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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR l5 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-28784
HOT TOPIC, INC.
---------------
(Exact name of Registrant as specified in its Charter)
CALIFORNIA 77-0198182
- ---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
18305 EAST SAN JOSE AVE., CITY OF INDUSTRY, CA 91748
- ---------------------------------------------- -----
(address of principal executive offices) (Zip Code)
(Telephone number of registrant) (626) 839-4681
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of the issuer's common stock as of the latest practicable date: August 30, 2002
- - 31,278,595 shares, no par value.
HOT TOPIC, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets - August 3, 2002 and February 2, 2002 3
Consolidated Statements of Income for the three and six months
ended August 3, 2002 and August 4, 2001 4
Consolidated Statements of Cash Flows for the six months
ended August 3, 2002 and August 4, 2001 5
Notes to Consolidated Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14-15
SIGNATURE PAGE 16
CERTIFICATIONS 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOT TOPIC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share amounts)
August 3, February 2,
2002 2002
------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 18,171 $ 34,072
Short-term investments 31,462 37,238
Inventory 50,251 29,553
Prepaid expenses and other 9,593 5,435
Deferred tax asset 1,417 1,417
------------------------
Total current assets 110,894 107,715
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 54,140 43,482
Leasehold improvements 52,838 41,412
------------------------
106,978 84,894
Less accumulated depreciation 37,098 30,968
------------------------
Net leaseholds, fixtures and equipment 69,880 53,926
Deposits and other 187 174
Deferred tax asset 847 847
------------------------
Total assets $181,808 $162,662
========================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 22,453 $ 11,253
Accrued liabilities 10,970 10,953
Sales and other taxes payable 1,676 1,013
Income taxes payable -- 2,096
Current portion of obligations under capital leases 26 30
------------------------
Total current liabilities 35,125 25,345
Deferred rent 2,022 1,761
Capital lease obligations, less current portion 139 188
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;
31,633,287 and 31,375,064 shares issued and outstanding at
August 3, 2002 and February 2, 2002, respectively 58,033 56,906
Retained earnings 86,489 78,462
------------------------
Total shareholders' equity 144,522 135,368
------------------------
Total liabilities and shareholders' equity $181,808 $162,662
========================
See notes to consolidated financial statements.
3
HOT TOPIC, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands except per share amounts)
Three Months Ended Six Months Ended
-------------------- --------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-------------------- --------------------
Net sales $ 92,473 $ 71,944 $172,382 $134,871
Cost of goods sold, including buying,
distribution and occupancy costs 59,681 45,784 111,133 85,234
-------------------- --------------------
Gross margin 32,792 26,160 61,249 49,637
Selling, general and administrative expenses 26,134 19,818 49,061 38,552
-------------------- --------------------
Operating income 6,658 6,342 12,188 11,085
Interest income-net 349 450 759 1,020
-------------------- --------------------
Income before income taxes 7,007 6,792 12,947 12,105
Provision for income taxes 2,663 2,513 4,920 4,479
-------------------- --------------------
Net income $ 4,344 $ 4,279 $ 8,027 $ 7,626
==================== ====================
Net income per share:
Basic $ 0.14 $ 0.14 $ 0.25 $ 0.25
==================== ====================
Diluted $ 0.13 $ 0.13 $ 0.24 $ 0.23
==================== ====================
Shares used in computing net income per share:
Basic 31,712 30,900 31,593 30,756
Diluted 33,493 33,294 33,393 33,332
See notes to consolidated financial statements.
4
HOT TOPIC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
---------------------
August 3, August 4,
2002 2001
---------------------
OPERATING ACTIVITIES
Net income $ 8,027 $ 7,626
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,954 4,992
Deferred rent 261 158
Loss on disposal of fixed assets 135 164
Changes in operating assets and liabilities:
Inventory (20,698) (14,310)
Prepaid expenses and other current assets (4,159) (411)
Deposits and other assets (13) (78)
Accounts payable 11,201 5,140
Accrued liabilities 17 (2,375)
Sales and other taxes payable 663 485
Income taxes payable (2,096) --
---------------------
Net cash provided by operating activities 292 1,391
INVESTING ACTIVITIES
Purchases of property and equipment (23,079) (16,429)
Purchases of short-term investments (9,921) (11,247)
Proceeds from sale of short-term investments 15,697 7,891
---------------------
Net cash used in investing activities (17,303) (19,785)
FINANCING ACTIVITIES
Payments on capital lease obligations (17) (10)
Proceeds from employee stock purchases and exercise of
stock options, including related tax benefit 6,348 2,194
Repurchase of common shares (5,221) --
---------------------
Net cash provided by financing activities 1,110 2,184
---------------------
Decrease in cash and cash equivalents (15,901) (16,210)
Cash and cash equivalents at beginning of period 34,072 28,786
---------------------
Cash and cash equivalents at end of period $ 18,171 $ 12,576
=====================
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 7 $ 10
=====================
Cash paid during the period for income taxes $ 5,870 $ 3,372
=====================
See notes to consolidated financial statements.
5
HOT TOPIC, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Hot Topic, Inc. (together with its subsidiaries, the "Company") is a mall-based
specialty retailer of music-licensed and music-influenced apparel, accessories
and gift items for young men and women principally between the ages of 12 and
22. The Company launched a new retail concept in fiscal 2001 with the opening of
six stores under the trade name Torrid(TM). Torrid offers a selection of
apparel, lingerie, shoes and accessories centered around various lifestyles for
plus-size young women between the ages of 15 and 29. At the end of the second
quarter (August 3, 2002) of fiscal 2002 (the fiscal year ending February 1,
2003), the Company operated 401 Hot Topic stores in 48 states throughout the
United States, 14 Torrid stores and websites hottopic.com and torrid.com. The
Company has one reportable segment given the similarities of the economic
characteristics among the store formats.
The information set forth in these financial statements is unaudited except for
the February 2, 2002 Balance Sheet. These statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information, the instructions to Form 10-Q, and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the three and six months ended August 3, 2002 are not
necessarily indicative of the results that may be expected for the year ending
February 1, 2003. Certain reclassifications have been made to prior year periods
to conform to current period presentation. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended February 2, 2002.
NOTE 2. NET INCOME PER SHARE
The Company computes net income per share pursuant to Statement of Financial
Accounting Standards Board No. 128 "Earnings Per Share" (SFAS 128). Basic net
income per share is computed based on the weighted average number of common
shares outstanding for the period. Diluted net income per share is computed
based on the weighted average number of common and potentially dilutive common
stock equivalents outstanding for the period. A three-for-two stock split of the
Company's common stock became effective February 6, 2002. All share and per
share amounts have been restated to reflect the stock split and all previous
stock splits effectuated by the Company.
6
A reconciliation of the numerator and denominator of basic earnings per share
and diluted earnings per share is as follows (all amounts in thousands except
per share amounts):
Three Months Ended Six Months Ended
-------------------- --------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
--------- --------- --------- ---------
Basic EPS Computation:
Numerator $ 4,344 $ 4,279 $ 8,027 $ 7,626
Denominator:
Weighted average common shares outstanding 31,712 30,900 31,593 30,756
--------- --------- --------- ---------
Total shares 31,712 30,900 31,593 30,756
========= ========= ========= =========
Basic EPS $ 0.14 $ 0.14 $ 0.25 $ 0.25
========= ========= ========= =========
Diluted EPS Computation:
Numerator $ 4,344 $ 4,279 $ 8,027 $ 7,626
Denominator:
Weighted average common shares outstanding 31,712 30,900 31,593 30,756
Incremental shares from assumed
conversion of options 1,781 2,394 1,800 2,576
--------- --------- --------- ---------
Total shares 33,493 33,294 33,393 33,332
========= ========= ========= =========
Diluted EPS $ 0.13 $ 0.13 $ 0.24 $ 0.23
========= ========= ========= =========
NOTE 3. SHAREHOLDERS' EQUITY
On May 8, 2002, the Company announced that its Board of Directors approved the
repurchase of up to an aggregate of one million shares of its common stock
during the period ending January 31, 2003. As of August 3, 2002, the Company had
repurchased 237,927 shares of its common stock at a cost of $5.2 million.
NOTE 4. BANK CREDIT AGREEMENT
The Company has an unsecured bank credit agreement for $1.0 million, which is
used for issuing letters of credit. The credit agreement expires in August 2003,
and the Company expects to renew the agreement under similar terms. The letters
of credit are primarily used for inventory purchases. At August 3, 2002, the
Company had $0.5 million of outstanding letters of credit issued under the
credit agreement.
NOTE 5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of the Financial Accounting Standards Board (SFAS)
No. 144, "Accounting for the Impairment of Long-Lived Assets", which establishes
accounting and reporting standards for impairment and disposition of long-lived
assets, including discontinued operations. SFAS No. 144 is effective for all
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, its provisions are to be applied prospectively. The adoption of
SFAS No. 144 has not had a material impact on the Company's financial position,
results of operations or cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement addresses
financial accounting and reporting obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
standard is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company does not believe the adoption of SFAS No. 143
7
will have a significant impact on the financial position, results of operations
or cash flows of the Company for fiscal 2002.
The Company adopted Statement of the Financial Accounting Standards Board No.
141, Business Combinations and No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination, whether acquired individually or with a group
of other assets, and the accounting and reporting for goodwill and other
intangibles subsequent to their acquisition. These standards require all future
business combinations to be accounted for using the purchase method of
accounting. Goodwill will no longer be amortized, but instead will be subject to
an impairment test each reporting period. The adoption of SFAS No. 141 and 142
has not had a material impact on the financial position, results of operations
or cash flows of the Company. The Company does not have any goodwill or
amortization expense related to such goodwill in its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement updates, clarifies and simplifies existing accounting
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. The Company does not expect SFAS No.
145 to have a material impact on its results of operations or its financial
condition.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes related thereto.
The Company considers a store comparable after it has been open for 15 full
months. If a store is relocated or expanded by more than 15% in total square
footage, it is removed from the comparable store base and, similar to new
stores, becomes comparable after 15 full months.
RESULTS OF OPERATIONS
Three Months Ended August 3, 2002 Compared to Three Months Ended August 4, 2001
- -------------------------------------------------------------------------------
Net sales increased $20.5 million, or 28.5%, to $92.4 million during the second
quarter of fiscal 2002 from $71.9 million during the second quarter of fiscal
2001. The increased net sales in the second quarter of fiscal 2002 were
attributable to an increase in the number of Hot Topic and Torrid stores, an
increase in sales generated on the websites hottopic.com and torrid.com and an
increase in comparable store sales as compared to the second quarter of fiscal
2001. Approximately $17.2 million, or 83.9%, of the increase in net sales was
attributable to 116 new or non-comparable Hot Topic stores, with the remainder
of the increase coming from Torrid stores, 12 Hot Topic expanded/relocated
stores, the websites hottopic.com and torrid.com and a comparable store sales
increase of 0.6%. In the second quarter of fiscal 2001, comparable store sales
increased by 2.4%. At the end of the second quarter of fiscal 2002, 273 of the
Company's 401 Hot Topic stores were included in the comparable store base,
compared to 209 of the 316 Hot Topic stores open at the end of the second
quarter of fiscal 2001. No Torrid stores were comparable stores as of the end of
the second quarter of fiscal 2002. Sales of apparel and tee-shirt category
merchandise, as a percentage of total net sales, were 51.4% in the second
quarter of fiscal 2002 compared to 51.6% in the second quarter of fiscal 2001.
The slight decrease in apparel was due primarily to decreases in sales of men's
fashion tops and men's bottoms. These sales decreases were offset in part by
increases in women's apparel (women's tops and bottoms) and music-licensed
tee-shirts.
Gross margin increased $6.6 million to $32.8 million during the second quarter
of fiscal 2002 from $26.2 million during the second quarter of fiscal 2001. As a
percentage of net sales, gross margin decreased to 35.5% during the second
quarter of fiscal 2002 from 36.4% in the second quarter of fiscal 2001. The 0.9%
decrease in gross margin as a percentage of net sales is due primarily to higher
distribution expenses and higher store occupancy and depreciation expenses
partially offset by improved merchandise margins and buying costs. The increase
in distribution expenses of 0.8% resulted from increased inventory and expansion
costs of the Company's distribution center. Store occupancy expenses were 0.7%
higher as a result of lower sales per square foot and an increase in occupancy
cost per square foot. Store depreciation expenses increased by 0.3% related to
the new point of sales platform installed in the third quarter of fiscal 2001
and enhancements made to the Company's websites (including development and
design costs) and fulfillment system. The Company's merchandise margin increased
0.8% of sales in the second quarter of fiscal 2002 compared to the second
quarter of fiscal 2001 principally due to higher initial markup. The Company
also achieved a 0.1% gross margin improvement due to leveraging of buying costs.
Selling, general and administrative expenses increased $6.3 million, or 31.9%,
to $26.1 million during the second quarter of fiscal 2002 compared to $19.8
million during the second quarter of fiscal 2001. Selling, general and
administrative expenses increased to 28.3% of sales during the second quarter of
9
fiscal 2002 compared to 27.5% during the second quarter of fiscal 2001. The
total dollar increase in selling, general and administrative expenses was
primarily attributable to an increase in the number of retail stores from 322 at
the end of the second quarter of fiscal 2001 to 415 (including Torrid stores) at
the end of the second quarter of fiscal 2002. As a percentage of sales, selling,
general and administrative expenses increased 0.8% in the second quarter of
fiscal 2002 as compared to the second quarter of fiscal 2001 due to a 0.6%
increase in store payroll, a 0.3% increase in benefits cost, and a 0.2% increase
in supplies expense; and these increases were partially offset by a 0.3%
decrease in performance based payroll.
Operating income increased 5.0%, to $6.7 million, during the second quarter of
fiscal 2002 from $6.3 million during the second quarter of fiscal 2001. As a
percentage of net sales, the operating income was 7.2% in the second quarter of
fiscal 2002 compared to 8.8% in the second quarter of fiscal 2001.
Interest income, net, decreased $0.1 million to $0.3 million in the second
quarter of fiscal 2002 from $0.4 million in the second quarter of fiscal 2001,
due to lower average interest rates offset in part by the additional interest
earned from higher average cash balances.
Six Months Ended August 3, 2002 Compared to Six Months Ended August 4, 2001
- ---------------------------------------------------------------------------
Net sales increased $37.5 million, or 27.8%, to $172.4 million during the first
six months of fiscal 2002 from $134.9 million during the first six months of
fiscal 2001. The increased net sales in the first six months of fiscal 2002 were
primarily attributable to an increase in the number of stores, an increase in
sales generated on the websites hottopic.com and torrid.com and an increase in
comparable store sales as compared to the first six months of fiscal 2001. Net
sales for the 116 Hot Topic stores (new and non-comparable) contributed
approximately $32.2 million of the increase in net sales with the remainder of
the increase coming from Torrid stores, 12 Hot Topic expanded/relocated stores,
the websites hottopic.com and torrid.com and the 0.1% increase in comparable
store sales. In the first six months of fiscal 2001, comparable store sales
increased by 5.0%. Sales of apparel category merchandise, as a percentage of
total net sales, were 52.1% in the first six months of fiscal 2002 compared to
51.2% in the first six months of fiscal 2001. The increase in apparel was due
primarily to increases in sales of music-related tee-shirts and women's apparel
(women's tops and bottoms) offset in part by decreases in men's tops and bottoms
and certain accessory categories.
Gross margin increased approximately $11.6 million to $61.2 million during the
first six months of fiscal 2002 from $49.6 million during the first six months
of fiscal 2001. As a percentage of net sales, gross margin decreased to 35.5%
during the first six months of fiscal 2002 from 36.8% in the first six months of
fiscal 2001. Occupancy and store depreciation expenses were 1.1% higher as
compared to the corresponding six months last year primarily as a result of
lower sales per square foot, depreciation expenses for the new point of sales
platform installed in the third quarter of fiscal 2001 and enhancements made to
the Company's websites (including development and design costs) and fulfillment
system. Distribution expenses were 0.3% higher primarily as a result of
increased inventory and expansion costs of the Company's distribution center.
The Company's merchandise margin, as a percentage of sales, was 0.1% higher in
the first six months of fiscal 2002 compared to the first six months of fiscal
2001 principally from a higher initial markup and lower shrinkage.
Selling, general and administrative expenses increased $10.5 million, or 27.3%,
to $49.1 million during the first six months of fiscal 2002 compared to $38.6
million during the first six months of fiscal 2001. As a percentage of net
sales, selling, general and administrative expenses decreased to 28.5% in the
first six months of fiscal 2002 compared to 28.6% in the first six months of
fiscal 2001. The total dollar increase in selling, general and administrative
expenses is primarily attributable to an increase in the number of retail
stores, 415 stores at the end of the second quarter of fiscal 2002 compared to
10
322 stores at the end of the second quarter of fiscal 2001. The decrease as a
percentage of net sales was due primarily to a decrease in performance based
payroll and the leveraging of headquarters expenses, partially offset by an
increase in store payroll and benefits cost.
Operating income increased $1.1 million, or 10%, to $12.2 million during the
first six months of fiscal 2002 from $11.1 million during the first six months
of fiscal 2001. As a percentage of net sales, the operating income was 7.1% in
the first six months of fiscal 2002 compared to 8.2% in the first six months of
fiscal 2001.
Interest income, net, decreased approximately $0.3 million to $0.7 million in
the first six months of fiscal 2002 from $1.0 million in the first six months of
fiscal 2001, principally due to lower average interest rates offset in part by
the additional interest earned from higher average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the first six months of fiscal 2002, the
Company's primary uses of cash have been to finance store openings and purchase
merchandise inventories. In addition, during the first six months of fiscal
2002, one of the Company's uses of cash was to expand the Company's headquarters
and distribution center. The Company historically has satisfied its cash
requirements principally from cash flows from operations, and, in earlier years,
also from proceeds from the sale of equity securities. The Company maintains a
$1.0 million unsecured credit agreement for the purpose of issuing letters of
credit. At August 3, 2002, the Company had $0.5 million of outstanding letters
of credit.
Cash flows provided by operating activities were $0.3 million and $1.4 million
in the first six months of fiscal 2002 and 2001, respectively. The decrease in
cash flows from operating activities in the first six months of fiscal 2002
compared to fiscal 2001 resulted primarily from an increase in inventories
balances, an increase in prepaid expenses, and a decrease in income taxes
payable. These were partially offset by an increase in accounts payable, accrued
liabilities, and depreciation expense. The significant changes in net cash
provided by operating activities were due primarily to the Company's increase in
store growth to 415 stores as of August 3, 2002 compared to 322 stores as August
4, 2001. The decrease in income tax payable was primarily attributed to the tax
payments made in the first six months of fiscal 2002 as compared to the first
six months of fiscal 2001.
Cash flows used in investing activities were $17.3 million and $19.8 million in
the first six months of fiscal 2002 and 2001, respectively. The $2.5 million
decrease in net cash used in investing activities is due to a net increase ($9.1
million) in the proceeds from short-term investments offset by an increase ($6.7
million) in purchases of property and equipment. The $6.7 million increase in
purchases of property and equipment relates primarily to the $4.7 million
expansion of the Company's headquarters and distribution center, $0.8 million
relating to new store openings, $0.7 million in development costs and design for
the Company's websites which the Company relaunched in the second quarter of
fiscal 2002 and $0.5 million in additional hardware and software expenditures.
Cash flows provided by financing activities were $1.1 million and $2.2 million
in the first six months of fiscal 2002 and 2001, respectively. The $1.1 million
decrease was due primarily to the repurchase of shares of the Company's Common
Stock offset by proceeds received and tax related benefit from the exercise of
stock options in the first six months of fiscal 2002 compared to the first six
months of fiscal 2001.
11
On May 8, 2002 the Company announced that its Board of Directors had approved
the repurchase of up to an aggregate of 1,000,000 shares of its Common Stock. As
of August 3, 2002, the Company had repurchased 237,927 shares of its common
stock at a cost of $5.2 million. The Company intends to make repurchases from
time to time on the open market at prevailing market prices or in negotiated
transactions off the market. The repurchase is expected to continue through
January 31, 2003 unless extended or shortened by the Company's Board of
Directors.
The Company believes that its current cash balances and cash generated from
operations will be sufficient to fund its operations and planned expansion
through at least the next 12 months.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements requires the Company 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, the Company evaluates estimates, including
those related primarily to inventories, long-lived assets and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed 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.
The Company believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the Company's
consolidated financial statements. For additional discussion on the application
of these and other accounting policies, refer to the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended February 2, 2002.
INVENTORIES: Inventories and related cost of sales are accounted for by the
retail method. The cost of inventory is valued at the lower of average cost or
market, on a first-in, first-out (FIFO) basis, utilizing the retail method. Each
month, slow moving or seasonally obsolete merchandise is marked down. The first
markdown is typically to 50% of the original retail. In cases where the
merchandise does not sell after the first markdown, an additional markdown is
made in a subsequent month. Any marked down merchandise that does not sell is
marked down to a zero value and removed from the store, approximately three
months after the original markdown. In determining the lower of average cost or
market value of period ending inventories, consistently applied valuation
criteria is used. Consideration is given to a number of quantitative factors,
including anticipated subsequent permanent markdowns and aging of inventories.
VALUATION OF LONG-LIVED ASSETS: The Company assesses the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important that could
trigger an impairment review include a significant underperformance relative to
expected historical or projected future operating results, a significant change
in the manner of the use of the asset or a significant negative industry or
economic trend. When the Company determines that the carrying value of
long-lived assets may not be recoverable based upon the existence of one or more
of the above indicators of impairment, the Company will measure any impairment
based on a projected discounted cash flow method using a discount rate
determined by our management. The Company has not historically had an impairment
of a long-lived asset.
REVENUE RECOGNITION: Sales are recognized upon the purchase by customers at the
Company's retail store locations and websites, less merchandise returned by
customers.
12
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially depending
on, among other things, the timing of store openings and related pre-opening and
other startup expenses, net sales contributed by new stores, increases or
decreases in comparable store sales, releases of new music and music-related
products, shifts in timing of certain holidays, changes in the Company's
merchandise mix and overall economic conditions.
The Company's business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school, Halloween and Holiday seasons
(defined as the week of Thanksgiving through the first few days of January), and
other periods when schools are not in session. The Holiday season remains the
Company's single most important selling season. The Company believes, however,
that the importance of the summer vacation and back-to-school seasons (which
affect operating results in the second and third quarters, respectively) and to
a lesser extent, the spring break season (which affects operating results in the
first quarter) as well as Halloween (which affects operating results in the
third quarter), all reduce the Company's dependence on the Holiday selling
season. Furthermore, summer vacation, back-to-school seasons and spring break
seasons take place at somewhat different times in different parts of the
country, spreading the impact of these events on the Company's sales over a
longer period. As is the case with many retailers of apparel, accessories and
related merchandise, the Company typically experiences lower first fiscal
quarter net sales relative to other quarters.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the preceding
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", contain various forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements relating to
expected financial results, which represent the Company's expectations or
beliefs concerning future events. These forward looking statements involve risks
and uncertainties, and the Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, without
limitation, the relationships with mall developers and operators, the
availability of mall space for planned expansion, the sufficiency of the
Company's working capital and cash flows from operating activities, the
implementation and management of the Company's growth strategy (including the
Company's new retail concept Torrid), the demand for the merchandise offered by
the Company, the ability of the Company to obtain adequate merchandise supply,
the ability of the Company to gauge the fashion tastes of its customers and
provide merchandise that satisfies customer demand, the effect of economic
conditions, the effect of severe weather or natural disasters, political and/or
social changes or events that could negatively impact shopping patterns and/or
mall traffic and the effect of competitive pressures from other retailers as
well as other risks detailed from time to time in the Company's SEC reports,
including the Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
PART II. OTHER INFORMATION
ITEMS 1- 3 AND 5 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company (the "Annual Meeting") was
held on June 13, 2002 in the City of Industry, California. The Company had
31,569,255 shares of common stock outstanding as of April 19, 2002, the record
date for the Annual Meeting.
Proposal 1 - Election of Directors
Each of the candidates listed below were duly elected to the Board of directors
at the Annual Meeting by the tally indicated.
Candidate Votes in Favor Votes Withheld
--------- -------------- --------------
Edgar F. Berner 28,767,255 341,011
Cynthia Cohen 29,017,459 90,797
Corrado Federico 28,741,286 366,970
W. Scott Hedrick 29,017,303 90,953
Elizabeth M. McLaughlin 29,017,837 90,419
Bruce A. Quinnell 28,751,018 357,238
Andrew Schuon 28,768,293 339,963
Proposal 2 - Amendment to the Company's Amended and Restated Articles of
Incorporation to increase the number of shares of authorized common stock from
50,000,000 shares to 150,000,000 shares.
Votes in Favor Votes Against Votes Abstained
-------------- ------------- ---------------
17,806,792 11,266,582 34,882
Proposal 3 - Ratification of Selection of Ernst & Young, LLP as Independent
Auditors.
Votes in Favor Votes Against Votes Abstained
-------------- ------------- ---------------
28,130,161 973,822 4,273
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate. (1)
99.1 Certification, dated September 4, 2002, required by
Section 906 of the Public Company Accounting Reform
and Investor Protection Act of 2002 (18 U.S.C ss.
1350, as adopted).
(1) Filed as an exhibit to Registrant's Registration Statement
on Form SB - 2 (No. 333-5054-LA) and incorporated herein by
reference.
14
(2) Filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended February 3, 2001 and incorporated
herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOT TOPIC, INC.
(Registrant)
Date: 9/4/02 /s/ Elizabeth M. McLaughlin
---------------------------
Elizabeth M. McLaughlin
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: 9/4/02 /s/ James J. McGinty
--------------------
James J. McGinty
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
CERTIFICATIONS
I, Elizabeth M. McLaughlin, Chief Executive Officer and President of Hot Topic,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hot Topic, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 4, 2002
/s/ Elizabeth M. McLaughlin
-------------------------------
Elizabeth M. McLaughlin
Chief Executive Officer and President
(Principal Executive Officer)
I, James J. McGinty, Chief Financial Officer of Hot Topic, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hot Topic, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 4, 2002
/s/ James J. McGinty
-------------------------------
James J. McGinty
Chief Financial Officer
(Principal Financial and Accounting Officer)
17