-----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, V1PAN0X6L3ChqBqHSeS7QVTGfQIwfVfPiha0dBmIpta70qMV9hXfI+7lZVMhSz+M 1XQQUC1x1MbXwJBEXcbZ1Q== 0001017062-98-002437.txt : 19981210 0001017062-98-002437.hdr.sgml : 19981210 ACCESSION NUMBER: 0001017062-98-002437 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981209 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: 98765938 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 FOR THE PERIOD ENDED OCTOBER 31, 1998 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 October 31, 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: November 30, 1998 - 4,839,927 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 - October 31, 1998 and January 31, 1998 3 Statements of Operations for the: 13 and 39 weeks ended October 31, 1998 and November 1, 1997 4 Statements of Cash Flows for the 39 weeks ended October 31, 1998 and November 1, 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 10 2 HOT TOPIC, INC. BALANCE SHEETS (Unaudited)
Oct 31,1998 Jan 31,1998(a) ASSETS Current Assets: Cash and cash equivalents $22,486,000 $26,579,000 Inventory 11,065,000 7,636,000 Prepaid expenses and other 2,271,000 658,000 Deferred tax asset 339,000 339,000 ----------- ----------- Total current assets 36,161,000 35,212,000 Leaseholds, fixtures and equipment: Furniture, fixtures and equipment 16,348,000 12,452,000 Leasehold improvements 13,873,000 10,727,000 ----------- ----------- 30,221,000 23,179,000 Less accumulated depreciation 9,380,000 6,479,000 ----------- ----------- Net leaseholds, fixtures and equipment 20,841,000 16,700,000 Deposits and other assets 42,000 41,000 ----------- ----------- Total Assets $57,044,000 $51,953,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 3,543,000 $ 1,706,000 Accrued payroll and related expenses 2,958,000 2,627,000 Accrued sales and other taxes 563,000 264,000 Income taxes payable 1,399,000 1,352,000 Current portion capital lease obligations 33,000 34,000 ----------- ----------- Total current liabilities 8,496,000 5,983,000 Deferred rent 676,000 509,000 Capital lease obligations, less current portion 105,000 126,000 Deferred tax liability 599,000 599,000 Shareholders' equity Common shares, no par value; 50,000,000 shares authorized; 4,832,064 and 4,759,606 issued and outstanding at October 31, 1998 and January 31,1998, respectively 37,970,000 37,701,000 Deferred compensation (52,000) (78,000) Retained earnings 9,250,000 7,113,000 ----------- ----------- Total shareholders' equity 47,168,000 44,736,000 ----------- ----------- Total liabilities and shareholders' equity $57,044,000 $51,953,000 =========== ===========
3 (a) - The balance sheet at Jan. 31, 1998 is from the audited financial statements at that date. See accompanying notes. HOT TOPIC, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Third Quarter (13 weeks ended) ------------------------------- Oct. 31, 1998 Nov. 1, 1997 Net sales $28,708,000 $18,753,000 Cost of goods sold, including buying, distribution and occupancy costs 18,066,000 12,029,000 ----------- ----------- Gross margin 10,642,000 6,724,000 Selling, general and administrative expenses 8,055,000 5,124,000 ----------- ----------- Operating income 2,587,000 1,600,000 Interest income-net 226,000 206,000 ----------- ----------- Income before income taxes 2,813,000 1,806,000 Provision for income taxes 1,055,000 686,000 ----------- Net income $ 1,758,000 $ 1,120,000 =========== =========== Net income per share Basic $ 0.36 $ 0.24 Diluted $ 0.36 $ 0.23 Weighted average shares outstanding Basic 4,831,000 4,723,000 Diluted 4,944,000 4,928,000 See accompanying notes. Nine Months (39 weeks ended) ------------------------------- Oct. 31, 1998 Nov. 1, 1997 Net sales $66,809,000 $43,623,000 Cost of goods sold, including buying, distribution and occupancy costs 43,669,000 28,519,000 ----------- ----------- Gross margin 23,140,000 15,104,000 Selling, general and administrative expenses 20,414,000 13,800,000 ----------- ----------- Operating income 2,726,000 1,304,000 Interest income-net 693,000 654,000 ----------- -----------
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Income before income taxes 3,419,000 1,958,000 Provision for income taxes 1,282,000 744,000 ----------- ----------- Net income $ 2,137,000 $ 1,214,000 =========== =========== Net income per share Basic $ 0.44 $ 0.26 Diluted $ 0.43 $ 0.25 Weighted average shares outstanding Basic 4,807,000 4,671,000 Diluted 4,969,000 4,935,000 See accompanying notes. HOT TOPIC, INC. STATEMENTS OF CASH FLOWS - (UNAUDITED) Year-to-date (39 weeks) ended ------------------------------- Oct. 31,1998 Nov. 1,1997 --------------- ------------- Net income $ 2,137,000 $ 1,214,000 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 2,901,000 2,008,000 Deferred rent 167,000 130,000 Deferred compensation 26,000 27,000 Loss on disposal of fixed assets - 33,000 Changes in operating assets and liabilities: Inventory (3,429,000) (2,638,000) Prepaid expenses and other (1,613,000) (516,000) Deposits and other (1,000) (4,000) Accounts payable 1,837,000 1,205,000 Accrued payroll and related expenses 331,000 10,000 Accrued sales and other taxes payable 299,000 120,000 Income taxes payable 47,000 (170,000) ----------- ----------- Net cash flows provided by (used in) operating activities 2,702,000 1,419,000 Investing Activities: Purchases of property and equipment (7,042,000) (7,970,000) Net cash flows used in ----------- ----------- investing activities (7,042,000) (7,970,000)
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Financing Activities: Payments on capital lease obligations (22,000) (10,000) Proceeds from exercise of stock options 269,000 374,000 ----------- ----------- Net cash flows provided by financing activities 247,000 364,000 Decrease in cash --------- ---------- and cash equivalents (4,093,000) (6,187,000) Cash and cash equivalents at the beginning of period 26,579,000 27,151,000 ----------- ----------- Cash and cash equivalents at the end of period $22,486,000 $20,964,000 =========== =========== Supplemental Information: Cash paid during the period for interest $ 15,000 $ 11,000 Cash paid during the period for income taxes $ 1,415,000 $ 918,000 Capital lease obligations entered into for equipment - $ 88,000 See accompanying notes.
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. As of October 31, 1998, the end of the third quarter of fiscal 1998, the Company operated 145 stores in 38 states throughout the United States. As of December 1, 1998, the Company operated 155 stores in 38. 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 39 weeks ended October 31, 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 October 31, 1998 (Third Quarter of Fiscal 1998) Compared to 13 - ----------------------------------------------------------------------------- Weeks Ended November 1, 1997 (Third Quarter of Fiscal 1997) - ----------------------------------------------------------- Net sales increased $9,955,000, or 53.1%, to $28,708,000 during the third quarter of fiscal 1998 from $18,753,000 during the third quarter of fiscal 1997. Net sales for the 59 stores not yet qualifying as comparable stores contributed approximately $8,475,000 of the increase in net sales. Comparable store sales increased 9.5% and contributed approximately $1,480,000 of the increase in net sales for the third quarter of fiscal 1998. Sales of apparel category merchandise, as a percentage of total net sales, increased to 51% in the third quarter of 1998 compared to 49% in the third quarter of 1997. Gross margin increased approximately $3,918,000 to $10,642,000 during the third quarter of fiscal 1998 from $6,724,000 during the third quarter of fiscal 1997. As a percentage of net sales, gross margin increased to 37.0% during the third quarter of fiscal 1998 from 35.9% in the third quarter of fiscal 1997. The increase in gross margin as a percentage of net sales primarily reflects the leveraging of occupancy expenses by the higher average net sales per store and to a lesser extent, higher merchandise margins. The higher merchandise margins resulted principally from lower merchandise mark downs as a percentage of net sales, off set in part by 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 $8,055,000 during the third quarter of fiscal 1998 from $5,124,000 during the third quarter of fiscal 1997 and increased as a percentage of net sales to 28.1% in the third quarter of fiscal 1998 from 27.3% in the third quarter of fiscal 1997. The largest portion of the increase as a percentage of net sales was principally the result of planned increases in field management and training in support of the Company's continued growth. 7 Operating income increased to $2,587,000 during the third quarter of fiscal 1998 from $1,600,000 during the third quarter of fiscal 1997. As a percentage of net sales, operating income was 9.0% in the third quarter of fiscal 1998 compared to 8.5% in the third quarter of fiscal 1997. 39 Weeks Ended October 31, 1998 (First Nine Months of Fiscal 1998) Compared to - ------------------------------------------------------------------------------ 39 Weeks Ended November 1, 1997 (First Nine Months of Fiscal 1997) - ------------------------------------------------------------------ Net sales increased $23,186,000, or 53.1%, to $66,809,000 during the first nine months of fiscal 1998 from $43,623,000 during the first nine months of fiscal 1997. Net sales for the 86 stores not yet qualifying as comparable stores contributed approximately $21,546,000 of the increase in net sales. Comparable store sales increased 4.5% and contributed approximately $1,640,000 of the increase in net sales for the first nine months of fiscal 1998. Gross margin increased approximately $8,036,000 to $23,140,000 during the first nine months of fiscal 1998 from $15,104,000 during the first nine months of fiscal 1997. As a percentage of net sales, gross margin was 34.6% during the first nine months of both fiscal 1998 and fiscal 1997. Selling, general and administrative expenses increased approximately $3,683,000 to $20,414,000 during the first nine months of fiscal 1998 from $13,800,000 during the first nine months of fiscal 1997, but decreased as a percentage of net sales to 30.6% in the first nine months of fiscal 1998 from 31.6% in the first nine 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 planned increases in the third quarter of fiscal 1998 in field management and training in support of the Company's continued growth. Operating income increased to $2,726,000 during the first nine months of fiscal 1998 from $1,304,000 during the first nine months of fiscal 1997. As a percentage of net sales, operating income was 4.1% during the first nine months of fiscal 1998 compared to 3.0% during the first nine months of fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Historically, as well as during the third quarter and first nine months of fiscal 1998, the Company's primary uses of cash have been to finance store openings and purchase merchandise inventories. Recently, the Company has satisfied its annual cash requirements principally from proceeds from cash flows from operations. In addition, in September 1996 the Company completed its initial public offering of 1,495,000 shares, and received net proceeds of approximately $24.3 million. Working capital at October 31, 1998 was $27,665,000 compared to $29,229,000 at January 31, 1998. The decrease is primarily due to the use of working capital to finance the new store openings. Cash flows provided by operating activities were $2,702,000 and $1,419,000 in the first nine months of fiscal 1998 and 1997, respectively. The increase in cash flows provided by operating activities in the first nine months of fiscal 1998 was primarily attributable to an increase in the Company's net income and depreciation and amortization expense, offset in part by a net change in operating assets and liabilities. Cash flows used in investing activities were $7,042,000 and $7,970,000 in the first nine months of fiscal 1998 and 1997, respectively. Cash flows used in investing activities relate primarily to store 8 openings, equipment for the distribution center and computer hardware and software. The Company opened 37 and 36 stores in the first nine months of fiscal 1998 and 1997, respectively. Cash flows provided by financing activities, principally proceeds from the exercise of stock options, were $247,000 and $364,000 in the first nine 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. 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. 9 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 early 1999. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there 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 Company's 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 - 5 are not applicable. 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: 12/09/98 /s/ Orval D. Madden -------- ------------------- Orval D. Madden President and Chief Executive Officer (principal executive officer) Date: 12/09/98 /s/ Jay A. Johnson -------- ------------------ Jay A. Johnson Chief Financial Officer (principal financial and accounting officer 10 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS JAN-30-1999 JAN-30-1999 AUG-02-1998 FEB-01-1998 OCT-31-1998 OCT-31-1998 22,486 0 0 0 0 0 0 0 11,065 0 36,161 0 30,221 0 9,380 0 57,044 0 8,496 0 0 0 0 0 0 0 37,970 0 9,198 0 57,044 0 28,708 66,809 28,708 66,809 18,066 43,669 18,066 43,669 8,055 20,414 0 0 0 0 2,813 3,419 1,055 1,282 1,758 2,137 0 0 0 0 0 0 1,758 2,137 $0.36 $0.44 $0.36 $0.43
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