-----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, Oia+y8ZKYfWT/FYTiMpXlBWE/BABmT3TK1FraKfxI8HNQjPtW53AAsOsFTCAvbtQ BDTOSxSCBLNem+4JU6y98Q== 0001017062-97-002181.txt : 19971209 0001017062-97-002181.hdr.sgml : 19971209 ACCESSION NUMBER: 0001017062-97-002181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971101 FILED AS OF DATE: 19971208 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: 97733924 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 QUARTERLY REPORT (11/1/1997) 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. - -------------------------------- HOT TOPIC, INC. INDEX TO FORM 10-Q
Page No. 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
2 HOT TOPIC, INC. BALANCE SHEETS (Unaudited)
Nov. 1, 1997 Feb. 1, 1997(a) ASSETS 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 =========== ===========
(a) - The balance sheet at Feb. 1, 1997 has been derived from the audited financial statements at that date. See accompanying notes. 3 HOT TOPIC, INC. STATEMENTS OF INCOME (UNAUDITED)
Third Quarter (13 weeks ended) --------------------------- Nov. 1, 1997 Nov. 2, 1996 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
See accompanying notes.
Nine Months (39 weeks ended) --------------------------- Nov. 1, 1997 Nov. 2, 1996 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
See accompanying notes. 4 HOT TOPIC, INC. STATEMENTS OF CASH FLOWS - (UNAUDITED)
Year-to-date (39 weeks) ended ------------------------------- Nov. 1, 1997 Nov. 2, 1996 -------------- -------------- 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
5 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
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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE (ARTICLE 5)
5 1,000 3-MOS 9-MOS JAN-31-1998 JAN-31-1998 AUG-03-1997 FEB-02-1997 NOV-01-1997 NOV-01-1997 20,964 0 0 0 0 0 0 0 7,575 0 30,358 0 22,237 0 5,615 0 47,020 0 5,319 0 0 0 0 0 0 0 36,987 0 3,697 0 40,684 0 18,753 0 18,753 0 12,029 0 12,029 0 5,124 0 0 0 0 0 1,806 0 686 0 0 0 0 0 0 0 0 0 1,120 0 0.23 0 0.23 0
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