10-Q 1 hottopic_10q-110103.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 1, 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 Rule 12b-2 of the Exchange Act). 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: November 28, 2003 - 47,844,920 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 1, 2003 and February 1, 2003 3 Consolidated Statements of Income for the three and nine months ended November 1, 2003 and November 2, 2002 4 Consolidated Statements of Cash Flows for the nine months ended November 1, 2003 and November 2, 2002 5 Notes to Consolidated Financial Statements 6-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20 ITEM 4. CONTROLS AND PROCEDURES 20-21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 SIGNATURES 23 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Hot Topic, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands except share amounts)
November 1, February 1, 2003 2003 ------------- ------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 40,385 $ 50,449 Short-term investments 56,121 32,969 Inventory 63,295 38,409 Prepaid expenses and other 11,318 7,866 Deferred tax assets 2,093 2,093 ------------- ------------- Total current assets 173,212 131,786 Leaseholds, fixtures and equipment: Furniture, fixtures and equipment 72,195 58,597 Leasehold improvements 71,090 58,322 ------------- ------------- 143,285 116,919 Less accumulated depreciation 58,250 44,773 ------------- ------------- Net leaseholds, fixtures and equipment 85,035 72,146 Deposits and other 189 171 Deferred tax assets 683 683 ------------- ------------- Total assets $ 259,119 $ 204,786 ============= ============= Liabilities and shareholders' equity Current liabilities: Accounts payable $ 26,335 $ 15,407 Accrued liabilities 25,945 19,524 Income taxes payable 7,050 6,453 Current portion of obligations under capital leases 13 23 ------------- ------------- Total current liabilities 59,343 41,407 Deferred rent 2,921 2,358 Capital lease obligations, less current portion 82 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; 47,788,563 and 46,805,980 shares issued and outstanding at November 1, 2003 and February 1, 2003, respectively 58,263 47,837 Retained earnings 138,664 113,092 Accumulated other comprehensive loss (154) -- ------------- ------------- Total shareholders' equity 196,773 160,929 ------------- ------------- Total liabilities and shareholders' equity $ 259,119 $ 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 Nine Months Ended ---------------------------- ---------------------------- November 1, November 2, November 1, November 2, 2003 2002 2003 2002 ---------------------------- ---------------------------- Net sales $ 161,546 $ 122,590 $ 377,931 $ 294,972 Cost of goods sold, including buying, distribution and occupancy costs 98,503 75,830 237,643 186,963 ---------------------------- ---------------------------- Gross margin 63,043 46,760 140,288 108,009 Selling, general and administrative expenses 38,626 30,852 99,782 79,913 ---------------------------- ---------------------------- Operating income 24,417 15,908 40,506 28,096 Interest income-net 333 298 939 1,057 ---------------------------- ---------------------------- Income before income taxes 24,750 16,206 41,445 29,153 Provision for income taxes 9,479 6,158 15,873 11,078 ---------------------------- ---------------------------- Net income $ 15,271 $ 10,048 $ 25,572 $ 18,075 ============================ ============================ Net income per share: Basic $ 0.32 $ 0.22 $ 0.54 $ 0.38 ============================ ============================ Diluted $ 0.31 $ 0.21 $ 0.52 $ 0.37 ============================ ============================ Shares used in computing net income per share: Basic 47,656 46,691 47,328 47,155 Diluted 49,917 48,390 49,263 49,286 See notes to consolidated financial statements. 4
HOT TOPIC, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (in thousands)
Nine Months Ended ----------------------------- November 1, November 2, 2003 2002 ------------- ------------- OPERATING ACTIVITIES Net income $ 25,572 $ 18,075 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,820 11,043 Tax benefit from exercise of stock options 4,318 4,291 Stock-based compensation 135 65 Deferred rent 563 427 Loss on disposal of fixed assets 243 193 Changes in operating assets and liabilities: Inventory (24,886) (16,848) Prepaid expenses and other current assets (3,452) (3,587) Deposits and other assets (18) (14) Accounts payable 10,928 4,401 Accrued liabilities 6,420 6,074 Income taxes payable 596 877 ------------- ------------- Net cash provided by operating activities 34,239 24,997 INVESTING ACTIVITIES Purchases of property and equipment (26,952) (29,764) Purchases of short-term investments (64,228) (16,110) Proceeds from sale of short-term investments 40,923 29,378 ------------- ------------- Net cash used in investing activities (50,257) (16,496) FINANCING ACTIVITIES Payments on capital lease obligations (20) (22) Proceeds from employee stock purchases and exercise of stock options 5,974 3,025 Repurchase of common shares -- (19,700) ------------- ------------- Net cash provided by (used in) financing activities 5,954 (16,697) ------------- ------------- Decrease in cash and cash equivalents (10,064) (8,196) Cash and cash equivalents at beginning of period 50,449 34,072 ------------- ------------- Cash and cash equivalents at end of period $ 40,385 $ 25,876 ============= ============= SUPPLEMENTAL INFORMATION Cash paid during the period for interest $ 29 $ 9 ============= ============= Cash paid during the period for income taxes $ 10,991 $ 6,451 ============= ============= 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 third quarter (November 1, 2003) of fiscal 2003 (the fiscal year ending January 31, 2004), the Company operated 491 Hot Topic stores in 49 states and Puerto Rico, 49 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 and nine months ended November 1, 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 September 2, 2003. All share and per share amounts have been restated to reflect this 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 1, November 2, November 1, November 2, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Basic EPS Computation: Numerator $ 15,271 $ 10,048 $ 25,572 $ 18,075 Denominator: Weighted average common shares outstanding 47,656 46,691 47,328 47,155 ------------ ------------ ------------ ------------ Total shares 47,656 46,691 47,328 47,155 ============ ============ ============ ============ Basic EPS $ 0.32 $ 0.22 $ 0.54 $ 0.38 ============ ============ ============ ============ Diluted EPS Computation: Numerator $ 15,271 $ 10,048 $ 25,572 $ 18,075 Denominator: Weighted average common shares outstanding 47,656 46,691 47,328 47,155 Incremental shares from assumed conversion of options 2,261 1,699 1,935 2,131 ------------ ------------ ------------ ------------ Total shares 49,917 48,390 49,263 49,286 ============ ============ ============ ============ Diluted EPS $ 0.31 $ 0.21 $ 0.52 $ 0.37 ============ ============ ============ ============
NOTE 3. OTHER COMPREHENSIVE INCOME (LOSS) Other Comprehensive Loss items consist of fluctuations in the fair market value of certain short-term investments. Other Comprehensive Income was lower than net income for the nine months ended November 1, 2003 as a result of Other Comprehensive Loss items aggregating $154,000. Other Comprehensive Loss items are reported in the Shareholders' Equity section of the Consolidated Balance Sheet. NOTE 4. 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. On August 12, 2003, the Company announced that its Board of Directors approved a three-for-two stock split (in the form of a dividend) of its common stock. On the effective date of September 2, 2003, shareholders received a dividend of one additional share for every two shares they owned at the close of business on the record date of August 21, 2003. NOTE 5. BANK CREDIT AGREEMENT The Company has increased its unsecured bank credit agreement from $1.0 million to $5.0 million, effective August 2003. The credit agreement will expire in August 2004. Letters of credit are issued under the credit agreement, which are primarily used for inventory purchases. At November 1, 2003, the Company had $0.8 million of outstanding letters of credit issued under the credit agreement. 7 NOTE 6. 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 incentives 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):
Three Months Ended Nine Months Ended -------------------------- -------------------------- November 1, November 2, November 1, November 2, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income As reported $ 15,271 $ 10,048 $ 25,572 $ 18,075 Add: Stock-based compensation expense included in reported net income, net of related tax effects 28 22 83 40 Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects (1,286) (1,077) (3,787) (3,093) ------------ ------------ ------------ ------------ Pro forma $ 14,013 $ 8,993 $ 21,868 $ 15,022 ============ ============ ============ ============ Basic earnings per share: As reported $ 0.32 $ 0.22 $ 0.54 $ 0.38 Pro forma $ 0.29 $ 0.19 $ 0.46 $ 0.32 Diluted earnings per share: As reported $ 0.31 $ 0.21 $ 0.52 $ 0.37 Pro forma $ 0.28 $ 0.19 $ 0.44 $ 0.30
NOTE 7. 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 additional 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 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. 8 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 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. 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. 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. 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 November 1, 2003 Compared to Three Months Ended November 2, 2002 -------------------------------------------------------------------------------- Net sales increased $38.9 million, or 31.8%, to $161.5 million during the third quarter of fiscal 2003 from $122.6 million during the third quarter of fiscal 2002. Net sales for new Hot Topic stores opened during the third quarter of fiscal 2003 and for the other Hot Topic stores not yet qualifying as comparable stores contributed $19.4 million of the net sales increase. Comparable store sales for the Company increased 10.8% in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002 and contributed $11.7 million of the increase in net sales. Net sales for new Torrid stores and for Torrid stores not yet qualifying as comparable stores contributed $5.4 million of the net sales increase. Hottopic.com and torrid.com sales were approximately 2.5% of total Company net sales in the third quarter of fiscal 2003 and contributed $2.2 million (including shipping and handling revenue) of the net sales increase. The remainder of the net sales increase ($0.2 million) came from the 4 Hot Topic expanded/relocated stores. At the end of the third quarter of fiscal 2003, 399 of the Company's 540 stores (Hot Topic and Torrid) were included in the comparable store base, compared to 302 of the Company's 437 stores (Hot Topic and Torrid) open at the end of the third quarter of fiscal 2002. Sales of Hot Topic apparel and tee-shirt category merchandise, as a percentage of total net sales, were 55.2% in the third quarter of fiscal 2003 compared to 53.6% in the third quarter of fiscal 2002. The increase in apparel and tee-shirt sales mix was due primarily to men's novelty tee-shirts and men's music-related tee-shirts, partially offset by decreases in women's apparel, men's fashion tops and men's bottoms. Gross margin increased $16.2 million to $63.0 million during the third quarter of fiscal 2003 from $46.8 million during the third quarter of fiscal 2002. As a percentage of net sales, gross margin increased to 39.0% during the third quarter of fiscal 2003 from 38.1% in the third quarter of fiscal 2002. Store depreciation and occupancy expenses were lower, 0.3% and 0.2%, respectively, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002 as a result of leverage gained from higher comparable store sales. This decrease was partially offset by increases in rent expenses and common area charges for Torrid stores due to their larger store size as compared to Hot Topic stores. The Company's merchandise margin increased 0.1% of net sales in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002 principally due to lower markdowns partially offset by lower initial markup. The decrease in distribution expenses and buying costs of 0.3% for the third quarter of fiscal 2003 resulted from significant cost savings in freight and leveraging of buying costs. 10 Selling, general and administrative expenses increased $7.7 million, or 25.2%, to $38.6 million during the third quarter of fiscal 2003 compared to $30.9 million during the third quarter of fiscal 2002. As a percentage of net sales, selling, general and administrative expenses decreased to 23.9% in the third quarter of fiscal 2003 compared to 25.2% in the third 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 437 at the end of the third quarter of fiscal 2002 to 540 at the end of the third quarter of fiscal 2003 and the corresponding additional payroll and other expenses required to support these additional stores. The decrease as a percentage of net sales (1.3%) was due primarily to a decrease in store payroll (0.8%), store supplies (0.1%), store telephone (0.1%) and the leveraging of headquarters expenses (0.4%), partially offset by higher store pre-opening costs (0.1%). Operating income increased 53.5%, to $24.4 million, during the third quarter of fiscal 2003 from $15.9 million during the third quarter of fiscal 2002. As a percentage of net sales, operating income was 15.1% in the third quarter of fiscal 2003 compared to 13.0% in the third quarter of fiscal 2002. Interest income-net, as a percentage of net sales, was flat compared to the third quarter of fiscal 2002, due to lower average interest rates offset in part by the additional interest earned from higher average cash balances. Nine Months Ended November 1, 2003 Compared to Nine Months Ended November 2, 2002 -------------------------------------------------------------------------------- Net sales increased $82.9 million, or 28.1%, to $377.9 million during the first nine months of fiscal 2003 from $295.0 million during the first nine months of fiscal 2002. The increased net sales in the first nine months of fiscal 2003 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 2002. Net sales for the 137 new and non-comparable stores (Hot Topic and Torrid) contributed $58.1 million of the increase in net sales with the remainder of the increase coming from the comparable stores, the websites hottopic.com and torrid.com and the 4 Hot Topic expanded/relocated stores. Comparable store sales for the Company increased 6.8% in the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002 and contributed $17.7 million of the increase in net sales. In the first nine months of fiscal 2002, comparable store sales increased by 2.6% compared to the first nine months of fiscal 2001. Sales of Hot Topic apparel and tee-shirt category merchandise, as a percentage of total net sales, were 53.0% for the first nine months of fiscal 2003 compared to 52.8% during the first nine months of fiscal 2002. The increase in apparel and tee-shirt sales mix was due primarily to increase in men's novelty tee-shirts and men's music-related tee-shirts. These sales increases were offset in part by decreases in women's apparel, men's fashion tops and men's bottoms. Gross margin increased approximately $32.3 million to $140.3 million during the first nine months of fiscal 2003 from $108.0 million during the first nine months of fiscal 2002. As a percentage of net sales, gross margin increased to 37.1% during the first nine months of fiscal 2003 from 36.6% in the first nine months of fiscal 2002. Distribution expenses and buying costs were 0.6% lower as compared to the corresponding nine months last year primarily as a result of significant cost savings in freight and labor, and leveraging of buying costs. Store occupancy and depreciation expenses were 0.1% higher as compared to the corresponding nine months last year primarily as a result of Torrid's larger store size as compared to Hot Topic stores and Torrid's increased store count. 11 Selling, general and administrative expenses increased $19.9 million, or 24.9%, to $99.8 million during the first nine months of fiscal 2003 compared to $79.9 million during the first nine months of fiscal 2002. As a percentage of net sales, selling, general and administrative expenses decreased to 26.4% in the first nine months of fiscal 2003 compared to 27.1% in the first nine months of fiscal 2002. The total dollar increase in selling, general and administrative expenses is primarily attributable to an increase in the number of retail stores, 540 stores at the end of the third quarter of fiscal 2003 compared to 437 stores at the end of the third quarter of fiscal 2002. The decrease as a percentage of net sales was due primarily to a decrease in store payroll. Operating income increased $12.4 million, or 44.2%, to $40.5 million during the first nine months of fiscal 2003 from $28.1 million during the first nine months of fiscal 2002. As a percentage of net sales, operating income was 10.7% in the first nine months of fiscal 2003 compared to 9.5% in the first nine months of fiscal 2002. Interest income-net, decreased to $0.9 million in the first nine months of fiscal 2003 from $1.1 million in the first nine months of fiscal 2002, principally due to lower average interest rates offset in part by the additional interest earned from higher average cash balances. LIQUIDITY AND CAPITAL RESOURCES Historically, as well as during the first nine months of fiscal 2003, the Company's primary uses of cash have been to finance store openings and purchase merchandise inventories. In recent years, the Company has satisfied its cash requirements principally from cash flows from operations and to a lesser extent proceeds from the sale of equity securities. The Company maintains a $5.0 million unsecured credit agreement for the purpose of issuing letters of credit, primarily for inventory purchases. At November 1, 2003, the Company had $0.8 million of outstanding letters of credit under the credit agreement. Cash flows provided by operating activities were $34.2 million in the first nine months of fiscal 2003 and $25.0 million in the first nine months of fiscal 2002. The increase of $9.2 million in cash flows from operating activities in the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002 resulted primarily from an increase in net income, an increase in accounts payable and an increase in depreciation expense, partially offset by an increase in inventory. The significant changes in net cash provided by operating activities were due primarily to the Company's increase in store growth to 540 stores as of November 1, 2003 compared to 437 stores as of November 2, 2002. Cash flows used in investing activities were $50.3 million and $16.5 million in the first nine months of fiscal 2003 and 2002, respectively. The $33.8 million increase in net cash used in investing activities is due to a net increase ($36.6 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 nine months of fiscal 2003 relate primarily to store openings and purchases of computer hardware and software. Cash flows provided by financing activities were $6.0 million in the first nine months of fiscal 2003 compared to cash flows used in financing activities of $16.7 million in the first nine months of fiscal 2002. The $22.7 million increase in financing activities is principally a result of a $3.0 million increase from proceeds received from the exercise of stock options and $19.7 million of cash was used to repurchase Company common stock in the first nine months of fiscal 2002. 12 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. The Company has entered into operating leases for retail and office space, and equipment under noncancelable lease agreements with terms ranging from approximately three to ten years. Annual future minimum lease payments under operating leases as of November 1, 2003 are as follows (in thousands): Operating Payments Due Leases ------------ -------- Under 1 year $ 35,880 1 to 3 years 70,692 4 to 5 years 66,379 Over 5 years 104,698 -------- Total minimum lease payments $277,649 ======== 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 price. 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. 13 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. 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. 14 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 109 stores, consisting of 84 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. 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. 15 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, and 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 increases for fiscal 1999, 2000, 2001, and 2002 were 22.8%, 16.7%, 3.9% and 5.0%, respectively. The Company's comparable store sales increases (decreases) were 2.6%, 5.2%, and 10.8% for the first, second and third quarters, respectively, of fiscal 2003, (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. 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, the 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 slowdown in the United States economy as well as an 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. 16 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 its 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. 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. 17 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 Over the past several years the Company has made improvements to existing hardware and software systems, as well as implemented new systems. The Company continues to implement hardware and software systems at its offices, distribution center and stores to support current operations and future growth. If these hardware and software systems 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. 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, 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. 18 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., 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 Deb Shops, Lane Bryant, plus-size departments in department stores and discount stores, and various e-commerce websites that sell to the plus-size customer, as well as numerous potential competitors who may begin or increase efforts to market and sell products competitive with Torrid's products. Some of the Company's competitors are larger and may 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. 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. 19 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, which may include rights senior to those of the Company's common stock. 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. 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 prior to 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 as of the end of the period covered by this report. 20 (b) Changes in Internal Controls There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. During the third quarter ended November 1, 2003, the Company implemented new Lawson financial systems. The Company does not believe that the implementation of these new Lawson financial systems has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 21 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) 31.1 Certification, dated December 1, 2003, of Registrant's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification, dated December 1, 2003, of Registrant's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications, dated December 1, 2003, of Registrant's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C ss. 1350, as adopted). (1) Filed as an exhibit to Registrant's Registration Statement on Form SB - 2 (No. 333-5054-LA) and incorporated herein by reference. (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 On August 6, 2003, the Company filed a report on Form 8-K furnishing, under Item 12, information related to its sales for the second quarter of fiscal 2003 (quarter ended August 2, 2003). On August 12, 2003, the Company filed a report on Form 8-K disclosing, under Item 5, information related to a three-for-two stock split implemented as a 50% stock dividend effective September 2, 2003. On August 20, 2003, the Company filed a report on Form 8-K furnishing, under Item 12, information related to its results for the second quarter of fiscal 2003. 22 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 1, 2003 /s/ Elizabeth McLaughlin ------------------------------------- Elizabeth McLaughlin Chief Executive Officer (Principal Executive Officer) Date: December 1, 2003 /s/ James McGinty ------------------------------------- James McGinty Chief Financial Officer and Secretary (Principal Financial Officer) 23