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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 May 2, 1998
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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.
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(Exact name of Registrant as specified in Its Charter)
CALIFORNIA 77-0198182
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(State of Incorporation) (IRS Employer Identification No.)
3410 POMONA BLVD., POMONA, CA 91768
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(address of principle executive offices) (Zip Code)
(Telephone number of registrant) (909) 869-6373
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of the issuer's common stock as of the latest practicable date: May 22, 1998 -
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4,783,706 shares, no par value.
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HOT TOPIC, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets - May 2, 1998 and January 31, 1998 3
Statements of Operations for the
13 weeks ended May 2, 1998 and May 3, 1997 4
Statements of Cash Flows for the 13
weeks ended May 2, 1998 and May 3, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION 9
SIGNATURE PAGE 9
2
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HOT TOPIC, INC.
BALANCE SHEETS
(Unaudited)
May 2, 1998 Jan 31, 1998(a)
ASSETS
Current Assets:
Cash and cash equivalents $22,233,000 $26,579,000
Inventory 7,610,000 7,636,000
Prepaid expenses and other 1,703,000 658,000
Deferred tax asset 339,000 339,000
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Total current assets 31,885,000 35,212,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 13,934,000 12,452,000
Leasehold improvements 12,213,000 10,727,000
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26,147,000 23,179,000
Less accumulated depreciation 7,357,000 6,479,000
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Net leaseholds, fixtures and equipment 18,790,000 16,700,000
Deposits and other assets 41,000 41,000
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Total Assets $50,716,000 $51,953,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,080,000 $ 1,706,000
Accrued payroll and related expenses 2,086,000 2,627,000
Accrued sales and other taxes 351,000 264,000
Income taxes payable 7,000 1,352,000
Current portion capital
lease obligations 34,000 34,000
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Total current liabilities 4,558,000 5,983,000
Deferred rent 562,000 509,000
Capital lease obligations, less
current portion 117,000 126,000
Deferred tax liability 599,000 599,000
Shareholders' equity
Common shares, no par value; 50,000,000
shares authorized; 4,783,144 and
4,759,606 issued and outstanding at
May 2, 1998 and January 31,1998,
respectively 37,791,000 37,701,000
Deferred compensation (69,000) (78,000)
Retained earnings 7,158,000 7,113,000
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Total shareholders' equity 44,880,000 44,736,000
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Total liabilities and
shareholders' equity $50,716,000 $51,953,000
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(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)
First Quarter
(13 weeks ended)
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May 2, 1998 May 3, 1997
Net sales $17,314,000 $11,188,000
Cost of goods sold, including
buying, distribution and
occupancy costs 11,592,000 7,426,000
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Gross margin 5,722,000 3,762,000
Selling, general and
administrative expenses 5,901,000 4,175,000
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Operating loss (179,000) (413,000)
Interest income-net 251,000 236,000
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Income (loss) before
income taxes 72,000 (177,000)
Provision (benefit) for
income taxes 27,000 (67,000)
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Net income (loss) $ 45,000 $ (110,000)
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Net loss per share
Basic $ 0.01 $ (0.02)
Diluted $ 0.01 $ (0.02)
Weighted average shares
outstanding
Basic 4,777,725 4,606,632
Diluted 4,978,726 4,927,983
See accompanying notes.
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HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
Year-to-date (13 weeks) ended
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May 2,1998 May 3,1997
Net income (loss) $ 45,000 $ (110,000)
Adjustments to reconcile net
income (loss) to net cash flows
provided by (used in)
operating activities:
Depreciation and amortization 879,000 559,000
Deferred rent 53,000 28,000
Deferred compensation 9,000 9,000
Loss on disposal of fixed assets 37,000
Changes in operating assets
and liabilities:
Inventory 27,000 (250,000)
Prepaid expenses and other (1,046,000) (164,000)
Deposits and other (3,000)
Accounts payable 374,000 335,000
Accrued payroll and related expenses (540,000) (352,000)
Accrued sales and other taxes payable 87,000 19,000
Income taxes payable (1,345,000) (859,000)
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Net cash flows provided by (used
in) operating activities (1,457,000) (751,000)
Investing Activities:
Purchases of property and equipment (2,969,000) (2,553,000)
Net cash flows used in ----------- -----------
investing activities (2,969,000) (2,553,000)
Financing Activities:
Payments on capital lease
obligations (10,000) (31,000)
Proceeds from exercise of stock options 90,000 57,000
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Net cash flows provided by (used in)
financing activities 80,000 26,000
Decrease in cash ----------- -----------
and cash equivalents (4,346,000) (3,278,000)
Cash and cash equivalents
at the beginning of period 26,579,000 27,151,000
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Cash and cash equivalents
at the end of period $22,233,000 $23,873,000
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Supplemental Information:
Cash paid during the period
for interest $ 6,000 $ 3,000
Cash paid during the period
for income taxes $ 1,371,000 $ 858,000
Capital lease obligations
entered into for equipment $ 119,000
See accompanying notes.
HOT TOPIC, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Organization and Basis of Presentation:
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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 123 stores in 35 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 weeks ended May 2, 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.
NOTE 2. Net Income (Loss) Per Share:
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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.
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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 May 2, 1998 (First Quarter of Fiscal 1998) Compared to 13 Weeks
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Ended May 3, 1997 (First Quarter of Fiscal 1997)
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Net sales increased $6,126,000, or 54.8%, to $17,314,000 during the first
quarter of fiscal 1998 from $11,188,000 during the first quarter of fiscal 1997.
Net sales for the 55 stores not yet qualifying as comparable stores contributed
the entire increase in net sales. Comparable store sales decreased (0.6)% or
approximately $(60,000) as compared to the first quarter of fiscal 1997. The
increased sales in the first quarter of fiscal 1998 were primarily attributable
to an increase in the number of stores. In last year's first quarter,
comparable store sales increased by 5.7%. Sales of apparel category
merchandise, as a percentage of total net sales, increased to 48% in the first
quarter of 1998 compared to 44% in the first quarter of 1997.
Gross margin increased approximately $1,960,000 to $5,722,000 during the first
quarter of fiscal 1998 from $3,762,000 during the first quarter of fiscal 1997.
As a percentage of net sales, gross margin decreased to 33.1% during the first
quarter of fiscal 1998 from 33.6% in the first 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 and an increase in occupancy
costs. 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 quarter
of 1998 compared to the first quarter of 1997 principally due to the greater
number of new stores.
Selling, general and administrative expenses increased approximately
$1,726,000 to $5,901,000 during the first quarter of fiscal 1998 from $4,175,000
during the first quarter of fiscal 1997, but decreased as a percentage of net
sales to 34.1% in the first quarter of fiscal 1998 from 37.3% in the first
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, 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
Company's aggregate pre-opening expense was approximately the same in the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997, but
decreased as a percentage of sales.
Operating loss decreased approximately $234,000 to a loss of $179,000 during
the first quarter of fiscal 1998 from a loss of $413,000 during the first
quarter of fiscal 1997. As a percentage of net sales, the operating loss
decreased to 1.0% in the first quarter of fiscal 1998 from a loss of 3.7% in the
first quarter of fiscal 1997.
Interest income, net, increased approximately $15,000 to $251,000 in the first
quarter of fiscal 1998 from $236,000 in the first quarter of fiscal 1997.
7
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LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the first quarter 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 cash requirements
principally from proceeds from the sale of equity securities and cash flows from
operations.
Working capital at May 2, 1998 was $27,327,000 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 provided by (used in) operating activities were ($1,457,000) and
($751,000) in the first quarter of fiscal 1998 and 1997, respectively. The
increase in cash flows used in operating activities in the first quarter of
fiscal 1998 was primarily from the payment of income taxes.
Cash flows used in investing activities were $2,969,000 and $2,553,000 in the
first quarter 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 15
and 13 stores in the first quarter of fiscal 1998 and 1997, respectively.
Cash flows provided by (used in) financing activities were $80,000 and $26,000
in the first quarter 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 1998.
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 (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
8
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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.
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
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: 6/3/98 /s/ Orval D. Madden
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Orval D. Madden
President and Chief
Executive Officer (principal
executive officer)
Date: 6/3/98 /s/ Jay A. Johnson
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Jay A. Johnson
Chief Financial Officer
(principal financial and
accounting officer)
9
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q DATED
05/02/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<COMMON> 37,791
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