-----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, JpScV8LtNztbHeRxqiou+k5lSfs2kEZ0lcPPkQjpHYAINy58hpknPHzYics9bzXN nf0h8qWqfjj3qgTpoalJTg== 0000950150-96-001534.txt : 19970108 0000950150-96-001534.hdr.sgml : 19970108 ACCESSION NUMBER: 0000950150-96-001534 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961102 FILED AS OF DATE: 19961212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOT TOPIC INC /CA/ CENTRAL INDEX KEY: 0001017712 STANDARD INDUSTRIAL CLASSIFICATION: 3827 IRS NUMBER: 770198182 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28784 FILM NUMBER: 96679577 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 FOR THE PERIOD ENDED NOVEMBER 2, 1996 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 2 HOT TOPIC, INC. INDEX TO FORM 10-Q
Page No. 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
2 3 HOT TOPIC, INC. BALANCE SHEETS
Nov. 2, Feb. 3, 1996 1996 ASSETS (Unaudited) (Note) 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 =========== ===========
Note - The balance sheet at Feb. 3, 1996 has been derived from the audited financial statements at that date. See accompanying notes. 3 4 HOT TOPIC, INC. STATEMENTS OF OPERATIONS - (UNAUDITED)
Third Quarter (13 weeks ended) ----------------------------------- Nov. 2, Oct. 28, 1996 1995 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
Year-to-Date (39 weeks) ended ------------------------------------ Nov. 2, Oct. 28, 1996 1995 ----------- ----------- 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
See accompanying notes. 4 5 HOT TOPIC, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Year-to-date (39 weeks) ended ----------------------------------- Nov. 2, Oct. 28, 1996 1995 ----------- ----------- 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)
5 6 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 --
See accompanying notes. 6 7 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. 7 8 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 9 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 9 10 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 11 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 12 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. 12 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. 13 14 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS FEB-01-1997 FEB-03-1996 NOV-02-1996 25,080 0 0 0 4,366 30,386 13,485 3,100 40,807 3,499 0 0 0 36,536 439 40,807 11,788 0 7,364 0 3,461 0 (80) 1,043 380 0 0 0 0 663 0.16 0
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