SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
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|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material under Rule 14a-12
HOT TOPIC, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
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HOT TOPIC, INC.
18305 E. San Jose Avenue
City of Industry, California 91748
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 12, 2003
TO THE SHAREHOLDERS OF HOT TOPIC, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of HOT
TOPIC, INC., a California corporation (the "Company"), will be held on Thursday,
June 12, 2003 at 8:30 a.m. local time at the Company's headquarters at 18305 E.
San Jose Avenue, City of Industry, California 91748 for the following purposes:
1. To elect seven directors to serve until the Company's 2004 Annual
Meeting of Shareholders.
2. To approve the amendment of the Company's 1996 Equity Incentive Plan to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 1,850,000 shares.
3. To ratify the selection of Ernst & Young LLP as the Company's
independent auditors for its fiscal year ending January 31, 2004.
4. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on April 18,
2003, as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting and at any adjournment or
postponement thereof. If you plan on attending the Annual Meeting, please call
James McGinty at the Company at (626) 839-4681.
By Order of the Board of Directors
/s/ James McGinty
JAMES MCGINTY
Secretary
City of Industry, California
May 1, 2003
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ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
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HOT TOPIC, INC.
18305 E. San Jose Avenue
City of Industry, California 91748
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
June 12, 2003
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors
(the "Board") of Hot Topic, Inc., a California corporation ("Hot Topic" or the
"Company"), for use at the Annual Meeting of Shareholders to be held on June 12,
2003, at 8:30 a.m. local time (the "Annual Meeting"), or at any adjournment or
postponement thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting. The Annual Meeting will be held at the Company's
headquarters at 18305 E. San Jose Avenue, City of Industry, California 91748.
The Company intends to mail this proxy statement and accompanying proxy card on
or about May 1, 2003, to all shareholders entitled to vote at the Annual
Meeting. On the Proposals coming before the Annual Meeting for which a choice
has been specified by a shareholder on the accompanying proxy card, the shares
will be voted accordingly. If no choice is specified, the shares will be voted
FOR the election of the seven nominees for director listed in Proposal 1 of this
proxy statement and FOR the approval of Proposals 2 and 3 listed in the
accompanying notice and this proxy statement.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies,
including preparation, assembly, printing and mailing of this proxy statement,
the proxy card and any additional information furnished to shareholders. Copies
of solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of common stock of the
Company (the "Common Stock") beneficially owned by others to forward to such
beneficial owners. The Company may reimburse persons representing beneficial
owners of Common Stock for their costs of forwarding solicitation materials to
such beneficial owners. Original solicitation of proxies by mail may be
supplemented by telephone, telegram or personal solicitation by directors,
officers or other regular employees of the Company. No additional compensation
will be paid to directors, officers or other regular employees for such
services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
April 18, 2003 (the "Record Date") will be entitled to notice of and to vote at
the Annual Meeting. At the close of business on the Record Date, the Company had
31,420,256 shares of Common Stock outstanding and entitled to vote. Each holder
of record of Common Stock on the Record Date will be entitled to one vote for
each share held on all matters to be voted upon at the Annual Meeting.
A quorum of shareholders is necessary to hold a valid meeting. A quorum
will be present if at least a majority of the outstanding shares are represented
by votes at the meeting or by proxy. Votes will be counted by the inspector of
election appointed for the meeting, who will separately count "For" and (with
respect to proposals other than the election of directors) "Against" votes,
abstentions and broker non-votes. A "broker non-vote" occurs when a nominee
holding shares for a beneficial owner does not vote on a particular proposal
because the nominee does not have discretionary voting power with respect to
that proposal and has not received instructions with respect to that proposal
from the beneficial owner, despite voting on at least one other proposal for
which it does have discretionary authority or for which it has received
instructions. Abstentions and broker non-votes will not be counted towards the
vote total for any proposal.
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REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted. It may be revoked by filing with
the Secretary of the Company at the Company's principal executive office, 18305
E. San Jose Avenue, City of Industry, California 91748, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
SHAREHOLDER PROPOSALS
The deadline for submitting a shareholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2004 Annual
Meeting of Shareholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission (the "SEC") is January 2, 2004. Shareholder proposals submitted after
the January 2, 2004 deadline may be excluded from the Company's proxy statement
and form of proxy, but may still be submitted for consideration at the Company's
2004 Annual Meeting of Shareholders if written notice thereof is delivered to or
mailed and received at the principal executive offices of the Company no later
than January 31, 2004. Shareholders are also advised to review the Company's
Amended and Restated Bylaws, which contain additional requirements with respect
to advance notice of shareholder proposals and director nominations.
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, WE URGE YOU TO
VOTE BY PROXY TO ENSURE YOUR VOTE IS COUNTED. YOU MAY STILL ATTEND THE
ANNUAL MEETING, REVOKE YOUR PROXY AND VOTE IN PERSON EVEN IF YOU HAVE
ALREADY RETURNED YOUR SIGNED PROXY.
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PROPOSAL 1
ELECTION OF DIRECTORS
There are seven nominees for the seven Board positions presently
authorized in the Company's Amended and Restated Bylaws. Each director to be
elected will hold office until the Company's 2004 Annual Meeting of Shareholders
and until his or her successor is elected and has qualified, or until such
director's earlier death, resignation or removal. Each nominee listed below is
currently a director of the Company and was nominated by the Company's
Governance and Nominating Committee. In addition, the Board approved each
nomination and each nominee was elected by the shareholders at the Company's
2002 Annual Meeting of Shareholders.
Shares represented by executed proxies will be voted, if authority to
do so is not withheld, for the election of the seven nominees named below. In
the event that any nominee should be unavailable for election as a result of an
unexpected occurrence, such shares will be voted for the election of such
substitute nominee as management may propose. Each person nominated for election
has agreed to serve if elected and management has no reason to believe that any
nominee will be unable to serve.
The seven candidates receiving the highest number of affirmative votes
of the shares entitled to be voted will be elected directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
NOMINEES
The names of the nominees and certain information about them are set
forth below:
NAME AGE POSITION CURRENTLY HELD WITH THE COMPANY
- --------------------------------------------- --- -----------------------------------------------
Edgar Berner(1)(3)........................... 71 Director
Cynthia Cohen(1)(3).......................... 50 Director
Corrado Federico(2)(3)....................... 62 Director
W. Scott Hedrick(2).......................... 57 Director
Elizabeth McLaughlin......................... 42 Chief Executive Officer, President and Director
Bruce Quinnell(1)............................ 54 Chairman of the Board
Andrew Schuon(2)(3).......................... 38 Director
____________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Governance and Nominating Committee.
EDGAR BERNER has been a director of the Company since 1990. Mr. Berner
is a private investor. Since March 1999, Mr. Berner has been Vice President and
on the Board of Directors of Real Age, Inc. Mr. Berner currently serves as a
director of Garden Fresh, Inc., a publicly traded restaurant chain, and
Barbeques Galore Ltd., a publicly traded chain of barbeque stores. From 1991 to
February 1999, Mr. Berner served as Chairman of the Board of Directors of Sweet
Factory, Inc., a retail candy store chain, and he also served as Chief Executive
Officer of that company from 1991 to January 1996.
CYNTHIA COHEN has been a director of the Company since September 2001.
Ms. Cohen is the President of Strategic Mindshare, a marketing and strategy
consulting firm, that she founded in 1990. Prior to founding Strategic
Mindshare, Ms. Cohen was a Partner in Management Consulting with Deloitte &
Touche. Ms. Cohen is a director of Office Depot, Inc. and The Sports Authority,
Inc., both publicly-traded, consumer products companies. She is also Chairperson
of the Strategic Mindshare Foundation, which provides mentoring and scholarships
to young women pursuing business careers.
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CORRADO FEDERICO has been a director of the Company since December
1997. Mr. Federico is also a director of bebe stores, inc., a contemporary
women's fashion chain with approximately 180 stores throughout the United States
and abroad, and the President of Corado, Inc., a land development company
specializing in affordable housing. Since May 1999, he has also served as
President of Solaris Properties, Inc., a real estate company. From 1986 to 1991,
Mr. Federico served as President and CEO of ESPRIT's United States apparel,
retail and mail order operations.
W. SCOTT HEDRICK has served as a director of the Company since January
2002. Mr. Hedrick was a founder and has been a General Partner of InterWest
Partners, a venture capital fund, since 1979. Since April 1991, Mr. Hedrick has
been a director of Office Depot, Inc. and from November 1986 until April 1991,
he served as a director of The Office Club, Inc., which was acquired by Office
Depot, Inc. in April 1991. Mr. Hedrick also serves as a director of Golden State
Vintners, Inc., a publicly-traded, consumer products company, and several
privately held companies.
ELIZABETH MCLAUGHLIN has served as Chief Executive Officer of the
Company since August 2000 and President since February 2000, and has served on
the Board since May 2000. From June 1996 through February 2000, Ms. McLaughlin
served as Senior Vice President and General Merchandise Manager of the Company.
From May 1993 through May 1996, Ms. McLaughlin was the Company's Vice President,
Operations. Prior to joining the Company, Ms. McLaughlin held various positions
with Miller's Outpost and with The Broadway. Ms. McLaughlin is a member of the
Board of Visitors for the Anderson School at UCLA.
BRUCE QUINNELL has been a director of the Company since September 1998.
From April 1999 to February 2002, Mr. Quinnell was Vice Chairman of Borders
Group, Inc. From January 1997 to April 1999, Mr. Quinnell was the President and
Chief Operating Officer of Borders Group, Inc. From 1994 to January 1997, Mr.
Quinnell was the President and Chief Operating Officer of Waldenbooks.
ANDREW SCHUON has been a director of the Company since January 1998.
Since August 2002, Mr. Schuon has been President of Programming of Infinity
Broadcasting and prior to that, he was President and Chief Executive Officer of
Pressplay, a joint venture created by Sony Music Entertainment and Universal
Music Group, from April 2001. From December 1999 to April 2001, Mr. Schuon has
been President and Chief Operating Officer of the Universal Music Group's music
business, Farmclub.com, Inc. Prior to that, from February 1998 to November 1999,
Mr. Schuon was Executive Vice President/General Manager of Warner Bros. Records
Inc. From 1992 to December 1997, Mr. Schuon served as Executive Vice President
of MTV where he was responsible for programming, music, production and talent
for their MTV and VH1 cable channels.
BOARD OF DIRECTORS COMMITTEES AND MEETINGS
During the fiscal year ended February 1, 2003, the Board held five
regular meetings and acted by unanimous written consent one time. The Board has
an Audit Committee, a Compensation Committee and a Governance and Nominating
Committee.
The Audit Committee meets with the Company's independent auditors at
least annually to review the results of the annual audit and discuss the
financial statements; recommends to the Board the independent auditors to be
retained; reviews and pre-approves the engagement of the independent auditors,
including the scope, extent and procedures of the audit and the compensation to
be paid therefor; reviews the Company's balance sheet, income statement and
statement of cash flows and shareholders' equity for each interim period, and
any changes in accounting policy that have occurred during the interim period;
reviews and pre-approves those professional services allowed within the scope of
the Sarbanes-Oxley Act of 2002 to be provided to the Company by its independent
auditors and considers the possible effect of such services on the independence
of such auditors; reviews director and officer insurance policies and provides
the Board of Directors with recommendations as to any proposed modifications;
and receives and considers the independent auditor's comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. During fiscal 2002 (the fiscal year ended February
1, 2003), the Audit Committee was composed of three non-employee directors: Ms.
Cohen and Messrs. Berner and Quinnell. The Audit Committee met four times and
did not act by unanimous written consent during fiscal 2002. All members of the
Company's Audit Committee are independent (as independence is defined in Rule
4200(a)(14) of the NASD listing standards). The Board has determined that Bruce
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Quinnell is an "audit committee financial expert", as defined by the SEC. The
Audit Committee has adopted a written Audit Committee Charter that is attached
as Appendix A to these proxy materials.
The Compensation Committee makes recommendations concerning salaries
and incentive compensation, awards stock options to employees and consultants
under the Company's equity incentive plans and otherwise determines compensation
levels and performs such other functions regarding compensation as the Board may
delegate. During fiscal 2002, the Compensation Committee was composed of three
non-employee directors: Messrs. Hedrick, Schuon and Federico. The Compensation
Committee met twice and did not act by unanimous written consent during fiscal
2002.
The Governance and Nominating Committee interviews, evaluates,
nominates and recommends individuals for membership on the Board and committees
thereof; nominates specific individuals to be elected as officers of the Company
by the Board; evaluates and recommends whether a Board or committee member
qualifies as an independent director; stays abreast of developments in the area
of corporate governance; and has oversight responsibility for questions
pertaining to (i) the quality of the process by which the Board and committees
conduct their affairs, (ii) the quality of the strategic planning process, (iii)
matters of ethics and /or conflicts of interest on the part of the directors and
(iv) the design and implementation of the Chief Executive Officer review
process. No procedure has been established for the consideration of nominees
recommended by shareholders. During fiscal 2002, the Governance and Nominating
Committee was composed of four non-employee directors: Ms. Cohen and Messrs.
Federico, Berner and Schuon. The Governance and Nominating Committee met once
and did not act by unanimous written consent during fiscal 2002.
During fiscal 2002, each Board member attended 75% or more of the
aggregate meetings of the Board and of the committees on which each Board member
served, held during the period for which the Board member was a director or
committee member, respectively.
6
PROPOSAL 2
APPROVAL OF AMENDMENT TO THE 1996 EQUITY INCENTIVE PLAN
The Company's 1996 Equity Incentive Plan (the "Incentive Plan") is an
amended, restated and retitled version of the Company's 1993 Stock Option Plan,
which was originally adopted on January 20, 1993. As of April 18, 2003, there
were 10,350,000 shares of Common Stock reserved for issuance under the Incentive
Plan.
As of April 18, 2003, 9,770,820 awards (net of canceled or expired
awards) had been granted under the Incentive Plan and 579,180 shares of Common
Stock (plus any shares that might in the future be returned to the Incentive
Plan as a result of cancellations or expiration of awards) remained available
for future issuance under the Incentive Plan.
Shareholders are being asked to approve an amendment to the Incentive
Plan to increase the number of shares of Common Stock reserved for issuance
under the Incentive Plan by 1,850,000 shares. The affirmative vote of the
holders of a majority of the shares present in person or represented by proxy
and voting at the Annual Meeting (which shares voting affirmatively also
constitute at least a majority of the required quorum) will be required to
approve the amendment to the Incentive Plan. Abstentions and broker non-votes
will not be counted for any purpose in determining whether this Proposal has
been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The material features of the Incentive Plan in its current form are
outlined below. The following description of the Incentive Plan is a summary
only.
GENERAL
The Incentive Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock appreciation rights, stock bonuses and
restricted stock purchase awards (collectively "awards"). Incentive stock
options granted under the Incentive Plan are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). Nonstatutory stock options granted under the
Incentive Plan are not intended to qualify as incentive stock options under the
Code. Stock appreciation rights granted under the Incentive Plan may be tandem
rights, concurrent rights or independent rights. See "Federal Income Tax
Information" for a discussion of the tax treatment of awards. To date, the
Company has granted only incentive stock options, nonstatutory stock options and
restricted stock grants under the Plan.
BOARD APPROVAL
On March 20, 2003, the Board approved the proposed increase in the
number of shares of Common Stock reserved for issuance under the Incentive Plan
(the "Share Increase"), as well as certain other amendments to the Incentive
Plan that are contingent on shareholder approval of the Share Increase. The
amendments contingent on shareholder approval of the Share Increase include the
following: (i) the exercise price of nonstatutory stock options granted on or
after March 20, 2003 may not be less than 100% of the fair market value of the
stock on the date of grant; (ii) stock awarded on or after March 20, 2003
pursuant to restricted stock purchase agreements or stock bonus agreements may
not exceed in the aggregate 62,000 shares of Common Stock; (iii) the feature of
the Incentive Plan regarding repricing or cancellation and re-grant of options
and stock appreciation rights has been eliminated; and (iv) any amendment to the
Incentive Plan that materially increases the benefits accruing to participants
under the Incentive Plan shall not be effective unless approved by the
shareholders of the Company within 12 months of the adoption of the amendment.
A copy of the Incentive Plan in substantially the form in which it will
take effect if Proposal 2 is approved is attached as Appendix B. The description
of the Incentive Plan set forth herein is subject to, and qualified in its
entirety by, the full text of the Incentive Plan.
7
PURPOSE
The Board adopted the Incentive Plan to provide a means by which
employees, directors and consultants of the Company and its affiliates may be
given an opportunity to purchase stock in the Company and to assist in retaining
their services. The Incentive Plan also provides a means to recruit individuals
for management positions to continue the growth and success of the Company and
its affiliates. All of the approximately 5,200 employees, directors and
consultants of the Company and its affiliates are eligible to participate in the
Incentive Plan.
ADMINISTRATION
The Board administers the Incentive Plan. Subject to the provisions of
the Incentive Plan, the Board has the power to construe and interpret the
Incentive Plan and to determine the persons to whom and the dates on which
awards will be granted, the number of shares of Common Stock to be subject to
each award, the time or times during the term of each award within which all or
a portion of such award may be exercised, the exercise price, the type of
consideration and other terms of the award.
The Board has the power to delegate administration of the Incentive
Plan to a committee composed of not fewer than two members of the Board (a
"Delegated Committee"). In the discretion of the Board, a Delegated Committee
may consist solely of two or more outside directors in accordance with Section
162(m) of the Code or solely of two or more non-employee directors in accordance
with Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Board has delegated administration of the Incentive Plan to
the Compensation Committee of the Board. As used herein with respect to the
Incentive Plan, the "Board" refers to any Delegated Committee as well as to the
Board itself.
The regulations under Section 162(m) of the Code require that the
directors who serve as members of the Delegated Committee must be "outside
directors." The Incentive Plan provides that, in the Board's discretion,
directors serving on the Delegated Committee may be "outside directors" within
the meaning of Section 162(m). This limitation would exclude from the Delegated
Committee directors who are (i) current employees of the Company or an
affiliate, (ii) former employees of the Company or an affiliate receiving
compensation for past services (other than benefits under a tax-qualified
pension incentive plan), (iii) current and former officers of the Company or an
affiliate, (iv) directors currently receiving direct or indirect remuneration
from the Company or an affiliate in any capacity (other than as a director) and
(v) any other person who is otherwise not considered an "outside director" for
purposes of Section 162(m).
STOCK SUBJECT TO THE INCENTIVE PLAN
If this Proposal is approved, an aggregate of 12,200,000 shares of
Common Stock will be reserved for issuance under the Incentive Plan. If awards
granted under the Incentive Plan expire or otherwise terminate without being
exercised, the shares of Common Stock not acquired pursuant to such awards again
become available for issuance under the Incentive Plan. Shares subject to stock
appreciation rights exercised in accordance with the Incentive Plan are not
available for subsequent issuance under the plan.
ELIGIBILITY
Incentive stock options and stock appreciation rights appurtenant
thereto may be granted under the Incentive Plan only to employees (including
officers) of the Company and its affiliates. Employees (including officers),
directors, and consultants of both the Company and its affiliates are eligible
to receive all other types of awards under the Incentive Plan.
No option may be granted under the Incentive Plan to any person who, at
the time of the grant, owns (or is deemed to own) stock possessing more than 10%
of the total combined voting power of the Company or any affiliate of the
Company, unless the exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of grant. Likewise, no restricted stock
award may be granted under the Incentive Plan to any such 10% shareholder unless
the exercise price is at least 100% of the fair market value of the stock
subject to the award. In addition, the aggregate fair market value, determined
at the time of grant, of the shares of Common Stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under the Incentive Plan and all other such plans of
the Company and its affiliates) may not exceed $100,000.
8
No person may be granted options and stock appreciation rights under
the Incentive Plan exercisable for more than 1,200,000 shares of Common Stock in
any twelve (12) month period ("Section 162(m) Limitation").
TERMS OF OPTIONS
The following is a description of the permissible terms of options
under the Incentive Plan. Individual option grants may be more restrictive as to
any or all of the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options
may not be less than 100% of the fair market value of the Common Stock on the
date of the grant and, in some cases (see "Eligibility" above), may not be less
than 110% of such fair market value. The exercise price of nonstatutory options
may not be less than 85% of the fair market value of the Common Stock on the
date of grant and, in some cases (see "Eligibility" above), may not be less than
110% of such fair market value. If options were granted to certain "covered
employees" (see "Federal Income Tax Information" below) with exercise prices
below fair market value, deductions for compensation attributable to the
exercise of such options could be limited by Section 162(m) of the Code.
The exercise price of options granted under the Incentive Plan must be
paid either in cash at the time the option is exercised or at the discretion of
the Board, (i) by delivery of other Common Stock of the Company, (ii) pursuant
to a deferred payment arrangement or (iii) in any other form of legal
consideration acceptable to the Board.
OPTION EXERCISE. Options granted under the Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. The
Board has the power to accelerate the time during which an option may vest. In
addition, options granted under the Incentive Plan may permit exercise prior to
vesting, but in such event the participant may be required to enter into an
early exercise stock purchase agreement that allows the Company to repurchase
unvested shares, generally at their exercise price, should the participant's
service terminate before vesting. To the extent provided by the terms of an
option, a participant may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such option by a cash payment upon
exercise, by authorizing the Company to withhold a portion of the stock
otherwise issuable to the participant, by delivering already-owned Common Stock
of the Company or by a combination of these means.
TERM. The maximum term of options under the Incentive Plan is 10 years,
except that in certain cases (see "Eligibility" above) the maximum term is five
years. Options under the Incentive Plan generally terminate one month after
termination of the participant's service unless (i) such termination is due to
the participant's disability, in which case the option may provide that it may
be exercised (but only to the extent the option was exercisable at the time of
the termination of service) at any time within 12 months of such termination;
(ii) the participant dies before the participant's service has terminated, or
within a period after termination of such service to be specified in the option,
in which case the option may provide that it may be exercised (but only to the
extent the option was exercisable at the time of the participant's death) within
12 months of the participant's death by the person or persons to whom the rights
to such option pass by will or by the laws of descent and distribution; or (iii)
the option by its terms specifically provides otherwise. A participant may
designate a beneficiary who may exercise the option following the participant's
death. Individual option grants by their terms may provide for exercise within a
longer period of time following termination of service.
The option term generally is not extended in the event that exercise of
the option within these periods is prohibited. A participant's option agreement
may provide that if the exercise of the option following the termination of the
participant's service 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 or (ii) the 10th day after the last date on
which such exercise would result in such liability under Section 16(b).
9
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
PAYMENT. The Board determines the purchase price under a restricted
stock purchase agreement but the purchase price may not be less than 85% of the
fair market value of the Common Stock on the date of purchase. The Board may
award stock bonuses in consideration of past services without a purchase
payment.
The purchase price of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan must be paid either in cash at the
time of purchase or at the discretion of the Board, pursuant to a deferred
payment arrangement or in any other form of legal consideration acceptable to
the Board.
VESTING. Shares of stock sold or awarded under the Incentive Plan may,
but need not be, subject to a repurchase option in favor of the Company in
accordance with a vesting schedule as determined by the Board. The Board has the
power to accelerate the vesting of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan.
STOCK APPRECIATION RIGHTS
The Incentive Plan authorizes three types of stock appreciation rights.
TANDEM STOCK APPRECIATION RIGHTS. Tandem stock appreciation rights are
tied to an underlying option and require the participant to elect whether to
exercise the underlying option or to surrender the option for an appreciation
distribution equal to the fair market value of the vested shares purchasable
under the surrendered option less the aggregate exercise price payable for such
shares. Appreciation distributions payable upon exercise of tandem stock
appreciation rights must be made in cash.
CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent stock appreciation
rights are tied to an underlying option and are exercised automatically at the
same time the underlying option is exercised. The participant receives an
appreciation distribution equal to the fair market value of the vested shares
purchased under the option less the aggregate exercise price payable for such
shares. Appreciation distributions payable upon exercise of concurrent stock
appreciation rights must be made in cash.
INDEPENDENT STOCK APPRECIATION RIGHTS. Independent stock appreciation
rights are granted independently of any option and entitle the participant to
receive upon exercise an appreciation distribution equal to the fair market
value of that number of shares of stock equal to the number of share equivalents
in which the participant is vested under the independent stock appreciation
rights less the fair market value of such shares of stock on the date of grant
of the independent stock appreciation rights. Appreciation distributions payable
upon exercise of independent stock appreciation rights may, at the Board's
discretion, be made in cash, in shares of stock or a combination thereof.
RESTRICTIONS ON TRANSFER
A participant may not transfer an incentive stock option otherwise than
by will or by the laws of descent and distribution. During the lifetime of the
participant, only the participant may exercise an incentive stock option.
Nonstatutory stock options are transferable only to the extent provided in the
stock option agreement. Shares subject to repurchase by the Company under an
early exercise stock purchase agreement may be subject to restrictions on
transfer that the Board deems appropriate. Rights under a stock bonus or
restricted stock bonus agreement may not be transferred except where such
assignment is required by law or expressly authorized by the terms of the
applicable stock bonus or restricted stock purchase agreement.
ADJUSTMENT PROVISIONS
Transactions not involving receipt of consideration by the Company,
such as a merger, consolidation, reorganization, stock dividend, or stock split,
may change the type(s), class(es) and number of shares of Common Stock subject
to the Incentive Plan and outstanding awards. In that event, the Incentive Plan
will be appropriately adjusted as to the type(s), class(es) and the maximum
number of shares of Common Stock subject to the Incentive Plan and the Section
162(m) Limitation, and outstanding awards will be adjusted as to the type(s),
class(es), number of shares and price per share of Common Stock subject to such
awards.
10
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of certain merger, consolidation, acquisition or similar
transactions specified in the Incentive Plan (collectively, "Corporate
Transaction"), any surviving or acquiring corporation may continue or assume
awards outstanding under the Incentive Plan or may substitute similar awards. If
any surviving or acquiring corporation does not assume such awards or substitute
similar awards, then with respect to awards held by participants whose service
with the Company or an affiliate has not terminated as of the effective date of
the Corporate Transaction, the vesting of such awards (and, if applicable, the
time during which such awards may be exercised) will be accelerated in full and
the awards will terminate if not exercised (if applicable) at or prior to such
effective date.
The acceleration of an award in the event of an acquisition or similar
corporate event may be viewed as an anti-takeover provision, which may have the
effect of discouraging a proposal to acquire or otherwise obtain control of the
Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Incentive Plan without
shareholder approval or ratification at any time or from time to time. Unless
sooner terminated, the Incentive Plan will terminate on June 14, 2006.
The Board may also amend the Incentive Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
shareholders of the Company within 12 months before or after its adoption by the
Board if the amendment would (i) modify the requirements as to eligibility for
participation (to the extent such modification requires shareholder approval in
order for the Incentive Plan to satisfy Section 422 of the Code, if applicable,
or Rule 16b-3 of the Exchange Act); (ii) increase the number of shares reserved
for issuance under the Incentive Plan; or (iii) change any other provision of
the Incentive Plan in any other way if such modification requires shareholder
approval in order to comply with Rule 16b-3 of the Exchange Act or satisfy the
requirements of Section 422 of the Code. The Board may submit any other
amendment to the Incentive Plan for shareholder approval, including, but not
limited to, amendments intended to satisfy the requirements of Section 162(m) of
the Code regarding the exclusion of performance-based compensation from the
limitation on the deductibility of compensation paid to certain employees.
FEDERAL INCOME TAX INFORMATION
INCENTIVE STOCK OPTIONS. Incentive stock options under the Incentive
Plan are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the
participant or the Company by reason of the grant or exercise of an incentive
stock option. However, the exercise of an incentive stock option may increase
the participant's alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an incentive
stock option for more than two years from the date on which the option is
granted and more than one year from the date on which the shares are transferred
to the participant upon exercise of the option, any gain or loss on a
disposition of such stock will be a long-term capital gain or loss if the
participant held the stock for more than one year.
Generally, if the participant disposes of the stock before the
expiration of either of these holding periods (a "disqualifying disposition"),
then at the time of disposition the participant will realize taxable ordinary
income equal to the lesser of (i) the excess of the stock's fair market value on
the date of exercise over the exercise price, or (ii) the participant's actual
gain, if any, on the purchase and sale. The participant's additional gain or any
loss upon the disqualifying disposition will be a capital gain or loss, which
will be long-term or short-term depending on whether the stock was held for more
than one year.
To the extent the participant recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
11
NONSTATUTORY STOCK OPTIONS, RESTRICTED STOCK PURCHASE AWARDS AND STOCK
BONUSES. Nonstatutory stock options, restricted stock purchase awards and stock
bonuses granted under the Incentive Plan generally have the following federal
income tax consequences.
There are no tax consequences to the participant or the Company by
reason of the grant. Upon acquisition of the stock, the participant normally
will recognize taxable ordinary income equal to the excess, if any, of the
stock's fair market value on the acquisition date over the purchase price.
However, to the extent the stock is subject to certain types of vesting
restrictions, the taxable event will be delayed until the vesting restrictions
lapse unless the participant elects to be taxed on receipt of the stock. With
respect to employees, the Company is generally required to withhold from regular
wages or supplemental wage payments an amount based on the ordinary income
recognized. Subject to the requirement of reasonableness, the provisions of
Section 162(m) of the Code and the satisfaction of a tax reporting obligation,
the Company will generally be entitled to a business expense deduction equal to
the taxable ordinary income realized by the participant.
Upon disposition of the stock, the participant will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon acquisition (or vesting) of the stock. Such gain or loss will be long-term
or short-term depending on whether the stock was held for more than one year.
Slightly different rules may apply to participants who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
STOCK APPRECIATION RIGHTS. No taxable income is realized upon the
receipt of a stock appreciation right, but upon exercise of the stock
appreciation right the fair market value of the shares (or cash in lieu of
shares) received must be treated as compensation taxable as ordinary income to
the participant in the year of such exercise. Generally, with respect to
employees, the Company is required to withhold from the payment made on exercise
of the stock appreciation right or from regular wages or supplemental wage
payments an amount based on the ordinary income recognized. Subject to the
requirement of reasonableness, Section 162(m) of the Code and the satisfaction
of a reporting obligation, the Company will be entitled to a business expense
deduction equal to the taxable ordinary income recognized by the participant.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. Section 162(m) of the Code
denies a deduction to any publicly held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation to
such covered employee exceeds $1 million. It is possible that compensation
attributable to awards, when combined with all other types of compensation
received by a covered employee from the Company, may cause this limitation to be
exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury Regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as
performance-based compensation if the award is granted by a compensation
committee comprised solely of "outside directors" and either (i) the plan
contains a per-employee limitation on the number of shares for which such awards
may be granted during a specified period, the per-employee limitation is
approved by the shareholders, and the exercise price of the award is no less
than the fair market value of the stock on the date of grant, or (ii) the award
is granted (or exercisable) only upon the achievement (as certified in writing
by the compensation committee) of an objective performance goal established in
writing by the compensation committee while the outcome is substantially
uncertain, and the award is approved by shareholders.
Awards to purchase restricted stock and stock bonus awards will qualify
as performance-based compensation under the Treasury Regulations only if (i) the
award is granted by a compensation committee comprised solely of "outside
directors," (ii) the award is granted (or exercisable) only upon the achievement
of an objective performance goal established in writing by the compensation
committee while the outcome is substantially uncertain, (iii) the compensation
committee certifies in writing prior to the granting (or exercisability) of the
award that the performance goal has been satisfied and (iv) prior to the
granting (or exercisability) of the award, shareholders have approved the
material terms of the award (including the class of employees eligible for such
award, the business criteria on which the performance goal is based, and the
maximum amount -- or formula used to calculate the amount -- payable upon
attainment of the performance goal).
12
NEW PLAN BENEFITS
The following table presents certain information with respect to
options granted under the Incentive Plan during the fiscal year ended February
1, 2003 to certain individuals and groups of individuals.
NEW PLAN BENEFITS
1996 EQUITY INCENTIVE PLAN
NUMBER OF SHARES
UNDERLYING OPTIONS
NAME AND POSITION GRANTED
- --------------------------------------------------------------------------- ------------------------------
Elizabeth McLaughlin(1).................................................... 200,000
Chief Executive Officer and President
Gerald Cook................................................................ 50,000
Chief Operating Officer
James McGinty.............................................................. 30,000
Chief Financial Officer
Jane Cruz.................................................................. 25,000
Senior Vice President, Human Resources
Jay Johnson................................................................ 17,500
Senior Vice President, Strategic Analysis and Investor Relations
Thomas Rail(2)............................................................. 25,000
Senior Vice President and General Manager, Torrid
All executive officers as a group.......................................... 465,000
All directors who are not current executive officers as a group(3)......... 38,116
All employees as a group (excluding all executive officers)................ 432,150
____________
(1) Includes 100,000 shares of Common Stock underlying a grant of an option
that the Company granted in fiscal 2002 reflecting a stock option bonus
earned in fiscal 2001.
(2) The Company announced on November 20, 2002 that Mr. Rail resigned on
November 15, 2002 to pursue other interests.
(3) Includes 32,500 shares of Common Stock underlying nonqualified stock
options and 5,616 shares of Common Stock underlying restricted stock
awards.
13
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all of
the Company's equity compensation plans in effect as of February 1, 2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)
--------------------------------------------------------------------------------
Equity compensation plans approved
by shareholders(1)............... 3,220,104 $ 13.15 2,190,648
Equity compensation plans not
approved by shareholders(2)...... 31,190 $ 3.36 not applicable
------------------------- ------------------------------
Total............................ 3,251,294 $ 13.05 2,190,648
========================= ==============================
____________
(1) Includes the Incentive Plan, the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") and the Employee Stock Purchase Plan
(the "ESPP"). 779,723 shares under column (c) are attributable to the
Employee Stock Purchase Plan.
(2) Includes non-plan option grants approved by the Board and granted pursuant
to individual compensation arrangements. The terms of such non-plan option
grants are substantially similar to the terms of stock options granted
under the Incentive Plan, the material features of which are summarized
under this Proposal 2.
14
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board has selected Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending January 31, 2004 and has further directed
that management submit the selection of independent auditors for ratification by
the shareholders at the Annual Meeting. Ernst & Young LLP has audited the
Company's financial statements since the Company's inception in 1988.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
Shareholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Ernst & Young LLP
to the shareholders for ratification as a matter of good corporate practice. If
the shareholders do not ratify the selection, the Audit Committee will
reconsider whether or not to retain Ernst & Young LLP. Even if the selection is
ratified, the Audit Committee in its discretion may direct the appointment of
different independent auditors at any time during the year if it determines that
such a change would be in the best interests of the Company and its
shareholders.
The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and voting at the Annual Meeting (which shares
voting affirmatively also constitute at least a majority of the required quorum)
will be required to ratify the selection of Ernst & Young LLP. Abstentions and
broker non-votes will not be counted for any purpose in determining whether this
Proposal has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
AUDITOR'S FEES
For the fiscal years ended February 1, 2003 and February 2, 2002, Ernst
& Young LLP provided services in the following categories and amounts:
FISCAL YEAR FISCAL YEAR
ENDED ENDED
2/1/03 2/2/02
Audit Fees(1)........................... $ 170,100 130,200
Audit-related Fees(2)................... $ 14,495 13,600
Tax Fees(3)............................. $ 152,700 147,400
All Other Fees.......................... $ 0 0
____________
(1) Represents the aggregate fees billed for professional services rendered for
the audit and/or reviews of the Company's financial statements and in
connection with the Company's statutory and regulatory filings or
engagements.
(2) Represents the aggregate fees billed for assurance and related services
that were reasonably related to the performance of the audit or review of
the Company's financial statements that are not included under "Audit Fees"
above. These fees were for the audit of the Company's benefit plan.
(3) Represents the aggregate fees billed for professional services rendered for
tax compliance, tax advice and tax planning. These fees were for services
related to the preparation of the Company's tax returns and other filings
the Company made with the Internal Revenue Service and consultations
regarding the application of various provisions of the Code.
The Audit Committee has determined that the rendering of all non-audit
services by Ernst & Young LLP is compatible with maintaining the auditor's
independence. Non-audit services rendered by Ernst & Young LLP in fiscal 2001
and 2002 were limited to services related to the preparation of the Company's
tax returns and other filings the Company made with the Internal Revenue Service
and consultations regarding the application of various provisions of the Code.
To date the Audit Committee has not established policies and procedures
concerning pre-approval of audit or non-audit services and the establishment of
any such policies and procedures is subject to the approval of the Audit
Committee.
15
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of March 14, 2003, unless otherwise
indicated, by: (i) each director; (ii) each of the current or former executive
officers named in the Summary Compensation Table; and (iii) all executive
officers and directors of the Company as a group.
SHARES BENEFICIALLY OWNED
-------------------------------------------
NUMBER OF PERCENT OF
DIRECTORS, OFFICERS AND 5% SHAREHOLDERS(1)(2) SHARES TOTAL(3)
- ---------------------------------------------------------- -------------- --------------
FMR Corp.(4).............................................. 4,048,976 12.9%
82 Devonshire Street
Boston, Massachusetts 02109
Elizabeth McLaughlin(5)................................... 685,853 2.2%
Edgar Berner(6)........................................... 98,937 *
Cynthia Cohen(7).......................................... 7,739 *
Corrado Federico(8)....................................... 64,163 *
W. Scott Hedrick(9)....................................... 6,036 *
Bruce Quinnell(10)........................................ 49,163 *
Andrew Schuon(11)......................................... 15,101 *
Gerald Cook(12)........................................... 47,849 *
James McGinty(13)......................................... 54,679 *
Jane Cruz( 14)............................................ 25,937 *
Jay Johnson(15)........................................... 97,687 *
Thomas Rail(16)........................................... -- *
All executive officers and directors as a group
(14 persons)(17).......................................... 1,051,766 3.4%
____________
* Less than one percent.
(1) Unless otherwise indicated, the address of all the owners is: c/o Hot Topic
Inc., 18305 East San Jose Avenue, City of Industry, California 91748.
(2) This table is based upon information supplied by officers and directors,
except in the case of information relating to FMR Corp. ("FMR"), which is
based on Amendment No. 1 to Schedule 13G filed by FMR with the SEC on
February 13, 2003. The Company has also reviewed previous Schedules 13D and
13G filed with the SEC. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, the Company
believes that each of the shareholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 31,294,802 shares outstanding on
March 14, 2003, adjusted as required by rules promulgated by the SEC.
(3) Percent of shares beneficially owned by any person is calculated by
dividing the number of shares beneficially owned by that person by the sum
of the number of shares outstanding as of March 14, 2003 and the number of
shares as to which that person has the right to acquire voting or
investment power as of March 14, 2003 or within 60 days thereafter.
16
(4) Based on Amendment No. 1 to Schedule 13G filed by FMR with the SEC on
February 13, 2003. Includes 3,944,930 shares beneficially owned by Fidelity
Management & Research Company ("FMRC") and 81,000 shares beneficially owned
by Fidelity Management Trust Company, each a wholly-owned subsidiary of
FMR. Also includes 11,846 shares held by Geode Capital Management, LLC
("Geode"), a wholly-owned subsidiary of Fidelity Investors III Limited
Partnership ("FILP III"). Fidelity Investors Management, LLC ("FIML") is
the general partner and investment manager of FILP III, and the managers of
Geode, the limited partners of FILP III and the members of FIML are certain
shareholders and employees of FMR. Also includes 11,200 shares beneficially
owned by Fidelity International Limited ("FIL"), which was a majority-owned
subsidiary of FMRC until the shares of FIL held by FMRC were distributed,
as a dividend, to the shareholders of FMR.
(5) Includes 632,617 shares subject to options exercisable within 60 days of
March 14, 2003.
(6) Includes 9,000 shares held by The Julia A. Berner Trust, of which Mr.
Berner's wife is the trustee. Also includes 13,144 shares subject to
options exercisable within 60 days of March 14, 2003 held by Edgar Berner.
(7) Includes 5,625 shares subject to options exercisable within 60 days of
March 14, 2003.
(8) Includes 61,640 shares subject to options exercisable within 60 days of
March 14, 2003.
(9) Includes 4,687 shares subject to options exercisable within 60 days of
March 14, 2003.
(10) Includes 46,640 shares subject to options exercisable within 60 days of
March 14, 2003.
(11) Includes 12,578 shares subject to options exercisable within 60 days of
March 14, 2003.
(12) Includes 47,587 shares subject to options exercisable within 60 days of
March 14, 2003.
(13) Includes 53,749 shares subject to options exercisable within 60 days of
March 14, 2003.
(14) Includes 25,937 shares subject to options exercisable within 60 days of
March 14, 2003.
(15) Includes 70,828 shares subject to options exercisable within 60 days of
March 14, 2003.
(16) The Company announced on November 20, 2002 that Mr. Rail resigned on
November 15, 2002 to pursue other interests.
(17) Includes shares as described in the notes above, as applicable, and
1,051,766 shares subject to options exercisable within 60 days of March 14,
2003, held by an officer not required to be named in this table.
17
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended February 1, 2003, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
18
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
As consideration for service on the Board, each director is reimbursed
for reasonable out-of-pocket expenses in connection with such director's travel
to and attendance at Board and committee meetings. In addition, in fiscal 2002,
non-employee directors received a $4,000 fee for their attendance at each
regularly scheduled Board meeting and a $500 fee for their attendance at each
special meeting or committee meeting, except that no director could be
compensated more than $3,000 for the year for attendance at meetings of a
particular committee. In fiscal 2002, the Chairman of the Board received a
$6,000 fee for his attendance at each regularly scheduled Board meeting and a
$750 fee for his attendance at each special meeting or committee meeting, except
that the Chairman's compensation for attendance at meetings of a particular
committee was limited to $4,500 for the year. In fiscal 2002, the total
compensation paid to non-employee directors was $147,450.
Each non-employee director of the Company also receives stock option
grants under the Directors' Plan. Only non-employee directors of the Company
receive options under the Directors' Plan. Options granted under the Directors'
Plan are intended by the Company not to qualify as incentive stock options under
the Code.
Generally, option grants under the Directors' Plan are
non-discretionary. In fiscal 2002, the Directors' Plan provided for each
non-employee director to be automatically granted an option to purchase 10,000
shares upon becoming a member of the Board and an option to purchase 2,500
shares of Common Stock upon each subsequent Annual Meeting of Shareholders of
the Company. A Chairman who has not previously served on the Board will receive
a stock option grant of 15,000 shares of Common Stock upon joining the Board. If
the Chairman has previously served on the Board, he or she will receive the
number of shares equal to the difference between 15,000 shares of Common Stock
and the amount of his or her initial stock option grant (received upon initially
joining the Board). The Chairman is also entitled to receive a stock option
grant of 3,750 shares (rather than 2,500 shares) of Common Stock of the
Company's Common Stock upon each Annual Meeting of Shareholders of the Company.
In addition, the Directors' Plan provides that the Board may approve
discretionary grants to the non-employee directors in amounts as the Board deems
appropriate.
In March 2003, the Board amended its director compensation policy to
provide that commencing in fiscal 2003, non-employee directors will receive a
$500 fee for their attendance at each Compensation Committee and Nominating and
Governance Committee meeting and $1,000 for their attendance at each Audit
Committee meeting, and the chairman of each committee will receive a $1,000 fee
for attendance at each Compensation Committee and Nominating and Governance
Committee meeting and $2,500 for attendance at each Audit Committee meeting. The
amended policy also provides that commencing in fiscal 2003, each non-employee
director will be granted an additional option to purchase 5,000 shares of Common
Stock upon each subsequent Annual Meeting of Shareholders of the Company after
the director's appointment to the Board and the Chairman of the Board will be
granted an additional option to purchase 6,250 shares (rather than 5,000 shares)
of Common Stock upon each subsequent Annual Meeting of Shareholders of the
Company after the Chairman's appointment to the Board.
The exercise price of options granted under the Directors' Plan is the
fair market value of the Common Stock subject to the option on the date of the
option grant. An option granted under the Directors' Plan may not be exercised
until the date upon which the optionee, or the affiliate of such optionee, as
the case may be, has provided one year of continuous service as a non-employee
director following the date of grant of such option, whereupon such option shall
become exercisable as to 25% of the option shares and 6.25% of the option shares
shall become exercisable each quarter thereafter. The term of options granted
under the Directors' Plan is 10 years. In the event of a merger of the Company
with or into another corporation in which the Company is not the surviving
corporation or a consolidation, acquisition of assets or other change-in-control
transaction specified in the Directors' Plan, the vesting of each option will
accelerate and the option will terminate if not exercised prior to the
consummation of the transaction.
During the last fiscal year, the Company granted options to purchase
32,500 shares of Common Stock under the Directors' Plan at an exercise price per
share of $24.13 to the six non-employee directors.
In addition, each non-employee director receives a stock grant with a
value equal to $25,000, and the Chairman receives a stock grant with a value
equal to $30,000, for serving on the Board pursuant to a director compensation
plan adopted by the Board. The stock awards are granted to each non-employee
director immediately following his or her election at the Company's Annual
Meeting of Shareholders (although the Board can amend its policy and change the
grant or otherwise determine that no grant shall be made). The number of shares
subject to the stock grant will be determined by the closing price of the
Company's Common Stock on the last trading day prior to the date of grant.
Pursuant to the policy adopted by the Board, these stock grants vest 100% on the
earlier to occur of the following: (i) one year from the date of grant, or (ii)
the commencement of the Company's next Annual Meeting of Shareholders, provided
that the directors are prohibited from selling the shares they received pursuant
to such stock grants until they no longer serve on the Board.
19
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows, for the fiscal years ended February 3, 2001,
February 2, 2002, and February 1, 2003, compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer during fiscal 2002, each of the
four other most highly compensated executive officers of the Company who earned
more than $100,000 in fiscal 2002 and one former executive officer who departed
from the Company during fiscal 2002 (collectively the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------- ---------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK SECURITIES LTIP COMPEN-
NAME AND PRINCIPAL SALARY BONUS(1) SATION(2) AWARD UNDERLYING PAY-OUTS SATION
POSITION YEAR ($) ($) ($) ($) OPTIONS ($) ($)
- ------------------------ ---- ------- -------- --------- ---------- ---------- -------- ---------
Elizabeth McLaughlin, 2002 500,000 501,600 11,429 -- 100,000 -- --
Chief Executive Officer 2001 400,000 -- 23,147 -- 250,000 -- --
and President(3) 2000 332,862 400,000 17,246 -- 300,000 -- --
Gerald Cook, 2002 335,000 144,050 3,870 -- 50,000 -- --
Chief Operating Officer 2001 300,000 150,000 99,429 -- 75,000 -- --
2000 -- -- -- -- -- -- --
James McGinty, 2002 235,000 101,050 5,900 -- 30,000 -- --
Chief Financial Officer 2001 200,000 100,000 18,120 -- 37,500 -- --
2000 90,193 102,813 -- -- -- -- --
Jane Cruz, 2002 228,000 98,384 5,493 -- 25,000 -- --
Senior Vice President, 2001 102,384 -- 1,292 -- 45,000 -- --
Human Resources(4) 2000 -- -- -- -- -- -- --
Jay Johnson, 2002 229,600 99,574 6,185 -- 17,500 -- --
Senior Vice President, 2001 216,418 97,388 16,530 -- 26,250 -- --
Strategic Analysis and 2000 212,096 122,255 15,503 -- 30,000 -- --
Investor Relations
Thomas Rail, 2002 212,421 -- 1,083 -- 25,000 -- 54,831(6)
Senior Vice President and 2001 187,500 84,375 5,125 -- 45,000 -- --
General Manager, Torrid(5) 2000 -- -- -- -- -- -- --
____________
(1) 2002 amounts reflect bonuses earned in fiscal 2002 and paid in fiscal 2003,
2001 amounts reflect bonuses earned in fiscal 2001 and paid in fiscal 2002,
and 2000 amounts reflect bonuses earned in fiscal 2000 and paid in fiscal
2001.
(2) For fiscal 2002, the amounts shown include: (i) life and long-term
disability insurance premiums: Ms. McLaughlin ($3,804), Mr. Cook ($1,120),
Mr. Johnson ($4,414), Mr. McGinty ($800), Ms. Cruz ($880) and Mr. Rail
($1,083); (ii) automobile allowance: Ms. McLaughlin ($7,625), Mr. Cook
($2,750), Mr. Johnson ($1,771), Mr. McGinty ($5,100), and Ms. Cruz
($4,613).
(3) Does not include 100,000 shares of Common Stock underlying an option
granted by the Company reflecting a stock option bonus earned in fiscal
2001 and granted in fiscal 2002.
20
(4) Ms. Cruz became the Company's Senior Vice President, Human Resources in
August 2001.
(5) The Company announced on November 20, 2002 that Mr. Rail resigned on
November 15, 2002 to pursue other interests.
(6) Pursuant to a severance payment.
21
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under the
Incentive Plan. As of March 14, 2003, options to purchase a total of 3,166,751
shares were outstanding under the Incentive Plan and options to purchase
1,410,269 shares remained available for grant thereunder. The following table
sets forth certain information regarding stock options made during the fiscal
year ended February 1, 2003, to each of the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
% OF TOTAL FOR OPTION TERM(3)
OPTIONS ($)
NUMBER OF GRANTED TO ----------------------------
SECURITIES EMPLOYEES
UNDERLYING IN FISCAL EXERCISE OR
OPTIONS YEAR(2) BASE PRICE EXPIRATION
NAME GRANTED(1) (%) ($/SH) DATE 5% 10%
- ------------------------- ---------- ---------- ----------- ---------- ----------- -----------
Elizabeth McLaughlin(4) 200,000 22.3% 22.99 3/20/12 2,891,657 7,328,028
Gerald Cook 50,000 5.6% 22.99 3/20/12 722,914 1,832,007
James McGinty 30,000 3.3% 22.99 3/20/12 433,749 1,099,204
Jane Cruz 25,000 2.8% 22.99 3/20/12 361,457 916,003
Jay Johnson 17,500 2.0% 22.99 3/20/12 253,020 641,202
Thomas Rail(5) 25,000 2.8% 22.99 3/20/12 361,457 916,003
____________
(1) Options become exercisable over a 4 year period with 25% vesting one year
from the date of grant and 6.25% of the remaining shares vesting quarterly
thereafter. The options will fully vest upon a change of control, as
defined in the Company's option plans, unless the acquiring company assumes
the options or substitutes similar options. The term of the options is ten
years.
(2) Based on options to purchase 897,150 shares granted to employees in fiscal
2002 under the Incentive Plan, including options granted to the Named
Executive Officers.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that the
stock price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option
is exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent certain assumed rates of appreciation only,
in accordance with the rules of the SEC, and do not reflect the Company's
estimate or projection of future stock price performance. Actual gains, if
any, are dependent on the actual future performance of the Company's Common
Stock and no gain to the optionee is possible unless the stock price
increases over the option term, which will benefit all shareholders.
(4) Includes 100,000 shares of Common Stock underlying grant of an option that
the company granted in fiscal 2002 reflecting a stock option bonus earned
in fiscal 2001.
(5) The Company announced on November 20, 2002 that Mr. Rail resigned on
November 15, 2002 to pursue other interests.
22
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the number
and value of securities acquired upon the exercise of options by the Named
Executive Officers during fiscal 2002 and the number and value of securities
underlying unexercised options held by the Named Executive Officers as of
February 1, 2003:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(2)
---------------------------- ------------------------------
SHARES
ACQUIRED VALUE REALIZED
ON ON EXERCISE(1) EXERCISABLE UNEXERCISABLE
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE ($) ($)
- ------------------------- ---------- -------------- ----------- ------------- ----------- -------------
Elizabeth McLaughlin 90,000 1,593,000 557,868 453,632 8,757,206 3,041,887
Gerald Cook 7,100 61,894 25,712 92,188 164,300 269,581
James McGinty 10,000 149,421 40,156 77,344 395,425 457,450
Jane Cruz -- -- 14,062 55,938 77,341 170,159
Jay Johnson 98,899 2,078,134 65,330 48,301 1,012,657 370,095
Thomas Rail(3) 16,875 34,247 -- -- -- --
____________
(1) Amounts reflected are based on the fair market value on the date of
exercise minus the exercise price and do not indicate that the optionees
sold such shares.
(2) Based on the fair market value of the Common Stock as of January 31, 2003
($22.35), the last business day in fiscal 2002.
(3) The Company announced on November 20, 2002 that Mr. Rail resigned on
November 15, 2002 to pursue other interests.
23
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
The Company entered into an employment agreement with Patricia Van
Cleave, its Chief Merchandising Officer, on August 14, 2002 and with James
McGinty, its Chief Financial Officer, on January 23, 2003. Neither of the
employment agreements provide for a specified term of employment and each is
terminable at will. The employment agreements specify minimum annualized base
salaries as follows: Ms. Van Cleave, $330,000 and Mr. McGinty, $235,000. Both
Ms. Van Cleave and Mr. McGinty are entitled to a target bonus of 50% of their
respective base salaries based upon the achievement of goals specified in their
respective employment agreements. Both employment agreements also provide for an
automobile allowance and Ms. Van Cleave's employment agreement provides for an
initial grant of an option to purchase 75,000 shares of the Company's Common
Stock.
Ms. Van Cleave's and Mr. McGinty's employment agreements, under certain
circumstances, are terminable with or without cause. However, Ms. Van Cleave and
Mr. McGinty are each entitled to certain benefits in the event their employment
with the Company is terminated without cause including a severance payment equal
to six months of continued pay and benefits.
Each of Ms. Van Cleave and Mr. McGinty are entitled to immediate
vesting of all of their unvested options in the event of a "change in control"
of the Company. "Change of control" is defined in each of Ms. Van Cleave's and
Mr. McGinty's agreement as (i) a sale of all or substantially all of the
Company's assets, (ii) a merger or consolidation in which the Company is not the
surviving corporation and in which beneficial ownership of at least 50% of the
Company's voting securities has changed, or (iii) an acquisition by any person,
entity or group of beneficial ownership of at least 50% of the combined voting
power of the Company.
The Company entered into a separation agreement with Thomas Rail, its
former Senior Vice President and General Manager, Torrid. Mr. Rail's employment
with the Company was terminated effective November 15, 2002. The separation
agreement provides for salary and benefit continuation for a period of six
months following termination of employment, the cessation of vesting of all
stock options held by Mr. Rail as of the termination of employment, and the
forfeiture of any unvested portions of such stock options as well as any vested
portions not exercised within 30 days following termination of employment.
PENSION AND LONG-TERM INCENTIVE PLANS
The Company has no pension plans or long-term incentive plans.
24
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION
THE MATERIAL IN THIS REPORT IS NOT "SOLICITING MATERIAL," IS NOT DEEMED
"FILED" WITH THE SEC, AND IS NOT TO BE INCORPORATED BY REFERENCE INTO
ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR THE EXCHANGE ACT WHETHER MADE BEFORE OR AFTER
THE DATE HEREOF AND IRRESPECTIVE OF ANY GENERAL INCORPORATION LANGUAGE
IN ANY SUCH FILING.
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Compensation Committee").
The Compensation Committee is appointed by the Board of Directors and is
comprised of three non-employee directors. The Compensation Committee advises
the Board of Directors on all compensation matters concerning the Company's
executive officers.
OVERALL COMPENSATION POLICY
The Compensation Committee believes that in order for the Company to
succeed it must be able to attract and retain qualified executives. The
objective of the Compensation Committee in determining the type and amount of
executive officer compensation is to provide a compensation package consisting
of a base salary, bonus, and long-term incentives in the form of stock options
that allows the Company to attract and retain talented executive officers and to
align their interests with those of shareholders.
BASE SALARY
During fiscal 2002, the base salaries for the Company's executive
officers were intended to be competitive with salaries of similar executive
positions in comparable companies in the Company's industry. Annual adjustments
in base salaries are made effective at the beginning of the third month of the
fiscal year for which they are intended to apply and therefore reflect in large
part the prior year's business and individual performance achievements. The
Chief Executive Officer's base salary for fiscal 2002 was determined in this
manner to be $500,000 for Elizabeth McLaughlin, as noted in the summary
compensation table, based upon a 52-week fiscal year.
BONUS
Annual incentive bonuses are intended to reflect the Compensation
Committee's belief that a significant portion of the annual compensation of each
executive officer should be contingent upon the performance of the Company, as
well as the individual contribution of each officer. Accordingly, the executive
officers of the Company, including the Chief Executive Officer, participate in
an annual executive incentive bonus plan ("Executive Bonus Plan") which provides
for cash bonuses based upon the Company's overall financial performance and the
achievement of certain specified levels of profitability for the fiscal year.
The Board of Directors, upon receiving the Compensation Committee's
recommendations, makes awards. The Compensation Committee annually establishes
targeted profitability levels for the ensuing fiscal year in conjunction with
the Company's annual financial plan. Upon the achievement of various increasing
levels of profitability above the minimum target level, the Compensation
Committee may choose to increase bonuses accrued to the Executive Bonus Plan.
The purpose of the Executive Bonus Plan is to reward and reinforce executive
management's commitment to achieve levels of profitability and return consistent
with increasing shareholder value.
Cash bonuses earned under the Executive Bonus Plan are paid each year
upon completion of the Company's annual audit of the results of operations for
the previous fiscal year by the Company's outside auditors.
LONG TERM INCENTIVES
The final portion of the executive officers' compensation during fiscal
2002 consisted of incentive stock options as listed in this Proxy Statement in
the table entitled "Option Grants in Last Fiscal Year." It is this award that
the Company has utilized to provide long-term incentives.
CHIEF EXECUTIVE OFFICER COMPENSATION
As Chief Executive Officer and President of the Company, Ms. McLaughlin
received a base salary in 2002 at an annual rate of $500,000. During fiscal
2002, as part of her overall compensation package, Ms. McLaughlin was granted an
25
option under the Incentive Plan to purchase a total of 200,000 shares of Common
Stock at an exercise price of $22.99 per share. Further, Ms. McLaughlin was
eligible to earn a bonus under the Company's Executive Bonus Plan.
Among the factors considered by the Committee in its evaluation of Ms.
McLaughlin's performance in fiscal 2002 were earnings per share results, the
performance of the Torrid stores and the further strengthening of the Company's
personnel.
Upon the Committee's recommendation, the Board of Directors determined
that Ms. McLaughlin earned an incentive bonus award for fiscal 2002 under the
Executive Bonus Plan based substantially on the financial performance of the
Company in fiscal 2002. On that basis, Ms. McLaughlin received an incentive
bonus award of $501,600 for the fiscal year.
SECTION 162(M) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Code limits the Company to a deduction for
federal income tax purposes of no more than $1 million of compensation paid to
certain executive officers in a taxable year. Compensation above $1 million may
be deducted if it is "performance-based compensation" within the meaning of the
Code.
The Compensation Committee has determined that stock options granted
under the Incentive Plan with an exercise price at least equal to the fair
market value of the Common Stock on the date of grant shall be treated as
"performance-based compensation."
COMPENSATION COMMITTEE
W. Scott Hedrick, Chairman
Andrew Schuon
Corrado Federico
26
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
THE MATERIAL IN THIS REPORT IS NOT "SOLICITING MATERIAL," IS NOT DEEMED
"FILED" WITH THE SEC, AND IS NOT TO BE INCORPORATED BY REFERENCE INTO
ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OR THE EXCHANGE ACT
WHETHER MADE BEFORE OR AFTER THE DATE HEREOF AND IRRESPECTIVE OF ANY
GENERAL INCORPORATION LANGUAGE IN ANY SUCH FILING.
We have reviewed and discussed with management the Company's
consolidated financial statements as of and for the fiscal year ended February
1, 2003.
We have discussed with the independent public accountants the matters
required to be discussed by Statement on Auditing Standards No. 61,
COMMUNICATION WITH AUDIT COMMITTEES, as amended.
We have received and reviewed the written disclosures and the letter
from the independent public accountants required by Independence Standard No.
1., INDEPENDENCE DISCUSSIONS WITH AUDIT COMMITTEES, as amended, and have
discussed with the independent public accountants their independence.
Based on the reviews and discussions referred to above, we recommend to
the Board of Directors that the financial statements referred to above be
included in the Company's Annual Report on Form 10-K.
AUDIT COMMITTEE
Bruce Quinnell, Chairman
Edgar Berner
Cynthia Cohen
27
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hedrick, Schuon and Federico currently serve as members of the
Compensation Committee. Compensation of Messrs. Hedrick, Schuon and Federico, as
well as the Company's other non-employee directors, is determined by the entire
Board with a view to attracting and retaining talented individuals to serve as
directors. No executive officer of the Company serves as a member of the Board
of Directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Board or Compensation Committee.
PERFORMANCE MEASUREMENT COMPARISON
THE MATERIAL IN THIS SECTION IS NOT "SOLICITING MATERIAL", IS NOT
DEEMED "FILED" WITH THE SEC, AND IS NOT TO BE INCORPORATED BY REFERENCE
INTO ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OR THE EXCHANGE
ACT WHETHER MADE BEFORE OR AFTER THE DATE HEREOF AND IRRESPECTIVE OF
ANY GENERAL INCORPORATION LANGUAGE IN ANY SUCH FILING.
The following graph shows a comparison of cumulative total returns for
the Company, the Nasdaq CRSP Retail Trade Index, and the Nasdaq Market Index for
the period that commenced February 2, 1998 and ended on February 1, 2003. The
graph assumes that all dividends have been reinvested (there have been no
dividends declared by the Company other than stock dividends).
COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN
Among Hot Topic, Inc. and the Nasdaq stock market (U.S.) Index
And the Nasdaq retail trade index
[PERFORMANCE MEASUREMENT GRAPH HERE]
Cumulative Total Return
2/02/98 6/30/98 2/01/99 6/30/99 1/31/00 6/30/00 2/05/01 6/29/01 2/04/02 6/28/02 2/01/03
------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------
HOT TOPIC, INC. 100.00 104.97 59.12 119.34 151.38 282.87 423.20 549.83 575.47 708.33 629.86
NASDAQ STOCK MARKET (U.S.) 100.00 114.23 153.53 164.12 239.25 242.66 160.05 131.82 125.51 89.80 81.31
NASDAQ RETAIL TRADE 100.00 118.78 118.53 114.03 97.88 74.34 73.41 77.94 88.33 90.36 71.87
ASSUMES $100 INVESTED ON 2/02/98
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED 2/01/03
28
CERTAIN TRANSACTIONS
The Company has entered into indemnity agreements with certain officers
and directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he or she may
be required to pay in actions or proceedings which he or she is or may be made a
party by reason of his or her position as a director, officer or other agent of
the Company, and otherwise to the fullest extent permitted under California law
and the Company's Bylaws. The Company has also entered into and may in the
future enter into employment agreements with certain of its executive officers.
See "Employment, Severance and Change of Control Agreements."
HOUSEHOLDING OF PROXY MATERIALS
The SEC has adopted rules that permit companies and intermediaries
(e.g., brokers) to satisfy the delivery requirements for proxy statements and
annual reports with respect to two or more shareholders sharing the same address
by delivering a single proxy statement addressed to those shareholders. This
process, which is commonly referred to as "householding," potentially means
extra convenience for shareholders and cost savings for companies.
This year, a number of brokers with account holders who are Company
shareholders will be "householding" our proxy materials. A single proxy
statement will be delivered to multiple shareholders sharing an address unless
contrary instructions have been received from the affected shareholders. Once
you have received notice from your broker that it will be "householding"
communications to your address, "householding" will continue until you are
notified otherwise or until you revoke your consent. If, at any time, you no
longer wish to participate in "householding" and would prefer to receive a
separate proxy statement and annual report, please notify your broker, and
direct a written request for the separate proxy statement and annual report to
Corporate Secretary, Hot Topic, Inc., 18305 E. San Jose Avenue, City of
Industry, California 91748 or contact James McGinty at (626) 839-4681.
Shareholders who currently receive multiple copies of the proxy statement at
their address and would like to request "householding" of their communications
should contact their broker.
OTHER MATTERS
The Board knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
/s/ James McGinty
JAMES MCGINTY
Secretary
May 1, 2003
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003 IS AVAILABLE WITHOUT
CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, HOT TOPIC, INC., 18305 E.
SAN JOSE AVENUE, CITY OF INDUSTRY, CALIFORNIA 91748.
29
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors of Hot Topic,
Inc. (the "Company") shall consist of at least three independent members of the
Board of Directors and shall be charged with the following functions:
1. To recommend annually to the full Board the firm of certified public
accountants to be employed by the Company as its independent auditors for the
ensuing year.
2. To review and pre-approve the engagement of the independent
auditors, including the scope, extent and procedures of the audit and the
compensation to be paid therefore, and all other matters the Committee deems
appropriate.
3. To have familiarity, through the individual efforts of its members,
with the accounting and reporting principles and practices applied by the
Company in preparing its financial statements including without limitation the
policies for recognition of revenues in financial statements.
4. To review with the senior management of the Company and the
independent auditors, upon completion of their audit, financial results for the
year, as reported in the Company's financial statements, supplemental
disclosures to the Securities and Exchange Commission or other disclosures.
5. To assist and interact with the independent auditors in order that
they may carry out their duties in the most efficient and cost effective manner.
6. To evaluate the cooperation received by the independent auditors
during their audit examination, including their access to all requested records,
data and information, and elicit the comments of management regarding the
responsiveness of the independent auditors to the Company's needs.
7. To review the Company's financial statements for each quarterly
period, and any changes in accounting policy that have occurred during the
quarterly period.
8. To review and pre-approve those professional services allowed within
the scope of the Sarbanes-Oxley Act of 2002 to be provided to the Company by its
independent auditors and consider the possible effect of such services on the
independence of such auditors.
9. To review director and officer insurance policies and provide the
Board of Directors with recommendations as to any proposed modifications.
10. To ensure receipt from the independent auditors of a formal written
statement delineating all relationships between the independent auditors and the
Company, consistent with Independent Standards Board Standard 1, to actively
engage in a dialogue with the independent auditors with respect to any disclosed
relationships or services that may impact the objectivity and independence of
the independent auditors, and to take, or recommend that the Board take,
appropriate action to oversee the independence of the auditors.
11. To consult with the independent auditors and discuss with the
senior management of the Company the scope and quality of internal accounting
and financial reporting controls in effect.
12. To investigate, review and report to the Board the propriety and
ethical implications of any transactions, as reported or disclosed to the
Committee by the independent auditors, employees, officers, members of the Board
or otherwise, between (a) the Company and (b) any employee, officer or member of
the Board of the Company, or any affiliates of the foregoing.
A-1
13. To perform such other functions and have such power as may be
necessary or convenient in the efficient and lawful discharge of the foregoing.
14. To report to the Board from time to time, or whenever it shall be
called upon to do so.
15. To adopt and review a code of ethics for all Company senior
officers.
16. To establish procedures for receiving and treating complaints
regarding accounting and auditing matters, including claims from those who wish
to remain anonymous.
Minutes of each meeting of the Audit Committee shall be prepared and
distributed to each director of the Company promptly after each meeting.
The operation of the Audit Committee shall be subject to the Bylaws as
in effect from time to time and Section 311 of the California Corporations Code.
A-2
APPENDIX B
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
SUBJECT TO APPROVAL BY SHAREHOLDERS ON JUNE 12, 2003
SHARES SUBJECT TO THE PLAN AUTOMATICALLY ADJUSTED ON DECEMBER 27, 1999,
DECEMBER 27, 2000 AND FEBRUARY 6, 2002.
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.
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.
B-1
(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.
(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
B-2
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.
(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.
(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).
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(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
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 Twelve Million Two Hundred Thousand
(12,200,000) 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.
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(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.
(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 Two Hundred Thousand
(1,200,000) 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.
(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.
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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.
(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,
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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.
(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 Sixty Two Thousand (62,000)
shares of the Company's Common Stock.
(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.
B-7
(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.
(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
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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.
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.
(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
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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.
(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.
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:
B-10
(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.
(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.
B-11
HOT TOPIC, INC.
ANNUAL MEETING OF SHAREHOLDERS
JUNE 12, 2003
8:30 A.M.
18305 E. SAN JOSE AVENUE
CITY OF INDUSTRY, CA 91748
HOT TOPIC, INC.
18305 E. SAN JOSE AVENUE
CITY OF INDUSTRY, CA 91748 PROXY
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THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
OF SHAREHOLDERS OF HOT TOPIC, INC. (THE "COMPANY") ON JUNE 12, 2003.
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify below.
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE
NOMINEES LISTED IN PROPOSAL 1 AND "FOR" PROPOSALS 2 AND 3, AS MORE SPECIFICALLY
DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS
PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
By signing the proxy, you revoke all prior proxies and appoint Elizabeth
McLaughlin and James McGinty, and each of them, as attorneys and proxies of the
undersigned with full power of substitution, to vote the undersigned's shares on
the matters shown on the reverse side, and at any and all continuations,
adjournments or postponements thereof with all powers that the undersigned would
possess if personally present, upon in respect of the following matters and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the Annual Meeting of
Shareholders of the Company.
SEE REVERSE FOR VOTING INSTRUCTIONS.
PLEASE DETACH HERE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
1. To elect directors to hold office until the Company's 2004 Annual Meeting of Shareholders.
01 Edgar Berner |_| Vote FOR all |_| Vote WITHHELD
02 Cynthia Cohen Nominees from all nominees
03 Corrado Federico (except as marked)
04 W. Scott Hedrick
05 Elizabeth McLaughlin
06 Bruce Quinnell
07 Andrew Schuon
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY ----------------------------------------
INDICATED NOMINEE, WRITE THE NUMBER NEXT TO THE | |
NAME(S) OF SUCH NOMINEE(S) IN THE BOX PROVIDED TO THE | |
RIGHT.) | |
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2. To approve the amendment to the Company's |_| For |_| Against |_| Abstain
1996 Equity Incentive Plan to increase the
aggregate number of shares of Common Stock
authorized for issuance under such plan by
1,850,000 shares.
3. To ratify the selection of Ernst & Young LLP |_| For |_| Against |_| Abstain
as independent auditors of the Company for the
fiscal year ending January 31, 2004.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
ADDRESS CHANGE? MARK BOX |_|
INDICATE CHANGES BELOW: DATE:__________________________
SIGNATURE(S):__________________
NAME OF SHAREHOLDER: __________
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON PROXY. IF HELD IN JOINT TENANCY, ALL PERSONS MUST
SIGN. TRUSTEES, ADMINISTRATORS, ETC., SHOULD INCLUDE THEIR TITLE AND AUTHORITY. CORPORATIONS SHOULD
PROVIDE FULL NAME OF CORPORATION AND TITLE OF AUTHORIZED OFFICER SIGNING THE PROXY.