-----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, RNC5cO2iAW7oVwBKfWevN4QEo8CQZqXuWB1uGue+Ioo9O9a2znnXbFjB20nqvHXW 9w3nhAjJcegmzzQ+HUaGLQ== 0001017062-98-001968.txt : 19980911 0001017062-98-001968.hdr.sgml : 19980911 ACCESSION NUMBER: 0001017062-98-001968 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19980910 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOT TOPIC INC /CA/ CENTRAL INDEX KEY: 0001017712 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 770198182 STATE OF INCORPORATION: CA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28784 FILM NUMBER: 98707402 BUSINESS ADDRESS: STREET 1: 3410 POMONA BLVD CITY: POMONA STATE: CA ZIP: 91768 MAIL ADDRESS: STREET 1: 3410 POMONA BLVD CITY: POMONA STATE: CA ZIP: 91768 10-Q 1 10-Q DATED 8-1-98 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 1, 1998 -------------- 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.) 3410 POMONA BLVD., POMONA, CA 91768 - --------------------------------------------------- ----- (address of principle executive offices) (Zip Code) (Telephone number of registrant) (909) 869-6373 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's common stock as of the latest practicable date: August 27, 1998 --------------- - - 4,831,470 shares, no par value. - --------------------------------- HOT TOPIC, INC. INDEX TO FORM 10-Q Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Balance Sheets - August 1, 1998 and January 31, 1998 3 Statements of Operations for the: 13 and 26 weeks ended August 1, 1998 and August 2, 1997 4 Statements of Cash Flows for the 26 weeks ended August 1, 1998 and August 2, 1997 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION 10 SIGNATURE PAGE 11 2 HOT TOPIC, INC. BALANCE SHEETS (Unaudited)
Aug. 1,1998 Jan 31,1998(a) ASSETS Current Assets: Cash and cash equivalents $21,888,000 $26,579,000 Inventory 11,280,000 7,636,000 Prepaid expenses and other 1,956,000 658,000 Deferred tax asset 339,000 339,000 ----------- ----------- Total current assets 35,463,000 35,212,000 Leaseholds, fixtures and equipment: Furniture, fixtures and equipment 15,037,000 12,452,000 Leasehold improvements 12,870,000 10,727,000 ----------- ----------- 27,907,000 23,179,000 Less accumulated depreciation 8,335,000 6,479,000 ----------- ----------- Net leaseholds, fixtures and equipment 19,572,000 16,700,000 Deposits and other assets 42,000 41,000 ----------- ----------- Total Assets $55,077,000 $51,953,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,073,000 $ 1,706,000 Accrued payroll and related expenses 2,615,000 2,627,000 Accrued sales and other taxes 431,000 264,000 Income taxes payable 207,000 1,352,000 Current portion capital lease obligations 33,000 34,000 ----------- ----------- Total current liabilities 8,359,000 5,983,000 Deferred rent 616,000 509,000 Capital lease obligations, less current portion 113,000 126,000 Deferred tax liability 599,000 599,000 Shareholders' equity Common shares, no par value; 50,000,000 shares authorized; 4,830,845 and 4,759,606 issued and outstanding at August 1, 1998 and January 31,1998, respectively 37,958,000 37,701,000 Deferred compensation (60,000) (78,000) Retained earnings 7,492,000 7,113,000 ----------- ----------- Total shareholders' equity 45,390,000 44,736,000 ----------- ----------- Total liabilities and shareholders' equity $55,077,000 $51,953,000 =========== ===========
(a) - The balance sheet at Jan. 31, 1998 is from the audited financial statements at that date. See accompanying notes. 3 HOT TOPIC, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Second Quarter (13 weeks ended) ------------------------------- Aug. 1, 1998 Aug. 2, 1997 Net sales $20,787,000 $13,682,000 Cost of goods sold, including buying, distribution and occupancy costs 14,011,000 9,064,000 ----------- ----------- Gross margin 6,776,000 4,618,000 Selling, general and administrative expenses 6,458,000 4,501,000 ----------- ----------- Operating income 318,000 117,000 Interest income-net 216,000 212,000 ----------- ----------- Income before income taxes 534,000 329,000 Provision for income taxes 200,000 125,000 ----------- ----------- Net income $ 334,000 $ 204,000 =========== =========== Net income per share Basic $ 0.07 $ 0.04 Diluted $ 0.07 $ 0.04 Weighted average shares outstanding Basic 4,811,000 4,683,000 Diluted 4,984,000 4,948,000
See accompanying notes.
Six Months (26 weeks ended) ------------------------------- Aug. 1, 1998 Aug. 2, 1997 Net sales $38,101,000 $24,870,000 Cost of goods sold, including buying, distribution and occupancy costs 25,603,000 16,490,000 ----------- ----------- Gross margin 12,498,000 8,380,000 Selling, general and administrative expenses 12,359,000 8,676,000 ----------- ----------- Operating income (loss) 139,000 (296,000) Interest income-net 467,000 448,000 ----------- ----------- Income before income taxes 606,000 152,000 Provision for income taxes 227,000 58,000 ----------- ----------- Net income $ 379,000 $ 94,000 =========== =========== Net income per share Basic $ 0.08 $ 0.02 Diluted $ 0.08 $ 0.02 Weighted average shares outstanding Basic 4,794,000 4,645,000 Diluted 4,982,000 4,938,000
See accompanying notes. 4 HOT TOPIC, INC. STATEMENTS OF CASH FLOWS - (UNAUDITED)
Year-to-date (26 weeks) ended ------------------------------- Aug. 1, 1998 Aug. 2, 1997 -------------- -------------- Net income $ 379,000 $ 94,000 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 1,857,000 1,216,000 Deferred rent 107,000 79,000 Deferred compensation 18,000 18,000 Loss on disposal of fixed assets - 23,000 Changes in operating assets and liabilities: Inventory (3,644,000) (3,255,000) Prepaid expenses and other (1,298,000) (221,000) Deposits and other (1,000) (3,000) Accounts payable 3,368,000 3,056,000 Accrued payroll and related expenses (12,000) 99,000 Accrued sales and other taxes payable 167,000 102,000 Income taxes payable (1,145,000) (801,000) ----------- ----------- Net cash flows provided by (used in) operating activities (204,000) 407,000 Investing Activities: Purchases of property and equipment (4,729,000) (5,808,000) Net cash flows used in --------- ---------- investing activities (4,729,000) (5,808,000) Financing Activities: Payments on capital lease obligations (15,000) (6,000) Proceeds from exercise of stock options 257,000 368,000 ----------- ----------- Net cash flows provided by financing activities 242,000 362,000 Decrease in cash --------- ---------- and cash equivalents (4,691,000) (5,039,000) Cash and cash equivalents at the beginning of period 26,579,000 27,151,000 ----------- ----------- Cash and cash equivalents at the end of period $21,888,000 $22,112,000 =========== =========== Supplemental Information: Cash paid during the period for interest $ 9,000 $ 8,000 Cash paid during the period for income taxes $ 1,371,000 $ 861,000 Capital lease obligations entered into for equipment - $ 88,000
See accompanying notes. 5 HOT TOPIC, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1. Organization and Basis of Presentation: --------------------------------------- Hot Topic, Inc. (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 currently operates 136 stores in 36 states throughout the United States. The information set forth in these financial statements is unaudited except for the January 31, 1998 Balance Sheet. These statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 13 and 26 weeks ended August 1, 1998 are not necessarily indicative of the results that may be expected for the year ending January 30, 1999. For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1998. 6 NOTE 2. Net Income Per Share: --------------------- In February 1997, the Financial Accounting Standards Board (FASB) issued "Earnings Per Share" (Statement No. 128) establishing standards for computing and presenting earnings per share (EPS) for publicly-held common stock or potential common stock. Statement No. 128 supersedes the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share" and simplifies the standards for computing earnings per share. In addition, Statement No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share, requires dual presentation of basic and diluted earnings per share on the face of the statements of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997, with earlier application not permitted. All periods presented reflect the adoption of Statement No. 128. The impact on amounts previously reported was not material. 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 Financial Statements and the Notes related thereto. RESULTS OF OPERATIONS 13 Weeks Ended August 1, 1998 (Second Quarter of Fiscal 1998) Compared to 13 - ----------------------------------------------------------------------------- Weeks Ended August 2, 1997 (Second Quarter of Fiscal 1997) - ----------------------------------------------------------- Net sales increased $7,105,000, or 51.9%, to $20,787,000 during the second quarter of fiscal 1998 from $13,682,000 during the second quarter of fiscal 1997. Net sales for the 53 stores not yet qualifying as comparable stores contributed approximately $6,885,000 of the increase in net sales. Comparable store sales increased 2.0% and contributed approximately $220,000 of the increase in net sales for the second quarter of fiscal 1998. Sales of apparel category merchandise, as a percentage of total net sales, increased to 49% in the second quarter of 1998 compared to 47% in the second quarter of 1997. Gross margin increased approximately $2,158,000 to $6,776,000 during the second quarter of fiscal 1998 from $4,618,000 during the second quarter of fiscal 1997. As a percentage of net sales, gross margin decreased to 32.6% during the second quarter of fiscal 1998 from 33.8% in the second quarter of fiscal 1997. The decrease in gross margin as a percentage of net sales was primarily due to a decrease in the Company's merchandise margins. The decrease in merchandise margin was principally attributable to a higher mix of apparel sales. Apparel merchandise traditionally has a lower markup than accessory and gift categories. Selling, general and administrative expenses increased approximately $1,957,000 to $6,458,000 during the second quarter of fiscal 1998 from $4,501,000 during the second quarter of fiscal 1997, but decreased as a percentage of net sales to 31.1% in the second quarter of fiscal 1998 from 32.9% in the second quarter of fiscal 1997. The decrease as a percentage of net sales was primarily attributable to a reduction of corporate overhead expense as a percentage of net sales due to the operating leverage achieved through the Company's larger store base and a decrease in the aggregate pre-opening expense, both offset in part by higher store payroll expense as a percentage of net sales. The higher store payroll expense as a percentage of net sales resulted principally from increases in Federal and state minimum wage rates. The 7 aggregate dollar decrease in pre-opening expense is attributable to opening three fewer stores in the current quarter compared to last year's second quarter Operating income increased to $318,000 during the second quarter of fiscal 1998 from $117,000 during the second quarter of fiscal 1997. As a percentage of net sales, operating income was 1.5% in the second quarter of fiscal 1998 compared to 0.9% in the second quarter of fiscal 1997. 26 Weeks Ended August 1, 1998 (First Six Months of Fiscal 1998) Compared to 26 - ------------------------------------------------------------------------------- Weeks Ended August 2, 1997 (First Six Months of Fiscal 1997) - ------------------------------------------------------------- Net sales increased $13,231,000, or 53.2%, to $38,101,000 during the first six months of fiscal 1998 from $24,870,000 during the first six months of fiscal 1997. Net sales for the 53 stores not yet qualifying as comparable stores contributed approximately $13,071,000 of the increase in net sales. Comparable store sales increased 0.8% and contributed approximately $160,000 of the increase in net sales for the first six months of fiscal 1998. The increased sales in the first six months of fiscal 1998 were attributable to increases in the sales of apparel category merchandise as a percentage of total net sales and improvements in the allocation and distribution of merchandise to the stores. Gross margin increased approximately $4,118,000 to $12,498,000 during the first six months of fiscal 1998 from $8,380,000 during the first six months of fiscal 1997. As a percentage of net sales, gross margin decreased to 32.8% during the first six months of fiscal 1998 from 33.7% in the first six months of fiscal 1997. The decrease in gross margin as a percentage of net sales was primarily due to a decrease in the Company's merchandise margins and an increase in occupancy expenses. The decrease in merchandise margin was principally attributable to an increase in apparel sales as a percentage of total net sales. Apparel merchandise traditionally has a lower markup than accessory and gift categories. Occupancy expense, as a percentage of net sales, was higher in the first half of 1998 compared to the first half of 1997 principally due to the greater number of new stores. Selling, general and administrative expenses increased approximately $3,683,000 to $12,359,000 during the first six months of fiscal 1998 from $8,676,000 during the first six months of fiscal 1997, but decreased as a percentage of net sales to 32.4% in the first six months of fiscal 1998 from 34.9% in the first six months of fiscal 1997. The decrease as a percentage of net sales was primarily attributable to a reduction of corporate overhead expense as a percentage of net sales due to the operating leverage achieved through the Company's larger store base, offset in part by higher store payroll expense as a percentage of net sales. The higher store payroll expense as a percentage of net sales resulted principally from increases in Federal and state minimum wage rates. Operating income increased to $139,000 during the first six months of fiscal 1998 from an operating loss of ($296,000) during the first six months of fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Historically, as well as during the second quarter and first six months of fiscal 1998, the Company's primary uses of cash have been to finance store openings and purchase merchandise inventories. The Company has satisfied its annual cash requirements principally from proceeds from cash flows from operations and from the sale of equity securities. 8 Working capital at August 1, 1998 was $27,107,000 compared to $29,229,000 at January 31, 1998. The decrease is primarily from the use of working capital used to finance the new store openings. Cash flows (used in) provided by operating activities were ($204,000) and $407,000 in the first six months of fiscal 1998 and 1997, respectively. The decrease in cash flows provided by operating activities in the first six months of fiscal 1998 was primarily attributable to an increase in the Company's net income and depreciation and amortization expense, offset by a net change in operating assets and liabilities. Cash flows used in investing activities were $4,729,000 and $5,808,000 in the first six months of fiscal 1998 and 1997, respectively. Cash flows used in investing activities relate primarily to store openings, equipment for the distribution center and computer hardware and software. The Company opened 25 and 26 stores in the first six months of fiscal 1998 and 1997, respectively. Cash flows provided by financing activities were $242,000 and $362,000 in the first six months of fiscal 1998 and 1997, respectively. The Company believes that its current cash balances and cash generated from operations will be sufficient to fund its operations and planned expansion through fiscal 1999. SEASONALITY The Company's business is subject to seasonal influences, with heavier concentrations of sales during the Christmas holiday, back-to-school season, and other periods when schools are not in session. The Christmas holiday season remains the Company's single most important selling season. As is the case with many retailers of apparel, accessories and related merchandise, the Company typically experiences lower net sales and operating losses during the first fiscal quarter. The Company does not believe that inflation has had a material adverse effect on its 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 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, 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 sufficiency of the Company's working capital and cash flows from operating activities, the implementation and management of the Company's growth strategy, 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 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 dated April 22, 1998. 9 YEAR 2000 Like all companies having business-application software programs written over many years and a computing infrastructure including computerized devices, the Company is also affected by the so-called "Year 2000" issue. Certain of the Company's software programs were written using two-year digits to define the applicable year, rather than four. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in the computer shutting down or performing incorrect computations. The computing infrastructure, including computerized devices could contain data-sensitive software that could cause the devices to fail to operate or to operate inconsistently. The Company has obtained information from the vendors for its integrated store, merchandising, distribution and financial systems as to required modifications and timing of those modifications to ensure that the systems will be Year 2000 compliant. These efforts are under way and are scheduled to be completed in late 1998. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, the can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material adverse effect on the Company. The cost of the Year 2000 Problem initiatives is not expected to be material to the Company's results of operations or financial position. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable PART II. - OTHER INFORMATION Items 1-3 and 5 are not applicable. Item 4. Submission of Matters to a vote of Security Holders The annual meeting of shareholders of the Company (the "Annual Meeting") was held on May 27, 1998 in Pomona, California. Proposal 1 - Election of Directors Each of the candidates listed below were duly elected to the Board of directors at the Annual Meeting by the tally indicated. Candidate Votes in Favor Votes Withheld --------- -------------- -------------- Robert M. Jaffe 3,205,879 0 Orval D. Madden 3,205,879 0 Edgar F. Berner 3,205,879 0 Stanley E. Foster 3,205,879 0 Cece Smith 3,205,879 0 Corrado Federico 3,205,879 0 Andrew Schuon 3,205,879 0 10 Proposal 2 - Amendment to the 1996 Equity Incentive Plan to increase the aggregate number of shares of Common Stock authorized under such plan by 500,000 shares. Votes in favor Votes Against Votes Abstained -------------- ------------- --------------- 2,943,730 261,849 300 Proposal 3 - Amendments to the 1996 Non-Employee Director Stock Option Plan to (i) increase the aggregate number of Common Shares authorized under the plan by 50,000 shares, (ii) provide for the automatic grant to new directors of options to purchase 5,000 shares upon becoming a member of the Board, and (iii) provide for an automatic grant to directors of options to purchase 1,250 shares upon each annual meeting of shareholders of the Company. Votes in favor Votes Against Votes Abstained -------------- ------------- --------------- 3,051,063 153,197 1,619 Proposal 4 - Ratification of Selection of Ernst & Young, LLP as Independent Auditors Votes in favor Votes Against Votes Abstained -------------- ------------- --------------- 3,205,879 0 0 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the period. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Hot Topic, Inc. (Registrant) Date: 9/8/98 /s/ ORVAL D. MADDEN ------ ------------------- Orval D. Madden President and Chief Executive Officer (principal executive officer) Date: 9/8/98 /s/ JAY A. JOHNSON ------ ------------------ Jay A. Johnson Chief Financial Officer (principal financial and accounting officer 11 EX-27 2 FDS ARTICLE 5 / 10-Q DATED 8-1-98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q DATED AUGUST 1, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS JAN-30-1999 JAN-30-1999 MAY-02-1998 FEB-01-1998 AUG-01-1998 AUG-01-1998 21,888 0 0 0 0 0 0 0 11,280 0 35,463 0 27,907 0 8,335 0 55,077 0 8,359 0 0 0 0 0 0 0 37,958 0 7,432 0 55,077 0 20,787 38,101 20,787 38,101 14,011 25,603 14,011 25,603 6,458 12,359 0 0 0 0 534 606 200 227 334 379 0 0 0 0 0 0 334 379 $0.07 $0.08 $0.07 $0.08
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