<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 August 1, 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
--------------
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 27, 1998
---------------
- - 4,831,470 shares, no par value.
- ---------------------------------
<PAGE>
HOT TOPIC, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets - August 1, 1998 and January 31, 1998 3
Statements of Operations for the:
13 and 26 weeks ended August 1, 1998 and August 2, 1997 4
Statements of Cash Flows for the 26
weeks ended August 1, 1998 and August 2, 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 11
2
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HOT TOPIC, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Aug. 1,1998 Jan 31,1998(a)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $21,888,000 $26,579,000
Inventory 11,280,000 7,636,000
Prepaid expenses and other 1,956,000 658,000
Deferred tax asset 339,000 339,000
----------- -----------
Total current assets 35,463,000 35,212,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 15,037,000 12,452,000
Leasehold improvements 12,870,000 10,727,000
----------- -----------
27,907,000 23,179,000
Less accumulated depreciation 8,335,000 6,479,000
----------- -----------
Net leaseholds, fixtures and equipment 19,572,000 16,700,000
Deposits and other assets 42,000 41,000
----------- -----------
Total Assets $55,077,000 $51,953,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,073,000 $ 1,706,000
Accrued payroll and related expenses 2,615,000 2,627,000
Accrued sales and other taxes 431,000 264,000
Income taxes payable 207,000 1,352,000
Current portion capital
lease obligations 33,000 34,000
----------- -----------
Total current liabilities 8,359,000 5,983,000
Deferred rent 616,000 509,000
Capital lease obligations, less
current portion 113,000 126,000
Deferred tax liability 599,000 599,000
Shareholders' equity
Common shares, no par value; 50,000,000
shares authorized; 4,830,845 and
4,759,606 issued and outstanding at
August 1, 1998 and January 31,1998,
respectively 37,958,000 37,701,000
Deferred compensation (60,000) (78,000)
Retained earnings 7,492,000 7,113,000
----------- -----------
Total shareholders' equity 45,390,000 44,736,000
----------- -----------
Total liabilities and
shareholders' equity $55,077,000 $51,953,000
=========== ===========
</TABLE>
(a) - The balance sheet at Jan. 31, 1998 is from the audited financial
statements at that date.
See accompanying notes.
3
<PAGE>
HOT TOPIC, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Second Quarter
(13 weeks ended)
-------------------------------
Aug. 1, 1998 Aug. 2, 1997
<S> <C> <C>
Net sales $20,787,000 $13,682,000
Cost of goods sold, including
buying, distribution and
occupancy costs 14,011,000 9,064,000
----------- -----------
Gross margin 6,776,000 4,618,000
Selling, general and
administrative expenses 6,458,000 4,501,000
----------- -----------
Operating income 318,000 117,000
Interest income-net 216,000 212,000
----------- -----------
Income before income taxes 534,000 329,000
Provision for income taxes 200,000 125,000
----------- -----------
Net income $ 334,000 $ 204,000
=========== ===========
Net income per share
Basic $ 0.07 $ 0.04
Diluted $ 0.07 $ 0.04
Weighted average shares outstanding
Basic 4,811,000 4,683,000
Diluted 4,984,000 4,948,000
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Six Months
(26 weeks ended)
-------------------------------
Aug. 1, 1998 Aug. 2, 1997
<S> <C> <C>
Net sales $38,101,000 $24,870,000
Cost of goods sold, including
buying, distribution and
occupancy costs 25,603,000 16,490,000
----------- -----------
Gross margin 12,498,000 8,380,000
Selling, general and
administrative expenses 12,359,000 8,676,000
----------- -----------
Operating income (loss) 139,000 (296,000)
Interest income-net 467,000 448,000
----------- -----------
Income before
income taxes 606,000 152,000
Provision for
income taxes 227,000 58,000
----------- -----------
Net income $ 379,000 $ 94,000
=========== ===========
Net income per share
Basic $ 0.08 $ 0.02
Diluted $ 0.08 $ 0.02
Weighted average shares
outstanding
Basic 4,794,000 4,645,000
Diluted 4,982,000 4,938,000
</TABLE>
See accompanying notes.
4
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HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
Year-to-date (26 weeks) ended
-------------------------------
Aug. 1, 1998 Aug. 2, 1997
-------------- --------------
<S> <C> <C>
Net income $ 379,000 $ 94,000
Adjustments to reconcile net
income to net cash flows
provided by (used in)
operating activities:
Depreciation and amortization 1,857,000 1,216,000
Deferred rent 107,000 79,000
Deferred compensation 18,000 18,000
Loss on disposal of fixed assets - 23,000
Changes in operating assets
and liabilities:
Inventory (3,644,000) (3,255,000)
Prepaid expenses and other (1,298,000) (221,000)
Deposits and other (1,000) (3,000)
Accounts payable 3,368,000 3,056,000
Accrued payroll and related expenses (12,000) 99,000
Accrued sales and other taxes payable 167,000 102,000
Income taxes payable (1,145,000) (801,000)
----------- -----------
Net cash flows provided by (used
in) operating activities (204,000) 407,000
Investing Activities:
Purchases of property and equipment (4,729,000) (5,808,000)
Net cash flows used in --------- ----------
investing activities (4,729,000) (5,808,000)
Financing Activities:
Payments on capital lease
obligations (15,000) (6,000)
Proceeds from exercise of stock options 257,000 368,000
----------- -----------
Net cash flows provided by
financing activities 242,000 362,000
Decrease in cash --------- ----------
and cash equivalents (4,691,000) (5,039,000)
Cash and cash equivalents
at the beginning of period 26,579,000 27,151,000
----------- -----------
Cash and cash equivalents
at the end of period $21,888,000 $22,112,000
=========== ===========
Supplemental Information:
Cash paid during the period
for interest $ 9,000 $ 8,000
Cash paid during the period
for income taxes $ 1,371,000 $ 861,000
Capital lease obligations
entered into for equipment - $ 88,000
</TABLE>
See accompanying notes.
5
<PAGE>
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. The Company currently
operates 136 stores in 36 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 and 26 weeks ended August 1, 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.
6
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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 August 1, 1998 (Second Quarter of Fiscal 1998) Compared to 13
- -----------------------------------------------------------------------------
Weeks Ended August 2, 1997 (Second Quarter of Fiscal 1997)
- -----------------------------------------------------------
Net sales increased $7,105,000, or 51.9%, to $20,787,000 during the second
quarter of fiscal 1998 from $13,682,000 during the second quarter of fiscal
1997. Net sales for the 53 stores not yet qualifying as comparable stores
contributed approximately $6,885,000 of the increase in net sales. Comparable
store sales increased 2.0% and contributed approximately $220,000 of the
increase in net sales for the second quarter of fiscal 1998. Sales of apparel
category merchandise, as a percentage of total net sales, increased to 49% in
the second quarter of 1998 compared to 47% in the second quarter of 1997.
Gross margin increased approximately $2,158,000 to $6,776,000 during the
second quarter of fiscal 1998 from $4,618,000 during the second quarter of
fiscal 1997. As a percentage of net sales, gross margin decreased to 32.6%
during the second quarter of fiscal 1998 from 33.8% in the second 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. The decrease
in merchandise margin was principally attributable to 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 $6,458,000 during the second quarter of fiscal 1998 from
$4,501,000 during the second quarter of fiscal 1997, but decreased as a
percentage of net sales to 31.1% in the second quarter of fiscal 1998 from 32.9%
in the second 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 and a decrease in the aggregate pre-opening expense,
both 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
7
<PAGE>
aggregate dollar decrease in pre-opening expense is attributable to opening
three fewer stores in the current quarter compared to last year's second quarter
Operating income increased to $318,000 during the second quarter of fiscal
1998 from $117,000 during the second quarter of fiscal 1997. As a percentage of
net sales, operating income was 1.5% in the second quarter of fiscal 1998
compared to 0.9% in the second quarter of fiscal 1997.
26 Weeks Ended August 1, 1998 (First Six Months of Fiscal 1998) Compared to 26
- -------------------------------------------------------------------------------
Weeks Ended August 2, 1997 (First Six Months of Fiscal 1997)
- -------------------------------------------------------------
Net sales increased $13,231,000, or 53.2%, to $38,101,000 during the first six
months of fiscal 1998 from $24,870,000 during the first six months of fiscal
1997. Net sales for the 53 stores not yet qualifying as comparable stores
contributed approximately $13,071,000 of the increase in net sales. Comparable
store sales increased 0.8% and contributed approximately $160,000 of the
increase in net sales for the first six months of fiscal 1998. The increased
sales in the first six months of fiscal 1998 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 $4,118,000 to $12,498,000 during the
first six months of fiscal 1998 from $8,380,000 during the first six months of
fiscal 1997. As a percentage of net sales, gross margin decreased to 32.8%
during the first six months of fiscal 1998 from 33.7% in the first six months 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 expenses. 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 half of 1998 compared to the first half of 1997 principally due to the
greater number of new stores.
Selling, general and administrative expenses increased approximately
$3,683,000 to $12,359,000 during the first six months of fiscal 1998 from
$8,676,000 during the first six months of fiscal 1997, but decreased as a
percentage of net sales to 32.4% in the first six months of fiscal 1998 from
34.9% in the first six 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 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.
Operating income increased to $139,000 during the first six months of fiscal
1998 from an operating loss of ($296,000) during the first six months of fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the second quarter and first six months 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
annual cash requirements principally from proceeds from cash flows from
operations and from the sale of equity securities.
8
<PAGE>
Working capital at August 1, 1998 was $27,107,000 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 (used in) provided by operating activities were ($204,000) and
$407,000 in the first six months of fiscal 1998 and 1997, respectively. The
decrease in cash flows provided by operating activities in the first six months
of fiscal 1998 was primarily attributable to an increase in the Company's net
income and depreciation and amortization expense, offset by a net change in
operating assets and liabilities.
Cash flows used in investing activities were $4,729,000 and $5,808,000 in the
first six months 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 25
and 26 stores in the first six months of fiscal 1998 and 1997, respectively.
Cash flows provided by financing activities were $242,000 and $362,000 in the
first six 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.
9
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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.
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
late 1998. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, the 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 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 1-3 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 May 27, 1998 in Pomona, California.
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 3,205,879 0
Orval D. Madden 3,205,879 0
Edgar F. Berner 3,205,879 0
Stanley E. Foster 3,205,879 0
Cece Smith 3,205,879 0
Corrado Federico 3,205,879 0
Andrew Schuon 3,205,879 0
10
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Proposal 2 - Amendment to the 1996 Equity Incentive Plan to increase the
aggregate number of shares of Common Stock authorized under such plan by
500,000 shares.
Votes in favor Votes Against Votes Abstained
-------------- ------------- ---------------
2,943,730 261,849 300
Proposal 3 - Amendments to the 1996 Non-Employee Director Stock Option
Plan to (i) increase the aggregate number of Common Shares authorized
under the plan by 50,000 shares, (ii) provide for the automatic grant to
new directors of options to purchase 5,000 shares upon becoming a member
of the Board, and (iii) provide for an automatic grant to directors of
options to purchase 1,250 shares upon each annual meeting of shareholders
of the Company.
Votes in favor Votes Against Votes Abstained
-------------- ------------- ---------------
3,051,063 153,197 1,619
Proposal 4 - Ratification of Selection of Ernst & Young, LLP as
Independent Auditors
Votes in favor Votes Against Votes Abstained
-------------- ------------- ---------------
3,205,879 0 0
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: 9/8/98 /s/ ORVAL D. MADDEN
------ -------------------
Orval D. Madden
President and Chief
Executive Officer (principal
executive officer)
Date: 9/8/98 /s/ JAY A. JOHNSON
------ ------------------
Jay A. Johnson
Chief Financial Officer
(principal financial and
accounting officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q DATED
AUGUST 1, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> MAY-02-1998 FEB-01-1998
<PERIOD-END> AUG-01-1998 AUG-01-1998
<CASH> 21,888 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 11,280 0
<CURRENT-ASSETS> 35,463 0
<PP&E> 27,907 0
<DEPRECIATION> 8,335 0
<TOTAL-ASSETS> 55,077 0
<CURRENT-LIABILITIES> 8,359 0
<BONDS> 0 0
0 0
0 0
<COMMON> 37,958 0
<OTHER-SE> 7,432 0
<TOTAL-LIABILITY-AND-EQUITY> 55,077 0
<SALES> 20,787 38,101
<TOTAL-REVENUES> 20,787 38,101
<CGS> 14,011 25,603
<TOTAL-COSTS> 14,011 25,603
<OTHER-EXPENSES> 6,458 12,359
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 534 606
<INCOME-TAX> 200 227
<INCOME-CONTINUING> 334 379
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 334 379
<EPS-PRIMARY> $0.07 $0.08
<EPS-DILUTED> $0.07 $0.08
</TABLE>
