<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
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 28, 1997
- - 4,722,092 shares, no par value.
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HOT TOPIC, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets - August 2, 1997 and February 1, 1997 3
Statements of Operations for the:
13 and 26 weeks ended August 2, 1997 and August 3, 1996 4
Statements of Cash Flows for the 26
weeks ended August 2, 1997 and August 3, 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION 10
SIGNATURE PAGE 11
</TABLE>
2
<PAGE> 3
HOT TOPIC, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
August 2,1997 Feb.1,1997(a)
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,112,000 $ 27,151,000
Inventory 8,192,000 4,937,000
Prepaid expenses and other 1,214,000 993,000
Deferred tax asset 310,000 310,000
------------- -------------
Total current assets 31,828,000 33,391,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 10,309,000 7,021,000
Leasehold improvements 9,781,000 7,197,000
------------- -------------
20,090,000 14,218,000
Less accumulated depreciation 4,828,000 3,612,000
------------- -------------
Net leaseholds, fixtures and equipment 15,262,000 10,606,000
Deposits and other assets 39,000 36,000
------------- -------------
Total Assets $ 47,129,000 $ 44,033,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,072,000 $ 2,016,000
Accrued payroll and related expenses 1,144,000 1,045,000
Accrued sales and other taxes 312,000 210,000
Income taxes payable 58,000 859,000
Current portion capital
lease obligations 24,000 14,000
------------- -------------
Total current liabilities 6,610,000 4,144,000
Deferred rent 398,000 319,000
Capital lease obligations, less
current portion 106,000 35,000
Deferred tax liability 466,000 466,000
Shareholders' equity
Common shares, no par value; 10,000,000
shares authorized; 4,721,936 and
4,599,253 issued and outstanding at
August 2, 1997 and February 1,1997,
respectively 36,981,000 36,613,000
Deferred compensation (96,000) (114,000)
Retained earnings 2,664,000 2,570,000
------------- -------------
Total shareholders' equity 39,549,000 39,069,000
------------- -------------
Total liabilities and
shareholders' equity $ 47,129,000 $ 44,033,000
============= =============
</TABLE>
(a) - The balance sheet at Feb. 1, 1997 has been derived from the audited
financial statements at that date. See accompanying notes.
3
<PAGE> 4
HOT TOPIC, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Second Quarter
(13 weeks ended)
-----------------------------
Aug. 2, 1997 Aug. 3, 1996
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<S> <C> <C>
Net sales $ 13,682,000 $ 8,890,000
Cost of goods sold, including
buying, distribution and
occupancy costs 9,064,000 5,716,000
------------ ------------
Gross margin 4,618,000 3,174,000
Selling, general and
administrative expenses 4,501,000 3,050,000
------------ ------------
Operating income 117,000 124,000
Interest income-net 212,000 1,000
------------ ------------
Income before
income taxes 329,000 125,000
Provision for
income taxes 125,000 50,000
------------ ------------
Net income $ 204,000 $ 75,000
============ ============
Net income per share $ 0.04 $ 0.02
Weighted average shares
outstanding 4,935,000 3,323,000
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Six Months
(26 weeks ended)
------------------------------
Aug. 2, 1997 Aug. 3, 1996
------------ ------------
<S> <C> <C>
Net sales $ 24,870,000 $ 15,401,000
Cost of goods sold, including
buying, distribution and
occupancy costs 16,490,000 10,065,000
------------ ------------
Gross margin 8,380,000 5,336,000
Selling, general and
administrative expenses 8,676,000 5,529,000
------------ ------------
Operating (loss) (296,000) (193,000)
Interest income-net 448,000 38,000
------------ ------------
Income (loss) before
income taxes 152,000 (155,000)
Provision (benefit) for
income taxes 58,000 (62,000)
------------ ------------
Net income (loss) $ 94,000 $ (93,000)
============ ============
Net income (loss) per share $ 0.02 $ (0.03)
Weighted average shares
outstanding 4,771,000 3,089,000
</TABLE>
See accompanying notes.
4
<PAGE> 5
HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
Year-to-date (26 weeks) ended
------------------------------
Aug. 2,1997 Aug. 3,1996
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<S> <C> <C>
Net income (loss) $ 94,000 ($ 93,000)
Adjustments to reconcile net
income (loss) to net cash flows
provided by (used in)
operating activities:
Depreciation and amortization 1,216,000 730,000
Deferred rent 79,000 38,000
Deferred compensation 18,000 13,000
Loss on disposal of fixed assets 23,000 --
Changes in operating assets and liabilities:
Inventory (3,255,000) (1,409,000)
Prepaid expenses and other (221,000) (198,000)
Deposits and other (3,000) 35,000
Accounts payable 3,056,000 794,000
Accrued payroll and related expenses 99,000 (253,000)
Accrued sales and other taxes payable 102,000 49,000
Income taxes payable (801,000) (340,000)
------------ ------------
Net cash flows provided by (used
in) operating activities 407,000 (634,000)
Investing Activities:
Purchases of property and equipment (5,808,000) (3,287,000)
------------ ------------
Net cash flows used in
investing activities (5,808,000) (3,287,000)
Financing Activities:
Payments on capital lease
obligations (6,000) (36,000)
Proceeds from exercise of warrants -- 72,000
Proceeds from exercise of stock options 368,000 --
------------ ------------
Net cash flows provided by
financing activities 362,000 36,000
------------ ------------
Decrease in cash
and cash equivalents (5,039,000) (3,885,000)
Cash and cash equivalents
at the beginning of period 27,151,000 4,569,000
------------ ------------
Cash and cash equivalents
at the end of period $ 22,112,000 $ 684,000
============ ============
Supplemental Information:
Cash paid during the period
for interest $ 8,000 $ 30,000
Cash paid during the period
for income taxes $ 861,000 $ 340,000
Capital lease obligations
entered into for equipment $ 88,000 $ 546,000
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 98 stores in 31 states throughout the Western, Midwestern,
Eastern and Southern regions of the United States.
The information set forth in these financial statements is unaudited
except for the February 1, 1997 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 2, 1997 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 1998. 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 February 1, 1997.
NOTE 2. Net Income (Loss) Per Share:
Net income (loss) per share is 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 August 3, 1996,
reflect pro forma effect of the conversion of the then outstanding redeemable
convertible preferred stock into common stock, using the as 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 $24.3 million from the offering in short-term,
investment grade, interest-bearing securities.
NOTE 4. Impact of Recently Issued Accounting Standards:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of earnings per share for these quarters is not
expected to be material.
6
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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 August 2, 1997 (Second Quarter of Fiscal 1997) Compared to 13
Weeks Ended August 3, 1996 (Second Quarter of Fiscal 1996)
Net sales increased $4,792,000, or 53.9%, to $13,682,000 during the
second quarter of fiscal 1997 from $8,890,000 during the second quarter of
fiscal 1996. Net sales for the 50 stores not yet qualifying as comparable stores
contributed approximately $4,748,000 of the increase in net sales. Comparable
store sales increased 0.7% and contributed approximately $44,000 of the increase
in net sales for the second quarter of fiscal 1997. Sales of apparel category
merchandise, as a percentage of total net sales, increased to 47% in the second
quarter of 1997 compared to 43% in the second quarter of 1996.
Gross margin increased approximately $1,444,000 to $4,618,000 during the
second quarter of fiscal 1997 from $3,174,000 during the second quarter of
fiscal 1996. As a percentage of net sales, gross margin decreased to 33.8%
during the second quarter of fiscal 1997 from 35.7% in the second quarter of
fiscal 1996. 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, both offset, in part, by the leveraging of the buying and
distribution expenses of the Company over a larger store base. The decrease in
merchandise margin was principally attributable to a higher mix of apparel sales
(which traditionally have a lower markup than accessory and gift categories), as
well as a higher level of promotional sales compared to the second quarter last
year, which the Company attributed to the cooler weather in the East and Midwest
that led many retailers to clear summer merchandise earlier than normal in the
quarter. Further, occupancy expense, as a percentage of net sales, was higher
than in the second quarter of 1997 compared to the second quarter of 1996
principally due to the greater number of new stores.
Selling, general and administrative expenses increased approximately
$1,451,000 to $4,501,000 during the second quarter of fiscal 1997 from
$3,050,000 during the second quarter of fiscal 1996, but decreased as a
percentage of net sales to 32.9% in the second quarter of fiscal 1997 from 34.3%
in the second quarter of fiscal 1996. 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 decreased slightly to approximately $117,000 during the
second quarter of fiscal 1997 from $124,000 during the second quarter of fiscal
1996. As a percentage of net sales, operating income was 0.9% in the second
quarter of fiscal 1997 compared to 1.4% in the second quarter of fiscal 1996.
Interest income, net, increased approximately $211,000 to $212,000 in the
second quarter of fiscal 1997 from $1,000 in the second quarter of fiscal 1996.
The increase in interest income was primarily due to an increase in the average
cash balance invested in the second quarter of fiscal 1997.
7
<PAGE> 8
26 Weeks Ended August 2, 1997 (First Six Months of Fiscal 1997) Compared to 26
Weeks Ended August 3, 1996 (First Six Months of Fiscal 1996)
Net sales increased $9,469,000, or 61.5%, to $24,870,000 during the first
six months of fiscal 1997 from $15,401,000 during the first six months of fiscal
1996. Net sales for the 50 stores not yet qualifying as comparable stores
contributed approximately $9,037,000 of the increase in net sales. Comparable
store sales increased 3.0% and contributed approximately $432,000 of the
increase in net sales for the first six months of fiscal 1997. The increased
sales in the first six months of fiscal 1997 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 $3,044,000 to $8,380,000 during the
first six months of fiscal 1997 from $5,336,000 during the first six months of
fiscal 1996. As a percentage of net sales, gross margin decreased to 33.7%
during the first six months of fiscal 1997 from 34.6% in the first six months of
fiscal 1996. The decrease in gross margin as a percentage of net sales was
primarily due to a decrease in the Company's merchandise margins, increase in
occupancy expenses, both offset, in part, by the leveraging of the buying and
distribution expenses of the Company over a larger store base. The decrease in
merchandise margin in the first six months of 1997 was principally attributable
to the increased apparel sales, which have lower initial mark ups and higher
markdowns, principally during the second quarter of 1997.
Selling, general and administrative expenses increased approximately
$3,147,000 to $8,676,000 during the first six months of fiscal 1997 from
$5,529,000 during the first six months of fiscal 1996, but decreased as a
percentage of net sales to 34.9% in the first six months of fiscal 1997 from
35.3% in the first six months of fiscal 1996. 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 loss increased approximately $103,000 during the first six
months of fiscal 1997 to $296,000 from $193,000 during the first six months of
fiscal 1996. As a percentage of net sales, operating loss was 1.2% in the first
six months of fiscal 1997 compared to 1.3% in the first six months of fiscal
1996.
Interest income, net, increased approximately $410,000 to $448,000 in the
first six months of fiscal 1997 from $38,000 in the first six months of fiscal
1996. The increase in interest income was primarily due to an increase in the
average cash balance invested in 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 1997, 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.
Working capital at August 2, 1997 was $25,218,000 compared to $29,247,000
at February 1, 1997. The decrease is primarily from the use of working capital
used to finance the new store openings.
8
<PAGE> 9
Cash flows provided by (used in) operating activities were $407,000 and
($634,000) in the first six months of fiscal 1997 and 1996, respectively. The
increase in cash flows provided by operating activities in the first six months
of fiscal 1997 was primarily attributable to an increase in the Company's net
income and depreciation and amortization expense, off set in part by the payment
of income taxes.
Cash flows used in investing activities were $5,808,000 and $3,287,000 in
the first six months of fiscal 1997 and 1996, 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 26
and 20 stores in the first six months of fiscal 1997 and 1996, respectively.
Cash flows provided by financing activities were $362,000 and $36,000 in
the first six months of fiscal 1997 and 1996, 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 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 second
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, 1997.
9
<PAGE> 10
PART II. - OTHER INFORMATION
Items 1-3 and 5-6 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 3, 1997 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 3,666,051 825
Orval D. Madden 3,666,051 825
Edgar F. Berner 3,666,051 825
Stanley E. Foster 3,666,051 825
Jess R. Marzak 3,666,051 825
George Peyser 3,666,051 825
Cece Smith 3,666,051 825
Proposal 2 - Ratification of Selection of Independent Auditors
Votes in favor Votes Against Votes Abstained
-------------- ------------- ---------------
3,666,226 100 550
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: 9/5/97 /s/ Orval D. Madden
-----------------------------------
Orval D. Madden
President and Chief
Executive Officer (principal
executive officer)
Date: 9/5/97 /s/ Jay A. Johnson
-----------------------------------
Jay A. Johnson
Chief Financial Officer
(principal financial and
accounting officer)
11
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAY-04-1997
<PERIOD-END> AUG-02-1997
<CASH> 22,112
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 8,192
<CURRENT-ASSETS> 31,828
<PP&E> 20,090
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<CURRENT-LIABILITIES> 6,610
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<COMMON> 36,981
0
0
<OTHER-SE> 2,568
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<SALES> 13,682
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