-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UpsYYATHGnR/H8tc5QkoFqOj/Nxp38TUG4xmE7BPqNf1HPWfTRMuiGig9dEUTD1J 5v8xm67dGUK1CZ1SwCw4Xw== 0001019687-01-500351.txt : 20010618 0001019687-01-500351.hdr.sgml : 20010618 ACCESSION NUMBER: 0001019687-01-500351 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010505 FILED AS OF DATE: 20010615 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-Q SEC ACT: SEC FILE NUMBER: 000-28784 FILM NUMBER: 1661908 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 10-Q 1 hottopic_10q-0501.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 5, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR l5 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- COMMISSION FILE NUMBER: 0-28784 HOT TOPIC, INC. --------------- (Exact name of Registrant as specified in Its Charter) CALIFORNIA 77-0198182 - ---------- ---------- (State of Incorporation) (IRS Employer Identification No.) 18305 EAST SAN JOSE AVE., CITY OF INDUSTRY, CA 91748 - ---------------------------------------------- ----- (address of principal executive offices) (Zip Code) (Telephone number of registrant) (626) 839-4681 -------------- 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 --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's common stock as of the latest practicable date: June 7, 2001 - 20,542,162 shares, no par value. -------------- - -------------------------------- HOT TOPIC, INC. INDEX TO FORM 10-Q Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Consolidated Balance Sheets - May 5, 2001 and February 3, 2001 3 Consolidated Statements of Income for the 13 weeks ended May 5, 2001 and April 29, 2000 4 Consolidated Statements of Cash Flows for the 13 weeks ended May 5, 2001 and April 29, 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 9 PART II. OTHER INFORMATION 9-10 SIGNATURE PAGE 10 2 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
May 5, 2001 February 3, 2001 (a) ASSETS Current Assets Cash and cash equivalents $ 44,687,000 $ 51,288,000 Inventory 26,243,000 21,336,000 Prepaid expenses and other 7,079,000 5,552,000 Deferred tax asset 944,000 944,000 ------------- ------------- Total current assets 78,953,000 79,120,000 Leaseholds, fixtures and equipment: Furniture, fixtures and equipment 35,207,000 31,300,000 Leasehold improvements 33,698,000 29,135,000 ------------- ------------- 68,905,000 60,435,000 Less accumulated depreciation 23,226,000 21,270,000 ------------- ------------- Net leaseholds, fixtures and equipment 45,679,000 39,165,000 Deposits and other assets 104,000 101,000 Long term: Deferred tax asset 260,000 260,000 ------------- ------------- Total Assets $124,996,000 $118,646,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 8,864,000 $ 6,632,000 Accrued payroll and related expenses 7,673,000 10,093,000 Accrued sales and other taxes payable 1,122,000 1,103,000 Income taxes payable 1,966,000 -- Current portion of capital lease obligations 23,000 38,000 ------------- ------------- Total current liabilities 19,648,000 17,866,000 Deferred rent 1,477,000 1,404,000 Capital lease obligations, less current portion 130,000 85,000 Shareholders' equity Common shares, no par value; 50,000,000 shares authorized; 20,501,092 and 20,293,855 issued and outstanding at May 5, 2001 and February 3, 2001, respectively 50,532,000 49,429,000 Retained earnings 53,209,000 49,862,000 ------------- ------------- Total shareholders' equity 103,741,000 99,291,000 ------------- ------------- Total liabilities and shareholders' equity $124,996,000 $118,646,000 ============= =============
(a) - The balance sheet at Feb. 3, 2001 is derived from the audited financial statements at that date. See accompanying notes to consolidated financial statements. 3 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) First Quarter ------------- (13 weeks ended) May 5, 2001 April 29, 2000 ------------------------------ Net Sales $62,927,000 $44,839,000 Cost of goods sold, including buying, distribution and occupancy costs 39,449,000 28,070,000 ------------ ------------ Gross Margin 23,478,000 16,769,000 Selling, general, and administrative expenses 18,735,000 13,312,000 ------------ ------------ Operating Income 4,743,000 3,457,000 Interest income-net 570,000 421,000 ------------ ------------ Income before income taxes 5,313,000 3,878,000 Provision for income taxes 1,966,000 1,435,000 ------------ ------------ Net income $ 3,347,000 $ 2,443,000 ============ ============ Net income per share Basic $ 0.16 $ 0.13 Diluted $ 0.15 $ 0.12 Weighted average shares outstanding Basic 20,407,000 19,441,000 Diluted 22,246,000 21,016,000 See accompanying notes to consolidated financial statements. 4 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Year-to-date (13 weeks) ended ------------------------------ May 5, 2001 April 29, 2000 ------------------------------ Operating activities: Net income $ 3,347,000 $ 2,443,000 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 2,361,000 1,772,000 Deferred rent 74,000 77,000 Deferred compensation -- 7,000 Loss on disposal of fixed assets 53,000 14,000 Changes in operating assets and liabilities: Inventory (4,908,000) (4,653,000) Prepaid expenses and other (1,527,000) (1,755,000) Accounts payable 2,232,000 2,026,000 Accrued payroll and related expenses (2,420,000) (2,482,000) Accrued sales and other taxes payable 19,000 213,000 Income taxes payable 1,966,000 (4,126,000) ------------- ------------- Net cash provided by (used in) operating activities 1,197,000 (6,464,000) Investing Activities: Purchases of property and equipment (8,954,000) (3,286,000) ------------- ------------- Net cash used in investing activities (8,954,000) (3,286,000) Financing Activities: Payments on capital lease obligations 54,000 (8,000) Proceeds from exercise of stock options 1,102,000 1,633,000 ------------- ------------- Net cash provided by financing activities 1,156,000 1,625,000 ------------- ------------- Decrease in cash and cash equivalents (6,601,000) (8,125,000) Cash and cash equivalents at the beginning of period 51,288,000 39,550,000 ------------- ------------- Cash and cash equivalents at the end of period $ 44,687,000 $ 31,425,000 ============= ============= Supplemental Information: Cash paid during the period for interest $ 5,000 $ 7,000 ============= ============= Cash paid during the period for income taxes $ 604,000 $ 5,816,000 ============= =============
See accompanying notes to consolidated financial statements. 5 HOT TOPIC, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Organization and Basis of Presentation: --------------------------------------- Hot Topic, Inc. (the "Company") is a mall-based specialty retailer of music-licensed and music-influenced apparel, accessories and gift items for young men and women principally between the ages of 12 and 22. In the first quarter of fiscal 2001 (the fiscal year ending February 2, 2002) the Company also launched a second retail concept with the opening of three stores under the trade name Torrid(TM). Torrid offers a selection of apparel, lingerie, shoes and accessories centered around various lifestyles for plus-size women between the ages of 15 and 30. At the end of the first quarter (May 5, 2001), the Company operated 293 Hot Topic stores and three Torrid stores in 45 states throughout the United States. The information set forth in these financial statements is unaudited except for the February 3, 2001 Balance Sheet. These statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been included. The results of operations for the 13 weeks ended May 5, 2001 are not necessarily indicative of the results that may be expected for the year ending February 2, 2002. For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 3, 2001. NOTE 2. Net Income Per Share: --------------------- The Company computes net income per share pursuant to Statement of Financial Accounting Standards Board No. 128 "Earnings Per Share" (Statement No. 128). Basic net income per share is computed based on the weighted average number of shares outstanding for the period. Diluted net income per share is computed based on the weighted average number of common and potentially dilutive common stock equivalents outstanding for the period. A two-for-one stock split became effective December 27, 2000. All share and per share amounts have been restated to reflect the split. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes related thereto. RESULTS OF OPERATIONS 13 Weeks Ended May 5, 2001 (First Quarter of Fiscal 2001) Compared to 13 Weeks - ------------------------------------------------------------------------------ Ended April 29, 2000 (First Quarter of Fiscal 2000) - --------------------------------------------------- Net sales increased $18,088,000, or 40.3%, to $62,927,000 during the first quarter of fiscal 2001 from $44,839,000 during the first quarter of fiscal 2000. The increased net sales in the first quarter of fiscal 2001 were attributable to an increase in the number of stores, and to an 8.0% increase in comparable store sales as compared to the corresponding 13 weeks last year. Net sales for the 89 stores not yet qualifying as comparable stores contributed approximately $14,700,000 of the increase in net sales. The comparable store sales increase of 8.0% contributed approximately $3,400,000 of the increase in net sales. In the first quarter of fiscal 2000, comparable store sales increased by 24.1%. Sales of apparel category merchandise, as a percentage of total net sales, were 51% in the first quarter of fiscal 2001 compared to 50% in the first quarter of fiscal 2000. Gross margin increased approximately $6,709,000 to $23,478,000 during the first quarter of fiscal 2001 from $16,769,000 during the first quarter of fiscal 2000. As a percentage of net sales, gross margin decreased to 37.3% during the first quarter of fiscal 2001 from 37.4% in the first quarter of fiscal 2000. The decrease in gross margin as a percentage of net sales reflects a slight increase in occupancy expenses related to higher common area maintenance charges partially offset by higher merchandise margins. The Company's merchandise margins, as a percentage of sales, were approximately ten basis points higher in the first quarter of 2001 compared to the first quarter of 2000, principally from lower markdowns as a percentage of sales. Selling, general and administrative expenses increased approximately $5,423,000 to $18,735,000 during the first quarter of fiscal 2001 from $13,312,000 during the first quarter of fiscal 2000, and increased as a percentage of net sales to 29.8% in the first quarter of fiscal 2001 from 29.7% in the first quarter of fiscal 2000. The increase as a percentage of net sales was primarily attributable to an increase in store payroll, pre-opening expenses from opening up 20 new Hot Topic stores in the first quarter of fiscal 2001 versus twelve new Hot Topic stores in the first quarter of fiscal 2000, and development and pre-opening expenses related to the opening of three Torrid stores in the first quarter of fiscal 2001. These expenses were offset in part by a reduction in other store expenses as a percentage of net sales due to the operating leverage achieved through the higher comp store sales for the quarter as well as these expenses being down on an average per store basis in the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000. Operating income increased approximately $1,286,000 to $4,743,000 during the first quarter of fiscal 2001 from $3,457,000 during the first quarter of fiscal 2000. As a percentage of net sales, the operating income was 7.5% in the first quarter of fiscal 2001 compared to 7.7% in the first quarter of fiscal 2000. Interest income, net, increased approximately $149,000 to $570,000 in the first quarter of fiscal 2001 from $421,000 in the first quarter of fiscal 2000, principally due to higher average cash balances. 7 LIQUIDITY AND CAPITAL RESOURCES Historically, as well as during the first quarter of fiscal 2001, the Company's primary uses of cash have been to finance store openings and purchase merchandise inventories. The Company has historically satisfied its cash requirements principally from cash flows from operations, and, in earlier years, also from proceeds from the sale of equity securities. Cash flows provided by (used in) operating activities were $1,198,000 and ($6,464,000) in the first quarters of fiscal 2001 and 2000, respectively. The increase in cash flows provided by operating activities in the first quarter of fiscal 2001 was primarily due to an increase in income taxes payable related to the timing of income tax payments, as well as an increase in net income in the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000. The changes in other items of working capital for the first quarter of fiscal 2001 were consistent with the fiscal 2000 quarter. Cash flows used in investing activities were ($8,953,000) and ($3,286,000) in the first quarters of fiscal 2001 and 2000, respectively. Cash flows used in investing activities relate primarily to store openings and the purchase of computer hardware and software. The higher capital expenditures over the first quarter of fiscal 2000 relate primarily to the opening of eleven more new stores (including three Torrid stores) in the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000 as well as expenditures related to new store openings in early second quarter fiscal 2001 (eight May 2001 new Hot Topic store openings and three new Torrid store openings versus eight May 2000 new Hot Topic store openings), and expenditures made for the new point of sale equipment being rolled out to all existing stores between March 2001 and October 2001. Cash flows provided by financing activities were $1,156,000 and $1,625,000 in the first quarter of fiscal 2001 and 2000, respectively. This decrease was primarily due to lower proceeds received from the exercise of stock options in the first quarter of fiscal 2001 versus the first quarter of fiscal 2000. The Company believes that its current cash balances and cash generated from operations will be sufficient to fund its operations and planned expansion through at least the next 12 months. QUARTERLY RESULTS AND SEASONALITY The Company's quarterly results of operations may fluctuate materially depending on, among other things, the timing of store openings and related pre-opening and other startup expenses, net sales contributed by new stores, increases or decreases in comparable store sales, releases of new music and music-related products, shifts in timing of certain holidays, changes in the Company's merchandise mix and overall economic conditions. The Company's business is also subject to seasonal influences, with heavier concentrations of sales during the Christmas, back-to-school and Halloween seasons, and other periods when schools are not in session. The Christmas holiday season remains the Company's single most important selling season. The Company believes, however, that the importance of the summer vacation and back-to-school seasons (which affect operating results in the second and third quarters, respectively) and to a lesser extent, the spring break season (which affects operating results in the first quarter) as well as Halloween, (which affects operating results in the third quarter) all reduce the Company's dependence on the Christmas holiday selling season. Furthermore, summer vacation, spring break and the back-to-school seasons take place at somewhat different times in different parts of the country, spreading the impact 8 of these events on the Company's sales over a longer period. As is the case with many retailers of apparel, accessories and related merchandise, the Company typically experiences lower first fiscal quarter net sales relative to other quarters. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE Certain sections of this Quarterly Report on Form 10-Q, including the preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. These forward looking statements involve risks and uncertainties, and the Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, without limitation, the sufficiency of the Company's working capital and cash flows from operating activities, the implementation and management of the Company's growth strategy - (including the Company's new retail concept Torrid), the demand for the merchandise offered by the Company, the ability of the Company to obtain adequate merchandise supply, the ability of the Company to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand, the effect of economic conditions, the effect of severe weather or natural disasters, and the effect of competitive pressures from other retailers as well as other risks detailed from time to time in the Company's SEC reports, including the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. - OTHER INFORMATION Items 1 - 5 are not applicable. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 3.1 Amended and Restated Articles of Incorporation. (1) 3.2 Amended and Restated Bylaws. (3) 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2 Specimen stock certificate. (1) 10.13 Form of Restricted Stock Bonus Agreement entered into between the Company and each of its non-employee directors as of March 7, 2001 (with Robert Jaffe for 1,270 shares, and with each of Bruce Quinnell, Edgar Berner, Andrew Schuon and Corrado Federico for 1,058 shares). (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. 9 (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. (b) Reports on Form 8-K No reports on Form 8-K were filed during the period. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Hot Topic, Inc. (Registrant) Date: 6/15/2001 /s/ Elizabeth M. McLaughlin --------- --------------------------- Elizabeth M. McLaughlin Chief Executive Officer, President and Director (Principal Executive Officer) Date: 6/15/2001 /s/ Jim McGinty --------- --------------------------- Jim McGinty Chief Financial Officer (Principal Financial and Accounting Officer) 10 EX-10.13 2 ex_10-13.txt Exhibit 10.13 HOT TOPIC, INC. 1996 EQUITY INCENTIVE PLAN RESTRICTED STOCK BONUS AGREEMENT THIS RESTRICTED STOCK BONUS AGREEMENT (the "Agreement") is made as of the 7th day of March, 2001, by and between Hot Topic, Inc., a California corporation (the "Company"), and ("DIRECTOR"). WHEREAS, Director is a member of the Board; WHEREAS, pursuant to the non-employee director compensation policy adopted by the Board, and in consideration for past services, Director has been granted a stock bonus under the Company's 1996 Equity Incentive Plan (the "Plan") for the number of shares of Common Stock set forth below and subject to vesting and other terms and conditions as provided herein; and WHEREAS, the issuance of Common Stock pursuant to the stock bonus described herein is further subject to all the terms and conditions of the Plan and defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. AWARD OF STOCK. The Company hereby awards to Director a stock bonus covering an aggregate of ____________ (_____) shares of Common Stock (the "Shares"), with a Fair Market Value of $________ per share, for an aggregate award value of $____________, in consideration of past services as a member of the Board. 2. VESTING. Provided that Director has not ceased to be a member of the Board for any reason (including death) or no reason, with or without cause, at any time during the period beginning on the date hereof and ending March 6, 2002, the Shares shall vest on March 7, 2002. 3. RIGHT OF REACQUISITION. The Company shall reacquire the Shares that have not yet vested in accordance with Section 2 herein (the "Unvested Shares") on the following terms and conditions (the "Reacquisition Right"): (a) In the event of a termination of Director's service as a member of the Board occurring on or before March 6, 2002, the Company shall automatically reacquire for no consideration (monetary or otherwise) all of the Unvested Shares, unless the Company agrees to waive its Reacquisition Right as to some or all of the Unvested Shares. Any such waiver shall be exercised by the Company by written notice to Director or his representative (with a copy to the Escrow Holder as defined below) within ninety (90) days after termination of Director's service as a member of the Board, and the Escrow Holder may then release to Director the number of Unvested Shares not being reacquired by the Company. If the Company does not waive its reacquisition right as to all of the Unvested Shares, then on the date that is ninety-one (91) days after termination of Director's service as a member of the Board, the Escrow Holder shall transfer to the Company the number of shares the Company is reacquiring. 1. (b) To facilitate operation of the Company's Reacquisition Right, the Shares shall be held in escrow pursuant to the terms of the Joint Escrow Instructions attached hereto as Exhibit A and incorporated herein by this reference. Director agrees to execute three (3) Assignment Separate From Certificate forms (with date and number of shares blank) attached hereto as Exhibit B and incorporated herein by this reference and deliver the same, along with the Joint Escrow Instructions and certificate or certificates evidencing the shares, for use by the escrow agent designated pursuant to the terms of such Joint Escrow Instructions (the "Escrow Agent") (provided, however, the parties agree that the Shares may be uncertificated, and Director hereby instructs and authorizes the Company to hold and maintain evidence of ownership in its sole control with the Company's transfer agent pursuant to the terms hereof). Director hereby authorizes Escrow Agent to implement in its discretion the services of the Company's transfer agent for any of the foregoing. 4. RIGHTS OF DIRECTOR. Except as otherwise provided in Section 7 herein, Director shall exercise all rights and privileges of a shareholder of the Company with respect to the Shares deposited in escrow. Director shall be deemed to be the holder of the Shares for purposes of receiving any dividends which may be paid with respect to such shares and for purposes of exercising any voting rights relating to such shares, even if some or all of such Shares have not yet vested and been released from the Company's Reacquisition Right. 5. CAPITALIZATION ADJUSTMENTS TO COMMON STOCK. In the event of a capitalization adjustment affecting the Common Stock as a class as described in subsection 13(a) of the Plan, then any and all new, substituted or additional securities or other property to which Director is entitled by reason of Director's ownership of the Shares shall be immediately subject to the Reacquisition Right and any other applicable restrictions as described in Section 7 herein and shall and be included in the word "Shares" for all purposes of the Reacquisition Right and Section 7 restrictions with the same force and effect as the Shares presently subject to the Reacquisition Right and Section 7 restrictions, but only to the extent the Shares are, at the time, covered by such Reacquisition Right and Section 7 restrictions. 6. CORPORATE TRANSACTIONS. In the event of a dissolution, liquidation, merger or other corporate transaction as described in subsection 13(b) of the Plan, then the Reacquisition Right may be assigned by the Company to the successor of the Company (or such successor's parent company), if any, in connection with such transaction. To the extent the Reacquisition Right and/or Section 7 restrictions remain in effect following such transaction, it or each, as applicable, shall apply to the new capital stock or other property received in exchange for the Shares in consummation of such transaction, but only to the extent the Shares were at the time covered by such right or restriction. The Reacquisition Right shall apply if Director does not continue service on the Board of Directors of such successor (or its parent or subsidiaries). In such case, the references herein to the "Company" shall be deemed to refer to such successor. 7. LIMITATIONS ON TRANSFER. Director shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in the Shares except in compliance with the provisions herein and applicable securities laws. Until such time as Director ceases to serve as a member of the Board, the Shares may not be sold, assigned, hypothecated, encumbered or otherwise disposed of in any manner without the written consent of the Company and any attempt to do so shall be void. The Company shall not be required (a) to transfer on its books 2. any of the Shares which shall have been transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 8. RESTRICTIVE LEGENDS. Until (i) March 7, 2002, in the case of the first legend below, (ii) such time as Director ceases to serve as a member of the Board, in the case of the second legend below, and (iii) such time as the Company shall determine in its discretion, in the case of the third legend below and any other legend(s), all certificates representing the Shares shall have endorsed thereon legends in substantially the following forms (in addition to any other legend which may be required by other agreements between the parties hereto or be advisable in the discretion of the Company): (a) "SOME OR ALL OF THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A REACQUISITION RIGHT IN FAVOR OF HOT TOPIC, INC., AND ANY SUCCESSOR ENTITY UNTIL MARCH 6, 2002, AS SET FORTH IN A RESTRICTED STOCK BONUS AGREEMENT BETWEEN THE COMPANY AND THE HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY SHARES SUBJECT TO SUCH REPURCHASE OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF THE ISSUER OF THESE SHARES." (b) "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE SUBJECT TO DISPOSITION EXCEPT AS PROVIDED FOR IN A RESTRICTED STOCK BONUS AGREEMENT BETWEEN THE COMPANY AND THE HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OR OTHER DISPOSITION OF ANY SHARES SUBJECT TO THE STOCK AGREEMENT IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF THE ISSUER OF THESE SHARES." (c) The Affiliate legend. 9. AWARD NOT A SERVICE CONTRACT. Director acknowledges that neither this Agreement nor the stock bonus granted to Director constitutes an employment or service contract with the Company or an Affiliate, and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on Director's to continue any relationship he may have as a Director for the Company. 10. TAX CONSEQUENCES. The acquisition and vesting of the Shares may have adverse tax consequences to Director that may be voided or mitigated by filing an election under Section 83(b) of the Internal Revenue Code, as amended (the "Code"). Such election must be filed within thirty (30) days after the date of grant of the stock bonus described herein. DIRECTOR ACKNOWLEDGES THAT IT IS HIS RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF HE REQUESTS THE COMPANY TO MAKE THE FILING ON HIS BEHALF. 11. GOVERNING PLAN DOCUMENT. This Agreement is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this Agreement, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this Agreement and those of the Plan, the provisions of the Plan shall control. 3. 12. MISCELLANEOUS. (a) NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or sent by telegram or fax or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below its signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. (b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Director, Director's successors, and assigns. (c) ATTORNEYS' FEES; SPECIFIC PERFORMANCE. Director shall reimburse the Company for all costs incurred by the Company in enforcing the performance of, or protecting its rights under, any part of this Agreement, including reasonable costs of investigation and attorneys' fees. (d) GOVERNING LAW; VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of California. The parties agree that any action brought by either party to interpret or enforce any provision of this Agreement shall be brought in, and each party agrees to, and does hereby, submit to the jurisdiction and venue of, the appropriate state or federal court for the district encompassing the Company's principal place of business. (e) FURTHER EXECUTION. The parties agree to take all such further action(s) as may reasonably be necessary to carry out and consummate this Agreement as soon as practicable, and to take whatever steps may be necessary to obtain any governmental approval in connection with or otherwise qualify the issuance of the securities that are the subject of this Agreement. (f) INDEPENDENT COUNSEL. Director acknowledges that this Agreement has been prepared on behalf of the Company by Cooley Godward LLP, counsel to the Company and that Cooley Godward LLP does not represent, and is not acting on behalf of, Director. Director has been provided with an opportunity to consult with Director's own counsel with respect to this Agreement. (g) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and merges all prior agreements or understandings, whether written or oral. This Agreement may not be amended, modified or revoked, in whole or in part, except by an agreement in writing signed by each of the parties hereto. 4. (h) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (i) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HOT TOPIC, INC. By: ------------------------------------------- Title: ---------------------------------------- Address: 8305 E. San Jose Avenue City of Industry, CA 91748 DIRECTOR: ---------------------------------------------- Address: -------------------------------------- ---------------------------------------------- 5. EXHIBIT A STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, _______________________ hereby sells, assigns and transfers unto Hot Topic, Inc., a California corporation (the "Company"), pursuant to the Reacquisition Right under that certain Restricted Stock Bonus Agreement, dated as of March 7, 2001 by and between the undersigned and the Company (the "Agreement"), _____________________ shares of Common Stock of the Company standing in the undersigned's name on the books of the Company represented by Certificate No(s). _______________ (or uncertificated and recorded at the office of the Company's transfer agent, if applicable) and does hereby irrevocably constitute and appoint the Company's Chief Financial Officer as attorney to transfer said Common Stock on the books of the Company with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the reacquisition of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Reacquisition Right under the Agreement. Dated: _______________ --------------------------------------------- (Signature) --------------------------------------------- (Print Name) (INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE "SIGNATURE" LINE AND THE "PRINT NAME" LINE.) SIGNATURE MUST BE MEDALLION GUARANTEED EXHIBIT B JOINT ESCROW INSTRUCTIONS JOINT ESCROW INSTRUCTIONS Chief Financial Officer Hot Topic, Inc. 18305 E. San Jose Avenue City of Industry, CA 91748 Ladies and Gentlemen: As Escrow Agent for both HOT TOPIC, INC., a California corporation ("Company") and _____________ ("Director"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Bonus Agreement dated as of ___________, 2001 ("Agreement"), to which a copy of these Joint Escrow Instructions is attached as Exhibit B, in accordance with the following instructions: 1. In the event of a termination of Director's service as a member of the Board occurring on or before March 6, 2002, the Company will provide you with notice of such termination of Director's service. Unless you receive a written notice from the Company stating that the Company intends to waive all or any part of its Reacquisition Right as described in the Agreement (in which case the number of shares transferred shall be as indicated in such notice), on the ninety-first day following such termination of Director's service (unless the Company requests in writing that the actions contemplated herein occur within a shorter period following such termination of Director's service), you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred (which shall be all of the Shares as defined in the Agreement unless the Company has elected to waive its Reacquisition Right with respect to any portion of the Shares), and (c) to deliver the same, together with the certificate evidencing the shares of stock to be transferred, to the Company for the number of shares of stock being reacquired pursuant to operation of the Reacquisition Right. 2. Director and the Company hereby irrevocably authorize and direct you to effectuate the transfer described above in accordance with the terms set forth herein and in the Agreement without further action by either Director or the Company (other than the written notice of termination as described above). 3. As of the date of the Agreement, Director irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Director does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and complete any transaction herein contemplated, including but not limited to any appropriate filing with state or government officials or bank officials. Subject to the provisions of this paragraph 3 and as otherwise provided in the Agreement, Director shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. This escrow shall terminate upon the expiration, execution or waiver in full of the Company's Reacquisition Right in full. 1. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Director, you shall deliver all of the same to Director and shall be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that any property subject to this escrow is the subject of a pledge or other security agreement, you shall deliver all such property to the pledgeholder or other person designated by the Company. 6. Except as otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Director while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Chief Financial Officer of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint any officer or assistant officer of the Company as successor Escrow Agent, and Director hereby confirms the appointment of such successor as his attorney-in-fact and agent to the full extent of your appointment. 12. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 2. 13. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, including delivery by express courier, or five (5) days after deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties entitled to such notice at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: HOT TOPIC, INC. 18305 E. San Jose Avenue City of Industry, CA 91748 DIRECTOR: ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ESCROW AGENT: HOT TOPIC, INC. Attention: Chief Financial Officer 18305 E. San Jose Avenue City of Industry, CA 91748 15. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 16. You shall be entitled to employ such legal counsel and other experts (including, without limitation, the firm of Cooley Godward LLP) as you may deem necessary properly to advise you in connection with your obligations hereunder. You may rely upon the advice of such counsel, and you may pay such counsel reasonable compensation therefor. The Company shall be responsible for all fees generated by such legal counsel in connection with your obligations hereunder. 17. You are expressly permitted to use the services of the Company's transfer agent to hold the shares subject to this escrow (in certificated or uncertificated form), to make transfers permitted hereby, and to otherwise implement this escrow in your discretion. The parties agree that such transfer agent shall hold such shares for the benefit of the Company as security for those matters described in the Agreement, and shall exercise complete control over such shares pursuant to the terms hereof, and that Director shall have no right to possession or control of such shares except as provided herein. 3. 18. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" and "your" herein refer to the original Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions. 19. This Agreement shall be governed by and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. Very truly yours, HOT TOPIC, INC. By -------------------------------------- DIRECTOR ---------------------------------------- ESCROW AGENT: - ------------------------------------- Chief Financial Officer 4. -----END PRIVACY-ENHANCED MESSAGE-----