-----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, IG7d1ELzoyhsptp4JKpSLmjTH72zhk4acctQf6SEcTyrWN6H2eWkPWX1iI23jdGX RZkQ6lkgPF1yXbfbMhzMFg== 0001021408-99-001555.txt : 19990910 0001021408-99-001555.hdr.sgml : 19990910 ACCESSION NUMBER: 0001021408-99-001555 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990909 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: 0130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28784 FILM NUMBER: 99708078 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 QUARTERLY REPORT 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 July 31, 1999 ------------- 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 - APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's common stock as of the latest practicable date: September 2, ------------ 1999 - 4,634,936 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 - July 31, 1999 and January 30, 1999 3 Statements of Income for the: 13 and 26 weeks ended July 31, 1999 and August 1, 1998 4 Statements of Cash Flows for the 26 weeks ended July 31, 1999 and August 1, 1998 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and qualitative disclosure about market risk 10 PART II. OTHER INFORMATION 10 SIGNATURE PAGE 11 2 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
July 31,1999 Jan 30,1999(a) ASSETS Current Assets: Cash and cash equivalents $17,589,000 $24,574,000 Inventory 17,284,000 10,447,000 Prepaid expenses and other 2,539,000 1,440,000 Deferred tax asset 322,000 322,000 ----------- ----------- Total current assets 37,734,000 36,783,000 Leaseholds, fixtures and equipment: Furniture, fixtures and equipment 21,574,000 17,710,000 Leasehold improvements 19,027,000 14,725,000 ----------- ----------- 40,601,000 32,435,000 Less accumulated depreciation 11,821,000 10,540,000 ----------- ----------- Net leaseholds, fixtures and equipment 28,780,000 21,895,000 Deposits and other assets 91,000 87,000 ----------- ----------- Total Assets $66,605,000 $58,765,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 8,684,000 $ 2,186,000 Accrued payroll and related expenses 4,616,000 4,036,000 Accrued sales and other taxes 663,000 383,000 Income taxes payable 724,000 1,715,000 Current portion of capital lease obligations 89,000 30,000 ----------- ----------- Total current liabilities 14,776,000 8,350,000 Deferred rent 954,000 744,000 Capital lease obligations, less current portion 126,000 90,000 Deferred tax liability 832,000 832,000 Shareholders' equity Common shares, no par value; 50,000,000 shares authorized; 4,636,341 and 4,654,431 issued and outstanding at July 31, 1999 and January 30,1999, respectively 35,038,000 35,676,000 Deferred compensation (24,000) (43,000) Retained earnings 14,903,000 13,116,000 ----------- ----------- Total shareholders' equity 49,917,000 48,749,000 ----------- ----------- Total liabilities and shareholders' equity $66,605,000 $58,765,000 =========== ===========
(a) - The balance sheet at Jan. 30, 1999 is derived from the audited financial statements at that date. See accompanying notes. 3 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Second Quarter (13 weeks ended) ------------------------------ July 31, 1999 Aug. 1, 1998 Net sales $32,779,000 $20,787,000 Cost of goods sold, including buying, distribution and occupancy costs 21,366,000 14,011,000 ----------- ----------- Gross margin 11,413,000 6,776,000 Selling, general and administrative expenses 9,775,000 6,458,000 ----------- ----------- Operating income 1,638,000 318,000 Interest income-net 177,000 216,000 ----------- ----------- Income before income taxes 1,815,000 534,000 Provision for income taxes 663,000 200,000 ----------- ----------- Net income $ 1,152,000 $ 334,000 =========== =========== Net income per share Basic $ 0.25 $ 0.07 Diluted $ 0.24 $ 0.07 Weighted average shares outstanding Basic 4,619,000 4,811,000 Diluted 4,819,000 4,984,000
See accompanying notes.
Six Months (26 weeks ended) ------------------------------ July 31, 1999 Aug. 1, 1998 Net sales $61,065,000 $38,101,000 Cost of goods sold, including buying, distribution and occupancy costs 39,906,000 25,603,000 ----------- ----------- Gross margin 21,159,000 12,498,000 Selling, general and administrative expenses 18,740,000 12,359,000 ----------- ----------- Operating income 2,419,000 139,000 Interest income-net 396,000 467,000 ----------- ----------- Income before income taxes 2,815,000 606,000 Provision for income taxes 1,028,000 227,000 ----------- ----------- Net income $ 1,787,000 $ 379,000 =========== =========== Net income per share Basic $ 0.39 $ 0.08 Diluted $ 0.37 $ 0.08 Weighted average shares outstanding Basic 4,620,000 4,794,000 Diluted 4,768,000 4,982,000
See accompanying notes. 4 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Year-to-date (26 weeks) ended ------------------------------- July 31,1999 Aug. 1,1998 Net income $ 1,787,000 $ 379,000 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 2,594,000 1,857,000 Deferred rent 209,000 107,000 Deferred compensation 18,000 18,000 Loss on disposal of fixed assets 192,000 Changes in operating assets and liabilities: Inventory (6,837,000) (3,644,000) Prepaid expenses and other (1,098,000) (1,298,000) Deposits and other assets (4,000) (1,000) Accounts payable 6,498,000 3,368,000 Accrued payroll and related expenses 580,000 (12,000) Accrued sales and other taxes payable 280,000 167,000 Income taxes payable (991,000) (1,145,000) ----------- ----------- Net cash flows provided by (used in) operating activities 3,228,000 (204,000) Investing Activities: Purchases of property and equipment (9,559,000) (4,729,000) Net cash flows used in ----------- ----------- investing activities (9,559,000) (4,729,000) Financing Activities: Payments on capital lease obligations (16,000) (15,000) Repurchase common shares (1,065,000) Proceeds from exercise of stock options 427,000 257,000 ----------- ----------- Net cash flows (used in) provided by financing activities (654,000) 242,000 Decrease in cash ----------- ----------- and cash equivalents (6,985,000) (4,691,000) Cash and cash equivalents at the beginning of period 24,574,000 26,579,000 ----------- ----------- Cash and cash equivalents at the end of period $17,589,000 $21,888,000 =========== =========== Supplemental Information: Cash paid during the period for interest $ 12,000 $ 9,000 Cash paid during the period for income taxes $ 2,145,000 $ 1,371,000 Capital lease obligations entered into for equipment $ 112,000 -
See accompanying notes. 5 HOT TOPIC, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED 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. At the end of the quarter (July 31, 1999), the Company operated 184 stores in 40 states throughout the United States. The information set forth in these financial statements is unaudited except for the January 30, 1999 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 July 31, 1999 are not necessarily indicative of the results that may be expected for the year ending January 29, 2000. 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 30, 1999. NOTE 2. Net Income Per Share: --------------------- The Company computes net income per share pursuant to Statement of Financial Accounting Standards Board No. 128 "Earnings Per Share" (Statement No. 128). Basic net income per share is computed based on the weighted average number of 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. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes related thereto. RESULTS OF OPERATIONS 13 Weeks Ended July 31, 1999 (Second Quarter of Fiscal 1999) Compared to 13 - --------------------------------------------------------------------------- Weeks Ended August 1, 1998 (Second Quarter of Fiscal 1998) - ----------------------------------------------------------- Net sales increased $11,992,000, or 57.7%, to $32,779,000 during the second quarter of fiscal 1999 from $20,787,000 during the second quarter of fiscal 1998. The increased sales in the second quarter of fiscal 1999 were attributable to an increase in the number of stores, and to a 16.9% increase in comparable store sales as compared to the second quarter of fiscal 1998 Net sales for the 66 stores not yet qualifying as comparable stores contributed approximately $9,000,000 of the increase in net sales. The comparable store sales increase of 16.9% contributed approximately $3,000,000 of the increase in net sales. In the second quarter of fiscal 1998, comparable store sales increased by 2.0% as compared to the second quarter of fiscal 1997. The sales mix was approximately the same in the quarter as in the second quarter of fiscal 1998. Sales of apparel category merchandise, as a percentage of total net sales, were 47% in the second quarter of 1999 compared to 49% in the second quarter of 1998. Gross margin increased approximately $4,637,000 to $11,413,000 during the second quarter of fiscal 1999 from $6,776,000 during the second quarter of fiscal 1998. As a percentage of net sales, gross margin increased to 34.8% during the second quarter of fiscal 1999 from 32.6% in the second quarter of fiscal 1998. 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. The Company's merchandise margins, as a percentage of sales, were slightly higher in the second quarter of 1999 compared to the second quarter of 1998, the result of slightly higher initial mark ups and lower mark downs. Selling, general and administrative expenses increased approximately $3,317,000 to $9,775,000 during the second quarter of fiscal 1999 from $6,458,000 during the second quarter of fiscal 1998, but decreased as a percentage of net sales to 29.8% in the second quarter of fiscal 1999 from 31.1% in the second quarter of fiscal 1998. The decrease as a percentage of net sales was primarily attributable to a reduction of store payroll and overhead expense as a percentage of net sales due to the operating leverage achieved through the higher average sales per store. Operating income increased approximately $1,320,000 to $1,638,000 during the second quarter of fiscal 1999 from $318,000 during the second quarter of fiscal 1998. As a percentage of net sales, the operating income was 5.0% in the second quarter of fiscal 1999 compared to 1.5% in the second quarter of fiscal 1998. Interest income, net, decreased approximately $39,000 to $177,000 in the second quarter of fiscal 1999 from $216,000 in the second quarter of fiscal 1998, principally due to lower average cash balances. 7 26 Weeks Ended July 31, 1999 (First Six Months of Fiscal 1999) Compared to 26 - ----------------------------------------------------------------------------- Weeks Ended August 1, 1998 (First Six Months of Fiscal 1998) - ------------------------------------------------------------- Net sales increased $22,964,000, or 60.3%, to $61,065,000 during the first six months of fiscal 1999 from $38,101,000 during the first six months of fiscal 1998. Net sales for the 66 stores not yet qualifying as comparable stores contributed approximately $17,500,000 of the increase in net sales. Comparable store sales increased 16.2% and contributed approximately $5,500,000 of the increase in net sales for the first six months of fiscal 1999. The increased sales in the first six months of fiscal 1999 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 $8,661,000 to $21,159,000 during the first six months of fiscal 1999 from $12,498,000 during the first six months of fiscal 1998. As a percentage of net sales, gross margin increased to 34.6% during the first six months of fiscal 1999 from 32.8% in the first six months of fiscal 1998. 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. The Company's merchandise margins, as a percentage of sales, were approximately the same in the first half of 1999 compared to the first half of 1998. Selling, general and administrative expenses increased approximately $6,381,000 to $18,740,000 during the first six months of fiscal 1999 from $12,359,000 during the first six months of fiscal 1998, but decreased as a percentage of net sales to 30.7% in the first six months of fiscal 1999 from 32.4% in the first six months of fiscal 1998. The decrease as a percentage of net sales was primarily attributable to lower store payroll and store operating expenses as a percentage of net sales, primarily reflecting the leveraging of store payroll and other store operating expenses by the higher average net sales per store. Pre-opening expense also decreased as a percentage of sales, principally due to the higher sales volume.. Operating income increased to $2,419,000 during the first six months of fiscal 1999 from $139,000 during the first six months of fiscal 1998. As a percentage of net sales, operating income was 4.0% for the first six months of fiscal 1999 compared to 0.4% for the first six months of fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES Historically, as well as during the second quarter and first half of fiscal 1999, the Company's primary uses of cash have been to finance store openings, the Company's new headquarters and merchandise distribution facility and to purchase merchandise inventories. The Company has historically satisfied its cash requirements principally from cash flows from operations, and in earlier years also from proceeds from the sale of equity securities. Working capital at July 31, 1999 was $22,958,000 compared to $28,433,000 at January 30, 1999. The decrease was primarily due to the use of working capital to finance the new store openings as well as the construction, equipment, fixtures and furniture for the Company's new headquarters and merchandise distribution facility. The Company moved into the merchandise distribution portion of the facility during the second half of May 1999 and into the headquarters portion of the facility at the end of June 1999. Cash flows provided by (used in) operating activities were $3,228,000 and ($204,000) in the first six months of fiscal 1999 and 1998, respectively. The increase in cash flows provided by operating activities in the first six months of fiscal 1999 was primarily due to the increase in net income. 8 Cash flows used in investing activities were $9,559,000 and $4,729,000 in the first six months of fiscal 1999 and 1998, respectively. Cash flows used in investing activities relate primarily to store openings, computer hardware and software and, in 1999, to the construction, equipment, fixtures and furniture for the Company's new headquarters and merchandise distribution facility. The Company opened 26 and 25 stores in the first six months of fiscal 1999 and 1998, respectively. Cash flows provided by (used in) financing activities were ($654,000) and $242,000 in the first six months of fiscal 1999 and 1998, respectively. The increase in cash flows used in financing activities is primarily due to the Company's use of $1,065,000 to repurchase 69,000 shares of its Common Stock in the first six months of fiscal 1999. 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 during the first fiscal six months. 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 (the "Securities Act"), and Section 21E of the Exchange Act, 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 for the fiscal year ended January 30, 1999. YEAR 2000 The year 2000 issue exists because many computer applications currently use two-digit date fields to designate a year. As the century date occurs, 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, leading to disruptions in normal business processing. 9 The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing and implementation. During 1998, the Company completed its assessment of all critical systems and developed a plan to bring these systems into compliance. 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 began in mid-1998 and are scheduled to be completed in the third and fourth quarters of fiscal 1999. During the first and second quarters of fiscal 1999, the hardware for these systems was tested and, as required, replacement hardware and operating systems were installed. The Company also tested certain portions of revised software of its vendor. The Company's plans call for further testing of the vendor's revised software in the third quarter of fiscal 1999, and full implementation during the third and fourth quarters of fiscal 1999. The cost of the Company's Year 2000 problem initiatives is expected to be approximately $100,000 to $150,000. The Company does not have systems that interface directly with significant third party vendors and has queried its significant suppliers of merchandise and services that do not share information systems with the Company ("external agents"). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could have a material impact on the Company. The effect of non-compliance by external agents is not determinable. The Company has not yet completed its contingency plan with respect to a worst case scenario in the event of non-compliance by external agents. The Company does not presently believe that an interruption in the supply of merchandise would have a significant adverse impact on its operations since it purchases merchandise from over 600 vendors, none of which historically supplies more than approximately 5% of the Company's annual purchases. However, the Company may increase inventory levels of certain merchandise late in calendar 1999 to offset the risk that certain vendors may be adversely affected by Year 2000 issues. The Company presently uses United Parcel Service ("UPS") to ship merchandise to its stores. The Company has contacted UPS regarding Year 2000 compliance and received written confirmation from UPS that UPS believes it will be fully compliant by December 31, 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. 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 10 The annual meeting of shareholders of the Company (the "Annual Meeting") was held on June 1, 1999 in Pomona, California. The Company had 4,595,931 shares of Common Stock outstanding as of April 19, 1999, the record date for the Annual Meeting. 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 3,999,710 0 Orval D. Madden 3,999,710 0 Edgar F. Berner 3,999,710 0 Stanley E. Foster 3,999,710 0 Bruce A. Quinnell 3,999,710 0 Corrado Federico 3,999,710 0 Andrew Schuon 3,999,710 0 Proposal 2 - Ratification of Selection of Ernst & Young, LLP as Independent Auditors Votes in favor Votes Against Votes Abstained -------------- ------------- --------------- 4,007,632 300 750 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: 9/2/99 /s/ Orval D. Madden ------ ------------------- Orval D. Madden President and Chief Executive Officer (principal executive officer) Date: 9/2/99 /s/ Jay A. Johnson ------ ------------------ Jay A. Johnson Chief Financial Officer (principal financial and accounting officer) 11 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS JAN-29-2000 JAN-29-2000 MAY-02-1999 JAN-31-1999 JUL-31-1999 JUL-31-1999 17,589 17,589 0 0 0 0 0 0 17,284 17,284 37,734 37,734 40,601 40,601 11,821 11,821 66,605 66,605 14,776 14,776 0 0 0 0 0 0 35,038 35,038 14,927 14,927 66,605 66,605 32,779 61,065 32,779 61,065 21,366 39,906 21,366 39,906 9,775 18,740 0 0 0 0 1,815 2,815 663 1,028 0 0 0 0 0 0 0 0 1,152 1,787 0.25 0.39 0.24 0.37
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