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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
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For the quarterly period ended May 1, 1999
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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: June 2, 1999 -
---- -- ---- -
4,613,519 shares, no par value.
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HOT TOPIC, INC.
INDEX TO FORM 10-Q
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets - May 1, 1999 and January 30, 1999 3
Consolidated Statements of Income for the
13 weeks ended May 1, 1999 and May 2, 1998 4
Consolidated Statements of Cash Flows for the 13
weeks ended May 1, 1999 and May 2, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION 10
SIGNATURE PAGE 10
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
May 1,1999 Jan 30, 1999(a)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $18,250,000 $24,574,000
Inventory 12,974,000 10,447,000
Prepaid expenses and other 2,305,000 1,440,000
Deferred tax asset 322,000 322,000
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Total current assets 33,851,000 36,783,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 20,661,000 17,710,000
Leasehold improvements 16,091,000 14,725,000
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36,752,000 32,435,000
Less accumulated depreciation 11,751,000 10,540,000
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Net leaseholds, fixtures and equipment 25,001,000 21,895,000
Deposits and other assets 88,000 87,000
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Total Assets $58,940,000 $58,765,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,455,000 $ 2,186,000
Accrued payroll and related expenses 3,673,000 4,036,000
Accrued sales and other taxes 589,000 383,000
Income taxes payable 61,000 1,715,000
Current portion of capital
lease obligations 85,000 30,000
----------- -----------
Total current liabilities 8,863,000 8,350,000
Deferred rent 888,000 744,000
Capital lease obligations, less
current portion 27,000 90,000
Deferred tax liability 832,000 832,000
Shareholders' equity
Common shares, no par value; 50,000,000
shares authorized; 4,585,931 and
4,759,606 issued and outstanding at
May 1, 1999 and January 30,1999,
respectively 34,612,000 35,676,000
Deferred compensation (33,000) (43,000)
Retained earnings 13,751,000 13,116,000
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Total shareholders' equity 48,330,000 48,749,000
----------- -----------
Total liabilities and
shareholders' equity $58,940,000 $58,765,000
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</TABLE>
(a) - The balance sheet at Jan. 30, 1999 is derived from the audited financial
statements at that date.
See accompanying notes.
3
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
First Quarter
(13 weeks ended)
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May 1, 1999 May 2, 1998
<S> <C> <C>
Net sales $28,286,000 $17,314,000
Cost of goods sold, including
buying, distribution and
occupancy costs 18,540,000 11,592,000
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Gross margin 9,746,000 5,722,000
Selling, general and
administrative expenses 8,965,000 5,901,000
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Operating income (loss) 781,000 (179,000)
Interest income-net 219,000 251,000
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Income before
income taxes 1,000,000 72,000
Provision for
income taxes 365,000 27,000
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Net income $ 635,000 $ 45,000
=========== ===========
Net income per share
Basic $ 0.14 $ 0.01
Diluted $ 0.13 $ 0.01
Weighted average shares
outstanding
Basic 4,621,000 4,778,000
Diluted 4,716,000 4,979,000
</TABLE>
See accompanying notes.
4
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
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<CAPTION>
Year-to-date (13 weeks) ended
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May 1, 1999 May 2, 1998
<S> <C> <C>
Net income $ 635,000 $ 45,000
Adjustments to reconcile net
income to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 1,211,000 879,000
Deferred rent 144,000 53,000
Deferred compensation 9,000 9,000
Loss on disposal of fixed assets 3,000
Changes in operating assets
and liabilities:
Inventory (2,527,000) 27,000
Prepaid expenses and other (865,000) (1,046,000)
Accounts payable 2,268,000 374,000
Accrued payroll and related expenses (363,000) (540,000)
Accrued sales and other taxes payable 205,000 87,000
Income taxes payable (1,654,000) (1,345,000)
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Net cash flows (used in) operating
activities (934,000) (1,457,000)
Investing Activities:
Purchases of property and equipment (4,319,000) (2,969,000)
Net cash flows used in -------------- ------------
investing activities (4,319,000) (2,969,000)
Financing Activities:
Payments on capital lease
obligations (7,000) (10,000)
Repurchase common shares (1,065,000)
Proceeds from exercise of stock options 1,000 90,000
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Net cash flows (used in) provided by
financing activities (1,071,000) 80,000
Decrease in cash -------------- ------------
and cash equivalents (6,324,000) (4,346,000)
Cash and cash equivalents
at the beginning of period 24,574,000 26,579,000
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Cash and cash equivalents
at the end of period $ 18,250,000 $ 22,233,000
============== =============
Supplemental Information:
Cash paid during the period
for interest $ 4,000 $ 6,000
Cash paid during the period
for income taxes $ 2,018,000 $ 1,371,000
Capital lease obligations
entered into for equipment - -
</TABLE>
See accompanying notes.
5
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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 (May 1, 1999), the Company operated 168 stores in 38 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 weeks ended May 1, 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.
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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 Consolidated Financial Statements and the Notes related thereto.
RESULTS OF OPERATIONS
13 Weeks Ended May 1, 1999 (First Quarter of Fiscal 1999) Compared to 13 Weeks
- -------------------------------------------------------------------------------
Ended May 2, 1998 (First Quarter of Fiscal 1998)
- -------------------------------------------------
Net sales increased $10,972,000, or 63.4%, to $28,286,000 during the first
quarter of fiscal 1999 from $17,314,000 during the first quarter of fiscal 1998.
The increased sales in the first quarter of fiscal 1999 were attributable to an
increase in the number of stores, and to a 15.3% increase in comparable store
sales as compared to the first quarter of fiscal 1998. Net sales for the 50
stores not yet qualifying as comparable stores contributed approximately
$8,500,000 of the increase in net sales. The comparable store sales increase of
15.3% contributed approximately $2,472,000 of the increase in net sales. In the
first quarter of fiscal 1998, comparable store sales decreased by 0.6%. The
sales mix was approximately the same in the current quarter as in the first
quarter of fiscal 1998. Sales of apparel category merchandise, as a percentage
of total net sales, was 47% in the first quarter of 1999 compared to 48% in the
first quarter of 1998.
Gross margin increased approximately $4,024,000 to $9,746,000 during the first
quarter of fiscal 1999 from $5,722,000 during the first quarter of fiscal 1998.
As a percentage of net sales, gross margin increased to 34.5% during the first
quarter of fiscal 1999 from 33.1% in the first 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 approximately the
same in the first quarter of 1999 compared to the first quarter of 1998.
Selling, general and administrative expenses increased approximately
$3,064,000 to $8,965,000 during the first quarter of fiscal 1999 from $5,901,000
during the first quarter of fiscal 1998, but decreased as a percentage of net
sales to 31.7% in the first quarter of fiscal 1999 from 34.1% in the first
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. The Company's aggregate pre-opening expense per
store was slightly lower in the first quarter of fiscal 1999 compared to the
first quarter of fiscal 1998 and also decreased as a percentage of sales.
Operating income increased approximately $960,000 to $781,000 during the first
quarter of fiscal 1999 from a loss of $179,000 during the first quarter of
fiscal 1998. As a percentage of net sales, the operating income was 2.8% in the
first quarter of fiscal 1999 compared to a loss of 1.0% in the first quarter of
fiscal 1998.
Interest income, net, decreased approximately $32,000 to $219,000 in the first
quarter of fiscal 1999 from $251,000 in the first quarter of fiscal 1998,
principally due to lower average cash balances.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the first quarter of fiscal 1999, the
Company's primary uses of cash have been to finance store openings and purchase
merchandise inventories. The Company has historically satisfied its cash
requirements principally from proceeds from the sale of equity securities and
cash flows from operations.
Working capital at May 1, 1999 was $24,988,000 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 plans to move
into the headquarters portion of the facility in the second quarter of fiscal
1999.
Cash flows used in operating activities were ($934,000) and ($1,457,000) in
the first quarter of fiscal 1999 and 1998, respectively. The decrease in cash
flows used in operating activities in the first quarter of fiscal 1999 was
primarily due to the increase in net income.
Cash flows used in investing activities were $4,319,000 and $2,969,000 in the
first quarter of fiscal 1999 and 1998, respectively. Cash flows used in
investing activities relate primarily to store openings, computer hardware and
software and, in 1999, also to the construction, equipment, fixtures and
furniture for the Company's new headquarters and merchandise distribution
facility. The Company opened 10 and 15 stores in the first quarter of fiscal
1999 and 1998, respectively.
Cash flows provided by (used in) financing activities were ($1,071,000) and
$80,000 in the first quarter of fiscal 1999 and 1998, respectively. In the first
quarter of fiscal 1999, the company used $1,065,000 to repurchase 69,000 shares
of its Common Stock.
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 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
8
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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.
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 second
and third quarters of fiscal 1999. During the first quarter 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 second quarter of fiscal 1999, and full
implementation during the second and third quarters of fiscal 1999. The cost of
the Company's Year 2000 problem initiatives is expected to be less than
$100,000.
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
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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 - 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: 6/3/99 /s/ Orval D. Madden
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Orval D. Madden
President and Chief
Executive Officer (principal executive officer)
Date: 6/3/99 /s/ Jay A. Johnson
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Jay A. Johnson
Chief Financial Officer
(principal financial and accounting officer)
10
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 18,250
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 12,974
<CURRENT-ASSETS> 33,851
<PP&E> 20,661
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<CURRENT-LIABILITIES> 8,863
<BONDS> 0
0
0
<COMMON> 34,612
<OTHER-SE> 13,718
<TOTAL-LIABILITY-AND-EQUITY> 58,940
<SALES> 28,286
<TOTAL-REVENUES> 28,286
<CGS> 18,540
<TOTAL-COSTS> 0
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