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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 November 2, 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of the issuer's common stock as of the latest practicable date: December 4, 2002
- - 31,055,236 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 - November 2, 2002 and February 2, 2002 3
Consolidated Statements of Income for the three and nine months
ended November 2, 2002 and November 3, 2001 4
Consolidated Statements of Cash Flows for the nine months
ended November 2, 2002 and November 3, 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
ITEM 4. CONTROLS AND PROCEDURES 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE PAGE 16
CERTIFICATIONS 17-18
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HOT TOPIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
November 2, February 2,
2002 2002
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 25,876 $ 34,072
Short-term investments 23,970 37,238
Inventory 46,401 29,553
Prepaid expenses and other 9,021 5,435
Deferred tax asset 1,417 1,417
------------ ------------
Total current assets 106,685 107,715
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 56,831 43,482
Leasehold improvements 56,793 41,412
------------ ------------
113,624 84,894
Less accumulated depreciation 41,206 30,968
------------ ------------
Net leaseholds, fixtures and equipment 72,418 53,926
Deposits and other 188 174
Deferred tax asset 847 847
------------ ------------
Total assets $ 180,138 $ 162,662
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 15,654 $ 11,253
Accrued liabilities 15,950 10,953
Sales and other taxes payable 2,089 1,013
Income taxes payable 2,973 2,096
Current portion of obligations under capital leases 24 30
------------ ------------
Total current liabilities 36,690 25,345
Deferred rent 2,188 1,761
Capital lease obligations, less current portion 136 188
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;
30,973,089 and 31,375,064 shares issued and outstanding at
November 2, 2002 and February 2, 2002, respectively 44,587 56,906
Retained earnings 96,537 78,462
------------ ------------
Total shareholders' equity 141,124 135,368
------------ ------------
Total liabilities and shareholders' equity $ 180,138 $ 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 Nine Months Ended
---------------------------- ----------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 122,590 $ 92,080 $ 294,972 $ 226,951
Cost of goods sold, including buying,
distribution and occupancy costs 75,830 56,150 186,963 141,384
------------- ------------- ------------- -------------
Gross margin 46,760 35,930 108,009 85,567
Selling, general and administrative expenses 30,852 22,694 79,913 61,246
------------- ------------- ------------- -------------
Operating income 15,908 13,236 28,096 24,321
Interest income-net 298 466 1,057 1,486
------------- ------------- ------------- -------------
Income before income taxes 16,206 13,702 29,153 25,807
Provision for income taxes 6,158 5,195 11,078 9,674
------------- ------------- ------------- -------------
Net income $ 10,048 $ 8,507 $ 18,075 $ 16,133
============= ============= ============= =============
Net income per share:
Basic $ 0.32 $ 0.27 $ 0.57 $ 0.52
============= ============= ============= =============
Diluted $ 0.31 $ 0.26 $ 0.55 $ 0.49
============= ============= ============= =============
Shares used in computing net income per share:
Basic 31,127 31,104 31,437 30,872
Diluted 32,260 33,120 32,857 33,216
See notes to consolidated financial statements.
4
HOT TOPIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
-----------------------------
November 2, November 3,
2002 2001
------------- -------------
OPERATING ACTIVITIES
Net income $ 18,075 $ 16,133
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,043 7,955
Deferred rent 427 250
Loss on disposal of fixed assets 193 277
Changes in operating assets and liabilities:
Inventory (16,848) (16,947)
Prepaid expenses and other current assets (3,587) 71
Deposits and other assets (14) (115)
Accounts payable 4,401 6,281
Accrued liabilities 4,998 1,198
Sales and other taxes payable 1,076 491
Income taxes payable 877 402
------------- -------------
Net cash provided by operating activities 20,641 15,996
INVESTING ACTIVITIES
Purchases of property and equipment (29,764) (23,056)
Purchases of short-term investments (16,110) (21,109)
Proceeds from sale of short-term investments 29,378 13,423
------------- -------------
Net cash used in investing activities (16,496) (30,742)
FINANCING ACTIVITIES
Payments on capital lease obligations (22) (20)
Proceeds from employee stock purchases and exercise of
stock options, including related tax benefit 7,381 2,951
Repurchase of common shares (19,700) --
------------- -------------
Net cash (used) provided by financing activities (12,341) 2,931
------------- -------------
Decrease in cash and cash equivalents (8,196) (11,815)
Cash and cash equivalents at beginning of period 34,072 28,786
------------- -------------
Cash and cash equivalents at end of period $ 25,876 $ 16,971
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 9 $ 18
============= =============
Cash paid during the period for income taxes $ 6,451 $ 7,302
============= =============
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 third
quarter (November 2, 2002) of fiscal 2002 (the fiscal year ending February 1,
2003), the Company operated 414 Hot Topic stores in 48 states throughout the
United States, 23 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 Consolidated 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 nine months ended November 2, 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 ("SFAS") No. 128 "Earnings Per Share." Basic net
income per share is computed based on the weighted average number of common
shares outstanding for the period. Diluted net income per share is computed
based on the weighted average number of common 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 Nine Months Ended
-------------------------- --------------------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic EPS Computation:
Numerator $ 10,048 $ 8,507 $ 18,075 $ 16,133
Denominator:
Weighted average common shares outstanding 31,127 31,104 31,437 30,872
------------ ------------ ------------ ------------
Total shares 31,127 31,104 31,437 30,872
============ ============ ============ ============
Basic EPS $ 0.32 $ 0.27 $ 0.57 $ 0.52
============ ============ ============ ============
Diluted EPS Computation:
Numerator $ 10,048 $ 8,507 $ 18,075 $ 16,133
Denominator:
Weighted average common shares outstanding 31,127 31,104 31,437 30,872
Incremental shares from assumed
conversion of options 1,133 2,016 1,420 2,344
------------ ------------ ------------ ------------
Total shares 32,260 33,120 32,857 33,216
============ ============ ============ ============
Diluted EPS $ 0.31 $ 0.26 $ 0.55 $ 0.49
============ ============ ============ ============
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 November 2, 2002, the Company
had completed the repurchase of one million shares of its common stock at a cost
of $19.7 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 November 2, 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 SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which establishes accounting and reporting standards for
impairment and disposition of long-lived assets, including discontinued
operations. SFAS No. 144 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.
7
In June 2001, the Financial Accounting Standards Board ("FASB") 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
will have a significant impact on the financial position, results of operations
or cash flows of the Company for fiscal 2002.
The Company adopted SFAS 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost, as defined in EITF 94-3, was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect the adoption of SFAS No. 146 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 November 2, 2002 Compared to Three Months Ended November 3,
2001
- ----
Net sales increased $30.5 million, or 33.1%, to $122.6 million during the third
quarter of fiscal 2002 from $92.1 million during the third quarter of fiscal
2001. The increased net sales in the third quarter of fiscal 2002 were
attributable to an increase in the number of Hot Topic and Torrid stores, an
increase in comparable store sales, and an increase in sales generated on the
websites hottopic.com and torrid.com as compared to the third quarter of fiscal
2001. Approximately $23.0 million, or 75.4%, of the increase in net sales was
attributable to 122 new Hot Topic and Torrid stores, with the remainder of the
increase coming from Hot Topic and Torrid comparable store sales increase of
6.3%, 13 Hot Topic expanded/relocated stores and the websites hottopic.com and
torrid.com. In the third quarter of fiscal 2001, comparable store sales
increased by 2.2%. At the end of the third quarter of fiscal 2002, 302 of the
Company's 437 stores (Hot Topic and Torrid) were included in the comparable
store base, compared to 232 of the 347 stores (Hot Topic and Torrid) open at the
end of the third quarter of fiscal 2001. Sales of apparel and tee-shirt category
merchandise, as a percentage of total net sales, were 53.6% in the third quarter
of fiscal 2002 compared to 55.3% in the third quarter of fiscal 2001. The
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 $10.9 million to $46.8 million during the third quarter
of fiscal 2002 from $35.9 million during the third quarter of fiscal 2001. As a
percentage of net sales, gross margin decreased to 38.1% during the third
quarter of fiscal 2002 from 39.0% in the third quarter of fiscal 2001. The 0.9%
decrease in gross margin as a percentage of net sales is due primarily to lower
merchandise margins and higher store occupancy costs offset by lower
distribution expenses and buying costs. The Company's merchandise margin
decreased 1.2% of sales in the third quarter of fiscal 2002 compared to the
third quarter of fiscal 2001 principally due to higher markdowns partially
offset by higher initial markup. Store occupancy costs were 0.3% higher as a
result of the increases in common area charges, increased store size for both
new Hot Topic and Torrid stores offset in part by leverage gained in comparable
stores. The decrease in distribution expenses and buying costs of 0.6% resulted
from cost savings in freight, labor, supplies and leveraging of buying costs.
Selling, general and administrative expenses increased $8.2 million, or 36.1%,
to $30.9 million during the third quarter of fiscal 2002 compared to $22.7
million during the third quarter of fiscal 2001. Selling, general and
administrative expenses increased to 25.2% of sales during the third quarter of
fiscal 2002 compared to 24.6% during the third 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 347 at the end
of the third quarter of fiscal 2001 to 437 at the end of the third quarter of
fiscal 2002. As a percentage of sales, selling, general and administrative
expenses increased 0.6% in the third quarter of fiscal 2002 as compared to the
third quarter of fiscal 2001 due to a 0.3% increase in benefits cost, a 0.3%
increase in costs associated with the Company's wide area network, and a 0.2%
increase in performance based payroll and recruiting costs partially offset by
0.2% decrease in store payroll and related costs.
9
Operating income increased 20.5%, to $15.9 million, during the third quarter of
fiscal 2002 from $13.2 million during the third quarter of fiscal 2001. As a
percentage of net sales, the operating income was 13.0% in the third quarter of
fiscal 2002 compared to 14.4% in the third quarter of fiscal 2001.
Interest income, net, decreased $0.2 million to $0.3 million in the third
quarter of fiscal 2002 from $0.5 million in the third quarter of fiscal 2001,
due to lower interest rates offset in part by the additional interest earned
from higher average cash balances.
Nine Months Ended November 2, 2002 Compared to Nine Months Ended November 3,
2001
- ----
Net sales increased $68.0 million, or 30.0%, to $295.0 million during the first
nine months of fiscal 2002 from $227.0 million during the first nine months of
fiscal 2001. The increased net sales in the first nine months of fiscal 2002
were primarily attributable to an increase in the number of stores, an increase
in comparable store sales, and an increase in sales generated on the websites
hottopic.com and torrid.com as compared to the first nine months of fiscal 2001.
Net sales for the 122 new Hot Topic and Torrid stores contributed approximately
$57.6 million of the increase in net sales with the remainder of the increase
coming from the 2.6% increase in comparable store sales (Hot Topic and Torrid),
13 Hot Topic expanded/relocated stores and the websites hottopic.com and
torrid.com. In the first nine months of fiscal 2001, comparable store sales
increased by 3.9%. Sales of apparel category merchandise, as a percentage of
total net sales, were 52.7% in the first nine months of fiscal 2002 compared to
52.8% in the first nine months of fiscal 2001. The decrease 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.
Gross margin increased approximately $22.4 million to $108.0 million during the
first nine months of fiscal 2002 from $85.6 million during the first nine months
of fiscal 2001. As a percentage of net sales, gross margin decreased to 36.6%
during the first nine months of fiscal 2002 from 37.7% in the first nine months
of fiscal 2001. Occupancy and store depreciation expenses were 0.7% higher as
compared to the corresponding nine months last year. This increase is
attributable to higher common area charges, the increased store size for new Hot
Topic and Torrid stores, 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. The Company's merchandise margin, as a percentage of sales, was 0.4%
lower in the first nine months of fiscal 2002 compared to the first nine months
of fiscal 2001 principally from higher markdowns partially offset by a higher
initial markup and lower shrinkage.
Selling, general and administrative expenses increased $18.7 million, or 30.6%,
to $79.9 million during the first nine months of fiscal 2002 compared to $61.2
million during the first nine months of fiscal 2001. As a percentage of net
sales, selling, general and administrative expenses increased to 27.1% in the
first nine months of fiscal 2002 compared to 27.0% in the first nine 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, 437 stores at the end of the third quarter of fiscal 2002 compared to
347 stores at the end of the third quarter of fiscal 2001. The increase as a
percentage of net sales was due primarily to an increase in benefits cost and an
increase in costs associated with the Company's wide area network, partially
offset by a decrease in supplies expense and the leveraging of headquarters
expenses.
10
Operating income increased $3.8 million, or 15.6%, to $28.1 million during the
first nine months of fiscal 2002 from $24.3 million during the first nine months
of fiscal 2001. As a percentage of net sales, the operating income was 9.5% in
the first nine months of fiscal 2002 compared to 10.7% in the first nine months
of fiscal 2001.
Interest income, net, decreased approximately $0.4 million to $1.1 million in
the first nine months of fiscal 2002 from $1.5 million in the first nine months
of fiscal 2001, principally due to lower 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 nine 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 nine months of fiscal
2002, the Company used cash to repurchase common shares and expand its
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 November 2, 2002, the Company had $0.5 million of
outstanding letters of credit under the credit agreement.
Cash flows provided by operating activities were $20.6 million and $16.0 million
in the first nine months of fiscal 2002 and 2001, respectively. The increase in
cash flows from operating activities in the first nine months of fiscal 2002
compared to fiscal 2001 resulted primarily from an increase in net income, an
increase in depreciation expense and an increase in accrued liabilities. These
were partially offset by a decrease in prepaid expenses and other current
assets, and a decrease in accounts payable. The significant changes in net cash
provided by operating activities were due primarily to the Company's increase in
store growth to 437 stores as of November 2, 2002 compared to 347 stores as of
November 3, 2001.
Cash flows used in investing activities were $16.5 million and $30.7 million in
the first nine months of fiscal 2002 and 2001, respectively. The $14.2 million
decrease in net cash used in investing activities is due to a net increase
($20.9 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 includes $4.9 million for the
expansion of the Company's headquarters and distribution center, $1.2 million in
additional hardware and software expenditures, $0.4 million in development costs
and design for the Company's websites which the Company relaunched in the second
quarter of fiscal 2002, and $0.2 million relating to new store openings and wide
area network costs.
Cash flows used in financing activities were $12.3 million for the first nine
months of fiscal 2002 compared to cash flows provided by financing activities of
$2.9 million in the first nine months of fiscal 2001. The $15.2 million decrease
was due to the repurchase of shares of the Company's Common Stock ($19.7
million) offset by proceeds received and tax related benefit from the exercise
of stock options ($4.4 million) in the first nine months of fiscal 2002 compared
to the first nine months of fiscal 2001.
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 November 2, 2002, the Company completed the repurchase of 1,000,000 shares of
its common stock at a cost of $19.7 million.
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.
11
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated 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 consolidated 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 season and spring break
season 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 Company's 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
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures
conducted within 90 days of the date of filing this report on Form
10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange
Act of 1934) are effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.
14
PART II. OTHER INFORMATION
ITEMS 1 - 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate. (1)
99.1 Certifications, dated December 6, 2002, required by
Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.Css. 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.
(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: December 6, 2002 /s/ Elizabeth M. McLaughlin
-----------------------------------------------
Elizabeth M. McLaughlin
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: December 6, 2002 /s/ James J. McGinty
-----------------------------------------------
James J. McGinty
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
CERTIFICATION
I, Elizabeth M. McLaughlin, 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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "EVALUATION DATE"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 6, 2002
/s/ Elizabeth M. McLaughlin
- --------------------------------
Elizabeth M. McLaughlin
Chief Executive Officer, President and Director
17
CERTIFICATION
I, James J. McGinty, 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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "EVALUATION DATE"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 6, 2002
/s/ James J. McGinty
- ----------------------------------------
James J. McGinty
Chief Financial Officer
18