-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V4OiREM+oMnKUbsvt5Snbnt3tlLVKekaaIeBgmrnVoMrXTbfJmKFcKD9PGcgLpB9 56SZ2l6b5HYT5pE07qUoEw== 0000936392-97-001190.txt : 19970912 0000936392-97-001190.hdr.sgml : 19970912 ACCESSION NUMBER: 0000936392-97-001190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970802 FILED AS OF DATE: 19970910 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOT TOPIC INC /CA/ CENTRAL INDEX KEY: 0001017712 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 770198182 STATE OF INCORPORATION: CA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28784 FILM NUMBER: 97677753 BUSINESS ADDRESS: STREET 1: 3410 POMONA BLVD CITY: POMONA STATE: CA ZIP: 91768 MAIL ADDRESS: STREET 1: 3410 POMONA BLVD CITY: POMONA STATE: CA ZIP: 91768 10-Q 1 FORM 10-Q 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. 2 HOT TOPIC, INC. INDEX TO FORM 10-Q
Page No. 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
2 3 HOT TOPIC, INC. BALANCE SHEETS (Unaudited)
August 2,1997 Feb.1,1997(a) ------------- ------------- 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 ============= =============
(a) - The balance sheet at Feb. 1, 1997 has been derived from the audited financial statements at that date. See accompanying notes. 3 4 HOT TOPIC, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Second Quarter (13 weeks ended) ----------------------------- Aug. 2, 1997 Aug. 3, 1996 ------------ ------------ 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
See accompanying notes.
Six Months (26 weeks ended) ------------------------------ Aug. 2, 1997 Aug. 3, 1996 ------------ ------------ 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
See accompanying notes. 4 5 HOT TOPIC, INC. STATEMENTS OF CASH FLOWS - (UNAUDITED)
Year-to-date (26 weeks) ended ------------------------------ Aug. 2,1997 Aug. 3,1996 ------------ ------------ 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
See accompanying notes. 5 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 7 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 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 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 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 11 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JAN-31-1998 MAY-04-1997 AUG-02-1997 22,112 0 0 0 8,192 31,828 20,090 4,828 47,129 6,610 0 36,981 0 0 2,568 47,129 13,682 13,682 9,064 9,064 4,501 0 0 329 125 0 0 0 0 204 0.04 0.04
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