<PAGE>
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
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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: November 30,
1998 - 4,839,927 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 - 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
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HOT TOPIC, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Oct 31,1998 Jan 31,1998(a)
<S> <C> <C>
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
=========== ===========
</TABLE>
3
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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)
<TABLE>
<CAPTION>
Third Quarter
(13 weeks ended)
-------------------------------
Oct. 31, 1998 Nov. 1, 1997
<S> <C> <C>
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.
<CAPTION>
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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</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
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.
<CAPTION>
HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
Year-to-date (39 weeks) ended
-------------------------------
Oct. 31,1998 Nov. 1,1997
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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)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
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.
</TABLE>
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.
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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
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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
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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
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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
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> AUG-02-1998 FEB-01-1998
<PERIOD-END> OCT-31-1998 OCT-31-1998
<CASH> 22,486 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 11,065 0
<CURRENT-ASSETS> 36,161 0
<PP&E> 30,221 0
<DEPRECIATION> 9,380 0
<TOTAL-ASSETS> 57,044 0
<CURRENT-LIABILITIES> 8,496 0
<BONDS> 0 0
0 0
0 0
<COMMON> 37,970 0
<OTHER-SE> 9,198 0
<TOTAL-LIABILITY-AND-EQUITY> 57,044 0
<SALES> 28,708 66,809
<TOTAL-REVENUES> 28,708 66,809
<CGS> 18,066 43,669
<TOTAL-COSTS> 18,066 43,669
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<INCOME-CONTINUING> 1,758 2,137
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<NET-INCOME> 1,758 2,137
<EPS-PRIMARY> $0.36 $0.44
<EPS-DILUTED> $0.36 $0.43
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