<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
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For the quarterly period ended May 3, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________________
COMMISSION FILE NUMBER: 0-28784
HOT TOPIC, INC.
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(Exact name of Registrant as specified in Its Charter)
CALIFORNIA 77-0198182
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(State of Incorporation) (IRS Employer Identification No.)
3410 POMONA BLVD., POMONA, CA 91768
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(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: May 29, 1997 -
4,636,816 shares, no par value. ---------------
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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 - May 3, 1997 and February 1, 1997 3
Statements of Operations for the
13 weeks ended May 3, 1997 and May 4, 1996 4
Statements of Cash Flows for the 13
weeks ended May 3, 1997 and May 4, 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 9
SIGNATURE PAGE 10
</TABLE>
2
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HOT TOPIC, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
May 3,1997 Feb.1,1997(a)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,873,000 $ 27,151,000
Inventory 5,187,000 4,937,000
Prepaid expenses and other 1,157,000 993,000
Deferred tax asset 310,000 310,000
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Total current assets 30,527,000 33,391,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 8,392,000 7,021,000
Leasehold improvements 8,454,000 7,197,000
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16,846,000 14,218,000
Less accumulated depreciation 4,165,000 3,612,000
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Net leaseholds, fixtures and equipment 12,681,000 10,606,000
Deposits and other assets 39,000 36,000
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Total Assets $ 43,247,000 $ 44,033,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,351,000 $ 2,016,000
Accrued payroll and related expenses 693,000 1,045,000
Accrued sales and other taxes 229,000 210,000
Income taxes payable - 859,000
Current portion capital
lease obligations 24,000 14,000
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Total current liabilities 3,297,000 4,144,000
Deferred rent 347,000 319,000
Capital lease obligations, less
current portion 112,000 35,000
Deferred tax liability 466,000 466,000
Shareholders' equity
Common shares, no par value; 10,000,000 shares
authorized; 4,618,331 and 4,599,253 issued and
outstanding at May 3, 1997 and February 1,1997,
respectively 36,670,000 36,613,000
Deferred compensation (105,000) (114,000)
Retained earnings 2,460,000 2,570,000
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Total shareholders' equity 39,025,000 39,069,000
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Total liabilities and
shareholders' equity $ 43,247,000 $ 44,033,000
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</TABLE>
(a) - The balance sheet at Feb. 1, 1997 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>
First Quarter
(13 weeks ended)
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May 3, 1997 May 4, 1996
<S> <C> <C>
Net sales $ 11,188,000 $ 6,511,000
Cost of goods sold, including
buying, distribution and
occupancy costs 7,426,000 4,349,000
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Gross margin 3,762,000 2,162,000
Selling, general and
administrative expenses 4,175,000 2,479,000
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Operating loss (413,000) (317,000)
Interest income-net 236,000 37,000
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Loss before
income taxes (177,000) (280,000)
(Benefit) for
income taxes (67,000) (112,000)
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Net loss $ (110,000) $ (168,000)
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Net loss per share $ (0.02) $ (0.05)
Weighted average shares
outstanding 4,606,635 3,081,973
</TABLE>
See accompanying notes.
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HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
Year-to-date (13 weeks) ended
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May 3,1997 May 4,1996
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<S> <C> <C>
Net income (loss) $ (110,000) $ (168,000)
Adjustments to reconcile net
income (loss) to net cash flows
provided by (used in)
operating activities:
Depreciation and amortization 559,000 332,000
Deferred rent 28,000 18,000
Deferred compensation 9,000 -
Loss on disposal of fixed assets 37,000 -
Changes in operating assets and liabilities:
Inventory (250,000) (320,000)
Prepaid expenses and other (164,000) (190,000)
Deposits and other (3,000) 42,000
Accounts payable 335,000 804,000
Accrued payroll and related expenses (352,000) (280,000)
Accrued sales and other taxes payable 19,000 (23,000)
Income taxes payable (859,000) (335,000)
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Net cash flows provided by (used
in) operating activities (751,000) (120,000)
Investing Activities:
Purchases of property and equipment (2,553,000) (1,385,000)
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Net cash flows used in
investing activities (2,553,000) (1,385,000)
Financing Activities:
Payments on capital lease
obligations (31,000) (18,000)
Proceeds from exercise of stock options 57,000 --
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Net cash flows provided by (used in)
financing activities 26,000 (18,000)
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Decrease in cash
and cash equivalents (3,278,000) (1,523,000)
Cash and cash equivalents
at the beginning of period 27,151,000 4,569,000
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Cash and cash equivalents
at the end of period $ 23,873,000 $ 3,046,000
============ ===========
Supplemental Information:
Cash paid during the period
for interest $ 3,000 $ 7,000
Cash paid during the period
for income taxes $ 858,000 $ 335,000
Capital lease obligations
entered into for equipment $ 119,000 $ 341,000
</TABLE>
See accompanying notes.
5
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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 84 stores in 25 states throughout the Western, Midwestern and
Eastern 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 weeks ended May 3, 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 period ended May 4, 1996,
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 $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.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
Company's Financial Statements and the Notes related thereto.
RESULTS OF OPERATIONS
13 Weeks Ended May 3, 1997 (First Quarter of Fiscal 1997) Compared to 13 Weeks
Ended May 4, 1996 (First Quarter of Fiscal 1996)
Net sales increased $4,677,000, or 71.8%, to $11,188,000 during the first
quarter of fiscal 1997 from $6,511,000 during the first quarter of fiscal 1996.
Net sales for the 40 stores not yet qualifying as comparable stores contributed
approximately $4,300,000 of the increase in net sales. Comparable store sales
increased 5.7% and contributed approximately $300,000 of the increase in net
sales for the first quarter of fiscal 1997. The increased sales in the first
quarter of fiscal 1997 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 $1,600,000 to $3,762,000 during the
first quarter of fiscal 1997 from $2,162,000 during the first quarter of fiscal
1996. As a percentage of net sales, gross margin increased to 33.6% during the
first quarter of fiscal 1997 from 33.2% in the first quarter of fiscal 1996. 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. These margin improvements were offset, in part, by a slight decrease
in the Company's merchandise margins, principally 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
$1,696,000 to $4,175,000 during the first quarter of fiscal 1997 from $2,479,000
during the first quarter of fiscal 1996, but decreased as a percentage of net
sales to 37.3% in the first quarter of fiscal 1997 from 38.1% in the first
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 and by higher pre-opening expenses. The higher store payroll expense as a
percentage of net sales resulted principally from increases in Federal and state
minimum wage rates. The Company's aggregate pre-opening expenses increased
significantly, attributable to opening 13 stores in the first quarter of 1997
compared to 9 in the first quarter of 1996. The average pre-opening expense per
new store opened was approximately the same in each period.
Operating loss increased approximately $96,000 to a loss of $413,000 during
the first quarter of fiscal 1997 from a loss of $317,000 during the first
quarter of fiscal 1996. As a percentage of net sales, the operating loss
decreased to 3.7% in the first quarter of fiscal 1997 from a loss of 4.9% in the
first quarter of fiscal 1996. A significant portion of the increased dollar loss
is attributable to the increased pre-opening expenses.
Interest income, net, increased approximately $199,000 to $236,000 in the
first quarter of fiscal 1997 from $37,000 in the first quarter of fiscal 1996.
The increase in interest income was primarily due to an increase in the average
cash balance invested in the first quarter of fiscal 1997.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the first quarter 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 May 3, 1997 was $27,230,000 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.
Cash flows provided by (used in) operating activities were ($751,000) and
($120,000) in the first quarter of fiscal 1997 and 1996, respectively. The
increase in cash flows used in operating activities in the first quarter of
fiscal 1997 was primarily the result of an increase in inventory resulting from
the Company's larger store base and the payment of income taxes.
Cash flows used in investing activities were $2,553,000 and $1,385,000 in
the first quarter 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 13
and 9 stores in the first quarter of fiscal 1997 and 1996, respectively.
Cash flows provided by (used in) financing activities were $26,000 and
$(18,000) in the first quarter 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 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
8
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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.
PART II. - OTHER INFORMATION
Items 1-6 are not applicable.
9
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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: 6/5/97 /s/ Orval D. Madden
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Orval D. Madden
President and Chief
Executive Officer (principal
executive officer)
Date: 6/5/97 /s/ Jay A. Johnson
------------------- -----------------------------
Jay A. Johnson
Chief Financial Officer
(principal financial and
accounting officer)
Item 1. - Legal Proceedings - Not Applicable
Item 2. - Changes in Securities - Not Applicable
Item 3. - Defaults Upon Senior Securities - Not Applicable
Item 4. - Submission of Matters to a Vote of Stockholders - Not Applicable
Item 5. - Other Information - Not Applicable
Item 6(a) - Exhibits - Not Applicable
Item 6(b) - Reports on Form 8-K
No reports on Form 8-K were filed during the period.
10
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 23,873
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 5,187
<CURRENT-ASSETS> 30,527
<PP&E> 16,846
<DEPRECIATION> 4,165
<TOTAL-ASSETS> 43,247
<CURRENT-LIABILITIES> 3,297
<BONDS> 0
0
0
<COMMON> 36,670
<OTHER-SE> 2,355
<TOTAL-LIABILITY-AND-EQUITY> 43,247
<SALES> 11,188
<TOTAL-REVENUES> 11,424
<CGS> 7,426
<TOTAL-COSTS> 7,426
<OTHER-EXPENSES> 4,175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (177)
<INCOME-TAX> (67)
<INCOME-CONTINUING> (110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (110)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
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