UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 2, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File 0-28784

HOT TOPIC, INC.

(Exact name of Registrant as specified in its charter)

California	77-0198182
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
18305 E. San Jose Ave. City of Industry, California	91748
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (626) 839-4681

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Common Stock, no par value	Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o	Accelerated filer  x
Non-accelerated filer    o   (Do not check if a smaller reporting company)	Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  o    No  x

The aggregate market value of Common Stock held by non-affiliates of the Registrant as of July 28, 2012 the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $411,830,401 based on the closing price on that date of the Registrant’s Common Stock on the Nasdaq Stock Market.  All outstanding shares of voting stock, except for shares held by executive officers and members of the Board of Directors and their affiliates are deemed to be held by non-affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant’s Common Stock was 40,672,424 as of March 18, 2013.

Documents Incorporated By Reference

Certain of the information required by Part III of this Form 10-K (Items 10 through 14) is incorporated by reference to portions of the Registrant’s Definitive Proxy Statement for the Registrant’s 2013 Annual Meeting of Shareholders, or alternatively, will be provided as an amendment to this Form 10-K, in either case to be filed with the Securities and Exchange Commission (the “SEC”) no later than 120 days after February 2, 2013.

HOT TOPIC, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE

FISCAL YEAR ENDED FEBRUARY 2, 2013

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	36
Item 9A.	Controls and Procedures	36
Item 9B.	Other Information	37
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	39
Item 11.	Executive Compensation	39
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	39
Item 13.	Certain Relationships and Related Transactions, and Director Independence	39
Item 14.	Principal Accountant Fees and Services	39
PART IV
Item 15.	Exhibits and Financial Statement Schedules	40

i

Cautionary Statement Regarding Forward-Looking Statements   From time to time, in both written reports (such as this report) and oral statements, we make “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend that such forward-looking statements be subject to the “safe harbors” created by these sections. Generally, the words “believes,” “anticipates,” “expects,” “continue,” “intends,” “will,” “may,” “plans” and similar expressions identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements include, for example, statements regarding our expectations, beliefs, intentions or strategies regarding the future, such as the extent and timing of future revenues and expenses, economic conditions affecting consumer demand, ability to realize anticipated benefits of cost reduction plans and business changes, ability to grow or maintain comparable sales, response to new concepts, statements about the expected completion of the proposed merger with an affiliate of Sycamore Partners, and other expected financial results and information.  All forward-looking statements included in this report are based on information available to us as of the date of this report and we assume no obligation to update or revise any forward-looking statements to reflect events or circumstances that occur after such statements are made. Readers are cautioned not to place undue reliance on these forward-looking statements as they involve risks and uncertainties which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements. These risks, as well as other risks and uncertainties, are located in our reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission, or SEC, including in Part I, Item 1A under the caption “Risk Factors” and in Part II, Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

Available Information   Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our investor relations website, investorrelations.hottopic.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available our Standards of Business Ethics at that website.

Fiscal Year   Our fiscal year ends on the Saturday nearest to January 31. References to fiscal 2013 refer to the 52-week period ending February 1, 2014.  References to fiscal 2012 refer to the 53-week period ended February 2, 2013.  References to fiscal 2011, 2010, 2009 and 2008 refer to the 52-week periods ended January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009.

References to Hot Topic, Inc.   Throughout this report, the terms “we,” “us,” “our,” “company” and similar references refer to Hot Topic, Inc. and its wholly-owned subsidiaries.

Part I

Item 1. Business

General  We are a mall and web-based specialty retailer of apparel, accessories, music and gift items for young men and women whose lifestyles reflect a passion for music, fashion and pop culture.  We primarily operate under two concepts: Hot Topic and Torrid.  We launched a new test retail concept, Blackheart, during the fourth quarter of fiscal 2012.  Music and pop culture are the overriding inspirations at Hot Topic, and Torrid is focused on providing the best in fashion to young plus-size women.  We generate revenues primarily through our retail stores in the United States of America, Puerto Rico and Canada, and online through our websites.   We were incorporated in California in 1988.

Merger  On March 6, 2013, we entered into an Agreement and Plan of Merger, or the Merger Agreement, providing for the acquisition of the company by an affiliate of Sycamore Partners Management, L.L.C., or Sycamore. Under the terms of the Merger Agreement, which was unanimously approved by our Board of Directors, or the Board, Sycamore will acquire all of the outstanding shares of our common stock for $14.00 per share in cash. The transaction, which is structured as a one-step merger with the company as the surviving corporation, or the Merger, is subject to customary closing conditions, including receipt of regulatory approvals and the approval of the holders of a majority of our outstanding shares. We currently plan to complete the proposed Merger in the second or third quarter of fiscal 2013.  However, we cannot assure you that the Merger will be completed nor can we predict the exact timing of the completion of the Merger because it is subject to governmental and regulatory review processes and other conditions, many of which are beyond our control.  If the Merger is approved and is consummated, we will no longer be a publicly-traded company, our shares will cease to be traded on Nasdaq and we expect to save approximately $2 million per year by eliminating expenses associated with being a publicly traded company. For more information, see “NOTE 15 – Subsequent Events” contained in the financial statements and notes included elsewhere in this annual report on Form 10-K, as well as our Current Report on Form 8-K filed with the Securities and Exchange Commission, or the SEC, on March 8, 2013.

1

Concepts

Hot Topic At our Hot Topic stores and on our website hottopic.com, we sell a selection of licensed and non-licensed apparel, accessories and gift items that are influenced by popular music artists and pop culture trends.  We also sell a limited assortment of music CDs/vinyl LPs and DVDs.  Our merchandise is designed to appeal to young men and women who are passionate about and have diverse tastes in music and pop culture.

We strive to consistently be the first to expose our customers to new music, pop culture and fashion trends.  We believe our ability to quickly identify and source unique and diverse merchandise centered around music and pop culture is one of our competitive strengths.  We also believe that our deep-rooted knowledge of music and pop culture and rich music experiences that we offer are competitive strengths.  We opened our first Hot Topic store in California in fiscal 1989 and have since gained a national presence in the United States.

Torrid  At our Torrid stores and on our website torrid.com, we sell on-trend fashion apparel, lingerie and accessories inspired by and designed to fit the young, voluptuous woman who wears a size 12 and up.  Torrid’s merchandise is designed to appeal to women who are young at heart and in attitude, who want their clothes to be an extension of their lifestyles.  We believe that our ability to provide our plus-size customers with easy access to the latest and best in fashion without sacrificing fit or style is a core competitive strength of Torrid.  We opened our first Torrid store in fiscal 2001.  In fiscal 2012, Torrid implemented a new fashion merchandising strategy that involves vertically-designed and sourced styles.

Blackheart:  At our Blackheart stores and on our website blackheartlingerie.com,  we sell a collection of edgy bras, panties, corsets, hosiery, sleepwear, rock apparel, accessories and beauty products.  Blackheart targets women aged between 18 and 30 who consider lingerie to be a part of their fashion statement.  We opened our first Blackheart store in fiscal 2012.

Merchandising

Hot Topic Merchandise  Hot Topic’s music/pop culture-licensed merchandise includes tee shirts, hoodies, hats, jewelry, novelty items and a limited assortment of CDs/vinyl LPs and DVDs.  Our fashion selection, influenced by trends in music and pop culture, includes denim, shorts, jewelry, sunglasses, belts, bags and beauty products.  Hot Topic’s diverse and extensive selection of merchandise is regularly tested before it is available in all stores and on the website to stay current with customer demand and new product trends.

2

The following table shows, for the periods indicated, Hot Topic’s major merchandise categories expressed as a percentage of net sales:

	Fiscal Year
	2012			2011
Fashion apparel		16	%		12	%
Tees and hoodies		41			40
Accessories and other		43			48
		100	%		100	%

Torrid Merchandise  Torrid sells primarily private label merchandise that includes casual and dressy jeans and pants, fashion and novelty tops, intimate apparel, dresses, and fashion accessories.

The following table shows, for the periods indicated, Torrid’s major merchandise categories expressed as a percentage of net sales:

	Fiscal Year
	2012			2011
Apparel		78	%		75	%
Accessories		10			14
Intimates		12			11
		100	%		100	%

Merchandising Staff  Our merchandising teams typically consist of a mix of general and divisional merchandise managers, buyers and assistant buyers.  In determining which Hot Topic merchandise to purchase, the merchants:  attend trade shows, concerts and fan events; interact with customers and our store employees to gain insight into frequently requested merchandise and to identify upcoming trends before they happen; keep up with the latest movies, television shows, music and book series as well as work closely with major studios, labels and publishers to facilitate early access to future releases for merchandise programs; and monitor and interact with social media sites.  The Hot Topic merchant’s goal is not only to identify and act on trends early so we can be the first to market a look or property, but to quickly move on from them before the popularity of the trends wane.  At Torrid, in order to remain in tune with reigning trends and preferences, the merchandising team conducts fashion research from a variety of sources within and outside the United States.  Such sources include fashion industry publications, trade shows, emerging trends observed during international travel and customer interaction to determine customer interpretation and acceptance of these trends.

PurchasingOur goal is to provide exclusive, diverse, trend-setting merchandise to our customers early and at the right price.  We purchase merchandise from a broad base of domestic and international vendors and commit to merchandise in as little as two weeks and as much as four months in advance of delivery, depending on the category.  We constantly monitor sales to determine desirable product types and quantities, emerging or declining trends and the spending patterns of our customers.  We solicit input from our vendors and maintain productive relationships with them to support our effort to deliver quality, relevant merchandise that is reflective of new and emerging trends.  Torrid’s vertical sourcing strategy enables us to design products in-house and purchase directly from manufacturers.  No vendor individually accounted for more than 10% of our merchandise purchases during fiscal 2012.

Planning and Allocation  Planning and allocation of our inventory is done by merchandise classification and Stock Keeping Unit, or SKU, using integrated third-party software.  Most merchandise is ordered in bulk and then allocated to each store based on sales performance and inventory levels.  Our buyers, merchandise planners and allocation analysts consider current inventory levels, sales history, projected sales, planned inventories, store demographics, geographic preferences, store openings and planned markdown dates to determine SKU reorder quantities.

3

Distribution and Fulfillment  To facilitate timely and efficient merchandise distribution to our stores and internet customers, we have distribution centers located in California and Tennessee, both of which are sufficient to meet our anticipated needs over the next several years.  Substantially all merchandise is delivered to our distribution centers and generally within one to two business days of receipt, it is inspected, allocated, picked, prepared and boxed for shipment to our stores.  Merchandise is shipped from the distribution centers daily and selective SKUs are identified to maintain back stock.

Stores

Location and Site Selection  As of the end of fiscal 2012, we operated 618, 190 and 5 primarily mall-based Hot Topic, Torrid and Blackheart stores, respectively, in the United States, Puerto Rico and Canada.  Refer to “Item 2 – Properties” for a geographical breakdown of stores by state and country.  In selecting a site for a new store, we target high-traffic shopping areas with favorable lease terms and suitable demographics of likely customers.

Design and Environment  The look and feel of our Hot Topic stores highlight the merchandise in a unique, high-energy and eclectic shopping atmosphere.  Our Torrid stores present a youthful atmosphere designed to create a comfortable and fun environment for our customers.

Sales  During fiscal 2012, average sales per Hot Topic store was $0.8 million and average sales per square foot was $472.  Average sales per Torrid store in fiscal 2012 was $0.9 million and average sales per square foot was $347.

Expansion     While we have significantly slowed our new Hot Topic store growth in the past few years, we aggressively pursued new Torrid store growth by increasing our store count by about one third during fiscal 2012.  We anticipate that in fiscal 2013, our new Torrid store growth will be equally aggressive.  New Hot Topic store growth will gain some traction in fiscal 2013 mainly through opening outlet stores.  We continue to focus on remodeling or relocating those stores where there is a reasonable expectation of satisfactory sales results after the remodel or relocation.  As we have done in the past, we renegotiate or extend existing leases with more favorable terms and close stores that do not meet our expectations of profitability.

In fiscal 2012, our capital investment to open a new Hot Topic store, including leasehold improvements and furniture and fixtures, was approximately $224,000.  The average initial gross inventory for a new Hot Topic store opened in fiscal 2012 was approximately $58,000.  Initial inventory requirements vary at new stores depending on the season and current merchandise trends. The average pre-opening costs for a new Hot Topic store are typically $14,000. The new Hot Topic stores have square footage similar to current averages of 1,740 square feet.

In fiscal 2012, our capital investment to open a new Torrid store, including leasehold improvements and furniture and fixtures, was approximately $294,000.  The average initial gross inventory for a new Torrid store opened in fiscal 2012 was approximately $65,000.  As with our Hot Topic stores, initial inventory requirements vary at new stores depending on the season and current merchandise trends.  The average pre-opening costs in fiscal 2012 for a new Torrid store were approximately $22,000.  The new Torrid stores have square footage similar to current averages of 2,507 square feet.

4

The following table shows our historical store expansion and closure activity, as well as the number of stores included in the comparable store base, for the periods indicated.  Our planned store expansion and closure activity in fiscal 2013 is also reflected in the table.  All activity is evaluated by our real estate committee.

	Number of Stores
	Estimate			Actual
	Fiscal Year
	2013			2012			2011			2010			2009			2008
Hot Topic
Beginning of Period		618			628			657			680			681			690
Open		15			2			1			6			2			4
Close *		(5	)		(12	)		(30	)		(29	)		(3	)		(13	)
End of Period		628			618			628			657			680			681
Remodel/relocate		50			48			29			24			16			14
Comparable store base		599			605			609			631			656			665
Torrid
Beginning of Period		190			148			153			156			159			151
Open		53			50			6			3			1			11
Close *		(10	)		(8	)		(11	)		(6	)		(4	)		(3	)
End of Period		233			190			148			153			156			159
Remodel/relocate		18			5			1			-			-			-
Comparable store base		158			131			139			150			152			136
Blackheart
Beginning of Period		5			-			n/a			n/a			n/a			n/a
Open		4			5			n/a			n/a			n/a			n/a
Close		-			-			n/a			n/a			n/a			n/a
End of Period		9			5			n/a			n/a			n/a			n/a
Remodel/relocate		-			-			n/a			n/a			n/a			n/a
Comparable store base		-			n/a			n/a			n/a			n/a			n/a

* Includes stores impacted by our cost reduction plan during the fourth quarter of fiscal 2010 and the first quarter of fiscal 2011.

Operation Teams  Hot Topic and Torrid each have a Vice President of Store Operations who leads a divisional operations team.  Supporting the Vice President of Store Operations for each division are regional directors who oversee multiple district managers, and district managers who typically oversee approximately ten stores.  A typical store has a store manager, two assistant managers, and five to eight part-time sales associates, depending on the season.  We believe our distinct culture attracts Hot Topic sales associates that are passionate about music and pop culture and Torrid sales associates that are passionate about fashion for the plus-size customer.  Each member of our store operation teams receive comprehensive training that is customized to fit their roles and responsibilities.  In addition to base pay and the opportunity to participate in our Employee Stock Purchase Plan and the Hot Topic 401(k) Plan if eligible, we offer incentive programs to some members of our store operations teams based on achieving certain sales levels.

eCommerce Operations

Websites  Our hottopic.com, torrid.com and blackheartlingerie.com websites provide convenient access to a broad selection of merchandise for sale, including some internet exclusive items, information on upcoming events, promotions, store locations, job postings and community features.  Customers may also access our hottopic.com website through touchscreen kiosk terminals located within most Hot Topic stores.  These kiosks allow customers to access, purchase and ship merchandise from hottopic.com to the store for pickup or their homes.

5

The following table shows, for the periods indicated, internet sales (including sales made through kiosk terminals) for Hot Topic and Torrid (in thousands, except percent amounts):

	Fiscal Year
	2012			2011			2010
Hot Topic Internet Sales	$	46,500		$	48,200		$	40,100
Hot Topic Internet Sales as a Percentage of Total Hot Topic Sales		8.5	%		9.1	%		7.4	%
Torrid Internet Sales	$	37,170		$	36,390		$	33,695
Torrid Internet Sales as a Percentage of Total Torrid Sales		20.2	%		22.9	%		21.6	%
Total Company Internet Sales	$	83,670		$	84,590		$	73,795
Total Company Internet Sales as a Percentage of Total Company Sales		11.4	%		12.3	%		10.6	%

Marketing

Hot Topic   We strive to increase sales and our brand recognition, enhance the customer shopping experience and reach out to new customers using a unique combination of tools including: promotional signage in stores and on our website; viral online marketing; marketing via mobile devices; branded gift cards; loyalty program; social media; reliance on our customers and associates to tell people about us; compelling store designs; and experiential events.  Our loyalty program, HT+1, is free to join and is designed to build customer loyalty and encourage repeat sales.  HT+1 allows us to communicate to members about products and events that are relevant to them as well as giving members access to exclusive events that are not available to other customers.  Touchscreen kiosk terminals located within most Hot Topic stores offer another way that members may access their HT+1 loyalty accounts.

Torrid  We seek to build the Torrid brand with many of the same tools used by Hot Topic, as well as print media and direct mail.  Our Torrid loyalty program, divastyle®, gives us the chance to regularly communicate with our most loyal Torrid customers.  They are rewarded throughout the year with special offers, promotions, information and updates on new products and current trends available at Torrid.  Customers may also participate in our private label Torrid credit card program, divastatusSM.

Information Technology  Our information systems provide for the integration of store, internet, merchandising, distribution, financial and human resources records and data.  Many of these information systems have been customized in varying degrees to fit our business needs, and we license a full range of software from different vendors.  We regularly upgrade existing systems or replace all or part of an existing system with one that we believe is better suited to our business.  In addition, we occasionally implement new technology to support our business.  In the first quarter of fiscal 2013, we went live with a new Oracle merchandising system that we believe will better support the needs of our business.

6

Trademarks Our trademarks, which constitute our primary intellectual property, have been registered or are the subject of pending applications in the United States Patent and Trademark Office and with the registries of many foreign countries.  In addition, we have common law rights to certain trademarks, service marks and trade names used in our business from time to time.  We are unaware of the use of any of our marks raising any claims of infringement or other challenges to our right to use our marks in the United States.

Seasonality   Our business, particularly at Hot Topic, is subject to seasonal influences, with heavier concentrations of sales during the back-to-school, Halloween and holiday (defined as the week of Thanksgiving through the first few days of January) seasons and other periods when schools are not in session. The holiday season has historically been our single most important selling season.  We believe that the importance of the summer vacation and back-to-school seasons (which affect operating results in the second and third quarters, respectively) and to a lesser extent, the spring break season (which affects operating results in the first quarter), as well as Halloween (which affects operating results in the third quarter), all reduce our dependence on the holiday selling season, but this may not always be the case or always affect the company to the same degree.  As is the case with many retailers of apparel, accessories and related merchandise, we typically experience lower net sales in the first and second fiscal quarters relative to other quarters.

\

Competition  The apparel, music and accessory categories within the retail industry in which we operate are highly competitive and are subject to rapidly changing consumer demands and preferences.  We compete with numerous retailers for vendors, teenage and young adult customers, suitable store locations and qualified associates and management personnel.  We currently compete with street alternative stores located primarily in metropolitan areas; shopping mall-based teenage and young adult-focused retailers; big-box discount stores; music stores; mail order catalogs and websites; and with numerous potential competitors who may begin or increase efforts to market and sell products competitive with Hot Topic, Torrid and Blackheart products.  Torrid has additional competitors who operate plus-size departments in department stores and discount stores, as does Blackheart, whose competitors operate underwear and lingerie departments in department stores and discount stores.  Increased competition could have a material adverse effect on our business, results of operations and financial condition.

Employees   As of the end of fiscal 2012, we employed approximately 2,100 full-time and 6,500 part-time associates.  Of our 8,600 associates, approximately 800 were headquarters and distribution center personnel and the remainder were field management and store associates.  The number of part-time associates changes based upon seasonal needs.  None of our associates are covered by collective bargaining agreements.

Executive Officers   Our executive officers and their ages are as follows:

Lisa Harper	53	Chief Executive Officer and Director
George Wehlitz, Jr.	52	Chief Financial Officer
Don Hendricks	46	Chief Operating Officer
Mark Mizicko	44	Chief Planning Officer

Lisa Harper has served as Chairman of our Board of Directors since November 2011 and Chief Executive Officer since March 2011.  Prior to becoming Chairman, she served on our Board of Directors since June 2008.  Prior to joining us, she served as Chairman of the Board of Directors of the Gymboree Corporation, a publicly-traded corporation operating a chain of specialty retail stores for children and women, from June 2002 until her retirement in July 2006.  From January 2006 through July 2006, Ms. Harper served as Chief Creative Officer of the Gymboree Corporation.  From February 2001 through January 2006, Ms. Harper served as Chief Executive Officer of the Gymboree Corporation and from February 2001 through June 2002, she was Vice Chairman of the Gymboree Corporation’s Board of Directors.  From 1995 through 2001, Ms. Harper held various merchandising and design positions at the Gymboree Corporation and before that, held similar positions with several other clothing retailers, including Limited Too,  Esprit de Corp., GapKids, Mervyn’s, and Levi Strauss.  Ms. Harper also served as a director of Longs Drug Stores Corporation from February 2006 to May 2008.  Since 2008, Ms. Harper has developed and operates a hotel in Mexico.  Ms. Harper attended the University of North Carolina at Chapel Hill.

George Wehlitz Jr.has served as Chief Financial Officer since March 2013 and served as Interim Chief Financial Officer since January 2013.  Mr. Wehlitz joined us in April 2008 as Vice President, Finance.  From November 2005 to January 2008, Mr. Wehlitz was Chief Financial Officer at Cycle Gear, Inc., a specialty retailer of motorcycle apparel and accessories.  Mr. Wehlitz previously served Hot Topic, Inc. as Vice President, Controller from February 2002 to August 2003, and then served as Vice President, Finance from August 2003 to November 2005.  From August 2000 to February 2002, Mr. Wehlitz was Chief Financial Officer at The Popcorn Factory, a catalog company for gourmet popcorn gifts.  From 1987 to 2000, Mr. Wehlitz held various financial-related positions, at the divisional and corporate level, for The Bombay Company, Inc.  Mr. Wehlitz holds a B.A. degree in Accounting from Texas Christian University and is a Certified Public Accountant.

7

Don Hendricks joined us in August 2011 as Chief Information Officer and has served as Chief Operating Officer since March 2013.  From November 1998 to August 2011, Mr. Hendricks served in various information technology and distribution and logistics positions at Gymboree Corporation, most recently as Chief Information Officer.  Prior to Gymboree, Mr. Hendricks held various information technology positions with other retailers, including Bisgby & Kruthers and Reading, China & More.  Mr. Hendricks holds a B.A. degree from Loyola University of Chicago.

Mark Mizicko has served as Chief Planning Officer since March 2012.  Mr. Mizickojoined us in October 2011 as Senior Vice President, Planning and Allocation.  From April 2003 to March 2011, Mr. Mizicko served in various positions at Gymboree Corporation, including Vice President over functions such as Planning and Allocation, eCommerce, and Marketing and Logistics.  Prior to Gymboree, Mr. Mizicko served in various planning and inventory management roles with Williams-Sonoma, The Gap and Limited Brands.  Mr. Mizicko holds a B.S. degree in Economics from The Ohio State University.

Item 1A. Risk Factors

Before deciding to invest in Hot Topic, Inc. or to maintain or increase an investment in Hot Topic, Inc., readers should carefully consider the risks described below, in addition to the other information contained in this annual report on Form 10-K and our quarterly reports on Form 10-Q and current reports on Form 8-K.  The risks described below are not the only risks we face.  Additional risks that are not presently known to us or that we currently deem immaterial may also affect our business.  If any of these known or unknown risks actually occur, our business, financial condition and results of operations could be seriously harmed, and our stock price could decline.

RISKS RELATED TO THE PROPOSED MERGER

There are risks and uncertainties associated with the Merger

There are a number of risks and uncertainties relating to the Merger. For example:

● the Merger may not be consummated (including as a result of a legal injunction) or may not be consummated as currently anticipated;

● there can be no assurance that approval of our shareholders and the requisite regulatory approvals will be obtained;

● there can be no assurance other conditions to the closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the termination of the Merger;

● if the Merger is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed;

● failure of the Merger to close, or a delay in its closing, may have a negative impact on our ability to pursue alternative strategic transactions or our ability to implement alternative business plans;

● under certain circumstances, if the Merger Agreement is terminated, we will be required to pay Sycamore a $21 million termination fee or reimburse Sycamore for up to $4.5 million of expenses;

● pending the closing of the Merger, the Merger Agreement restricts us from engaging in certain actions without Sycamore’s approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the Merger;

● any delay in completing, or the failure to complete, the Merger could have a negative impact on our business, stock price and our relationships with our customers or suppliers; and

● the attention of our management may be directed to transaction-related considerations and may be diverted from the day-to-day operations of our business and pursuit of our strategic initiatives.

We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and many of these fees and costs are payable by us whether or not the Merger is consummated.

8

Our executive officers and directors may have interests that are different from, or in addition to, those of our shareholders generally.

Our executive officers and directors may have interests in the Merger that are different from, or are in addition to, those of our shareholders generally. These interests include direct or indirect ownership of our common stock and stock options,  the acceleration of stock options and restricted stock upon consummation of the Merger, certain arrangements between certain of our executive officers and Parent, and other interests.  In addition, our executive officers may have certain rights to severance and other payments in the event that their employment is terminated following the consummation of the Merger. The interests of our director and executive officers in the proposed Merger will be described in more detail in the proxy statement regarding the proposed Merger that we will file with the SEC.

The Merger Agreement limits our ability to pursue alternative transactions to the Merger.

The Merger Agreement contains “no shop” provisions that, subject to limited exceptions, limit our ability to discuss, facilitate or commit to third-party acquisition proposals to acquire all or a significant part of the company. In addition, we are required to pay a $21 million termination fee if we terminate the Merger Agreement under certain circumstances. These provisions place conditions on our ability to pursue offers from third parties that could result in greater value to our shareholders. The obligation to make the termination fee payment also could discourage a third party from pursuing an alternative acquisition proposal.

Hot Topic will no longer exist as a public company following the Merger and its shareholders will forego any increase in its value.

If the Merger is completed, we will no longer exist as a public company and our shareholders will forego any increase in the Company’s value that might have otherwise resulted from our possible future growth.

We are subject to litigation initiated in connection with the Merger, which could be time consuming and divert our resources and the attention of our management.

As described in Part I, Item 3, we and the individual members of our board of directors have been named as defendants in certain lawsuits relating to the Merger Agreement and the proposed Merger. The lawsuits generally allege that the our directors breached their fiduciary duties by engaging in a flawed sales process, by approving an inadequate price, and by agreeing to provisions that would allegedly preclude another interested buyer from making a financially superior proposal to acquire the company. The lawsuits also allege that the company, Sycamore and related entities aided and abetted the alleged breaches of fiduciary duties by the directors. Plaintiffs seek to enjoin the proposed transaction, declaratory relief, and attorneys’ fees. Although we believe that these suits are without merit, the defense of these suits may be expensive and may divert management’s attention and resources, which could adversely affect our business.

CERTAIN OTHER RISKS TO OUR BUSINESS

Our success relies on popularity of music, pop culture and fashion trends, and our ability to react to them

Our financial performance is largely dependent upon the continued popularity of apparel, accessories and other merchandise inspired by music, film, television, pop culture, and fashion trends, particularly among teenagers and young adults.  The popularity of such products is influenced by the internet; music videos and music television networks; the emergence of new artists; the success and timing of music releases, movies and television shows; music/pop culture-related products and fashion trends.  The popularity of particular types of music, movies, television shows, artists, actors, styles, trends and brands is constantly changing.  Our failure to anticipate, identify and react appropriately to changing trends and preferences of our customers could lead to, among other things, excess inventories and higher markdowns.  There can be no assurance that the products we sell will be accepted by our customers.

We depend on a small number of key licensed products for a portion of our earnings and lower than expected sales of those products or the inability to obtain new licensed products could adversely affect our revenues

We license from others the rights to produce and/or sell certain products that contain a third party’s trademarks, designs and other intellectual property.  If the popularity of those licensed products diminishes or if we are unable to obtain new licensed products with comparable consumer demand, our sales could decline.  Furthermore, if we are unable to obtain favorable terms from licensors, our operational results may suffer.  We may not be able to prevent a licensor from choosing not to renew a license with us and/or from licensing a product to one of our competitors.

9

Our access to merchandise could be hurt by changes in vendors’ business condition

Our financial performance depends on our ability to obtain our merchandise in sufficient quantities at competitive prices.  We depend on independent contractors and vendors to manufacture much of our merchandise.  Substantially all of our music/pop culture-licensed products are available from vendors that have exclusive license rights.  In addition, we rely on small, specialized vendors who generally have limited resources, production capacities and operating histories.  Lack of access to capital, as a result of the current economic conditions or otherwise, and changes in vendors’ compliance and certification procedures may cause our vendors to delay, reduce or eliminate shipment of products we otherwise would sell in our stores.  We generally do not have long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products.  There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on acceptable terms in the future.

Opening, remodeling, relocating and closing stores may not achieve the anticipated benefits and could create challenges we may not be able to adequately meet

We depend on our ability to open new stores, manage our existing store base, ensure that the performance of our remodeled and relocated stores is at acceptable levels, and close underperforming stores.  In order to open, remodel and relocate stores, among other things, we need to locate suitable store sites, negotiate acceptable lease terms, obtain or maintain adequate capital resources on acceptable terms, source sufficient levels of inventory, hire and train store managers and sales associates, integrate new or relocated stores into our existing operations and maintain adequate distribution center space and information technology systems.  Moving or expanding store locations and operating stores in new markets, especially markets outside the continental United States, present competitive, merchandising and regulatory challenges we do not have experience in or know how to face.  There can be no assurance that moving or expanding store locations and operating stores in new markets will not adversely affect the individual financial performance of our existing stores or our overall results of operations.  In the event that the number of our stores increases, we may face risks associated with market saturation of our products and concepts.  Similarly, there can be no assurance that remodeling or relocating existing stores will not adversely affect either the individual financial performance of the store prior to the change or our overall results of operations.  Furthermore, there can be no assurance that we will successfully achieve our remodel or expansion targets or, if achieved, that planned remodel or expansion will result in profitable operations.

Expanding our operations to include new concepts presents risks.

We have expanded our business beyond the Hot Topic and Torrid concepts to include, in fiscal 2012, our Blackheart test concept.  We may implement other new concepts in the future. Starting and operating new concepts presents new and challenging risks and uncertainties, including, among others, unanticipated operational problems, lack of experience, lack of customer acceptance, the inability to market a new concept effectively, new vendor relationships, competition from existing and new retailers, and diversion of management’s attention from our existing concepts.  If we do not operate Blackheart or any new concept effectively, it could materially impact our business.

Our business strategy requires innovating and improving our operations, and we may not be able to do this sufficiently to effectively prevent a negative impact on our business and financial results

To be successful we must innovate our products, our stores, and the shopping experience for our customers.  Such innovation involves risks, including that we will not properly anticipate the need for or rate of change, that we are not able to successfully bring about such change, that we will not be able to produce anticipated results, and that our customers will not be receptive to the change.  Such innovation also involves significant capital expenditures and other costs that we may not be able to recover if the innovation is not favorably received by our customers.

Failure of our vendors to use acceptable ethical business practices could negatively impact our business

We require and expect our vendors and manufacturers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices, the environment and intellectual property.  However, we do not control their labor and other business practices.  Further, we do not inspect our manufacturers’ operations and would not be immediately aware of any noncompliance by our vendors with applicable domestic or international laws and standards, including our internal standards.  If one of our vendors or manufacturers violates labor or other laws or implements labor or other business practices that are regarded as unethical, the shipment of merchandise to us could be interrupted, orders could be canceled, relationships could be terminated and our reputation could be damaged.

10

Technology and other risks associated with our internet sales could hinder our overall financial performance

We sell merchandise over the internet through websites we control and affiliated websites controlled by others.  Our internet sales generate a significant portion of our total sales and are dependent on our ability to drive internet traffic to our websites.  Our internet operations are subject to numerous risks and pose risks to our overall business, including the inability to successfully establish partnerships that are instrumental in driving traffic to our websites; diversion of sales from our stores; liability for online content; computer and consumer privacy concerns; rapid technological changes; the need to invest in additional computer hardware and software to support sales; hiring, retention and training of personnel; failure of computer hardware and software, including computer viruses, telecommunication failures, online security breaches and similar disruptions; governmental regulations; and credit card fraud.  There can be no assurance that our internet operations will achieve sales and profitability levels that justify our investment in them.

We materially rely on eCommerce, information and other technology systems, including such technology provided by third parties

We believe our dependence on eCommerce, information and other technology systems, including technology provided by third parties, will increase in the future, and it is possible we may not be able to obtain, maintain or use such systems as quickly or as effectively as needed.  Implementing new systems, modifying existing systems, and restoring such systems and technology following a shut-down could present technological and operational challenges which we are unprepared for.  We continue to evaluate the adequacy of the eCommerce, information and other technology systems we use to operate our business.  Our failure to adapt to changing technological needs could have a material adverse effect on our results of operations and financial condition.  We have agreements with third-party providers to maintain eCommerce and information technology systems, including content.  We would be negatively impacted if such third parties fail to provide such services, including by way of malfunction of third-party sites, hardware, software and other equipment; service outages of third-party sites; third-party claims of data privacy violations, security breaches and intellectual property infringement; and poor integration of our technology into their software and services.

System security risk issues and system failures could disrupt our internal operations or information technology services provided to customers

Computer hacking attacks, as well as computer malware, denial-of-service attacks and viruses, have become increasingly prevalent in recent years.  Using such methods and others, experienced computer programmers, hackers and other users may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions or cause shutdowns.  As a result, we could incur significant expenses addressing problems created by security breaches of our network.  Moreover, we could incur significant loss of revenue and increased expenses in connection with system failures.  In addition, hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system.  The costs to us to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.  In addition, our systems are not fully redundant and could be subject to failure.  Our disaster recovery planning may not be sufficient, and we may not have adequate insurance coverage to compensate us for any significant casualty loss.

We are responsible for maintaining the privacy of personally identifiable information of our customers

Through our sale transactions, loyalty programs and other methods, we obtain personally identifiable information about our customers which is subject to federal, state and international privacy laws.  These laws are constantly changing.  If we fail to comply with these laws, we may be subject to fines, penalties or other adverse actions.  We are highly dependent on the use of credit cards to complete sale transactions in our stores and through our websites, and if we fail to comply with Payment Card Industry (PCI) Data Security Standards, we may become subject to limitations on our ability to accept credit cards.  Moreover, third parties may seek to access this information through improper means such as computer hacking, malware and viruses.  Any incidents involving unauthorized access or improper use of our customers’ personally identifiable information could damage our reputation and brand and result in legal or regulatory action against us.

11

Loss of key people or an inability to hire necessary and significant personnel could hurt our business

Our ability to achieve and maintain operating efficiency and to anticipate and effectively respond to changing trends and consumer preferences depends in part on our ability to retain and attract senior management and other key personnel in our operations, merchandising, music and other departments.  Competition for these personnel is intense, and we cannot be sure that we will be able to retain or attract qualified personnel as needed.  The sudden loss of the services of key people could have a material adverse effect on our business, results of operations and financial condition. 

Our supply chain has risks and uncertainties that could affect our sales and business

The merchandise we sell is obtained from vendors and manufacturers in the United States and outside of the country.  Generally, this product is shipped to our distribution centers in California and Tennessee, and from our distribution centers to our stores or directly to our customers using Federal Express and the United States Postal Service.  Certain products we sell are imported and subject to delivery delays based on availability and port capacity.  Our reliance on Federal Express and the United States Postal Service for shipments is subject to risks associated with their ability to provide delivery services that meet our shipping needs and our ability to obtain such services at an affordable cost.  We are also dependent upon the ability to hire temporary associates to adequately staff our distribution centers, particularly during busy periods such as the holiday season.  We may not be able to achieve or maintain operating efficiencies using two distribution centers that are located approximately 2,000 miles apart.

Risks associated with contracting directly with manufacturers for merchandise could hinder our financial performance

We are sourcing a greater percentage of our merchandise directly from manufacturers.  We have limited experience in sourcing and importing merchandise directly from manufacturers.  We may encounter administrative challenges and operational difficulties with the manufacturers from which we may source our merchandise.  Operational difficulties could include reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failures to meet production deadlines.  A manufacturer’s failure to ship merchandise to us on a timely basis or to meet the required quality standards could cause supply shortages that could result in lost sales.  If a manufacturer conducts its operations in a manner that is illegal or regarded as unethical, it could affect our business and our reputation could be damaged.

We could acquire merchandise without full rights to sell it, which could inhibit sales and lead to disputes or litigation

We purchase licensed merchandise from vendors who represent that they hold manufacturing and distribution rights to such merchandise.  We also contract directly with licensors to obtain the manufacturing and distribution rights.  We do not independently verify whether these vendors legally hold adequate rights to the licensed properties they are manufacturing, distributing or licensing.  If we license merchandise that we have not legally obtained the rights to sell, we could be obligated to remove such merchandise from our stores, incur costs associated with destruction of merchandise and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages.  As we expand our efforts to contract directly with manufacturers and licensors for licensed merchandise, we may incur difficulties securing the necessary manufacturing and distribution rights.  Even when we have secured the rights needed to sell such products in the United States, we may not be able to secure the rights to sell the products outside of the United States.

12

There are litigation and other claims against us from time to time, which could distract management from our business activities and could lead to adverse consequences to our business and financial condition

We are involved from time to time with litigation and other claims against us.  Often these cases can raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time.  Although we do not currently believe that the outcome of any current matter of litigation or claim against us will have a material adverse effect on our overall financial condition, we have, in the past, incurred unexpected expense in connection with litigation matters.  In the future, adverse settlements, judgments or resolutions may negatively impact earnings.  Injunctions against us could have an adverse effect on our business by requiring us to do or prohibiting us from doing certain things.  We may in the future be the target of material litigation, including class-action and securities litigation, which could result in substantial costs and divert our management’s attention and resources.

Uncertainty in the global capital and credit markets may materially impair the liquidity of a portion our cash and investment portfolio

We hold cash, cash equivalents and short-term and long-term investments, including an auction rate security (discussed in more detail in “NOTE 1 – Organization and Summary of Significant Accounting Policies” contained in the financial statements and notes included elsewhere in this annual report on Form 10-K).  Continued failures of auctions for the auction rate security we hold limit our ability to liquidate this investment and is expected to continue failing for some period of time.  Although the money market funds and municipal bonds we hold are highly rated and are comprised of high-quality, liquid instruments, if the financial markets trading the underlying assets experience a disruption, we may need to temporarily rely on other forms of liquidity.  In addition, a risk exists that our cash and investments may not always be optimally managed and this may affect our profitability and results of operations.

Our charter documents and other circumstances could prevent a takeover or cause dilution of our existing shareholders, which could be detrimental to existing shareholders

Our Articles of Incorporation and Bylaws contain provisions that may have the effect of delaying, deterring or preventing a takeover of Hot Topic, Inc.  For instance, our Articles of Incorporation include certain “fair price provisions” generally prohibiting business combinations with controlling or significant shareholders unless certain minimum price or procedural requirements are satisfied, and our Bylaws prohibit shareholder action by written consent.  Additionally, our Board has the authority to issue, without shareholder approval, up to 10,000,000 shares of “blank check” preferred stock having such rights, preferences and privileges as designated by the Board.  The issuance of these shares could have a dilutive effect on shareholders and potentially prohibit a takeover of Hot Topic, Inc. by requiring the preferred shareholders to approve such a transaction.  We also have a significant number of authorized and unissued shares of our common stock available under our Articles of Incorporation.  These shares provide us with the flexibility to issue our common stock for future business and financial purposes including stock splits, raising capital and providing equity incentives to employees, officers and directors.  The issuance of these shares could result in dilution to our shareholders.

We are dependent upon shopping malls, strip centers and outlet centers remaining popular as shopping destinations, and maintaining good relationships with shopping mall, strip center and outlet center operators

The global economic downturn and other factors have diminished the ability of shopping mall, strip center and outlet center operators to operate profitably and, in some cases, forced them to declare bankruptcy or cease operations entirely.  The ongoing slowdown in the United States economy, uncertain economic outlook, and other factors could continue to curtail shopping mall, strip center and outlet center development, decrease customer traffic, reduce the number of hours landlords keep their shopping malls, strip centers and outlet centers open, cause landlords to lower their operational standards and negatively impact our lease contracts.  Consolidation of ownership of shopping malls, strip centers and outlet centers may give landlords more leverage in negotiations and adversely affect our ability to negotiate favorable lease terms.  Such consolidation may result in increased lease costs.  We believe we have favorable relationships with landlords and developers, however if this changes it could inhibit our ability to negotiate with them and may make it more difficult for us to manage our leases, including for us to expand, remodel or relocate to certain sites.  If our relations with landlords or developers become strained, or we otherwise encounter difficulties in leasing store sites, we may not be able to open stores in malls, strip centers and outlet centers we would otherwise be interested in maintaining stores; we may not be able to negotiate lease terms favorable to the company; and we may be inhibited in our ability to close underperforming stores.

13

We face intense competition

The apparel, music and accessory categories within the retail industry in which we operate are highly competitive.  Increased competition could have a material adverse effect on our business, results of operations and financial condition.  Our competitors, particularly big-box retailers, may have the ability to sell merchandise at substantially lower prices than we are able to sell such merchandise.  This may cause us to incur greater than anticipated price reductions and unanticipated increases in our inventories for such products.  It may also cause us to elect not to sell such products, despite the fact the products would otherwise attract customers and sell well in our stores.

Timing, seasonal issues and other fluctuations outside of our control could negatively impact our financial performance for given periods

Our business, particularly our Hot Topic division, is subject to seasonal influences that affect our comparable sales.  There are heavier concentrations of sales during the back-to-school, Halloween and holiday (defined as the week of Thanksgiving through the first few days of January) seasons and other periods when schools are not in session.  Our results of operations may fluctuate materially depending on, among other things, the timing of store openings and related pre-opening and other startup expenses; net sales contributed by new stores; increases or decreases in comparable sales; timing, popularity of and our ability to obtain, certain pop culture-related licenses, including on an exclusive basis; releases of new music, movies and television shows; releases of new music/pop culture-related products; our ability to efficiently source and distribute products; changes in our merchandise mix and the challenges involved in getting the right mix into stores at the right time; shifts in timing of certain holidays; weather conditions; and overall economic conditions.

Our profitability could be adversely affected by volatile commodity prices, including petroleum and cotton

The profitability of our business depends to a certain degree upon the price of certain commodities, including petroleum and cotton products.  We are affected by changes in such prices to the extent that such commodities are part of the costs of delivery of merchandise to our stores and to the extent that the commodities are used in the production of our merchandise.  Higher gasoline prices may also affect the willingness of consumers to drive to our stores.

Significant fluctuation in the value of the United States dollar or foreign exchange rates may affect our profitability

Substantially all of our foreign purchases of merchandise have been negotiated and paid for in United States dollars.  As a result, our sourcing operations may be adversely affected by significant fluctuation in the value of the United States dollar against foreign currencies, restrictions on the transfer of funds and other trade disruptions.  A portion of our revenues come from foreign markets.  Changes in foreign exchange rates applicable to these markets may adversely affect our revenues, even if the volume of sales remains the same.  We may not be able to repatriate revenues earned in foreign markets.

Recording impairment charges for certain underperforming stores may negatively impact our future financial condition or results of operations, and closing stores might not have a positive impact on our operating results

We are required to assess, and where appropriate, record a charge for, the impairment of underperforming assets.  This may negatively impact our reported and future financial condition and results of operations.  In addition, we continue to close stores that do not meet our expectations of profitability which may cause us to impair or accelerate the depreciation of certain store assets and incur additional amounts for lease termination, severance and other closing costs.  There can be no assurance that we will not incur future impairment charges and store closure expenses for underperforming assets or that store closures will have a significant positive impact on our operating results.

14

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or change the way we do business

Changes in laws and any future changes could make our operations more expensive or require us to change the way we do business.  Changes in federal and state minimum wage laws could require us to change our entire wage structure for stores.  Other laws related to treatment of employees, including laws related to employee benefits and privacy, could also negatively impact us, such as by increasing medical insurance costs and related expenses.  Changes in product safety or other consumer protection laws, and private-party enforcement of existing laws, could lead to increased costs to us for certain merchandise, additional labor costs associated with readying merchandise for sale, or serve as the basis for litigation.  Changes in laws affecting our supply chain, including the effect of the California Transparency in Supply Chain Act of 2012 and portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to conflict minerals, may adversely affect the sourcing, availability and pricing of certain materials which may be used in the manufacture of  some of our products.  In addition, we may incur additional legal and other costs to comply with the annual disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals which may be used in our products.

A disruption of imports may increase our costs and reduce our supply of merchandise

We receive apparel and other merchandise from foreign sources, both purchased directly in foreign markets and indirectly through domestic vendors with foreign sources.  As a result of our reliance on international vendors and manufacturers, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign and domestic laws and regulations, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our merchandise is manufactured.  In addition, disease outbreaks, terrorist acts or military conflicts could increase the risks of doing business with suppliers who rely on foreign markets.  Trade restrictions in the form of tariffs or quotas, or both, that are applicable to the merchandise we sell also could affect the importation of the merchandise and increase the cost and reduce the supply of products available to us.  Further, changes in tariffs or quotas for merchandise imported from individual foreign countries could lead us to shift our sources of supply among various countries.  Any shift we might undertake in the future could result in a disruption of our sources of supply and lead to a reduction in our revenues and earnings.  Supply chain security initiatives undertaken by the United States or foreign governments that impede the normal flow of product could also negatively impact our business.

We incur costs associated with regulatory compliance, and this cost could be significant

There are numerous regulatory requirements for public companies that we comply with or may be required to comply with in the future and compliance with these rules could result in the diversion of management’s time and attention, which could be disruptive to normal business operations.  These regulations may include more stringent accounting standards, taxation requirements (including changes in applicable income tax rate, new tax laws and revised tax law interpretations), trade restrictions, regulations regarding financial matters, privacy and data security, environmental regulations, advertising, safety and product liability.  We may in the future be required to adopt International Financial Reporting Standards, and doing so could be time-consuming and cause us to incur significant expense.  If we do not satisfactorily or timely comply with these requirements, possible consequences could include sanction or investigation by regulatory authorities such as the SEC or the Nasdaq Stock Market; fines and penalties; incomplete or late filing of our periodic reports, including our annual report on Form 10-K or quarterly reports on Form 10-Q or civil or criminal liability. 

Government or consumer concerns about product safety could result in regulatory actions, recalls or changes to laws, which could harm our reputation, increase costs or reduce sales

We are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities.  We purchase merchandise from suppliers domestically as well as outside the United States.  One or more of our suppliers might not adhere to product safety requirements or our quality control standards, and we might not identify the deficiency before such merchandise is received by our customers.  Issues of product safety could result in a recall of products we sell.  Additionally, regulatory authorities, including the Consumer Product Safety Commission, have undertaken reviews of product safety and are in the process of enacting or are considering various proposals for more stringent laws and regulations.  In particular, the Consumer Product Safety Improvement Act of 2008, which imposes significant requirements on the sale of consumer products and enhanced penalties for noncompliance.  Such regulations contain provisions which have uncertain applicability to products we sell, and such lack of certainty may inhibit our willingness carry products or cause us to carry product we otherwise would not.  These regulations could result in delays in getting products to our stores, lost sales, the rejection of our products by consumers, damage to our reputation or material increases in our costs, and may have a material adverse effect on our business.  Moreover, individuals and organization may assert legal claims for our non-compliance with consumer product rules and regulations, and we may be subject to lawsuits relating to these claims.  There is a risk that these claims or liabilities may exceed or fall outside the scope of indemnities provided by third parties or outside the coverages of our insurance policies.

15

Economic conditions could decrease consumer spending and reduce our sales

Certain economic conditions could affect the level of consumer spending on merchandise we offer, including, among others, employment levels; salary and wage levels, particularly of teens and college-age adults; interest rates; availability of consumer credit; taxation; and consumer confidence in future economic conditions.  For example, the global economic downturn has significantly reduced consumer spending levels and mall customer traffic in general.  The ongoing slowdown in the United States economy and uncertain economic outlook could continue to cause lower consumer spending levels and mall customer traffic which could adversely affect our sales results and financial performance.  In addition, we are highly dependent on a significant level of teenage and college-age spending on music/pop culture-licensed and music/pop culture-influenced products, and we likely would be adversely affected if economic conditions limited such spending.

War, terrorism and other catastrophes could negatively impact our customers, places where we do business and our expenses

The continued threat of terrorism, heightened security and military action in response to this threat, any future acts of terrorism, and significant natural disasters or other catastrophic events may cause disruptions and create uncertainties that affect our business.  To the extent that such disruptions or uncertainties negatively impact shopping patterns and/or shopping mall traffic, or adversely affect consumer confidence or the economy in general, our business, operating results and financial condition could be materially and adversely affected.  A significant natural disaster or other catastrophic event affecting our facilities could materially affect our supply chain, our information system and other aspects of our operations.

Our stock price could fluctuate substantially for reasons outside of our control

Our common stock is quoted on the Nasdaq Stock Market, which has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect our stock price without regard to our financial performance.  In addition, we believe that factors such as quarterly fluctuations in our financial results and comparable sales; announcements by other apparel, accessory, music and gift item retailers; the trading volume of our stock; changes in estimates of our performance by securities analysts; litigation; overall economic and political conditions, including the global economic downturn; the condition of the financial markets, including the credit crisis; and other events or factors outside of our control could cause our stock price to fluctuate substantially. 

Environmental risks associated with the retail industry may result in significant costs and decreased sales

We are exposed to risks arising out of environmental matters and existing and potential laws relating to the protection of the environment.  Adverse and unexpected weather conditions, including such conditions caused by the global climate change phenomena, earthquakes and other natural disasters could affect our supply chain, mall traffic and customer interest in our products.  We receive apparel and other merchandise from foreign sources, both purchased directly in foreign markets and indirectly through domestic vendors with foreign sources.  Stricter global and domestic greenhouse gas emission requirements may cause our vendors to incur higher costs, including increased transportation costs.  There is a risk that we may occupy retail space that may require remediation to comply with environmental laws.  In addition to potential liability for remediation costs, the cleanup process may cause our stores to be closed for an extended period of time, resulting in loss of sales.

16

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease all of our existing store locations, with lease terms expiring between 2013 and 2023.  As of the end of fiscal 2012, we had a total of approximately 1,096,000 leased store square feet for Hot Topic, approximately 495,000 leased store square feet for Torrid and approximately 9,000 leased store square feet for Blackheart.  The leases for most of the existing stores are for approximately ten-year terms and provide for minimum rent payments as well as contingent rent based upon a percent of sales in excess of the specified minimums.

We lease our headquarters and distribution center facility, located in City of Industry, California, which is approximately 250,000 square feet.  Our lease expires in April 2014, with an option to renew for two more five-year terms, and the annual base rent is approximately $1.1 million.  We own our distribution center in LaVergne, Tennessee, which is approximately 300,000 square feet.

The following chart shows, as of the end of fiscal 2012, the number of Hot Topic, Torrid and Blackheart stores operated within each state in the United States, Puerto Rico and Canada, as well as the aggregate number of Hot Topic, and Torrid stores we operated as of the end of fiscal 2011:

17

Hot Topic, Inc. Stores
	Hot Topic Stores	Torrid Stores	Blackheart Stores	Total Company
Alabama	7	1	-	8
Alaska	3	2	-	5
Arizona	15	8	-	23
Arkansas	6	-	-	6
California	75	44	3	122
Colorado	13	2	-	15
Connecticut	8	3	-	11
Delaware	2	-	-	2
Florida	36	8	-	44
Georgia	13	7	-	20
Hawaii	5	-	-	5
Idaho	4	-	-	4
Illinois	19	13	-	32
Indiana	14	3	-	17
Iowa	7	1	-	8
Kansas	6	-	-	6
Kentucky	6	1	-	7
Louisiana	8	3	-	11
Maine	2	1	-	3
Maryland	13	5	-	18
Massachusetts	14	3	-	17
Michigan	20	6	-	26
Minnesota	10	4	-	14
Mississippi	4	-	-	4
Missouri	13	4	-	17
Montana	3	-	-	3
Nebraska	4	1	-	5
Nevada	6	2	-	8
New Hampshire	5	1	-	6
New Jersey	15	6	-	21
New Mexico	7	1	-	8
New York	25	8	-	33
North Carolina	14	2	-	16
North Dakota	4	1	-	5
Ohio	26	6	-	32
Oklahoma	7	1	-	8
Oregon	6	3	-	9
Pennsylvania	31	1	-	32
Rhode Island	1	-	-	1
South Carolina	7	-	-	7
South Dakota	2	-	-	2
Tennessee	11	2	-	13
Texas	55	16	2	73
Utah	6	3	-	9
Vermont	1	-	-	1
Virginia	18	4	-	22
Washington	15	10	-	25
West Virginia	5	-	-	5
Wisconsin	11	2	-	13
Wyoming	1	-	-	1
Canada	4	-	-	4
Puerto Rico	5	1	-	6
FY 2012 Total	618	190	5	813
FY 2011 Total	628	148	-	776

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Item 3. Legal Proceedings

Between March 8 and March 19, 2013, seven putative class action complaints were filed in the Superior Court of California, County of Los Angeles in connection with the proposed acquisition of the company by an affiliate of Sycamore Partners. Each lawsuit names the company, its board of directors, Sycamore Partners and related entities as defendants. The lawsuits generally allege that the company’s directors breached their fiduciary duties by engaging in a flawed sales process, by approving an inadequate price, and by agreeing to provisions that would allegedly preclude another interested buyer from making a financially superior proposal to acquire the company. The lawsuits also allege that one or more of the company, Sycamore Partners and related entities aided and abetted the alleged breaches of fiduciary duties by the directors. Among other things, plaintiffs seek an injunction (to prevent consummation of the transaction), damages, declaratory relief, and attorneys’ fees. The company believes these lawsuits are without merit and intends to defend against them vigorously.

On March 19, 2013, an employee filed a lawsuit against the company in the Superior Court of California, County of Sacramento, on behalf of herself and a putative class. The lawsuit asserts claims for failure to provide adequate meal or rest breaks, failure to pay regular and overtime wages, failure to timely pay wages at end of employment, failure to provide compliant wage statements, failure to indemnify employees for business-related expenditures, and unfair business practices. The lawsuit seeks actual, compensatory and incidental damages, restitution, special damages, statutory penalties, punitive damages, pre-judgment interest, attorneys' fees and injunctive relief.  We intend to vigorously defend ourselves against the various claims, though at the present time we are unable to predict the outcome of this matter.

From time to time, we are also involved in other matters of litigation that arise in the ordinary course of business, but we do not at this time expect any of those matters to have a material adverse effect on our overall financial condition.

Item 4.           Mine Safety Disclosures

Not applicable.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Stock Market under the symbol “HOTT.” The following table shows, for the periods indicated, the high and low sales prices of our shares of common stock, as reported on the Nasdaq Stock Market. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

2012 Fiscal Year Quarters	High		Low
First Quarter	$	10.73	$	7.23
Second Quarter	$	10.70	$	8.81
Third Quarter	$	10.41	$	8.41
Fourth Quarter	$	11.45	$	8.25
2011 Fiscal Year Quarters	High		Low
First Quarter	$	6.97	$	5.05
Second Quarter	$	8.45	$	6.35
Third Quarter	$	8.74	$	6.05
Fourth Quarter	$	7.82	$	6.44

On March 18, 2013, the last sales price of our common stock as reported on the Nasdaq Stock Market was $13.83 per share. As of March 18, 2013, there were approximately 171 holders of record of our common stock.  This number does not reflect the actual number of beneficial holders of our common stock, which we believe is significantly higher.

Share Repurchase   On October 31, 2012, we announced that our Board approved an increase of our stock repurchase program from up to $15 million (previously announced on June 6, 2012), to $25 million, of our outstanding common stock.    As of the end of fiscal 2012, we had completed the repurchase of 2,535,370 shares of our common stock for approximately $25 million (excluding expenses), which represents an average price of $9.86 per share.

On August 17, 2011, we announced that our Board approved the repurchase of up to $25 million of our outstanding common stock during the period ended January 28, 2012.  As of the end of fiscal 2011, we had completed the repurchase of 3,212,628 shares of our common stock for approximately $25 million (excluding expenses), which represents an average price of $7.78 per share.

Purusant to the Merger Agreement (discussed in more detail in “Item 1 – Business” included elsewhere in this annual report on Form 10-K), we are prohibited from repurchasing shares of our common stock (with limited exceptions) following execution of the Merger Agreement on March 6, 2013.

The following table contains information regarding repurchases of our common stock during the fourth quarter of fiscal 2012:

Issuer Purchases of Equity Securities
							Approximate
	Total				Total Number		Dollar Value of
	Number of		Average		of Shares Purchased		Shares that May
	Shares		Price Paid		as Part of Publicly		Yet Be Purchased
Period	Repurchased		per Share		Announced Program		Under the Program
							(millions)
November 25, 2012 through December 29, 2012		2,535,370	$	9.86		2,535,370	$	-

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We began to pay cash dividends during the first quarter of fiscal 2010; however, pursuant to the Merger Agreement (discussed in more detail in “Item 1 – Business” included elsewhere in this annual report on Form 10-K), we are prohibited from declaring or paying any dividends (including our regular quarterly cash dividend) following execution of the Merger Agreement on March 6, 2013. Cash dividends are discussed in more detail in “NOTE 4 – Cash Dividends” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

Please see “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” included elsewhere in this annual report on Form 10-K for information about our equity compensation plans.

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 Hot Topic under the Securities Act or the Exchange Act.

The following graph shows a comparison of five-year cumulative total returns to shareholders for Hot Topic, the NASDAQ Composite Index and the NASDAQ Retail Trade Index for the period that commenced February 2, 2008 and ended on February 2, 2013.  The graph assumes an initial investment of $100 and that all dividends have been reinvested.

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Item 6. Selected Financial Data

The following table summarizes selected financial data for each of the five most recent fiscal years.  This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

	Fiscal Year
	2012			2011			2010			2009			2008
	(In thousands, except per share data, number of stores, comparable sales and sales per square foot)
Statement of Operations Data:
Net sales	$	741,745		$	697,934		$	708,244		$	736,710		$	761,074
Cost of goods sold, including buying, distribution and occupancy costs		473,505			465,081			474,917			480,453			487,769
Gross margin		268,240			232,853			233,327			256,257			273,305
Selling, general and administrative expenses		237,401			236,308			247,089			237,010			242,483
Income (loss) from operations		30,839			(3,455	)		(13,762	)		19,247			30,822
Other income and interest, net		138			310			336			519			1,670
Income (loss) before provision (benefit) for income taxes		30,977			(3,145	)		(13,426	)		19,766			32,492
Provision (benefit) for income taxes		11,507			(1,327	)		(5,191	)		7,886			12,750
Net income (loss)	$	19,470		$	(1,818	)	$	(8,235	)	$	11,880		$	19,742
Earnings (loss) per share:
Basic	$	0.46		$	(0.04	)	$	(0.18	)	$	0.27		$	0.45
Diluted	$	0.46		$	(0.04	)	$	(0.18	)	$	0.27		$	0.45
Weighted average shares outstanding:
Basic		41,970			43,892			44,554			44,134			43,789
Diluted		42,737			43,892			44,554			44,409			43,913
Selected Operating Data:
Number of stores at year end		813			776			810			836			840
Comparable sales increase (decrease)1		3.4	%		1.4	%		(4.0	)%		(3.5	)%		2.7	%
Average store sales per square foot	$	436		$	390		$	401		$	422		$	444
Average store sales per store	$	832		$	773		$	762		$	801		$	841
Balance Sheet Data:
Cash and short- and long-term investments	$	51,721		$	67,840		$	79,539		$	131,257		$	105,912
Working capital		78,796			92,093			113,932			158,531			125,582
Total assets		274,945			277,963			310,607			376,394			370,571
Shareholders’ equity	$	172,754		$	183,003		$	217,497		$	277,047		$	258,426

1All periods include internet sales.

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Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our results of operations, financial condition and liquidity and other matters should be read in conjunction with the consolidated financial statements and notes included in “Item 8 – Financial Statements and Supplementary Data” elsewhere in this annual report on Form 10-K.  These statements have been prepared in conformity with accounting principles generally accepted in the United States of America and require our management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes.  Actual results could differ from these estimates.  Our ability to achieve business objectives in fiscal 2013 and beyond will be dependent on many factors, known and unknown, including those outlined in the sections entitled “Cautionary Statement Regarding Forward Looking Disclosure” before Part I and “Item 1A – Risk Factors” included elsewhere in this annual report on Form 10-K.

Overview

Business  We are a specialty retailer of apparel, accessories and gift items operating under the Hot Topic and Torrid concepts.  We launched a new test retail concept, Blackheart, during the fourth quarter of fiscal 2012.  Our business is discussed in more detail in “Item 1 – Business” included elsewhere in this annual report on Form 10-K.

Merger  On March 6, 2013, we entered into the Merger Agreement with Sycamore. The Merger is discussed in more detail in “Item 1 – Business” included elsewhere in this annual report on Form 10-K.

Strategic Business Changes  We have completed the implementation of all planned initiatives related to the strategic business changes approved by the Board in fiscal 2011 to improve our operating results and to better position us for growth.   The business changes involved discontinuing the operations of ShockHound; writing down inventory; writing down property and equipment that are no longer critical to our strategic direction; and implementing other strategic business and operational initiatives.  As of the end of the second quarter of fiscal 2011, we had incurred all charges related to the strategic business changes.  

Cost Reduction Plan  The cost reduction plan, which was designed to meet the challenges of the environment at that time, involved closing approximately 50 underperforming stores, a majority of which closed at the end of the first quarter of fiscal 2011.  These closures occurred as a result of natural lease expirations, exercising lease kick out clauses and other negotiations.  The implementation of the cost reduction plan was expected to improve annual income of approximately $13 million.  The cost reduction plan also included reducing our home office and field management positions, reducing planned capital expenditures in fiscal 2011 to approximately $25 million from $31 million in fiscal 2010 and implementing other non-payroll overhead expense reduction initiatives.  As of the end of the second quarter of fiscal 2011, we had recorded all charges related to the cost reduction plan, completed the announced reduction of our home office and field management positions, and completed the implementation of non-payroll overhead expense reduction initiatives as part of the cost reduction plan.   As of the end of the second quarter of fiscal 2012, we had closed all underperforming stores related to the cost reduction plan, totaling 41 Hot Topic stores and seven Torrid stores.

The following table details charges related to the strategic business changes and the cost reduction plan recorded since their implementation in the first quarter of fiscal 2011 and the fourth quarter of fiscal 2010, respectively (in thousands).

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				Non-Store Related
				Severance and			Inventory and
	Store Related			Outplacement			Asset-Related			Consulting			Stock Option
	Closure Costs 1			Costs			Costs 2			Fees			Expense			Total
Balance at October 30, 2010	$	-		$	-		$	-		$	-		$	-		$	-
Cost Reduction Plan charges		(7,077	)		(1,850	)		(830	)		-			-			(9,757	)
Cash payments		93			985			-			-			-			1,078
Non-cash adjustments		6,497			-			830			-			-			7,327
Balance at January 29, 2011		(487	)		(865	)		-			-			-			(1,352	)
Cost Reduction Plan recovery		365			-			-			-			-			365
Strategic Business Changes charges		-			(1,583	)		(9,605	)		(1,606	)		-			(12,794	)
Cash payments		699			889			-			1,645			-			3,233
Non-cash adjustments		(659	)		-			4,891			-			-			4,232
Balance at April 30, 2011		(82	)		(1,559	)		(4,714	)		39			-			(6,316	)
Cost Reduction Plan recovery		174			-			-			-			-			174
Strategic Business Changes charges		-			(1,330	)		(532	)		(1,383	)		(1,072	)		(4,317	)
Cash payments		144			812			182			753			-			1,891
Non-cash adjustments		(455	)		-			4,866			-			1,072			5,483
Balance at July 30, 2011		(219	)		(2,077	)		(198	)		(591	)		-			(3,085	)
Cash payments		197			464			-			473			-			1,134
Non-cash adjustments		22			(43	)		18			20			-			17
Balance at October 29, 2011		-			(1,656	)		(180	)		(98	)		-			(1,934	)
Cash payments		-			682			20			-			-			702
Non-cash adjustments		-			-			75			-			-			75
Balance at January 28, 2012		-			(974	)		(85	)		(98	)		-			(1,157	)
Cash payments		-			476			-			-			-			476
Non-cash adjustments		-			17			68			98			-			183
Balance at April 28, 2012		-			(481	)		(17	)		-			-			(498	)
Cash payments		-			318			-			-			-			318
Non-cash adjustments		-			23			17			-			-			40
Balance at July 28, 2012		-			(140	)		-			-			-			(140	)
Cash payments		-			133			-			-			-			133
Non-cash adjustments		-			7			-			-			-			7
Balance at October 27, 2012       and February 2, 2013	$	-		$	-		$	-		$	-		$	-		$	-

1 Store related closure costs represent charges related to the closure of approximately 50 underperforming stores.  Such charges include the write down and accelerated depreciation of store assets, the write down of inventory, early lease terminations and store severance, partially offset by certain credits and allowances.

2 Inventory and asset-related costs represent charges related to the write down and impairment of inventory and non-critical property and equipment.

We recorded charges related to store closures; write down of assets; store severance; non-store related severance and outplacement; consulting fees and stock option expense in selling, general and administrative expenses in our consolidated statements of operations.  Charges related to the write down of store inventory; accelerated depreciation of store assets; and early lease terminations were recorded in cost of goods sold in our consolidated statements of operations.

Non-Cash Impairment Charge and Discontinued Operations  During the third quarter of fiscal 2010, we concluded that ShockHound’s assets had become impaired due to its slower than expected revenue growth.  Revenues from partnerships entered into in the earlier part of fiscal 2010, as well as other revenues, did not build as much as we had anticipated.  In the third quarter of fiscal 2010, we recorded an impairment charge of approximately $3 million to selling, general and administrative expenses in our consolidated statements of operations.  The assessment of our long-lived assets for impairment is discussed in more detail in “NOTE 1 – Organization and Summary of Significant Accounting Policies” contained in the financial statements and notes included elsewhere in this annual report on Form 10-K.  In addition, during the second quarter of fiscal 2011, ShockHound’s operations were discontinued.  See “Strategic Business Changes” above for more information concerning the discontinuation of ShockHound’s operations.

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Comparable Sales and Store Count  We consider a store comparable after it has been open for 15 full fiscal months.  If a store is closed during a fiscal year, it is only included in the computation of comparable sales for full fiscal months in which it was open.  Partial fiscal months are excluded from the computation of comparable sales.  During the first quarter of fiscal 2012, we began including our internet sales in the computation of comparable sales.  All prior year comparable sales results included in this annual report on Form 10-K have been adjusted unless otherwise noted.  The following table shows our comparable sales results, including internet, by division for fiscal 2012 and other recent periods:

Fiscal Year	2012			2011			2010			2009			2008
Hot Topic		3.5	%		0.7	%		(5.7	)%		(4.6	)%		2.8	%
Torrid		3.1	%		3.8	%		2.3	%		0.8	%		2.1	%
Total Company		3.4	%		1.4	%		(4.0	)%		(3.5	)%		2.7	%

In fiscal 2012, the comparable sales increase in the Hot Topic division resulted from an increase in fashion apparel and tees and hoodies categories, partially offset by a decrease in the accessories category.  The comparable sales increase at our Torrid division was due to an increase in apparel and intimates, partially offset by a decrease in the accessories category.

The following table shows our comparable sales results, excluding internet, by division for fiscal 2012 and other recent periods:

Fiscal Year	2012			2011			2010			2009			2008
Hot Topic		3.7	%		0.1	%		(6.5	)%		(5.6	)%		1.8	%
Torrid		3.6	%		2.5	%		(0.7	)%		(2.9	)%		(2.4	)%
Total Company		3.7	%		0.6	%		(5.3	)%		(5.1	)%		1.0	%

Our historical and planned store count, as well as the number of stores included in the comparable store base, is discussed in more detail in “Item 1 – Business” included elsewhere in this annual report on Form 10-K.

Share Repurchase  Our recent share repurchase activity is discussed in more detail in “NOTE 12 – Share Repurchase” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

Cash Dividends  We began to pay cash dividends during the first quarter of fiscal 2010.  Cash dividends are discussed in more detail in “NOTE 4 – Cash Dividends” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

Segment InformationWe currently have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts and the relatively immaterial business operations of our Blackheart test concept.

Seasonality  Our business, particularly at Hot Topic, is subject to seasonal influences.  Refer to “Item 1 – Business” included elsewhere in this annual report on Form 10-K for further discussion about the seasonality of our business.

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Key Performance Indicators  There are several key indicators that we use to help us evaluate the financial condition and operating performance of our business, including:

Store Sales Productivityis used to assess the operational performance of each of our stores.  Store productivity metrics include year over year store sales comparisons (or comparable sales results), net store sales per average square foot, number of transactions per store, dollars per transaction, number of units sold per store and number of units per transaction.

Merchandise Margin is used to allocate a variety of resources to each of our concepts, determine initial mark-ups, mark-downs, inventory reserves, freight costs, etc. for our concepts and to measure the general performance of each of our stores.  We consider merchandise margin to be the difference between net sales and certain costs associated with our merchandise, such as product costs, markdowns, freight, vendor allowances and inventory reserves.

Gross Margin is the difference between merchandise margin and buying, distribution and store occupancy costs.

Income from Operations is primarily driven by net sales, gross margin, our ability to control selling, general and administrative expenses, and our level of capital expenditures that affect depreciation expense.

Other  During the fourth quarter of fiscal 2012, eight stores were tested for impairment as part of our long-lived asset impairment review.  Four of these stores were impaired and the remaining four, although not impaired, were considered ‘at risk’ of impairment, with an aggregate net book value of $0.1 million and undiscounted cash flows that ranged from approximately 160% to 400% of their net book values.  We do not expect material changes in the near term to the assumptions underlying our impairment calculations as of the end of fiscal 2012.  However, if changes in these assumptions do occur, and should those changes be significant, they could have a material impact on our determination of whether or not impairment exists.  We continue to closely monitor these stores and other assets that potentially have carrying values that may not be recoverable.

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Results of Operations

The following discussion of our results of operations, financial condition and liquidity and other matters should be read in conjunction with our consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

The following table shows, for the periods indicated, certain selected statement of operations data expressed as a percentage of net sales.  The discussion that follows should be read in conjunction with this table:

	Fiscal Year
	2012			2011			2010
Net sales		100.0	%		100.0	%		100.0	%
Cost of goods sold, including buying, distribution & occupancy costs		63.8	%		66.6	%		67.1	%
Gross margin		36.2	%		33.4	%		32.9	%
Selling, general and administrative expenses		32.0	%		33.9	%		34.9	%
Income (loss) from operations		4.2	%		(0.5	)%		(2.0	)%
Other income and interest, net		0.0	%		0.0	%		0.1	%
Income (loss) before provision (benefit) for income taxes		4.2	%		(0.5	)%		(1.9	)%
Provision (benefit) for income taxes		1.6	%		(0.2	)%		(0.7	)%
Net income (loss)		2.6	%		(0.3	)%		(1.2	)%

Fiscal 2012 Compared to Fiscal 2011

Net sales increased approximately $43.8 million, or 6.3%, to $741.7 million in fiscal 2012 from $697.9 million in fiscal 2011.  Approximately $10.5 million of this increase was due to the fact that 53-week fiscal 2012 had an extra week of sales that we did not have in fiscal 2011.  The components of this $43.8 million increase in net sales are as follows:

Amount
(in millions)			Description
$	27.3		Increase in sales from Torrid comparable and non-comparable stores.
	20.4		Increase in sales from Hot Topic comparable and non-comparable stores.
	10.5		Increase due to 53rd week in fiscal 2012.
	(14.4	)	Decrease due to store closures and other.
$	43.8		Total

Gross margin increased approximately $35.3 million, which includes a $1.3 million increase from the internet, or 15.2%, to $268.2 million in fiscal 2012 from $232.9 million in fiscal 2011.  As a percentage of net sales, gross margin increased to 36.2% in fiscal 2012 from 33.4% in fiscal 2011.  The components of this 2.8 percentage point increase in gross margin as a percentage of net sales are as follows:

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%			Description
	2.1		Increase in merchandise margin primarily as a result of higher realized markup mainly due to an increase in products designed internally and a decrease in clearance sales.
	0.4		Decrease in store depreciation expenses related to lower expenses from comparable stores, store closures and leverage on higher sales.
	0.3		Decrease in distribution expenses primarily due to lower depreciation, supplies, freight, and leverage on higher sales.
	0.2		Store occupancy percentage decrease due to leverage on higher sales, partially offset by higher rent expense as a result of an increase in the number of stores and the recognition of deferred rent credits in the prior fiscal year as part of our cost reduction plan.
	(0.2	)	Increase in buying payroll expenses.
	2.8	%	Total

Selling, general and administrative expenses increased approximately $1.1 million, or 0.5%, to $237.4 million in fiscal 2012 from $236.3 million in fiscal 2011.  As a percentage of net sales, selling, general and administrative expenses were 32.0% in fiscal 2012 compared to 33.9% in fiscal 2011.  The components of this 1.9 percentage point decrease in selling, general and administrative expenses as a percentage of net sales are as follows:

%			Description
	(1.7	)	Costs associated with the write-down of non-critical property and equipment, severance payments, consulting fees and other costs related to the strategic business changes incurred in the prior fiscal year.
	(0.8	)	Decrease in other store expenses primarily due to lower utility costs, debit/credit card processing fees and supply expenses.
	(0.6	)	Store and internet payroll expenses and related benefits percentage decrease as a result of leverage on higher sales and improved productivity.
	(0.4	)	Decrease in general and administrative payroll and related benefits and depreciation, partially offset  by increase in consulting services expenses and computer maintenance costs.
	0.2		Increase in preopening expenses as a result of a greater number of new, relocated and remodeled stores in fiscal 2012.
	1.4		Increase in performance based bonuses (75% of the increase relates to exceeding bonus target).
	(1.9	%)	Total

Income from operations increased approximately $34.3 million to $30.8 million in fiscal 2012 (includes $2.5 million related to the 53rd week in fiscal 2012) from a loss of $3.5 million in fiscal 2011.  As a percentage of net sales, income from operations was 4.2% in fiscal 2012 compared to loss of 0.5% in fiscal 2011.  Operating income on an average store basis was approximately $39,000 in fiscal 2012 compared to an operating loss of $4,000 in fiscal 2011.  Net loss in fiscal 2011 included net losses from our ShockHound concept of $0.3 million, or $0.01 per share.

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As a percentage of net sales, other income and interest, net, was immaterial in fiscal 2012 and 2011.

Our effective tax rate was 37.1% (provision) and 42.2% (benefit) in fiscal 2012 and 2011, respectively.  The decrease was primarily due to a change in the liability associated with unrecognized tax benefits.

Fiscal 2011 Compared to Fiscal 2010

Net sales decreased approximately $10.3 million, or 1.5%, to $697.9 million in fiscal 2011 from $708.2 million in fiscal 2010.  The components of this $10.3 million decrease in net sales are as follows:

(in millions)			Description
$	(24.6	)	Decrease due to store closures and other.
	5.9		Increase in sales from Hot Topic comparable and non-comparable stores.
	8.4		Increase in sales from Torrid comparable and non-comparable stores.
$	(10.3	)	Total

Gross margin decreased approximately $0.4 million, which includes a $2.7 million increase from the internet, or 0.2%, to $232.9 million in fiscal 2011 from $233.3 million in fiscal 2010.  As a percentage of net sales, gross margin increased to 33.4% in fiscal 2011 from 32.9% in fiscal 2010.  The components of this 0.5 percentage point increase in gross margin as a percentage of net sales are as follows:

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%			Description
	0.8		Decrease in store depreciation expenses related to store closures, ShockHound closure, and the accelerated depreciation taken in the prior fiscal year for stores closing as part of our cost reduction plan.
	0.3		Decrease in distribution expenses, primarily due to lower freight, payroll, and supplies, partially offset by higher depreciation.
	0.2		Decrease in store occupancy expenses, primarily related to charges taken in the prior fiscal year and deferred rent credits recognized in the current fiscal year as part of our cost reduction plan.
	(0.1	)	Increase in buying payroll expenses.
	(0.7	)	Decrease in merchandise margin as a result of higher markdowns.
	0.5	%	Total

Selling, general and administrative expenses decreased approximately $10.8 million, or 4.4%, to $236.3 million in fiscal 2011 from $247.1 million in fiscal 2010.  As a percentage of net sales, selling, general and administrative expenses were 33.9% in fiscal 2011 compared to 34.9% in fiscal 2010.  The components of this 1.0 percentage point decrease in selling, general and administrative expenses as a percentage of net sales are as follows:

%			Description
	(0.8	)	Decrease in store payroll expenses and related costs as a result of improved store productivity and store closures, partially offset by higher store peformance based bonuses.
	(0.5	)	Decrease in general and administrative payroll and related costs, professional fees, and travel/meetings expenses, partially offset by an increase in performance based bonuses and relocation expenses.
	(0.5	)	Decrease in impairment expenses as a result of the non-cash asset impairment charge taken for ShockHound in the prior fiscal year.
	(0.2	)	Decrease in other store expenses, primarily due to utility expenses, inventory service fees, costs associated with the Hot Topic loyalty program and debit/credit card processing costs.
	(0.1	)	Decrease in marketing expenses, primarily due to reductions in direct marketing programs and marketing events, partially offset by increased email and internet marketing programs, higher payroll and store signage expenses.
	0.1		Increase in depreciation on computer hardware and software.
	1.0		Costs associated with the write-down of non-critical property and equipment, severance payments, consulting fees and other costs related to the strategic business changes.
	(1.0	)%	Total

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Loss from operations decreased approximately $10.3 million to $3.5 million in fiscal 2011 from $13.8 million in fiscal 2010.  As a percentage of net sales, loss from operations was 0.5% in fiscal 2011 compared to 2.0% in fiscal 2010.  Operating loss on an average store basis was approximately $4,000 in fiscal 2011 compared to $17,000 in fiscal 2010.  Net loss included net losses from our ShockHound concept of $0.3 million, or $0.01 per share, in fiscal 2011 compared to $4.1 million, or $0.09 per share, in fiscal 2010.

As a percentage of net sales, other interest and income, net, was immaterial in fiscal 2011 and 0.1% in 2010.

Our effective tax rate was 42.2% and 38.7% in fiscal 2011 and 2010, respectively.  The increase was primarily due to a change in the liability associated with unrecognized tax benefits and higher state income tax.

Quarterly Results and Seasonality

Our quarterly results of operations may fluctuate materially depending on, among other things, the timing of store openings and related pre-opening and other startup expenses, store closings, net sales contributed by new stores, increases or decreases in comparable sales, releases of new music, film, television and music/pop culture-related products, shifts in timing of certain holidays, changes in our merchandise mix and overall economic conditions.

Our business, particularly our Hot Topic division, is also subject to seasonal influences.  Refer to “Item 1 – Business” under the caption “Seasonality” included elsewhere in this annual report on Form 10-K for further discussion about the seasonality of our business.

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The following table shows certain statements of operations and selected operating data for each of our last eight fiscal quarters (all 13-week periods with the exception of the fouth quarter of fiscal 2012 which was a 14-week period).  The quarterly statements of operations data and selected operating data shown below were derived from our unaudited financial statements, which in the opinion of management contain all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation.  Results in any quarter are not necessarily indicative of results that may be achieved for a full year.

	Fiscal Year 2012												Fiscal Year 2011
	First			Second			Third			Fourth			First			Second			Third			Fourth
Statements of Operations Data:	(In thousands, except selected operating and per share data)
Net sales	$	171,544		$	157,828		$	179,413		$	232,960		$	161,273		$	150,950		$	175,822		$	209,889
Gross margin		61,685			53,851			64,239			88,465			50,410			48,662			59,584			74,197
Income (loss) from operations		6,082			(1,240	)		6,860			19,137			(12,389	)		(10,098	)		4,223			14,809
Net income (loss)	$	3,835		$	(768	)	$	4,289		$	12,114		$	(7,661	)	$	(6,220	)	$	3,113		$	8,950
Earnings (loss) per share:
Basic	$	0.09		$	(0.02	)	$	0.10		$	0.29		$	(0.17	)	$	(0.14	)	$	0.07		$	0.21
Diluted	$	0.09		$	(0.02	)	$	0.10		$	0.29		$	(0.17	)	$	(0.14	)	$	0.07		$	0.21
Weighted average shares outstanding:
Basic		42,139			42,252			42,319			41,228			44,713			44,843			43,942			42,068
Diluted		42,821			42,252			43,056			42,063			44,713			44,843			44,481			42,451
Selected Operating Data:
Comparable sales 1		7.5	%		3.9	%		0.2	%		2.6	%		1.2	%		3.2	%		(0.5	)%		1.9	%
Stores open at end of period		788			791			806			813			793			781			780			776

1 All periods include internet sales.

Liquidity And Capital Resources

During fiscal 2012, one of our primary uses of cash was to repurchase an aggregate of $25 million of our common stock (discussed in more detail in “NOTE 12 – Share Repurchase” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K).  We also funded cash dividend payments totaling $13.4 million during fiscal 2012 (discussed in more detail in “NOTE 4 – Cash Dividends” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K).  During fiscal 2012 and 2011, we made cash outlays of approximately $0.9 million and $7 million, respectively, related to certain strategic business changes and the cost reduction plan (discussed in more detail in “NOTE 2 – Business Events” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K).  During fiscal 2011, we repurchased an aggregate of $25 million of our common stock and funded cash dividend payments totaling $12.2 million (also discussed in the related references above). Other uses of cash during the last three fiscal years have been to purchase merchandise inventories, improve our information technology infrastructure and fund new store openings, store remodels and store relocations.  We have typically satisfied our cash requirements principally from cash flows from operations and we also maintain a $5 million unsecured credit agreement (discussed in more detail in “NOTE 8 – Bank Credit Agreement” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K).

Cash, cash equivalents and short-term and long-term investments, including an auction rate security, held by us were $51.7 million and $67.8 million as of the end of fiscal 2012 and 2011, respectively.  We believe our current cash balances and cash generated from operations will be sufficient to fund our operations through at least the next 12 months.  Auctions representing the auction rate security we hold have continued to fail and will limit our ability to liquidate this investment for some period of time.  However, we do not believe the auction failures will impact our ability to fund our working capital needs, capital expenditures or other business requirements.

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Working capital was $78.8 million and $92.1 million for fiscal 2012 and 2011, respectively.  The $13.3 million decrease in working capital in fiscal 2012 from 2011 is primarily attributable to an increase in current liabilities relating to increases in accrued bonuses and income taxes payable.

Net cash flows provided by operating activities were $53.2 million and $45.9 million in fiscal 2012 and 2011, respectively. The $7.3 million increase in net cash provided by operating activities in fiscal 2012 as compared to fiscal 2011 was primarily attributable to an increase in net income, partially offset by an increase in inventory.

Net cash flows used in investing activities were $26.0 million and $13.8 million in fiscal 2012 and 2011, respectively.  The $12.2 million increase in net cash used in investing activities in fiscal 2012 as compared to fiscal 2011 was primarily attributable to a $12.5 million increase in purchases of property and equipment.

Net cash flows used in financing activities were $33.0 million and $33.7 million in fiscal 2012 and 2011, respectively.  The decrease in net cash used in financing activities was primarily attributable to increases in proceeds from employee stock purchases and stock option exercises, partially offset by an increase in cash dividend payments.

In fiscal 2013, we anticipate we will spend approximately $47 million on capital expenditures.  Of the $47 million, we plan to spend approximately $31 million for store construction and other improvements to existing stores, including remodels and relocations (refer to “Item 1 – Business” included elsewhere in this annual report on Form 10-K for detail on our store expansion activity).  We plan to spend the remaining capital expenditures on various improvements in our information technology infrastructure, including technological improvements at the store level and further development and improvement of our eCommerce and logistic operations.  We may make additional capital expenditures for other strategic and operational purposes.

The following table summarizes our contractual obligations as of the end of fiscal 2012, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:

	Payments due by period (in thousands)
Contractual obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating leases¹	$	245,787	$	55,183	$	81,583	$	52,498	$	56,523
Purchase obligations		82,012		82,012		-		-		-
Letters of credit and other obligations		2,322		1,788		534		-		-
Income tax  audit settlements ²		492		492		-		-		-
Total contractual obligations	$	330,613	$	139,475	$	82,117	$	52,498	$	56,523

(1)     See “NOTE 9 – Commitments and Contingencies” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K for additional disclosure related to operating lease obligations.

(2)     The $492,000 of income tax audit settlements relate to certain open audits we expect to be fully settled in fiscal 2013 and to gross unrecognized tax benefits for which the statutes of limitations are expected to expire in fiscal 2013.  Due to the uncertainty regarding the timing of future cash outflows associated with other noncurrent unrecognized tax benefits of $489,000, we are unable to make a reliable estimate of the periods of cash settlement with the respective tax authorities and have not included such amount in the contractual obligations table above.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate estimates, including those related primarily to inventories, long-lived assets and contingencies.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.  For a further discussion about the application of these and other accounting policies, refer to “NOTE 1 – Organization and Summary of Significant Accounting Policies” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

Inventories  Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail method.  Under the retail method, inventory is stated at its current retail selling value and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the purchase activity for the month.  Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise.  We record a charge to cost of goods sold for permanent markdowns.  Inherent in the retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins.  To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded.  Physical inventories are conducted during the year to determine actual inventory on hand and shrinkage.  We accrue our estimated inventory shrinkage for the period between the last physical count and current balance sheet date.  Thus, the difference between actual and estimated shrink amounts may cause fluctuations in quarterly results, but not for the full fiscal year results.

Valuation of Long-Lived Assets  We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  For our Hot Topic and Torrid concepts, we group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified.  Factors we consider important that could trigger an impairment review of our stores or online operations include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend.  When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate, which we currently estimate to be approximately 13%, determined by management.  These cash flows are calculated by netting future estimated sales of each store against estimated cost of goods sold, occupancy costs and other store operating expenses such as payroll, supplies, repairs and maintenance and credit/debit card fees.  The discount rate, the estimated sales and the aforementioned costs and expenses used for this nonrecurring fair value measurement are considered significant Level 3 inputs as defined in “NOTE 7 – Fair Value Measurements” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K and changes in these assumptions may cause the fair value to be significantly impacted.  We have recorded impairment charges in fiscal 2012 and prior years.  In addition, in the event future performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges.  While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges.  

Revenue Recognition  Revenue is generally recognized at our retail store locations at the point at which the customer receives and pays for the merchandise at the register.  For online sales, revenue is recognized upon delivery to the customer.  Sales are recognized net of merchandise returns, which are reserved for based on historical experience.  Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption.  Shipping and handling revenues from our websites are included as a component of net sales.

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We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed.  Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods.  During the fourth quarter of fiscal 2012, we performed an analysis of historical customer redemption patterns and based on the results of this analysis, we revised our estimated gift card breakage rate to 6% from the previous 5% to 6% range.  In addition, the results of our analysis led us to conclude that customer redemption of our oldest gift cards was remote.  These changes to our gift card breakage estimate resulted in additional gift card breakage income of $0.8 million recognized in net sales during the fourth quarter of fiscal 2012.  While customer redemption patterns result in estimated gift card breakage, changes in our customers’ behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales.

Stock-Based Payments  We account for stock-based compensation expense by estimating the fair value of stock options granted, except for certain stock options granted in March 2011 that are subject to the vesting determination described in “NOTE 3 – Stock-Based Compensation” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K, using the Black-Scholes option-pricing formula and a single option award approach.  We estimated the fair value of the stock options granted in March 2011 that are subject to the vesting determination using a Monte Carlo simulation valuation model.  Both of the option-pricing models used require the input of highly subjective assumptions, including the option’s expected life, price volatility of the underlying stock, risk free interest rate, early exercise behavior and expected dividend rate.  As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Forfeitures are estimated based on historical experience.

Self-Insurance We are self-insured for certain losses related to medical and workers compensation claims although we maintain stop loss coverage with third party insurers to limit our total liability exposure.  The estimate of our liability for these claims involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.  When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries.  As claims develop, the actual ultimate losses may differ from actuarial estimates.  Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Rent ExpenseRent expense under our operating leases typically provides for fixed non-contingent rent escalations.  We recognize rent expense on a straight-line basis over the non-cancelable term of the lease, commencing when we take possession of the property.  Construction allowances are recorded as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each lease.

Income Taxes We account for income taxes using the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled.  Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized.

We prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  We include interest and penalties related to uncertain tax positions in income tax expense.

Inflation

We do not believe that inflation has had a material adverse effect on our net sales or results of operations in the past. However, we cannot assure that our business will not be affected by inflation in the future.

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Item 7a. Quantitative and Qualitative Disclosures About Market Risk

We are not a party to any derivative financial instruments.  Our exposure to market risk primarily relates to changes in interest rates on our investments with maturities of less than three months (which are considered to be cash and cash equivalents) and short-term and long-term investments with maturities in excess of three months.  A 100 basis point change in interest rates over a three month period would not have a material impact on the fair value of our investment portfolio as of the end of fiscal 2012.  Cash, cash equivalents and short-term and long-term investments, including the auction rate security, are discussed in more detail in “NOTE 1 – Organization and Summary of Significant Accounting Policies” contained in the consolidated financial statements and notes included elsewhere in this annual report on Form 10-K.

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements and notes listed in Part IV, Item 15(a)(1) are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9a. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures  Our management maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure.

We have carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our most recent fiscal quarter.  Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are effective as of the end of our most recent fiscal quarter.

Report of Management on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Our management assessed the effectiveness of our internal control over financial reporting as of the end of fiscal 2012.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Our management concluded that, as of the end of fiscal 2012, our internal control over financial reporting was effective based on the criteria set forth by COSO in Internal Control-Integrated Framework.

Changes in Internal Control Over Financial Reporting  There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Hot Topic, Inc. and subsidiaries

We have audited Hot Topic, Inc. and subsidiaries’ internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hot Topic, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Hot Topic, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of February 2, 2013, based onthe COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hot Topic, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended February 2, 2013 of Hot Topic, Inc. and subsidiaries and our report dated March 22, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

March 22, 2013

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Item 9b.          Other Information

On March 13, 2013, the company paid bonuses to certain of our executive officers. The following table sets forth the bonus amounts awarded to certain of our named executive officers:

Named Executive Officer	Title	Cash Bonus ($)
Lisa Harper	Chairman and Chief Executive Officer	2,275,000
George Wehlitz, Jr.	Chief Financial  Officer	250,000
Don Hendricks	Chief Operating Officer	585,000
Mark Mizicko	Chief Planning Officer	585,000

Mr. Wehlitz’s bonus includes a discretionary bonus of $47,000 awarded in recognition of his contribution to the company as interim Chief Financial Officer.

With respect to potential annual bonuses, our Compensation Committee annually establishes target profitability levels for the ensuing fiscal year in conjunction with our annual financial plan, in order to reflect the Compensation Committee’s belief that a significant portion of the annual compensation of each executive officer should be contingent upon our performance and officer contribution to that performance. Upon the achievement of various increasing levels of financial performance above the minimum level, varying amounts are awardable; however, the Compensation Committee may choose to recommend increasing bonuses above the original bonus targets, or to recommend awarding less than the target bonuses, or no bonuses.  The financial performance targets attributable to particular executive officers are varied to align the officers’ duties with the appropriate metrics that best reflect the officers’ impact on the company and our performance.

The following table details the fiscal 2013 annual bonus performance targets for our named executive officers:

		Target Payout as
Name of Executive Officer	Title	Precentage of Base Salary
Lisa Harper	Chairman and Chief Executive Officer	175%
George Wehlitz, Jr.	Chief Financial  Officer	35%
Don Hendricks	Chief Operating Officer	65%
Mark Mizicko	Chief Planning Officer	65%

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Part III

Item 10. Directors, Executive Officers and Corporate Governance

See the section entitled “Executive Officers” in Part I, Item 1 hereof for information regarding our executive officers.

The information required by this item with respect to directors (1) is incorporated by reference to the information appearing under the caption “Election of Directors,” contained in our Definitive Proxy Statement in connection with the solicitation of proxies for our 2013 Annual Meeting of Shareholders, or the Proxy Statement, or (2) alternatively, will be provided as an amendment to this annual report on Form 10-K, or the Form 10-K/A, in either case to be filed with the SEC within 120 days of February 2, 2013.

Certain other information required by this item is incorporated by reference to the information appearing under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement, or, alternatively, will be provided in the Form 10-K/A.

We have adopted Standards of Business Ethics that apply to all of our officers, directors and employees.  The Standards of Business Ethics is available on our investor relations website at investorrelations.hottopic.com.  If we make any substantive amendments to the Standards of Business Ethics or grant any waiver from a provision of the Standards of Business Ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website, as well as via any other means then required by Nasdaq listing standards or applicable law.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the information appearing under the captions “Executive Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement, or alternatively, will be provided in the Form 10-K/A.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by this item is incorporated by reference to the information appearing under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement, or alternatively, will be provided in the Form 10-K/A.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to the information appearing under the captions “Election of Directors” and “Policies and Procedures with respect to Related Party Transactions” in the Proxy Statement, or alternatively, will be provided in the Form 10-K/A.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the information appearing under the caption “Ratification of Selection of Independent Auditors” in the Proxy Statement, or alternatively, will be provided in the Form 10-K/A.

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Part IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1)    Consolidated Financial Statements

The following consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K:

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended February 2, 2013, January 28, 2012 and January 29, 2011	F-2
Consolidated Balance Sheets as of February 2, 2013 and January 28, 2012	F-3
Consolidated Statements of Shareholders’ Equity for the years ended February 2, 2013, January 28, 2012 and January 29, 2011	F-4
Consolidated Statements of Cash Flows for the years ended February 2, 2013, January 28, 2012 and January 29, 2011	F-5
Notes to Consolidated Financial Statements	F-6

(a)(2)    Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable, and therefore, have been omitted.

Schedule II
Valuation and Qualifying Accounts
(in thousands)
For Fiscal 2012, 2011 and 2010
	Balance at		Charged to
	Beginning of		Costs and			Deductions/		Balance at
	Year		Expenses			Write-offs		End of Year
Fiscal 2012
Allowance for sales returns	$	340	$	(36	)	$	-	$	304
Fiscal 2011
Allowance for sales returns	$	287	$	53		$	-	$	340
Fiscal 2010
Allowance for sales returns	$	363	$	(76	)	$	-	$	287

(a)(3)      Index to Exhibits—See Item 15(b) below.

(b)           Exhibits

The exhibits listed under Item 15(b) hereof are filed with, and incorporated by reference into, this Annual Report on Form 10-K. Management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15(b) are so identified therein.

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Exhibit Number	Description of Document
3.1	Amended and Restated Articles of Incorporation.  (Filed as an exhibit to Registrant’s Registration Statement on Form SB-2 (333-5054-LA) and incorporated herein by reference.)
3.2	Certificate of Amendment of Amended and Restated Articles of Incorporation.  (Filed as Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference.)
3.3	Amended and Restated Bylaws, as amended.  (Filed as Exhibit 3.3 to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference.)
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2	Specimen stock certificate.  (Filed as an exhibit to Registrant’s Registration Statement on Form SB-2 (333-5054-LA) and incorporated herein by reference.)
10.1a	Form of Indemnity Agreement entered into between Registrant and its directors and officers.  (Filed as Exhibit 10.1a to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 28, 2012 and incorporated herein by reference.)
10.2a	2012 Equity Incentive Plan (the “2012 Plan”). (Filed as Exhibit 99.1 to Registrant’s Initial Registration Statement on Form S-8 (33-181887), filed on June 5, 2012 and incorporated herein by reference.)
10.3a	Form of Restricted Stock Agreement of Registrant pursuant to the 2012 Plan. (Filed as Exhibit 99.2 to Registrant’s Initial Registration Statement on Form S-8 (33-181887), filed on June 5, 2012 and incorporated herein by reference.)
10.4a	Form of Nonstatutory Stock Option Agreement of Registrant pursuant to the 2012 Plan. (Filed as Exhibit 99.3 to Registrant’s Initial Registration Statement on Form S-8 (33-181887), filed on June 5, 2012 and incorporated herein by reference.)
10.5a	2006 Equity Incentive Plan (the “2006 Plan”), as amended.  (Filed as Exhibit 10.2a to Registrant’s Annual Report on Form 10-K for the year ended February 3, 2007 and incorporated herein by reference.)
10.6a	Form of Nonstatutory Stock Option Agreement of Registrant pursuant to the 2006 Plan.  (Filed as Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed on June 15, 2006 and incorporated herein by reference.)
10.7a	Form of Incentive Stock Option Agreement of Registrant pursuant to the 2006 Plan.  (Filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed on June 15, 2006 and incorporated herein by reference.)

10.8a	Form of Restricted Stock Bonus Agreement between Registrant and each of its non-employee directors, under the 2006 Plan.  (Filed as Exhibit 10.9a to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2011 and incorporated herein by reference.)
10.9a	1996 Equity Incentive Plan (the “1996 Plan”), as amended, including the forms of incentive stock option agreement and nonstatutory stock option agreement thereunder..  (Filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2005 and incorporated herein by reference.)
10.10a	Form of Restricted Stock Bonus Agreement between the Registrant and each of its non-employee directors under the 1996 Plan.  (Filed as Exhibit 10.13 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 5, 2001 and incorporated herein by reference.)
10.11a	1996 Non-Employee Directors’ Stock Option Plan, as amended.  (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on June 13, 2008 and incorporated herein by reference.)
10.12a	Employee Stock Purchase Plan, as amended.  (Filed as Exhibit 10.6a to Registrant’s Annual Report on Form 10-K for the year ended February 3, 2007 and incorporated herein by reference.)
10.13a	Hot Topic 401(k) Plan of Registrant, effective as of August 1, 1995, as amended.  (Filed as Exhibit 10.7a to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference.)
10.14a	Hot Topic, Inc. Deferred Compensation Plan.  (Filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed on July 6, 2006 and incorporated herein by reference.)
10.15a	Board Compensation Summary.
10.16a	Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and Gerald Cook.  (Filed as Exhibit 10.1a to Registrant’s Quarterly Report on Form  10-Q for the quarter ended November 1, 2008 and incorporated herein by reference.)
10.17a	Amendment dated March 21, 2011, to the Amended and Restated Employment Letter Agreement dated November 24, 2008 between the Registrant and Gerald Cook.  (Filed as Exhibit 10.14a to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2011 and incorporated herein by reference.)
10.18a	Second Amendment, dated March 16, 2012, to the Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and Gerald Cook.  (Filed as Exhibit 10.1a to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 28, 2012 and incorporated herein by reference.)
10.19a	Third Amendment, dated September 6, 2012, to the Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and Gerald Cook.  (Filed as Exhibit 10.1a to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 27, 2012 and incorporated herein by reference.)
10.20a	Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and James McGinty.  (Filed as Exhibit 10.2a to Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 1, 2008 and incorporated herein by reference.)
10.21a	Amendment dated March 21, 2011, to the Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and James McGinty.  (Filed as Exhibit 10.16a to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2011 and incorporated herein by reference.)

41

10.22a	Second Amendment dated March 16, 2012, to the Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and James McGinty.  (Filed as Exhibit 10.2a to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 28, 2012 and incorporated herein by reference.)
10.23a	Third Amendment, dated January 21, 2013, to the Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and James McGinty.
10.24a	Fourth Amendment, dated January 31, 2013, to the Amended and Restated Employment Letter Agreement dated November 24, 2008, between the Registrant and James McGinty.
10.25a	Employment Offer Letter, dated as of January 21, 2013, by and between Registrant and George Wehlitz.
10.26a	Mutual Separation Agreement, dated as of January 26, 2011, by and between Registrant and Christopher Daniel.  (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on February 1, 2011 and incorporated herein by reference.)
10.27a	Employment Agreement, dated as of March 21, 2011, by and between Registrant and Lisa Harper.  (Filed as Exhibit 10.21a to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2011 and incorporated herein by reference.)
10.28a	Amended and Restated Employment Agreement, dated as of March 16, 2012, by and between Registrant and Lisa Harper.  (Filed as Exhibit 10.2a to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 28, 2012 and incorporated herein by reference.)
10.29a	Mutual Separation Agreement, dated as of March 21, 2011, by and between Registrant and Elizabeth McLaughlin.  (Filed as Exhibit 10.22a to Registrant’s Annual Report on Form 10-K for the year ended January 29, 2011 and incorporated herein by reference.)
10.30a	Employment Agreement, dated as of July 25, 2011, by and between Registrant and Donald Hendricks.
10.31a	Employment Agreement, dated as of September 26, 2011, by and between Registrant and Mark Mizicko.
10.32	Industrial Real Estate Lease (Multi-Tenant Facility), dated December 10, 1998, entered into between Registrant’s wholly owned subsidiary, Hot Topic Administration, Inc. and Majestic Realty Co. and Patrician Associates, Inc.   (Filed as Exhibit 10.18 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1999 and incorporated herein by reference.)
10.33	Guaranty of Lease, dated December 10, 1998, entered into between the Registrant and Majestic Realty Co. and Patrician Associates, Inc.  (Filed as Exhibit 10.19 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1999 and incorporated herein by reference.)
10.34	First Amendment to Industrial Real Estate Lease, dated March 19, 2001, by and between Majestic—Fullerton Road, LLC, PFG Fullerton Limited Partnership and Hot Topic Administration, Inc.  (Filed as Exhibit 10.10 to Registrant’s Annual Report on Form 10-K for the year ended February 3, 2001 and incorporated herein by reference.)
10.35	Third Amendment to Industrial Real Estate Lease, dated February 25, 2004, by and among Majestic-Fullerton Road, LLC, PFG Fullerton Limited Partnership and Hot Topic Administration, Inc.  (Filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2004 and incorporated herein by reference.)

42

10.36	Centre Pointe Distribution Park Lease, dated June 1, 2004, by and among Crescent Resources, LLC and Hot Topic, Inc.  (Filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004 and incorporated herein by reference.)
10.37	Purchase and sale agreement between the Registrant and Crescent Resources, LLC.  (Filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed on June 20, 2005 and incorporated herein by reference.)
10.38	Union Bank of California Trust Agreement.  (Filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed on July 6, 2006 and incorporated herein by reference.)
10.39	Agreement, dated as of September 19, 2010, by and among Registrant, Steven R. Becker, Matthew A. Drapkin, Becker Drapkin Management, L.P., Becker Drapkin Partners (QP), L.P., Becker Drapkin Partners, L.P., BD Partners I, L.P. and BC Advisors, LLC.  (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on September 20, 2010 and incorporated herein by reference.)
10.40	Agreement, dated as of September 19, 2010, by and among Hot Topic, Inc., Clint D. Carlson, Black Diamond Offshore Ltd., Double Black Diamond Offshore Ltd., Carlson Capital L.P. and Asgard Investment Corp.  (Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on September 20, 2010 and incorporated herein by reference.)
10.41	Agreement and Plan of Merger, dated as of March 6, 2013, by and among 212F Holdings LLC, HT Merger Sub Inc., and Registrant.  (Filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on March 8, 2013 and incorporated herein by reference.)
21	Hot Topic, Inc. List of Subsidiaries.
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
24.1	Power of Attorney is contained on the signature page.
31.1	Certification, dated March 22, 2012, of Registrant's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification, dated March 22, 2012, of Registrant's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications, dated March 22, 2012, of Registrant's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

a         Denotes management contract or compensatory plan or arrangement.

(c)           Financial Statement Schedules

Reference is made to Item 15(a)(2).

43

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Hot Topic, Inc.
By:	/S/    Lisa Harper
	Lisa Harper
	Chairman and Chief Executive Officer

March 22, 2013

44

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Lisa Harper and George Wehlitz, Jr., or either of them, his attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Position	Date
/s/    LISA HARPER	Chairman and Chief Executive Officer (Principal Executive Officer)	March 22, 2013
Lisa Harper
/s/    GEORGE WEHLITZ, JR.	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 22, 2013
George Wehlitz, Jr.
/s/    STEVEN R. BECKER	Director	March 22, 2013
Steven R. Becker
/s/    EVELYN D'AN	Director	March 22, 2013
Evelyn D'An
/s/    MATTHEW A. DRAPKIN	Director	March 22, 2013
Matthew A. Drapkin
/s/    W. SCOTT HEDRICK	Director	March 22, 2013
W. Scott Hedrick
/s/    JOHN KYEES	Director	March 22, 2013
John Kyees
/s/    ANDREW SCHUON	Director	March 22, 2013
Andrew Schuon
/s/    THOMAS VELLIOS	Director	March 22, 2013
Thomas Vellios
/s/    TERRI FUNK GRAHAM	Director	March 22, 2013
Terri Funk Graham

45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Hot Topic, Inc.

We have audited the accompanying consolidated balance sheets of Hot Topic, Inc. and subsidiaries as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended February 2, 2013.  Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hot Topic, Inc. and subsidiaries at February 2, 2013 and January 28, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 2, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hot Topic, Inc. and subsidiaries’ internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 22, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

March 22, 2013

F-1

Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share amounts)

	Years Ended
	February 2,			January 28,			January 29,
	2013			2012			2011
Net sales	$	741,745		$	697,934		$	708,244
Cost of goods sold, including buying,
distribution and occupancy costs		473,505			465,081			474,917
Gross margin		268,240			232,853			233,327
Selling, general and administrative expenses		237,401			236,308			247,089
Income (loss) from operations		30,839			(3,455	)		(13,762	)
Other income and interest, net		138			310			336
Income (loss) before provision (benefit) for income taxes		30,977			(3,145	)		(13,426	)
Provision (benefit) for income taxes		11,507			(1,327	)		(5,191	)
Net income (loss)	$	19,470		$	(1,818	)	$	(8,235	)
Earnings (loss) per share:
Basic	$	0.46		$	(0.04	)	$	(0.18	)
Diluted	$	0.46		$	(0.04	)	$	(0.18	)
Cash dividends declared and paid per share:	$	0.32		$	0.28		$	1.28
Shares used in computing earnings (loss) per share:
Basic		41,970			43,892			44,554
Diluted		42,737			43,892			44,554
Comprehensive income (loss):
Net income (loss)	$	19,470		$	(1,818	)	$	(8,235	)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(79	)		(23	)		71
Unrealized gainon short-term and long-term       investments, net of taxes of $1, $30, and $85		7			24			121
Total other comprehensive (loss) income		(72	)		1			192
Comprehensive income (loss)	$	19,398		$	(1,817	)	$	(8,043	)

See accompanying Notes to Consolidated Financial Statements.

F-2

Hot Topic, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
	February 2, 2013			January 28, 2012
Assets
Current assets:
Cash and cash equivalents	$	43,833		$	49,615
Short-term investments		6,158			16,503
Inventory		80,844			70,800
Prepaid expenses and other		13,716			17,474
Deferred tax assets		10,664			5,953
Total current assets		155,215			160,345
Property and equipment, net		107,347			105,790
Deposits and other		8,039			7,002
Long-term investments		1,730			1,722
Deferred tax assets		2,614			3,104
Total assets	$	274,945		$	277,963
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	23,211		$	23,828
Accrued liabilities		48,065			44,253
Income taxes payable		5,143			171
Total current liabilities		76,419			68,252
Deferred rent and other		19,627			20,486
Income taxes payable		657			1,812
Deferred compensation		5,488			4,410
Commitments and contingencies		-			-
Shareholders’ equity:
Preferred shares, no par value; 10,000,000 shares
authorized; no shares issued and outstanding		-			-
Common shares, no par value; 150,000,000 shares authorized;
40,246,247 and 42,047,991 shares issued and outstanding
at February 2, 2013 and January 28, 2012, respectively		135,567			129,354
Retained earnings		37,476			53,866
Accumulated other comprehensive loss		(289	)		(217	)
Total shareholders’ equity		172,754			183,003
Total liabilities and shareholders’ equity	$	274,945		$	277,963
See accompanying Notes to Consolidated Financial Statements.

F-3

Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(In thousands)
										Accumulated
										Other			Total
	Common Shares						Retained			Comprehensive			Shareholders’
	Shares			Amount			Earnings			Loss			Equity
Balance at January 30, 2010		44,340		$	122,552		$	154,905		$	(410	)	$	277,047
Exercise of stock options		174			938			-			-			938
Employee stock purchase plan		95			411			-			-			411
Restricted stock awards		21			155			-			-			155
Tax deficiency from exercise of stock
options, net		-			(41	)		-			-			(41	)
Stock-based compensation expense		-			4,047			-			-			4,047
Dividends		-			-			(57,017	)		-			(57,017	)
Net loss		-			-			(8,235	)		-			(8,235	)
Other comprehensive income		-			-			-			192			192
Balance at January 29, 2011		44,630		$	128,062		$	89,653		$	(218	)	$	217,497
Exercise of stock options		523			2,743			-			-			2,743
Employee stock purchase plan		71			389			-			-			389
Restricted stock awards		37			189			-			-			189
Repurchase of common stock		(3,213	)		(3,309	)		(21,770	)		-			(25,079	)
Tax deficiency from exercise of stock
options and awards, net		-			(2,806	)		-			-			(2,806	)
Stock-based compensation expense		-			4,086			-			-			4,086
Dividends		-			-			(12,199	)		-			(12,199	)
Net loss		-			-			(1,818	)		-			(1,818	)
Other comprehensive income		-			-			-			1			1
Balance at January 28, 2012		42,048		$	129,354		$	53,866		$	(217	)	$	183,003
Exercise of stock options		609			3,888			-			-			3,888
Employee stock purchase plan		78			544			-			-			544
Restricted stock awards		46			306			-			-			306
Repurchase of common stock		(2,535	)		(2,611	)		(22,440	)		-			(25,051	)
Tax benefit from exercise of stock
options and awards, net		-			66			-			-			66
Stock-based compensation expense		-			4,020			-			-			4,020
Dividends		-			-			(13,420	)		-			(13,420	)
Net income		-			-			19,470			-			19,470
Other comprehensive loss		-			-			-			(72	)		(72	)
Balance at February 2, 2013		40,246		$	135,567		$	37,476		$	(289	)	$	172,754

See accompanying Notes to Consolidated Financial Statements.

F-4

Hot Topic, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
	Years Ended
	February 2,			January 28,			January 29,
	2013			2012			2011
OPERATING ACTIVITIES
Net income (loss)	$	19,470		$	(1,818	)	$	(8,235	)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		33,135			35,729			40,926
Stock-based compensation		4,244			4,373			4,235
Loss on disposal of property and equipment		1,107			2,896			1,085
Impairment of long-lived assets		519			2,658			6,054
Deferred taxes		(5,237	)		(1,167	)		(1,002	)
Gift card breakage		(1,602	)		(853	)		(1,100	)
Foreign currency translation gain		69			-			-
Changes in operating assets and liabilities:
Inventory		(10,200	)		(536	)		6,203
Prepaid expenses and other current assets		3,758			2,139			(7,320	)
Deposits and other assets		(1,037	)		(353	)		(1,246	)
Accounts payable		(617	)		1,804			1,789
Accrued liabilities		6,626			7,389			(93	)
Deferred rent and other		(859	)		(5,769	)		(5,932	)
Income taxes payable		3,817			(596	)		(346	)
Net cash provided by operating activities		53,193			45,896			35,018
INVESTING ACTIVITIES
Purchases of property and equipment		(36,369	)		(23,891	)		(31,031	)
Proceeds from sale of short-term and long-term investments		20,215			25,796			6,160
Purchases of short-term and long-term investments		(9,871	)		(15,743	)		(20,685	)
Net cash used in investing activities		(26,025	)		(13,838	)		(45,556	)
FINANCING ACTIVITIES
Excess tax benefit from stock-based compensation		1,082			592			246
Proceeds from employee stock purchases and exercise
of stock options		4,432			3,132			1,349
Payment of capital lease obligation		-			(191	)		(571	)
Payment of cash dividends		(13,420	)		(12,199	)		(57,017	)
Repurchase of common stock		(25,051	)		(25,079	)		-
Net cash used in financing activities		(32,957	)		(33,745	)		(55,993	)
Decrease in cash and cash equivalents		(5,789	)		(1,687	)		(66,531	)
Effect of foreign currency exchange rate changes
on cash		7			(14	)		83
Cash and cash equivalents at beginning of period		49,615			51,316			117,764
Cash and cash equivalents at end of period	$	43,833		$	49,615		$	51,316
SUPPLEMENTAL INFORMATION
Cash (received) paid during the period for interest	$	(23	)	$	10		$	32
Cash paid (received) during the period for income taxes	$	5,593		$	(1,109	)	$	2,480
See accompanying Notes to Consolidated Financial Statements.

F-5

HOT TOPIC, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 2, 2013

NOTE 1. Organization and Summary of Significant Accounting Policies

Organization and Business ActivitiesWe are a mall and web-based specialty retailer of apparel, accessories, music and gift items for young men and women whose lifestyles reflect a passion for music, fashion and pop culture.  We primarily operate under two concepts: Hot Topic and Torrid.  We launched a new test retail concept, Blackheart, during the fourth quarter of fiscal 2012.  Music and pop culture are the overriding inspirations at Hot Topic, and Torrid is focused on providing the best in fashion to young plus-size women.  At our Hot Topic stores and our website hottopic.com, we sell a selection of licensed and non-licensed apparel, accessories and gift items that are influenced by popular music artists and pop culture trends, designed to appeal to young men and women.  We also sell a limited assortment of music CDs/vinyl LPs and DVDs at Hot Topic.  At our Torrid stores and on our website torrid.com, we sell on-trend fashion apparel, lingerie and accessories inspired by and designed to fit the young, voluptuous woman who wears a size 12 and up.  We generate revenues primarily through our retail stores in the United States of America, Puerto Rico and Canada, and online through our websites.  We were incorporated in California in 1988 and opened our first Hot Topic store the following year in fiscal 1989.  We opened our first Torrid store in fiscal 2001.  We currently have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts and the relatively immaterial business operations of our Blackheart test concept.  During the second quarter of fiscal 2011, the operations of ShockHound, an online digital music website launched in fiscal 2008, were discontinued.  Refer to “NOTE 2 – Business Events” contained in these consolidated financial statements and notes for more information concerning the discontinuation of ShockHound’s operations.

Merger  On March 6, 2013, we entered into an agreement and plan of merger with Sycamore Partners, discussed in more detail in “NOTE 15 – Subsequent Events” contained in these consolidated financial statements and notes.

Principles of Consolidation Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.  The consolidated financial statements include the accounts of Hot Topic, Inc. and our wholly-owned subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

Fiscal YearOur fiscal year ends on the Saturday nearest to January 31.  References to fiscal 2013 refer to the 52-week period ending February 1, 2014.  References to fiscal 2012 refer to the 53-week period ended February 2, 2013.  References to fiscal 2011, 2010, 2009 and 2008 refer to the 52-week periods ended January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009.

Use of Estimates  We are required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with generally accepted accounting principles.  Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes.  Our most significant estimates relate to the valuation of inventory balances, the valuation of our auction rate security, the determination of sales returns, the assessment of expected cash flows used in evaluating long-lived assets for impairment, the determination of gift card breakage and estimates related to certain strategic business changes made during fiscal 2011 and 2010.  The estimation process required to prepare our consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain.  Our actual results could differ materially from those estimates.

Cash and Cash Equivalents We consider all highly liquid investments with maturities of less than three months when purchased to be cash equivalents.  All credit and debit card transactions that process in less than seven days are classified as cash and cash equivalents.  The amounts due from third party financial institutions for these transactions classified as cash totaled $3.8 million and $2.9 million as of the end of fiscal 2012 and 2011, respectively.  Cash used primarily for working capital purposes is maintained with various major financial institutions in amounts which are in excess of the Federal Deposit Insurance Corporation, or FDIC, insurance limits.  We are potentially exposed to a concentration of credit risk when cash deposits in banks are in excess of FDIC limits.  Excess cash and cash equivalents, which represent the majority of our cash and cash equivalents balance, are held primarily in diversified money market funds.

F-6

Fair Value of Financial Instruments  We consider carrying amounts of cash and cash equivalents, receivables and accounts payable to approximate fair value because of the short maturity of these financial instruments.

Short-Term and Long-Term Investments Our short-term investments consist of highly-rated interest-bearing municipal bonds that have maturities that are less than one year and are accounted for as available for sale.  As of the end of fiscal 2012 and  2011, short-term investments consisted of municipal bonds of $6.2 million and $16.5 million, respectively.  Refer to “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes for further discussion on how we determined the fair value of our short-term investments.  The associated unrealized net gains and losses in fiscal 2012 and 2011, respectively, were immaterial and have been recorded in the consolidated statements of comprehensive income (loss).  

As of the end of fiscal 2012 and 2011, our long-term investment comprised of an auction rate security.  Our auction rate security is a AAA/A3-rated debt instrument with a maturity of 25 years.  It is accounted for as available for sale and backed by pools of student loans guaranteed by the U.S. Department of Education.  Its interest rate is reset through an auction process, most commonly at intervals of approximately 4 weeks.  This same auction process is designed to provide a means by which this security can be sold and prior to 2008 had provided a liquid market for it.  There continues to be uncertainty in the global credit and capital markets, which has resulted in the failure of auctions representing the auction rate security we hold as the amount of securities submitted for sale in those auctions exceed the amount of bids.  While we have continued to earn and receive interest on our auction rate security through the date of this report, we concluded that its estimated fair value no longer approximates par value.  Due to the lack of availability of observable market quotes on our auction rate security, the fair market value of this security has been based on a valuation model using current assumptions.  Refer to “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes for further discussion on how we determined the fair value of our auction rate security investment.

As of the end of fiscal 2012 and 2011, the fair value of our auction rate security remained the same at $1.7 million.  This fair value reflects a cumulative decline of $0.4 million from the par value.  This cumulative $0.4 million decline ($0.2 million net of tax) is deemed temporary as we have the ability to hold this security and we do not have the intent to sell it below par value.  Furthermore, it is not likely that we will be required to sell the security before the recovery of its amortized cost basis.  If uncertainties in the credit and capital markets continue, we may incur additional losses, some of which may be other-than-temporary, which could negatively affect our financial condition or results of operations.  In addition, in the event that we decide to sell this security and it becomes likely that we will be required to sell the security before the recovery of its amortized cost basis, we may be required to recognize impairment charges against income.  We have classified our auction rate security as a non-current asset on our consolidated balance sheet, as we do not expect it to successfully auction and recover its full or par value within the next 12 months.

In fiscal 2012, we recorded immaterial unrealized gains for our auction rate security in the consolidated statements of comprehensive income (loss).

In fiscal 2011, we recorded unrealized gains of $0.1 million ($0.1 million net of tax), for our auction rate security in the consolidated statements of comprehensive income (loss).  The $0.1 million unrealized gain in fiscal 2011 primarily represents a $149,000 recovery in fair value which was previously temporarily impaired, offset by a $52,000 decrease in fair value.

The consolidated statements of comprehensive income (loss) is comprised of unrealized gains and losses from short-term and long-term investments, net of all related taxes, as well as foreign currency translation adjustments.

F-7

Inventories  Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail method.  Under the retail method, inventory is stated at its current retail selling value and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the purchase activity for the month.  Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise.  We record a charge to cost of goods sold for permanent markdowns.  Inherent in the retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins.  To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded.  Physical inventories are conducted during the year to determine actual inventory on hand and shrinkage.  We accrue our estimated inventory shrinkage for the period between the last physical count and current balance sheet date.  Thus, the difference between actual and estimated shrink amounts may cause fluctuations in quarterly results, but not for the full fiscal year results.

Property and Equipment Property and equipment are recorded at cost less accumulated depreciation, or in the case of capitalized leases, at the present value of future minimum lease payments.  Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred.  Application and development costs associated with internally developed software such as salaries of employees and payments made to third parties and consultants working on the software development are capitalized.  Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform.  Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally three years.  In fiscal 2012, 2011 and 2010, we amortized approximately $1.2 million, $1.5 million and $1.8 million, respectively.  Additionally, as of the end of fiscal 2012 and 2011, the net book value of capitalized internal use software totaled approximately $3.3 million and $2.5 million, respectively.

Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets (3 to 20 years).

Leasehold improvements are amortized using the straight-line method over the shorter of the respective lease terms or the 10 year estimated useful life of the assets.

We assess property and equipment for impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable.  

Valuation of Long-Lived Assets  We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  For our Hot Topic and Torrid concepts, we group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified.  Factors we consider important that could trigger an impairment review of our stores or online operations include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend.  When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate, which we currently estimate to be approximately 13%, determined by management.  These cash flows are calculated by netting future estimated sales of each store against estimated cost of goods sold, occupancy costs and other store operating expenses such as payroll, supplies, repairs and maintenance and credit/debit card fees.  The discount rate, the estimated sales and the aforementioned costs and expenses used for this nonrecurring fair value measurement are considered significant Level 3 inputs as defined in “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes.  Changes in these assumptions may cause the fair value to be significantly impacted.  In the event future performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges.  While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges.

F-8

In fiscal 2012, 2011 and 2010, we recorded store impairment charges of $0.5 million, $2.4 million (of which $0.9 million related to the cost reduction plan described in “NOTE 2 – Business Events” contained in these consolidated financial statements and notes) and $3.1 million (of which $1.2 million related to the cost reduction plan described in “NOTE 2 –Business Events” contained in these consolidated financial statements and notes), respectively, which are included in selling, general and administrative expenses in our consolidated statements of operations.  During the third quarter of fiscal 2010, we concluded that ShockHound’s assets had become impaired due to its slower than expected revenue growth.  Revenues from partnerships entered into in the earlier part of fiscal 2010, as well as other revenues, did not build as much as we had anticipated.  In the third quarter of fiscal 2010, we recorded a full impairment charge of $3.0 million to selling, general and administrative expenses in our consolidated statements of operations.

Self-Insurance We are self-insured for certain losses related to medical and workers compensation claims although we maintain stop loss coverage with third party insurers to limit our total liability exposure.  The estimate of our self-insurance liability involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.  When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries.  As claims develop, the actual ultimate losses may differ from actuarial estimates.  Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Revenue Recognition  Revenue is generally recognized at our retail store locations at the point at which the customer receives and pays for the merchandise at the register.  For online sales, revenue is recognized upon delivery to the customer.  Sales are recognized net of merchandise returns, which are reserved for based on historical experience.  As of the end of fiscal 2012, 2011 and 2010, net merchandise returns were $25.2 million, $24.3 million and $23.6 million, respectively.  Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption.  Shipping and handling revenues from our websites are included as a component of net sales.

We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed.  Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods.  During the fourth quarter of fiscal 2012, we performed an analysis of historical customer redemption patterns and based on the results of this analysis, we revised our estimated gift card breakage rate to 6% from the previous 5% to 6% range.  In addition, the results of our analysis led us to conclude that customer redemption of our oldest gift cards was remote.  These changes to our gift card beakage estimate resulted in additional gift card breakage income of $0.8 million recognized in net sales during the fourth quarter of fiscal 2012.  While customer redemption patterns result in estimated gift card breakage, changes in our customers’ behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales. In fiscal 2012, 2011 and 2010, we recognized $1.6 million (which includes the $0.8 million additional gift card breakage income described above), $0.9 million and $1.1 million, respectively, as a component of sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed.

Cost of Goods Sold, Including Buying, Distribution and Occupancy Costs  Cost of goods sold, including buying, distribution and occupancy costs includes: merchandise costs; freight; inventory shrink; payroll expenses associated with the merchandising and distribution departments; distribution center expenses including rent, common area maintenance charges, real estate taxes, depreciation, utilities, supplies and maintenance; and store expenses including rents, common area maintenance charges, real estate taxes and depreciation.

Vendor AllowancesWe receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and pricing.  Allowances received from vendors related to damaged merchandise and pricing are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold.  Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received as these allowances are received after goods have been sold or marked down.  In fiscal 2012, 2011 and 2010, we received vendor allowances of $6.0 million, $8.3 million and $8.5 million, respectively, substantially all of which were accounted for as a reduction of cost of goods sold.  Most of the vendor allowances that we receive are based on on-going agreements and negotiations with vendors.  We receive vendor allowances from substantially all of our vendors.

F-9

Selling, General and Administrative Expenses  Selling, general and administrative expenses include: payroll expenses associated with stores; store operating expenses; store pre-opening costs; marketing expenses; and payroll and other expenses associated with headquarters and administrative functions.

Store Pre-Opening Costs These are costs incurred in connection with the opening of a new store and are expensed as incurred.

Shipping and Handling Costs We classify shipping and handling costs in costs of goods sold, including buying, distribution and occupancy costs in the accompanying consolidate statements of operations.

Rent ExpenseRent expense under our operating leases typically provides for fixed non-contingent rent escalations.  We recognize rent expense on a straight-line basis over the non-cancelable term of the lease, commencing when we take possession of the property.  Construction allowances are recorded as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each lease.  Our leases are discussed in more detail in “NOTE 9 – Commitments and Contingencies” contained in these consolidated financial statements and notes.

Advertising Costs Advertising costs are expensed the first time the event occurs or as incurred.  During fiscal 2012, 2011 and 2010, advertising expenses were $7.8 million, $7.4 million and $8.5 million, respectively, and advertising reimbursements from vendors for these years were immaterial.  As of the end of fiscal 2012 and 2011, the amount of advertising costs reported as prepaid advertising was immaterial.

Income Taxes We account for income taxes using the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled.  Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized.

We prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  We include interest and penalties related to uncertain tax positions in income tax expense.

Stock-Based Payments  We account for stock-based compensation expense by estimating the fair value of stock options granted, except for certain stock options granted in March 2011 that are subject to the vesting determination described in “NOTE 3 – Stock-Based Compensation” contained in these consolidated financial statements and notes, using the Black-Scholes option-pricing formula and a single option award approach.  We estimated the fair value of the stock options granted in March 2011 that are subject to the vesting determination using a Monte Carlo simulation valuation model.  Both of the option-pricing models used require the input of highly subjective assumptions, including the option’s expected life, price volatility of the underlying stock, risk free interest rate, early exercise behavior and expected dividend rate.  As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Forfeitures are estimated based on historical experience.

Earnings (Loss) Per Share Basic earnings or loss per share is computed by dividing net income or net loss, respectively, by the weighted average number of common shares outstanding for the period.  Diluted earnings per share is applicable only in periods of net income and is computed by dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents outstanding for the period.  Periods of net loss require the diluted computation to be the same as the basic computation.

Comprehensive Income (Loss)  Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to shareholders.  Other comprehensive (loss) income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity.  Components of our comprehensive income (loss) include net income (loss), foreign currency translation adjustments and gains/losses associated with our short-term and long-term investments.

F-10

Impact of Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board, or FASB, issued new guidance that results in a consistent definition of fair value and common requirements for measurement of, and disclosure about, fair value between U.S. Generally Accepted Accounting Pronouncements, or GAAP, and International Financial Reporting Standards, or IFRS.  The new guidance changes some fair value measurement principles and disclosure requirements under U.S. GAAP.  Several new disclosures about Level 3 measurements are required, including quantitative information about the significant  unobservable inputs disclosed and a description of the valuation processes used by us.  The new guidance was effective for interim or fiscal years beginning on or after December 15, 2011, with early adoption prohibited.  Our adoption of this new guidance on January 29, 2012 did not have a material impact on our financial condition or results of operations.

In June 2011, the FASB issued a final standard requiring entities to present net income (loss) and other comprehensive income (loss) in either a single continuous statement or in two separate, but consecutive, statements of net income (loss) and other comprehensive income (loss).  The new standard eliminates the option to present items of other comprehensive income (loss) in the statement of changes in equity.  The new requirements do not change which components of comprehensive income (loss) are recognized in net income (loss) or other comprehensive income (loss), or when an item of other comprehensive income (loss) must be reclassified to net income (loss).  Also, earnings (loss) per share computations do not change.  The new requirements were effective for interim and fiscal years beginning after December 15, 2011, with early adoption permitted.    Full retrospective application was required.  As this standard related only to the presentation of other comprehensive income (loss), our adoption of this new guidance on January 29, 2012 did not have a material impact on our financial condition or results of operations.

In February 2013, the FASB issued new guidance requiring entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. It requires entities to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income (loss). This disclosure is required only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income (loss), a cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts is required. The new guidance is effective for interim or fiscal years beginning on or after December 15, 2012, with early adoption permitted. The adoption of this new guidance is not expected to have a material impact on our financial condition or results of operations.

NOTE 2. Business Events

Strategic Business Changes  In March 2011, our Board of Directors, or the Board, approved certain strategic business changes to better position the company for growth.  The business changes involved discontinuing the operations of ShockHound; writing down inventory due to a change in management’s inventory strategy; writing down property and equipment that are no longer critical to our strategic direction; and implementing other strategic business and operational initiatives.  As of the end of the second quarter of fiscal 2011, we had incurred all charges related to the strategic business changes.

Cost Reduction Plan  In November 2010, our Board approved a cost reduction plan, designed to meet the challenges of the environment at that time, which involved closing approximately 50 underperforming stores, a majority of which closed by the end of the first quarter of fiscal 2011.  These closures occurred as a result of natural lease expirations, exercising lease kick out clauses and other negotiations.  The cost reduction plan also included reducing our home office and field management positions, reducing planned capital expenditures in fiscal 2011 relative to fiscal 2010 and implementing other non-payroll overhead expense reduction initiatives.  As of the end of the second quarter of fiscal 2011, we had recorded all charges related to the cost reduction plan, completed the announced reduction of our home office and field management positions, and completed the implementation of non-payroll overhead expense reduction initiatives as part of the cost reduction plan.  As of the end of the second quarter of fiscal 2012, we had closed all underperforming stores related to the costreduction plan, totaling 41 Hot Topic stores and seven Torrid stores.

F-11

The following table details charges related to the strategic business changes and cost reduction plan recorded since their implementation in the first quarter of fiscal 2011 and the fourth quarter of fiscal 2010, respectively, (in thousands).

				Non-Store Related
				Severance and			Inventory and
	Store Related			Outplacement			Asset-Related			Consulting			Stock Option
	Closure Costs 1			Costs			Costs 2			Fees			Expense			Total
Balance at October 30, 2010	$	-		$	-		$	-		$	-		$	-		$	-
Cost Reduction Plan charges		(7,077	)		(1,850	)		(830	)		-			-			(9,757	)
Cash payments		93			985			-			-			-			1,078
Non-cash adjustments		6,497			-			830			-			-			7,327
Balance at January 29, 2011		(487	)		(865	)		-			-			-			(1,352	)
Cost Reduction Plan recovery		365			-			-			-			-			365
Strategic Business Changes charges		-			(1,583	)		(9,605	)		(1,606	)		-			(12,794	)
Cash payments		699			889			-			1,645			-			3,233
Non-cash adjustments		(659	)		-			4,891			-			-			4,232
Balance at April 30, 2011		(82	)		(1,559	)		(4,714	)		39			-			(6,316	)
Cost Reduction Plan recovery		174			-			-			-			-			174
Strategic Business Changes charges		-			(1,330	)		(532	)		(1,383	)		(1,072	)		(4,317	)
Cash payments		144			812			182			753			-			1,891
Non-cash adjustments		(455	)		-			4,866			-			1,072			5,483
Balance at July 30, 2011		(219	)		(2,077	)		(198	)		(591	)		-			(3,085	)
Cash payments		197			464			-			473			-			1,134
Non-cash adjustments		22			(43	)		18			20			-			17
Balance at October 29, 2011		-			(1,656	)		(180	)		(98	)		-			(1,934	)
Cash payments		-			682			20			-			-			702
Non-cash adjustments		-			-			75			-			-			75
Balance at January 28, 2012		-			(974	)		(85	)		(98	)		-			(1,157	)
Cash payments		-			476			-			-			-			476
Non-cash adjustments		-			17			68			98			-			183
Balance at April 28, 2012		-			(481	)		(17	)		-			-			(498	)
Cash payments		-			318			-			-			-			318
Non-cash adjustments		-			23			17			-			-			40
Balance at July 28, 2012		-			(140	)		-			-			-			(140	)
Cash payments		-			133			-			-			-			133
Non-cash adjustments		-			7			-			-			-			7
Balance at October 27, 2012 and February 2, 2013	$	-		$	-		$	-		$	-		$	-		$	-

1 Store related closure costs represent charges related to the closure of approximately 50 underperforming stores.  Such charges include the write down and accelerated depreciation of store assets, the write down of inventory, early lease terminations and store severance, partially offset by certain credits and allowances.

2 Inventory and asset-related costs represent charges related to the write down and impairment of inventory and non-critical property and equipment.

F-12

We recorded charges related to store closures; write down of assets; store severance; non-store related severance and outplacement; consulting fees and stock option expense in selling, general and administrative expenses in our consolidated statements of operations.  Charges related to the write down of store inventory; accelerated depreciation of store assets; and early lease terminations were recorded in cost of goods sold in our consolidated statements of operations.

NOTE 3. Stock-Based Compensation

Stock Plan Activity

Under our 1996 Equity Incentive Plan, or the 1996 Plan, we granted stock options, stock bonuses and other awards to our employees, directors and consultants as deemed appropriate by the Board.  Options granted were subject to different vesting terms as determined by the Board and the maximum term of options granted was 10 years.  On June 14, 2006, the 1996 Plan expired and was replaced with the 2006 Equity Incentive Plan, or the 2006 Plan.  Upon the expiration of the 1996 Plan, no shares had been granted to consultants and 732,456 shares out of an aggregate of 18,300,000 shares of common stock were authorized and available for grant.

Under our 2006 Plan, we granted stock options, stock bonuses and other awards to our employees, directors and consultants as deemed appropriate by the Board.  Options granted were subject to different vesting terms as determined by the Board and the maximum term of options granted was 10 years.  On June 5, 2012, the 2006 Plan was terminated and replaced with the 2012 Equity Incentive Plan, or the 2012 Plan.  The 2012 Plan was approved by the Board on March 16, 2012 and by our shareholders on June 5, 2012.  There were 942,602 shares out of an aggregate of 3,082,456 shares of common stock authorized and available for grant upon the termination of the 2006 Plan.

The 2012 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of equity compensation to our employees, consultants and directors as deemed appropriate by the Board.  Both incentive and non-statutory stock options granted by us under the 2012 Plan must carry an exercise price of at least 100% of the fair market value of our common stock on the date of grant.  Incentive stock options must carry an exercise price of at least 110% of the fair market value of our common stock on the date of grant for persons possessing 10% or more of the total combined voting power of all classes of stock.  Options granted may be subject to different vesting terms as determined by the Board and the maximum term of options granted is 8 years.  In addition, the maximum number of shares of common stock available for future issuance may not exceed the sum of (a) 942,602 and 34,976 shares of common stock remaining available for issuance under the 2006 Plan and the 1996 Non-Employee Directors’ Stock Option Plan, or the 1996 NEDSOP, respectively, as of June 5, 2012, (b) an additional 3,100,000 shares and (c) the number of shares subject to stock awards as of June 5, 2012 under the 2006 Plan and the 1996 NEDSOP pursuant to the terms of the 2006 Plan and the 1996 NEDSOP.  As of the end of fiscal 2012, 4,210,795 shares were available for future grants under the 2012 Plan.  All awards to date under the 2012 Plan have been granted to our employees and directors, and none have been granted to consultants.

Under the 1996 NEDSOP, we granted stock options to non-employee directors.  Options granted were subject to different vesting terms as determined by the Board and the maximum term of options granted was 10 years.  On June 5, 2012, the 1996 NEDSOP was terminated.  Upon the termination of the 1996 NEDSOP, no shares had been granted to anyone for their role as a consultant to the company and 34,976 shares out of an aggregate of 720,000 shares of common stock were authorized and available for grant.

F-13

In June 1996, the Board adopted the Employee Stock Purchase Plan, or the Stock Purchase Plan.   The Stock Purchase Plan provides for the issuance of up to 1,350,000 shares of common stock to our employees.  All eligible employees are granted identical rights to purchase common stock for each Board authorized offering under the Stock Purchase Plan.  Rights granted pursuant to any offering under the Stock Purchase Plan terminate immediately upon cessation of an employee’s employment for any reason.  In general, an employee may reduce their contribution or withdraw from participation in an offering at any time during the purchase period for such offering.  Employees receive a 15% discount on shares purchased under the Stock Purchase Plan.  Rights granted under the Stock Purchase Plan are not transferable and may be exercised only by the person to whom such rights are granted.  The initial offering under the Stock Purchase Plan commenced October 24, 1996 and terminated December 31, 1996.  Subsequent offerings have occurred every six months commencing January 1, 1997.  As of the end of fiscal 2012, 652,254 shares could still be sold to employees under the Stock Purchase Plan.  Compensation expense for fiscal 2012, 2011 and 2010 was $216,000, $168,000 and $174,000, respectively, related to the fair value of the rights granted to participants under the Stock Purchase Plan.

In June 2012, we granted non-employee directors an aggregate of 21,008 shares of restricted common stock under the 2012 Plan.  In March 2012 and June 2011, we granted non-employee directors an aggregate of 515 and 25,387 shares of restricted common stock, respectively, under the 2006 Plan.  Restricted shares generally vest in one installment in the year subsequent to the grant year.  All awarded common shares remain restricted (i.e., not transferable by the holders) until such time as the recipient is no longer a member of our Board.  The value of these grants is expensed over the vesting period.  During fiscal 2012, 2011 and 2010 $199,000, $189,000 and $172,000 was expensed, respectively.

In April 2012, we granted an independent consultant 2,525 shares of restricted common stock under the 2006 Plan.  This grant was substantially similar to the restricted common stock granted to non-employee directors described above except that vesting occurred in full after providing six months of continuous service to the company.  As of the end of the third quarter of fiscal 2012, we had recorded the entire $25,000 charge related to this grant.

In March 2012, we granted Lisa Harper an option to purchase 100,000 shares of our common stock under the 2006 Plan.  This 100,000 share option is subject to a service condition as well as a performance condition that the company achieves a defined earnings target in fiscal year 2012.  The defined earnings target was achieved and certified by the Compensation Committee of the Board on March 4, 2013.

In March 2011, in connection with her appointment as Chief Executive Officer, we granted Lisa Harper an option to purchase 500,000 shares of our common stock under the 2006 Plan.  This 500,000 share option vests only upon a vesting determination by the Compensation Committee of the Board.  The option will terminate on the day following the third anniversary of the date of grant if the vesting determination has not been made.   The vesting determination shall be made at any time on or before the third anniversary of the date of grant when the Compensation Committee of the Board certifies that the weighted average per share closing price of the company’s common stock for any trailing 90 trading days equals or exceeds twice the closing price per share on the date of grant.

In March 2011, we granted certain employees the option to purchase an aggregate of 314,000 shares of our common stock, net of forfeitures, under the 2006 Plan.  These share options are subject to four-year vesting, but vesting will occur in full upon the occurrence of the vesting determination described above.

In February 2011, prior to her appointment as Chief Executive Officer, we granted Lisa Harper, in her capacity as an independent consultant, 17,568 shares of restricted common stock under the 2006 Plan.  This grant was substantially similar to the restricted common stock granted to non-employee directors described above.  The total charge of $98,000 was expensed for this grant during the first quarter of fiscal 2011.

In March 2009, we granted performance stock awards under the 2006 plan to certain members of our management.  These 2009 awards provided for the issuance of up to 100,000 shares of our common stock, net of forfeitures, with vesting and issuance contingent upon achieving a performance goal for fiscal 2011, based upon our operating income for that fiscal year; and prior to vesting (or termination without vesting), the awards constituted an agreement by us to issue shares to the extent this performance goal was ultimately met.  The market value of our common stock as of the 2009 grant date of these performance stock awards was $9.56.  Compensation expense for these awards was required to be recorded over the three-year terms of the awards, based on the market values as of the grant dates, with actual amounts expensed dependent upon the likelihood from period to period of vesting of these awards at the end of fiscal 2011.  In March 2012, the Board confirmed that the target performance goal for fiscal 2011 had not been met, and therefore all such awards terminated without vesting or issuance of the underlying shares.  We did not recognize any compensation expense for these 2009 awards.

F-14

All outstanding options to purchase shares of our common stock are subject to accelerated vesting upon the close of the merger with Sycamore, discussed in more detail in “NOTE 15 – Subsequent Events” contained in these consolidated financial statements and notes.

The following table summarizes stock options outstanding under all of our plans as of the end of fiscal 2012, as well as activity during fiscal 2012:

	Options			Weighted- Average  Exercise Price
Outstanding at beginning of year		5,890,439		$	9.29
Granted		1,863,354		$	9.72
Exercised		(609,093	)	$	6.38
Forfeited or expired		(925,306	)	$	11.51
Outstanding at end of year		6,219,394		$	9.37
Exercisable at end of year		2,960,238		$	10.69

The following table summarizes information about stock options outstanding and exercisable as of the end of fiscal 2012:

	Options Outstanding						Options Exercisable
			Weighted-		Weighted-				Weighted-		Weighted-
			Average		Average				Average		Average
			Exercise		Contractual				Exercise		Contractual
Range of Exercise Prices	Options		Price		Life (Years)		Options		Price		Life (Years)
$4.56 - $5.66		334,413	$	4.94		6.08		253,783	$	4.91
$5.77 - $5.77		1,539,000	$	5.77		7.59		693,581	$	5.77
$5.79 - $7.32		758,450	$	6.79		7.35		370,819	$	6.57
$7.45 - $9.56		868,248	$	8.88		6.86		394,326	$	8.96
$9.60 - $9.60		50,000	$	9.60		7.44		0	$	0.00
$9.69 - $9.69		1,138,000	$	9.69		9.12		0	$	0.00
$9.71 - $13.09		636,604	$	10.99		5.33		353,050	$	11.44
$13.79 - $21.24		793,329	$	17.40		1.45		793,329	$	17.40
$21.30 - $21.30		2,500	$	21.30		1.33		2,500	$	21.30
$25.51 - $25.51		98,850	$	25.51		1.09		98,850	$	25.51
$4.56 - $25.51		6,219,394	$	9.37		6.54		2,960,238	$	10.69	4.45

F-15

The aggregate intrinsic values of stock options outstanding and exercisable as of the end of fiscal 2012 were $17.3 million and $7.8 million, respectively.  The aggregate intrinsic values of stock options outstanding and exercisable as of the end of fiscal 2011 were $5.8 million and $1.8 million, respectively.

The total fair value of shares vested during fiscal 2012, 2011 and 2010 is $3.0 million, $3.7 million and $4.4 million, respectively.

Cash proceeds, tax benefits and intrinsic values related to total stock options exercised during fiscal 2012, 2011 and 2010 are provided in the following table (in thousands):

	Fiscal Year
	2012		2011		2010
Proceeds from stock options exercised	$	3,888	$	2,743	$	938
Tax benefit related to stock options exercised	$	917	$	486	$	206
Intrinsic value of stock options exercised	$	2,293	$	1,215	$	514

Accounting for Stock-Based Compensation Expense  We account for stock-based compensation expense by estimating the fair value of stock options granted, except for certain stock options granted in March 2011 that are subject to the vesting determination described above, using the Black-Scholes option-pricing formula and a single option award approach.  The fair value is then amortized over the requisite vesting periods of the awards.  As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

We estimate the fair values of the stock options granted in March 2011, that are subject to the vesting determination, using a Monte Carlo simulation valuation model.  The fair values of the options to purchase the aggregate of 314,000 shares, net of forfeitures, are amortized over the vesting period determined by this model.  The entire fair value of the 500,000 share option was recognized as compensation expense during fiscal 2011.

The effect of recording stock-based compensation for fiscal 2012, 2011 and 2010 was as follows (in thousands):

	Fiscal Year
Stock-based compensation by type of award:	2012			2011			2010
Employee and director stock options and awards	$	4,003		$	4,205		$	4,060
Non-employee stock award		25			-			-
Employee stock purchase plan		216			168			175
Total stock-based compensation expense	$	4,244		$	4,373		$	4,235
Tax effect on stock-based compensation expense		(1,522	)		(1,594	)		(1,555	)
Net effect on net income or loss	$	2,722		$	2,779		$	2,680

For fiscal 2012, 2011 and 2010, $0.6 million, $0.5 million and $0.6 million, respectively, of stock-based compensation expense was recorded as a component of cost of goods sold and the remainder, $3.6 million, $3.9 million and $3.6 million, respectively, was charged to selling, general and administrative expense.

As of the end of fiscal 2012 and  2011, we had $6.1 million and $5.2 million, respectively, of unrecognized expense related to non-vested stock option grants (with the exception of Lisa Harper’s 100,000 stock options granted in March 2012 that are subject to the performance condition, and the aggregate of 314,000 stock options granted in March 2011 that are subject to the vesting determination), which is expected to be recognized over weighted average periods of 2.56 years and 2.67 years, respectively.

F-16

As of the end of fiscal 2012, we had $0.2 million of unrecognized expense related to Lisa Harper’s option to purchase 100,000 shares of our common stock granted in March 2012 that are subject to the performance condition, which is expected to be recognized over a weighted average period of 3.17 years.  This option to purchase 100,000 shares has a $3.44 weighted average fair value at grant date.

As of the end of fiscal 2012 and 2011, we had $0.2 million and $0.6 million, respectively, of unrecognized expense related to the options to purchase an aggregate of 314,000 shares of our common stock granted in March 2011 that are subject to the vesting determination, which is expected to be recognized over weighted average periods of 2.17 years and 3.17 years, respectively.

As of the end of fiscal 2012 and 2011, we had $0.1 million of unrecognized expense related to restricted stock grants, which are expected to be recognized over weighted average periods of 0.34 years and 0.23 years, respectively.

Calculation of Fair Value of Options  The Black-Scholes option valuation model used to determine the fair value of stock-based compensation for all options, except for those granted in March 2011 that are subject to the vesting determination, incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield.  The expected term of an award is generally no less than the option vesting period and is based on our historical experience.  Expected volatility is based upon the historical volatility of our stock price.  The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term equal to the option’s expected life.  The dividend yield is based on the expected dividend yield as of the date of option grant.  We began to pay dividends during the first quarter of fiscal 2010.

The following weighted average assumptions were used in the Black-Scholes option valuation model for stock options granted:

	2012			2011			2010
Risk free interest rate		1	%		2	%		2	%
Expected life	5 years			5 years			5 years
Expected volatility		57	%		58	%		57	%
Expected dividend yield		4	%		4	%		3	%
Weighted average fair value at grant date
(with the exception of Lisa Harper's 100,000 stock options granted in March 2012 that are subject to the performance condition)	$	3.52		$	2.45		$	2.84

A Monte Carlo simulation was used to determine the fair value of stock-based compensation for the stock options granted in March 2011 that are subject to the vesting determination.  This risk neutral model is based on projections of stock price paths and incorporates various assumptions including early exercise behavior, volatility of stock price, risk-free rates of return and dividend yield.  Expected volatility is based upon the historical volatility of our stock price.  The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term equal to the option’s contractual life.  The dividend yield is based on the expected dividend yield as of the date of option grant.

F-17

The following weighted average assumptions were used in the Monte Carlo simulation valuation model for the stock options granted in March 2011 that are subject to the vesting determination:

Risk free interest rate		4%
Contractual life	10 years
Expected volatility		58%
Expected dividend yield		5%
Weighted average fair value at grant date	$	2.60

NOTE 4. Cash Dividends

On November 14, 2012, we announced that our Board authorized a regular quarterly cash dividend of $0.08 per share.  The $0.08 per share dividend was paid in December 2012 to shareholders of record at the close of business on December 14, 2012.  We released the funds used to pay for this regular quarterly cash dividend during the fourth quarter of fiscal 2012.  As of the end of fiscal 2012, total dividends paid in fiscal 2012 amounted to $13.4 million.  As of the end of fiscal 2011, total dividends paid in fiscal 2011 amounted to $12.2 million.  As of the end of fiscal 2010, total dividends paid in fiscal 2010 amounted to $57.0 million, including $44.5 million for the $1.00 per share special one-time cash dividend paid in the first quarter of fiscal 2010.  

On March 6, 2013,  we entered into an agreement and plan of merger with Sycamore, discussed in more detail in “NOTE 15 – Subsequent Events” contained in these consolidated financial statements and notes.  In connection with the transaction contemplated by the agreement, we have suspended the payment of our regular quarterly dividend.

NOTE 5. Property and Equipment

Property and equipment are summarized as follows (in thousands):

	Fiscal Year
	2012			2011
Leasehold improvements	$	166,807		$	159,639
Furniture, fixtures and equipment		118,351			114,719
Software and licenses		66,761			65,455
Building and land		14,270			14,270
		366,189			354,083
Less: Accumulated depreciation and amortization		(258,842	)		(248,293	)
Property and equipment, net	$	107,347		$	105,790

We recorded depreciation expense in the amounts of $33.1 million, $35.7 million and $40.9 million for fiscal 2012, 2011 and 2010, respectively.

F-18

NOTE 6. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	Fiscal Year
	2012		2011
Accrued payroll and related expenses	$	20,644	$	13,700
Gift cards, gift certificates and store merchandise credits		6,197		7,315
Accrued self insurance liabilities		3,802		3,870
Accrued sales and use tax		3,445		4,586
Accrued cost of fixed assets and software		2,562		2,057
Other		11,415		12,725
Accrued liabilities	$	48,065	$	44,253

NOTE 7. Fair Value Measurements

Our financial assets and liabilities are valued at the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  We determine fair value based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, we prioritize the inputs used in measuring fair value into a three-tier fair value hierarchy, which are as follows:

 Level 1: Observable inputs such as quoted prices in active markets (the fair value hierarchy gives the highest priority to Level 1 inputs);

 Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 Level 3: Unobservable inputs in which there is little or no market data and require the reporting entity to develop its own assumptions (the fair value hierarchy gives the lowest priority to Level 3 inputs).

Financial assets and liabilities measured at fair value on a recurring basis as of the end of fiscal 2012 consisted of the following (in thousands):

F-19

	Balance at February 2, 2013		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (cash equivalent)	$	44,781	$	44,781	$	-	$	-
Municipal bonds (short-term)		6,158		-		6,158		-
Auction rate security (long-term)		1,730		-		-		1,730
Total assets	$	52,669	$	44,781	$	6,158	$	1,730
Liabilities:
Deferred compensation plan (long-term)	$	5,488	$	-	$	5,488	$	-

Financial assets and liabilities measured at fair value on a recurring basis as of the end of fiscal 2011 consisted of the following (in thousands):

	Balance at January 28, 2012		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (cash equivalent)	$	52,553	$	52,553	$	-	$	-
Municipal bonds * (short-term)		16,503		-		16,503		-
Auction rate security (long-term)		1,722		-		-		1,722
Total assets	$	70,778	$	52,553	$	16,503	$	1,722
Liabilities:
Deferred compensation plan * (long-term)	$	4,410	$	-	$	4,410	$	-
*In the third quarter of fiscal 2011, municipal bonds and deferred compensation plan amounts were reclassified to Level 2 upon further interpretation.

The fair value of our short-term municipal bonds is based on market prices for similar assets from third-party pricing services using observable market information.  The money market funds fair value is determined based on quoted prices in active markets.  Due to the lack of availability of observable market quotes on our auction rate security, the fair market value of this security has been determined based on an internal valuation model which incorporates primarily management’s own current assumptions.  The model values the security by estimating the present value of future principal and interest payments discounted at rates considered to reflect current market conditions.  Significant assumptions used in the valuation include those made about the liquidity horizon which we currently estimate to be approximately five years and the net trading yield rate which we currently estimate to be approximately 5%.  The fair value of our auction rate security has an inverse relationship with our liquidity horizon assumption and changes in this assumption may cause the fair value to be significantly impacted.  Other factors that impact our valuation include changes to credit ratings of our auction rate security as well as to the underlying assets supporting this security and the ongoing strength and quality of the credit markets.  Our valuation is subject to uncertainties that are difficult to predict and could change significantly based on future market conditions.  The deferred compensation plan liability represents the amount that would be earned by participants if the funds were invested in securities traded in active markets.  The fair value of the deferred compensation plan liability is determined based on quoted prices of similar assets that are traded in observable markets.

F-20

The activity of our auction rate security in fiscal 2012, whose fair value was measured using Level 3 inputs, is summarized below (in thousands):

	Fiscal Year
	2012			2011
Carrying value at beginning of year	$	1,722		$	2,475
Redemptions		-			(850	)
Total gains
Included in earnings		-			-
Included in other comprehensive income		8	*		97
Carrying value at end of year	$	1,730		$	1,722

* Unrealized gains of $5,000 and $6,000 occurred during the first and third quarters of fiscal 2012, respectively, and unrealized losses of $3,000 occurred during the second quarter of fiscal 2012. 

NOTE 8. Bank Credit Agreement

We maintain an unsecured bank credit agreement of $5 million that will expire on September 1, 2013.  Letters of credit, which are primarily used for inventory purchases, are issued under the credit agreement.  There were no letters of credit outstanding under the credit agreement as of the end of fiscal 2012 and 2011.

NOTE 9. Commitments and Contingencies

Leases  We have entered into operating lease agreements for retail, distribution and office space, vehicles and equipment under primarily non-cancelable leases with terms ranging from approximately two to ten years.  The retail space leases provide for rents based upon the greater of the minimum annual rental amounts or a percentage of annual store sales volume.  Certain leases provide for increasing minimum annual rental amounts.  Rent expense is recorded on a straight-line basis over the term of the lease based on us taking possession of premises.  Accordingly, deferred rent, as reflected in the accompanying balance sheets, represents the difference between rent expense accrued and amounts paid under the terms of the lease agreements.  Total rent expense for fiscal 2012, 2011 and 2010 was $54.7 million, $52.3 million and $52.6 million, respectively, including contingent rentals of $0.5 million, $0.2 million and $0.2 million, respectively.

F-21

Annual future minimum lease payments under operating leases as of the end of fiscal 2012 are as follows (in thousands):

Fiscal Year
2013	$	55,183
2014		45,200
2015		36,383
2016		29,590
2017		22,908
Thereafter		56,523
Total minimum operating lease payments	$	245,787

Litigation  From time to time, we are involved in other matters of litigation that arise in the ordinary course of business. See “NOTE 15 – Subsequent Events” contained in these consolidated financial statements and notes for a discussion of litigation relating to our proposed plan of merger with Sycamore Partners.

Indemnities, Commitments and Guarantees During the ordinary course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions.  These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of California.  From time to time, we have issued guarantees in the form of letters of credit as security for some merchandise shipments from overseas (our letters of credit are discussed in more detail in “NOTE 8 – Bank Credit Agreement” contained in these consolidated financial statements and notes).  The durations of these indemnities, commitments and guarantees vary.  Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make.  We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated financial statements.

NOTE 10. Income Taxes

Provision (Benefit) for Income Taxes  The composition of the provision (benefit) for income taxes for fiscal 2012, 2011 and 2010 is as follows (in thousands):

	Fiscal Year
	2012			2011			2010
Current:
Federal	$	13,333		$	(1,575	)	$	(4,040	)
State		2,298			831			(372	)
		15,631			(744	)		(4,412	)
Deferred:
Federal		(3,385	)		153			(814	)
State		(739	)		(736	)		35
		(4,124	)		(583	)		(779	)
Total income tax expense (benefit)	$	11,507		$	(1,327	)	$	(5,191	)

F-22

Significant components of our deferred tax assets and liabilities are as follows (in thousands):

	Fiscal Year
	2012			2011
Current deferred tax assets (liabilities):
Inventory	$	725		$	647
Other assets, net		189			642
State taxes		(295	)		(560	)
Vacation accrual		1,288			1,029
Deferred compensation		2,106			1,694
Accrued expense and other		6,651			2,501
Net current deferred tax assets		10,664			5,953
Long-term deferred tax assets (liabilities):
Depreciation		(5,100	)		(4,594	)
Deferred rent		3,264			3,575
Stock-based compensation expense		4,231			3,695
Other assets, net		219			428
Total long-term deferred tax assets		2,614			3,104
Net deferred tax assets	$	13,278		$	9,057

A reconciliation of the provision / benefit for income taxes to the statutory tax rate is as follows:

	Fiscal Year
	2012			2011			2010
Statutory federal rate		35.0	%		35.0	%		35.0	%
State and local taxes, net of federal benefit and other		2.6			(2.3	)		1.6
Stock-based compensation expense		0.2			(1.3	)		(0.5	)
FIN 48 reserve		0.0			9.1			(0.8	)
Other permanent differences, net		(0.7	)		1.7			3.4
Effective income tax rate		37.1	%		42.2	%		38.7	%

We operate in numerous tax jurisdictions and are subject to routine tax examinations.  Future tax examinations could involve difficult issues and multiple years.  Although we cannot predict the outcome of future examinations, amounts that could be owed in excess of amounts accrued would impact future tax expense but would not be expected to have a material impact on our financial condition.

Uncertain Tax Positions As of the end of fiscal 2012, the total liability for income tax associated with unrecognized tax benefits was $1.9 million ($0.8 million net of federal benefit), of which $0.1 million ($0.1 million net of federal benefit) related to interest and $0.2 million related to penalties.  Our effective tax rate will be affected by any portion of this liability we may recognize.   As of the end of fiscal 2011, the total liability for income tax associated with unrecognized tax benefits was $2.0 million ($0.9 million net of federal benefit), of which $0.3 million ($0.2 million net of federal benefit) related to interest and $0.1 million related to penalties.

F-23

We believe that it is reasonably possible that $1.2 million ($0.6 million net of federal benefit) of our liability for unrecognized tax benefits of which $0.1 million ($0.1 million net of federal benefit) of associated interest may be recognized in the next 12 months due to the settlement of audits and the expiration of statutes of limitations.  As such, we have classified this amount as a current liability.

The following table reconciles the amount recorded for the liability for income tax associated with unrecognized tax benefits as of the end of fiscal 2012 and 2011 (in thousands):

	Fiscal Year
	2012			2011
Unrecognized tax benefits - beginning of year	$	1,596		$	2,017
Additions:
Tax positions related to prior period		44			87
Tax positions related to current period		138			26
Reductions:
Tax positions related to prior period		-			(79	)
Settlements		(62	)		(21	)
Lapse of statute of limitations		(156	)		(434	)
Unrecognized tax benefits - end of year	$	1,560		$	1,596

Our continuing practice is to recognize interest and penalties related to unrecognized tax benefits as a tax expense.  Tax expense for fiscal 2012 related to interest and penalties was not material.  As of the end of fiscal 2012, we had accrued $0.3 million of interest and penalties related to uncertain tax positions.  Tax expense for fiscal 2011 related to interest and penalties was $0.1 million.  As of the end of fiscal 2011, we had accrued $0.4 million of interest and penalties related to uncertain tax positions.

We operate stores throughout the United States, Puerto Rico and Canada, and as a result, we file income tax returns in the United States federal jurisdiction and various state, local and foreign jurisdictions.  In the normal course of business, we are subject to examination by taxing authorities.  With few exceptions, we are no longer subject to United States federal, state, local or foreign income tax examinations for years before fiscal 2007.  While it is often difficult to predict the final outcome or the timing or resolution of any particular uncertain tax position, we believe our reserves for income taxes represent the most probable outcome.  We adjust these reserves, as well as the related interest and penalties, in light of changing facts and circumstances.

NOTE 11. Earnings (Loss) Per Share

Basic earnings or loss per share is computed by dividing net income or net loss, respectively, by the weighted average number of common shares outstanding for the period.  Diluted earnings per share is applicable only in periods of net income and is computed by dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents outstanding for the period.  Periods of net loss require the diluted computation to be the same as the basic computation.  As of the end of fiscal 2012, 2011 and 2010, options to purchase 3.0 million, 3.6 million and 6.1 million shares, respectively, of potentially anti-dilutive common stock equivalents were outstanding.

F-24

A reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share is as follows (in thousands except per share amounts):

	Fiscal Year
	2012		2011			2010
Basic earnings (loss) per share computation:
Numerator	$	19,470	$	(1,818	)	$	(8,235	)
Denominator:
Weighted average common shares outstanding		41,970		43,892			44,554
Basic earnings (loss) per share	$	0.46	$	(0.04	)	$	(0.18	)
Diluted earnings (loss) per share computation:
Numerator	$	19,470	$	(1,818	)	$	(8,235	)
Denominator:
Weighted average common shares outstanding		41,970		43,892			44,554
Incremental shares from assumed exercise of options		767		-			-
Total shares		42,737		43,892			44,554
Diluted earnings (loss) per share	$	0.46	$	(0.04	)	$	(0.18	)

NOTE 12. Share Repurchases

On October 31, 2012, we announced that our Board approved an increase of our stock repurchase program from up to $15 million (previously announced on June 6, 2012), to $25 million, of our outstanding common stock.    As of the end of fiscal 2012, we had completed the repurchase of 2,535,370 shares of our common stock for approximately $25 million (excluding expenses), which represents an average price of $9.86 per share.

On August 17, 2011, we announced that our Board approved the repurchase of up to $25 million of our outstanding common stock during the period ended January 28, 2012.  As of the end of fiscal 2011, we had completed the repurchase of 3,212,628 shares of our common stock for approximately $25 million (excluding expenses), which represents an average price of $7.78 per share.

We did not repurchase any shares of our common stock during fiscal 2010.

NOTE 13. Employee Benefit Plan

Effective January 1, 1995, we adopted the Hot Topic 401(k) Plan, or the 401(k) Plan.  All employees who have been employed by us for at least 90 days and are at least 21 years of age are eligible to participate.  Employees may contribute up to 25% of their eligible compensation to the 401(k) Plan, subject to a statutorily prescribed annual limit.  We may at our discretion contribute certain amounts to eligible employees’ accounts.  In January 2009, we began to contribute 50% of the first 4% of participants’ eligible contributions into their 401(k) Plan accounts.  We contributed $366,000,  $381,000 and $384,000 to eligible employees’ 401(k) accounts during fiscal 2012, 2011 and 2010, respectively.

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NOTE 14. Deferred Compensation Plan

In August 2006, we adopted the Hot Topic Inc. Management Deferred Compensation Plan, or the Deferred Compensation Plan, for the purpose of providing highly compensated employees and members of our Board a program to meet their financial planning needs.  The Deferred Compensation Plan provides participants with the opportunity to defer up to 80% of their base salary and up to 100% of their annual earned bonus, or, in the case of members of our Board, 100% of their earned cash fees, all of which, together with the associated investment returns, are 100% vested from the outset.  The Deferred Compensation Plan, which is designed to be exempt from most provisions of the Employee Retirement Security Act of 1974, is informally funded by us in order to preserve the tax-deferred savings advantages of a non-qualified plan.  As such, all deferrals and associated earnings are general unsecured obligations of Hot Topic, Inc. held within a “rabbi trust” on our consolidated balance sheet.  We may at our discretion contribute certain amounts to eligible employees’ accounts.  In January 2009, to the extent participants were ineligible to receive such contributions from participation in our 401(k) Plan, we began to contribute 50% of the first 4% of participants’ eligible contributions into their Deferred Compensation Plan accounts.  As of the end of fiscal 2012, assets and associated liabilities of the Deferred Compensation Plan were $5.2 million and $5.5 million, respectively, and are included in other non-current assets and non-current liabilities, respectively, in our consolidated balance sheets. As of the end of fiscal 2011, assets and associated liabilities of the Deferred Compensation Plan were $4.7 million and $4.4 million, respectively.

NOTE 15. Subsequent Events

On March 6, 2013, we entered into an Agreement and Plan of Merger, or the Merger Agreement, providing for the acquisition of the company by an affiliate of Sycamore Partners Management, L.L.C., or Sycamore. Under the terms of the Merger Agreement, which was unanimously approved by the our Board of Directors, Sycamore will acquire all of the outstanding shares of our common stock for $14.00 per share in cash. The transaction, which is structured as a one-step merger with the company as the surviving corporation, or the Merger, is subject to customary closing conditions, including receipt of regulatory approvals and the approval of the holders of a majority of our outstanding shares. If the Merger is approved and is consummated, we will no longer be a publicly-traded company, and our shares will cease to be traded on Nasdaq. We will account for the merger by applying the acquistion method as described in ASC 805, Business Combinations.

Prior to and effective as of the effective time of the proposed Merger, referred to as the Effective Time, we will take all necessary action to accelerate the vesting of each outstanding option under our 1996 Plan, 1996 NEDSOP, 2006 Plan and 2012 Plan,  collectively referred to as the Stock Plans. At the Effective Time, each outstanding option under a Stock Plan will vest and be cancelled and converted into the right to receive the excess, if any, of the per share Merger consideration over the exercise price of the option, multiplied by the number of shares subject to such option, less all applicable tax withholdings. Prior to the Effective Time, we will take all necessary action to accelerate the vesting of each share of restricted stock granted and outstanding under the Stock Plans, and each such share of restricted stock will be treated as a share of common stock for purposes of the Merger Agreement. We will terminate our Employee Stock Purchase Plan prior to the Effective Time and will not permit any new offering period to begin prior to the Effective Time.

In March 2013, we were named as a defendant in class action lawsuits challenging the plan of merger with Sycamore described above.  These lawsuits allege general various wrongdoings such as breach of our fiduciary duty to our shareholders. We may be named as a defendant in other similar lawsuits in the future. While we believe that all of the allegations are without merit and that we have valid defenses to all potential claims, our litigation exposure could have a material adverse effect on our financial condition and results of operations in the event the claims are not settled in our favor.

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