<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 November 1, 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: December 1, 1997
----------------
- - 4,754,180 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 - November 1, 1997 and February 1, 1997 3
Statements of Income for the:
13 and 39 weeks ended November 1, 1997 and November 2, 1996 4
Statements of Cash Flows for the:
39 weeks ended November 1, 1997 and November 2, 1996 5-6
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION 11
SIGNATURE PAGE 11
</TABLE>
2
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HOT TOPIC, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Nov. 1, 1997 Feb. 1, 1997(a)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $20,964,000 $27,151,000
Inventory 7,575,000 4,937,000
Prepaid expenses and other 1,509,000 993,000
Deferred tax asset 310,000 310,000
----------- -----------
Total current assets 30,358,000 33,391,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 11,704,000 7,021,000
Leasehold improvements 10,533,000 7,197,000
----------- -----------
22,237,000 14,218,000
Less accumulated depreciation 5,615,000 3,612,000
----------- -----------
Net leaseholds, fixtures and equipment 16,622,000 10,606,000
Deposits and other assets 40,000 36,000
----------- -----------
Total Assets $47,020,000 $44,033,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,221,000 $ 2,016,000
Accrued payroll and related expenses 1,055,000 1,045,000
Accrued sales and other taxes 330,000 210,000
Income taxes payable 689,000 859,000
Current portion of capital
lease obligations 24,000 14,000
----------- -----------
Total current liabilities 5,319,000 4,144,000
Deferred rent 449,000 319,000
Capital lease obligations, less
current portion 102,000 35,000
Deferred tax liability 466,000 466,000
Shareholders' equity
Common shares, no par value; 10,000,000
shares authorized; 4,724,074 and
4,599,253 issued and outstanding at
November 1, 1997 and February 1, 1997,
respectively 36,987,000 36,613,000
Deferred compensation (87,000) (114,000)
Retained earnings 3,784,000 2,570,000
----------- -----------
Total shareholders' equity 40,684,000 39,069,000
----------- -----------
Total liabilities and
shareholders' equity $47,020,000 $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>
HOT TOPIC, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Third Quarter
(13 weeks ended)
---------------------------
Nov. 1, 1997 Nov. 2, 1996
<S> <C> <C>
Net sales $18,753,000 $11,788,000
Cost of goods sold, including
buying, distribution and
occupancy costs 12,029,000 7,364,000
----------- -----------
Gross margin 6,724,000 4,424,000
Selling, general and
administrative expenses 5,124,000 3,461,000
----------- -----------
Operating income 1,600,000 963,000
Interest income-net 206,000 80,000
----------- -----------
Income before income taxes 1,806,000 1,043,000
Provision for income taxes 686,000 390,000
----------- -----------
Net income $ 1,120,000 $ 663,000
=========== ===========
Net income per share $0.23 $0.16
Weighted average shares
outstanding 4,928,000 4,062,000
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Nine Months
(39 weeks ended)
---------------------------
Nov. 1, 1997 Nov. 2, 1996
<S> <C> <C>
Net sales $43,623,000 $27,189,000
Cost of goods sold, including
buying, distribution and
occupancy costs 28,519,000 17,429,000
----------- -----------
Gross margin 15,104,000 9,760,000
Selling, general and
administrative expenses 13,800,000 8,990,000
----------- -----------
Operating income 1,304,000 770,000
Interest income-net 654,000 118,000
----------- -----------
Income before income taxes 1,958,000 888,000
Provision for income taxes 744,000 318,000
----------- -----------
Net income $ 1,214,000 $ 570,000
=========== ===========
Net income per share $0.25 $0.16
Weighted average shares
outstanding 4,819,000 3,555,000
</TABLE>
See accompanying notes.
4
<PAGE>
HOT TOPIC, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
Year-to-date (39 weeks) ended
-------------------------------
Nov. 1, 1997 Nov. 2, 1996
-------------- --------------
<S> <C> <C>
Net income $ 1,214,000 $ 570,000
Adjustments to reconcile net
income to net cash flows
provided by operating activities:
Depreciation and amortization 2,008,000 943,000
Deferred rent 130,000 55,000
Deferred compensation 27,000 12,000
Loss on disposal of fixed assets 33,000 --
Changes in operating assets
and liabilities:
Inventory (2,638,000) (1,204,000)
Prepaid expenses and other (516,000) (324,000)
Deposits and other (4,000) 53,000
Accounts payable 1,205,000 777,000
Accrued payroll and related expenses 10,000 79,000
Accrued sales and other taxes payable 120,000 58,000
Income taxes payable (170,000) (21,000)
----------- -----------
Net cash flows provided by
operating activities 1,419,000 998,000
Investing Activities:
Purchases of property and equipment (7,970,000) (4,286,000)
Net cash flows used in ----------- -----------
investing activities (7,970,000) (4,286,000)
Financing Activities:
Payments on capital lease
obligations (10,000) (563,000)
Proceeds from exercise of warrants -- 72,000
Proceeds from Initial Public
Offering, net of expenses 24,261,000
Proceeds from exercise of warrants
and stock options 374,000 101,000
----------- -----------
Net cash flows provided by
financing activities 364,000 23,799,000
(Decrease) increase in cash --------- ----------
and cash equivalents (6,187,000) 20,511,000
</TABLE>
5
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<TABLE>
<S> <C> <C>
Cash and cash equivalents
at the beginning of period 27,151,000 4,569,000
----------- -----------
Cash and cash equivalents
at the end of period $20,964,000 $25,080,000
=========== ===========
Supplemental Information:
Cash paid during the period
for interest $ 11,000 $ 78,000
Cash paid during the period
for income taxes $ 918,000 $ 340,000
Capital lease obligations
entered into for equipment $ 88,000 $ 579,000
</TABLE>
See accompanying notes.
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 108 stores in 32 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 39 weeks ended November 1, 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 Per Share:
---------------------
Net income 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 November 2, 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.
6
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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.
7
<PAGE>
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 November 1, 1997 (Third Quarter of Fiscal 1997) Compared to 13
- -----------------------------------------------------------------------------
Weeks Ended November 2, 1996 (Third Quarter of Fiscal 1996)
- -----------------------------------------------------------
Net sales increased $6,965,000, or 59%, to $18,753,000 during the third
quarter of fiscal 1997 from $11,788,000 during the third quarter of fiscal 1996.
Net sales for the 45 stores in the quarter not yet qualifying as comparable
stores contributed approximately $6,903,000 of the increase in net sales.
Comparable store sales increased 0.6% and that increase contributed
approximately $62,000 of the increase in net sales for the third quarter of
fiscal 1997. In last year's third quarter, comparable store sales increased by
14.2%. Sales of apparel category merchandise, as a percentage of total net
sales, increased to 49% in the third quarter of 1997 compared to 47% in the
third quarter of 1996.
Gross margin increased approximately $2,300,000 to $6,724,000 during the third
quarter of fiscal 1997 from $4,424,000 during the third quarter of fiscal 1996.
As a percentage of net sales, gross margin decreased to 35.9% during the third
quarter of fiscal 1997 from 37.5% in the third 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 and
distribution costs. 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
third quarter of 1997 compared to the third quarter of 1996 principally due to
the greater number of new stores. A significant portion of the increased
distribution expense was attributable to incrementally higher freight and labor
expense incurred during the UPS strike to prepare and ship merchandise by
alternative carriers. In addition the freight element of distribution expense
increased as a percentage of sales because the larger portion of stores in the
East, South and Mid-west. Shipping costs to these stores are higher than the
costs for those in the West.
Selling, general and administrative expenses increased approximately
$1,663,000 to $5,124,000 during the third quarter of fiscal 1997 from $3,461,000
during the third quarter of fiscal 1996, but decreased as a percentage of net
sales to 27.3% in the third quarter of fiscal 1997 from 29.4% in the third
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.
Operating income increased approximately $637,000 to $1,600,000 during the
third quarter of fiscal 1997 from $963,000 during the third quarter of fiscal
1996. As a percentage of net sales, operating income was 8.5% in the third
quarter of fiscal 1997 compared to 8.2% in the third quarter of fiscal 1996.
Interest income, net, increased approximately $126,000 to $206,000 in the
third quarter of fiscal 1997 from $80,000 in the third quarter of fiscal 1996.
The increase in interest income was primarily due to an increase in the average
cash balance invested in the third quarter of fiscal 1997.
8
<PAGE>
39 Weeks Ended November 1, 1997 (First Nine Months of Fiscal 1997) Compared to
- ------------------------------------------------------------------------------
39 Weeks Ended November 2, 1996 (First Nine Months of Fiscal 1996)
- ------------------------------------------------------------------
Net sales increased $16,434,000, or 60%, to $43,623,000 during the first nine
months of fiscal 1997 from $27,189,000 during the first nine months of fiscal
1996. Net sales for the 41 stores during the first nine months not yet
qualifying as comparable stores contributed approximately $15,939,000 of the
increase in net sales. Comparable store sales increased 2.0% and contributed
approximately $495,000 of the increase in net sales for the first nine months of
fiscal 1997. The increased sales in the first nine 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 $5,344,000 to $15,104,000 during the
first nine months of fiscal 1997 from $9,760,000 during the first nine months of
fiscal 1996. As a percentage of net sales, gross margin decreased to 34.6%
during the first nine months of fiscal 1997 from 35.9% in the first nine 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 and an increase
in occupancy expenses, both offset, in part, by the leveraging of the buying
expenses of the Company over a larger store base. The decrease in merchandise
margins in the first nine months of 1997 was principally attributable to
increased apparel sales, which have lower initial mark ups and to higher
markdowns, primarily during the second quarter of 1997.
Selling, general and administrative expenses increased approximately
$4,810,000 to $13,800,000 during the first nine months of fiscal 1997 from
$8,990,000 during the first nine months of fiscal 1996, but decreased as a
percentage of net sales to 31.6% in the first nine months of fiscal 1997 from
33.1% in the first nine 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 income increased approximately $534,000 to $1,304,000 during the
first nine months of fiscal 1997 from $770,000 during the first nine months of
fiscal 1996. As a percentage of net sales, operating income was 3.0% in the
first nine months of fiscal 1997 compared to 2.8% in the first nine months of
fiscal 1996.
Interest income, net, increased approximately $426,000 to $744,000 in the
first nine months of fiscal 1997 from $318,000 in the first nine months of
fiscal 1996. The increase in interest income was primarily due to an increase in
the average cash balance invested in the first nine months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the third quarter and first nine 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 November 1, 1997 was $25,039,000 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.
9
<PAGE>
Cash flows provided by operating activities were $1,419,000 and $998,000 in
the first nine months of fiscal 1997 and 1996, respectively. The increase in
cash flows provided by operating activities in the first nine months of fiscal
1997 was primarily attributable to an increase in the Company's net income and
depreciation and amortization expense, offset in part by the payment of income
taxes.
Cash flows used in investing activities were $7,970,000 and $4,286,000 in the
first nine 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 36
and 24 stores in the first nine months of fiscal 1997 and 1996, respectively.
Cash flows provided by financing activities were $364,000 and $23,799,000 in
the first nine 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 1998.
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, 1997.
10
<PAGE>
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: 12/8/97 /s/ Orval D. Madden
------- -------------------
Orval D. Madden
President and Chief
Executive Officer (principal
executive officer)
Date: 12/8/97 /s/ Jay A. Johnson
------- ------------------
Jay A. Johnson
Chief Financial Officer
(principal financial and
accounting officer)
11
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998
<PERIOD-START> AUG-03-1997 FEB-02-1997
<PERIOD-END> NOV-01-1997 NOV-01-1997
<CASH> 20,964 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 7,575 0
<CURRENT-ASSETS> 30,358 0
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0 0
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