<PAGE> 1
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 November 2, 1996
----------------
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: November 2,
1996 - 4,576,520 shares, no par value.
1
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HOT TOPIC, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets - November 2, 1996 3
Statements of Operations:
13 weeks ended Nov. 2, 1996 and Oct. 28, 1995 4
39 weeks ended Nov. 2, 1996 and Oct. 28, 1995 4
Statements of Cash Flows for the 39
weeks ended Nov. 2, 1996 and Oct. 28, 1995 5-6
Notes to Financial Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-13
PART II. OTHER INFORMATION 14
SIGNATURE PAGE 14
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HOT TOPIC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Nov. 2, Feb. 3,
1996 1996
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $25,080,000 $ 4,569,000
Inventory 4,366,000 3,162,000
Prepaid expenses and other 940,000 616,000
----------- -----------
Total current assets 30,386,000 8,347,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 6,593,000 4,230,000
Leasehold improvements 6,892,000 4,391,000
----------- -----------
13,485,000 8,621,000
Less accumulated depreciation 3,100,000 2,157,000
----------- -----------
Net leaseholds, fixtures and equipment 10,385,000 6,464,000
Deposits and other assets 36,000 89,000
----------- -----------
Total Assets $40,807,000 $14,900,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,291,000 $ 1,514,000
Accrued payroll and related expenses 614,000 535,000
Accrued sales and other taxes 213,000 155,000
Income taxes payable 364,000 385,000
Current portion capital
lease obligations 17,000 12,000
----------- -----------
Total current liabilities 3,499,000 2,601,000
Deferred rent 301,000 246,000
Capital lease obligations, less
current portion 32,000 22,000
Shareholders' equity
Common shares, no par value; 10,000,000
shares authorized; 4,576,520 and
3,022,974 issued and outstanding at
November 2, 1996 and February 3,
1996, respectively 36,536,000 12,031,000
Deferred compensation (131,000) --
Retained earnings 570,000 --
----------- -----------
Total shareholders' equity 36,975,000 12,031,000
----------- -----------
Total liabilities and
shareholders' equity $40,807,000 $14,900,000
=========== ===========
</TABLE>
Note - The balance sheet at Feb. 3, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes.
3
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HOT TOPIC, INC.
STATEMENTS OF OPERATIONS - (UNAUDITED)
<TABLE>
<CAPTION>
Third Quarter
(13 weeks ended)
-----------------------------------
Nov. 2, Oct. 28,
1996 1995
<S> <C> <C>
Net Sales $11,788,000 $6,022,000
Cost of goods sold, including
buying, distribution and
occupancy costs 7,364,000 3,973,000
----------- ----------
Gross margin 4,424,000 2,049,000
Selling, general and
administrative expenses 3,461,000 2,110,000
----------- ----------
Operating income (loss) 963,000 (61,000)
Interest income-net 80,000 41,000
----------- ----------
Income (loss) before
income taxes 1,043,000 (20,000)
Provision (benefit) for
income taxes 380,000 (8,000)
----------- ----------
Net Income (loss) $663,000 $ (12,000)
=========== ==========
Net income (loss) per share $ 0.16 $ (0.00)
Weighted average shares
outstanding 4,062,120 3,081,973
</TABLE>
<TABLE>
<CAPTION>
Year-to-Date (39 weeks) ended
------------------------------------
Nov. 2, Oct. 28,
1996 1995
----------- -----------
<S> <C> <C>
Net Sales $27,189,000 $13,674,000
Cost of goods sold, including
buying, distribution and
occupancy costs 17,429,000 9,243,000
----------- -----------
Gross margin 9,760,000 4,431,000
Selling, general and
administrative expenses 8,990,000 5,514,000
----------- -----------
Operating income (loss) 770,000 (1,083,000)
Interest income - net 118,000 93,000
----------- -----------
Income (loss) before
income taxes 888,000 (990,000)
Provision (benefit) for
income taxes 318,000 (396,000)
----------- -----------
Net Income (loss) 570,000 $ (594,000)
=========== ===========
Net income (loss) per share $ 0.16 $ (0.19)
Weighted average shares
outstanding 3,555,102 3,081,973
</TABLE>
See accompanying notes.
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HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Year-to-date (39 weeks) ended
-----------------------------------
Nov. 2, Oct. 28,
1996 1995
----------- -----------
<S> <C> <C>
Net income (loss) $ 570,000 ($594,000)
Adjustments to reconcile net
income (loss) to net cash flows
provided by (used in)
operating activities:
Depreciation and amortization 943,000 660,000
Deferred rent 55,000 51,000
Deferred compensation 12,000 --
Changes in operating assets
and liabilities:
Inventory (1,204,000) (1,458,000)
Prepaid expenses and other (324,000) (574,000)
Deposits and other 53,000 --
Accounts payable 777,000 737,000
Accrued payroll and
related expenses 79,000 17,000
Accrued sales and other
taxes payable 58,000 (181,000)
Income taxes payable (21,000) (120,000)
----------- ------------
Net cash flows provided by (used
in) operating activities 998,000 (1,462,000)
Investing Activities:
Purchases of property and
equipment (4,286,000) (3,086,000)
Net cash flows used in ----------- -----------
investing activities (4,286,000) (3,086,000)
Financing Activities:
Payments on capital lease
obligations (563,000) (8,000)
Proceeds from sale of preferred
shares, net of issuance costs -- 4,028,000
Proceeds from Initial Public
Offering, net of expenses 24,261,000 --
Proceeds from exercise of
warrants and options 101,000 --
----------- ------------
Net cash flows provided by
financing activities 23,799,000 4,020,000
Increase (decrease) in cash ----------- -----------
and cash equivalents 20,511,000 (528,000)
</TABLE>
5
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<TABLE>
<S> <C> <C>
Cash and cash equivalents
at the beginning of period 4,569,000 3,870,000
Cash and cash equivalents
at the end of period $25,080,000 $3,342,000
=========== ==========
Supplemental Information:
Cash paid during the period
for interest $ 78,000 $7,000
Cash paid during the period
for income taxes $ 340,000 $ 135,000
Capital lease obligations
entered into for equipment $ 579,000 --
</TABLE>
See accompanying notes.
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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 68 stores in 19 states throughout the Western, Midwestern
and Northeastern regions of the United States.
The information set forth in these financial statements is unaudited except for
the February 3, 1996 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 November 2, 1996 are not
necessarily indicative of the results that may be expected for the year ending
February 1, 1997. For further information, refer to the financial statements
and notes thereto included in the Company's Registration statement on Form SB-2
dated September 23, 1996.
NOTE 2. Earnings Per Share:
Earnings per share are based on the weighted average number of common and
common stock equivalent, if dilutive, shares outstanding during the period.
Shares used in this computation for the periods ended October 28, 1995, reflect
pro forma effect of the conversion of the then outstanding redeemable
convertible preferred stock into common stock, using the if converted method
from the original date of issuance.
NOTE 3. Initial Public Offering of Common Stock
On September 24, 1996, the Company completed its initial public offering of
1,495,000 shares of common stock for $18.00 per share. The Company invested
the net proceeds of approximately $26.0 million from the offering in
short-term, investment grade, interest-bearing securities.
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NOTE 4. Line of Credit:
In March 1996, the Company entered into a bank line of credit for seasonal
working capital under which up to $5,000,000 is available. Borrowings are
limited to a Borrowing Base, as defined in the credit agreement, which
considers number of stores, inventory levels and equipment. lnterest is payable
monthly at a rate equal to the bank's prime rate plus 1% and a fee of .5% per
annum. The credit facility is secured by substantially all of the Company's
assets and is available through April 1, 1998. The loan agreement contains
certain restrictive covenants including limitations on capital expenditures,
compensation to shareholders, payment of dividends and incurring of new debt,
and requires the maintenance of certain financial ratios. At November 2, 1996,
$3,630,000 was available and no borrowings were outstanding under the line.
8
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ITEM 2 - MANAGEMENTS 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 November 2, 1996 (Third Quarter of Fiscal 1996) Compared to 13
Weeks Ended October 28, 1995 (Third Quarter of Fiscal 1995)
Net sales increased $5,766,000, or 95.7%, to $11,788,000 during the third
quarter of fiscal 1996 from $6,022,000 during the third quarter of fiscal 1995.
Net sales for the 33 stores not yet qualifying as comparable stores contributed
approximately $5.1 million of the increase in net sales. Comparable store sales
increased 14.2% and contributed approximately $700,000 of the increase in net
sales for the third quarter of fiscal 1996. The increased sales in the third
quarter of fiscal 1996 were attributable to a generally more favorable retail
apparel environment, 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 $2,375,000 to $4,424,000 during the
third quarter of fiscal 1996 from $2,049,000 during the third quarter of fiscal
1995. As a percentage of net sales, gross margin increased to 37.5% during the
third quarter of fiscal 1996 from 34.0% in the third quarter of fiscal 1995.
The increase in gross margin as a percentage of net sales was principally due
to the leveraging of the buying and distribution expenses of the Company over a
larger store base, and, to a lesser extent, to the leveraging of the fixed
portion of occupancy expenses over the increased sales. These margin
improvements were offset, in part, by a small decrease in the Company's
merchandise margins, attributable to the increased apparel sales, which have
lower initial mark ups, as a percentage of net sales.
Selling, general and administrative expenses increased approximately
$1,351,000 to $3,461,000 during the third quarter of fiscal 1996 from
$2,110,000 during the third quarter of fiscal 1995, but decreased as a
percentage of net sales to 29.4% in the third quarter of fiscal 1996 from 35.0%
in the third quarter of fiscal 1995. The decrease as a percentage of net sales
was primarily due 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, to a lesser extent, to a reduction in store payroll
expense as a percentage of net sales.
Operating income increased approximately $1,024,000 to $963,000 during the
third quarter of fiscal 1996 from a loss of $61,000 during the third quarter of
fiscal 1995. As a percentage
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of net sales, operating income increased to 8.2% in the third quarter of fiscal
1996 from a loss of 1.0% in the third quarter of fiscal 1995.
Interest income, net, increased approximately $39,000 to $80,000 in the
third quarter of fiscal 1996 from $41,000 in the third quarter of fiscal 1995.
The increase in interest income was primarily due to an increase in the average
cash balance invested, partially offset by higher interest expense during part
of the quarter attributable to the financing of certain computer hardware and
software through capitalized leases in the first seven months of fiscal 1996.
Such leases were paid off with a portion of the proceeds from the Company's
initial public offering in September 1996.
The income tax provision of $380,000 in the third quarter of fiscal 1996
was 36.4% of pre-tax income compared to an income tax benefit of $8,000 in the
third quarter of fiscal 1995 or 40% of the pre-tax loss. The variance in the
third quarter of fiscal 1996 from an expected rate of approximately 40% is a
result of a significant portion of the quarter's interest income being
non-taxable.
Net income increased to $663,000 for the third quarter of fiscal 1996 from
a loss of $12,000 for the third quarter of fiscal 1995, as a result of the
increased sales, leveraging of buying, distribution and corporate overhead
expenses and other factors discussed above.
39 Weeks Ended November 2, 1996 (Nine Months) Compared to The 39 Weeks Ended
October 28, 1995 (Nine Months)
Net sales increased approximately $13,515,000, or 98.8%, to $27,189,000
during the first nine months of fiscal 1996 from $13,674,000 during the first
nine months of fiscal 1995. Net sales for the 24 stores opened during the first
nine months of fiscal 1996 and for those stores not yet qualifying as
comparable stores contributed approximately $12.4 million of the increase in
net sales. Comparable store sales increased 9.8% and contributed approximately
$1.1 million of the increase in net sales for the first nine months of fiscal
1996. The increased sales in the first nine months of fiscal 1996 were
attributable to a generally more favorable retail apparel environment,
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 $5,329,000 to $9,760,000 during the
first nine months of fiscal 1996 from $4,431,000 during the first nine months
of fiscal 1995. As a percentage of net sales, gross margin increased to 35.9%
during the first nine months of fiscal 1996 from 32.4% in the first nine months
of fiscal 1995. The increase in gross margin as a percentage of net sales was
principally due to the leveraging of the buying and distribution expenses of
the Company over a larger store base.
10
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Selling, general and administrative expenses increased approximately
$3,476,000 to $8,990,000 during the first nine months of fiscal 1996 from
$5,514,000 during the first nine months of fiscal 1995, but decreased as a
percentage of net sales to 33.1% in the first nine months of fiscal 1996 from
40.3% in the first nine months of fiscal 1995. The decrease as a percentage of
net sales was primarily due 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, to a lesser extent, to a reduction in store
payroll expense as a percentage of net sales.
Operating income during the first nine months of fiscal 1996 of $770,000
increased approximately $1,853,000 from a loss of $1,083,000 during the first
nine months of fiscal 1995. As a percentage of net sales, operating income was
2.8% in the first nine months of fiscal 1996 compared to a loss of 7.9% in the
first nine months of fiscal 1995.
Interest income, net, increased approximately $25,000 to $118,000 in the
first nine months of fiscal 1996 from $93,000 in the first nine months of
fiscal 1995. The increase in interest income was primarily due to an increase
in the average cash balance invested, partially offset by higher interest
expense during most of the nine month period attributable to the financing of
certain computer hardware and software through capitalized leases in the first
six months of fiscal 1996. Such leases were paid off with a portion of the
proceeds from the Company's initial public offering in September 1996.
The income tax provision of $318,000 for the first nine months of fiscal
1996 was 35.8% of pre-tax income compared to an income tax benefit of $396,000
for the first nine months of fiscal 1995 or 40% of the pre-tax loss. The
variance in the first nine months of fiscal 1996 from an expected rate of
approximately 40% is a result of a significant portion of the third quarter's
interest income being non-taxable. Net income increased to $570,000 for the
first nine months of fiscal 1996 from a loss of $594,000 for the first nine
months of fiscal 1995, as a result of the increased sales, leveraging of
buying, distribution and corporate overhead expenses and other factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the third quarter and the first nine months of
fiscal 1996, the Company's primary uses of cash have been to finance store
openings and purchase merchandise inventories. The Company has satisfied its
cash requirements principally from proceeds from the sale of equity securities
and cash flows from operations.
11
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Working capital at November 2, 1996 was $26,817,000 compared to $5,746,000 at
February 3, 1996. The increase is primarily from the proceeds of the Company's
initial public offering completed in September 1996, partially offset by
working capital used to finance the 24 new store openings.
Cash flows provided by (used in) operating activities were $998,000 and
($1,462,000) in the first nine months of fiscal 1996 and 1995, respectively.
The increase in cash flows from operating activities in the first nine months
of fiscal 1996 was primarily attributable to an increase in the Company's net
income.
Cash flows used in investing activities were $4,286,000 and $3,086,000 in
the first nine months of fiscal 1996 and 1995, 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 24
and 16 stores in the first nine months of fiscal 1996 and 1995, respectively.
Cash flows provided by financing activities were $23,799,000 and $4,020,000
in the first nine months of fiscal 1996 and 1995, respectively. In June 1996,
the Company received net proceeds of $72,000 from the exercise of warrants to
purchase shares of Series C Preferred Stock and in September 1996, the Company
received net proceeds of approximately $24.3 million from the Company's initial
public offering and $29,000 from the exercise of stock options. In the first
nine months of fiscal 1995, the Company received net proceeds of $4.0 million
from the sale of shares of Series D Preferred Stock. All preferred stock was
converted to common stock upon the completion of the Company's initial public
offering in September 1996.
In March 1996, the Company entered into a bank line of credit for seasonal
working capital under which up to $5 million is available. Borrowings are
limited to a Borrowing Base, as defined in the credit agreement, which
considers number of stores, inventory levels and equipment. Interest is payable
monthly at a rate equal to the bank's prime rate plus 1%, and the Company is
also charged a fee of 0.5% per annum. The credit facility is secured by
substantially all of the Company's assets and is available through April 1,
1998. The credit agreement contains certain restrictive covenants including
limitations on capital expenditures, payment of dividends and incurrence of new
debt, and requires the maintenance of certain financial ratios. The Company
would be required under the terms of the credit agreement to obtain prior
written consent of the bank in the event the Company determines its planned
expansion will cause the Company to incur capital expenditures in excess of
$6.85 million during any fiscal year (as is currently contemplated for fiscal
1997). The Company has not borrowed on the bank line of credit, and the Company
does not expect to borrow any amounts therefrom prior to the end of fiscal
1996.
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<PAGE> 13
The Company anticipates that it will spend approximately $500,000 to open
two more new stores in fiscal 1996 and for certain computer hardware and
software.
The Company believes that its current cash balances (that include the
proceeds from the Company's September 1996 initial public offering), cash
generated from operations and funds available under its credit agreement will
be sufficient to fund its operations and planned expansion through fiscal 1997.
SEASONALITY
The Company's business is subject to seasonal influences, with heavier
concentrations of sales during the Christmas holiday, back-to-school season,
and other periods when schools are not in session. The Christmas holiday season
remains the Company's single most important selling season. As is the case
with many retailers of apparel, accessories and related merchandise, the
Company typically experiences lower net sales and operating losses during the
first fiscal quarter. The Company does not believe that inflation has had a
material adverse effect on its net sales or results of operations. The Company
has generally been able to pass on increased costs related to inflation through
increases in selling prices.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the
preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain various forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act, which represent the
Company's expectations or beliefs concerning future events. These forward
looking statements involve risks and uncertainties, and the Company cautions
that these statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the sufficiency of the Company's
working capital and cash flows from operating activities, the implementation
and management of the Company's growth strategy, the demand for the merchandise
offered by the Company, the ability of the Company to obtain adequate
merchandise supply, the ability of the Company to gauge the fashion tastes of
its customers and provide merchandise that satisfies customer demand, the
effect of economic conditions, the effect of severe weather or natural
disasters and the effect of competitive pressures from other retailers as well
as other risks detailed from time to time in the Company's SEC reports,
including the Registration Statement on Form SB-2 dated September 23, 1996.
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PART II. - OTHER INFORMATION
Items 1-6 are not applicable.
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: 12/11/96 /S/Orval D. Madden
-------- ------------------
Orval D. Madden
President and Chief
Executive Officer
(principal executive
officer)
Date: 12/11/96 /S/Jay A. Johnson
-------- ------------------
Jay A. Johnson
Chief Financial Officer
(principal financial and
accounting officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> NOV-02-1996
<CASH> 25,080
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,366
<CURRENT-ASSETS> 30,386
<PP&E> 13,485
<DEPRECIATION> 3,100
<TOTAL-ASSETS> 40,807
<CURRENT-LIABILITIES> 3,499
<BONDS> 0
0
0
<COMMON> 36,536
<OTHER-SE> 439
<TOTAL-LIABILITY-AND-EQUITY> 40,807
<SALES> 11,788
<TOTAL-REVENUES> 0
<CGS> 7,364
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (80)
<INCOME-PRETAX> 1,043
<INCOME-TAX> 380
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 663
<EPS-PRIMARY> 0.16
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