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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 July 29, 2000
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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
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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.)
18305 EAST SAN JOSE AVE., CITY OF INDUSTRY, CA 91748
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(Address of Principal Executive Offices) (Zip Code)
(Telephone Number of Registrant) (626) 839-4681
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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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of the issuer's common stock as of the latest practicable date: August 30, 2000
- 9,897,933 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):
Consolidated Balance Sheets - July 29, 2000 and January 29, 2000 3
Consolidated Statements of Income for the:
13 and 26 weeks ended July 29, 2000 and July 31, 1999 4
Consolidated Statements of Cash Flows for the 26
weeks ended July 29, 2000 and July 31, 1999 5
Notes to Consolidated 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
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on form 8-K 10
SIGNATURE PAGE 11
2
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 29,2000 Jan 29,2000(a)
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ASSETS
Current Assets:
Cash and cash equivalents $ 28,647,000 $ 39,550,000
Inventory 24,930,000 15,367,000
Prepaid expenses and other 7,732,000 1,580,000
Deferred tax asset 721,000 721,000
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Total current assets 62,030,000 57,218,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 29,624,000 25,396,000
Leasehold improvements 25,691,000 21,419,000
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55,315,000 46,815,000
Less accumulated depreciation 18,607,000 15,094,000
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Net leaseholds, fixtures and equipment 36,708,000 31,721,000
Deposits and other assets 95,000 83,000
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Total Assets $ 98,833,000 $ 89,022,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,365,000 $ 6,215,000
Accrued payroll and related expenses 7,532,000 8,452,000
Accrued sales and other taxes payable 1,003,000 638,000
Income taxes payable 1,744,000 4,289,000
Current portion of capital
lease obligations 75,000 60,000
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Total current liabilities 21,719,000 19,654,000
Deferred rent 1,252,000 1,104,000
Capital lease obligations, less
current portion 138,000 171,000
Deferred tax liability 816,000 816,000
Shareholders' equity
Common shares, no par value; 50,000,000
shares authorized; 9,894,709 and
9,660,844 issued and outstanding at
July 29, 2000 and January 29, 2000,
respectively 42,728,000 40,668,000
Deferred compensation - (7,000)
Retained earnings 32,180,000 26,616,000
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Total shareholders' equity 74,908,000 67,277,000
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Total liabilities and
shareholders' equity $ 98,833,000 $ 89,022,000
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(a) - The balance sheet at Jan. 29, 2000 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)
Second Quarter
(13 weeks ended)
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July 29, 2000 July 31, 1999
Net sales $51,718,000 $32,779,000
Cost of goods sold, including
buying, distribution and
occupancy costs 32,431,000 21,366,000
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Gross margin 19,287,000 11,413,000
Selling, general and
administrative expenses 14,709,000 9,775,000
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Operating income 4,578,000 1,638,000
Interest income-net 376,000 177,000
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Income before
income taxes 4,954,000 1,815,000
Provision for
income taxes 1,833,000 663,000
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Net income $ 3,121,000 $ 1,152,000
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Net income per share
Basic $ 0.32 $ 0.13
Diluted $ 0.29 $ 0.12
Weighted average shares outstanding
Basic 9,866,000 9,239,000
Diluted 10,647,000 9,632,000
See accompanying notes
Six Months
(26 weeks ended)
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July 29, 2000 July 31, 1999
Net sales $96,556,000 $61,065,000
Cost of goods sold, including
buying, distribution and
occupancy costs 60,501,000 39,906,000
Gross margin 36,055,000 21,159,000
Selling, general and
administrative expenses 28,021,000 18,740,000
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Operating income 8,034,000 2,419,000
Interest income-net 798,000 396,000
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Income before income taxes 8,832,000 2,815,000
Provision for income taxes 3,268,000 1,028,000
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Net income $ 5,564,000 $ 1,787,000
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Net income per share
Basic $ 0.57 $ 0.19
Diluted $ 0.53 $ 0.19
Weighted average shares outstanding
Basic 9,793,000 9,240,000
Diluted 10,577,000 9,528,000
See accompanying notes
4
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Year-to-date (26 weeks) ended
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July 29, 2000 July 31, 1999
Net income $ 5,564,000 $ 1,787,000
Adjustments to reconcile net
income to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 3,667,000 2,594,000
Deferred rent 147,000 209,000
Deferred compensation 7,000 18,000
Loss on disposal of fixed assets 70,000 192,000
Changes in operating assets and liabilities:
Inventory (9,563,000) (6,837,000)
Prepaid expenses and other (6,152,000) (1,098,000)
Deposits and other assets (13,000) (4,000)
Accounts payable 5,150,000 6,498,000
Accrued payroll and related expenses (921,000) 580,000
Accrued sales and other taxes payable 366,000 280,000
Income taxes payable (2,545,000) (991,000)
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Net cash flows provided by (used
in) operating activities (4,223,000) 3,228,000
Investing Activities:
Purchases of property and equipment (8,723,000) (9,559,000)
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Net cash flows used in
investing activities (8,723,000) (9,559,000)
Financing Activities:
Payments on capital lease
obligations (17,000) (16,000)
Repurchase common shares - (1,065,000)
Proceeds from exercise of stock options 2,060,000 427,000
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Net cash flows (used in) provided
by financing activities 2,043,000 (654,000)
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Decrease in cash
and cash equivalents (10,903,000) (6,985,000)
Cash and cash equivalents
at the beginning of period 39,550,000 24,574,000
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Cash and cash equivalents
at the end of period $ 28,647,000 $ 17,589,000
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Supplemental Information:
Cash paid during the period
for interest $ 17,000 $ 12,000
Cash paid during the period
for income taxes $ 9,772,000 $ 2,145,000
Capital lease obligations
entered into for equipment - $ 112,000
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:
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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. At the end of the
quarter (July 29, 2000), the Company operated 247 stores in 44 states throughout
the United States.
The information set forth in these financial statements is unaudited
except for the January 29, 2000 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 29, 2000 are not
necessarily indicative of the results that may be expected for the year ending
February 3, 2001. 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 29, 2000.
NOTE 2. Net Income Per Share:
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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
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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 July 29, 2000 (Second Quarter of Fiscal 2000) Compared to 13
Weeks Ended July 31, 1999 (Second Quarter of Fiscal 1999)
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Net sales increased $18,939,000 or 57.8%, to $51,718,000 during the
second quarter of fiscal 2000 from $32,779,000 during the second quarter of
fiscal 1999. The increased sales in the second quarter of fiscal 2000 were
attributable to an increase in the number of stores and to a 21.8% increase in
comparable store sales as compared to the second quarter of fiscal 1999. Net
sales for the 83 stores not yet qualifying as comparable stores contributed
approximately $12,450,000 of the increase in net sales. The comparable store
sales increase of 21.8% contributed approximately $6,500,000 of the increase in
net sales. In the second quarter of fiscal 1999, comparable store sales
increased by 16.9% as compared to the second quarter of fiscal 1998. Sales of
apparel category merchandise, as a percentage of total net sales, were 49% in
the second quarter of 2000 compared to 47% in the second quarter of 1999.
Average sales per store increased by approximately 19% to $220,000 in the
current quarter from $185,000 in last year's second quarter.
Gross margin increased approximately $7,874,000 to $19,287,000 during
the second quarter of fiscal 2000 from $11,413,000 during the second quarter of
fiscal 1999. As a percentage of net sales, gross margin increased to 37.3%
during the second quarter of fiscal 2000 from 34.8% in the second quarter of
fiscal 1999. The increase in gross margin as a percentage of net sales reflects
primarily an increase in merchandise margins and 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 0.9% higher in the second
quarter of 2000 compared to the second quarter of 1999, principally from an
average higher initial mark up and lower shrinkage. Distribution and buying
expenses were also slightly lower as a percentage of sales in the current
quarter compared to the last year's second quarter, reflecting increased
efficiencies.
Selling, general and administrative expenses increased approximately
$4,934,000 to $14,709,000 during the second quarter of fiscal 2000 from
$9,775,000 during the second quarter of fiscal 1999, but decreased as a
percentage of net sales to 28.4% in the second quarter of fiscal 2000 from 29.8%
in the second quarter of fiscal 1999. The decrease as a percentage of net sales
was primarily attributable to a reduction of general and administrative expense
as a percentage of net sales due to the operating leverage achieved through the
higher average sales per store.
Operating income increased approximately $2,940,000 to $4,578,000
during the second quarter of fiscal 2000 from $1,638,000 during the second
quarter of fiscal 1999. As a percentage of net sales, the operating income was
8.9% in the second quarter of fiscal 2000 compared to 5.0% in the second quarter
of fiscal 1999.
Interest income, net, increased approximately $199,000 to $376,000 in
the second quarter of fiscal 2000 from $177,000 in the second quarter of fiscal
1999, principally due to higher average cash balances.
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26 Weeks Ended July 29, 2000 (First Six Months of Fiscal 2000) Compared to 26
Weeks Ended July 31, 1999 (First Six Months of Fiscal 1999)
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Net sales increased $35,491,000, or 58.1%, to $96,556,000 during the
first six months of fiscal 2000 from $61,065,000 during the first six months of
fiscal 1999. Net sales for the 83 stores not yet qualifying as comparable stores
contributed approximately $22,550,000 of the increase in net sales. Comparable
store sales increased 22.9% and contributed approximately $12,900,000 of the
increase in net sales for the first six months of fiscal 2000. The increased
sales in the first six months of fiscal 2000 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 $14,896,000 to $36,055,000 during
the first six months of fiscal 2000 from $21,159,000 during the first six months
of fiscal 1999. As a percentage of net sales, gross margin increased to 37.3%
during the first six months of fiscal 2000 from 34.7% in the first six months of
fiscal 1999. The increase in gross margin as a percentage of net sales reflects
primarily an increase in merchandise margins and 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 1.0% higher in the first
six months of fiscal 2000 compared to the first six months of fiscal 1999,
principally from an average higher initial mark up and lower shrinkage.
Selling, general and administrative expenses increased approximately
$9,281,000 to $28,021,000 during the first six months of fiscal 2000 from
$18,740,000 during the first six months of fiscal 1999, but decreased as a
percentage of net sales to 29.0% in the first six months of fiscal 2000 from
30.7% in the first six months of fiscal 1999. The decrease as a percentage of
net sales was primarily attributable to a reduction of general and
administrative expense as a percentage of net sales due to the operating
leverage achieved through the higher average sales per store.
Operating income increased to $8,034,000 during the first six months of
fiscal 2000 from $2,419,000 during the first six months of fiscal 1999. As a
percentage of net sales, operating income was 8.3% for the first six months of
fiscal 2000 compared to 4.0% for the first six months of fiscal 1999.
Interest income, net, increased approximately $402,000 to $798,000 in
the first six months of fiscal 2000 from $396,000 in the first six months of
fiscal 1999, principally due to higher average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the second quarter and first half of
fiscal 2000, the Company's primary uses of cash have been to finance store
openings 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 29, 2000 was $40,311,000 compared to
$37,564,000 at January 29, 2000.
Cash flows (used in) provided by operating activities were ($4,223,000)
and $3,228,000 in the first six months of fiscal 2000 and 1999, respectively.
The increase in cash flows used in operating activities in the first six months
of fiscal 2000 was primarily due to the increase in inventories, increase in
prepaid and other expenses, payments of bonuses earned in fiscal 1999 and
payment of income taxes, all net of an increase in net income.
Cash flows used in investing activities were $8,723,000 and $9,559,000
in the first six months of fiscal 2000 and 1999, 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 35 and 26 stores in the first six months of fiscal
2000 and 1999, respectively.
8
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Cash flows provided by (used in) financing activities were $2,043,000
and ($654,000) in the first six months of fiscal 2000 and 1999, respectively. In
the first six months of 2000, $2,060,000 was received on the exercise of stock
options compared to $427,000 in the first six months of fiscal 1999. The
increase in cash flows used in financing activities is primarily due to the
Company's use of $1,065,000 to repurchase 138,000 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 2000.
SEASONALITY
The Company's business is subject to seasonal influences, with heavier
concentrations of sales during the Christmas holiday, back-to-school season, the
Halloween holiday 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 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 29, 2000.
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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 June 28, 2000 in the City of Industry, California. The
Company had 9,834,791 shares of Common Stock outstanding as of May 4, 2000, 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
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Robert M. Jaffe 8,411,315 575,831
Orval D. Madden 6,834,573 2,152,573
Elizabeth M. McLaughlin 8,939,475 47,671
Edgar F. Berner 8,937,657 49,489
Bruce A. Quinnell 8,938,907 48,239
Corrado Federico 8,937,557 49,589
Andrew Schuon 8,938,707 49,439
Proposal 2 - Amendment to the 1996 Equity Incentive Stock Option Plan
Votes in favor Votes Against Votes Abstained
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3,475,336 3,269,513 12,234
Proposal 3 - Amendment to the 1996 Non-Employee Director Stock Option Plan
Votes in favor Votes Against Votes Abstained
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7,503,481 1,452,700 3,965
Proposal 4 - Ratification of Selection of Ernst & Young, LLP as Independent
Auditors
Votes in favor Votes Against Votes Abstained
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8,979,993 5,315 1,838
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.
10
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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: 9/5/2000 /s/ Elizabeth M. McLaughlin
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Elizabeth M. McLaughlin
President and Chief
Executive Officer (principal executive officer)
Date: 9/5/2000 /s/ Jay A. Johnson
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Jay A. Johnson
Chief Financial Officer
(principal financial and accounting officer)
11
