licensed from Lawson Software and are
used for general ledger, accounts payable, and asset management as integrated
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financials. Sales are updated daily in the merchandising reporting systems by
polling sales information from each store's point-of-sale, or POS, terminals.
Our POS system consists of registers providing price look-up, time and
attendance, e-mail and credit card/check/gift card authorization. Through
automated nightly two-way electronic communication with each store, sales
information and payroll hours are uploaded to the host system. The host system
downloads price changes, performs system maintenance and provides software
updates to the stores. We evaluate information obtained through nightly polling
to implement merchandising decisions, including product purchasing/reorders,
markdowns and allocation of merchandise on a daily basis. In June 2004, we
implemented our new warehouse management system in our California distribution
center, which is licensed from Manhattan Associates.
Our Wide Area Network ("WAN") is used to connect all locations with
real-time e-mail and several Intranet applications. In addition, this technology
has improved operating efficiency in such areas as credit card and gift card
authorization, store-to-store transfer, product lookup, product location and
several other applications to eliminate paper distribution and paperwork.
In 2005, we plan to open a new distribution center in Tennessee and
implement a new Internet order management software system and a customer loyalty
software system. We believe our enhancements to existing systems and additions
of new systems will help support our growth.
TRADEMARKS
We have registered on the Principal Register of the United States Patent
and Trademark Office our retail store service marks Hot Topic(R) and Torrid(R)
in various forms. We have also registered various other trademarks for
merchandise such as Morbid Make-Up(R), Morbid Scents(R), Morbid Metals(R),
Morbid Threads(R), Tragedy(R), Misery(R), and MT:2(R); and general marks such as
our slogan "Everything About the Music". Each federal registration is renewable
indefinitely if the mark is in use at the time of the renewal. We have several
trademark applications on file with the USPTO, for which we hope to obtain
registration in the future. In addition, we have common law trademark rights to
certain trademarks, service marks and trade names used in our business from time
to time. We are not aware of our use of any of our marks raising any claims of
infringement or other challenges to our right to use our marks in the United
States. We also have additional registrations and pending applications in
foreign jurisdictions. All other trademarks, trade names and service marks
referenced in this report and in our stores are the property of their respective
owners.
HOT TOPIC COMPETITION
We compete with other retailers for vendors, customers, suitable retail
locations and qualified associates. 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 Abercrombie & Fitch,
Aeropostale, American Eagle Outfitters, Anchor Blue (Millers Outpost), Charlotte
Russe Inc., Claire's Stores, Inc., Forever 21, Old Navy (a division of Gap
Inc.), Pacific Sunwear of California, Inc., Spencer Gifts, Inc., The Buckle, Wet
Seal, Inc., and Urban Outfitters, Inc.; and, to a lesser extent, with music
stores. Some of our competitors are larger and have substantially greater
financial, marketing and other resources than us. The principal factors of
competition are merchandise selection, connection to the music industry,
customer service, store location and price.
TORRID COMPETITION
Based on direct customer research we have conducted, we believe that
plus-size female teens and young women have historically shopped for apparel at
department stores, discount stores such as Target and specialty stores such as
Lane Bryant. Though a source of competition, we believe such stores generally
target more mature customers, which is also reflected in their store
environments. We are not aware of other exclusively mall-based chains that are
specifically targeting younger plus-size fashion forward customers. Torrid
competes with traditional department stores, local specialty stores and junior
teen retailers that offer a combination of junior and plus-sizes, such as Deb
Shops. Torrid also competes with traditional plus-size catalogs and web sites,
as well as Delia's Corp. and Alloy, Inc. which carry both junior and junior
plus-sizes. Many companies compete for the junior customers and additional
competitors may enter into the plus-size female market.
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EMPLOYEES
We employed approximately 2,030 full-time and 5,940 part-time employees,
which we refer to as associates, as of March 9, 2005. Of our 7,970 associates,
approximately 600 were headquarters and distribution center personnel and the
remainder were field management and store associates. The number of part-time
associates changes with seasonal needs. None of our associates are covered by
collective bargaining agreements. We believe that our relationships with our
associates are good.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our executive officers and key employees and their ages at March 9, 2005
are as follows:
<TABLE>
NAME AGE POSITION
- ----------------------- ----- ------------------------------------------------------
<S> <C> <C>
Elizabeth McLaughlin 44 Chief Executive Officer and Director
Gerald Cook 52 President, Hot Topic
Patricia Van Cleave 57 President, Torrid
James McGinty 42 Chief Financial Officer
Tom Beauchamp 52 Senior Vice President and Chief Information Officer
Christopher Kearns 38 Senior Vice President, General Counsel and Secretary
Cindy Boden 50 Vice President, Torrid Store Operations
Christopher Daniel 47 Vice President, Torrid General Merchandise Manager
Ed Gusman 46 Vice President, Hot Topic Store Operations
Tricia Higgins 37 Vice President, Distribution
Darrell Kinsley 42 Vice President, Store Design and Visual Merchandising
Alain Krakirian 39 Vice President, Hot Topic Planning and Allocation
Cindy Levitt 44 Vice President, Hot Topic General Merchandise Manager
Sue McPherson-Spissu 37 Vice President, Logistics
John Neppl 48 Vice President, Real Estate and Construction
George Wehlitz, Jr. 44 Vice President, Finance
</TABLE>
ELIZABETH MCLAUGHLIN has served as Chief Executive Officer and on the Board
of Directors since 2000. From 1996 through 2000, Ms. McLaughlin served as Senior
Vice President and General Merchandise Manager. From 1993 through 1996, Ms.
McLaughlin was our Vice President, Operations. Prior to joining us, Ms.
McLaughlin held various positions with Millers Outpost and The Broadway. Ms.
McLaughlin holds a B.A. degree in Economics from the University of California at
Irvine. Ms. McLaughlin is a Director of Noodles & Company, a privately held
quick casual restaurant concept. She is also a member of the Board of Visitors
for the Anderson School at UCLA.
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GERALD COOK has been President, Hot Topic since September 2003. From
February 2001 to September 2003, he was Chief Operating Officer. From February
1999 until joining us, he was the President and Chief Operating Officer of
Travel 2000, Inc. Subsequent to his departing Travel 2000, Inc., that company
filed for chapter 11 bankruptcy in March 2001. 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. Mr.
Cook holds a B.S. degree in Business Administration from the University of
Minnesota.
PATRICIA VAN CLEAVE has been President, Torrid since September 2003. From
September 2002 to September 2003, she was Chief Merchandising Officer. From July
1998 to June 2001, she was the President and CEO of Sundance Catalog Company.
From May 1995 until joining Sundance, she was the President of Cherokee. Prior
to joining Cherokee, she was Executive Vice President of Merchandising for
apparel, fashion accessories and intimate apparel for The Broadway. She came to
The Broadway from The Bon Marche, a Seattle-based division of Federated
Department Stores where she was Senior Vice President, General Merchandise
Manager of Apparel. Prior to that she held management positions for The Broadway
Southwest, John Wanamaker, The May Company and Daytons. Ms. Van Cleave holds a
B.S. degree in Business and Textiles from the University of Minnesota.
JAMES MCGINTY has served as Chief Financial Officer since February 2001.
Mr. McGinty joined us in August 2000 as 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 division of 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.
TOM BEAUCHAMP has been Senior Vice President and Chief Information Officer
since June 2004. Mr Beauchamp has over 30 years of Information technology
experience. From October 2001 until joining us, he was Chief Information Officer
for CMI Marketing, a provider of loyalty marketing programs. From January 2000
until June of 2001, Mr. Beauchamp was Chief Information Officer of Columbia
House. From June 1999 through January 2001, he was Senior Vice President, Chief
Information Officer for Oxford Health Plans. From March 1996 through June 1999,
he was Senior Vice President, Chief Information Officer for Woolworth
Corporation. Prior to 1996, Mr. Beauchamp held management positions with
Montgomery Ward, Limited, Inc., Millers Outpost, and The Broadway.
CHRISTOPHER KEARNS has served as Senior Vice President, General Counsel and
Secretary since April 2004. Prior to that, Mr. Kearns spent a decade as an
attorney in private practice, most recently as a Partner with the law firm
Cooley Godward LLP, which he joined in 1996. Mr. Kearns holds a B.A. degree in
History and a specialization in Business Administration from UCLA, and a J.D.
with honors from the University of California, Hastings College of the Law.
CINDY BODEN has been Vice President, Torrid Store Operations since October
2003. Prior to that, Ms. Boden held Regional Director positions with Hot Topic
both in the Northeast and the Midwest regions, beginning in 2000. From 1993 to
1997, Ms. Boden was a Regional Manager for County Seat stores. From 1990 to
1992, she held the position of Regional Manager for Millers Outpost stores.
Prior to Millers Outpost, she was a District Manager for Brookstone for five
years. Ms. Boden holds a B.S. degree in Textiles and Clothing with a minor in
Business Administration from the University of Minnesota at Mankato.
CHRISTOPHER DANIEL has served as Vice President, General Merchandise
Manager for Torrid since October 2004. From September 1996 until September 2004,
he was the Vice President of Design and Product Development for Mervyn's, a
division of Target Corporation. Prior to that, Mr. Daniel held management
positions in merchandising and product development with Structure, a division of
Limited, Inc., Charming Shoppes, a national women's specialty retailer, and
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Dayton-Hudson, the department store division of Target Corporation. Prior to
that, he held merchandising positions with Bullock's, a Los Angeles based
division of Federated Stores and Miller and Rhoads, a division of Allied stores
based in Richmond, Virginia. Mr. Daniel holds a B.A. degree in English
literature from the University of Richmond in Richmond, Virginia.
ED GUSMAN has served as Vice President, Hot Topic Store Operations since
January 2005. From January 2004 to January 2005, Mr. Gusman was the Senior
Regional Director for the Eastern United States. From March 2001 to December
2003, Mr. Gusman was the Regional Director for the Southeast. From September
1999 to February 2001, he was the district manager for Urban Outfitters for the
Mid Atlantic, Southeast. From May 1994 to August 1999, Mr. Gusman was a regional
director for Zany Brainy, heading up their expansion on the West Coast. From
1990 to 1994, he was regional director for Brentano's, Waldenbooks Super Store.
Prior to that, he held various management positions with Waldenbooks.
TRICIA HIGGINS has been Vice President, Distribution since October 2004 and
is responsible for the Distribution Center in the City of Industry. From
February 2004 to October 2004, she was Vice President, Internet. Before her
promotion to Vice President, Internet, she held the position of Director,
Internet, beginning in June 2002. Prior to joining us, she was Director, Contact
Center Operations for Cooking.com. From 1997 to August 2000, Ms. Higgins was
Director, Retail Operations for the Williams-Sonoma, Pottery Barn and Hold
Everything divisions of Williams-Sonoma, Inc. From 1994 to July 1997, she held
various positions with The Disney Stores, Inc. in Retail Operations and New
Business Development. Ms. Higgins holds a B.A. degree in Psychology from Indiana
University.
DARRELL KINSLEY was promoted to Vice President, Store Design and Visual
Merchandising, in January 2005. From February 2000 through December 2004, Mr.
Kinsley was Vice President, Hot Topic Store Operations. 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 us in February 1995 as the District Manager
for the eastern United States and was responsible for the expansion into the
East Coast. Mr. Kinsley holds a business management leadership certificate from
the Anderson School of Business at the University of California, Los Angeles.
ALAIN KRAKIRIAN has been Vice President, Hot Topic Planning and Allocation
since February 2000. From July 1997 through February 2000, Mr. Krakirian was
Director of Planning and Allocation. Mr. Krakirian was a 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.
CINDY LEVITT has been Vice President, Hot Topic General Merchandise Manager
since February 2000. From June 1996 to February 2000, she served as Divisional
Merchandise Manager, Apparel and Music. Ms. Levitt has held senior buying
positions since 1989. Prior to her career at Hot Topic, Ms. Levitt held buying
positions at The May Company. Ms. Levitt holds a degree in Fashion Merchandising
from Orange Coast College.
SUE MCPHERSON-SPISSU has been Vice President, Logistics since October 2004.
From October 2001 to October 2004, she was Vice President, Distribution Center
and E-Commerce. Ms. McPherson-Spissu was Vice-President, Distribution Center
from February 2001 to October 2001 and was Divisional Vice President of
Distribution Center from February 2000 to February 2001. From March 1995 to
February 2000, she was Director of the Distribution Center. Ms. McPherson-Spissu
joined us in 1989 as a store associate in our first store while attending the
University of Southern California. Ms. McPherson-Spissu holds a B.S. degree in
Business from the University of Southern California.
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JOHN NEPPL joined us in October 2001 as Vice President, Real Estate and
Construction. From January 1995 to September 2001, Mr. Neppl served as
Vice-President of Real Estate and Construction for Eastern Mountain Sports,
Inc., a specialty retailer based in New Hampshire. Mr. Neppl served as Director
of Real Estate at Miller's Outpost/Anchor Blue from October 1987 to December
1994. Mr. Neppl held various financial positions with Mervyn's department
stores, a division of Target Corporation, from October 1978 to September 1987.
Mr. Neppl received a B.S. degree in Accounting from Villanova University.
GEORGE WEHLITZ, JR. has been Vice President, Finance since August 2003. He
joined us in February 2002 as Vice President, Controller. From August 2000 to
February 2002, Mr. Wehlitz was Chief Financial Officer at The Popcorn Factory,
Inc., a catalog company for gourmet popcorn gifts. From 1987 to 2000 Mr. Wehlitz
held various financial-related positions, at the divisional and corporate level,
for The Bombay Company, Inc. Mr. Wehlitz holds a B.A. degree in Accounting from
Texas Christian University and is a Certified Public Accountant.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To our present knowledge, compliance with federal, state and local
provisions enacted or adopted for protection of the environment has had no
material effect upon our operations.
INTERNET WEBSITE
We make available free of charge through our investor relations website at
www.corporatewindow.com/fl/hott/frame.html our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the SEC. We also make available our
Standards of Business Ethics at www.corporatewindow.com/fl/hott/frame.html.
CERTAIN RISKS RELATED TO THE COMPANY'S BUSINESS
Before deciding to invest in Hot Topic, Inc. or to maintain or increase an
investment in Hot Topic, Inc., readers should carefully consider the risks
described below, in addition to the other information contained in this Annual
Report on Form 10-K and in other filings with the SEC, including our Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K. The risks described below
are not the only risks we face. Additional risks that are not presently known to
us or that we currently deem immaterial may also affect our business. If any of
these known or unknown risks actually occur, our business, financial condition
and results of operations could be seriously harmed, and our stock price could
decline.
OUR AGGRESSIVE GROWTH STRATEGY ANTICIPATES A SIGNIFICANT NUMBER OF NEW
STORE OPENINGS, WHICH COULD CREATE CHALLENGES WE MAY NOT BE ABLE TO ADEQUATELY
MEET.
Our net sales have grown significantly during the past several years,
primarily as a result of the opening of new stores and, to a lesser extent, the
introduction of new products. Of our 668 stores opened as of January 29, 2005,
115 had been open for less than one full year. We intend to continue to pursue
an aggressive growth strategy for the foreseeable future, and our future
operating results will depend largely upon our ability to open and operate
stores successfully and to profitably manage a larger business. We currently
anticipate opening approximately 110 stores, consisting of 65 Hot Topic and 45
Torrid stores, during fiscal 2005, which will result in a significant increase
in the number of stores we operate. Five of these Hot Topic stores and one of
these Torrid stores were opened as of March 9, 2005. 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
us in our existing stores and markets. In addition, as the number of stores
increases, we may face risks associated with market saturation of our products
and concepts. There can be no assurance that our expansion will not adversely
affect the individual financial performance of our existing stores or our
overall results of operations, or that new stores will achieve sales and
profitability levels consistent with existing stores. Further, there can be no
assurance that we will successfully achieve our expansion targets or, if
achieved, that planned expansion will result in profitable operations.
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THIS GROWTH STRATEGY REQUIRES EFFECTIVE UPSCALING OF OUR OPERATIONS, AND WE
MAY NOT BE ABLE TO DO THIS SUFFICIENTLY TO EFFECTIVELY PREVENT NEGATIVE IMPACT
ON OUR OPERATIONS AND FINANCIAL RESULTS.
In order to manage our planned expansion, among other things, we will need
to locate suitable store sites; negotiate acceptable lease terms; obtain
adequate capital resources on acceptable terms; source sufficient levels of
inventory; hire and train store managers and sales associates; integrate new
stores into our existing operations; and maintain adequate distribution center
space and information technology and other operations systems.
We have entered into a lease (with a purchase option) for an additional
distribution center facility located in Tennessee, which we expect to be
operational in the second quarter of fiscal 2005, and we face challenges and
risks associated with establishing operations in this facility. In particular,
there are staffing and logistical concerns, as well as financial risks and other
risks associated with opening a significant facility in a site approximately
2,000 miles from our headquarters and current distribution center.
We also need to continually evaluate the adequacy of our management
information and distribution systems. Implementing new systems and changes made
to existing systems could present challenges we do not anticipate and could
impact our business (for example, we experienced some delay in product
distribution during our second quarter of fiscal 2004 upon implementing our new
warehouse management system). We cannot anticipate all of the changing demands
that our expanding operations will impose on our business, systems and
procedures, and our failure to adapt to such changing demands could have a
material adverse effect on our results of operations and financial condition.
Our failure to timely implement initiatives necessary to support our expanding
operations could also materially impact our business.
EXPANDING OUR OPERATIONS TO INCLUDE AN INCREASING NUMBER OF TORRID STORES
AND ANY OTHER NEW CONCEPTS PRESENTS RISKS WE HAVE FACED WITH THE HOT TOPIC
CONCEPT BUT ALSO NEW RISKS DUE TO DIFFERENCES IN CONCEPT OBJECTIVES AND
STRATEGIES.
Our ability to expand into new concepts, and in particular our Torrid
concept, has not been fully tested. Accordingly, the operation of Torrid stores
and the sale of Torrid merchandise over the Internet are subject to numerous
risks, including unanticipated operational problems; lack of experience; lack of
customer acceptance; new vendor relationships; competition from existing and new
retailers; and diversion of management's attention from the Hot Topic concept.
The Torrid concept involves implementation of a retail apparel concept which is
subject to most of the same risks as the Hot Topic concept, as well as
additional risks inherent in a concept that concentrates on apparel and fashion,
including risks of difficulty in merchandising, uncertainty of customer
acceptance, fluctuations in fashion trends and customer tastes, extreme
competition with a less differentiated product offering and attendant mark-down
risks. We may not be able to generate continued customer interest in Torrid
stores and products, and the Torrid concept may not be able to support the store
or Internet sales formats. Risks inherent in any new concept are particularly
acute with respect to Torrid, because this is our first significant new venture,
and the nature of the Torrid business differs in certain respects from that of
the Hot Topic business. There can be no assurance that the Torrid stores or
website will achieve sales and profitability levels that justify our investment.
THE SUCCESS OF OUR BUSINESS DEPENDS ON ESTABLISHING AND MAINTAINING GOOD
RELATIONSHIPS WITH MALL OPERATORS AND DEVELOPERS, AND PROBLEMS WITH THOSE
RELATIONSHIPS COULD MAKE IT MORE DIFFICULT FOR US TO EXPAND TO CERTAIN SITES OR
OFFER CERTAIN PRODUCTS.
Any restrictions on our ability to expand to new store sites or to offer a
broad assortment of merchandise could have a material adverse effect on our
business, results of operations and financial condition. If our relations with
mall operators or developers become strained, or we otherwise encounter
difficulties in leasing store sites, we may not grow as planned and may not
reach certain revenue levels and other operating targets. Risks associated with
these relationships are more acute given recent consolidation in that industry,
and we have seen certain increases in expenses as a result of such consolidation
that could continue.
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OUR COMPARABLE STORE SALES ARE SUBJECT TO FLUCTUATION RESULTING FROM
FACTORS WITHIN AND OUTSIDE OUR CONTROL, AND LOWER THAN EXPECTED COMPARABLE STORE
SALES COULD IMPACT OUR BUSINESS AND OUR STOCK PRICE.
A variety of factors affects our comparable store sales including, among
others, the timing of new music releases and music/pop culture-related products;
music and fashion trends; the general retail sales environment and the effect of
the overall economic environment; our ability to efficiently source and
distribute products; changes in our merchandise mix; and our ability to execute
our business strategy efficiently. Our comparable store sales results have
fluctuated significantly in the past and we believe that such fluctuations will
continue. The following table shows our comparable store sales results for
recent periods:
Fiscal Year 2004 2003 2002 2001
----------------------------------------------------------
(2.9)% 7.4% 5.0% 3.9%
FY 2004 FY 2003
-----------------------------------------------
1st Quarter 4.0% 2.6%
2nd Quarter (2.1)% 5.2%
3rd Quarter (4.2)% 10.8%
4th Quarter (6.0)% 8.5%
Past comparable store sales results are not an indicator of future results,
and there can be no assurance that our comparable store sales results will not
decrease in the future. Changes in our comparable store sales results could
cause our stock price to fluctuate substantially.
OUR SUCCESS RELIES ON POPULARITY WITH YOUNG PEOPLE OF MUSIC, POP CULTURE,
AND FASHION TRENDS, AND WE MAY NOT BE ABLE TO REACT TO TRENDS IN A WAY TO
PREVENT DECLINING POPULARITY AND SALES OF OUR PRODUCTS.
Our financial performance is largely dependent upon the continued
popularity of alternative and rock music, the Internet and digital music, music
videos, and MTV and other music television networks among teenagers and college
age adults; the emergence of new artists and the success of music releases and
music/pop culture-related products; the continuance of a significant level of
teenage spending on music/pop culture-licensed and music/pop culture-influenced
products; and our ability to anticipate and keep pace with the music, fashion
and merchandise preferences of our customers. The popularity of particular types
of music, artists, styles, trends and brands is subject to change. Our failure
to anticipate, identify and react appropriately to changing trends could lead
to, among other things, excess inventories and higher markdowns, which could
have a material adverse effect on our results of operations and financial
condition, and on our image with customers. There can be no assurance that our
new products will be met with the same level of acceptance as in the past or
that the failure of any new products will not have an adverse material effect on
our business, results of operations and financial condition.
ECONOMIC CONDITIONS COULD CHANGE IN WAYS THAT REDUCE OUR SALES OR INCREASE
OUR EXPENSES.
Certain economic conditions affect the level of consumer spending on
merchandise we offer, including, among others, employment levels; salary and
wage levels; interest rates; taxation; and consumer confidence in future
economic conditions. We are also dependent upon the continued popularity of
malls as a shopping destination, the ability of mall anchor tenants and other
attractions to generate customer traffic, and the development of new malls. A
slowdown in the United States economy or an uncertain economic outlook could
lower consumer spending levels and cause a decrease in mall traffic or new mall
development, each of which would adversely affect our growth, sales results and
financial performance.
CHANGES IN LAWS, INCLUDING EMPLOYMENT LAWS AND LAWS RELATED TO OUR
MERCHANDISE, COULD MAKE CONDUCTING OUR BUSINESS MORE EXPENSIVE OR CHANGE THE WAY
WE DO BUSINESS.
18.
<PAGE>
In addition to increased regulatory compliance requirements, changes in
laws could make ordinary conduct of our business more expensive or require us to
change the way we do business. For example, changes in federal and state minimum
wage laws could raise the wage requirements for certain of our associates, which
would likely cause us to reexamine our entire wage structure for stores. Other
laws related to employee benefits and treatment of employees could also
negatively impact us such as by increasing benefits costs such as medical
expenses. Moreover, changes in product safety or other consumer protection laws
could lead to increased costs to us for certain merchandise, or additional labor
costs associated with readying merchandise for sale. It is often difficult for
us to plan and prepare for potential changes to applicable laws.
TIMING AND SEASONAL ISSUES COULD NEGATIVELY IMPACT OUR FINANCIAL
PERFORMANCE FOR GIVEN PERIODS.
Our 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/pop
culture-related products, shifts in timing of certain holidays, changes in our
merchandise mix and overall economic and political conditions.
Our business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school, Halloween and Holiday
(defined as the week of Thanksgiving through the first few days of January)
seasons, and other periods when schools are not in session. The Holiday season
has historically been our single most important selling season. We believe 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) as well as Halloween (which affects operating results in the
third quarter), all reduce our dependence on the Holiday selling season, but
this may not always be the case to the same degree. As is the case with many
retailers of apparel, accessories and related merchandise, we typically
experience lower net sales in the first fiscal quarter relative to other
quarters.
WE HAVE MANY IMPORTANT VENDOR RELATIONSHIPS, AND OUR ABILITY TO GET
MERCHANDISE COULD BE HURT BY CHANGES IN THOSE RELATIONSHIPS AND EVENTS HARMFUL
TO OUR VENDORS COULD IMPACT OUR RESULTS OF OPERATION.
Our financial performance depends on our ability to purchase desired
merchandise in sufficient quantities at competitive prices. Although we may have
many sources of merchandise, substantially all of our music/pop culture-licensed
products are available only from vendors that have exclusive license rights. In
addition, certain of our products are supplied by small, specialized vendors,
some of which create unique products primarily for us. Our smaller vendors
generally have limited resources, production capacities and operating histories,
and some of our vendors have restricted the distribution of their merchandise in
the past. We generally have no long-term purchase contracts or other contractual
assurances of continued supply, pricing or access to new products. There can be
no assurance that we will be able to acquire desired merchandise in sufficient
quantities on acceptable terms in the future. Any inability to acquire suitable
merchandise, or the loss of one or more key vendors, may have a material adverse
effect on our business, results of operations and financial condition.
TECHNOLOGY AND OTHER RISKS ASSOCIATED WITH OUR INTERNET SALES COULD HINDER
OUR OVERALL FINANCIAL PERFORMANCE.
We sell merchandise over the Internet through the websites hottopic.com and
torrid.com. Our Internet operations are subject to numerous risks and pose risks
to our overall business, including, among other things: hiring; retention and
training of personnel to conduct the Internet operations; diversion of sales
from our stores; rapid technological change and the need to invest in additional
computer hardware and software to support sales, customer service and order
fulfillment; liability for online content; failure of computer hardware and
software, including computer viruses, telecommunication failures, online
security breaches and similar disruptions; governmental regulation; and credit
card fraud. There can be no assurance that our Internet operations will achieve
sales and profitability levels that justify our investment in them.
19.
<PAGE>
WE HAVE MADE AND PLAN TO CONTINUE TO MAKE SIGNIFICANT CHANGES TO
INFORMATION SYSTEMS AND SOFTWARE USED IN OPERATION OF OUR BUSINESS, AND WE MAY
NOT BE ABLE TO EFFECTIVELY ADOPT CHANGES IN A WAY TO PREVENT FAILURES IN OUR
OPERATIONS OR NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE AND REPORTING.
Over the past several years, we have made improvements to existing hardware
and software systems, as well as implemented new systems. For example, we have
invested approximately $6 million to enhance the functionality of our current
GERS Retail Systems software and to implement new financial system software from
Lawson. In addition, we are investing approximately $10 million in the
implementation of a new warehouse management software system, a new Internet
order management software system, and a new customer loyalty software system. We
expect to significantly increase our reliance on these systems in fiscal 2005.
If these information systems and software do not work effectively, we may
experience delays or failures in our operations. These delays or failures could
adversely impact the promptness and accuracy of our merchandise distribution,
transaction processing, financial accounting and reporting and ability to
properly forecast earnings and cash requirements. For example, in the second
quarter of 2004, we experienced some delay in product distribution upon
implementation of our new warehouse management system. To manage growth of our
operations and personnel, we may need to continue to improve our operational and
financial systems, transaction processing, and procedures and controls, and in
doing so, we could incur substantial additional expenses.
LOSS OF KEY PEOPLE OR AN INABILITY TO HIRE NECESSARY AND SIGNIFICANT
PERSONNEL COULD HURT OUR BUSINESS.
Our financial performance depends largely on the efforts and abilities of
senior management, especially Elizabeth McLaughlin, our Chief Executive Officer,
who has been with us since 1993. We have 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 our management team could have a material
adverse effect on our business, results of operations and financial condition.
Furthermore, there can be no assurance that Ms. McLaughlin and our existing
management team will be able to manage Hot Topic, Inc. or our growth or that we
will be able to attract and retain additional qualified personnel as needed in
the future.
OUR RELIANCE ON UNITED PARCEL SERVICE, TEMPORARY EMPLOYEES AND OTHER
MECHANICS OF SHIPPING OF OUR MERCHANDISE CREATES DISTRIBUTION RISKS AND
UNCERTAINTIES THAT COULD HURT OUR SALES AND BUSINESS.
We rely upon United Parcel Service for our product shipments, including
shipments to and from a significant number of our stores. Our reliance on this
source for shipments is subject to risks, including employee strikes and
inclement weather, associated with United Parcel Service's ability to provide
delivery services that adequately meet our shipping needs. We are also dependent
upon temporary associates to adequately staff our distribution facility,
particularly during busy periods such as the Holiday season and while multiple
stores are opening. There can be no assurance that we will continue to receive
adequate assistance from our temporary associates, or that there will continue
to be sufficient sources of temporary associates. Additionally, certain products
are imported and subject to delivery delays based on availability and ports
capacity.
THERE IS A RISK WE COULD ACQUIRE MERCHANDISE WITHOUT FULL RIGHTS TO SELL
IT, WHICH COULD LEAD TO DISPUTES OR LITIGATION AND HURT OUR FINANCIAL
PERFORMANCE AND STOCK PRICE.
We purchase licensed merchandise from a number of suppliers who hold
manufacturing and distribution rights under the terms of certain licenses. We
generally rely upon vendors' representations concerning manufacturing and
distribution rights and do not independently verify whether these vendors
legally hold adequate rights to licensed properties they are manufacturing or
distributing. If we acquire unlicensed merchandise, we could be obligated to
remove such merchandise from our stores, incur costs associated with destruction
of merchandise if the distributor is unwilling or unable to reimburse us, 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 our business, results of
operations and financial condition.
20.
<PAGE>
WE FACE INTENSE COMPETITION, AND AN INABILITY TO ADEQUATELY ADDRESS IT, OR
THE SUCCESS OF OUR COMPETITORS, COULD LIMIT OR PREVENT OUR BUSINESS GROWTH AND
SUCCESS.
The retail apparel and accessory industry is highly competitive. We compete
with other retailers for vendors, teenage and young adult customers, suitable
store locations and qualified associates and management personnel. Hot Topic
currently competes with street alternative stores located primarily in
metropolitan areas; with other mall-based teenage-focused retailers such as
Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Anchor Blue,
Charlotte Russe Inc., Claire's Stores, Inc., Forever 21, Pacific Sunwear of
California, Inc., Spencer Gifts, Inc., H&M, The Buckle, Wet Seal, Inc., and
Urban Outfitters, Inc.; and, to a lesser extent, with music stores and mail
order catalogs and websites. Torrid has additional competitors, such as Alloy,
Inc., Deb Shops, Delia's Corp., Old Navy (a division of Gap Inc.), Lane Bryant,
and plus-size departments in department stores and discount stores as well as
numerous potential competitors who may begin or increase efforts to market and
sell products competitive with Torrid's products. Some of our competitors are
larger and may have greater financial, marketing and other resources. Direct
competition with these and other retailers may increase significantly in the
future, which could require us, among other things, to lower our prices.
Increased competition could have a material adverse effect on our business,
results of operations and financial condition.
WAR, TERRORISM AND OTHER CATASTROPHES COULD NEGATIVELY IMPACT OUR
CUSTOMERS, PLACES WHERE WE DO BUSINESS, AND OUR EXPENSES, ALL OF WHICH COULD
HURT OUR BUSINESS.
The effects of war or acts of terrorism could have a material adverse
effect on our business, operating results and financial condition. The terrorist
attacks in New York and Washington, D.C. on September 11, 2001 disrupted
commerce and intensified the uncertainty of the U.S. economy, a condition which
has persisted due to recent military actions. The continued threat of terrorism
and heightened security and military action in response to this threat, or any
future acts of terrorism, may cause further disruptions and create further
uncertainties. To the extent that such disruptions or uncertainties negatively
impact shopping patterns and/or mall traffic, or adversely affect consumer
confidence or the economy in general, our business, operating results and
financial condition could be materially and adversely affected.
In addition, a few years ago, California experienced substantially
increased costs of electricity and gas caused by, among other things, disruption
in energy supplies. Our principal executive offices, distribution center and a
significant number of our stores are located in California. If we experience a
sustained disruption in energy supplies, or if electricity and gas costs in
California fluctuate dramatically, our results of operations could be materially
and adversely affected. California is also subject to natural disasters such as
earthquakes and floods. A significant natural disaster or other catastrophic
event affecting our facilities could have a material adverse impact on our
business, financial condition and operating results.
THERE ARE NUMEROUS RISKS THAT COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
SUBSTANTIALLY.
Our 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 our stock price without regard
to our financial performance. In addition, we believe that factors such as
quarterly fluctuations in our financial results and comparable store sales;
announcements by other apparel, accessory and gift item retailers; the trading
volume of our stock; changes in estimates of our performance by securities
analysts; overall economic and political conditions; the condition of the
financial markets; and other events or factors outside of our control could
cause our stock price to fluctuate substantially.
21.
<PAGE>
OUR CHARTER DOCUMENTS AND OTHER CIRCUMSTANCES COULD PREVENT A TAKEOVER OR
CAUSE DILUTION OF OUR EXISTING SHAREHOLDERS, WHICH COULD BE DETRIMENTAL TO
EXISTING SHAREHOLDERS AND HINDER BUSINESS SUCCESS.
Our Articles of Incorporation and Bylaws contain provisions that may have
the effect of delaying, deterring or preventing a takeover of Hot Topic, Inc.
For instance, our Articles of Incorporation include certain "fair price
provisions" generally prohibiting business combinations with controlling or
significant shareholders unless certain minimum price or procedural requirements
are satisfied, and our Bylaws prohibit shareholder action by written consent.
Additionally, our Board of Directors has the authority to issue, without
shareholder approval, up to 10,000,000 shares of "blank check" preferred stock
having such rights, preferences and privileges as designated by the Board of
Directors. The issuance of these shares could have a dilutive effect on certain
shareholders, and potentially prohibit a takeover of Hot Topic, Inc. by
requiring the preferred shareholders to approve such a transaction.
We also have a significant number of authorized and unissued shares of our
common stock available under our Articles of Incorporation. These shares provide
us with the flexibility to issue our common stock for future business and
financial purposes including stock splits, raising capital and providing equity
incentives to employees, officers and directors. However, the issuance of these
shares could result in dilution to our shareholders.
WE INCUR COSTS ASSOCIATED WITH REGULATORY COMPLIANCE, AND THIS COST COULD
BE SIGNIFICANT.
All companies are subject to laws and regulations, some of which require
certain actions to be taken (or not taken) and costs to be incurred relating to
business processes and risk management. There are additional requirements for
public companies, including the provisions of the Sarbanes-Oxley Act of 2002.
With regard to the Sarbanes-Oxley Act, we have and will continue to incur
significant expense as we continue to address the implications of applicable
rules and our operations relative thereto, and as we work to respond to and
comply with applicable requirements. Among other things, we have incurred and
will incur additional expenses as we implement Section 404 of the Sarbanes-Oxley
Act. Section 404 requires management to report on, and our independent auditors
to attest to, our internal controls. Compliance with these rules could also
result in continued diversion of management's time and attention, which could be
disruptive to normal business operations.
If we do not satisfactorily or timely comply with these requirements,
possible consequences could include sanction or investigation by regulatory
authorities such as the Securities and Exchange Commission or the Nasdaq
National Market, incomplete or late filing of our annual report on Form 10-K, or
civil or criminal liability. Our stock price and business could also be
adversely affected.
THERE ARE LITIGATION AND OTHER CLAIMS AGAINST US FROM TIME TO TIME, WHICH
COULD DISTRACT MANAGEMENT FROM OUR BUSINESS ACTIVITIES, AND COULD LEAD TO
ADVERSE CONSEQUENCES TO OUR BUSINESS AND FINANCIAL CONDITION.
As a growing company with expanding operations, we are increasingly
involved from time to time with litigation and other claims against us. These
arise primarily in the ordinary course of our business, and include employee
claims, commercial disputes, intellectual property issues and product-oriented
allegations. Often these cases raise complex factual and legal issues, which are
subject to risks and uncertainties and which could require significant
management time. Although we do not currently believe that the outcome of any
current litigation and claims against us will have a material adverse effect on
us, adverse settlements or resolutions may occur and negatively impact earnings,
injunctions against us could have an adverse effect on our business by requiring
us to do or prohibiting us from doing certain things, and other unexpected
events could have a negative impact on us.
22.
<PAGE>
RECENT ACCOUNTING REGULATION CHANGES WILL REQUIRE THE EXPENSING OF STOCK
OPTIONS.
Recently effective accounting regulation changes require that all publicly
traded companies begin recording compensation expense related to all unvested
and newly granted stock options prospectively for interim or annual periods
beginning after June 15, 2005. Currently, we include such expenses on a pro
forma basis in the notes to our quarterly and annual financial statements in
accordance with accounting principles generally accepted in the United States of
America and do not include compensation expense related to stock options in our
reported earnings in the financial statements. When we begin expensing stock
options as provided above, our reported earnings will be negatively impacted and
our stock price could decline.
ITEM 2. PROPERTIES
We lease all of our existing store locations, with lease terms expiring
between 2005 and 2015. At January 29, 2005, we had a total of 1,214,424 leased
store square feet (Hot Topic and Torrid stores) with an average store size of
1,810 square feet (Hot Topic and Torrid stores). The leases for most of the
existing stores are for approximately ten-year terms 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.
We lease our headquarters and distribution center facility, located in City
of Industry, California, which is approximately 250,000 square feet. Our lease
expires April 2014, and the annual base rent is approximately $1,110,000. We
have entered into a lease (with a purchase option) for an additional
distribution center facility in Tennessee, which is approximately 300,000 square
feet, which we expect to be operational by the end of the second quarter of
fiscal 2005.
ITEM 3. LEGAL PROCEEDINGS
On June 23, 2004, a non-profit corporation named Center for Environmental
Health filed a lawsuit in Federal district court in Alameda, California against
over two dozen retailers, large and small, including Hot Topic, Inc. Other
defendants include teen retailers like Claire's and Wet Seal, department stores
like Sears, Nordstrom, Macy's and J.C. Penney, and large retailers like Wal-Mart
and Target. Certain of the defendants, but not Hot Topic, were also named
defendants in a substantially similar lawsuit filed by the State of California.
The complaint in each case alleges, in general, that the defendant retailers
have violated certain California statutes by not providing sufficient warning
about an alleged potential for lead exposure relating to costume jewelry sold in
stores. The complaints do not contain allegations of personal injury. In August
2004, we were served another complaint, filed in the Circuit Court of Shelby
County, Tennessee, claiming we are liable due to alleged lead content in our
costume jewelry we allegedly target to children. This complaint is an alleged
class action, again excluding any personal injury claim, with counts of
negligence and breach of implied warranty. Similar claims had been made, prior
to service upon us, against other retailers in the same jurisdiction by
plaintiffs represented by the same law firm. Currently, a motion to dismiss is
under consideration by the court in a separate case against another retailer,
and the Tennessee case against us has been delayed pending the court's ruling on
that motion. We expect to file a similar motion to dismiss for our case. The
plaintiffs in the above California cases seek unspecified fines and penalties,
attorneys' fees and costs, and injunctive and other equitable relief; and the
plaintiff in the Tennessee case seeks unspecified money damages, punitive
damages, attorneys' fees and injunctive relief on behalf of the alleged class.
We continue to evaluate appropriate action in each of these cases with our
counsel. In each case, we believe we have meritorious defenses to the
plaintiff's claims and intend to defend against such claims; though it is
impossible to predict the outcome of the proceeding, and it is possible the
plaintiff will be awarded requested remedies or that we may determine it
appropriate to settle the lawsuit which could require us to take or not take
certain actions.
On September 17, 2004, a former Torrid employee filed a lawsuit against us
in Superior Court of Los Angeles County, on behalf of a purported class. The
lawsuit asserts claims for failure to provide adequate meal or rest breaks,
improper payment of overtime wages, failure to timely pay wages at end of
employment and unfair business practices. The lawsuit seeks compensatory
damages, statutory penalties, punitive damages, attorneys' fees and injunctive
relief. On October 21, 2004, we filed an answer denying the material allegations
of the complaint, and we intend to vigorously defend ourselves against the
various claims. Discovery has begun in connection with this matter but at the
present time we are unable to predict the outcome of this matter.
23.
<PAGE>
On November 18, 2004, a former Torrid employee filed a lawsuit against us
in Superior Court of Los Angeles County, on behalf of a purported class. The
lawsuit asserts claims for, among other things, failure to pay overtime wages
and unfair business practices. The lawsuit seeks compensatory damages, statutory
penalties, restitution, interest and other costs, and attorneys' fees. We intend
to vigorously defend ourselves against the various claims, though at the present
time we are unable to predict the outcome of this matter.
Though significant litigation or awards against us could seriously harm our
business and financial results, we do not at this time expect any of the
above-described litigation to have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
24.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the Nasdaq National Market under the symbol
"HOTT." The following table shows, for the periods indicated, the high and low
end-of-day closing sales prices of our shares of Common Stock, 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.
2004 FISCAL YEAR QUARTERS HIGH LOW
------------------------------------------------------
First Quarter $30.79 $21.78
Second Quarter $22.91 $14.87
Third Quarter $20.56 $14.49
Fourth Quarter $20.95 $15.46
2003 FISCAL YEAR QUARTERS HIGH LOW
------------------------------------------------------
First Quarter $16.35 $14.01
Second Quarter $19.67 $15.69
Third Quarter $29.25 $18.33
Fourth Quarter $31.85 $26.60
On August 12, 2003, we announced that our Board of Directors approved a
three-for-two stock split (in the form of a dividend) of our common stock. On
the effective date of September 2, 2003, shareholders received a dividend of one
additional share for every two shares they owned at the close of business on the
record date of August 21, 2003. The prices listed in the above table have been
adjusted for the split.
On March 9, 2005, the last sales price of our common stock as reported on
the Nasdaq National Market was $23.05 per share. As of March 9, 2005, there were
approximately 208 holders of record of our common stock. This number does not
reflect the actual number of beneficial holders of our common stock, which we
believe to be in excess of 25,000 holders.
On March 19, 2004, we announced that our Board of Directors approved the
repurchase of up to an aggregate of 2,000,000 shares of our common stock during
the period ending January 29, 2005. As of July 31, 2004 we had completed the
repurchase of 2,000,000 shares of our common stock at a cost of $46.8 million at
an average price of $23.41.
On August 18, 2004, we announced that our Board of Directors approved an
additional repurchase of up to an aggregate of 2,000,000 shares of our common
stock during the period ending January 29, 2005. As of January 29, 2005 we had
completed the repurchase of 2,000,000 shares of our common stock at a cost of
$32.8 million at an average price of $16.42. The following table summarizes
activity in the quarter ended January 29, 2005.
25.
<PAGE>
<TABLE>
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF
SHARES PURCHASED AS MAXIMUM NUMBER OF
PART OF PUBLICLY SHARES THAT MAY YET BE
TOTAL NUMBER OF AVERAGE PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE
FISCAL PERIOD SHARES PURCHASED PER SHARE PROGRAMS PLANS OR PROGRAMS
- ------------------------ ---------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
November 28, 2004 -
January 1, 2005 1,000,000 $15.98 2,000,000 -
---------------- ------------------ ------------------- ----------------------
Total 1,000,000 $15.98 2,000,000 -
================ ================== =================== ======================
</TABLE>
We have not paid any cash dividends since inception and do not anticipate
paying any cash dividends in the foreseeable future.
Please see Item 12 for information about our equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data for each of the five
fiscal years in the period ended January 29, 2005 and have been restated to
reflect adjustments that are discussed further in Note 2. "Restatement of
Financial Statements" in the Notes to Consolidated Financial Statements included
in Item 8. "Financial Statements and Supplementary Data" in this Form 10-K. This
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 included elsewhere in this Annual Report on Form 10-K.
26.
<PAGE>
<TABLE>
Fiscal Year (as restated)
--------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(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 $ 656,468 $ 572,039 $ 443,250 $ 336,094 $ 257,187
Cost of goods sold, including buying, distribution
and occupancy costs 422,712 352,277 274,008 205,756 154,765
--------- --------- --------- --------- ---------
Gross margin 233,756 219,762 169,242 130,338 102,422
Selling, general and administrative expenses 170,384 143,952 115,634 86,950 67,917
--------- --------- --------- --------- ---------
Operating income 63,372 75,810 53,608 43,388 34,505
Interest income, net 919 1,318 1,371 1,884 1,925
--------- --------- --------- --------- ---------
Income before income taxes 64,291 77,128 54,979 45,272 36,430
Provision for income taxes 24,618 29,539 20,892 17,146 13,479
--------- --------- --------- --------- ---------
Net income $ 39,673 $ 47,589 $ 34,087 $ 28,126 $ 22,951
========= ========= ========= ========= =========
Net income per share:
Basic $ 0.86 $ 1.00 $ 0.72 $ 0.61 $ 0.52
Diluted $ 0.83 $ 0.96 $ 0.69 $ 0.56 $ 0.48
Weighted average shares outstanding:
Basic 46,379 47,479 47,027 46,467 44,502
Diluted 47,875 49,588 49,276 49,829 48,104
Selected Operating Data:
Number of stores at year end 668 554 445 352 274
Comparable stores sales (2.9)% 7.4% 5.0% 3.9% 16.7%
Average sales per square foot $ 571 $ 619 $ 619 $ 636 $ 669
Average sales per store $ 1,034 $ 1,106 $ 1,064 $ 1,036 $ 1,020
Balance Sheet Data:
Cash and short-term investments $ 66,339 $ 128,205 $ 83,418 $ 71,310 $ 51,288
Working capital 87,221 141,803 90,261 82,370 61,253
Total assets 278,395 296,082 215,854 169,904 123,317
Shareholders' equity $ 187,562 $ 221,279 $ 158,756 $ 133,738 $ 98,135
27.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our results of operations, financial condition
and liquidity, and other matters should be read in conjunction with our
Consolidated Financial Statements and Notes related thereto included in Item 8.
"Financial Statements and Supplementary Data" in this Form 10-K. These
statements have been prepared in conformity with accounting principles generally
accepted in the United States and require our management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
GENERAL
We are a mall-based specialty retailer operating the Hot Topic and Torrid
store concepts. Hot Topic stores sell a selection of music/pop culture-licensed
and music/pop culture-influenced apparel, accessories and gift items for young
men and women principally between the ages of 12 and 22. Torrid stores sell
apparel, lingerie, shoes and accessories designed for various lifestyles for
plus-size females between the ages of 15 and 29. We opened our first Hot Topic
store in 1989 and our first Torrid store in 2001. At the end of fiscal 2004 (the
fiscal year ended January 29, 2005), we operated 592 Hot Topic stores throughout
the United States and Puerto Rico, and 76 Torrid stores. We also sell
merchandise on two websites, www.hottopic.com ("hottopic.com") and
www.torrid.com ("torrid.com"), which reflect the Hot Topic and Torrid store
concepts and carry merchandise similar to that sold in the respective stores.
We consider a store comparable after it has been open for 15 full months.
If a store is relocated or expanded by more than 15% in total square footage, it
is removed from the comparable store base and, similar to new stores, becomes
comparable after 15 full months. At the end of fiscal 2004, 471 of the 592 Hot
Topic stores were included in the comparable store base, compared to 401 of the
502 stores open at the end of fiscal 2003. At the end of fiscal 2004, 46 of the
76 Torrid stores were included in the comparable store base, compared to 22 of
the 52 stores open at the end of fiscal 2003.
We operate on a 52 or 53-week fiscal year, which ends on the Saturday
nearest to January 31. Fiscal 2004, 2003 and 2002 were 52-week fiscal years.
See Note 2 to the Consolidated Financial Statements included in this report
for a summary of changes related to accounting of leases on our consolidated
balance sheet as of January 31, 2004, as well as our consolidated statements of
income and cash flows for the fiscal years ended January 31, 2004 and February
1, 2003. This Management's Discussion and Analysis gives effect to those
corrections.
28.
<PAGE>
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, certain selected
statement of operations data expressed as a percentage of net sales and certain
store data:
FISCAL YEAR
-------------------------------
2004 2003 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including
buying, distribution & occupancy
costs 64.4% 61.6% 61.8%
----- ----- -----
Gross margin 35.6% 38.4% 38.2%
Selling, general and administrative expenses 25.9% 25.1% 26.1%
----- ----- -----
Operating income 9.7% 13.3% 12.1%
Interest income, net 0.1% 0.2% 0.3%
---- ---- ----
Income before income tax 9.8% 13.5% 12.4%
Provision for income taxes 3.8% 5.2% 4.7%
---- ---- ----
Net income 6.0% 8.3% 7.7%
==== ==== ====
Number of stores at year end 668 554 445
Comparable store sales (2.9)% 7.4% 5.0%
FISCAL 2004 COMPARED TO FISCAL 2003
Net sales increased approximately $84.4 million, or 14.8%, to $656.5
million in fiscal 2004 from $572.0 million in fiscal 2003. The components of
this $84.4 million increase in net sales are as follows:
AMOUNT
($ MILLIONS) DESCRIPTION
------------ -----------------------------------------------------------
$75.6 Net sales from new Hot Topic stores opened during fiscal
2004 and Hot Topic stores not yet qualifying as comparable
stores
19.2 Net sales from new Torrid stores opened during fiscal 2004
and Torrid stores not yet qualifying as comparable stores
(14.4) 2.9% decrease in comparable store net sales in fiscal 2004
compared to fiscal 2003
4.0 Increase in Internet sales (hottopic.com and torrid.com)
-----------
$84.4 TOTAL
===========
The annual average Hot Topic store volume decreased to $1.05 million in
fiscal 2004 from $1.13 million in fiscal 2003. Hot Topic sales of apparel
category merchandise, as a percentage of total net sales, were 53% in fiscal
2004 compared to 52% in fiscal 2003. The increase in apparel was primarily due
to increases in men's music-related tee shirts partially offset by decreases in
women's bottoms, men's fashion tops and men's bottoms.
29.
<PAGE>
Gross margin increased approximately $14.0 million to $233.8 million in
fiscal 2004 from $219.8 million in fiscal 2003. As a percentage of net sales,
gross margin decreased to 35.6% in fiscal 2004 from 38.4% in fiscal 2003. The
significant components of this 2.8% decrease in gross margin, as a percentage of
net sales, are as follows:
% DESCRIPTION
------------ -----------------------------------------------------------
(2.1)% Decrease in merchandise margin, principally due to higher
markdown activity driven by lower comparable store sales
(0.5) Increase in occupancy and store depreciation expenses,
primarily due to deleveraging over lower comparable store
sales
(0.2) Increase in distribution expenses and buying costs,
primarily due to higher freight costs and deleveraging
payroll costs over lower comparable store sales
-----------
(2.8)% TOTAL
===========
Selling, general and administrative expenses increased approximately $26.4
million to $170.4 million during fiscal 2004 from $144.0 million during fiscal
2003. As a percentage of net sales, selling, general and administrative expenses
were 25.9% for fiscal 2004 compared to 25.1% in fiscal 2003. The total dollar
increase in selling, general and administrative expenses was primarily
attributable to an increase in the number of retail stores from 554 at the end
of fiscal 2003 to 668 at the end of fiscal 2004 and the corresponding additional
payroll and other expenses required to support these additional stores. The
significant components of this 0.8% increase in selling, general and
administrative expenses as a percentage of net sales are as follows:
% DESCRIPTION
------------ -----------------------------------------------------------
0.5% Increase in store payroll due to deleveraging of payroll
costs over lower comparable store sales, and increase in
payroll-related benefits costs, partially offset by lower
store bonus payouts
0.5% Increase in other store expenses as a result of
deleveraging expenses over lower comparable store sales
along with increases in store supply costs and expenses
related to our wide area network
0.1% Increase in depreciation and amortization as a result of
our new warehouse management software implemented during
2004 and higher marketing expenses to support new
advertising programs.
(0.3)% Decrease in other general and administrative expenses
primarily due to a decrease in performance based
compensation, partially offset by an increase in payroll
related benefits costs and an increase in professional
fees related to implementing Section 404 of the
Sarbanes-Oxley Act
------------
0.8% TOTAL
============
Operating income decreased approximately $12.4 million to $63.4 million
during fiscal 2004 from $75.8 million during fiscal 2003. As a percentage of net
sales, operating income was 9.7% in fiscal 2004 compared to 13.3% in fiscal
2003. Operating income on an average store basis was approximately $103,000 in
fiscal 2004 as compared to $151,000 in fiscal 2003.
30.
<PAGE>
Net interest income decreased to $0.9 million in fiscal 2004 from $1.3
million in fiscal 2003, principally due to lower average cash balances, which
was primarily a result of cash used for purposes of common stock repurchases.
Our effective tax rate was 38.3% in both fiscal 2004 and 2003.
FISCAL 2003 COMPARED TO FISCAL 2002
Net sales increased approximately $128.8 million, or 29.1%, to $572.0
million in fiscal 2003 from $443.2 million in fiscal 2002. The components of
this $128.8 million increase in net sales are as follows:
AMOUNT
($ MILLIONS) DESCRIPTION
------------ -----------------------------------------------------------
$71.5 Net sales from new Hot Topic stores opened during fiscal
2003 and Hot Topic stores not yet qualifying as comparable
stores
20.3 Net sales from new Torrid stores opened during fiscal 2003
and Torrid stores not yet qualifying as comparable stores
29.1 7.4% increase in comparable store net sales in fiscal 2003
compared to fiscal 2002
7.9 Increase in Internet sales (hottopic.com and torrid.com)
------------
$128.8 TOTAL
============
The annual average Hot Topic store volume increased to $1.13 million in
fiscal 2003 from $1.07 million in fiscal 2002. Hot Topic sales of apparel
category merchandise, as a percentage of total net sales, were 52% in fiscal
2003 compared to 51% in fiscal 2002. The increase in apparel was primarily due
to increases in men's novelty tee shirts and men's music-related tee shirts
partially offset by decreases in women's apparel (women's bottoms and novelty
tees), men's fashion tops and men's bottoms. The sales mix for Hot Topic in
fiscal 2003 saw a decrease in sales of non-apparel merchandise (including
accessories, gifts, intimate apparel and shoes) to 48% from 49% in fiscal 2002.
Gross margin increased approximately $50.6 million to $219.8 million in
fiscal 2003 from $169.2 million in fiscal 2002. As a percentage of net sales,
gross margin increased to 38.4% in fiscal 2003 from 38.2% in fiscal 2002. The
significant components of this 0.2% improvement in gross margin, as a percentage
of net sales, are as follows:
% DESCRIPTION
------------ -----------------------------------------------------------
0.4% Decrease in distribution expenses, primarily due to
significant savings in freight costs, due to change in
shipping method to stores, and labor costs, due to
productivity improvements
0.2 Decrease in store depreciation as a result of leverage
gained from higher comparable store sales, partially offset
by an increase in store occupancy resulting from higher rent
expenses and common area charges
(0.4) Decrease in merchandise margin, principally due to lower
initial markup and higher shrinkage, partially offset by
lower markdowns.
------------
0.2% TOTAL
============
31.
<PAGE>
Selling, general and administrative expenses increased approximately $28.4
million to $144.0 million during fiscal 2003 from $115.6 million during fiscal
2002. As a percentage of net sales, selling, general and administrative expenses
were 25.1% for fiscal 2003 compared to 26.1% in fiscal 2002. The total dollar
increase in selling, general and administrative expenses was primarily
attributable to an increase in the number of retail stores from 445 at the end
of fiscal 2002 to 554 at the end of fiscal 2003 and the corresponding additional
payroll and other expenses required to support these additional stores. The
significant components of this 1.0% decrease in selling, general and
administrative expenses as a percentage of net sales are as follows:
% DESCRIPTION
------------ -----------------------------------------------------------
(1.2)% Decrease in store payroll and administrative salary expense
resulting from leverage gained from higher comparable store
sales and controlling payroll costs
(0.1) Decrease in pre-opening expenses
0.3 Increase in administrative performance based payroll
expenses, partially offset by headquarters expenses which
benefited from leverage gained from higher comparable store
sales
-----------
(1.0)% TOTAL
===========
Operating income increased approximately $22.2 million to $75.8 million
during fiscal 2003 from $53.6 million during fiscal 2002. As a percentage of net
sales, operating income was 13.3% in fiscal 2003 compared to 12.1% in fiscal
2002. Operating income on an average store basis was approximately $151,000 in
fiscal 2003 as compared to $133,000 in fiscal 2002.
Net interest income decreased to $1.3 million in fiscal 2003 from $1.4
million in fiscal 2002, principally due to lower interest rates offset in part
by the additional interest earned from higher average cash balances.
Our effective tax rate was 38.3% in fiscal 2003 and 38.0% in fiscal 2002.
The higher rate for fiscal 2003 is principally attributable to lower tax-exempt
interest income as a percentage of pre-tax income in fiscal 2003 as compared to
fiscal 2002.
QUARTERLY RESULTS AND SEASONALITY
Our 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/pop
culture-related products, shifts in timing of certain holidays, changes in our
merchandise mix and overall economic and political conditions.
Our business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school, Halloween and Holiday seasons
(defined as the week of Thanksgiving through the first few days of January), and
other periods when schools are not in session. The Holiday season remains our
single most important selling season. We believe, 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)
as well as Halloween (which affects operating results in the third quarter), all
reduce our dependence on the Holiday selling season. Furthermore, summer
vacation, back-to-school season and spring break season take place at somewhat
different times in different parts of the country, spreading the impact of these
events on our sales over a longer period. As is the case with many retailers of
apparel, accessories and related merchandise, we typically experience lower
first fiscal quarter net sales relative to other quarters.
32.
<PAGE>
The following table shows certain statement of operations and selected
operating data for each of our last eight fiscal quarters (13 week periods). See
Note 2 to the Consolidated Financial Statements for changes related to
accounting for leases, which are reflected in the amounts below. The quarterly
statement of operations data and selected operating data shown below were
derived from our unaudited financial statements, which in the opinion of
management contain all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation. Results in any quarter are not
necessarily indicative of results that may be achieved for a full year.
<TABLE>
FISCAL YEAR 2004 (AS RESTATED) FISCAL YEAR 2003 (AS RESTATED)
------------------------------------------- ------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------ ----- ------ ----- ------
(In thousands, except selected operating and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $128,143 $136,263 $180,808 $211,254 $100,657 $115,728 $161,546 $194,108
Gross margin 44,185 46,650 64,540 78,381 35,350 41,397 62,754 80,261
Operating income 8,200 7,135 19,987 28,050 6,501 9,090 24,128 36,091
Net income $5,277 $4,528 $12,448 $17,420 $4,254 $5,740 $15,093 $22,502
Net income per share:
Basic $0.11 $0.10 $0.27 $0.39 $0.09 $0.12 $0.32 $0.47
Diluted $0.11 $0.09 $0.26 $0.38 $0.09 $0.12 $0.30 $0.45
Weighted average shares outstanding:
Basic 48,019 46,565 46,086 44,944 46,968 47,360 47,656 47,932
Diluted 50,131 48,023 47,202 46,127 48,567 49,127 49,917 50,342
SELECTED OPERATING DATA:
Comparable stores sales 4.0% (2.1)% (4.2)% (6.0)% 2.6% (5.2)% 10.8% 8.5%
Stores open at end of period 581 613 649 668 468 497 540 554
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have satisfied our cash requirements principally from
cash flows from operations and to a lesser extent proceeds from the exercise of
stock options. During the last three fiscal years, our primary uses of cash have
been to finance store openings and purchase merchandise inventories, as well as
periodic repurchases of our common stock. In August 2004, we announced the
approval by our Board of Directors of the repurchase of up to 2,000,000 shares
of our common stock. As of January 29, 2005 we had completed the repurchase of
2,000,000 shares of our common stock at an average price of $16.42. In addition,
pursuant to authorization by our Board of Directors in March 2004, we
repurchased 2,000,000 shares of our common stock at an average price of $23.41
during the six months ended July 31, 2004. We also maintain a $5.0 million
unsecured credit agreement for the purpose of issuing letters of credit,
primarily for inventory purchases. At January 29, 2005, we had $0.1 million of
outstanding letters of credit under the credit agreement. At the end of fiscal
33.
<PAGE>
2004, we had $66.3 million in cash, cash equivalents and short-term investments,
a decrease of $61.9 million, or 48%, compared to the $128.2 million at the end
of fiscal 2003. Working capital was $87.2 million, $141.8 million, and $90.3
million for fiscal 2004, 2003 and 2002, respectively. The decrease in working
capital from 2003 to 2004 is primarily attributable to cash used for the
repurchase of our common stock.
Net cash flows provided by operating activities were $71.1 million, $78.6
million and $64.8 million in fiscal 2004, 2003, and 2002, respectively. The $7.5
million decrease in cash flows from operating activities in fiscal 2004 as
compared to fiscal 2003 was primarily attributable to decreases in net income,
accrued liabilities and tax benefits from exercise of stock options, partially
offset by increases in deferred rent, deferred taxes, and depreciation and
amortization, and decrease in the change of inventory compared to fiscal 2003.
The significant changes in net cash provided by operating activities were due
primarily to the increase in store growth to 668 stores at the end of fiscal
2004 compared to 554 stores at the end of fiscal 2003.
Net cash flows used in investing activities were $2.6 million, $88.2
million and $41.6 million in fiscal 2004, 2003 and 2002, respectively. In fiscal
2004, approximately $39 million was used for the construction of 91 Hot Topic
stores, 24 Torrid stores, expansion and refurbishment of ten Hot Topic and
Torrid stores and progress payments for construction of stores opening in early
fiscal 2005. We used approximately $14 million on computer hardware and software
and $5 million on our headquarters and distribution center infrastructure. We
opened 115, 109, and 95 stores in fiscal 2004, 2003 and 2002, respectively. Net
cash used in investing activities was reduced by the net proceeds ($55 million)
of short-term investments sold.
Net cash flows used in financing activities were $75.1 million in fiscal
2004 compared to net cash flows provided by financing activities of $8.3 million
and net cash flows used in financing activities of $14.3 million in fiscal 2003
and 2002, respectively. The $83.5 million decrease in fiscal 2004 compared to
fiscal 2003 was principally a result of $79.6 million of cash used to repurchase
our common stock in fiscal 2004 and $3.9 million related to a decrease in
proceeds from exercise of stock options.
We anticipate that we will spend approximately $56 million on capital
expenditures in fiscal 2005, including approximately $38 million for stores, $10
million for the second distribution center located in Tennessee, and $8 million
for computer hardware and software. The $38 million for stores is to be
primarily used for the construction of 65 Hot Topic stores and 45 Torrid stores,
and expansion of approximately 20 existing stores.
During fiscal 2004, our average gross capital expenditures for a new Hot
Topic store, including leasehold improvements and furniture and fixtures,
totaled approximately $235,000. The average initial gross inventory for the new
Hot Topic stores opened in 2004 was approximately $110,000 and the average
pre-opening costs for a new Hot Topic store were approximately $21,000. Initial
inventory requirements vary at new stores depending on the season and current
merchandise trends. We expect the average total cost per square foot associated
with opening a Hot Topic store to be approximately the same in fiscal 2005 as
those in fiscal 2004. Hot Topic stores are planned to be approximately 1,700
square feet compared to Torrid stores which are planned to be approximately
2,500 square feet. The costs associated with opening a new Torrid store will be
higher than a Hot Topic store primarily due to the larger size of the Torrid
stores. The actual costs that we will incur in connection with opening future
stores cannot be predicted with precision because such costs will vary based
upon, among other things, geographic location, store size, and the extent of the
build-out required at the selected sites.
The following table summarizes our contractual obligations as of January
29, 2005, and the timing and effect that such commitments are expected to have
on our liquidity and capital requirements in future periods:
34.
<PAGE>
<TABLE>
PAYMENTS DUE BY PERIOD ($ IN THOUSANDS)
-----------------------------------------------------------------------
MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL WITHIN 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
----- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING LEASES $339,423 $45,969 $90,538 $82,495 $120,421
PURCHASE OBLIGATIONS 55,624 55,624 - - -
LETTERS OF CREDIT AND OTHER OBLIGATIONS 3,283 3,021 262 - -
-----------------------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATIONS $398,330 $104,614 $90,800 $82,495 $120,421
=======================================================================
</TABLE>
See Note 6 to our consolidated financial statements for additional
disclosure related to operating lease obligations.
On March 19, 2004, we announced that our Board of Directors approved the
repurchase of up to an aggregate of 2,000,000 shares of our common stock during
the period ending January 29, 2005. As of July 31, 2004 we had completed the
repurchase of 2,000,000 shares of our common stock at a cost of $46.8 million at
an average price of $23.41.
On August 18, 2004, we announced that our Board of Directors approved an
additional repurchase of up to an aggregate of 2,000,000 shares of our common
stock during the period ending January 29, 2005. As of January 29, 2005 we had
completed the repurchase of 2,000,000 shares of our common stock at a cost of
$32.8 million at an average price of $16.42.
We believe that our existing cash balances and cash generated from
operations will be sufficient to fund our operations, planned expansion and
repurchase of our common stock through at least the next 12 months.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of Hot Topic, Inc.'s financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an ongoing basis, we
evaluate estimates, including those related primarily to inventories, long-lived
assets and contingencies. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a further discussion about the application of these
and other accounting policies, see Note 1 to our audited consolidated financial
statements included elsewhere in this report.
INVENTORIES: Inventories and related cost of sales are accounted for by the
retail method. The cost of inventory is valued at the lower of average cost or
market, on a first-in, first-out (FIFO) basis, utilizing the retail method. Each
month, slow moving or seasonally obsolete merchandise is marked down. The first
markdown is typically 25% to 50% of the original retail price. Typically, in
cases where the merchandise does not sell after the first markdown, an
additional markdown is made in a subsequent month. Any marked down merchandise
that does not sell is typically marked down to a zero value and removed from the
store, approximately three months after the original markdown. In determining
the lower of average cost or market value of period-ending inventories,
consistently applied valuation criteria are used. Consideration is given to a
number of quantitative factors, including anticipated subsequent permanent
markdowns and aging of inventories. To the extent our estimated markdowns at
year-end prove to be insufficient, additional future markdowns will need to be
recorded.
35.
<PAGE>
VALUATION OF LONG-LIVED ASSETS: We assess the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors considered important that could trigger an
impairment review include a significant underperformance relative to expected
historical or projected future operating results, a significant change in the
manner of the use of the asset or a significant negative industry or economic
trend. If we were to determine that the carrying value of long-lived assets may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, we would measure any impairment based on a projected
discounted cash flow method using a discount rate determined by management. To
date, we have not recorded any significant impairment of a long-lived asset. In
the event future store performance is lower than forecasted results, future cash
flows may be lower than expected, which could result in future impairment
charges. While we believe recently opened stores will provide sufficient cash
flow, material changes in results could result in future impairment charges.
REVENUE RECOGNITION: Sales are recognized upon the purchase by customers at
our retail store locations and websites, less merchandise returned by customers.
We provide a reserve for projected merchandise returns based on historical
experience. As the reserve for merchandise returns is based on estimates the
actual returns could differ from the reserve, which could impact sales. Revenue
from gift cards, gift certificates and store merchandise credits is recognized
at the time of redemption. Shipping and handling revenues from our websites are
included as a component of net sales.
RENT EXPENSE: Rent expense under our operating leases typically provide for
fixed non-contingent rent escalations. We recognize rent expense on a
straight-line over the non-cancelable term of each lease, commencing when we
take possession of the property. Construction allowances are recorded as a
deferred rent liability, which we amortize as a reduction of rent expense over
the non-cancelable term of each lease.
SELF-INSURANCE: We are self-insured for medical insurance coverage and
workers compensation insurance coverage, up to maximum exposure limits, above
which we are covered by insurance policies. We maintain a liability for
estimated claims based on historical claims experience and other actuarial
assumptions.
INCOME TAXES: Current income tax expense is the amount of income taxes
expected to be payable for the current year. The combined federal, state and
local income tax expense is calculated using estimated effective annual tax
rates. A deferred income tax asset or liability is established for the expected
future consequences of temporary differences in the financial reporting and tax
bases of assets and liabilities. We consider future taxable income and ongoing
prudent and feasible tax planning in assessing the value of our deferred tax
assets. Evaluating the value of these assets is necessarily based on our
judgment. If we were to determine that it is more likely than not that these
assets will not be realized, we would reduce the value of these assets to their
expected realizable value through a valuation allowance, thereby decreasing net
income. If we subsequently were to determine that the deferred tax assets, which
had been written down, would be realized in the future, the value of the
deferred tax assets would be increased, thereby increasing net income in the
period when that determination was made. We have recorded tax contingencies
based on our estimates of current tax exposures and adjust our estimates as
circumstances or regulations change.
INFLATION
We do not believe that inflation has had a material adverse effect on our
net sales or results of operations. We have generally been able to pass along
increased costs related to inflation through increases in selling prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not a party to any derivative financial instruments. Our exposure to
market risk primarily relates to changes in interest rates on our investments
with maturities of less than three months (which are considered to be cash and
cash equivalents) and short-term investments with maturities in excess of three
months. Changes in interest rates affect the investment income earned on those
investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and notes listed in Item 15(a) are
incorporated herein by reference.
36.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
a) CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
The management of the company maintains disclosure controls and procedures
that are designed to ensure that the information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the Security and Exchange Commissions's (the "SEC") rules and
forms, and that such information is accumulated and communicated to management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required
disclosure.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of inherent limitations, our disclosure controls and
procedures may not prevent or detect misstatements. In addition, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, have been detected.
We conducted an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures in connection with the preparation of
this annual report, under the supervision of and with the participation of our
management, including the CEO and CFO.
In making our assessment, we used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control--Integrated Framework. Based on that evaluation, our CEO and CFO
concluded that our disclosure controls and procedures were not effective as of
January 29, 2005, for the following reason: On March 2, 2005, we announced that
our financial statements were to be restated, relating to certain lease
accounting and leasehold depreciation accounting practices, consistent with
similar adjustments made by many other retailers and other publicly traded
companies concerning these practices. This restatement is described elsewhere in
this annual report. Although prior to the end of fiscal 2004, management
surfaced certain lease accounting issues based upon the internal control
practice of reviewing industry publications and financial statement filings and
brought this to the attention of our independent registered public accounting
firm, the decision to modify our lease accounting policy and practices was not
made prior to the end of the fiscal year. Our conclusion to change our
accounting policy and restate was made, among other things, in consideration of
the views of the Office of the Chief Accountant of the SEC expressed in its
letter related to these matters dated February 7, 2005. Accordingly, we
concluded that our controls over the selection of appropriate assumptions and
factors affecting lease accounting practices were not effective as of January
29, 2005.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect
on the financial statements.
37.
<PAGE>
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over
financial reporting as of January 29, 2005. In making our assessment, management
used the criteria set forth by the COSO in Internal Control--Integrated
Framework. In particular, our management evaluated the impact of the lease
accounting corrections described above on such assessment and concluded that the
control deficiency that resulted in the restatement of previously issued
financial statements for understatement of rent expense and deferred rent
represented a material weakness. As a result, management concluded that, as of
January 29, 2005, our internal control over financial reporting was not
effective based on the criteria set forth by COSO in Internal
Control--Integrated Framework.
A material weakness in internal control over financial reporting is a
control deficiency (within the meaning of the Public Company Accounting
Oversight Board ("PCAOB") Auditing Standard No. 2), or combination of control
deficiencies, that results in there being more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. PCAOB Auditing Standard No. 2 identifies a number of
circumstances that, because of their likely significant negative effect on
internal control over financial reporting, are to be regarded as at least
significant deficiencies as well as strong indicators that a material weakness
exists, including the restatement of previously issued financial statements to
reflect the correction of a misstatement.
Our independent registered public accounting firm, Ernst & Young LLP, has
issued an attestation report on management's assessment of our internal control
over financial reporting. This report appears below.
REMEDIATION STEPS
We have remediated the material weakness in internal control by correcting
our application of lease accounting principles for free rent periods. We have
implemented controls to ensure all future leases will be reviewed and accounted
for in accordance with SFAS No. 13, FTB No. 85-3 and FTB No. 88-1. We believe
these steps will help ensure continued compliance with, among other things, the
views of the Office of the Chief Accountant of the SEC expressed as of February
7, 2005 and described above.
b) CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During our last fiscal quarter, ended January 29, 2005, as part of our
review of lease accounting policies discussed above, we remediated our controls
associated with our accounting for tenant improvement allowances and the related
deferred rent credit and depreciation expense. These changes in internal control
identified the need to restate previously issued financial statements to record
tenant improvement allowances as a deferred rent credit, to record the related
fixed assets at their gross amount, and to record adjustments to depreciation
and rent expense.
c) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control over Financial Reporting, that Hot
Topic, Inc. did not maintain effective internal control over financial reporting
as of January 29, 2005, because of the effect of the Company's insufficient
controls over the selection and monitoring of appropriate assumptions and
factors affecting lease accounting, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Hot Topic, Inc.'s
management is responsible for maintaining effective internal
38.
<PAGE>
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment: In its assessment as of January 29, 2005, management
identified as a material weakness the Company's insufficient controls over the
selection and monitoring of appropriate assumptions and factors affecting lease
accounting. As a result of this material weakness in internal control, Hot
Topic, Inc. concluded the Company's previously reported rent expense and
deferred rent liabilities had been understated and that previously issued
financial statements should be restated. This material weakness was considered
in determining the nature, timing, and extent of audit tests applied in our
audit of the 2004 financial statements, and this report does not affect our
report dated March 11, 2005 on those financial statements.
In our opinion, management's assessment that Hot Topic, Inc. did not
maintain effective internal control over financial reporting as of January 29,
2005 is fairly stated, in all material respects, based on the COSO control
criteria. Also, in our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the control criteria,
Hot Topic, Inc. has not maintained effective internal control over financial
reporting as of January 29, 2005, based on the COSO control criteria.
/s/ Ernst & Young LLP
Los Angeles, California
March 11, 2005
39.
<PAGE>
ITEM 9B. OTHER INFORMATION
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 our 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 our Definitive Proxy Statement which will
be filed with the SEC within 120 days of January 29, 2005 pursuant to Regulation
14A in connection with the solicitation of proxies for our Annual Meeting of
Shareholders to be held on June 15, 2005 (the "2005 Proxy Statement").
Certain other information required by this item is incorporated by
reference to the information appearing under the captions "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Standards of Business Ethics" in
the 2005 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 2005
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated by reference to the
information appearing under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" in
the 2005 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 2005 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the
information appearing under the caption "Ratification of Selection of
Independent Auditors" in the 2005 Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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:
40.
<PAGE>
<TABLE>
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm...... F-1
Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004......... F-2
Consolidated Statements of Income for the years ended January 29, 2005,
January 31, 2004, and February 1, 2003 ................................... F-3
Consolidated Statements of Shareholders' Equity for the years ended
January 29, 2005, January 31, 2004, and February 1, 2003.................. F-4
Consolidated Statements of Cash Flows for the years ended January 29, 2005,
January 31, 2004, and February 1, 2003.................................... F-5
Notes to Consolidated Financial Statements...................................... F-6
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission other than the ones listed
above are not required under the related instructions or are not applicable, and
therefore, have been omitted.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
FOR THE FISCAL YEARS ENDED JANUARY 29, 2005,
JANUARY 31, 2004, AND FEBRUARY 1, 2003
Provision
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
--------- --------- --------- ---------
FISCAL 2004
- -----------
Allowance for sales returns $ 512 $ 65 $ - $ 577
Allowance for aged inventory 1,057 453 - 1,510
--------- --------- --------- ---------
$ 1,569 $ 518 $ - $ 2,087
========= ========= ========= =========
FISCAL 2003
- -----------
Allowance for sales returns $ 350 $ 162 $ - $ 512
Allowance for aged inventory 866 191 - 1,057
--------- --------- --------- ---------
$ 1,216 $ 353 $ - $ 1,569
========= ========= ========= =========
FISCAL 2002
- -----------
Allowance for sales returns $ - $ 350 $ - $ 350
Allowance for aged inventory 490 376 - 866
--------- --------- --------- ---------
$ 490 $ 726 $ - $ 1,216
========= ========= ========= =========
41.
<PAGE>
(a)(3) EXHIBITS
The exhibits listed under Item 15(c) hereof are filed with, and
incorporated by reference into, this Annual Report on Form 10-K. Management
contracts or compensatory plans or arrangements required to be filed pursuant to
Item 15(c) are so identified therein.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Certificate of Amendment of Amended and Restated Articles of
Incorporation
3.3 Amended and Restated Bylaws, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate. (1)
10.1a Form of Indemnity Agreement to be entered into between
Registrant and its directors and officers. (1)
10.2a 1996 Equity Incentive Plan (the "1996 Plan"), as amended.
10.3a Form of Nonstatutory Stock Option Agreement of Registrant
pursuant to the 1996 Plan. (1)
10.4a Form of Incentive Stock Option Agreement of Registrant
pursuant to the 1996 Plan. (1)
10.5a Non-Employee Directors' Stock Option Plan, as amended.
10.6a Employee Stock Purchase Plan, as amended.
10.7a 401(k) Defined Contribution Plan of Registrant, effective as
of August 1, 1995, as amended.
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. (3)
10.11a Employment Offer Letter dated January 12, 2001, between the
Registrant and Gerald Cook. (3)
10.12a Form of Restricted Stock Bonus Agreement between the
Registrant and each of its non-employee directors as of
March 7, 2001 (with Robert Jaffe for 1,905 shares, and with
each of Bruce Quinnell, Edgar Berner, Andrew Schuon and
Corrado Federico for 1,587 shares) and as of September 24,
2001 (with Cynthia Cohen for 1,178 shares and vesting from
September 24, 2001) and as of January 28, 2002 (with W.
Scott Hedrick for 618 shares and vesting from January 28,
2002). (4)
10.13a Employment Offer Letter dated August 14, 2002, between the
Registrant and Patricia Van Cleave. (6)
10.14a Employment Letter dated January 23, 2003, between the
Registrant and James McGinty. (6)
10.15 Third Amendment to Industrial Real Estate Lease, dated
February 25, 2004, by and among Majestic-Fullerton Road,
LLC, PFG Fullerton Limited Partnership, and Hot Topic
Administration, Inc. (7)
42.
<PAGE>
10.16 Employment Offer Letter dated March 15, 2004, between the
Registrant and Christopher J. Kearns. (7)
10.17 Centre Pointe Distribution Park Lease, dated June 1, 2004,
by and among Crescent Resources, LLC and Hot Topic, Inc. (8)
10.18 Employment Offer Letter dated May 13, 2004, between the
Registrant and Thomas Beauchamp. (8)
21 Hot Topic, Inc. List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
24.1 Power of Attorney is contained on the signature page.
31.1 Certification, dated April 13, 2005, of Registrant's Chief
Executive Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification, dated April 13, 2005, of Registrant's Chief
Financial Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications, dated April 13, 2005, of Registrant's Chief
Executive Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------
(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.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended February 3, 2001 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended May 5, 2001 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended February 2, 2002 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended February 1, 2003 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended May 1, 2004 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 31, 2004 and incorporated herein by reference.
a Denotes management contract or compensatory plan or arrangement.
(d) FINANCIAL STATEMENT SCHEDULES
Reference is made to Item 15(a)(2).
43.
<PAGE>
SIGNATURES
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.
HOT TOPIC, INC.
By: /s/ Elizabeth McLaughlin
-----------------------------
Elizabeth McLaughlin
Chief Executive Officer and Director
April 13, 2005
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Elizabeth McLaughlin and James McGinty,
or either of them, his attorney-in-fact, each with the power of substitution,
for him or her 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.
NAME POSITION DATE
- ---------------------------- ------------------------------- ---------------
/s/ ELIZABETH MCLAUGHLIN Chief Executive Officer and April 13, 2005
- ---------------------------- Director (PRINCIPAL EXECUTIVE
Elizabeth McLaughlin OFFICER)
/s/ JAMES MCGINTY Chief Financial Officer April 13, 2005
- ---------------------------- (PRINCIPAL FINANCIAL OFFICER)
James McGinty
/s/ GEORGE WEHLITZ, JR. Vice President, Finance April 13, 2005
- ---------------------------- (PRINCIPAL ACCOUNTING
George Wehlitz, Jr. OFFICER)
/s/ BRUCE QUINNELL Chairman of the Board April 8, 2005
- ----------------------------
Bruce Quinnell
/s/ KATHLEEN MASON Director April 7, 2005
- ----------------------------
Kathleen Mason
/s/ CORRADO FEDERICO Director April 7, 2005
- ----------------------------
Corrado Federico
/s/ ANDREW SCHUON Director April 11, 2005
- ----------------------------
Andrew Schuon
/s/ CYNTHIA COHEN Director April 8, 2005
- ----------------------------
Cynthia Cohen
/s/ W. SCOTT HEDRICK Director April 10, 2005
- ----------------------------
W. Scott Hedrick
44.
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Hot Topic, Inc.
We have audited the accompanying consolidated balance sheets of Hot Topic,
Inc. and subsidiaries as of January 29, 2005 and January 31, 2004 (restated) and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended January 29, 2005. Our
audit also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hot Topic, Inc.
and its subsidiaries at January 29, 2005 and January 31, 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 29, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth herein.
As described in Note 2, Restatement of the Financial Statements, the
Company has corrected its accounting for leases and restated previously issued
financial statements.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Hot
Topic, Inc. and subsidiaries internal control over financial reporting as of
January 29, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 11, 2005 expressed an unqualified opinion
on management's assessment of the effectiveness of internal control over
financial reporting and an adverse opinion on the effectiveness of internal
control over financial reporting.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 11, 2005
F-1
<PAGE>
<TABLE>
HOT TOPIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
January 29, January 31,
2005 2004
(As Restated)
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,248 $ 11,886
Short-term investments 61,091 116,319
Inventory 60,481 51,937
Prepaid expenses and other 12,390 10,654
Deferred tax assets 2,541 2,259
----------------------------
Total current assets 141,751 193,055
Leaseholds, fixtures and equipment, net 136,401 102,838
Deposits and other 243 189
----------------------------
Total assets $ 278,395 $ 296,082
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,874 $ 15,841
Accrued liabilities 27,769 28,133
Income taxes payable 8,887 7,278
----------------------------
Total current liabilities 54,530 51,252
Deferred rent 30,227 21,843
Deferred tax liability 6,076 1,708
Commitments and contingencies - -
Shareholders' equity:
Preferred shares, no par value; 10,000,000 shares
authorized; no shares issued and outstanding - -
Common shares, no par value; 150,000,000 shares authorized;
44,592,836 and 48,120,989 shares issued and outstanding at
January 29, 2005 and January 31, 2004, respectively 90,921 86,238
Retained earnings 96,847 135,242
Accumulated other comprehensive loss (206) (201)
----------------------------
Total shareholders' equity 187,562 221,279
----------------------------
Total liabilities and shareholders' equity $ 278,395 $ 296,082
============================
See notes to consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
HOT TOPIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended
------------------------------------------
January 29, January 31, February 1,
2005 2004 2003
(As Restated) (As Restated)
------------------------------------------
<S> <C> <C> <C>
Net sales $ 656,468 $ 572,039 $ 443,250
Cost of goods sold, including buying,
distribution and occupancy costs 422,712 352,277 274,008
------------------------------------------
Gross margin 233,756 219,762 169,242
Selling, general and administrative expenses 170,384 143,952 115,634
------------------------------------------
Operating income 63,372 75,810 53,608
Interest income, net 919 1,318 1,371
------------------------------------------
Income before income taxes 64,291 77,128 54,979
Provision for income taxes 24,618 29,539 20,892
------------------------------------------
Net income $ 39,673 $ 47,589 $ 34,087
==========================================
Net income per share:
Basic $ 0.86 $ 1.00 $ 0.72
==========================================
Diluted $ 0.83 $ 0.96 $ 0.69
==========================================
Shares used in computing net income per share:
Basic 46,379 47,479 47,027
Diluted 47,875 49,588 49,276
See notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In thousands)
Common Shares Accumulated Other Total
----------------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Loss Equity
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 2, 2002 (As restated) 47,063 $ 60,643 $ 73,095 $ - $ 133,738
Exercise of stock options 1,195 4,942 - - 4,942
Employee stock purchase plan 33 418 - - 418
Restricted stock awards 15 153 - - 153
Repurchase of common stock (1,500) (171) (19,529) - (19,700)
Tax benefit from exercise of stock options - 5,118 - - 5,118
Net income (As restated) - - 34,087 - 34,087
----------------------------------------------------------------------------
BALANCE AT FEBRUARY 1, 2003 (As restated) 46,806 71,103 87,653 - 158,756
Exercise of stock options 1,261 7,696 - - 7,696
Employee stock purchase plan 46 666 - - 666
Restricted stock awards 8 180 - - 180
Fractional shares purchased in 3-for-2 stock split - (23) - - (23)
Tax benefit from exercise of stock options - 6,616 - - 6,616
Comprehensive income:
Net income (As restated) - - 47,589 - 47,589
Unrealized loss on marketable securities, net - - - (201) (201)
------------
Total comprehensive income 47,388
----------------------------------------------------------------------------
BALANCE AT JANUARY 31, 2004 (As restated) 48,121 86,238 135,242 (201) 221,279
Exercise of stock options 409 3,662 - - 3,662
Employee stock purchase plan 54 862 - - 862
Restricted stock awards 9 155 - - 155
Repurchase of common stock (4,000) (1,581) (78,068) (79,649)
Tax benefit from exercise of stock options - 1,585 - - 1,585
Comprehensive Income:
Net income - - 39,673 - 39,673
Unrealized loss on marketable securities, net - - - (5) (5)
------------
Total comprehensive income 39,668
----------------------------------------------------------------------------
BALANCE AT January 29, 2005 44,593 $ 90,921 $ 96,847 $ (206) $ 187,562
============================================================================
F-4
</TABLE>
<PAGE>
<TABLE>
HOT TOPIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
--------------------------------------------
January 29, January 31, February 1,
2005 2004 2003
(As Restated) (As Restated)
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 39,673 $ 47,589 $ 34,087
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,635 20,360 16,364
Tax benefit from exercise of stock options 1,585 6,616 5,118
Stock-based compensation 155 155 142
Loss on disposal of fixed assets 751 656 278
Changes in operating assets and liabilities:
Inventory (8,544) (13,528) (8,856)
Prepaid expenses and other current assets (1,736) (2,787) (2,431)
Deposits and other assets (53) (18) 3
Accounts payable 2,033 434 4,155
Accrued liabilities (1,459) 8,519 7,528
Deferred rent 8,383 6,270 4,940
Deferred taxes 4,086 3,793 (655)
Income taxes payable 1,609 548 4,166
--------------------------------------------
Net cash provided by operating activities 71,118 78,607 64,839
INVESTING ACTIVITIES
Purchases of leasehold, fixtures and equipment (57,853) (41,959) (38,401)
Proceeds from sale of short-term investments 162,931 52,906 46,105
Purchases of short-term investments (107,709) (99,146) (49,296)
--------------------------------------------
Net cash used in investing activities (2,631) (88,199) (41,592)
FINANCING ACTIVITIES
Repurchase of common stock (79,649) (23) (19,700)
Proceeds from employee stock purchases and exercise
of stock options 4,524 8,362 5,370
--------------------------------------------
Net cash (used in) provided by financing activities (75,125) 8,339 (14,330)
--------------------------------------------
(Decrease) increase in cash and cash equivalents (6,638) (1,253) 8,917
Cash and cash equivalents at beginning of year 11,886 13,139 4,222
--------------------------------------------
Cash and cash equivalents at end of year $ 5,248 $ 11,886 $ 13,139
============================================
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 8 $ 40 $ 19
============================================
Cash paid during the year for income taxes $ 17,400 $ 18,614 $ 12,317
============================================
See notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
HOT TOPIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2005
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITIES
Hot Topic, Inc. is a mall-based specialty retailer operating the Hot Topic and
Torrid store concepts. Hot Topic sells a selection of music/pop culture-licensed
and music/pop culture-influenced apparel, accessories and gift items for young
men and women principally between the ages of 12 and 22. In fiscal 2001 (the
fiscal year ended February 2, 2002), we launched a second retail concept under
the trade name Torrid. Torrid sells apparel, lingerie, shoes and accessories
designed for various lifestyles for plus-size females between the ages of 15 and
29. At the end of the fiscal year ending January 29, 2005, we operated 592 Hot
Topic stores in 50 states and Puerto Rico, and 76 Torrid stores. We also
maintain two distinct websites, www.hottopic.com ("hottopic.com") and
www.torrid.com ("torrid.com"), which reflect the Hot Topic and Torrid store
concepts and sell merchandise similar to that sold in the respective stores. We
have one reportable segment given the similarities of the economic
characteristics among the store formats.
Throughout this report, the terms "our", "we" and "us" refer to Hot Topic, Inc.
and its subsidiaries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hot Topic, Inc.
and our wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
current year presentation. The common stock and retained earnings balances at
January 31, 2004 and February 1, 2003 have been reclassified to reflect the
excess of the repurchase cost of common stock over its issuance price (as
determined on a first-in, first-out basis) as a reduction of retained earnings.
Previously, all common stock repurchases had been charged against common stock.
FISCAL YEAR
Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to
January 31. The fiscal years ended January 29, 2005, January 31, 2004 and
February 1, 2003 were 52-week years.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with maturities of less than three
months when purchased to be cash equivalents. We are potentially exposed to a
concentration of credit risk when cash deposits in banks are in excess of
federally insured limits.
F-6
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
We consider carrying amounts of cash and cash equivalents, receivables, and
accounts payable to approximate fair value because of the short maturity of
these financial instruments.
Amounts outstanding under the unsecured bank credit agreement are held at their
estimated fair values because they accrue interest at rates which generally
fluctuate with interest rate trends.
SHORT-TERM INVESTMENTS
Short-term investments with maturities in excess of three months consist
primarily of interest bearing bonds that are highly liquid, low risk with a
minimum credit quality rating of A-1 (Standard and Poor's), SP-1 (Moody's
Investor Service) or equivalent, and are available for sale. At January 29, 2005
and January 31, 2004, short-term investments consisted of municipal bonds of
$37.7 million and $96.0 million, government obligations of $15.3 million and
$12.7 million, and corporate bonds of $8.0 million and $7.6 million,
respectively. Short-term investments are recorded at fair market value, based on
established market prices as of the end of the period for which the values are
determined.
Unrealized gains and losses, net, from short-term investments comprise
accumulated other comprehensive loss, reflected in the Shareholders' Equity
section of the Consolidated Balance Sheets, which for the fiscal years ended
January 29, 2005 and January 31, 2004 were $5,000 and $201,000, respectively. As
a result, for the years ended January 29, 2005 and January 31, 2004, the
Company's other comprehensive income was lower than its net income.
INVENTORY
Inventories and related cost of sales are accounted for by the retail method.
The cost of inventory is valued at the lower of average cost or market, on a
first-in, first-out (FIFO) basis.
LEASEHOLD, FIXTURES AND EQUIPMENT
Leasehold, fixtures and equipment are recorded at cost or in the case of
capitalized leases, at the present value of future minimum lease payments.
Depreciation is calculated 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 ten years or the life of the
lease. Expenditures for repairs that do not significantly extend the life of the
asset are expensed as incurred.
REVENUE RECOGNITION
Sales are recognized upon the purchase by customers at our retail store
locations and websites, less merchandise returned by customers. We provide a
reserve for projected merchandise returns based on historical experience.
Revenue from gift cards, gift certificates and store merchandise credits is
recognized at the time of redemption. Shipping and handling revenues from our
websites are included as a component of net sales.
F-7
<PAGE>
COST OF GOODS SOLD, INCLUDING BUYING, DISTRIBUTION AND OCCUPANCY COSTS
Cost of goods sold, including buying, distribution and occupancy costs includes:
merchandise costs, freight, inventory shrink, payroll expenses associated with
the merchandising and distribution departments, distribution center expenses
including rent, common area maintenance charges, real estate taxes,
depreciation, utilities, supplies and maintenance; and store expenses including
rents, common area maintenance charges, real estate taxes, and depreciation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include: payroll expenses
associated with stores, store operating expenses, store pre-opening costs,
marketing expenses; and payroll and other expenses associated with headquarters
and administrative functions.
STORE PRE-OPENING COSTS
Costs incurred in connection with the opening of a new store are expensed as
incurred.
SHIPPING AND HANDLING COSTS
We classify shipping and handling costs in costs of goods sold, including
buying, distribution and occupancy costs in the accompanying statements of
income.
LEASES
Rent expense under non-cancelable operating leases with scheduled rent increases
or free rent periods is accounted for on a straight-line basis over the lease
term, beginning on the date of initial possession, which is generally when we
enter the space and begin construction build-out. The amount of the excess of
straight-line rent expense over scheduled payments is recorded as a deferred
rent liability. Construction allowances and other such lease incentives are
recorded as deferred credits, and are amortized on a straight-line basis as a
reduction of rent expense.
ADVERTISING COSTS
Advertising costs are expensed the first time the event occurs or as incurred.
Advertising expenses were $1,152,000, $1,065,000, and $521,000 for the years
ended January 29, 2005, January 31, 2004, and February 1, 2003, respectively. At
January 29, 2005 and January 31, 2004, the amount of advertising costs reported
as prepaid advertising was $49,000 and $42,000, respectively.
INCOME TAXES
We utilize Statement of Financial Accounting Standards ("SFAS") 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 8). A
three-for-two stock split became effective September 2, 2003. All share and per
share amounts prior to that date have been restated to reflect the stock split
and all previous stock splits.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
F-8
<PAGE>
LONG-LIVED ASSETS
Long-lived assets are reviewed for events or changes in circumstances that
indicate that their carrying value may not be recoverable. The review is based
on comparing the expected undiscounted cash flows to the carrying amount of such
assets. If it is determined that the carrying amount of the long-lived assets is
not recoverable, we will recognize an impairment loss, measured by the future
discounted cash flow method. At January 29, 2005, we believe there has been no
impairment of the value of such assets to date.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which
establishes accounting and reporting standards for impairment and disposition of
long-lived assets, including discontinued operations. SFAS No. 144 became
effective for all financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, its provisions are to be applied
prospectively. The adoption of SFAS No. 144 did not have a significant impact on
our results of operations or financial condition.
STOCK-BASED COMPENSATION
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure an Amendment of SFAS No. 123", amends the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require more
prominent disclosures in both annual and interim financial statements regarding
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results.
We account for stock-based awards to employees and directors using the intrinsic
value method of accounting in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." We follow
the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 requires disclosures of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income (loss) and earnings (loss) per
share in annual and interim financial statements. We are required to follow the
prescribed disclosure format and have provided the additional disclosures
required by SFAS No. 148 for the fiscal years ended January 29, 2005, January
31, 2004 and February 1, 2003.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if we accounted for our employee stock
incentives 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 fiscal 2004,
2003, and 2002: weighted average risk-free interest rates of 5%; dividend yields
of 0%; weighted average volatility factors of the expected market price of our
common stock of 0.48 for fiscal 2004, 0.40 for fiscal 2003, and 0.61 for fiscal
2002; and a weighted average expected life of the options of 3.6 years for
fiscal 2004, 5 years for fiscal 2003 and 2002. The weighted average fair value
of options granted during the year are $8.57, $6.70, and $8.53 per share for
fiscal 2004, 2003, and 2002, respectively.
F-9
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options,
based on the Black-Scholes option pricing model, is amortized to expense over
the options' vesting periods. The following is the pro forma information using
the fair value method under SFAS No. 123, as amended by SFAS No. 148 (in
thousands, except per share amounts):
<TABLE>
Years Ended
--------------------------------------------
January 31, February 1,
January 29, 2004 2003
2005 (As Restated) (As Restated)
------------ ------------ ------------
<S> <C> <C> <C>
Net income
As reported $39,673 $47,589 $34,087
Add: Stock-based compensation expense
included in reported net income, net of
related tax effects 96 96 88
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (11,804) (5,166) (4,189)
------------ ------------ ------------
Pro forma $27,965 $42,519 $29,986
============ ============ ============
Basic earnings per share:
As reported $0.86 $1.00 $0.72
Pro forma $0.60 $0.90 $0.64
Diluted earnings per share:
As reported $0.83 $0.96 $0.69
Pro forma $0.59 $0.87 $0.61
</TABLE>
ACCELERATED OPTIONS
We accelerated the vesting of certain stock options awarded to employees,
officers and directors under various stock option plans, which had exercise
prices that were below market closing price on January 4, 2005. Options to
purchase approximately 1.38 million shares became exercisable immediately as a
result of the vesting acceleration. Our Board approved the vesting acceleration
as a result of SFAS No. 123 requiring the expensing of stock options effective
later in 2005 which with respect to such accelerated options would have
negatively impacted our results from operations.
COMPREHENSIVE INCOME
We report comprehensive income in accordance with the provisions of SFAS 130,
"Reporting Comprehensive Income." SFAS 130 established standards for the
reporting and display of comprehensive income. Components of comprehensive
income include net earnings (loss), foreign currency translation adjustments and
gains/losses associated with investments available for sale. Comprehensive
income for the fiscal years ended January 29, 2005 and January 31, 2004 were
$39.7 million and $47.4 million, respectively.
F-10
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46(R) clarifies the application of ARB No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. FIN 46(R) applies immediately to variable interest entities created
after December 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies no later than the
first reporting period ending after March 15, 2004, to variable interest
entities in which an enterprise holds a variable interest (other than special
purpose) that it acquired before January 1, 2004. FIN 46(R) applies to public
enterprises as of the beginning of the applicable interim or annual period. We
do not currently have any variable interest entities and the adoption of the
provisions of FIN 46 and FIN 46(R) did not have a material impact on our results
of operations or financial condition.
In November 2003, consensus was reached on Emerging Issues Task Force ("EITF")
Issue No. 03-10, "Application of EITF Issue No. 02-16, `Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor,' by
Resellers to Sales Incentives Offered to Consumers by Manufacturers." Under
Issue 02-16, cash consideration received by a customer from a vendor is presumed
to be a price reduction of the vendor's products or services and should
therefore be characterized as a reduction of cost of sales when recognized in
the income statement of the customer. Issue No. 03-10 is effective for fiscal
periods beginning after November 25, 2003. The adoption of Issue No. 03-10 did
not have a material impact on our operating results or financial condition.
In March 2004, the EITF reached a consensus on EITF Issue No. 03-1 ("EITF
03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," for which the measurement and recognition provisions were
to be effective for reporting periods beginning after June 15, 2004. However, in
September 2004, the EITF issued FASB Staff Position EITF Issue No. 03-1-1,
"Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,'"
which postponed the measurement and recognition provisions of EITF 03-1, but
maintained the disclosure requirements for all investments within the scope of
the guidance to be effective in annual financial statements for fiscal years
ending after June 15, 2004. EITF 03-1 provides a three-step process for
determining whether investments, including debt securities, are other than
temporarily impaired and requires additional disclosures in annual financial
statements. An investment is impaired if the fair value of the investment is
less than its cost. EITF 03-1 outlines that an impairment would be considered
other-than-temporary unless: a) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for the recovery of the
fair value up to (or beyond) the cost of the investment, and b) evidence
F-11
<PAGE>
indicating that the cost of the investment is recoverable within a reasonable
period of time outweighs evidence to the contrary. Although not presumptive, a
pattern of selling investments prior to the forecasted recovery of fair value
may call into question the investor's intent. In addition, the severity and
duration of the impairment should also be considered in determining whether the
impairment is other-than-temporary. We do not expect the adoption of EITF 03-1
to have a material impact on our results of operations or financial condition
because our investments are short-term in nature and consist primarily of
interest bearing bonds that are highly liquid and low risk with a minimum credit
quality rating of A-1 (Standard and Poor's), SP-1 (Moody's Investor Service) or
equivalent
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment
of ARB No. 43, Chapter 4". SFAS No. 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges. In addition, SFAS No. 151
requires the allocation of fixed production overheads to the cost of conversion
be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. We do not expect the
adoption of SFAS No. 151 to have a material impact on our operating results or
financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmentary Assets,
an amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets, which were previously
required to be recorded on a carryover basis rather than a fair value basis.
Instead, this statement provides that exchanges of nonmonetary assets that do
not have commercial substance be reported at carryover basis rather than a fair
value basis. A nonmonetary exchange is considered to have commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of this statement are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. We do not expect the adoption of SFAS No. 153 to have a material impact on
our operating results or financial condition.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which is a revision of SFAS No. 123. SFAS No. 123R
supersedes APB No. 25 and amends Statement No. 95, "Statement of Cash Flows."
Under SFAS No. 123, companies must calculate and record in the income statement
the cost of equity instruments, such as stock options, awarded to employees for
services received and pro forma disclosure is no longer permitted. The cost of
the equity instruments will be measured based on fair value of the instruments
on the date they are granted (with certain exceptions) and will be required to
be recognized over the period during which the employees are required to provide
services in exchange for the equity instruments. The statement is effective in
the first interim or annual reporting period beginning after June 15, 2005.
SFAS No. 123R provides two alternatives for adoption: (1) a "modified
prospective" method in which compensation cost is recognized for all awards
granted subsequent to the effective date of this statement as well as for the
unvested portion of awards outstanding as of the effective date; or (2) a
"modified retrospective" method which follows the approach in the "modified
prospective" method, but also permits entities to restate prior periods to
record compensations cost calculated under SFAS No. 123 for the pro forma
disclosure. We are currently evaluating our share-based payment programs on our
results of operations, and do not expect the adoption of SFAS No. 123 to have a
material impact on our overall financial position but could significantly impact
results of operations.
The impact of adopting SFAS No. 123R cannot be accurately estimated at this time
because it will depend on levels of share-based awards granted in the future.
However, had we adopted SFAS No. 123R in prior periods, the impact of that
standard would have approximated the impact of SFAS No. 123 as described in the
F-12
<PAGE>
disclosure of pro forma net income and earnings per share in Note 1 to our
consolidated financial statements. SFAS No 123R also requires the benefits of
tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow. This change will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While the amount of
this change cannot be estimated at this time, the amount of operating cash flows
recognized in prior periods for such excess tax deductions were $1.6 million,
$6.6 million, and $5.1 million in fiscal 2004, 2003 and 2002, respectively.
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS
In accordance with SFAS No. 13, "Accounting for Leases" and Financial Accounting
Standards Board Technical Bulletin No. 88-1, "Issues Relating to Accounting for
Leases" ("FTB 88-1"), we account for rental expense for step provisions and
escalation clauses on a straight-line basis over the minimum lease term, with
such amounts being included along with other related rent expense as part of
"Cost of goods sold, including buying, distribution and occupancy costs."
Construction allowances and other lease concessions received from landlords are
amortized over the minimum lease term on a straight-line basis as part of "Cost
of goods sold, including buying, distribution and occupancy costs." However, in
our detailed accounts, we had previously recorded this amortization as a
reduction of depreciation expense, rather than rent expense. Both depreciation
and rent expense are reflected within "Cost of goods sold, including buying,
distribution and occupancy costs" on the statements of income.
Historically, our balance sheets have reflected the unamortized portion of
construction allowances and other lease concessions as a reduction of
"Leaseholds, fixtures and equipment, net," instead of as a component of deferred
rent liability. Further, our historical statements of cash flows have reflected
construction allowances and other lease concessions received as a reduction of
"Leaseholds, fixtures and equipment, net" (within "investing" cash flows),
rather than as an operating lease activity (within "operating" cash flows).
We had historically recognized rent expense on a straight-line basis over the
lease term. Our leases typically have a rent commencement date to coincide with
the initial occupancy date, or store opening date. The store opening date
coincided with the commencement of business operations, which is the intended
use of the property. Management re-evaluated FASB Technical Bulletin No. 85-3,
"Accounting for Operating Leases with Scheduled Rent Increases" and determined
that the lease term for amortization purposes should commence on the date we
take possession of the leased space for construction purposes, which is
generally two months prior to a store opening date. Excluding tax impacts, the
correction of this accounting requires us to record additional rent credits in
"Deferred rent" and to adjust "Retained earnings" on the consolidated balance
sheets, as well as to record additional rent expense in the form of deferred
rent amortization in "Costs of goods sold, including, buying, distribution and
occupancy costs" on the consolidated statements of income for the years ended
January 31, 2004 and February 1, 2003. The cumulative effect of these changes is
a reduction to retained earnings of $1.6 million as of the beginning of fiscal
2002 and incremental decreases to retained earnings of $543,000 and $453,000,
for the fiscal years ended 2002 and 2003, respectively. The impact of these
adjustments reduced net income recorded in the first, second and third quarters
of fiscal 2004 by $82,000, $119,000, and $132,000, respectively and changed net
income recorded in the first, second, third and fourth quarters of fiscal 2003
by ($156,000), ($150,000), ($178,000) and $31,000, respectively.
F-13
<PAGE>
The following is a summary of the effects of these changes on our consolidated
balance sheets as of January 31, 2004 and February 1, 2003, as well as the
effects of these changes on our consolidated statements of income and cash flows
for fiscal years 2003 and 2002 (in thousands, except share data):
<TABLE>
Consolidated Statements of Income
--------------------------------------------
As
Previously
Fiscal Year Ended January 31, 2004 Reported Adjustments As Restated
- ---------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cost of goods sold, including buying, distribution and occupancy costs $ 351,542 $ 735 $ 352,277
Operating income 76,545 (735) 75,810
Income before income taxes 77,863 (735) 77,128
Provision for income taxes 29,821 (282) 29,539
Net income 48,042 (453) 47,589
Net income per share - basic 1.01 (0.01) 1.00
Net income per share - diluted 0.97 (0.01) 0.96
Fiscal Year Ended February 1, 2003
- ----------------------------------------------------------------------
Cost of goods sold, including buying, distribution and occupancy costs $ 273,132 $ 876 $ 274,008
Operating income 54,484 (876) 53,608
Income before income taxes 55,855 (876) 54,979
Provision for income taxes 21,225 (333) 20,892
Net income 34,630 (543) 34,087
Net income per share - basic 0.74 (0.01) 0.72
Net income per share - diluted 0.70 (0.01) 0.69
</TABLE>
<TABLE>
Consolidated Balance Sheets
--------------------------------------------
As
Previously
January 31, 2004 Reported Adjustments As Restated
- ---------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Leasehold, fixtures and equipment, net $ 88,348 $ 14,490 $ 102,838
Total assets 281,592 14,490 296,082
Income taxes payable 7,242 36 7,278
Deferred rent 3,155 18,688 21,843
Deferred taxes, net 3,316 (1,608) 1,708
Retained earnings 137,868 (2,626) 135,242
Total shareholders' equity 223,905 (2,626) 221,279
Total liabilities and shareholders' equity 281,592 14,490 296,082
</TABLE>
F-14
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
--------------------------------------------
As
Previously
Fiscal Year Ended January 31, 2004 Reported Adjustments As Restated
- ---------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 72,302 $ 6,305 $ 78,607
Net cash provided by investing activities (81,894) (6,305) (88,199)
Fiscal Year Ended February 1, 2003
- ----------------------------------------------------------------------
Net cash provided by operating activities $ 60,317 $ 4,522 $ 64,839
Net cash provided by investing activities (37,070) (4,522) (41,592)
</TABLE>
<TABLE>
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
As
Previously
February 2, 2002 Reported Adjustments As Restated
- ---------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Retained earnings $ 74,725 $ (1,630) $ 73,095
</TABLE>
NOTE 3. LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are summarized as follows (in thousands):
January 31,
January 29, 2004
2005 (As Restated)
----------- -----------
Furniture, fixtures and equipment $ 110,503 $ 78,476
Leasehold improvements 115,579 91,175
----------- -----------
226,082 169,651
Less: accumulated depreciation and amortization (89,681) (66,813)
----------- -----------
$ 136,401 $ 102,838
=========== ===========
F-15
<PAGE>
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
January 31,
January 29, 2004
2005 (As Restated)
----------- -----------
Accrued payroll and related expenses $ 4,194 $ 9,833
Gift cards, gift certificates and
store merchandise credits 7,943 5,713
Accrued percentage rents 1,858 4,012
Other 13,774 8,575
----------- -----------
$ 27,769 $ 28,133
=========== ===========
NOTE 5. BANK CREDIT AGREEMENT
We maintain an unsecured bank credit agreement of $5.0 million. The credit
agreement will expire in August 2005 and we expect to renew the credit agreement
under similar terms. Letters of credit are issued under the credit agreement,
which are primarily used for inventory purchases. At January 29, 2005, we had
$130,000 of outstanding letters of credit issued under the credit agreement.
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASES
We have entered into lease agreements for retail, distribution and office space,
vehicles, and equipment under primarily noncancelable leases with terms ranging
from approximately two to 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 leases provide for increasing minimum annual rental
amounts. Rent expense is recorded on a straight-line basis over the term of the
lease based on us taking possession of premises. 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 agreements.
Total rent expense for the years ended January 29, 2005, January 31, 2004, and
February 1, 2003 was $44,341,000, $38,572,000, and $30,787,000, respectively,
including contingent rentals of $4,259,000, $4,866,000, and $3,670,000,
respectively.
F-16
<PAGE>
Annual future minimum lease payments under operating leases as of January 29,
2005 are as follows (in thousands):
Fiscal Year Operating Leases
- ----------- ----------------
2005 $ 45,969
2006 45,875
2007 44,663
2008 42,504
2009 39,991
Thereafter 120,420
----------
Total minimum operating lease payments $ 339,422
==========
LITIGATION
We are involved in various matters of litigation during the ordinary course of
business. Management does not currently believe any such matters will have a
material adverse effect on our financial condition or results of operations.
INDEMNITIES, COMMITMENTS AND GUARANTEES
During the ordinary course of business, we have made certain indemnities,
commitments and guarantees under which we may be required to make payments in
relation to certain transactions. These indemnities include those given to
various lessors in connection with facility leases for certain claims arising
from such facility or lease and indemnities to our directors and officers to the
maximum extent permitted under the laws of the State of California. We have
issued guarantees in the form of letters of credit as security for some
merchandise shipments from overseas. There were $130,000 of these letters of
credit outstanding at January 29, 2005. The durations of these indemnities,
commitments and guarantees vary. Some of these indemnities, commitments and
guarantees do not provide for any limitation of the maximum potential future
payments we could be obligated to make. We have not recorded any liability for
these indemnities, commitments and guarantees in the accompanying consolidated
financial statements.
NOTE 7. SHAREHOLDERS' EQUITY
STOCK SPLIT
On August 12, 2003, we announced that our Board of Directors approved a
three-for-two stock split (in the form of a dividend) of our common stock. On
the effective date of September 2, 2003, shareholders received a dividend of one
additional share for every two shares they owned at the close of business on the
record date of August 21, 2003. All share and per share amounts have been
restated to reflect this stock split and all previous stock splits effectuated
by us.
F-17
<PAGE>
STOCK REPURCHASE
On May 8, 2002, we announced that our Board of Directors approved the repurchase
of up to an aggregate of 1,500,000 shares of our common stock during the period
ending January 31, 2003. As of January 31, 2003, we completed the repurchase of
1,500,000 shares of our common stock at a cost of $19.7 million, at an average
price of $13.13 per common share.
On March 19, 2004, we announced that our Board of Directors approved the
repurchase of up to an aggregate of 2,000,000 shares of our common stock during
the period ending January 29, 2005. As of July 31, 2004 we completed the
repurchase of 2,000,000 shares of our common stock at a cost of $46.8 million at
an average price of $23.41.
On August 18, 2004, we announced that our Board of Directors approved an
additional repurchase of up to an aggregate of 2,000,000 shares of our common
stock during the period ending January 29, 2005. As of January 29, 2005, we
completed the repurchase of 2,000,000 shares of our common stock at a cost of
$32.8 million at an average price of $16.42.
EMPLOYEE STOCK PURCHASE PLAN
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 1,350,000 shares of common stock to our employees. 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.
EQUITY INCENTIVE AND STOCK OPTION PLANS
Under the our 1996 Equity Incentive Plan, we may grant stock options, stock
bonuses, restricted stock purchase rights and stock appreciation rights to
employees, our directors or consultants, as deemed appropriate by the Board of
Directors. Under our 1996 Non-Employee Directors' Stock Option Plan and together
with the 1996 Equity Incentive Plan (the "Plans"), we may grant stock options to
non-employee directors. The exercise price of options granted under the Plans
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 our common stock on the date
of grant for incentive stock options, (ii) 85% of the fair market value our
common stock on the date of grant for non-statutory stock options, and (iii)
110% of the fair market value of our common stock on the date of grant for
persons possessing 10% or more of the total combined voting power of all classes
of stock. Unless the Board of Directors declares otherwise, options vest over
four years and generally expire ten years from the date of grant. An aggregate
of 19,020,000 shares of common stock may be issued pursuant to the Plans. During
fiscal 2003, the Plans were amended to increase the aggregate number of shares
of common stock authorized for issuance by 2,775,000 shares. As of January 29,
2005, 2,388,671 shares were available for future grants. No options, under the
Plans, have been granted to consultants.
F-18
<PAGE>
We granted 7,737; 8,855; and 8,424 shares of restricted common stock in the year
ended January 29, 2005, January 31, 2004, and February 1, 2003, respectively, to
non-employee directors under the 1996 Equity Incentive Plan. The 7,737
restricted shares issued in fiscal 2004 will vest in the year ending January 28,
2006, the 8,855 restricted shares issued in fiscal 2003 vested in the year ended
January 29, 2005, the 8,424 restricted shares issued in fiscal 2002 vested in
the year ended January 31, 2004. All awarded common shares will remain
restricted until such time the recipient is no longer a member of our Board of
Directors. The value of these grants is expensed over the vesting period and
$155,000, $155,000, and $142,000 was expensed in the years ended January 29,
2005, January 31, 2004, and February 1, 2003, respectively.
A summary of our stock option activity and related information follows:
<TABLE>
January 29, 2005 January 31, 2004 February 1, 2003
---------------------- ---------------------- ----------------------
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 4,813,795 $ 11.28 4,876,941 $ 8.70 4,891,268 $ 5.85
Granted 1,447,750 $ 24.75 1,396,931 $ 15.78 1,394,475 $ 15.14
Exercised (409,446) $ 8.94 (1,260,630) $ 6.11 (1,195,529) $ 4.13
Forfeited (159,254) $ 19.51 (199,447) $ 12.37 (213,273) $ 10.88
---------------------- ---------------------- ----------------------
Outstanding at end of year 5,692,845 $ 14.67 4,813,795 $ 11.28 4,876,941 $ 8.70
====================== ====================== ======================
---------------------- ---------------------- ----------------------
Exercisable at end of year 4,417,071 $ 14.48 2,146,586 $ 7.80 2,000,054 $ 5.06
====================== ====================== ======================
</TABLE>
F-19
<PAGE>
Exercise prices for the 5,692,845 options outstanding as of January 29, 2005
ranged from $1.51 to $27.60. The weighted average contractual life of those
options is 7.2 years. The following table summarizes information about stock
options outstanding as of January 29, 2005:
<TABLE>
Outstanding Options
-------------------------------------------------------------------------
Range of Exercise Prices Weighted Weighted Weighted
Average Average Average
Number Exercise Contractual Number Exercise
Outstanding Price Life Exercisable Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.51 - $3.73 780,942 $ 2.88 4.4 780,942 $ 2.88
$5.97 - $11.00 1,112,878 $ 8.90 5.9 1,040,596 $ 8.80
$11.23 - $15.33 1,139,378 $ 14.77 7.1 739,432 $ 14.77
$15.61 - $25.06 1,491,697 $ 16.56 8.3 691,589 $ 17.25
$25.51 - $27.60 1,167,950 $ 25.52 9.1 1,164,512 $ 25.52
-------------------------------------------------------------------------
$1.51 - $27.60 5,692,845 $ 14.67 7.2 4,417,071 $ 14.48
=========================================================================
</TABLE>
We recorded tax benefits associated with the exercise of non-qualified stock
options and non-qualifying dispositions of incentive stock options. The tax
benefits increased shareholders' equity and decreased income taxes payable in
the amounts of $1,585,000, $6,616,000, and $5,118,000 for the years ended
January 29, 2005, January 31, 2004, and February 1, 2003, respectively.
NOTE 8. NET INCOME PER SHARE
We compute net income per share pursuant to Statement of Financial Accounting
Standards No. 128 "Earnings Per Share." 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 shares outstanding for the period 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 is as follows (all amounts in thousands except
per share amounts):
<TABLE>
January 29, January 31, February 1,
2005 2004 2003
(As Restated) (As Restated)
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Share Computation:
Numerator $ 39,673 $ 47,589 $ 34,087
Denominator:
Weighted average common shares outstanding 46,379 47,479 47,027
----------- ----------- -----------
Total shares 46,379 47,479 47,027
=========== =========== ===========
Basic earnings per share $ 0.86 $ 1.00 $ 0.72
=========== =========== ===========
Diluted Earnings Per Share Computation:
Numerator $ 39,673 $ 47,589 $ 34,087
Denominator:
Weighted average common shares outstanding 46,379 47,479 47,027
Incremental shares from assumed
conversion of options 1,496 2,109 2,249
----------- ----------- -----------
Total shares 47,875 49,588 49,276
=========== =========== ===========
Diluted earnings per share $ 0.83 $ 0.96 $ 0.69
=========== =========== ===========
</TABLE>
F-20
<PAGE>
NOTE 9. INCOME TAXES
Composition of the provision for income taxes for the years ended (in
thousands):
January 29, January 31, February 1,
2005 2004 2003
(As Restated) (As Restated)
----------- ----------- -----------
Current:
Federal $ 17,141 $ 21,169 $ 18,570
State 3,574 4,577 2,963
----------- ----------- -----------
20,715 25,746 21,533
----------- ----------- -----------
Deferred:
Federal 3,949 4,155 (415)
State (46) (362) (226)
----------- ----------- -----------
3,903 3,793 (641)
----------- ----------- -----------
Total income tax expense $ 24,618 $ 29,539 $ 20,892
=========== =========== ===========
Significant components of our deferred tax assets and liabilities as of (in
thousands):
January 29, January 31,
2005 2004
(As Restated)
----------- -----------
Current deferred tax assets:
Inventory $ 940 $ 701
Accrued vacation and other 779 727
State taxes 566 597
Other assets 256 234
----------- -----------
Net current deferred tax assets 2,541 2,259
----------- -----------
Noncurrent deferred tax assets (liabilities):
Depreciation (6,600) (2,447)
Deferred rent 524 739
----------- -----------
Total noncurrent deferred tax liabilities (6,076) (1,708)
----------- -----------
Net deferred tax liabilities $ (3,535) $ (551)
=========== ===========
F-21
<PAGE>
Reconciliation of the provision for income taxes to the statutory tax rate for
the years ended:
<TABLE>
January 29, January 31, February 1,
2005 2004 2003
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
Permanent differences (0.2) (0.4) (0.5)
State and local taxes, net of federal benefit 3.6 3.6 3.7
Other items (0.1) 0.1 (0.2)
----------- ----------- -----------
Effective income tax rate 38.3% 38.3% 38.0%
=========== =========== ===========
</TABLE>
We operate in numerous tax jurisdictions and are subject to routine tax
examinations. Any such examinations could involve difficult issues and multiple
years. Although we cannot predict the outcome of future examinations, amounts
that could be owed in excess of amounts accrued will impact future tax expense
but will not impact our financial condition.
NOTE 10. EMPLOYEE BENEFIT PLAN
Effective January 1, 1995, we adopted the Hot Topic 401(k) Retirement Savings
Plan (the "401(k) Plan"). All employees who have been employed by us 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. We may at our discretion contribute
certain amounts to eligible employees' accounts. We have not made any
contributions to the 401(k) Plan.
F-22
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>2
<FILENAME>hottopic_10kex3-2.txt
<TEXT>
<PAGE>
EXHIBIT 3.2
STATE OF CALIFORNIA
SECRETARY OF STATE
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the attached transcript of 1 page(s) has been compared with the
record on file in this office, of which it purports to be a copy, and that it is
full, true and correct.
IN WITNESS WHEREOF, I execute this
certificate and affix the Great Seal of the
State of California this day of
Jul - 5 2002
--------------------------------------------
/s/ Bill Jones
[Seal of the State of California]
Secretary of State
<PAGE>
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF HOT TOPIC, INC.
Elizabeth M. McLaughlin and James J. McGinty certify that:
ONE: They are the duly elected and acting Chief Executive Officer and
President, and Chief Financial Officer and Secretary, respectively, of Hot
Topic, Inc., a California corporation.
TWO: The first paragraph of Article III of the Amended and Restated
Articles of Incorporation of this corporation is amended in its entirety to read
as follows:
III
"The Corporation is authorized to issue two classes of shares
designated "Common Stock" and "Preferred Stock," respectively. The number of
shares of Common Stock authorized to be issued is one hundred fifty million
(150,000,000) and the number of shares of Preferred Stock authorized to be
issued is ten million (10,000,000)."
THREE: The foregoing Amendment of Amended and Restated Articles of
Incorporation has been duly approved by the Board of Directors of the
corporation.
FOUR: The foregoing Amendment of Amended and Restated Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The total
number of outstanding shares of the corporation entitled to vote on the approval
of the amendment was 31,569,255 shares of Common Stock. The number of shares
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than fifty percent (50%) of the outstanding
shares of Common Stock. There are no outstanding shares of Preferred Stock.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Date: June 13, 2002 /s/ Elizabeth M. McLaughlin
----------------------------------------
Elizabeth M. McLaughlin
Chief Executive Officer and President
/s/ James J. McGinty
----------------------------------------
Jame J. McGinty
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.3
<SEQUENCE>3
<FILENAME>hottopic_10kex3-3.txt
<TEXT>
<PAGE>
EXHIBIT 3.3
================================================================================
AMENDED AND RESTATED BYLAWS (AS AMENDED)
OF
HOT TOPIC, INC.
================================================================================
<PAGE>
<TABLE>
<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........................................................................8
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
<PAGE>
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
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.................................................................14
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
<PAGE>
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 (AS AMENDED)
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
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,
1
<PAGE>
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
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.
2
<PAGE>
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,
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.
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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.
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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
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. 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 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).
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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.
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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.
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.
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SECTION 11. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any meeting to another time and place.
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
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
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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
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.
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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
to any shareholder demanding an examination of any such statement or a copy
shall be mailed to any such shareholder.
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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,
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.
15
<PAGE>
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
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.
16
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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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<PAGE>
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:
18
<PAGE>
(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
(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.
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<PAGE>
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
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(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-10.2A
<SEQUENCE>4
<FILENAME>hottopic_10kex10-2a.txt
<TEXT>
<PAGE>
EXHIBIT 10.2a
HOT TOPIC, INC.
1996 EQUITY INCENTIVE PLAN
ADOPTED ON JANUARY 20, 1993
AMENDED ON JULY 8, 1994
AMENDED ON MARCH 27, 1996
AMENDED AND RESTATED ON JUNE 14, 1996
AMENDED ON FEBRUARY 18, 1998
APPROVED BY SHAREHOLDERS ON MAY 27, 1998
AMENDED ON FEBRUARY 24, 2000
APPROVED BY SHAREHOLDERS ON JUNE 28, 2000
AMENDED ON MARCH 20, 2003
APPROVED BY SHAREHOLDERS ON JUNE 12, 2003
SHARES SUBJECT TO THE PLAN AUTOMATICALLY ADJUSTED ON DECEMBER 27, 1999,
DECEMBER 27, 2000, FEBRUARY 6, 2002 AND SEPTEMBER 2, 2003.
INTRODUCTION
Originally adopted on January 20, 1993 as the "1993 Stock Option Plan
of Hot Topic, Inc.," the plan is hereby amended and restated and retitled the
"1996 Equity Incentive Plan."
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase
restricted stock, and (v) stock appreciation rights, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock
appreciation rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
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2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Hot Topic, Inc., a California corporation.
(f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a
right granted pursuant to subsection 8(b)(2) of the Plan.
(g) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is not interrupted or
terminated. The Chief Executive Officer of the Company may determine, in his or
her sole discretion, whether Continuous Status as an Employee, Director or
Consultant shall be considered interrupted in the case of: (i) any leave of
absence approved by the Board or the Chief Executive Officer of the Company,
including sick leave, military leave, or any other personal leave; or (ii)
transfers between locations of the Company or between the Company, Affiliates or
their successors.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to shareholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
2
<PAGE>
(j) "DIRECTOR" means a member of the Board.
(k) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:
(1) If the common stock is listed on any established stock
exchange or a national market system, including without limitation The Nasdaq
Stock Market, the Fair Market Value of a share of common stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable;
(2) If the common stock is quoted on The Nasdaq Stock Market
(but not on the National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of common stock shall be the mean between the bid and asked prices for
the common stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(3) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
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<PAGE>
(q) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means
a right granted pursuant to subsection 8(b)(3) of the Plan.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(s) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "OPTION" means a stock option granted pursuant to the Plan.
(u) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(v) "OPTIONEE" means a person who holds an outstanding Option.
(w) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(x) "PLAN" means this Hot Topic, Inc. 1996 Equity Incentive Plan.
(y) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(z) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(aa) "STOCK AWARD" means any right granted under the Plan, including
any Option, any stock bonus, any right to purchase restricted stock, and any
Stock Appreciation Right.
4
<PAGE>
(bb) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(cc) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right
granted pursuant to subsection 8(b)(1) of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; whether a Stock Award will be an Incentive Stock Option,
a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted
stock, a Stock Appreciation Right, or a combination of the foregoing; the
provisions of each Stock Award granted (which need not be identical), including
the time or times when a person shall be permitted to receive stock pursuant to
a Stock Award; whether a person shall be permitted to receive stock upon
exercise of an Independent Stock Appreciation Right; and the number of shares
with respect to which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section
13.
(4) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of not fewer than two (2) members (the "Committee"), all of
the members of which Committee may be, in the discretion of the Board,
Non-Employee Directors and/or Outside Directors. If administration is delegated
to a Committee, the Committee shall have, in connection with the administration
of the Plan, the powers theretofore possessed by the Board, including the power
to delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such
5
<PAGE>
Subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to the
contrary, at any time the Board or the Committee may delegate to a committee of
one or more members of the Board the authority to grant Stock Awards to eligible
persons who (1) are not then subject to Section 16 of the Exchange Act and/or
(2) are either (i) not then Covered Employees and are not expected to be Covered
Employees at the time of recognition of income resulting from such Stock Award,
or (ii) not persons with respect to whom the Company wishes to avoid the
application of Section 162(m) of the Code.
(d) Any requirement that an administrator of the Plan be a
Disinterested Person shall not apply if the Board or the Committee expressly
declares that such requirement shall not apply. Any Disinterested Person shall
otherwise comply with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate Eighteen Million Three Hundred Thousand
(18,300,000) shares of the Company's common stock. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the stock not acquired under such Stock Award shall
revert to and again become available for issuance under the Plan. Shares subject
to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan
shall not be available for subsequent issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
only to Employees, Directors or Consultants. Notwithstanding the foregoing, no
Stock Awards shall be granted to a Director (including a Director who is an
Employee or a Consultant) prior to August 15, 1996 (or such later date as the
amendments to Rule 16b-3 adopted by the Securities and Exchange Commission
pursuant to Release No. 34-37260 become effective as to the Company), unless
such Director is expressly declared eligible to participate in the Plan by
action of the Board or the Committee.
6
<PAGE>
(b) No person shall be eligible for the grant of an Option or an award
to purchase restricted stock if, at the time of grant, such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of any of its Affiliates unless the exercise price of such Option
is at least one hundred ten percent (110%) of the Fair Market Value of such
stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant, or in the case of a
restricted stock purchase award, the purchase price is at least one hundred
percent (100%) of the Fair Market Value of such stock at the date of grant.
(c) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Options and
Stock Appreciation Rights covering more than One Million Eight Hundred Thousand
(1,800,000) shares of the Company's common stock in any twelve (12) month
period. This subsection 5(c) shall not apply prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act and, following such registration, shall not apply until (i) the
earliest of: (A) the first material modification of the Plan (including any
increase to the number of shares reserved for issuance under the Plan in
accordance with Section 4); (B) the issuance of all of the shares of common
stock reserved for issuance under the Plan; (C) the expiration of the Plan; or
(D) the first meeting of shareholders at which directors are to be elected that
occurs after the close of the third calendar year following the calendar year in
which occurred the first registration of an equity security under Section 12 of
the Exchange Act; or (ii) such other date required by Section 162(m) of the Code
and the rules and regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price of
each Nonstatutory Stock Option granted on or after March 20, 2003 shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; and the exercise price
of each Nonstatutory Stock Option granted prior to March 20, 2003 shall be not
less than eighty-five percent (85%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock
Option) may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
7
<PAGE>
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions of
the Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option may be
transferred by the Optionee upon such terms and conditions as are set forth in
the Option Agreement for such Nonstatutory Option, as the Board or the Committee
shall determine in its discretion, including (without limitation) pursuant to a
"domestic relations order" within the meaning of such rules, regulations or
interpretations of the Securities and Exchange Commission as are applicable for
purposes of Section 16 of the Exchange Act (a "DRO"). In the event of a transfer
of a Nonstatutory Option as provided in the Option Agreement, the transferee
shall be entitled to exercise such Nonstatutory Option to the extent of his or
her interest received in such transfer, subject to the terms and conditions of
the Option Agreement. Notwithstanding the foregoing, the person to whom the
Option is granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
8
<PAGE>
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date thirty (30) days after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
An Optionee's Option Agreement may also provide that if the exercise of
the Option following the termination of the Optionee's Continuous Status as an
Employee, Director, or Consultant (other than upon the Optionee's death or
disability) would result in liability under Section 16(b) of the Exchange Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day
after the last date on which such exercise would result in such liability under
Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionee's Continuous Status as an Employee, Director or Consultant (other than
upon the Optionee's death or disability) would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Act, then the Option shall terminate on the earlier of (i) the expiration of
the term of the Option set forth in the first paragraph of this subsection 6(f),
or (ii) the expiration of a period of thirty (30) days after the termination of
the Optionee's Continuous Status as an Employee, Director or Consultant during
which the exercise of the Option would not be in violation of such registration
requirements.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement), or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the shares covered by such Option shall
revert to and again become available for issuance under the Plan.
9
<PAGE>
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date twelve (12)
months following the date of death (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of such Option as
set forth in the Option Agreement. If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in
such form and shall contain such terms and conditions as the Board or the
Committee shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the terms
and conditions of separate agreements need not be identical, but each stock
bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement, but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value on
the date such award is made. Notwithstanding the foregoing, the Board or the
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit. Subject to the provisions
of Section 12 relating to adjustments upon changes in stock, stock awarded on or
after March 20, 2003 pursuant to restricted stock purchase agreements or stock
bonus agreements shall not exceed in the aggregate Ninety Three Thousand
(93,000) shares of the Company's common stock.
10
<PAGE>
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a DRO (as defined
in subsection 6(d) hereof), so long as stock awarded under such agreement
remains subject to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or the Committee in its discretion. Notwithstanding the foregoing, the
Board or the Committee to which administration of the Plan has been delegated
may award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.
(e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
8. STOCK APPRECIATION RIGHTS.
(a) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to Employees or Directors of or Consultants to, the Company or its
Affiliates. To exercise any outstanding Stock Appreciation Right, the holder
must provide written notice of exercise to the Company in compliance with the
provisions of the Stock Award Agreement evidencing such right. If a Stock
Appreciation Right is granted to an individual who is at the time subject to
Section 16(b) of the Exchange Act (a "Section 16(b) Insider"), the Stock Award
Agreement of grant shall incorporate all the terms and conditions at the time
necessary to assure that the subsequent exercise of such right shall qualify for
the safe-harbor exemption from short-swing profit liability provided by Rule
16b-3 promulgated under the Exchange Act (or any successor rule or regulation).
Except as provided in subsection 5(d), no limitation shall exist on the
aggregate amount of cash payments the Company may make under the Plan in
connection with the exercise of a Stock Appreciation Rights.
11
<PAGE>
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock
Appreciation Rights will be granted appurtenant to an Option, and shall, except
as specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of stock based on Fair
Market Value on the date of the Option surrender) in an amount up to the excess
of (A) the Fair Market Value (on the date of the Option surrender) of the number
of shares of stock covered by that portion of the surrendered Option in which
the Optionee is vested over (B) the aggregate exercise price payable for such
vested shares.
(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights
will be granted appurtenant to an Option and may apply to all or any portion of
the shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains. A
Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on an
exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of stock based on Fair Market Value on the date of
the exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.
(3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights
will be granted independently of any Option and shall, except as specifically
set forth in this Section 8, be subject to the same terms and conditions
applicable to Nonstatutory Stock Options as set forth in Section 6. They shall
be denominated in share equivalents. The appreciation distribution payable on
the exercised Independent Right shall be not greater than an amount equal to the
excess of (A) the aggregate Fair Market Value (on the date of the exercise of
the Independent Right) of a number of shares of Company stock equal to the
number of share equivalents in which the holder is vested under such Independent
Right, and with respect to which the holder is exercising the Independent Right
on such date, over (B) the aggregate Fair Market Value (on the date of the grant
of the Independent Right) of such number of shares of Company stock. The
appreciation distribution payable on the exercised Independent Right shall be in
cash or, if so provided, in an equivalent number of shares of stock based on
Fair Market Value on the date of the exercise of the Independent Right.
12
<PAGE>
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock under such Stock
Awards unless and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b),
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director or Consultant nor any person to whom
a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares subject to such Stock Award unless and until such person
has satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
13
<PAGE>
(c) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
other holder of Stock Awards any right to continue in the employ of the Company
or any Affiliate (or to continue acting as a Director or Consultant) or shall
affect the right of the Company or any Affiliate to terminate the employment of
any Employee with or without cause the right of the Company's Board of Directors
and/or the Company's shareholders to remove any Director pursuant to the terms
of the Company's Bylaws and the provisions of the California Corporations Code
(or the applicable laws of the Company's state of incorporation if the Company's
state of incorporation should change in the future), or the right to terminate
the relationship of any Consultant pursuant to the terms of such Consultant's
agreement with the Company or Affiliate.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred pursuant to
subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock
under any Stock Award, (1) to give written assurances satisfactory to the
Company as to such person's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Stock Award;
and (2) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
14
<PAGE>
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the common stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the common stock
of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan pursuant to subsection 4(a), the maximum
number of shares subject to award to any person during any twelve (12) month
period pursuant to subsection 5(c), the maximum number of shares subject to
award pursuant to restricted stock purchase agreements or stock bonus agreements
under subsection 7(a) and the outstanding Stock Awards will be appropriately
adjusted in the class(es) and number of shares and price per share of stock
subject to such outstanding Stock Awards. Such adjustments shall be made by the
Board or the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the 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 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, then: (i) any surviving or acquiring corporation shall assume any
Stock Awards outstanding under the Plan or shall substitute similar Stock Awards
(including an award to acquire the same consideration paid to the shareholders
in the transaction described in this subsection 12(b)) for those outstanding
under the Plan; or (ii) in the event any surviving or acquiring corporation
refuses to assume such Stock Awards or to substitute similar awards for those
outstanding under the Plan, then, (A) with respect to Stock Awards held by
persons then performing services as Employees, Directors or Consultants, the
vesting of such Stock Awards and, if applicable, exercisability of such Stock
Awards shall be accelerated prior to such event and the Stock Awards terminated
if not exercised after such acceleration and at or prior to such event, and (B)
with respect to any other Stock Awards outstanding under the Plan, such Stock
Awards shall be terminated if not exercised prior to such event.
15
<PAGE>
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the shareholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for Stock Awards
under the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires shareholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code);
(iii) Materially increase the benefits accruing to
participants under the Plan; or
(iv) Modify the Plan in any other way if such modification
requires shareholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for shareholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
16
<PAGE>
(d) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Award; provided, however, that the rights and
obligations under any Stock Award shall not be impaired by any such amendment
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on the day before the date that is
ten (10) years following the earlier of (i) the date of the amendment and
restatement of the Plan as determined by the Board, or (ii) the date such
amendment and restatement is approved by the shareholders of the Company. No
Stock Awards may be granted under the Plan while the Plan is suspended or after
it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the consent of the person to whom the Stock Award was granted.
15. EFFECTIVE DATE OF PLAN.
The Plan, as amended by the Board on June 14, 1996, shall become
effective on the same day that the Company's initial public offering of shares
of common stock becomes effective. Prior to the effectiveness of such initial
public offering, the terms and conditions of the Plan as in effect prior to its
amendment by the Board on June 14, 1996 shall continue to apply. No Stock Awards
granted under the Plan shall be exercised unless and until the Plan has been
approved by the shareholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5A
<SEQUENCE>5
<FILENAME>hottopic_10kex10-5a.txt
<TEXT>
<PAGE>
EXHIBIT 10.5a
HOT TOPIC, INC.
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON JUNE 14, 1996
APPROVED BY SHAREHOLDERS ON JULY 9, 1996
AMENDED ON FEBRUARY 18, 1998
APPROVED BY SHAREHOLDERS ON MAY 27, 1998
AMENDED ON FEBRUARY 24, 2000
APPROVED BY SHAREHOLDERS ON JUNE 28, 2000
SHARES SUBJECT TO THE PLAN AUTOMATICALLY ADJUSTED ON DECEMBER 27, 1999,
DECEMBER 27, 2000, FEBRUARY 6, 2002 AND SEPTEMBER 2, 2003.
1. PURPOSE.
(a) The purpose of the 1996 Non-Employee Directors' Stock Option Plan
(the "Plan") is to provide a means by which each director of Hot Topic, Inc.
(the "Company") who is not otherwise at the time of grant an employee of or
consultant to the Company or of any Affiliate of the Company (each such person
being hereafter referred to as a "Non-Employee Director") will be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board"), unless and until the Board delegates administration to a
committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
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3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate seven hundred twenty thousand
(720,000) shares of the Company's common stock. If any option granted under the
Plan shall for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such option shall again become
available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. GRANTS.
(a) Each person who is elected or appointed for the first time to be a
Non-Employee Director shall automatically be granted, upon the date of his or
her initial election or appointment, an option to purchase ten thousand (10,000)
shares of common stock (an "Initial Grant"), PROVIDED HOWEVER that in the case
of a new Non-Employee Chairman of the Board, such person shall automatically be
granted, upon the date of his or her initial election or appointment, an option
to purchase fifteen thousand (15,000) shares of common stock.
(b) On the date of each annual meeting of shareholders, commencing with
the 2000 annual meeting, each person who is then a Non-Employee Director shall
automatically be granted an option to purchase two thousand five hundred (2,500)
shares of common stock (an "Annual Grant"), PROVIDED HOWEVER that in the case of
a Non-Employee Chairman of the Board, such person shall automatically be
granted, on each such annual meeting date, an option to purchase three thousand
seven hundred fifty (3,750) shares. Notwithstanding the foregoing, a
Non-Employee Director shall not be entitled to an Annual Grant if (i) such
Non-Employee Director has served as a Non-Employee Director for less than three
(3) months, or (ii) such Non-Employee failed to attend at least seventy five
percent (75%) of the meetings (A) of the Board which occurred while the
Non-Employee Director was a member of the Board and (B) of each committee of
which such Non-Employee Director was a member.
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<PAGE>
(c) Non-Employee Directors may also be granted options to purchase
shares in amounts deemed appropriate by the Board of Directors.
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ("Expiration
Date") ten (10) years from the date of grant. If the optionee's service as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate terminates for any reason or for no reason, the option shall terminate
on the earlier of the Expiration Date or the date three (3) months following the
date of termination of such service; PROVIDED HOWEVER that if such termination
of service is due to the optionee's death, the option shall terminate on the
earlier of the Expiration Date or twelve (12) months following the date of the
optionee's death. In any and all circumstances, an option may be exercised
following termination of the optionee's service as a Non-Employee Director or
employee of or consultant to the Company or any Affiliate only as to that number
of shares as to which it was exercisable as of the date of termination of all
such service under the provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred percent
(100%) of the fair market value of the stock subject to such option on the date
such option is granted.
(c) Payment of the exercise price of each option is due in full in cash
upon any exercise when the number of shares being purchased upon such exercise
is less than 100 shares; but when the number of shares being purchased upon an
exercise is 100 or more shares, the optionee may elect to make payment of the
exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash at the
time of exercise;
(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in THE WALL STREET JOURNAL,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its fair market
value on the date preceding the date of exercise; or
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<PAGE>
(iii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in THE WALL STREET JOURNAL,
payment pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board which results in the receipt of cash (or check) by the
Company either prior to the issuance of shares of the Company's common stock or
pursuant to the terms of irrevocable instructions issued by the optionee prior
to the issuance of shares of the Company's common stock.
(iv) Payment by a combination of the methods of payment
specified in subparagraph 6(c)(i) and 6(c)(iii) above.
(d) An option shall not be transferable except by will or by the laws
of descent and distribution, or pursuant to a domestic relations order, and
shall be exercisable during the lifetime of the person to whom the option is
granted only by such person (or by his guardian or legal representative) or
transferee pursuant to such an order. Notwithstanding the foregoing, the
optionee may, by delivering written notice to the Company in a form satisfactory
to the Company, designate a third party who, in the event of the death of the
optionee, shall thereafter be entitled to exercise the option.
(e) The option shall become exercisable in installments over a period
of four (4) years from the date of grant as follows: twenty-five percent (25%)
shall be exercisable commencing on the date one year after the date of grant of
the option and six and one-quarter percent (6.25%) shall be exercisable at the
end of each calendar quarter thereafter, provided that the optionee has, during
the entire period prior to such vesting date, continuously served as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate of the Company, whereupon such option shall become fully exercisable
in accordance with its terms with respect to that portion of the shares
represented by that installment.
(f) The Company may require any optionee, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionee's knowledge and experience in financial and business matters; and
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the option for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise of the option has been registered under a then-currently-effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii), as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may require
any optionee to provide such other representations, written assurances or
information which the Company shall determine is necessary, desirable or
appropriate to comply with applicable securities laws as a condition of granting
an option to the optionee or permitting the optionee to exercise the option. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.
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<PAGE>
(g) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are not
then so registered, the Company has determined that such exercise and issuance
would be exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; PROVIDED HOWEVER that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such option. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(b) Nothing in the Plan, or in any instrument executed pursuant
thereto, shall confer upon any Non-Employee Director any right to continue in
the service of the Company or any Affiliate in any capacity or shall affect any
right of the Company, its Board or shareholders or any Affiliate to remove any
Non-Employee Director pursuant to the Company's Bylaws and the provisions of the
laws of the Company's state of incorporation.
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<PAGE>
(c) No Non-Employee Director, individually or as a member of a group,
and no beneficiary or other person claiming under or through him, shall have any
right, title or interest in or to any option reserved for the purposes of the
Plan except as to such shares of common stock, if any, as shall have been
reserved for him pursuant to an option granted to him.
(d) In connection with each option made pursuant to the Plan, it shall
be a condition precedent to the Company's obligation to issue or transfer shares
to a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other withholding tax
required to be withheld with respect to such sale or transfer, or such removal
or lapse, is made available to the Company for timely payment of such tax.
(e) As used in this Plan, "fair market value" means, as of any date,
the value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or a national market system, including without limitation The Nasdaq
Stock Market, the fair market value of a share of common stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reported in THE WALL STREET JOURNAL or such
other source as the Board deems reliable.
(ii) If the common stock is quoted on The Nasdaq Stock Market
(but not on the National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the fair market value of
a share of common stock shall be the mean between the bid and asked prices for
the common stock on the last market trading day prior to the day of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Board deems reliable.
(iii) In the absence of an established market for the common
stock, the fair market value shall be determined in good faith by the Board.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding options will
6
<PAGE>
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options. Such adjustments shall be made by the Board, the
determination of which shall be final, binding and conclusive. (The conversion
of any convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or any Affiliate of 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, then the time during which options outstanding under the Plan may be
exercised shall be accelerated prior to such event and the options terminated if
not exercised after such acceleration and at or prior to such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan
and/or some or all outstanding options granted under the Plan. Except as
provided in paragraph 10 relating to adjustments upon changes in stock, no
amendment shall be effective unless approved by the shareholders of the Company
within twelve (12) months before or after the adoption of the amendment if such
amendment requires shareholder approval in order for the Plan to comply with the
requirements of Rule 16b-3 promulgated under the Exchange Act, Section 162(m) of
the Internal Revenue Code or any Nasdaq or securities exchange requirements.
(b) Rights and obligations under any option granted before any
amendment of the Plan shall not be impaired by such amendment unless (i) the
Company requests the consent of the person to whom the option was granted and
(ii) such person consents in writing.
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<PAGE>
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. No options
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any option granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events
described in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is approved by the
shareholders of the Company.
(b) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.
8
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6A
<SEQUENCE>6
<FILENAME>hottopic_10kex10-6a.txt
<TEXT>
<PAGE>
EXHIBIT 10.6a
HOT TOPIC, INC.
EMPLOYEE STOCK PURCHASE PLAN
ADOPTED JUNE 14, 1996
APPROVED BY THE STOCKHOLDERS ON JULY 9, 1996
SHARES SUBJECT TO THE PLAN AUTOMATICALLY ADJUSTED ON DECEMBER 27, 1999,
DECEMBER 27, 2000, FEBRUARY 6, 2002 AND SEPTEMBER 2, 2003
1. PURPOSE.
(a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to
provide a means by which employees of Hot Topic, Inc., a California corporation
(the "Company"), and its Affiliates, as defined in subparagraph 1(b), which are
designated as provided in subparagraph 2(b), may be given an opportunity to
purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
its employees, to secure and retain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
(d) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an "employee
stock purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
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(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company and its Affiliates and to carry out the intent that the Plan be
treated as an "employee stock purchase plan" within the meaning of Section 423
of the Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to rights granted
under the Plan shall not exceed in the aggregate one million three hundred fifty
thousand (1,350,000) shares of the Company's common stock (the "Common Stock").
If any right granted under the Plan shall for any reason terminate without
having been exercised, the Common Stock not purchased under such right shall
again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(a) The Board or the Committee may from time to time grant or provide
for the grant of rights to purchase Common Stock of the Company under the Plan
to eligible employees (an "Offering") on a date or dates (the "Offering
Date(s)") selected by the Board or the Committee. Each Offering shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all employees granted rights to purchase stock under
the Plan shall have the same rights and privileges. The terms and conditions of
an Offering shall be incorporated by reference into the Plan and treated as part
of the Plan. The provisions of separate Offerings need not be identical, but
each Offering shall include (through incorporation of the provisions of this
Plan by reference in the document comprising the Offering or otherwise) the
period during which the Offering shall be effective, which period shall not
exceed twenty-seven (27) months beginning with the Offering Date, and the
substance of the provisions contained in paragraphs 5 through 8, inclusive.
(b) If an employee has more than one right outstanding under the Plan,
unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised.
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<PAGE>
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right;
(ii) the period of the Offering with respect to such right
shall begin on its Offering Date and end coincident with the end of such
Offering; and
(iii) the Board or the Committee may provide that if such
person first becomes an eligible employee within a specified period of time
before the end of the Offering, he or she will not receive any right under that
Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such employee.
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<PAGE>
(d) An eligible employee may be granted rights under the Plan only if
such rights, together with any other rights granted under "employee stock
purchase plans" of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan, provided, however, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding ten percent (10%) of such
employee's Earnings (as defined in subparagraph 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering. The Board
or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.
(b) In connection with each Offering made under the Plan, the Board or
the Committee may specify a maximum number of shares that may be purchased by
any employee as well as a maximum aggregate number of shares that may be
purchased by all eligible employees pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Purchase Date, the
Board or the Committee may specify a maximum aggregate number of shares which
may be purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted
under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Purchase Date.
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<PAGE>
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering. "Earnings" is defined as an employee's regular salary or wages
(including amounts thereof elected to be deferred by the employee, that would
otherwise have been paid, under any arrangement established by the Company
intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section
402(h), or Section 403(b) of the Code, and also including any deferrals under a
non-qualified deferred compensation plan or arrangement established by the
Company), which shall include or exclude (as provided for each Offering) the
following items of compensation: bonuses, commissions, overtime pay, incentive
pay, profit sharing, other remuneration paid directly to the employee, the cost
of employee benefits paid for by the Company or an Affiliate, education or
tuition reimbursements, imputed income arising under any group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company or an Affiliate under any employee benefit plan, and similar items of
compensation, as determined by the Board or Committee. The payroll deductions
made for each participant shall be credited to an account for such participant
under the Plan and shall be deposited with the general funds of the Company. A
participant may reduce (including to zero) or increase such payroll deductions,
and an eligible employee may begin such payroll deductions, after the beginning
of any Offering only as provided for in the Offering. A participant may make
additional payments into his or her account only if specifically provided for in
the Offering and only if the participant has not had the maximum amount withheld
during the Offering.
(b) At any time during an Offering, a participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall distribute
to such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's employment
with the Company and any designated Affiliate, for any reason, and the Company
shall distribute to such terminated employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire stock for the terminated employee) under the Offering, without
interest.
5
<PAGE>
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.
8. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering,
each participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in subparagraph 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in paragraph 5, in
which case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent
unless the shares to be issued upon such exercise under the Plan (including
rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act of 1933, as amended (the "Securities Act") and
the Plan is in material compliance with all applicable state, foreign and other
securities and other laws applicable to the Plan. If on a Purchase Date in any
Offering hereunder the Plan is not so registered or in such compliance, no
rights granted under the Plan or any Offering shall be exercised on such
Purchase Date, and the Purchase Date shall be delayed until the Plan is subject
to such an effective registration statement and such compliance, except that the
Purchase Date shall not be delayed more than twelve (12) months and the Purchase
Date shall in no event be more than twenty-seven (27) months from the Offering
Date. If on the Purchase Date of any Offering hereunder, as delayed to the
maximum extent permissible, the Plan is not registered and in such compliance,
no rights granted under the Plan or any Offering shall be exercised and all
payroll deductions accumulated during the Offering (reduced to the extent, if
any, such deductions have been used to acquire stock) shall be distributed to
the participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
6
<PAGE>
(b) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A SHAREHOLDER.
A participant shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights hereunder are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) the acquisition by
any person, entity or group within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act" or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of 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, then, as determined by the Board in its
sole discretion (i) any surviving or acquiring corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.
7
<PAGE>
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the shareholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under
the Plan;
(ii) Modify the provisions as to eligibility for participation
in the Plan (to the extent such modification requires shareholder
approval in order for the Plan to obtain employee stock purchase plan
treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended ("Rule 16b-3")); or
(iii) Modify the Plan in any other way if such modification
requires shareholder approval in order for the Plan to obtain employee
stock purchase plan treatment under Section 423 of the Code or to
comply with the requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible employees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to employee stock
purchase plans and/or to bring the Plan and/or rights granted under it into
compliance therewith.
(b) Rights and obligations under any rights granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan, except
with the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except as
necessary to ensure that the Plan and/or rights granted under the Plan comply
with the requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
8
<PAGE>
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion, may suspend or terminate the Plan at
any time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the same day that the Company's
initial public offering of shares of common stock becomes effective (the
"Effective Date"), but no rights granted under the Plan shall be exercised
unless and until the Plan has been approved by the shareholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board or the Committee, which date may be prior to the Effective Date.
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7A
<SEQUENCE>7
<FILENAME>hottopic_10kex10-7a.txt
<TEXT>
<PAGE>
EXHIBIT 10.7a
HOT TOPIC, INC.
401(k) PROFIT SHARING PLAN
<PAGE>
TABLE OF CONTENTS
ARTICLE 1..................................................................- 2 -
DEFINITIONS................................................................- 2 -
1.1 ACP or ACP TEST.................................................- 2 -
1.2 ACTUAL DEFERRAL PERCENTAGE TEST.................................- 2 -
1.3 ADP or ADP TEST.................................................- 4 -
1.4 ADMINISTRATOR...................................................- 4 -
1.5 ADOPTING EMPLOYER...............................................- 4 -
1.6 AFFILIATED EMPLOYER.............................................- 5 -
1.7 AGE.............................................................- 5 -
1.8 ANNIVERSARY DATE................................................- 5 -
1.9 ANNUITY STARTING DATE...........................................- 5 -
1.10 AVERAGE CONTRIBUTION PERCENTAGE TEST............................- 5 -
1.11 BENEFICIARY.....................................................- 8 -
1.12 BREAK IN SERVICE................................................- 8 -
1.13 CODE............................................................- 8 -
1.14 CODE ss.3401 COMPENSATION.......................................- 9 -
1.15 CODE ss.415 COMPENSATION........................................- 9 -
1.16 COMPENSATION....................................................- 9 -
1.17 DISABILITY.....................................................- 11 -
1.18 EARLY RETIREMENT AGE...........................................- 11 -
1.19 EARNED INCOME..................................................- 11 -
1.20 ELECTIVE DEFERRAL..............................................- 11 -
1.21 ELECTIVE DEFERRAL ACCOUNT......................................- 12 -
1.22 ELIGIBLE PARTICIPANT...........................................- 12 -
1.23 EMPLOYEE.......................................................- 12 -
1.24 EMPLOYER.......................................................- 13 -
1.25 ERISA..........................................................- 13 -
1.26 EXCESS AGGREGATE CONTRIBUTIONS.................................- 13 -
1.27 EXCESS CONTRIBUTIONS...........................................- 13 -
1.28 EXCESS ELECTIVE DEFERRALS......................................- 13 -
1.29 FIDUCIARY......................................................- 13 -
1.30 FISCAL YEAR....................................................- 13 -
1.31 FORFEITURE.....................................................- 13 -
1.32 FORM W-2 COMPENSATION..........................................- 14 -
1.33 HCE............................................................- 14 -
1.34 HIGHLY COMPENSATED EMPLOYEE....................................- 14 -
1.35 HOUR OF SERVICE................................................- 14 -
1.36 KEY EMPLOYEE...................................................- 15 -
1.37 LEASED EMPLOYEE................................................- 16 -
1.38 LIMITATION YEAR................................................- 16 -
<PAGE>
1.39 MATCHING CONTRIBUTION..........................................- 16 -
1.40 MATCHING CONTRIBUTION ACCOUNT..................................- 16 -
1.41 MATERNITY OR PATERNITY LEAVE...................................- 16 -
1.42 NHCE...........................................................- 16 -
1.43 NON-ELECTIVE CONTRIBUTIONS.....................................- 16 -
1.44 NON-ELECTIVE CONTRIBUTION ACCOUNT..............................- 17 -
1.45 NON-HIGHLY COMPENSATED EMPLOYEE................................- 17 -
1.46 NON-KEY EMPLOYEE...............................................- 17 -
1.47 NORMAL RETIREMENT AGE..........................................- 17 -
1.48 NORMAL RETIREMENT DATE.........................................- 17 -
1.49 OWNER-EMPLOYEE.................................................- 17 -
1.50 PARTICIPANT....................................................- 17 -
1.51 PARTICIPANT'S ACCOUNT..........................................- 17 -
1.52 PERIOD OF SERVICE..............................................- 17 -
1.53 PERIOD OF SEVERANCE............................................- 20 -
1.54 PERMISSIVE AGGREGATION GROUP...................................- 20 -
1.55 PLAN...........................................................- 20 -
1.56 PLAN YEAR......................................................- 20 -
1.57 POLICY.........................................................- 20 -
1.58 QMAC...........................................................- 20 -
1.59 QNEC...........................................................- 20 -
1.60 QUALIFIED JOINT AND SURVIVOR ANNUITY...........................- 20 -
1.61 QUALIFIED MATCHING CONTRIBUTION................................- 20 -
1.62 QUALIFIED NON-ELECTIVE CONTRIBUTION............................- 21 -
1.63 QUALIFIED PRERETIREMENT SURVIVOR ANNUITY.......................- 21 -
1.64 REQUIRED AGGREGATION GROUP.....................................- 21 -
1.65 REQUIRED BEGINNING DATE........................................- 21 -
1.66 ROLLOVER ACCOUNT...............................................- 22 -
1.67 ROLLOVER CONTRIBUTION..........................................- 22 -
1.68 SAFE HARBOR CONTRIBUTION ACCOUNT...............................- 22 -
1.69 SELF-EMPLOYED INDIVIDUAL.......................................- 22 -
1.70 SHAREHOLDER-EMPLOYEE...........................................- 22 -
1.71 SPONSOR........................................................- 23 -
1.72 SPOUSE.........................................................- 23 -
1.73 TERMINATION OF EMPLOYMENT......................................- 23 -
1.74 TERMINATED PARTICIPANT.........................................- 23 -
1.75 TOP HEAVY......................................................- 23 -
1.76 TOP HEAVY MINIMUM ALLOCATION...................................- 23 -
1.77 TOP HEAVY RATIO................................................- 23 -
1.78 TRUSTEE........................................................- 24 -
1.79 TRUST FUND.....................................................- 24 -
1.80 VALUATION DATE.................................................- 24 -
1.81 VESTED AGGREGATE ACCOUNT.......................................- 25 -
<PAGE>
1.82 VESTED, VESTED INTEREST or VESTING.............................- 25 -
1.83 VOLUNTARY EMPLOYEE CONTRIBUTION................................- 25 -
1.84 VOLUNTARY EMPLOYEE CONTRIBUTION ACCOUNT........................- 25 -
ARTICLE 2.................................................................- 26 -
PLAN PARTICIPATION........................................................- 26 -
2.1 ELIGIBILITY REQUIREMENTS.......................................- 26 -
2.2 ENTRY DATE.....................................................- 27 -
2.3 WAIVER OF PARTICIPATION........................................- 27 -
2.4 PARTICIPATION UPON REEMPLOYMENT................................- 27 -
2.5 EXCLUSION OF ELIGIBLE EMPLOYEE.................................- 27 -
2.6 INCLUSION OF INELIGIBLE EMPLOYEE...............................- 27 -
ARTICLE 3.................................................................- 28 -
CONTRIBUTIONS AND ALLOCATIONS.............................................- 28 -
3.1 EMPLOYER CONTRIBUTIONS.........................................- 28 -
3.2 ALLOCATION OF EMPLOYER CONTRIBUTIONS...........................- 30 -
3.3 ALLOCATION OF EARNINGS AND LOSSES..............................- 34 -
3.4 ALLOCATION OF FORFEITURES......................................- 34 -
3.5 TOP HEAVY MINIMUM ALLOCATION...................................- 35 -
3.6 SAFE HARBOR CONTRIBUTIONS......................................- 36 -
3.7 ROLLOVER CONTRIBUTIONS.........................................- 39 -
3.8 VOLUNTARY EMPLOYEE CONTRIBUTIONS...............................- 41 -
ARTICLE 4.................................................................- 42 -
PLAN BENEFITS.............................................................- 42 -
4.1 BENEFIT UPON NORMAL RETIREMENT.................................- 42 -
4.2 BENEFIT UPON LATE RETIREMENT...................................- 42 -
4.3 BENEFIT UPON DEATH.............................................- 42 -
4.4 BENEFIT UPON DISABILITY........................................- 42 -
4.5 BENEFIT UPON TERMINATION.......................................- 42 -
4.6 DETERMINATION OF VESTED INTEREST...............................- 43 -
ARTICLE 5.................................................................- 44 -
DISTRIBUTION OF BENEFITS..................................................- 44 -
5.1 BENEFIT UPON RETIREMENT........................................- 44 -
5.2 BENEFIT UPON DEATH.............................................- 44 -
5.3 DISABILITY BENEFITS............................................- 45 -
5.4 BENEFIT UPON TERMINATION.......................................- 46 -
5.5 CASH-OUT OF BENEFITS...........................................- 46 -
5.6 RESTRICTIONS ON IMMEDIATE DISTRIBUTIONS........................- 47 -
5.7 RESTORATION OF FORFEITED ACCOUNT BALANCE.......................- 48 -
5.8 SPOUSAL CONSENT REQUIREMENTS...................................- 49 -
5.9 APPLICATION OF CODE ss.401(a)(9) REQUIREMENTS..................- 49 -
<PAGE>
5.10 STATUTORY COMMENCEMENT OF BENEFITS.............................- 49 -
5.11 SEGREGATION OF BENEFIT BEFORE DISTRIBUTION.....................- 49 -
5.12 DISTRIBUTION IN EVENT OF INCAPACITY............................- 50 -
5.13 MISSING PARTICIPANTS AND UNCLAIMED BENEFITS....................- 50 -
5.14 DIRECT ROLLOVERS...............................................- 51 -
5.15 DISTRIBUTION OF PROPERTY.......................................- 51 -
5.16 DISTRIBUTIONS SUBJECT TO CODE ss.401(a)(11) REQUIREMENTS.......- 52 -
5.17 FINANCIAL HARDSHIP DISTRIBUTIONS...............................- 55 -
5.18 IN-SERVICE DISTRIBUTIONS.......................................- 56 -
5.19 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS......................- 56 -
5.20 DISTRIBUTION OF EXCESS CONTRIBUTIONS...........................- 57 -
5.21 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS.................- 59 -
5.22 ELIMINATION OF CERTAIN FORMS OF PAYMENT........................- 60 -
ARTICLE 6.................................................................- 61 -
CODE SS.415 LIMITATIONS...................................................- 61 -
6.1 MAXIMUM ANNUAL ADDITION........................................- 61 -
6.2 ADJUSTMENTS TO MAXIMUM ANNUAL ADDITION.........................- 61 -
6.3 MULTIPLE PLANS AND MULTIPLE EMPLOYERS..........................- 62 -
6.4 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS......................- 62 -
6.5 MULTIPLE PLAN REDUCTION........................................- 62 -
ARTICLE 7.................................................................- 65 -
DUTIES OF THE TRUSTEE.....................................................- 65 -
7.1 APPOINTMENT, RESIGNATION, REMOVAL AND SUCCESSION...............- 65 -
7.2 INVESTMENT ALTERNATIVES OF THE TRUSTEE.........................- 65 -
7.3 VALUATION OF THE TRUST FUND....................................- 67 -
7.4 COMPENSATION AND EXPENSES......................................- 68 -
7.5 PAYMENTS FROM THE TRUST FUND...................................- 68 -
7.6 PAYMENT OF TAXES...............................................- 68 -
7.7 ACCOUNTS, RECORDS AND REPORTS..................................- 68 -
7.8 EMPLOYMENT OF AGENTS AND COUNSEL...............................- 68 -
7.9 DIVISION OF DUTIES AND INDEMNIFICATION.........................- 69 -
7.10 APPOINTMENT OF INVESTMENT MANAGER..............................- 70 -
7.11 ASSIGNMENT AND ALIENATION OF BENEFITS..........................- 70 -
7.12 EXCLUSIVE BENEFIT RULE.........................................- 70 -
7.13 PURCHASE OF INSURANCE..........................................- 71 -
7.14 LOANS TO PARTICIPANTS..........................................- 72 -
7.15 DIRECTED INVESTMENT ACCOUNTS...................................- 74 -
7.16 SUPERSEDING TRUST OR CUSTODIAL AGREEMENT.......................- 76 -
<PAGE>
ARTICLE 8.................................................................- 77 -
DUTIES OF THE ADMINISTRATOR...............................................- 77 -
8.1 APPOINTMENT, RESIGNATION, REMOVAL AND SUCCESSION...............- 77 -
8.2 POWERS AND DUTIES OF THE ADMINISTRATOR.........................- 77 -
8.3 APPOINTMENT OF ADMINISTRATIVE COMMITTEE........................- 77 -
8.4 FINALITY OF ADMINISTRATIVE DECISIONS...........................- 77 -
8.5 MULTIPLE ADMINISTRATORS........................................- 77 -
8.6 COMPENSATION AND EXPENSES......................................- 77 -
8.7 APPOINTMENT OF AGENTS AND COUNSEL..............................- 78 -
8.8 CORRECTING ADMINISTRATIVE ERRORS...............................- 78 -
8.9 PROMULGATING NOTICES AND PROCEDURES............................- 78 -
8.10 CLAIMS PROCEDURES..............................................- 78 -
8.11 QUALIFIED DOMESTIC RELATIONS ORDERS............................- 81 -
ARTICLE 9.................................................................- 83 -
AMENDMENT, TERMINATION AND MERGER.........................................- 83 -
9.1 AMENDMENT OF THE PLAN..........................................- 83 -
9.2 TERMINATION OF PLAN BY SPONSOR.................................- 83 -
9.3 TERMINATION OF PARTICIPATION BY ADOPTING EMPLOYER..............- 84 -
9.4 MERGER OR CONSOLIDATION........................................- 84 -
ARTICLE 10................................................................- 85 -
MISCELLANEOUS PROVISIONS..................................................- 85 -
10.1 NO CONTRACT OF EMPLOYMENT......................................- 85 -
10.2 TITLE TO ASSETS................................................- 85 -
10.3 QUALIFIED MILITARY SERVICE.....................................- 85 -
10.4 BONDING OF FIDUCIARIES.........................................- 85 -
10.5 SEVERABILITY OF PROVISIONS.....................................- 85 -
10.6 GENDER AND NUMBER..............................................- 85 -
10.7 HEADINGS AND SUBHEADINGS.......................................- 85 -
10.8 LEGAL ACTION...................................................- 85 -
10.9 QUALIFIED PLAN STATUS..........................................- 86 -
10.10 MAILING OF NOTICES TO ADMINISTRATOR, EMPLOYER OR TRUSTEE.......- 86 -
10.11 PARTICIPANT NOTICES AND WAIVERS OF NOTICES TO PARTICIPANTS.....- 86 -
10.12 NO DUPLICATION OF BENEFITS.....................................- 86 -
10.13 EVIDENCE FURNISHED CONCLUSIVE..................................- 86 -
10.14 RELEASE OF CLAIMS..............................................- 86 -
10.15 MULTIPLE COPIES OF PLAN AND/OR TRUST...........................- 86 -
10.16 LIMITATION OF LIABILITY AND INDEMNIFICATION....................- 86 -
<PAGE>
HOT TOPIC, INC.
401(k) PROFIT SHARING PLAN
THIS AGREEMENT is made and entered into as of the _______ day of
____________________, __________, between HOT TOPIC, INC. (hereafter referred to
as the "Sponsor") and JAMES MCGINTY, ELIZABETH MCLAUGHLIN, JANE CRUZ, GERALD
COOK AND GEORGE WEHLITZ (hereafter collectively referred to as the Trustee).
W I T N E S S E T H:
WHEREAS, the Sponsor originally established a Code ss.401(k) plan
(hereafter referred to as the "Plan"), effective August 1, 1995, in order to
provide retirement and other incidental benefits to Employees who are eligible
to participate therein; and
WHEREAS, in accordance with the terms of the Plan, the Sponsor has the
ability at any time, and from time to time, to amend the Plan;
NOW, THEREFORE, effective January 1, 2003 (except for those specific
provisions that have an earlier effective date), the Sponsor hereby amends and
restates the Plan in its entirety in order to comply with the requirements of
the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code of 1986, as amended by the Uruguay Round Agreements Act, the Small Business
Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Uniformed
Services Employment and Reemployment Rights Act of 1994, the Internal Revenue
Service Restructuring and Reform Act of 1998, the Community Renewal Tax Relief
Act of 2000, and all applicable rulings and regulations issued thereunder, and
the Trustee accepts the Plan under the following terms and conditions:
ARTICLE 1
- 1 -
<PAGE>
DEFINITIONS
1.1 ACP OR ACP TEST
The term ACP means the Average Contribution Percentage as defined in
Section 1.10(c). The term ACP Test means the Average Contribution
Percentage Test.
1.2 ACTUAL DEFERRAL PERCENTAGE TEST
The term Actual Deferral Percentage Test (or ADP Test) means either of
the following nondiscrimination tests for Elective Deferrals: (1) the
ADP for Participants who are HCEs will not exceed the ADP for
Participants who are NHCEs multiplied by 1.25; or (2) the ADP for
Participants who are HCEs will not exceed the ADP for Participants who
are NHCEs multiplied by 2.0, provided that the ADP for Participants who
are HCEs does not exceed the ADP for Participants who are NHCEs by more
than 2 percentage points. The ADP Test for any Plan Year will be
determined in accordance with the following provisions:
(a) TESTING METHOD: The ADP Test will be determined each Plan Year
by either Current Year Testing or Prior Year Testing (as
described in paragraph (b) below) as follows: Current Year
Testing is used for the 1997 Plan Year; Current Year Testing
is used for the 1998 Plan Year; Current Year Testing is used
for the 1999 Plan Year; Current Year Testing is used for the
2000 Plan Year; Current Year Testing is used for the 2001 Plan
Year; and Prior Year Testing is used for the 2002 Plan Year
and for each Plan Year thereafter until otherwise elected by
the Employer by means of a Plan amendment.
(b) DEFINITION OF CURRENT AND PRIOR YEAR TESTING: The term Current
Year Testing means the ADP Test will be determined for a Plan
Year by comparing the ADP of Participants who are Highly
Compensated Employees for that Plan Year to the ADP of
Participants who were Non-Highly Compensated Employees for
that Plan Year. The term Prior Year Testing means the ADP Test
will be determined for a Plan Year by comparing the ADP of
Participants who are Highly Compensated Employees for that
Plan Year to the ADP of Participants who were Non-Highly
Compensated Employees for the prior Plan Year. If Prior Year
Testing is specified in paragraph (a), then in the case of the
first Plan Year in which the Plan permits any Participant to
make Elective Deferrals (unless this is a successor Plan), the
ADP used for Participants who were Non-Highly Compensated
Employees in the prior Plan Year will be the greater of 3% or
their actual ADP for the first Plan Year in which Elective
Deferrals were permitted. Prior Year Testing cannot be used in
any Plan Year in which a supplemental Safe Harbor Notice is
issued that reduces or eliminates a Safe Harbor Matching
Contribution for that Plan Year.
(c) DEFINITION OF ACTUAL DEFERRAL PERCENTAGE: The term Actual
Deferral Percentage (ADP) means, for a specified group of
Participants for a Plan Year, the average of the ratios
calculated separately for each Participant in such group of
(1) the amount of Employer contributions actually paid on
behalf of such Participant for the Plan Year to (2) the
Compensation of such Participant for such Plan Year.
(d) CONTRIBUTIONS USED TO DETERMINE ADP TEST: Employer
contributions used to determine the ADP Test include Elective
Deferrals, including Excess Elective Deferrals as defined in
Section 1.28, but excluding Excess Elective Deferrals of NHCEs
that arise solely from Elective Deferrals made to this Plan or
any other plans maintained by this Employer and Elective
Deferrals that are taken into account in the ACP Test if the
ADP Test is satisfied both with and without exclusion of these
Elective Deferrals. The Employer may also elect each Plan Year
- 2 -
<PAGE>
to include QMACs and/or QNECs, and in any Plan Year in which
Current Year Testing is used, may further elect to include
such QNECs and/or QMACs only to the extent necessary to pass
the ADP Test. In computing ADPs, an Employee who would be a
Participant but for the failure to make Elective Deferrals
will be treated as a Participant on whose behalf no Elective
Deferrals are made.
(e) HIGHLY COMPENSATED EMPLOYEES: A Participant is a Highly
Compensated Employee for a particular Plan Year if he or she
meets the definition of a Highly Compensated Employee in
effect for that Plan Year. A Participant is a Non-Highly
Compensated Employee for a particular Plan Year if he or she
does not meet the definition of a Highly Compensated Employee
in effect for that Plan Year. The ADP for any Participant who
is a HCE for the Plan Year and who is eligible to have
Elective Deferrals (and QNECs or QMACs, or both, if treated as
Elective Deferrals for purposes of the ADP Test) allocated to
his or her accounts under two or more arrangements described
in Code ss.401(k) that are maintained by this Employer will be
determined as if such Elective Deferrals (and, if applicable,
QNECs or QMACs, or both) were made under a single arrangement.
If a HCE participates in two or more cash or deferred
arrangements that have different Plan Years, all cash or
deferred arrangements ending with or within the same calendar
year will be treated as a single arrangement; except that
certain plans will be treated as separate if mandatorily
disaggregated under regulations under Code ss.401(k).
(f) OTHER RULES: In determining the ADP Test, (1) if this Plan
satisfies the requirements of Code ss.401(k), ss.401(a)(4), or
ss.410(b) only if aggregated with one or more other plans, or
if one or more other plans satisfy such requirements only if
aggregated with this Plan, then this section will be applied
by determining the ADP of Employees as if all such plans were
a single plan. For any Plan Year in which the Employer elects
prior year testing under this Section, adjustments to the ADP
of Non-Highly Compensated Employees for the prior Plan Year
will be made in accordance with Notice 98-1 and any
superseding guidance. Plans may be aggregated to satisfy Code
ss.401(k) only if they have the same Plan Year and use the
same ADP testing method; (2) Elective Deferrals, QNECs and
QMACs must be made before the last day of the 12-month period
immediately following the Plan Year to which contributions
relate; (3) the Employer will maintain records sufficient to
demonstrate satisfaction of the ADP test and the amount of
QNECs or QMACs, or both, used in such test; and (4) the
determination and treatment of the ADP amounts of any
Participant will satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
(g) CHANGE TO PRIOR YEAR TESTING: If the Employer elects Current
Year Testing for any Plan Year, the Employer can only elect to
change to Prior Year Testing in accordance with the
requirements in Notice 98-1 (or superseding guidance). If the
Employer elects to change to Prior Year Testing, the ADP for
NHCEs for the prior year will be determined by counting only
(1) Elective Deferrals for those NHCEs that were counted for
purposes of the ADP Test (and not the ACP Test) under the
Current Year Testing method for the prior year, and (2) QNECs
that were allocated to the accounts of those NHCEs for the
prior year but that were not used to satisfy the ADP Test or
the ACP Test under the Current Year Testing method for the
prior year. Thus, if the Employer elects to change to Prior
Year Testing, the following contributions made for the prior
year will be disregarded: QNECs used to satisfy either the ADP
Test or ACP Test under the Current Year Testing method for the
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prior testing year, Elective Deferrals taken into account for
purposes of the ACP Test, and all QMACs. The limitations on
double counting do not apply for testing years beginning
before January 1, 2001, and if the Plan changes to Prior Year
Testing for the first time for any Plan Year after 1997, the
ADP for NHCEs will be the same as for the Plan Year
immediately preceding the Plan Year for which the change to
Prior Year Testing was effective.
1.3 ADP OR ADP TEST
The term ADP means the Actual Deferral Percentage as defined in Section
1.2(c). The term ADP Test means the Actual Deferral Percentage Test.
1.4 ADMINISTRATOR
The term Administrator means the Employer unless another Administrator
is appointed by the Employer pursuant to the provisions of Section 8.1
of the Plan.
1.5 ADOPTING EMPLOYER
The term Adopting Employer means any entity that adopts this Plan with
the consent of the Sponsor. An Employee's transfer to or from any
Employer or Adopting Employer will not affect his or her Participant's
Account balance, total Years of Service (or Periods of Service) and
total Years of Service as a Participant (or Periods of Service as a
Participant). All Adopting Employers will be subject to the following
provisions:
(a) MULTIPLE EMPLOYER PLAN PROVISIONS UNDER CODE SS.413(C):
Notwithstanding any other provision in the Plan to the
contrary, unless the Plan is a collectively bargained plan
described in Regulation ss.1.413-1(a), the following
provisions will apply with respect to any Adopting Employer
that is not an Affiliated Employer of the Sponsor:
(1) INSTANCES OF SEPARATE EMPLOYER TESTING: Employees of
any such Adopting Employer will be treated separately
for purposes of testing under the provisions of Code
ss.401(a)(4), Code ss.401(k), Code ss.401(m) and, if
the Sponsor and the Adopting Employer do not share
Employees, Code ss.416. Furthermore, the terms of
Code ss.410(b) will be applied separately on an
employer-by-employer basis by the Sponsor (and the
Adopting Employers which are part of the Affiliated
Group which includes the Sponsor) and each Adopting
Employer that is not an Affiliated Employer of the
Sponsor, taking into account the generally applicable
rules described in Code ss.401(a)(5), ss.414(b) and
ss.414(c).
(2) INSTANCES OF SINGLE EMPLOYER TESTING: Employees of
the Adopting Employer will be treated as part of a
single employer plan for purposes of eligibility to
participate under Article 2 and under the provisions
of Code ss.410(a). Furthermore, the terms of Code
ss.411 relating to Vesting will be applied as if all
Employees of all such Adopting Employers and the
Sponsor were employed by a single employer, except
that the rules regarding Breaks in Service will be
applied under such regulations as may be prescribed
by the Secretary of Labor.
(3) COMMON TRUST: Contributions made by any such Adopting
Employer will be held in a common Trust Fund with
contributions made by the Sponsor, and all such
contributions will be available to pay the benefits
of any Participant or Beneficiary who is an Employee
of the Sponsor or any such Adopting Employer.
(4) COMMON DISQUALIFICATION PROVISION: The failure of
either the Sponsor or any such Adopting Employer to
satisfy the qualification requirements under Code
ss.401(a), as modified by the provisions of Code
ss.413(c), will result in the disqualification of the
Plan for all such Employers maintaining the Plan.
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(b) TERMINATION OF ADOPTION: An Adopting Employer may terminate
participation in the Plan by delivering written notice to the
Sponsor, the Administrator and the Trustee; but in accordance
with Article 9, only the Sponsor can terminate the Plan. If a
request for and approval of a transfer of assets from this
Plan to any successor qualified retirement plan maintained by
the Adopting Employer or its successor is not made in
accordance with Section 9.3, Participants who are no longer
Employees because the Adopting Employer terminates Plan
participation will only be entitled to the commencement of
their benefits (1) in the case of Participants who are no
longer Employees of an Adopting Employer that is an Affiliated
Employer of the Sponsor, in accordance with Article 5 after
their death, retirement, Disability or Termination of
Employment from the Adopting Employer or former Adopting
Employer; and (2) in the case of Participants who are no
longer Employees of an Adopting Employer that is not an
Affiliated Employer of the Sponsor, within a reasonable time
thereafter as if the Plan had been terminated under Section
9.2.
1.6 AFFILIATED EMPLOYER
The term Affiliated Employer means any of the following of which the
Employer is a part: (1) a controlled group of corporations as defined
in Code ss.414(b); (2) a trade or business (whether or not
incorporated) under common control under Code ss.414(c); (3) any
organization (whether or not incorporated) which is a member of an
affiliated service group under Code ss.414(m); and (4) any other entity
required to be aggregated under Code ss.414(o).
1.7 AGE
The term Age means an Employee's actual attained age.
1.8 ANNIVERSARY DATE
The term Anniversary Date means December 31st.
1.9 ANNUITY STARTING DATE
The term Annuity Starting Date means the first day of the first period
for which an amount is paid as an annuity, or, in the case of a benefit
not payable as an annuity, the first day all events have occurred which
entitle the Participant to such benefit. The first day of the first
period for which a benefit is to be received by reason of Disability
will be treated as the Annuity Starting Date only if such benefit is
not an auxiliary benefit.
1.10 AVERAGE CONTRIBUTION PERCENTAGE TEST
The term Average Contribution Percentage (or ACP) Test means the
greater of one of the following nondiscrimination tests for Matching
Contributions and Employee contributions: (1) the ACP for Participants
who are HCEs will not exceed the ACP for Participants who are NHCEs
multiplied by 1.25; or (b) the ACP for Participants who are HCEs will
not exceed the ACP for Participants who are NHCEs multiplied by 2.0,
provided that the ACP for Participants who are HCEs does not exceed the
ACP for Participants who are NHCEs by more than 2 percentage points.
The ACP Test for any Plan Year will be determined in accordance with
the following:
(a) TESTING METHOD: The ACP Test will be determined each Plan Year
by the Current Year Testing method as described in paragraph
(b) below.
(b) DEFINITION OF CURRENT AND PRIOR YEAR TESTING: The term Current
Year Testing means the ACP Test will be determined for a Plan
Year by comparing the ACP of Participants who are Highly
Compensated Employees for that Plan Year to the ACP of
Participants who were Non-Highly Compensated Employees for
that Plan Year. The term Prior Year Testing means the ACP Test
will be determined for a Plan Year by comparing the ACP of
Participants who are Highly Compensated Employees for that
Plan Year to the ACP of Participants who were Non-Highly
Compensated Employees for the prior Plan Year. If Prior Year
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Testing is specified in paragraph (a), then for the first Plan
Year in which the Plan permits any Participant to make
Voluntary Employee Contributions, provides for Matching
Contributions, or both (unless this Plan is a successor Plan),
the ACP used for Participants who were Non-Highly Compensated
Employees in the prior Plan Year will be the greater of 3% or
their actual ACP for the first Plan Year. Prior Year Testing
cannot be used in any Plan Year in which a supplemental Safe
Harbor Notice is issued that reduces or eliminates a Safe
Harbor Matching Contribution for that Plan Year.
(c) DEFINITION OF AVERAGE CONTRIBUTION PERCENTAGE: For purposes of
this Section, the term Average Contribution Percentage (or
ACP) means the average of the Contribution Percentages of the
"eligible" Participants in a group.
(d) DEFINITION OF CONTRIBUTION PERCENTAGE: For purposes of this
Section, the term Contribution Percentage means the ratio
(expressed as a percentage) of the Participant's Contribution
Percentage Amounts to the Participant's Compensation for the
Plan Year.
(e) DEFINITION OF CONTRIBUTION PERCENTAGE AMOUNTS: For purposes of
this Section, the term Contribution Percentage Amounts means
the sum of the Employee Contributions, Matching Contributions
and Qualified Non-Elective Contributions (to the extent not
used in the ADP Test) made under the plan on behalf of the
participant for the Plan Year.
(f) CONTRIBUTIONS USED IN DETERMINING CONTRIBUTION PERCENTAGE
AMOUNTS: Contribution Percentage Amounts will not include
Matching Contributions that are forfeited either to correct
Excess Aggregate Contributions or because the contributions to
which they relate are Excess Deferrals, Excess Contributions,
or Excess Aggregate Contributions. The Employer may elect each
Plan Year to include as Contribution Percentage Amounts QNECs
and/or Elective Deferrals so long as the ADP Test is met
before the Elective Deferrals are used in the ACP Test and
continues to be met following the exclusion of those Elective
Deferrals that are used to meet the ACP Test. For any Plan
Year in which Current Year Testing is specified in paragraph
(a) above, the Employer may further elect to include such
QNECs and/or Elective Deferrals as Contribution Percentage
Amounts only to the extent necessary to satisfy the ACP (and
Multiple Use) Test.
(g) MULTIPLE USE: If one or more HCEs participate in both a cash
or deferred arrangement and in a plan subject to the ACP Test
maintained by the Employer, and if the sum of the ADP and ACP
of those HCEs subject to either or both tests exceeds the
Aggregate Limit, then the ACP of those HCEs who also
participate in a cash or deferred arrangement will be reduced
as described in Section 5.21 so that the limit is not
exceeded. The amount by which each HCE's Contribution
Percentage Amount is reduced will be treated as an Excess
Aggregate Contribution. The ADP and ACP of HCEs are determined
after any corrections required to meet the ADP Test and the
ACP Test and are deemed to be the maximum permitted under such
tests for the Plan Year. Multiple use does not occur if either
the ADP or the ACP of the HCEs does not exceed 1.25 multiplied
by the ADP and the ACP of the NHCEs.
(h) HIGHLY COMPENSATED EMPLOYEES: A Participant is a HCE for a
particular Plan Year if he or she meets the definition of a
HCE in effect for that Plan Year; and a Participant is a NHCE
for a particular Plan Year if he or she does not meet the
definition of a HCE in effect for that Plan Year. The
Contribution Percentage for any Participant who is a HCE and
who is eligible to have Contribution Percentage Amounts
allocated to his or her account under two or more plans
described in Code ss.401(a), or arrangements described in Code
ss.401(k) that are maintained by the Employer, will be
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determined as if the total of such Contribution Percentage
Amounts was made under each plan. If a HCE participates in two
or more cash or deferred arrangements that have different plan
years, all cash or deferred arrangements ending with or within
the same calendar year will be treated as a single
arrangement. Notwithstanding the foregoing, certain plans will
be treated as separate if mandatorily disaggregated under
regulations under Code ss.401(m).
(i) OTHER RULES: In determining the ACP Test, if this Plan
satisfies the requirements of Code ss.401(m), ss.401(a)(4) or
ss.410(b) only if aggregated with one or more other plans, or
if one or more other plans satisfy such requirements only if
aggregated with this Plan, then this section will be applied
by determining the Contribution Percentage of Employees as if
all such plans were a single plan. For any Plan Year in which
the Employer elects Prior Year Testing under this Section,
adjustments to the ACP of Non-Highly Compensated Employees for
the prior Plan Year will be made in accordance with Notice
98-1 and any superseding guidance. Plans with the same Plan
Year may be aggregated to satisfy Code ss.401(m). In
determining the Contribution Percentage test, Employee
contributions are considered to have been made in the Plan
Year in which contributed to the Plan, and Matching
Contributions and QNECs will be considered made for a Plan
Year if made no later than the end of the twelve-month period
beginning on the day after the close of the Plan Year. The
Employer will maintain records sufficient to demonstrate
satisfaction of the ACP Test and the amount of QNECs or QMACs,
or both, used in such test. The determination and treatment of
the Contribution Percentage of any Participant will satisfy
such other requirements as may be prescribed by the Secretary
of the Treasury.
(j) AGGREGATE LIMIT: The term Aggregate Limit means the sum of (1)
125% of the greater of the ADP of Participants who are NHCEs
for the current Plan Year (or for the prior Plan Year for any
Plan Year for which prior year testing has been elected) or
the ACP of Participants who are NHCEs subject to Code
ss.401(m) for the Plan Year beginning with or within the
current Plan Year (or for the prior Plan Year for any Plan
Year for which prior year testing has been elected) of the
cash or deferred arrangement (2) the lesser of 200% or two
plus the lesser of such ADP or ACP. The word "lesser" will be
substituted for "greater" in (1) above, and the word "greater"
will be substituted for "lesser" after "two plus the" in (2)
above if that would result in a larger Aggregate Limit.
(k) "ELIGIBLE" PARTICIPANT: For purposes of this Section, an
"eligible" Participant is any Employee who is eligible to make
an Employee Contribution, or an Elective Deferral (if the
Employer takes such contributions into account in the
calculation of the Contribution Percentage), or to receive a
Matching Contribution (including forfeitures) or a QMAC. If an
Employee Contribution is required as a condition of Plan
participation, any Employee who would be a Participant if such
Participant made such a contribution will be treated as an
"eligible" Participant on behalf of whom no Employee
Contributions are made. An Employee Contribution means any
contribution made by or on behalf of a Participant that is
included in the Participant's gross income in the year in
which made and that is maintained under a separate account to
which earnings and losses are allocated.
(l) CHANGE TO PRIOR YEAR TESTING: If the Employer elects Current
Year Testing for any Plan Year, the Employer can only elect to
change to prior year testing in accordance with the
requirements in Notice 98-1 (or superseding guidance). If the
Employer amends the Plan to elect prior year testing, the ACP
for NHCEs for the prior year will be determined by taking into
account only (1) Voluntary Employee Contributions for those
NHCEs for the prior year, and (2) Matching Contributions for
those NHCEs that were taken into account in the ACP Test (and
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not the ADP Test) under the current year testing method for
the prior year, and (3) QNECs that were allocated to the
accounts of those NHCEs for the prior year but that were not
used to satisfy the ACP Test or the ADP Test under the current
year testing method for the prior year. Thus, if the Employer
elects to change to prior year testing, the following
contributions made for the prior year will be disregarded:
QNECs used to satisfy either the ADP or ACP Test under the
current year testing method for the prior testing year, QMACs
taken into account in the ADP Test, and all Elective
Deferrals. These limitations on double counting do not apply
for testing years beginning before January 1, 1999, and if the
Plan changes to prior year testing for the first time for the
1998 Plan Year, the ACP for NHCEs will be the same as for the
1997 Plan Year.
1.11 BENEFICIARY
The term Beneficiary means the recipient designated by the Participant
to receive the Plan benefits payable upon the death of the Participant,
or the recipient designated by a Beneficiary to receive any benefits
which may be payable in the event of the Beneficiary's death prior to
receiving the entire death benefit to which the Beneficiary is
entitled. All such Beneficiary designations will be made in accordance
with the following provisions:
(a) BENEFICIARY DESIGNATIONS BY A PARTICIPANT: Subject to the
provisions of Section 5.8 regarding the rights of a
Participant's Spouse, each Participant may designate a
Beneficiary on a form supplied by the Administrator, and may
change or revoke that designation by filing written notice
with the Administrator. If a Participant completes or has
completed a Beneficiary designation form in which the
Participant designates his or her Spouse as the Beneficiary,
and the Participant and the Participant's Spouse are legally
divorced subsequent to the date of such designation, then the
designation of such Spouse as a Beneficiary hereunder will be
deemed null and void unless the Participant, subsequent to the
legal divorce, reaffirms the designation by completing a new
Beneficiary designation form. In the absence of a written
Beneficiary designation form, the Participant will be deemed
to have designated the following Beneficiaries in the
following order: (1) the Participant's Spouse, if then living;
(2) the Participant's issue, per stirpes; and (3) the
Participant's estate.
(b) BENEFICIARY DESIGNATIONS BY A BENEFICIARY: In the absence of a
Beneficiary designation or other directive from the deceased
Participant to the contrary, any Beneficiary may name his or
her own Beneficiary in accordance with Section 5.2(e) to
receive any benefits which may be payable in the event of the
Beneficiary's death prior to the receipt of all the
Participant's death benefits to which the Beneficiary was
entitled.
(c) BENEFICIARIES CONSIDERED CONTINGENT UNTIL DEATH OF
PARTICIPANT: Notwithstanding any provision in this Section,
any Beneficiary named hereunder will be considered a
contingent Beneficiary until the death of the Participant (or
Beneficiary, as the case may be), and until such time will
have no rights granted to Beneficiaries under the Plan.
1.12 BREAK IN SERVICE
The term Break in Service means a 1-Year Period of Severance.
Notwithstanding the foregoing, a Participant who incurs a Break in
Service but does not terminate employment with the Employer will
continue to be eligible to make Elective Deferrals to the Plan, but
will no longer be eligible to receive an allocation of any other
Employer contributions.
1.13 CODE
The term Code means the Internal Revenue Code of 1986, as amended, and
the regulations and rulings promulgated thereunder by the Internal
Revenue Service.
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1.14 CODE SS.3401 COMPENSATION
The term Code ss.3401 Compensation means wages within the meaning of
Code ss.3401(a) that are actually paid or made available in gross
income for the purposes of income tax withholding at the source but
determined without regard to any rules under Code ss.3401 that limit
the remuneration included in wages based on the nature or location of
the employment or the services performed (such as the exception for
agricultural labor in Code ss.3401(a)(2)).
1.15 CODE SS.415 COMPENSATION
The term Code ss.415 Compensation means Earned Income, wages, salaries,
fees for professional services and other amounts received (without
regard to whether or not an amount is paid in cash) for personal
services actually rendered in the course of employment with the
Employer maintaining the Plan, including, but not limited to,
commissions paid salespersons, compensation for services based on a
percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, and reimbursements, or other expense
allowances under a non-accountable plan as described in IRS regulation
ss.1.62-2(c). A Participant's Code ss.415 Compensation will be
determined subject to the following provisions:
(a) AMOUNTS EXCLUDED FROM CODE SS.415 COMPENSATION: Code ss.415
Compensation does not include (1) Employer contributions to a
plan of deferred compensation which are not includible in
gross income for the taxable year in which contributed, or
Employer contributions to a simplified employee pension plan
to the extent such contributions are deductible by the
Employee, or any distributions from a plan of deferred
compensation; (2) amounts realized from a non-qualified stock
option, or when restricted stock or property held by the
Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture; (3) amounts
realized from the sale, exchange or other disposition of stock
acquired under a qualified stock option; and (4) other amounts
which receive special tax benefits, or contributions made by
an Employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity described in
Code ss.403(b) (whether or not the amounts are excludible from
an Employee's gross income).
(b) TREATMENT OF ELECTIVE DEFERRALS AND OTHER AMOUNTS: For
Limitation Years beginning on or after January 1, 1998, Code
ss.415 Compensation will include any elective deferrals as
defined in Code ss.402(g)(3), and any amounts contributed or
deferred at the election of the Employee that were not
includible in the gross income by reason of Code ss.125 or
ss.457. Code ss.415 Compensation will also include elective
amounts that are not includible in the gross income of the
Employee by reason of Code ss.132(f)(4) for Limitation Years
beginning on or after January 1, 2001 (or if elected by the
Administrator on a non-discriminatory basis, any earlier
Limitation Year beginning on or after January 1, 1998).
1.16 COMPENSATION
The term Compensation means amounts received by a Participant from the
Employer during a Compensation Determination Period, determined subject
to the following provisions:
(a) COMPENSATION USED TO DETERMINE ELECTIVE DEFERRALS: In
determining the amount of a Participant's Elective Deferrals
for a Plan Year, the term Compensation means a Participant's
Form W-2 Compensation actually paid during a Compensation
Determination Period, determined subject to the following
provisions:
(1) COMPENSATION DETERMINATION PERIOD: Under this
paragraph (a), the Compensation Determination Period
is the Plan Year.
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(2) TREATMENT OF ELECTIVE DEFERRALS: For purposes of this
paragraph (a), Employer contribution amounts made
pursuant to a salary reduction agreement which are
not currently includible in the gross income of an
Employee by reason of Code ss.125, ss.402(e)(3),
ss.402(h)(1)(B), or ss.403(b) will, at the election
of the Administrator on a non-discriminatory basis,
be included in determining Compensation. In addition,
if elected by the Administrator on a
non-discriminatory basis, Compensation will also
include elective amounts that are not includible in
the gross income of the Employee by reason of Code
ss.132(f)(4), beginning with the Plan Year elected by
the Administrator but not earlier than the Plan Year
beginning on or after January 1, 1998.
(3) CERTAIN AMOUNTS EXCLUDED FROM COMPENSATION: For
purposes of this paragraph (a), any amount which
would otherwise be considered Compensation under this
paragraph but which is received by a Participant
under the following circumstances will not be
considered Compensation for purposes of this
paragraph: (1) any amount received as a bonus; (2)
any amount received as a commission; (3) any amount
intended as reimbursement for moving expenses; (4)
any amount intended as reimbursement for car
expenses; and (5) any amount taxable for purposes of
Domestic Partner medical coverage and Stock Options.
(4) AMOUNTS RECEIVED PRIOR TO BECOMING A PARTICIPANT: All
amounts which would be considered Compensation under
this paragraph but which are received by an Employee
prior to the date the Employee becomes a Participant
in the Plan will be considered Compensation for
purposes of this paragraph (a). However, the
Administrator may elect to limit Compensation under
this paragraph to Compensation received during the
period during which the cash or deferred arrangement
was in effect under the Plan.
(5) COMPENSATION RECEIVED WHILE IN AN INELIGIBLE CLASS OF
EMPLOYEES: Compensation for purposes of this
paragraph (a) will exclude any amount received while
an Employee is a member of an ineligible class of
Employees as described in Section 2.1(a)(2).
(b) COMPENSATION USED TO DETERMINE MATCHING CONTRIBUTIONS:
Matching Contributions are not currently permitted under the
terms of the Plan.
(c) COMPENSATION USED TO DETERMINE NON-ELECTIVE CONTRIBUTIONS:
Non-Elective Contributions are not currently permitted under
the terms of the Plan.
(d) COMPENSATION USED IN DETERMINING THE ACP TEST AND ADP TEST: In
determining the ACP Test, the term Compensation means a
Participant's Form W-2 Compensation. In determining the ADP
Test, the term Compensation means a Participant's Form W-2
Compensation. However, in determining a Participant's ADP or
ACP, the Administrator may elect (1) to include or exclude
Elective Deferrals; (2) to include or exclude any items of
compensation includible or excludible under Code ss.414(s) and
the regulations thereunder, provided such adjusted definition
conforms to the nondiscrimination requirements of those
regulations; and/or (3) to limit Compensation taken into
account in computing a Participant's ADP or ACP to
Compensation received only for the portion of the Plan Year in
which the Participant was a Participant and only for the
portion of the Plan Year during which the Plan contained a
cash or deferred arrangement. The Plan Administrator's
election as described above must be consistent and uniform
with respect to all Participants and all plans of the Employer
for any particular Plan Year.
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(e) COMPENSATION USED FOR TOP HEAVY PURPOSES: Notwithstanding
anything in this Section to the contrary, in determining Top
Heavy allocations under Section 3.5, the term Compensation
means the Code ss.415 Compensation received by an Employee
during an entire Compensation Determination Period excluding
amounts received while a member of an ineligible class of
Employees as described in Section 2.1(a)(2).
(f) COMPENSATION OF OWNER-EMPLOYEES AND SHAREHOLDER-EMPLOYEES: For
purposes of this Plan, the Compensation of an Owner-Employee
or a Self-Employed Individual will equal his or her Earned
Income up to the dollar limit described in the next paragraph.
(g) DOLLAR LIMITATION ON COMPENSATION: Notwithstanding anything in
this Section to the contrary, a Participant's Compensation for
any Compensation Determination Period will not exceed the
limitation set forth in Code ss.401(a)(17) as in effect for
that determination period. If a Compensation Determination
Period consists of fewer than 12 months, the Code
ss.401(a)(17) limitation will be multiplied by a fraction, the
numerator of which is the number of months in that
determination period, and the denominator of which is 12.
(h) COMPENSATION LIMITATION ELECTION AVAILABLE TO CERTAIN
PARTICIPANTS: Except for purposes of determining Top Heavy
allocation requirements under Section 3.5 or the Code ss.415
limitations under Article 6, any Participant who is a Key
Employee, an Owner-Employee, a Self-Employed Individual, or a
Highly Compensated Employee may elect for any Plan Year, on a
form prescribed by the Administrator to limit Compensation for
all purposes under this Plan.
(i) REPEAL OF FAMILY AGGREGATION RULES: The family aggregation
rules that were described in Code ss.401(a)(17)(A) as in
effect prior to January 1, 1997 will not apply to this Plan
for Plan Years beginning on or after January 1, 1997.
1.17 DISABILITY
The term Disability means a physical or mental condition arising after
an Employee has become a Participant that qualifies the Participant for
disability benefits under the Social Security Act in effect on the date
the Participant suffers the Disability.
1.18 EARLY RETIREMENT AGE
There is no Early Retirement Age under the Plan.
1.19 EARNED INCOME
The term Earned Income means net earnings from self-employment in the
trade or business with respect to which the Plan is established and for
which personal services of the individual are a material
income-producing factor. Net earnings (1) will be determined without
regard to items not included in gross income and the deductions
allocable thereto, and for taxable years beginning after December 31,
1989, with regard to the deduction allowed by Code ss.164(f); and (2)
will be reduced by deductible Employer contributions to a qualified
retirement plan for taxable years beginning after December 31, 1989.
1.20 ELECTIVE DEFERRAL
The term Elective Deferrals means Employer contributions made to the
Plan at the election of the Participant in lieu of cash compensation,
and will include contributions made pursuant to a salary reduction
agreement or other deferral mechanism, as follows:
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(a) DETERMINATION OF AMOUNT: In any taxable year, a Participant's
Elective Deferral is the sum of all Employer contributions
made on behalf of such Participant pursuant to an election to
defer under any qualified cash or deferred arrangement under
Code ss.401(k), any simplified employee pension cash or
deferred arrangement under Code ss.402(h)(1)(B), any SIMPLE
individual retirement plan under Code ss.408(p), any eligible
deferred compensation plan under Code ss.457, any plan under
Code ss.501(c)(18), and any Employer contributions made on the
behalf of a Participant for the purchase of an annuity
contract under Code ss.403(b) pursuant to a salary reduction
agreement. Elective Deferrals will not include any deferrals
properly distributed as excess Annual Additions.
(b) RESTRICTIONS ON WITHDRAWAL: Elective Deferrals (exclusive of
earnings thereon) can only be withdrawn upon the earlier of
the date (1) a Participant incurs a Termination of Employment;
(2) a Participant dies; (3) a Participant suffers a
Disability; (4) an event described in Code ss.401(k)(10)
occurs; (5) a Participant receives a hardship distribution if
hardship distributions are permitted by the Employer under
Section 5.17; and (6) a Participant reaches Age 59 1/2 if on
or after such date a pre-retirement in-service withdrawal of
Elective Deferrals is permitted by the Employer under Section
5.18.
1.21 ELECTIVE DEFERRAL ACCOUNT
The term Elective Deferral Account means the sub-account of a
Participant's Account to which the Participant's Elective Deferrals are
credited.
1.22 ELIGIBLE PARTICIPANT
The term Eligible Participant means a Participant eligible in
accordance with the following provisions to receive an allocation of
any Matching Contributions, Non-Elective Contributions and Forfeitures
that are allocable for the Plan Year:
(a) MATCHING CONTRIBUTIONS AND RELATED FORFEITURES: Matching
Contributions are not currently permitted under the terms of
the Plan.
(b) NON-ELECTIVE CONTRIBUTIONS AND RELATED FORFEITURES:
Non-Elective Contributions are not currently permitted under
the terms of the Plan.
1.23 EMPLOYEE
The term Employee means (a) any person reported on the payroll records
of the Employer as an employee who is deemed by the Employer to be a
common law employee; (b) except for determining eligibility to
participate in this Plan, any person reported on the payroll records of
an Affiliated Employer of the Sponsor or an Adopting Employer as an
employee who is deemed by the Affiliated Employer to be a common law
employee, even if the Affiliated Employer is not an Adopting Employer;
(c) any Self-Employed Individual who derives Earned Income from the
Employer; (d) any Owner-Employee; and (e) any person who is considered
a Leased Employee but who (1) is not covered by a plan described in
Code ss.414(n)(5), or (2) is covered by a plan described in Code
ss.414(n)(5), but Leased Employees constitute more than 20% of the
Employer's non-highly compensated workforce. However, the term Employee
will not include any individual who is not reported on the payroll
records of the Employer or an Affiliated Employer as a common law
employee. If such person is later determined by the Sponsor or by a
court or governmental agency to be or to have been an Employee, he or
she will only be eligible for participation prospectively and may
participate in the Plan as of the next entry date in Section 2.2
following such determination and after the satisfaction of all other
eligibility requirements.
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1.24 EMPLOYER
The term Employer means the Sponsor, any Adopting Employer, and any
direct predecessor business entity of the Sponsor or an Adopting
Employer that was or would have been considered an Affiliated Employer
of the Sponsor or an Adopting Employer. Where applicable, such as
determining Hours of Service, Periods of Service and Years of Service,
the term Employer or Adopting Employer will also mean any business
entity that was an Adopting Employer. As to any Employee, the term
Employer at the time of reference means the employer of such Employee.
1.25 ERISA
The term ERISA means the Employee Retirement Income Security Act of
1974, as amended, and the regulations and rulings promulgated
thereunder.
1.26 EXCESS AGGREGATE CONTRIBUTIONS
The term Excess Aggregate Contributions means, with respect to any Plan
Year, the excess of (1) the aggregate Contribution Percentage Amounts
used in computing the numerator of the Contribution Percentage actually
made on behalf of Participants who are Highly Compensated Employees for
such Plan Year, over (2) the maximum Contribution Percentage Amounts
permitted by the ACP Test (determined by hypothetically reducing
contributions made on behalf of Participants who are Highly Compensated
Employees in order of their Contribution Percentages beginning with the
highest of such percentages). Such determination will be made after
first determining Excess Elective Deferrals and then determining Excess
Contributions. The terms Average Contribution Percentage, Contribution
Percentage and Contribution Percentage Amount are defined in Sections
1.10(c), 1.10(d) and 1.10(e).
1.27 EXCESS CONTRIBUTIONS
The term Excess Contributions means, with respect to any Plan Year, the
excess of the aggregate amount of Employer contributions actually taken
into account in computing the ADP of Participants who are Highly
Compensated Employees for such Plan Year, over the maximum amount of
such contributions permitted by the ADP Test (determined by
hypothetically reducing contributions made for Participants who are
Highly Compensated Employees in order of their ADPs, beginning with the
highest of such percentages).
1.28 EXCESS ELECTIVE DEFERRALS
The term Excess Elective Deferrals means Elective Deferrals that are
includible in a Participant's gross income under Code ss.402(g) to the
extent such Participant's Elective Deferrals for a taxable year exceed
the dollar limit under such Code Section.
1.29 FIDUCIARY
The term Fiduciary means any individual or entity which exercises any
discretionary authority or control over the management of the Plan or
over the disposition of the assets of the Plan; renders investment
advice for a fee or other compensation (direct or indirect); has any
discretionary authority or responsibility over Plan administration; or
acts to carry out a fiduciary responsibility, when designated by a
named Fiduciary pursuant to authority granted by the Plan; subject,
however, to any exception granted directly or indirectly by the
provisions of ERISA or any applicable regulations. The Sponsor is the
"named Fiduciary" for purposes of ERISA ss.402(a)(2).
1.30 FISCAL YEAR
The term Fiscal Year means the Employer's accounting year beginning
February 1st and ending the following January 31st.
1.31 FORFEITURE
The term Forfeiture means the amount by which a Participant's Account
balance exceeds his or her Vested Interest upon the earlier to occur of
(a) the date the Participant receives a distribution of his or her
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Vested Interest under Article 5; or (b) the date the Participant incurs
5 consecutive Breaks in Service after Termination of Employment. No
Forfeitures will occur solely as a result of the withdrawal of a
Participant's own contributions to the Plan or a Participant's transfer
to an Affiliated Employer or Adopting Employer. All Forfeitures will be
placed in the Forfeiture Account pending allocation pursuant to Section
3.4.
1.32 FORM W-2 COMPENSATION
The term Form W-2 Compensation means wages within the meaning of Code
ss.3401(a) and all other payments of compensation actually paid or made
available in gross income to an Employee by the Employer in the course
of the Employer's trade or business for which the Employer is required
to furnish the Employee a Form W-2 under Code ss.6041(d), ss.6051(a)(3)
and ss.6052. Compensation must be determined without regard to any
rules under Code ss.3401(a) limiting remuneration included in wages
based on the nature or location of the employment or services performed
(such as the exception for agricultural labor in Code ss.3401(a)(2)).
1.33 HCE
The term HCE means a Highly Compensated Employee.
1.34 HIGHLY COMPENSATED EMPLOYEE
The term Highly Compensated Employee means, for Plan Years beginning
after December 31, 1996, any Employee who during the Plan Year or
during the look-back year was a 5% owner as defined in Code
ss.416(i)(1), or who for the look-back year had Code ss.415
Compensation in excess of $80,000 as adjusted in accordance with Code
ss.415(d) (except that the base year will be the calendar quarter
ending September 30, 1996). In determining who is a highly compensated
former Employee, the rules for determining Highly Compensated Employee
status as in effect for the Plan Year or look-back year for which the
determination is being made (in accordance with temporary regulation
1.414(q)-1T, A-4 and Notice 97-45) will be applied. In determining if
an Employee is a Highly Compensated Employee for Plan Years beginning
in 1997, the amendments to Code ss.414(q) are deemed to have been in
effect for years beginning in 1996. If the Employer maintains more than
one qualified retirement plan, the definition of Highly Compensated
Employee must be consistently applied to all such plans.
(a) DETERMINATION OF LOOK-BACK YEAR: The look-back year will be
the 12 month period immediately preceding the Plan Year for
which the determination is being made.
(b) TOP PAID GROUP ELECTION: In determining if an Employee is a
Highly Compensated Employee based on Code ss.415 Compensation,
the top paid group election set forth in Code ss.414(q)(3) is
not being applied for any Plan Year beginning on or after
January 1, 1997.
(c) REPEAL OF FAMILY AGGREGATION RULES: The family aggregation
rules that were described in Code ss.414(q)(6) as in effect
prior to January 1, 1997 will not apply to this Plan for Plan
Years beginning on or after January 1, 1997.
1.35 HOUR OF SERVICE
The term Hour of Service means, with respect to any provision of the
Plan in which service is determined by reference to an Employee's
Periods of Service, each hour for which an Employee is paid, or is
entitled to payment, by the Employer or an Affiliated Employer for the
performance of duties. With respect to any provision of the Plan in
which service is determined by reference to an Employee's Years of
Service, the term Hour of Service means the following:
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(a) DETERMINATION OF HOURS: The term Hour of Service means (1)
each hour an Employee is paid, or entitled to payment, for the
performance of duties for the Employer or an Affiliated
Employer, which will be credited to the Employee for the
computation period in which the duties are performed; (2) each
hour for which an Employee is paid, or entitled to payment, by
the Employer or an Affiliated Employer on account of a period
of time during which no duties are performed (irrespective of
whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity (including disability),
layoff, jury duty, military duty or leave of absence, except
that no more than 501 hours will be credited under this clause
(2) for any single continuous period (whether or not such
period occurs in a single computation period); and (3) each
hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer or an