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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 May 3, 2003
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 the Exchange Act Rule 12b-2). Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of the issuer's common stock as of the latest practicable date: June 2, 2003 -
31,514,578 shares, no par value.
HOT TOPIC, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets - May 3, 2003 and February 1, 2003 3
Consolidated Statements of Income for the three months
ended May 3, 2003 and May 4, 2002 4
Consolidated Statements of Cash Flows for the three months
ended May 3, 2003 and May 4, 2002 5
Notes to Consolidated Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE PAGE 21
CERTIFICATIONS 22-23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Hot Topic, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands except share amounts)
May 3, 2003 February 1, 2003
-------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 34,389 $ 50,449
Short-term investments 37,131 32,969
Inventory 43,945 38,409
Prepaid expenses and other 8,950 7,866
Deferred tax assets 2,093 2,093
-------------------------------
Total current assets 126,508 131,786
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 63,259 58,597
Leasehold improvements 62,285 58,322
-------------------------------
125,544 116,919
Less accumulated depreciation 48,997 44,773
-------------------------------
Net leaseholds, fixtures and equipment 76,547 72,146
Deposits and other 171 171
Deferred tax assets 683 683
-------------------------------
Total assets $ 203,909 $ 204,786
===============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 15,922 $ 15,407
Accrued liabilities 17,272 19,524
Income taxes payable 290 6,453
Current portion of obligations under capital leases 22 23
-------------------------------
Total current liabilities 33,506 41,407
Deferred rent 2,528 2,358
Capital lease obligations, less current portion 84 92
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;
31,421,406 and 31,203,987 shares issued and outstanding at
May 3, 2003 and February 1, 2003, respectively 50,289 47,837
Retained earnings 117,502 113,092
-------------------------------
Total shareholders' equity 167,791 160,929
-------------------------------
Total liabilities and shareholders' equity $ 203,909 $ 204,786
===============================
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
---------------------
May 3, May 4,
2003 2002
---------------------
Net sales $100,657 $ 79,909
Cost of goods sold, including buying,
distribution and occupancy costs 65,043 51,452
---------------------
Gross margin 35,614 28,457
Selling, general and administrative expenses 28,859 22,927
---------------------
Operating income 6,755 5,530
Interest income-net 358 410
---------------------
Income before income taxes 7,113 5,940
Provision for income taxes 2,703 2,257
---------------------
Net income $ 4,410 $ 3,683
=====================
Net income per share:
Basic $ 0.14 $ 0.12
=====================
Diluted $ 0.14 $ 0.11
=====================
Shares used in computing net income per share:
Basic 31,312 31,473
Diluted 32,378 33,315
See notes to consolidated financial statements.
4
HOT TOPIC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
---------------------
May 3, May 4,
2003 2002
---------------------
OPERATING ACTIVITIES
Net income $ 4,410 $ 3,683
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,359 3,216
Tax benefit from exercise of stock options 1,155 1,121
Deferred rent 170 127
Loss on disposal of fixed assets 13 69
Changes in operating assets and liabilities:
Inventory (5,536) (6,245)
Prepaid expenses and other current assets (1,083) (1,838)
Deposits and other assets (1) (4)
Accounts payable 514 2,051
Accrued liabilities (2,252) 8
Income taxes payable (6,163) (2,096)
---------------------
Net cash provided by (used in) operating activities (4,414) 92
INVESTING ACTIVITIES
Purchases of property and equipment (8,773) (11,602)
Purchases of short-term investments (17,985) (9,922)
Proceeds from sale of short-term investments 13,823 9,517
---------------------
Net cash used in investing activities (12,935) (12,007)
FINANCING ACTIVITIES
Payments on capital lease obligations (8) (9)
Proceeds from employee stock purchases and
exercise of stock options 1,297 1,338
---------------------
Net cash provided by financing activities 1,289 1,329
---------------------
Decrease in cash and cash equivalents (16,060) (10,586)
Cash and cash equivalents at beginning of period 50,449 34,072
---------------------
Cash and cash equivalents at end of period $ 34,389 $ 23,486
=====================
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 23 $ 4
=====================
Cash paid during the period for income taxes $ 7,743 $ 4,366
=====================
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. and its wholly owned subsidiaries (collectively, the "Company")
is a mall-based specialty retailer operating the Hot Topic and Torrid store
concepts. Hot Topic offers a selection of music-licensed and music-influenced
apparel, accessories and gift items for young men and women principally between
the ages of 12 and 22. In the first half of fiscal 2001 (the fiscal year ended
February 2, 2002) the Company launched a second retail concept with the opening
of six stores under the trade name Torrid. Torrid offers a selection of apparel,
lingerie, shoes and accessories centered around various lifestyles for plus-size
females between the ages of 15 and 29. At the end of the first quarter (May 3,
2003) of fiscal 2003 (the fiscal year ending January 31, 2004), the Company
operated 434 Hot Topic stores in 49 states throughout the United States, 34
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 1, 2003 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 months ended May 3, 2003 are not necessarily
indicative of the results that may be expected for the year ending January 31,
2004. 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 1, 2003.
NOTE 2. NET INCOME PER SHARE
The Company computes net income per share pursuant to Statement of Financial
Accounting Standards ("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
------------------
May 3, 2003 May 4, 2002
----------- -----------
Basic EPS Computation:
Numerator $ 4,410 $ 3,683
Denominator:
Weighted average common shares outstanding 31,312 31,473
----------- -----------
Total shares 31,312 31,473
=========== ===========
Basic EPS $ 0.14 $ 0.12
=========== ===========
Diluted EPS Computation:
Numerator $ 4,410 $ 3,683
Denominator:
Weighted average common shares outstanding 31,312 31,473
Incremental shares from assumed
conversion of options 1,066 1,842
----------- -----------
Total shares 32,378 33,315
=========== ===========
Diluted EPS $ 0.14 $ 0.11
=========== ===========
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 January 31, 2003, 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 May 3, 2003, the
Company had $0.6 million of outstanding letters of credit issued under the
credit agreement.
NOTE 5. STOCK BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. For
purposes of pro forma disclosures, the estimated fair value of the options,
based on the Black-Scholes option pricing model, is amortized to expense over
the options' vesting periods. The following is the pro forma information had the
fair value method under SFAS No. 123, as amended by SFAS No. 148, been adopted
(in thousands, except per share amounts):
7
Three Months Ended
--------------------------
May 3, 2003 May 4, 2002
Net income
As reported $ 4,410 $ 3,683
Add: Stock-based compensation expense
included in reported net income, net
of related tax effects -- --
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (1,180) (933)
---------- ----------
Pro forma $ 3,230 $ 2,750
========== ==========
Basic earnings per share:
As reported $ 0.14 $ 0.12
Pro forma $ 0.10 $ 0.09
Diluted earnings per share:
As reported $ 0.14 $ 0.11
Pro forma $ 0.10 $ 0.08
NOTE 6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide new guidance concerning the transition when a company
changes from the intrinsic value method to the fair value method of accounting
for employee stock-based compensation cost. SFAS No. 123, as amended by SFAS No.
148, also requires additional disclosure regarding such cost in annual financial
statements and interim financial statements. The amendment to SFAS No. 123 is
effective for fiscal years ending after December 15, 2002 and effective for
interim financial statements beginning after December 15, 2002. The Company has
not adopted the fair value method, as permitted under SFAS No. 148, and
continues to account for stock options under APB No. 25. The Company adopted the
disclosure requirements of SFAS No. 148 in the year ended February 1, 2003.
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 supersedes
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 adopted SFAS No. 146 on February 2, 2003. The
adoption of SFAS No. 146 has not had a material impact on the Company's results
of operations or financial condition.
8
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. The Company adopted SFAS No. 145 on February 2, 2003. The adoption of
SFAS No. 145 has not had a material impact on the Company's results of
operations or financial condition.
In June 2001, the 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. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
adopted SFAS No. 143 on February 2, 2003. The adoption of SFAS No. 143 has not
had a material impact on the Company's results of operations or financial
condition.
The Company adopted SFAS No. 141, "Business Combinations" and No. 142, "Goodwill
and Other Intangible Assets", on February 3, 2002. 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. SFAS Nos. 141 and 142 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 Nos. 141 and 142 has
not had a material impact on the Company's results of operations or financial
condition. The Company does not have any goodwill or amortization expense
related to such goodwill in its financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations, financial condition and
liquidity of the Company and other matters 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 May 3, 2003 Compared to Three Months Ended May 4, 2002
- -------------------------------------------------------------------------
Net sales increased $20.8 million, or 26.0%, to $100.7 million during the first
quarter of fiscal 2003 from $79.9 million during the first quarter of fiscal
2002. Net sales for the new Hot Topic stores opened during the first quarter of
fiscal 2003 and for the other Hot Topic stores not yet qualifying as comparable
stores contributed $13.1 million of the net sales increase. Net sales for the
new Torrid stores and for the Torrid stores not yet qualifying as comparable
stores contributed $4.1 million of the net sales increase. Comparable store
sales for the Company increased 2.6% in the first quarter of fiscal 2003 and
contributed $1.9 million of the increase in net sales. Hottopic.com and
torrid.com sales were approximately 2.7% of total Company sales in the first
quarter of fiscal 2003 and contributed $1.7 million (including shipping and
handling revenue) of the net sales increase. At the end of the first quarter of
fiscal 2003, 340 of the Company's 468 stores (Hot Topic and Torrid) were
included in the comparable store base, compared to 261 of the Company's 379
stores (Hot Topic and Torrid) open at the end of the first quarter of fiscal
2002. Sales of apparel and tee-shirt category merchandise, as a percentage of
total net sales, were 49.9% in the first quarter of fiscal 2003 compared to
53.0% in the first quarter of fiscal 2002. The decrease in apparel sales mix was
due primarily to men's fashion apparel.
Gross margin increased $7.2 million to $35.6 million during the first quarter of
fiscal 2003 from $28.4 million during the first quarter of fiscal 2002. As a
percentage of net sales, gross margin decreased to 35.4% during the first
quarter of fiscal 2003 from 35.6% in the first quarter of fiscal 2002. The 0.2%
decrease in gross margin as a percentage of net sales is due primarily to higher
store occupancy costs, slightly lower merchandise margins, and higher store
depreciation expense partially offset by lower distribution expenses. Store
occupancy costs were 0.7% higher as a result of the increases in common area
charges and rent expenses. Torrid's larger store size and increased store count
resulted in a portion of the increase of rent expenses, as a percentage of net
sales. The Company's merchandise margin decreased 0.3% of net sales in the first
quarter of fiscal 2003 compared to the first quarter of fiscal 2002 principally
due to higher markdowns and the increased Torrid mix relative to Hot Topic. The
decrease in distribution expenses of 0.9% resulted from significant cost savings
in freight and labor.
Selling, general and administrative expenses increased $5.9 million, or 25.9%,
to $28.8 million during the first quarter of fiscal 2003 compared to $22.9
million during the first quarter of fiscal 2002. Selling, general and
administrative expenses were 28.7% of net sales during the first quarter of
fiscal 2003, equal as a percentage of net sales to the first quarter of fiscal
2002. The total dollar increase in selling, general and administrative expenses
was primarily attributable to an increase in the number of retail stores from
379 at the end of the first quarter of fiscal 2002 to 468 at the end of the
first quarter of fiscal 2003 and the corresponding additional payroll and other
expenses required to support these additional stores. In the first quarter of
2003, store payroll decreased 0.4%, as a percentage of net sales, as a result of
more efficient usage of store payroll hours, somewhat offset by an increase in
payroll related to the reclassification of store management to non-exempt status
and the resulting overtime expenses. This decrease in store payroll expense was
partially offset by a 0.3% increase, as a percentage of net sales, in costs
related to the Company's wide area network. The remaining 0.1% increase, as a
percentage of net sales, resulted from higher performance based payroll
partially offset by leveraging headquarters expenses.
10
Operating income increased 22.2%, to $6.8 million, during the first quarter of
fiscal 2003 from $5.5 million during the first quarter of fiscal 2002. As a
percentage of net sales, the operating income was 6.7% in the first quarter of
fiscal 2003 compared to 6.9% in the first quarter of fiscal 2002.
Interest income, net, decreased $0.1 million to $0.3 million in the first
quarter of fiscal 2003 from $0.4 million in the first quarter of fiscal 2002,
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 quarter of fiscal 2003, the Company's
primary uses of cash have been to finance store openings and purchase
merchandise inventories. 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 May 3, 2003, the Company had $0.6 million of outstanding letters of
credit under the credit agreement.
Cash flows used in operating activities were $4.4 million in the first quarter
of fiscal 2003 and provided $0.1 million in the first quarter of fiscal 2002.
The decrease of $4.5 million in cash flows from operating activities in the
first quarter of fiscal 2003 compared to the first quarter of fiscal 2002
resulted primarily from a decrease in income taxes payable, a decrease in
accrued liabilities and a decrease in accounts payable. These were partially
offset by an increase in depreciation and amortization, a decrease in prepaid
expenses, and an increase in net income. The decrease in income taxes payable is
primarily due to timing of income tax payments. The decrease in accrued
liabilities is primarily due to higher year end bonus payouts and higher gift
card redemptions.
Cash flows used in investing activities were $12.9 million and $12.0 million in
the first quarter of fiscal 2003 and 2002, respectively. The $0.9 million
increase in net cash used in investing activities is due to a net increase ($3.7
million) in the purchases of short-term investments offset by a decrease ($2.8
million) in purchases of property and equipment. Cash flows used in the
purchases of property and equipment during the first quarter of fiscal 2003
relate primarily to store openings and purchase of computer hardware and
software.
Cash flows provided by financing activities were $1.3 million in the first
quarter of fiscal 2003 and 2002. The financing activities were primarily related
to the proceeds received from the exercise of stock options.
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
Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. The preparation of these 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 its consolidated
financial statements. For a further discussion on the application of these and
other accounting policies, refer to the notes included in the Company's Annual
Report on Form 10-K for the year ended February 1, 2003.
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. The Company provides a reserve for projected merchandise
returns based on historical experience. Revenue from gift cards, gift
certificates and store merchandise credits is recognized at the time of
redemption.
SELF-INSURANCE: The Company is self-insured for medical insurance
coverage and workers compensation insurance coverage. Both programs have maximum
exposure limits. The Company maintains a liability for estimated claims based on
historical claims experience and other actuarial assumptions.
12
INFLATION
The Company does not believe that inflation has had a material adverse effect on
net sales or results of operations. The Company has generally been able to pass
on increased costs related to inflation through increases in selling prices.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This Quarterly Report on Form 10-Q contains various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extent and timing of future revenues and expenses and customer demand, expected
financial results, the profitability of future sales of the Company's products,
new store openings and new store concepts. All forward-looking statements
included in this report are based on information available to the Company as of
the date hereof and the Company assumes no obligation to update any
forward-looking statements. Forward-looking statements involve known or unknown
risks, uncertainties and other factors which may cause the Company's actual
results, performance or achievements, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include but are not limited to the items discussed under the captions
"Certain Risks Related to the Company's Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in this Item 2.
CERTAIN RISKS RELATED TO THE COMPANY'S BUSINESS
Before deciding to invest in the Company or to maintain or increase an
investment in the Company, readers should carefully consider the risks described
below, in addition to the other information contained in the Company's Annual
Report on Form 10-K and in the Company's other filings with the SEC, including
the Company's Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
The risks described below are not the only risks facing the Company. Additional
risks not presently known to the Company or that the Company currently deems
immaterial may also affect the Company's business. If any of these known or
unknown risks actually occur, the Company's business, financial condition and
results of operations could be seriously harmed, and the Company's stock price
could decline.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
The Company's net sales and net income have grown significantly during the past
several years, primarily as a result of the opening of new stores and, to a
lesser extent, the introduction of new products. The Company intends to continue
to pursue an aggressive growth strategy for the foreseeable future, and its
future operating results will depend largely upon its ability to open and
operate stores successfully and to profitably manage a larger business. The
Company currently anticipates opening approximately 95 stores, consisting of 70
Hot Topic and 25 Torrid stores, during fiscal 2003, which will result in a
significant increase in the number of stores operated by the Company. Operation
of a greater number of new stores and expansion into new markets may present
competitive and merchandising challenges that are different from those currently
encountered by the Company in its existing stores and markets. In addition, as
the number of Company stores increases, the Company may face risks associated
with market saturation of its products and concepts. There can be no assurance
that the Company's expansion will not adversely affect the individual financial
performance of the Company's existing stores or its overall results of
operations, or that new stores will achieve sales and profitability levels
consistent with existing stores.
13
In order to manage its planned expansion, among other things, the Company will
need to locate suitable store sites; negotiate acceptable lease terms; obtain
adequate capital resources on acceptable terms; source sufficient levels of
inventory; hire, train and supervise store management and sales associates; and
integrate new stores into its existing operations. The Company will also need to
continually evaluate the adequacy of its management information and distribution
systems. There can be no assurance that the Company will anticipate all of the
changing demands that its expanding operations will impose on its business,
systems and procedures, and the Company's failure to adapt to such changing
demands could have a material adverse effect on the Company's results of
operations and financial condition. Further, there can be no assurance that the
Company will successfully achieve its expansion targets or, if achieved, that
planned expansion will result in profitable operations.
RISKS ASSOCIATED WITH NEW TORRID CONCEPT
The Company's ability to expand into new concepts, and in particular its Torrid
concept, has not been fully tested. Accordingly, the operation of the Company's
Torrid stores and the sale of Torrid merchandise over the Internet are subject
to numerous risks, including unanticipated operating problems; lack of
experience; lack of customer acceptance; new vendor relationships; competition
from existing and new retailers; and diversion of management's attention from
the Company's Hot Topic concept. Among other things, the Torrid concept involves
implementation of a retail apparel concept which is subject to most of the same
risks as the Hot Topic concept, as well as additional risks inherent in a
dominantly apparel driven concept, including risks of difficulty in
merchandising, uncertainty of customer acceptance, fluctuations in apparel
styling and customer tastes, extreme competition with a less differentiated
product offering and attendant markdown risks. The Company may not be able to
generate continued customer interest in Torrid stores and products, and the
Torrid concept may not be able to support the store or Internet sales formats.
Risks inherent in any new concept are particularly acute with respect to Torrid,
because this is the first significant new venture by the Company. There can be
no assurance that the Company's Torrid stores or website will achieve sales and
profitability levels that justify the Company's investment.
DEPENDENCE ON RELATIONSHIPS WITH MALL OPERATORS AND DEVELOPERS
Any restrictions on the Company's ability to expand to new store sites or to
offer a broad assortment of merchandise could have a material adverse effect on
the Company's business, results of operations and financial condition. If the
Company's relations with mall operators or developers become strained, or the
Company otherwise encounters difficulties in leasing store sites, the Company
may not grow as planned, may not reach certain revenue levels and other
operating targets.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
A variety of factors affect the Company's comparable store sales including,
among others, the timing of new music releases and music-related products; music
and fashion trends; the general retail sales environment and the effect of the
difficult overall economic environment; the Company's ability to efficiently
source and distribute products; changes in the Company's merchandise mix; and
the Company's ability to execute its business strategy efficiently. The
Company's comparable store sales results have fluctuated significantly in the
past and the Company believes that such fluctuations may continue. The Company's
comparable store sales results for fiscal 1999, 2000, 2001 and 2002 were 22.8%,
16.7%, 3.9% and 5.0%, respectively. The Company's comparable store sales results
were (0.5%), 0.6%, 6.3% and 9.7% for the first, second, third and fourth
quarters, respectively, of fiscal 2002 and 8.0%, 2.4%, 2.2% and 3.8% for the
first, second, third and fourth quarters, respectively, of fiscal 2001. Past
comparable store sales results are not an indicator of future results, and there
can be no assurance as to whether Company's comparable store sales results will
increase or decrease in the future. The Company's comparable store sales results
could cause the Company's stock price to fluctuate substantially.
14
DEPENDENCE ON AND CHANGES IN MUSIC AND FASHION TRENDS
The Company's financial performance is largely dependent upon the continued
popularity of alternative and rock music, Internet, music videos, MTV and other
music television networks among teenagers and college age adults; the emergence
of new artists and the success of music releases and music-related products; the
continuance of a significant level of teenage spending on music-licensed and
music-influenced products; and the Company's ability to anticipate and keep pace
with the music, fashion and merchandise preferences of its customers. The
popularity of particular types of music, artists, styles and brands is subject
to change. The Company's failure to anticipate, identify and react appropriately
to changing trends could lead to, among other things, excess inventories and
higher markdowns, which could have a material adverse effect on the Company's
results of operations and financial condition, and on its image with customers.
There can be no assurance that the Company's new products will be met with the
same level of acceptance as in the past or that the failure of any new products
will not have an adverse material effect on the Company's business, results of
operations and financial condition.
IMPACT OF ECONOMIC CONDITIONS; WAGE RATE STRUCTURE AND BENEFITS
Certain economic conditions affect the level of consumer spending on merchandise
offered by the Company, including, among others, employment levels; salary and
wage levels; interest rates; taxation; and consumer confidence in future
economic conditions. The Company is also dependent upon the continued popularity
of malls as a shopping destination, the ability of mall anchor tenants and other
attractions to generate customer traffic, and the development of new malls. A
continued slowdown in the United States economy as well as a continued uncertain
economic outlook could lower consumer spending levels and cause a decrease in
mall traffic or new mall development, each of which would adversely affect the
Company's growth, sales results and financial performance.
Changes in federal and state minimum wage laws or statutory employment
regulations could raise wages above current wage rates or change the wage
structure of certain of the Company's associates, and competitive factors could
require corresponding increases in higher associate wage rates. These factors,
as well as continued significant increased benefits cost primarily driven by
medical expenses, would increase the Company's expenses and adversely affect
results of operations.
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 and political conditions.
The Company's business is also 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 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. As is the case with many retailers of
apparel, accessories and related merchandise, the Company typically experiences
lower net sales in the first fiscal quarter relative to other quarters.
15
DEPENDENCE ON KEY VENDORS
The Company's financial performance depends on its ability to purchase current
music-related merchandise in sufficient quantities at competitive prices.
Although the Company has many sources of merchandise, substantially all of the
Company's music-licensed products are available only from vendors that have
exclusive license rights. In addition, many of the Company's music-influenced
products are supplied by small, specialized vendors that create unique products
primarily for the Company. The Company's smaller vendors generally have limited
resources, production capacities and operating histories, and some of the
Company's vendors have restricted the distribution of their merchandise in the
past. The Company has no long-term purchase contracts or other contractual
assurances of continued supply, pricing or access to new products. There can be
no assurance that the Company will be able to acquire desired merchandise in
sufficient quantities on terms acceptable to the Company in the future. Any
inability to acquire suitable merchandise, or the loss of one or more key
vendors, may have a material adverse effect on the Company's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH INTERNET SALES
The Company sells merchandise over the Internet through the websites
hottopic.com and torrid.com. The Company's Internet operations are subject to
numerous risks, including, among other things, lack of experience; hiring,
retention and training of personnel to conduct the Company's Internet
operations; diversion of sales from the Company's stores; rapid technological
change, and the need to invest in additional computer hardware and software;
liability for online content; failure of computer hardware and software,
including computer viruses, telecommunication failures, online security breaches
and similar disruptions; governmental regulation; and credit card fraud. There
can be no assurance that the Company's Internet operations will achieve sales
and profitability levels that justify the Company's investment.
UNCERTAINTIES REGARDING INFORMATION SYSTEMS AND SOFTWARE
During fiscal 1999, after completing an evaluation of its long-term management
information system needs, the Company selected new hardware and software for its
stores, office and distribution center. The Company implemented the host
hardware and software systems at its office and distribution center during the
second half of fiscal 2000 and installed certain point-of-sale upgrades at its
stores in fiscal 2001. In addition, in fiscal 2002 the Company installed a new
Wide Area Network at its locations. If these information systems and software do
not work effectively, the Company may experience delays or failures in its
operations. These delays or failures could adversely impact the timeliness and
accuracy of the Company's ability to purchase and distribute merchandise, and
sales transaction processing. Additionally, such delays or failures could impact
the Company's ability to provide accurate and timely financial accounting and
reporting requirements, and the Company's ability to properly forecast earnings
and cash requirements. To manage growth of its operations and personnel, the
Company may need to continue to improve its operational and financial systems,
transaction processing, procedures and controls, and in doing so, could incur
substantial additional expenses.
16
DEPENDENCE ON KEY PERSONNEL
The Company's financial performance depends largely on the efforts and abilities
of senior management, especially Elizabeth McLaughlin, the Company's Chief
Executive Officer and President, who has been with the Company since 1993. The
Company has a $2,000,000 key-person life insurance policy on Ms. McLaughlin.
However, the sudden loss of Ms. McLaughlin's services or the services of other
members of the Company's management team could have a material adverse effect on
the Company's business, results of operations and financial condition.
Furthermore, there can be no assurance that Ms. McLaughlin and the Company's
existing management team will be able to manage the Company or its growth or
that the Company will be able to attract and retain additional qualified
personnel as needed in the future.
UNCERTAINTIES REGARDING DISTRIBUTION OF MERCHANDISE
The Company relies upon United Parcel Service for its product shipments,
including shipments to and from a significant number of its stores, and,
accordingly, is subject to risks, including employee strikes and inclement
weather, associated with United Parcel Service's ability to provide delivery
services to meet the Company's shipping needs. The Company is also dependent
upon temporary associates to adequately staff its distribution facility,
particularly during busy periods such as the Holiday season and while multiple
stores are opening. There can be no assurance that the Company will continue to
receive adequate assistance from its temporary associates, or that there will
continue to be sufficient sources of temporary associates.
FAILURE TO AUTHENTICATE LICENSING RIGHTS
The Company purchases licensed merchandise from a number of suppliers who hold
manufacturing and distribution rights under the terms of certain licenses. The
Company generally relies upon vendors' representations concerning manufacturing
and distribution rights and does not independently verify whether these vendors
legally hold adequate rights to licensed properties they are manufacturing or
distributing. If the Company acquires unlicensed merchandise, it could be
obligated to remove such merchandise from its stores, incur costs associated
with destruction of merchandise if the distributor is unwilling or unable to
reimburse the Company, and be subject to liability under various civil and
criminal causes of action, including actions to recover unpaid royalties and
other damages. Any of these results could have a material adverse effect on the
Company's business, results of operations and financial condition.
COMPETITION
The retail apparel and accessory industry is highly competitive. The Company
competes with other retailers for vendors, teenage and college age customers,
suitable store locations and qualified associates and management personnel. Hot
Topic currently competes with street alternative stores located primarily in
metropolitan areas; with other mall-based teenage-focused retailers such as
Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Anchor Blue
(Millers Outpost), Charlotte Russe Inc., Claire's Stores, Inc., Delias Inc.,
Gadzooks, Inc., Old Navy (a division of Gap Inc.), Pacific Sunwear of
California, Inc., Spencer Gifts, Inc., The Buckle, The Wet Seal, Inc., Urban
Outfitters, Inc.; and, to a lesser extent, with music stores and mail order
catalogs and websites. Torrid has additional competitors, such as Alloy, Inc.,
Deb Shops, Lane Bryant, and plus-size departments in department stores and
discount stores as well as numerous potential competitors who may begin or
increase efforts to market and sell products competitive with Torrid's products.
Many of the Company's competitors are larger and have substantially greater
financial, marketing and other resources than the Company. Direct competition
with these and other retailers may increase significantly in the future, which
could require the Company, among other things, to lower its prices. Increased
competition could have a material adverse effect on the Company's business,
results of operations and financial condition.
17
EFFECTS OF WAR, TERRORISM OR OTHER CATASTROPHES
The effects of war or acts of terrorism could have a material adverse effect on
the Company's business, operating results and financial condition. The terrorist
attacks in New York and Washington, D.C. on September 11, 2001 disrupted
commerce and intensified the uncertainty of the U.S. economy, a condition which
has persisted due to recent military actions in Afghanistan and Iraq. The
continued threat of terrorism and heightened security and military action in
response to this threat, or any future acts of terrorism, may cause further
disruptions and create further uncertainties. To the extent that such
disruptions or uncertainties negatively impact shopping patterns and/or mall
traffic, or adversely affect consumer confidence or the economy in general, the
Company's business, operating results and financial condition could be
materially and adversely affected.
In addition, California has recently experienced substantially increased costs
of electricity and gas caused by, among other things, disruption in energy
supplies. The Company's principal executive offices and a significant number of
its stores are located in California. If the Company experiences a sustained
disruption in energy supplies, or if electricity and gas costs in California
continue to increase, the Company's results of operations could be materially
and adversely affected. California is also subject to natural disasters such as
earthquakes and floods. A significant natural disaster or other catastrophic
event affecting the Company's facilities could have a material adverse impact on
its business, financial condition and operating results.
PRICE VOLATILITY
The Company's common stock is quoted on the Nasdaq National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations, which could adversely affect the Company's stock price
without regard to the Company's financial performance. In addition, the Company
believes that factors such as quarterly fluctuations in the Company's financial
results and comparable store sales; announcements by other apparel, accessory
and gift item retailers; the trading volume of the Company's stock; changes in
estimates of the Company's performance by securities analysts; overall economic
and political conditions; the condition of the financial markets; and other
events or factors could cause the Company's stock price to fluctuate
substantially.
ANTI-TAKEOVER MATTERS; SHAREHOLDER DILUTION
The Company's Articles of Incorporation and Bylaws contain provisions that may
have the effect of delaying, deterring or preventing a takeover of the Company.
For instance, the Company's 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 the Company's Bylaws prohibit shareholder action
by written consent. Additionally, the Company's Board of Directors 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 of Directors. The issuance of these shares could have a
dilutive effect on the Company's shareholders, and potentially prohibit a
takeover of the Company by requiring the preferred shareholders to approve such
a transaction.
18
The Company also has a significant number of authorized and unissued shares of
its common stock available under its Articles of Incorporation. These shares
provide the Company with the flexibility to issue its common stock for future
business and financial purposes including stock splits, raising capital and
providing equity incentives to employees, officers and directors. However, the
issuance of these shares by the Company could result in dilution to the
Company's shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not a party to any derivative financial instruments. The
Company's exposure to market risk relates to changes in interest rates on its
investments with maturities of less than three months (which are considered to
be cash and cash equivalents) and its short-term investments with maturities in
excess of three months. Changes in interest rates affect the investment income
earned on those investments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls
and procedures conducted within 90 days of the date of filing
this report on Form 10-Q, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the
Company's 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 the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
19
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 June 6, 2003, 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
Not applicable.
20
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: June 6, 2003 /s/ Elizabeth McLaughlin
-------------------------------------
Elizabeth McLaughlin
Chief Executive Officer and President
(Principal Executive Officer)
Date: June 6, 2003 /s/ James McGinty
-------------------------------------
James McGinty
Chief Financial Officer and Secretary
(Principal Financial Officer)
21
CERTIFICATION
I, Elizabeth 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: June 6, 2003
/s/ Elizabeth McLaughlin
- --------------------------------------
Elizabeth McLaughlin
Chief Executive Officer and President
22
CERTIFICATION
I, James 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: June 6, 2003
/s/ James McGinty
- --------------------------------------
James McGinty
Chief Financial Officer and Secretary
23