-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AbBalPUb+E/lWknvjVFlbuN3adM4QJ52L9xbOTY6ba+7hF0TpKOEoQcsyYhr95L8 6LUTYgrdLniuKudzBCLOCw== 0001019687-02-002367.txt : 20021206 0001019687-02-002367.hdr.sgml : 20021206 20021206170701 ACCESSION NUMBER: 0001019687-02-002367 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021102 FILED AS OF DATE: 20021206 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOT TOPIC INC /CA/ CENTRAL INDEX KEY: 0001017712 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-APPAREL & ACCESSORY STORES [5600] IRS NUMBER: 770198182 STATE OF INCORPORATION: CA FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28784 FILM NUMBER: 02851388 BUSINESS ADDRESS: STREET 1: 18305 EAST SAN JOSE AVENUE CITY: CITY OF INDUSTRY STATE: CA ZIP: 91748 BUSINESS PHONE: 6268394681 MAIL ADDRESS: STREET 1: 18305 EAST SAN JOSE AVENUE CITY: CITY OF INDUSTRY STATE: CA ZIP: 91768 10-Q 1 hottopic_10q-110202.txt 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 EX-99.1 3 hottopic_10qex99-1.txt EXHIBIT 99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350, as adopted). I, Elizabeth M. McLaughlin, Chief Executive Officer and President of Hot Topic, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hot Topic, Inc.; 2. Based on my knowledge, this quarterly report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 3. Based on my knowledge, the financial statements, and other information included in this quarterly report, fairly present in all material respects the financial condition and results of operations of the registrant as of, and for, the periods presented in this quarterly report. Date: December 6, 2002 /s/ Elizabeth M. McLaughlin -------------------------------------------- Elizabeth M. McLaughlin Chief Executive Officer and President (Principal Executive Officer) I, James J. McGinty, Chief Financial Officer of Hot Topic, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hot Topic, Inc.; 2. Based on my knowledge, this quarterly report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 3. Based on my knowledge, the financial statements, and other information included in this quarterly report, fairly present in all material respects the financial condition and results of operations of the registrant as of, and for, the periods presented in this quarterly report. Date: December 6, 2002 /s/ James J. McGinty -------------------------------------------- James J. McGinty Chief Financial Officer (Principal Financial and Accounting Officer) 19 -----END PRIVACY-ENHANCED MESSAGE-----