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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER: 000-24381
HASTINGS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1386375
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 PLAINS BOULEVARD, AMARILLO, TEXAS 79102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (806) 351-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share Nasdaq National Market
(Title of Class) (Name of Exchange on which registered)
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 twelve 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $13,357,602 based upon the closing market price of
$2.47 per share of Common Stock on the Nasdaq National Market as of April 17,
2001. (For the purposes of determination of the above-stated amounts, only the
directors, executive officers and 5% or greater shareholders of the registrant
have been deemed affiliates.)
Number of shares of $.01 par value Common Stock outstanding as of April 17,
2001: 11,751,851
(Cover page 1 of 2)
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders of the
registrant to be held during 2001 are incorporated by reference into Part III of
this Form 10-K.
(Cover page 2 of 2)
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HASTINGS ENTERTAINMENT, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JANUARY 31, 2001
INDEX
PAGE
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PART I
Item 1. Business................................................................... 4
Item 2. Properties................................................................. 12
Item 3. Legal Proceedings.......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 14
Item 6. Selected Financial Data.................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 23
Item 8. Financial Statements and Supplementary Data................................ 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 46
Item 11. Executive Compensation..................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 46
Item 13. Certain Relationships and Related Transactions............................. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 47
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PART I
This Report contains certain forward-looking statements concerning the
intentions, hopes, beliefs, expectations, strategies, predictions or any other
variation thereof or comparable phraseology of the future activities or other
future events or conditions of Hastings Entertainment, Inc. (the "Company",
"We", "Our", "Us") within the meaning of Section 27A of the Securities Act of
1993, as amended (the "1933 Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "1934 Act"), which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including, without
limitation, variations in quarterly results, volatility of stock price,
development by competitors of superior services or product offerings, the entry
into the market by new competitors, the sufficiency of our working capital, the
ability to retain management, to implement our business strategy, to attract and
retain customers, to increase revenue, and to successfully defend our company in
ongoing and future litigation. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and, therefore, there can be no
assurance that the forward-looking statements included in this Report will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved.
ITEM 1. BUSINESS
General
Hastings Entertainment, Inc. is a leading multimedia entertainment
retailer that combines the sale of books, music, software, periodicals,
videocassettes, digital video discs ("DVDs"), used compact discs ("CDs") and
used DVDs with the rental of videocassettes, video games and DVDs in a
superstore format. As of April 17, 2001, we operated 142 superstores and one
college bookstore in small to medium-sized markets located in 22 states,
primarily in the Western and Midwestern United States. We also operate a
multimedia entertainment e-commerce Web site offering a broad selection of
books, music, software, videocassettes, video games and DVDs. See note 14 to the
consolidated financial statements for more information regarding our operating
segments, retail stores and Internet operations. We operate three wholly owned
subsidiaries. Hastings Properties, Inc. and Hastings Internet, Inc. were
established in the first quarter of fiscal 1998. Hastings College Stores, Inc.
was established in the second quarter of fiscal 1998. References herein to
fiscal years are to the twelve-month periods, which end in January of each
following calendar year. For example, the twelve-month period ended January 31,
2001 is referred to as fiscal 2000.
On March 7, 2000, we announced that our fourth quarter and fiscal 1999
results (and the previous four fiscal years' results) would be negatively
impacted by certain accounting adjustments. All such adjustments were reflected
in the fiscal 1999 Annual Report on Form 10-K. See "Item 3. Legal Proceedings"
for a description of litigation matters which followed the announcement of the
restatement.
Industry Overview
Music. According to the Recording Industry Association of America
("RIAA"), music shipments by manufacturers to retailers has increased 16.7% to
$14.3 billion in 2000 compared to $12.3 billion in 1995. The dollar value of
shipments for the mainstay of the music industry, the full-length CD, increased
3.1% in 2000 over 1999 from $12.8 billion to $13.2 billion. Even with this
increase, the dollar value of total 2000 shipment numbers are down approximately
2% from 1999 primarily due to a decline in CD singles which fell 38.8% from
1999. RIAA attributes this decline to free access to music via the Internet,
through sites such as "Napster", which seems to have a dramatic effect on the
singles market. In addition, shipments of cassettes continued to drop as the
transition to CDs in vehicles and portable players accelerated.
Books. Consumer book sales grew in 2000 by a modest 1% to $12.6 billion
according to the American Booksellers Association. In a report released by
American Association of Publishers, the industry has experienced a 5.4% compound
annual growth rate over the past 3 years. General adult trade books accounted
for more than two-thirds of all purchases in 2000 while books purchased for
children, under age 14, were approximately 28% of total
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purchases. Web-based retailers showed the largest growth in adult trade sales
with the large book chains, declining and smaller chains remaining unchanged in
2000 from 1999.
Rental Video. According to Paul Kagan Associates ("Kagan"), consumer
spending on rental video increased 1% to $8.3 billion in 2000 from $8.2 billion
in 1999. Of the $8.3 billion, 48%, or $4.0 billion, was generated by revenue
sharing titles, up from 43% in 1999 and 1% in 1997. The acceptance of DVD as a
rental format is evidenced by a 130% increase in DVD households in the United
States, from 5.4 million in 1999 to 12.4 million in 2000. Kagan estimates that
the number of DVD households could hit 62.4 million by 2009. This explosive
growth will likely offset any VHS growth despite an almost 90% penetration rate
of VCRs in United States households.
Kagan states that rental video revenues are expected to decline as a
percent of overall at-home consumer spending in the next 10 years due in part to
the recognition of Pay Per View and Video On Demand as options for the consumer.
However, we believe rental video will continue to be a favored entertainment
medium for millions of consumers due to its relatively inexpensive price point,
broad selection of new release and catalog (older) movies and ability for
"viewer control" of the experience, i.e., start, stop, fast-forward, pause and
rewind.
Business Strategy
Our goal is to enhance our position as a leading multimedia entertainment
retailer by expanding and remodeling existing stores, opening new stores in
selected markets and offering our products through the Internet. Each element of
our business strategy is designed to build consumer awareness of the Hastings
concept and achieve high levels of customer loyalty and repeat business. The key
elements of this strategy are the following:
Superior Multimedia Concept. Our superstores present a wide variety of
products tailored to local preferences in a dynamic and comfortable store
atmosphere with exceptional service. Our superstores average approximately
22,000 square feet, with our new stores generally ranging in size from 12,000 to
25,000 square feet. Our superstores offer customers an extensive product
assortment consisting of approximately 25,000 to 70,000 book, 15,000 to 35,000
music, 1,000 to 2,000 software, 1,000 to 2,000 periodical, 5,000 to 10,000
videocassette, and 1,000 to 2,000 complementary and accessory titles for sale.
We also offer approximately 3,000 to 12,000 used CD, videocassette, DVD and
video game titles for sale. In addition, customers can select from 700 to 3,500
DVD titles for sale and rent and 12,000 to 20,000 videocassette and video game
selections for rent. Although the superstores' core product assortment tends to
be similar, the merchandise mix of each of our superstores is tailored to
accommodate the particular demographic profile of the local market in which the
superstore operates through the utilization of our proprietary purchasing and
inventory management systems. We believe that our multimedia format reduces our
reliance on and exposure to any particular entertainment segment and enables us
to promptly add exciting new entertainment categories to our product line.
Small to Medium-Sized Market Superstore Focus. We target small to
medium-sized markets with populations of 25,000 to 150,000 in which our
extensive product selection, low pricing strategy, efficient operations and
superior customer service enable us to become the market's destination
entertainment store. We believe that the small to medium-sized markets where we
operate the majority of our superstores present an opportunity to profitably
operate and expand our unique entertainment superstore format. These markets
typically are underserved by existing book, music or video stores, and
competition generally is limited to locally owned specialty stores,
single-concept entertainment retailers and general merchandise retailers. We
base our merchandising strategy for our superstores on an in-depth understanding
of our customers and our individual markets. We strive to optimize each
superstore's merchandise selection by using our proprietary information systems
to analyze the sales history, anticipated demand and demographics of each
superstore's market. In addition, we utilize flexible layouts that enable each
superstore to arrange our products according to local interests and to customize
the layout in response to new customer preferences and product lines.
Customer-Oriented Superstore Format. We design our superstores to provide
an easy-to-shop, open store atmosphere by offering major product categories in a
"store-within-a-store" format. Most of our superstores utilize product-category
boutiques positioned around a wide racetrack aisle that is designed to allow
customers to view the entire superstore. This store configuration produces
significant cross-marketing opportunities among the various entertainment
departments, which we believe results in higher transaction volumes and impulse
purchases. To
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encourage browsing and the perception of Hastings as a community gathering
place, we have incorporated amenities in many superstores, such as chairs for
reading, complementary gourmet coffee or full coffee bar, soft drinks and
snacks, music auditioning stations, interactive information kiosks, telephones
for free local calls, children's play areas and in-store promotional events.
Cost-Effective Operations. We are committed to controlling costs in every
aspect of our operations while maintaining our customer-oriented philosophy.
From 1993 to 1997, we spent $12.8 million to develop and implement proprietary
information, purchasing, distribution and inventory control systems that
position us to continue to grow profitably. These systems enable us to respond
actively to customers' changing desires and to rapid shifts in local and
national market conditions. Our 140,000 square-foot distribution center, which
adjoins our corporate offices in Amarillo, Texas, provides us with improved
store in-stocks, efficient product cross-docking and centralized returns
processing.
Low Pricing. Our pricing strategy at our superstores is to offer value to
our customers by maintaining prices that are competitive with or lower than the
lowest prices charged by other retailers in the market. We determine our prices
on a market-by-market basis, depending on the level of competition and other
market-specific considerations. We believe that our low pricing structure
results in part from (i) our ability to purchase directly from publishers,
studios and manufacturers as opposed to purchasing from distributors, (ii) our
proprietary information systems, improvements to which will enable management to
make more precise and targeted purchases and pricing for each superstore, and
(iii) our consistent focus on maintaining low occupancy and operating costs.
Internet. In May 1999, we launched our new e-commerce Internet Web site,
www.gohastings.com. Our site enables customers to electronically access more
than 800,000 new and used entertainment products and unique, contemporary gifts
and toys. The site features exceptional product and pricing offers and digital
downloading of music selections. The Web site is a fully integrated multimedia
entertainment e-commerce Internet Web site offering a broad selection of
entertainment products to the electronic global marketplace at competitive
Internet prices.
Expansion Strategy
We plan to increase our growth rate in fiscal 2001 by opening
approximately seven superstores while continuing our ongoing store expansion and
remodeling programs for our existing superstores. In addition, we anticipate the
closing of at least four superstores during fiscal 2001 bringing our total
superstore count to 145 by the end of the fiscal year. We have identified
numerous potential locations for future superstores in under-served, small to
medium-sized markets that meet our new-market criteria. We believe that with our
current information systems and distribution capabilities, our infrastructure
can support our anticipated rate of expansion and growth for at least the next
several years.
Merchandising
We are a leading multimedia entertainment retailer that combines the sale
of books, music, software, periodicals, videocassettes, DVDs and used CDs/DVDs
with the rental of videocassettes, video games and DVDs in a superstore format.
By offering a broad array of products within several distinct but complementary
categories, we strive to appeal to a wide range of customers and position our
superstores as destination entertainment stores in our targeted small to
medium-sized markets.
Superstore Product Selection. Although all Hastings superstores carry a
similar core product assortment, the merchandise mix of book, music, software,
videocassette and video game selections of each superstore is tailored
continually to accommodate the particular demographic profile and demand of the
local market in which the superstore operates. We accomplish this customization
through our proprietary purchasing, inventory and pricing management system. The
purchasing system analyzes historic consumer purchasing patterns at each
individual superstore to forecast customer demand for new releases and
anticipate seasonal changes in demand. In addition, our inventory management
process continually monitors product sales and videocassette rentals to identify
slow-moving books, music, software and sale videocassettes for return to vendors
and rental videocassettes for sale or transfer to other superstores. Our pricing
management system allows us to identify poor selling products and designate
their markdown prices to enhance
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sell-through while maximizing margin at each subsequent price reduction. It also
automatically implements the price change by printing new tags at the store.
Our superstores offer an extensive selection of items in each of our
entertainment categories. The typical Hastings superstore offers for sale
approximately 25,000 to 70,000 book, 15,000 to 35,000 music, 1,000 to 2,000
software, 1,000 to 2,000 periodical, 5,000 to 10,000 videocassette and 1,000 to
2,000 complementary and accessory titles for sale. We also offer approximately
3,000 to 12,000 used CD, videocassette, DVD and video game titles for sale. In
addition, customers can select from 700 to 3,500 DVD titles for sale and rent
and 12,000 to 20,000 videocassette and video game selections for rent. New
releases and special offerings in each entertainment product category are
prominently displayed and arranged by product category.
In addition to our primary product lines, we continually add new product
offerings to better serve our customers. Products for sale in these categories
include promotional t-shirts, licensed plush toys, portable electronics, musical
instruments, greeting cards, audio books and consumables, including soft drinks,
chips, popcorn and candy. Accessory items for sale include blank videocassettes,
video cleaning equipment and audiocassette and CD carrying cases. Many of these
products generate impulse purchases and produce higher margins. The rental of
videocassette, video game and DVD players is provided as a service to Hastings
customers.
Marketing
Low Pricing. Our pricing strategy at our superstores is to offer value to
our customers by maintaining prices that are competitive with or lower than the
lowest prices charged by other retailers in the market. We determine our prices
on a market-by-market basis, depending on the level of competition and other
market-specific considerations. We believe that our low pricing structure
results in part from (i) our ability to purchase directly from publishers,
studios and manufacturers as opposed to purchasing from distributors, (ii) our
proprietary information systems that enable management to make more precise and
targeted purchases for each superstore, and (iii) our consistent focus on
maintaining low occupancy and operating costs.
Customer Service. We are committed to providing the highest level of
customer service to increase customer loyalty. We devote significant resources
to associate training and measuring customer satisfaction. All Hastings
superstore associates undergo training when hired and are required to
participate in frequent training programs. Our ongoing customer service program,
"Quality Service Everytime," empowers every superstore associate to utilize our
flexible return and refund policies to resolve any customer problem. We believe
that these programs, together with our low pricing strategy and superstore
amenities, such as reading chairs, complementary gourmet coffee or full coffee
bar, and free local telephone calls to permit customers to confirm their
entertainment selections with family and friends, are important components of
the customer service we provide.
Advertising/Promotion. We participate in cooperative advertising programs
and merchandise display allowance programs offered by our vendors. Our
advertising programs are market-focused and emphasize the price competitiveness,
extensive product assortment and comfortable atmosphere of our superstores. We
benefit from market display allowances provided by vendors because of our
superstores' high traffic volume and our effective display implementation. We
utilize radio, television, newspaper and direct-mail advertising and in-store
point-of-sale promotional materials.
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Information System
Our information system is built upon a multi-tiered, distributed processing
architecture and was designed using client/server technology. All locations are
connected using a wide-area network that allows interchange of current
information. The primary components of the information system are as follows:
New Release Allocation. Our buyers use the new release allocation system to
purchase new release products for the superstores and have the ability within
the system to utilize up to 15 different methods of forecasting demand. By using
store-specific sales history, factoring in specific market traits, applying
sales curves for similar titles or groups of products and minimizing
subjectivity and human emotion for a transaction, the system customizes
purchases for each individual superstore to satisfy customer demand. The process
provides the flexibility to allow store management to anticipate customer needs,
including tracking missed sales and factoring in regional influences. We believe
that the new release allocation system enables us to increase revenues by having
the optimum levels and selection of products available in each superstore at the
appropriate time to satisfy customers' entertainment needs.
Rental Video Asset Purchasing System. Our rental video asset purchasing
system uses store-specific performance on individual rental videocassette titles
to anticipate customer demand for new release rental videocassettes. The system
analyzes the first eight weeks' performance of a similar title and factors in
the effect of such influences as seasonal trends, box office draw and prominence
of the movie's cast to customize an optimum inventory for each individual
superstore. The system also allows for the customized purchasing of other
catalog rental video assets on an individual store basis, additional copy depth
requirements under revenue-sharing agreements and timely sell-off of previously
viewed tapes. We believe that our rental video asset purchasing system allows us
to efficiently plan and stock each superstore's rental video asset inventory,
thereby improving performance and reducing exposure from excess inventory.
Store Replenishment. Store replenishment covers three main areas for
controlling a superstore's inventory.
Selection Management. Selection management constantly analyzes
store-specific sales, traits and seasonal trends to determine title
selection and inventory levels for each individual superstore. By
forecasting annual sales of products and consolidating recommendations from
store management, the system enables us to identify overstocked or
understocked items to prompt required store actions and optimize inventory
levels. The system tailors each store's individual inventory to the market
utilizing over 2,000 product categories, configurations and product status.
Model Stock Calculation/Ordering. Model stock calculation uses
store-specific sales, seasonal trends and sophisticated curve fitting to
forecast orders. It also accounts for turnaround time from a vendor or our
distribution center and tracks historical missed sales to adjust orders to
adequately fulfill sales potential. Orders are currently calculated on a
weekly basis and transmitted by all superstores to the corporate office to
establish a source vendor for the product.
Inventory Management. Inventory management systems interface with other
store systems and accommodate electronic receiving and returns to maintain
perpetual inventory information. Cycle counting procedures allow us to
perform all physical inventory functions, including the counting of each
superstore's inventory up to four times per year. The system provides
feedback to assist in researching variance.
Store Systems. Each superstore has a dedicated server within the store for
processing information connected through a wide area network. This connectivity
provides consolidation of individual transactions and allows store management
and corporate office associates easy access to the information needed to make
informed decisions. Transactions at the store are summarized and used to assist
in staff scheduling, loss prevention and inventory control. All point of sale
transactions utilize scanning technology allowing for maximum customer
efficiency at checkout. We also utilize an automated system for scheduling store
management and sales associates. This system was developed to assist in
controlling personnel costs while maintaining desired levels of customer service
by preventing over-scheduling or under-scheduling sales, stocking and customer
service associates.
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Accounting. Our financial accounting software has a flexible, open-systems
architecture. We prepare a variety of daily management reports covering store
and corporate performance. Detailed financial information for each superstore,
as well as for the distribution center and the corporate office, are generated
on a monthly basis. Our payroll, accounts payable, cash control, financial
planning and state and local tax functions are performed in-house.
Warehouse Management. Our warehouse management systems provide support for
high-volume retail transactions, including shipments, receipts and returns to
vendors. Software to perform these functions was customized through a joint
effort of our purchasing, distribution and information systems departments. The
warehouse system, using "real-time" inputs for total process coordination,
incorporates exact cube sizes of product containers, utilizing flow-through
racks and technologically advanced conveyor systems.
Distribution and Suppliers
Our distribution center is located in a 140,000 square foot facility
adjacent to our corporate headquarters in Amarillo, Texas. This central location
and the local labor pool enable us to realize relatively low transportation and
labor costs. The distribution center is utilized primarily for receiving,
storing and distributing approximately 15,000 products offered in substantially
every superstore. The distribution center also is used in distributing large
purchases, including forward buys, closeouts and other bulk purchases. In
addition, the distribution facility is used to receive, recycle, process and
ship items to be returned to manufacturers and distributors, as well as to
transfer and redistribute videocassettes among our superstores. This facility
currently provides inventory to all Hastings superstores and is designed to
support our anticipated rate of expansion and growth for at least the next
several years. We ship products weekly to each Hastings superstore, facilitating
quick and responsive inventory replenishment. Approximately 20% of the our total
product, based on store receipts, is distributed through the distribution
center. Approximately 80% of our total product is shipped directly from the
vendors to the superstores. We outsource all product transportation from our
distribution center to various freight companies.
Our information systems and corporate infrastructure facilitate our ability
to purchase products directly from manufacturers, which contributes to our low
pricing structure. In fiscal 2000, we purchased the majority of our products
directly from manufacturers, rather than through distributors. Our top three
suppliers accounted for approximately 25% of total products purchased during
fiscal 2000. While selections from a particular artist or author generally are
produced by a single manufacturer, we strive to maintain supplier relationships
that can provide alternate sources of supply. In general, products we purchase
are returnable to the supplying vendor. Refer to "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
General" for a description of our returns process.
Store Operations
Most of our superstores employ one store manager and one or more assistant
store managers. Store managers and assistant store managers are responsible for
the execution of all operational, merchandising and marketing strategies for the
superstore in which they work. Superstores also generally have department
managers, who are individually responsible for their respective book, music,
software, video, customer service and stocking departments within each
superstore. Hastings superstores are generally open daily from 10:00 a.m. to
11:00 p.m. However, several superstores are open 9:00 a.m. to 11:00 p.m. or
10:00 a.m. to 10:00 p.m. The only days our superstores are closed are
Thanksgiving and Christmas.
Competition
The entertainment retail industry is highly competitive. We compete with a
wide variety of book retailers, music retailers, software retailers, Internet
retailers and retailers that rent or sell videocassettes, including independent
single store operations, local multi-store operators, regional and national
chains, as well as supermarkets, pharmacies, convenience stores, bookstores,
mass merchants, mail order operations, warehouse clubs, record clubs, other
retailers and various non-commercial sources such as libraries. With regard to
our videocassette sales and rental video products in particular, we compete with
cable, satellite and pay-per-view cable television systems. In addition,
continuing technological advances that enhance the ability of consumers to shop
at home or access, produce and print written
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works or record music digitally by home computer through the Internet or
telephonic transmission could provide more serious competition to us in the
future.
We compete in most of our markets with either national entertainment
retailers or significant retailers of general merchandise or both. We compete in
our sale of books with retailers such as Barnes & Noble, Inc., Books-A-Million,
Inc., Borders Group, Inc., Walden Books and B. Dalton Bookseller. We compete in
our sale of music with music retailers, such as The Wherehouse, Inc., and
Transworld Entertainment and consumer electronics stores, including Best Buy and
Circuit City. Our principal competitors in the sale and rental of videocassettes
are Blockbuster, Inc., Hollywood Entertainment Corp. and Movie Gallery, Inc. In
addition, we compete in the sale of books, music and videocassettes and the
rental of videocassettes and video games with local entertainment retailers and
significant retailers of general merchandise, such as Wal-Mart. Retailers such
as Amazon.com, Inc., Barnes & Noble, Inc., CDNOW, Inc. and Hollywood
Entertainment, Inc., continue to increase their retail sales of entertainment
products, such as books and music, via the Internet. We compete with other
entertainment retailers on the basis of title selection, the number of copies of
popular selections available, store location, visibility and pricing.
Trademarks and Servicemarks
We believe our trademarks and servicemarks, including the servicemarks
"Hastings Books Music Video," "Hastings, Your Entertainment Superstore" and
"Hastings Entertainment," have significant value and are important to our
marketing efforts. We have registered "Hastings Books Music Video" as a
servicemark with the United States Patent and Trademark Office and are in the
process of registering "Hastings, Your Entertainment Superstore" and "Hastings
Entertainment." We maintain a policy of pursuing registration of our principal
marks and opposing any infringement of our marks.
Associates
We refer to our employees as associates because of the critical role they
play in the success of each Hastings superstore and the Company as a whole. As
of January 31, 2001, we employed approximately 6,245 associates; of which 2,023
are full-time and 4,222 are part-time associates. Of this number, approximately
5,824 were employed at retail superstores, 129 were employed at our distribution
center and 292 were employed at our corporate offices. None of our associates
are represented by a labor union or are subject to a collective bargaining
agreement. We believe that our relations with our associates are good.
Executive Officers of the Company
The following is certain information concerning the executive officers of
Hastings Entertainment, Inc.
Name Age Position
---- --- --------
John H. Marmaduke 53 Chairman of the Board, President and
Chief Executive Officer
Robert A. Berman 51 Vice President of Store Operations
Michael J. Woods 39 Vice President and Chief Information Officer
James S. Hicks 44 Vice President of Purchasing
Dan Crow 54 Vice President of Finance and Chief Financial
Officer
Jerry M. McKee 37 Vice President, Secretary, Treasurer and
Controller
Alan Van Ongevalle 33 Vice President of Marketing
All executive officers are chosen by the Board of Directors and serve at
the Board's discretion. Set forth below is information concerning the business
experience of our executive officers.
JOHN H. MARMADUKE, age 53, has served as President and Chief Executive
Officer of the Company since July 1976 and as Chairman of the Board since
October 1993. Mr. Marmaduke served as President of the Company's former parent
company, Western Merchandisers, Inc. ("Western"), from 1982 through June 1994,
including the years 1991 through 1994 when Western was a division of Wal-Mart.
Mr. Marmaduke also serves on the board of directors
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of the Video Software Dealers Association (VSDA). Mr. Marmaduke has been active
in the entertainment retailing industry with the Company and its predecessor
company for over 30 years.
ROBERT A. BERMAN, age 51, has served the Company as Vice President of Store
Operations since January 1997. From June 1995 to January 1997, Mr. Berman was
self-employed in the financial services industry. From January 1989 to June
1995, Mr. Berman served as Vice President and Senior Vice President of Store
Operations for Builders Square, Inc., a chain of 185 building material
superstores. At Builders Square, Inc., Mr. Berman was responsible for store
operations, store planning and design, purchasing and construction.
MICHAEL J. WOODS, age 39, has served as Vice President of Information
Systems of the Company since October 1992. From August 1990 to October 1992, Mr.
Woods served as Director of Microsystems for the Company, focusing on store
systems development. From October 1989 to August 1990, Mr. Woods served as a
programming specialist and analyst for the Company.
JAMES S. HICKS, age 44, has served as Vice President of Purchasing of the
Company since August of 1999. From August 1997 to August 1999, Mr. Hicks served
as the Senior Director of Purchasing and from April 1994 to August 1997, was the
Director of Purchasing. He was a District Leader for the Company from July of
1984 to April 1994. From October 1982 to July 1984, Mr. Hicks served as a
company troubleshooter and from April 1982 to October 1982 was a store manager.
Mr. Hicks began his career with Hastings in August 1981 as a manager trainee.
Prior to joining the Company, Mr. Hicks was the Regional Credit Manager for
Liquid Carbonics Corporation, a gas distributor and manufacturer headquartered
in Houston.
DAN CROW, age 54, has served as Vice President of Finance and Chief
Financial Officer of the Company since October 2000. From July of 2000 to
October 2000, Mr. Crow served as Vice President of Finance. Mr. Crow is a member
of the American Institute of Certified Public Accountants and the Financial
Executives Institute and has served as Chief Financial Officer of various retail
companies including Discount Auto Parts, Inc. and Scotty's, Inc. since 1984.
JERRY M. MCKEE, age 37, has served as Vice President, Secretary and
Treasurer since May 2000 and as Corporate Controller since January 2000. From
April 1999 to January 2000, Mr. McKee served as the Senior Director of Planning
and as Director of Planing from February 1996 to April 1999, focusing on the
implementation and direction of corporate financial planning and budgeting. From
November 1993 to February 1996, Mr. McKee held various financial accounting
positions with the Company including Accounting Manager and Assistant
Controller. Prior to joining Hastings, Mr. McKee was the accounting Manager for
Affiliated Foods, Inc., a wholesale grocery cooperative located in Amarillo.
ALAN VAN ONGEVALLE, age 33, has served as Vice President of Marketing
since May 2000. From August 1999 to May 2000, Mr. Van Ongevalle served as the
Senior Director of Marketing and as Director of Advertising from September 1998
to August 1999. Mr. Van Ongevalle joined Hastings in November 1992 and held
various store operation management positions including Store Manager, Director
of New Stores and the Southern Kansas area through September 1998.
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ITEM 2. PROPERTIES
As of January 31, 2001, we operated 142 superstores in 22 states located
as indicated in the following table:
NAME OF STATE NUMBER OF SUPERSTORES
------------- ---------------------
Alabama............................... 1
Arkansas.............................. 8
Arizona............................... 7
Colorado.............................. 3
Georgia............................... 1
Idaho................................. 8
Illinois.............................. 2
Indiana............................... 2
Iowa.................................. 2
Kansas................................ 9
Kentucky.............................. 1
Missouri.............................. 8
Montana............................... 5
Nebraska.............................. 4
New Mexico............................ 13
North Carolina........................ 1
Oklahoma.............................. 13
Tennessee............................. 3
Texas................................. 38
Utah.................................. 3
Washington............................ 7
Wyoming............................... 3
---
Total................................. 142
Currently, we lease sites for all of our superstores. These sites
typically are located in pre-existing, stand-alone buildings or strip shopping
centers. Our primary market areas are small and medium-sized communities with
populations typically ranging from 25,000 to 150,000. We have developed a
systematic approach using our site selection criteria to evaluate and identify
potential sites for new superstores. Key demographic criteria for superstores
include community population, community and regional retail sales, personal and
household disposable income levels, education levels, median age, and proximity
of colleges or universities. Other site selection factors include current
competition in the community, visibility, available parking, ease of access and
other neighbor tenants. To maintain low occupancy costs, we typically
concentrate on leasing existing locations that have been operated previously by
other retailers.
We actively manage our existing stores and from time to time close
under-performing stores. During fiscal 2000, we closed six superstores and one
college bookstore. An additional four superstores will be closed during the
first and second quarters of fiscal 2001.
The terms of our superstore leases vary considerably. We strive to
maintain maximum location flexibility by entering into leases with short initial
terms and multiple short-term extension options. We have been able to enter into
leases with these terms in part because we generally bear a substantial portion
of the cost of preparing the site for a
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superstore. The following table sets forth as of January 31, 2001 the number of
superstores that have current lease terms that will expire during each of the
following fiscal years and the associated number of superstores for which we
have options to extend the lease term:
NUMBER OF SUPERSTORES OPTIONS
--------------------- -------
Fiscal Year 2001............. 12 6
Fiscal Year 2002............. 15 13
Fiscal Year 2003............. 20 19
Fiscal Year 2004............. 19 17
Fiscal Year 2005............. 13 12
Thereafter................... 63 63
--- ---
Total........................ 142 130
We have not experienced any significant difficulty renewing or extending
leases on a satisfactory basis.
Our headquarters and distribution center are located in Amarillo, Texas in
a leased facility consisting of approximately 27,000 square feet for office
space and 140,000 square feet for the distribution center. The leases for this
property terminate in September 2003, and we have the option to renew these
leases through March 2015.
ITEM 3. LEGAL PROCEEDINGS
Following our initial announcement on March 7, 2000 of the requirement for
the accounting restatements, as previously described, six purported class action
lawsuits were filed in the United States District Court for the Northern
District of Texas against us and certain of the current and former directors and
officers of the Company asserting various claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. Although four of the lawsuits were
originally filed in the Dallas Division of the Northern District of Texas, all
of the five pending actions have been transferred to the Amarillo Division of
the Northern District and have been consolidated. One of the Section 10(b) and
20(a) lawsuits filed in the Dallas Division was voluntarily dismissed. On May
15, 2000, a lawsuit was filed in the United States District Court for the
Northern District of Texas against us, our current and former directors and
officers at the time of our June 1998 initial public offering and three
underwriters, Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz,
LLC asserting various claims under Sections 11, 12(2) and 15 of the Securities
Act of 1933.
None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on our consolidated financial position, results of
operations and cash flows.
We are also involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock trades on The Nasdaq National Market (Nasdaq) under the
symbol "HAST."
The following table sets forth, for the fiscal periods indicated, the high
and low closing market prices of our Common Stock as reported on Nasdaq within
the two most recent fiscal years.
HIGH LOW
---- ---
2000:
First Quarter $ 4.188 $ 2.438
Second Quarter $ 4.688 $ 1.250
Third Quarter $ 3.375 $ 2.250
Fourth Quarter $ 2.625 $ 1.375
1999:
First Quarter $15.313 $ 8.625
Second Quarter $16.438 $ 9.875
Third Quarter $11.125 $ 4.625
Fourth Quarter $ 6.813 $ 4.000
As of April 17, 2001, there were approximately 325 holders of record of
our Common Stock.
The payment of dividends is within the discretion of the Board of
Directors and will depend on our earnings, capital requirements, and the
operating and financial condition, among other factors. Our current revolving
credit facility restricts the payment of dividends. In view of such
restrictions, it is unlikely that we will pay a dividend in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and operating data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and our consolidated financial
statements and the notes thereto that appear elsewhere in this report.
Fiscal Year
---------------------------------------------------------------------------
(In thousands, except per share and square foot data) 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Merchandise revenue $ 370,512 $ 364,041 $ 320,162 $ 283,026 $ 251,439
Rental video revenue 87,691 81,384 78,904 74,656 72,274
----------- ----------- ----------- ----------- -----------
Total revenues 458,203 445,425 399,066 357,682 323,713
Merchandise cost of revenue 280,459 270,113 235,915 211,467 189,537
Rental video cost of revenue(1) 38,022 32,139 49,069 25,904 24,645
----------- ----------- ----------- ----------- -----------
Total cost of revenues 318,481 302,252 284,984 237,371 214,182
Gross profit 139,722 143,173 114,082 120,311 109,531
Selling, general and administrative expenses(2)(3) 148,967 141,513 116,521 108,434 96,294
Development expenses -- -- -- -- 2,421
Pre-opening expenses 33 1,681 1,474 1,071 404
----------- ----------- ----------- ----------- -----------
Operating income (loss) (9,278) (21) (3,913) 10,806 10,412
Interest expense, net (3,485) (3,708) (3,727) (4,228) (3,585)
Gain (loss) on sale of mall stores(4) -- -- 454 1,734 (2,500)
Other, net 197 205 232 139 187
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (12,566) (3,524) (6,954) 8,451 4,514
Income tax expense (benefit)(5) 2,034 (1,359) (2,649) 3,347 1,736
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (14,600) $ (2,165) $ (4,305) $ 5,104 $ 2,778
=========== =========== =========== =========== ===========
Basic income (loss) per share $ (1.25) $ (0.19) $ (0.41) $ 0.60 $ 0.32
=========== =========== =========== =========== ===========
Diluted income (loss) per share $ (1.25) $ (0.19) $ (0.41) $ 0.58 $ 0.32
=========== =========== =========== =========== ===========
Weighted-average common shares outstanding - basic 11,645 11,621 10,436 8,520 8,552
Weighted-average common shares outstanding - diluted 11,645 11,621 10,436 8,736 8,757
OTHER DATA:
Depreciation(1)(6) $ 33,155 $ 31,626 $ 55,331 $ 33,606 $ 28,535
Capital expenditures(7) $ 30,482 $ 47,427 $ 42,568 $ 55,753 $ 40,510
STORE DATA:
Total selling square footage at end of period 2,759,735 2,829,269 2,385,432 2,078,264 1,828,649
Comparable-store revenues increase(8) (0.1%) 4.0% 5.5% 7.0% 5.9%
January 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $ 46,567 $ 67,295 $ 64,866 $ 29,500 $ 41,455
Total assets 213,484 247,933 233,479 217,948 183,019
Total long-term debt, including current maturities 29,610 54,260 44,979 51,612 51,873
Total shareholders' equity 75,791 90,091 91,869 51,971 46,816
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(1) We adopted a new, accelerated method of amortizing our rental video assets
in the fourth quarter of fiscal 1998. The adoption of the new amortization
method was accounted for as a change in accounting estimate effected by a
change in accounting principle and, accordingly, we recorded a non-cash,
non-recurring, pre-tax charge of $18.5 million in rental video cost of
revenues in the fourth quarter of fiscal 1998, increasing net loss and
diluted loss per share for fiscal 1998 by $11.5 million and $1.10 per
share, respectively.
(2) We recorded pre-tax charges of approximately $6.5 million and $5.1 million
in fiscal years 2000 and 1999, respectively, related to the cost associated
with closing superstores. See Note 6 to the consolidated financial
statements for further discussion. As a result of these charges, fiscal
years 2000 and 1999 net losses were increased by $6.5 million and $3.1
million and $0.56 and $0.27 per share, respectively.
(3) In fiscal 2000, we recorded $2.7 million in accounting and legal fees
associated with the restatement of the first three quarters of fiscal 1999
and the prior four fiscal years as described in "Item 3. Legal
Proceedings", and "Item 8. Financial Statements and Supplementary Data." As
a result of these fees, fiscal year 2000 net losses were increased by $2.7
million and $0.23 per share.
(4) In fiscal 1996, we established a reserve of $2.5 million ($1.6 million
after-tax charge) to cover potential losses related to certain mall store
leases that were sold prior to fiscal 1995 to Camelot Music, Inc., which
filed for bankruptcy protection in August 1996. In fiscal 1997, the reserve
was reduced to $0.5 million, and $1.7 million was included in Gain on sale
of mall stores. In fiscal 1998, we were released from any contingent
liability on the remaining leases by order of a bankruptcy court.
Accordingly, the Company reduced the remaining $0.5 million reserve to zero
as of January 31, 1999, thereby decreasing net loss and diluted loss per
share for fiscal 1998 by $0.3 million and $.03 per share, respectively.
(5) Due to cumulative losses incurred in recent years, the current balance of
the net deferred tax asset currently does not meet the criteria for
recognition under Statement of Financial Accounting Standards No. 109. As a
result, the balance of the net deferred tax asset was reserved for during
fiscal 2000.
(6) Includes amounts associated with our rental video cost allocation.
(7) Includes procurement of rental video assets.
(8) Stores open a minimum of 60 weeks.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes thereto and "Item 6.
Selected Financial Data" appearing elsewhere in this Annual Report.
General
Hastings Entertainment is a leading multimedia entertainment retailer that
combines the sale of books, music, software, periodicals, videocassettes, video
games and DVDs with the rental of videocassettes, video games and DVDs in a
superstore and Internet Web site format. As of January 31, 2001, we operated 142
superstores averaging 22,000 square feet in small to medium-sized markets
located in 22 states, primarily in the Western and Midwestern United States. The
Company also operated one college bookstore. Each of the superstores and the
college bookstore is wholly owned by the Company and operates under the name of
Hastings. Our e-commerce Web site, www.gohastings.com, became operational in May
1999.
Our operating strategy is to enhance our position as a multimedia
entertainment retailer by expanding existing superstores, opening new
superstores in selected markets, and expanding our offering of products through
our Internet Web site. References herein to fiscal years are to the twelve-month
periods that end in January of the following calendar year. For example, the
twelve-month period ended January 31, 2001 is referred to fiscal 2000.
Returns Process
In general, merchandise inventory owned by us is returnable based upon
return agreements with our merchandise vendors. We continually return
merchandise to vendors based on, among other factors, current and projected
sales trends, overstock situations, authorized return timelines or change in
product offerings. At the end of any reporting period, there is inventory that
has been returned to vendors or in the process of being returned to vendors for
which we will be charged a fee. In order to appropriately match the expense
associated with the return of merchandise with the process of returning the
product, we utilize an allowance for cost of inventory returns (the
"Allowance"). To accrue for such fees charged by our vendors and estimate the
Allowance, we utilize historical experience adjusted for significant fee
modifications by our vendors. The time of year and the product mix of inventory
to be returned can have a significant effect on the ultimate cost to return the
products; however, we evaluate and adjust the Allowance on a quarterly basis.
Rental Video Cost Allocation
We adopted a new method of amortizing our rental video assets in the
fourth quarter of fiscal 1998. In late fiscal 1998, we completed a series of
direct revenue-sharing agreements with major studios, the majority of which were
amended in fiscal 2000, under which we acquired approximately 50% of our rental
video assets during fiscal 2000. We anticipate that our involvement in
revenue-sharing agreements will continue to increase moderately in the future.
Revenue sharing allows us to acquire rental video assets at a lower up-front
capital cost than traditional buying arrangements. We then share with studios a
percentage of the actual net rental revenues generated over a contractually
determined period of time. The increased access to additional copies of new
releases under revenue-sharing agreements will allow customer demand for new
releases to be satisfied over a shorter period of time at a time when the new
releases are most popular. Since this new business model results in a greater
proportion of rental revenue to be received over a reduced rental period because
there is more product available when product demand is greater, we changed our
method of amortizing rental video assets in order to better match expenses with
revenues.
Under the new amortization method, we continue to expense revenue-sharing
payments as revenues are recognized under the terms of the specific contracts
with supplying studios. The capitalized cost of all rental video assets acquired
for a fixed price is being amortized on an accelerated basis over six months to
a salvage value of $4 per unit, except for rental video assets purchased for the
initial stock of a new store, which are being amortized on a straight line basis
over 36 months to a salvage value of $4. Under the old amortization method, the
capitalized cost of base rental video assets (typically copies one through four
of a title for each store) was amortized on a straight line
17
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basis over 36 months to a salvage value of $5. The capitalized cost of non-base
units (typically copies five and above for each store) was amortized on a
straight-line basis over 6 months to a salvage value of $5.
The adoption of the accelerated amortization method was accounted for as a
change in accounting estimate effected by a change in accounting principle and,
accordingly, we recorded a non-cash, non-recurring, pre-tax charge of $18.5
million in the fourth quarter of fiscal 1998, increasing net loss and diluted
loss per share for fiscal 1998 by $11.5 million and $1.10 per share,
respectively.
Results of Operations
The following tables present our statement of operations data, expressed
as a percentage of revenue, and the number of superstores open at the end of
period for the three most recent fiscal years.
Fiscal Year
-----------------------------------
2000 1999 1998
------ ------ ------
Merchandise revenue 80.9 81.7% 80.2%
Rental video revenue 19.1 18.3 19.8
------ ------ ------
Total revenues 100.0 100.0 100.0
Merchandise cost of revenue 75.7 74.2 73.7
Rental video cost of revenue 43.4 39.5 62.2
------ ------ ------
Total cost of revenues 69.5 67.9 71.4
Gross profit 30.5 32.1 28.6
Selling, general and administrative
expenses 32.5 31.7 29.2
Pre-opening expenses 0.0 0.4 0.4
------ ------ ------
32.5 32.1 29.6
------ ------ ------
Operating loss (2.0) (0.0) (1.0)
Other income (expense):
Interest expense (0.8) (0.8) (0.9)
Gain on sale of mall stores -- -- 0.1
Other, net 0.0 0.0 0.1
------ ------ ------
(0.8) (0.8) (0.7)
------ ------ ------
Loss before income taxes (2.8) (0.8) (1.7)
Income tax expense (benefit) 0.4 (0.3) (0.7)
------ ------ ------
Net loss (3.2)% (0.5)% (1.0)%
====== ====== ======
Fiscal Year
------------------------------------
2000 1999 1998
---- ---- ----
Hastings Superstores:
Beginning number of stores 147 129 117
Openings 1 20 12
Closings* (6) (2) --
---- ---- ----
Ending number of stores 142 147 129
==== ==== ====
* Four additional superstores will be closed during the first and second
quarters fiscal 2001.
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Fiscal 2000 Compared to Fiscal 1999
Revenues. Total revenues for fiscal year 2000 increased 2.9% to $458.2
million from $445.4 million for fiscal year 1999. The revenue growth consisted
of a 1.8% increase in merchandise revenues and a 7.7% increase in rental video
revenue and was primarily due to the number of new stores opened in fiscal 1999
that were open for a full year during fiscal 2000. Comparable store revenues for
fiscal 2000 were essentially flat. Sale video, driven by sales of DVDs,
previously viewed videocassettes, and video games exhibited the largest
percentage growth year-over-year with music and book revenues declining as a
result of general weakness in the industries.
Gross Profit. Total gross profit as a percent of total revenue declined
from 32.1% in fiscal 1999 to 30.5% in fiscal 2000 as a result of a series of
factors as follows:
(i) During the first quarter of fiscal 2000, management determined a need
to improve inventory turns in order to enhance cash flow, reduce markdown
expense, and enhance our inventory offering. Our resulting implementation of an
initiative to permanently improve inventory turns generated an increase in the
volume of returns to vendors and markdowns as well as compressed the timing of
these returns resulting in higher fees per return based on the pricing
agreements with our vendors. This negatively impacted gross profit by a $3.1
million increase in the cost associated with the return of product;
(ii) Lower than anticipated sales volume for certain products in the first
three quarters of fiscal 2000 resulted in management's decision to increase the
markdown frequency on certain products to stimulate sales, increase inventory
turnover and improve cash flows. Such retail price markdowns increased
approximately $3.3 million resulting in lower merchandise margins;
(iii) Margins were also adversely affected by an increase in freight costs
of $1.0 million for the year ended January 31, 2001 due to freight carriers
adding fuel surcharges of 4% to 8%; and
(iv) As circumstances warrant, due to changing market conditions or
specific transactions, we record lower of cost or market inventory adjustments.
Such inventory adjustments increased $1.4 million from $5.6 million in fiscal
1999 to $7.0 million in fiscal 2000. This increase was primarily a result of our
entering into a barter transaction with a third party during fiscal 1999, for
which we recorded an asset related to the barter credit in the amount of $0.9
million. During the third quarter of fiscal 2000, the barter company ceased
operations and no longer appeared to be a going concern. Consequently, we deemed
the entire credit to be fully impaired, which resulted in a charge to income of
$0.9 million in the third quarter of fiscal 2000.
Also contributing to the overall decrease in margin was a decline in
rental video margin of approximately $3.6 million primarily as a result of an
increase in rental video revenue subject to revenue-sharing agreements with
studios as a percent of total rental video revenue, which has lower profit
margins.
Offsetting the declines in margin outlined above was a $2.5 million
decline in the amount of promotional coupons redeemed during fiscal 2000 over
fiscal 1999 and a reduction in shrinkage of approximately $1.9 million resulting
from an increased focus on loss prevention. In addition, we experienced an
increase in discounts on product purchase prices due to more advantageous buying
and improved seasonal terms from our vendors during the year.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased to $149.0 million or 32.5% of total
revenues in fiscal 2000 from $141.5 million or 31.7% in fiscal 1999. The
increase was primarily the result of (1) $2.7 million in accounting and legal
fees associated with the restatement of the first three quarters of fiscal 1999
and the prior four fiscal years and (2) collective asset impairment charges of
$1.4 million comprised of $1.0 in writedowns of leasehold improvements included
in three underperforming stores and $.4 million in writedowns of certain assets
of the Company's Internet segment. Such charges were recorded as projected cash
flows from these operations were not sufficient to realize the book value of the
specific assets.
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Additionally, during fiscal 2000, we recorded net expenses of $4.9
million associated with the closure of two stores during the fourth quarter and
an additional four stores approved for closure prior to year end. Such expenses
are comprised of accruals for the net present value of future minimum lease
payments, the write-off of leasehold improvements, and other related costs.
During fiscal 1999, we recorded expenses of $5.1 million related to the closure
of six superstores and one college bookstore.
Pre-opening Expenses. Pre-opening expenses were $33,000 for the year ending
January 31, 2001, as we opened one superstore during the year. For the year
ending January 31, 2000, pre-opening expenses totaled $1.7 million with the
opening of 20 new superstores. Pre-opening expenses include human resource
costs, travel, rent, advertising, supplies and certain other costs incurred
prior to a superstore's opening.
Interest Expense. Despite a higher interest rate environment, our overall
interest expense declined approximately $0.2 million to $3.5 million in fiscal
2000 compared to $3.7 million in fiscal 1999 primarily due to a lower average
balance of long-term debt.
Income Taxes. Due to cumulative losses incurred in recent years, the
current balance of the net deferred tax asset does not meet the criteria for
recognition under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." As a result, we fully reserved the balance of the
net deferred tax asset of $6.7 million. We recorded income tax expense of $2.0
million primarily as the result of the provision for the valuation allowance
partially offset by the tax benefit derived from the loss generated in fiscal
2000.
Net Loss. For fiscal year 2000, we incurred a net loss of $14.6 million,
or $1.25 per share, compared to a net loss of $2.2 million, or $0.19 per share
for fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Revenues. Total revenues for fiscal 1999 totaled $445.4 million, an
increase of $46.4 million or 11.6% over fiscal 1998 revenue of $399.1 million.
The revenue growth consisted of a 13.7% increase in merchandise revenues and a
3.1% increase in rental video revenue. The increase in revenue was primarily due
to comparable store revenue growth of 4.0% and the opening of 20 Hastings
superstores during fiscal 1999. We closed two superstores at the end of fiscal
1999, which had an insignificant effect on total revenue. Each significant
revenue category exhibited growth, with video games providing the largest gains
on a percentage basis.
Gross Profit. Total gross profit as a percent of total revenue decreased
in fiscal 1999 to 32.1% compared to 33.2% for 1998 excluding the non-cash,
non-recurring, pre-tax charge of $18.5 million discussed above under "Rental
Video Cost Allocation." This decline was primarily the result of a $3.5 million
pre-tax charge in the fourth quarter of fiscal 1999 for the write-down of
certain merchandise inventory to the lower of cost or market. Lower than
anticipated sales volume in the fourth quarter of fiscal 1999 resulted in
management's decision to increase promotional discounts on certain products to
stimulate sales and to increase inventory turnover and enhance cash flows. Such
discounts resulted in lower of cost or market inventory adjustments. Offsetting
these charges was a reduction in total returns expense (comprised of the cost of
operating our return center and cost associated with the return of merchandise
inventory) from $9.1 million in fiscal year 1999 compared to $10.6 million for
fiscal 1998. The decrease was primarily due to a decline in the costs associated
with returns settlements with vendors, resulting from an improvement in our
vendor settlement process.
The remainder of the gross profit change from fiscal 1998 resulted from
the increase in merchandise revenues, which generate lower profit margins versus
rental revenues, from 80.2% to 81.7% of total revenues. Excluding the write-down
and decrease in returns expense, merchandise gross profit as a percentage of
merchandise revenue remained constant at 26.4%. Gross profit as a percentage of
revenue for rental video increased to 39.5% for fiscal 1999 compared to 38.7%
for fiscal 1998, excluding the charge described above.
Selling, General and Administrative Expenses. SG&A expenses increased to
31.7% of total revenues in fiscal 1999 from 29.2% in fiscal 1998. One factor
contributing to this increase was the $5.1 million pre-tax charge for the costs
associated with the closing of six superstores and one college bookstore. This
charge includes the net present value of future minimum lease payments,
write-off of primarily leasehold improvements, and other related costs. Two
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of these superstores were closed as of the end of fiscal 1999, while the
remainders were closed during the first quarter of fiscal 2000.
Other factors contributing to the increase in SG&A were an increase of
approximately $1.4 million in costs associated with the operation of our
Internet segment and a $1.8 million increase in the costs related to our
superstore advertising program.
Pre-opening Expenses. Pre-opening expenses remained constant at 0.4% of
revenues for fiscal 1999 compared to fiscal 1998. Pre-opening expenses include
human resource costs, travel, rent, advertising, supplies and certain other
costs incurred prior to a superstore's opening. We opened 20 new superstores in
fiscal 1999, compared to 12 new superstores in fiscal 1998.
Interest Expense. Interest expense remained constant at $3.7 million for
fiscal 1999 compared to 1998.
Gain (Loss) on Sale of Mall Stores. As a result of the sale of our 42
mall stores to Camelot Music, Inc., we recorded a total pre-tax gain of $7.9
million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot
Music, Inc. filed for bankruptcy in August 1996, and we established a reserve of
$2.5 million in fiscal 1996 to cover potential losses related to certain mall
store leases. As of January 31, 1998, expenses totaling $0.3 million had been
charged against the reserve. In the fourth quarter of fiscal 1997, the reserve
was reduced to $0.5 million, resulting in an increase to pre-tax income of $1.7
million. By the end of the fourth quarter of fiscal 1998, all potential
liabilities related to the Camelot Music, Inc. bankruptcy were settled, and we
reduced the remaining reserve to zero resulting in a decrease in pre-tax loss in
the fourth quarter of fiscal 1998 of $0.5 million.
Net Income (Loss). We reported a net loss of $2.2 million or $0.19 per
diluted share in fiscal 1999 compared to a net loss of $4.3 million or $0.41 per
diluted share in fiscal 1998. Excluding the $5.1 million pre-tax charge for the
closing of stores and the $3.5 million pre-tax charge for the write-down of
merchandise inventory in fiscal 1999, our net income and diluted income per
share would have been $3.1 million and $0.27 per diluted share, respectively.
Excluding the non-cash, non-recurring, pre-tax charge of $18.5 million discussed
above under - "Rental Video Cost Allocation," and the $0.5 million reversal of
the reserve related to the Camelot Music, Inc. bankruptcy in fiscal 1998, our
fiscal 1998 net income and diluted income per share would have been $6.8 million
and $0.66 per share, respectively.
Liquidity and Capital Resources
We generate cash from operations exclusively from the sale of merchandise
and the rental of videocassettes and we have substantial operating cash flow
because most of our revenue is received in cash and cash equivalents. Other than
our principal capital requirements arising from the purchase, warehousing and
merchandising of inventory and rental videos, opening new superstores and
expanding existing superstores and updating existing and implementing new
information systems technology, we have no anticipated material capital
commitments. Our primary sources of working capital are cash flow from operating
activities, trade credit from vendors and borrowings under our revolving credit
facility (the "Facility"). We believe our cash flow from operations and
borrowings under the Facility will be sufficient to fund our ongoing operations,
new superstores and superstore expansions through fiscal 2001.
21
22
Consolidated Cash Flows
Operating Activities. Despite an operating loss, net cash flows from
operating activities increased $12.8 million, or 32.3%, from $39.5 million for
the fiscal year ending January 31, 2000 to $52.3 million for the fiscal year
ending January 31, 2001. The most significant reason for the increase was a
decline in and orderly reduction of merchandise inventory of approximately $21.4
million. Approximately $15 million of this decline was the result of our
initiative to increase cash flow and inventory turns by reducing our inventory.
The remaining decrease in inventory is due to added controls on purchasing,
markdown management and improved sell-through.
Investing Activities. Net cash used in investing activities decreased $16.9
million, or 35.7%, from $47.4 million in fiscal 1999 to $30.5 million in fiscal
2000. This reduction was due to a decrease in the number of superstores opened
from 20 in fiscal 1999 to one in fiscal 2000. Our capital expenditures include
store equipment and fixtures, expanding and remodeling existing superstores,
upgrading and implementation of information systems technology and the purchase
of rental video assets.
Financing Activities. Cash provided by or used in financing activities is
primarily associated with borrowings and payments made under the Facility. With
the increase in cash flow from operations and decrease in capital expenditures,
we decreased our overall debt balances by approximately $24.7 million to $29.6
million as of January 31, 2001 from $54.3 million as of January 31, 2000,
eliminating our term debt by paying off our Senior Notes and reducing the level
of our revolving credit borrowings.
At January 31, 2001 and 2000, we had borrowings outstanding of $28.3 million
and $32.3 million under our Facility and a prior revolving credit facility,
respectively. The average rate of interest charged under the Facility and prior
revolving credit facility at January 31, 2001 and 2000 was 8.4% and 7.3%,
respectively.
On August 29, 2000, we replaced the prior revolving credit facility and the
Senior Notes by entering into a three-year syndicated, secured Loan and Security
Agreement with Fleet Retail Finance, Inc. and The CIT Group/Business Credit,
Inc. The initial proceeds from the Facility were used to prepay the total
amounts outstanding under the prior revolving credit facility and the Senior
Notes. The amount outstanding under the Facility is subject to a borrowing base
predicated on eligible inventory, as defined, and certain rental video assets,
net of accumulated depreciation less specifically defined reserves and is
limited to the lesser of (i) a maximum principal amount of $70 million, which
increases to $80 million between October 15 and December 15 of each year of the
Facility, less a $10 million availability reserve and (ii) the borrowing base.
The borrowing base under the Facility is limited to an advance rate of 65% of
eligible inventory and certain rental video assets net of accumulated
amortization less specifically defined reserves. The Facility bears interest
based on the prevailing prime rate or LIBOR plus 2.00% at our option. The
Facility contains no financial covenants, restricts the payment of dividends and
certain other debt and acquisition limitations, allows for the repurchase of up
to $7.5 million of our common stock and requires a minimum availability of $10
million at all times. The Facility is secured by substantially all of the assets
of the Company and its subsidiaries and is guaranteed by each of our three
consolidated subsidiaries. The Facility expires on August 29, 2003. At January
31, 2001, the Company had $26.1 million in excess availability after the $10
million availability reserve, under the Facility.
Seasonality and Inflation
As is the case with many retailers, a significant portion of our revenues,
and an even greater portion of our operating profit, is generated in the fourth
fiscal quarter, which includes the Christmas selling season. As a result, a
substantial portion of our annual earnings has been, and will continue to be,
dependent on the results of this quarter. We experience reduced rentals of video
activity in the spring because customers spend more time outdoors. Major world
or sporting events, such as the Super Bowl, the Olympic Games or the World
Series, also have a temporary adverse effect on revenues. Future operating
results may be affected by many factors, including variations in the number and
timing of store openings, the number and popularity of new book, music and
videocassette titles, the cost of the new release or "best renter" titles,
changes in comparable-store revenues, competition, marketing programs, increases
in the minimum wage, weather, special or unusual events, and other factors that
may affect our operations.
22
23
We do not believe that inflation has materially impacted net income during
the past three years. Substantial increases in costs and expenses could have a
significant impact our operating results to the extent such increases are not
passed along to customers.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, that impacts our
accounting treatment and/or our disclosure obligations. The statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective in fiscal 2001. The
adoption of SFAS No. 133 will not have a material impact on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our business, we are exposed to certain market
risks, primarily changes in interest rates. Our exposure to interest rate risk
consists of variable rate debt based on the lenders base rate or LIBOR plus a
specified percentage at our option. The annual impact on our results of
operations of a 100 basis point interest rate change on the January 31, 2001
outstanding balance of the variable rate debt would be approximately $0.3
million. After an assessment of these risks to our operations, we believe that
the primary market risk exposures (within the meaning of Regulation S-K Item
305) are not material and are not expected to have any material adverse impact
on our financial position, results of operations or cash flows for the next
fiscal year. We are not party to any derivative contracts.
23
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HASTINGS ENTERTAINMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Reports 25
Consolidated Balance Sheets as of January 31, 2001 and 2000 27
Consolidated Statements of Operations
for the years ended January 31, 2001, 2000 and 1999 28
Consolidated Statements of Shareholders' Equity
for the years ended January 31, 2001, 2000 and 1999 29
Consolidated Statements of Cash Flows
for years ended January 31, 2001, 2000 and 1999 30
Notes to Consolidated Financial Statements 31
SCHEDULE
Financial Statement Schedule - The Financial Statement Schedule
filed as part of this report is listed under Part IV, Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K. 49
24
25
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Hastings Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Hastings
Entertainment, Inc. and subsidiaries as of January 31, 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hastings
Entertainment, Inc. and subsidiaries at January 31, 2001, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Fort Worth, Texas
March 27, 2001
25
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Hastings Entertainment, Inc.:
We have audited the consolidated balance sheet of Hastings Entertainment, Inc.
and subsidiaries as of January 31, 2000 and the related consolidated statements
of operations, shareholders' equity, and cash flows for the years ended January
31, 2000 and 1999. We also have audited the related financial statement schedule
for the years ended January 31, 2000 and 1999. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hastings
Entertainment, Inc. and subsidiaries as of January 31, 2000, and the results of
their operations and their cash flows for the years ended January 31, 2000 and
1999, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein for the years ended January 31, 2000 and 1999.
As discussed in Note 2, the Company changed its method of amortization for
rental videos in 1998.
/S/ KPMG LLP
Dallas, Texas
June 13, 2000
26
27
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 2001 and 2000
(In thousands, except share data)
FISCAL
--------------------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash $ 4,257 $ 7,026
Merchandise inventories, net 130,676 152,065
Income taxes receivable 7,759 6,272
Deferred income taxes -- 656
Other current assets 5,461 4,968
--------- ---------
Total current assets 148,153 170,987
Property and equipment, net 65,319 73,242
Deferred income taxes -- 3,026
Other assets 12 678
--------- ---------
$ 213,484 $ 247,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $ 154 $ 5,372
Trade accounts payable 70,534 66,568
Accrued expenses and other current liabilities 30,898 31,752
Deferred income taxes -- --
--------- ---------
Total current liabilities 101,586 103,692
Long-term debt, excluding current maturities 29,456 48,888
Other liabilities 6,651 5,262
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 75,000,000 shares authorized;
11,751,850 shares in 2000 and 11,736,923 shares in 1999 issued;
11,751,850 shares in 2000 and 11,628,973 shares in 1999 outstanding 117 117
Additional paid-in capital 36,323 37,402
Retained earnings 39,351 53,951
Treasury stock, at cost -- (1,379)
--------- ---------
75,791 90,091
--------- ---------
$ 213,484 $ 247,933
========= =========
See accompanying notes to consolidated financial statements.
27
28
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended January 31, 2001, 2000 and 1999
(In thousands, except per share data)
FISCAL YEAR
---------------------------------------------------------
2000 1999 1998
--------- --------- ---------
Merchandise revenue $ 370,512 $ 364,041 $ 320,162
Rental video revenue 87,691 81,384 78,904
--------- --------- ---------
Total revenues 458,203 445,425 399,066
Merchandise cost of revenue 280,459 270,113 235,915
Rental video cost of revenue 38,022 32,139 49,069
--------- --------- ---------
Total cost of revenues 318,481 302,252 284,984
--------- --------- ---------
Gross profit 139,722 143,173 114,082
Selling, general and administrative expenses 148,967 141,513 116,521
Pre-opening expenses 33 1,681 1,474
--------- --------- ---------
Operating loss (9,278) (21) (3,913)
Other income (expense):
Interest expense (3,485) (3,708) (3,727)
Gain on sale of mall stores -- -- 454
Other, net 197 205 232
--------- --------- ---------
Loss before income taxes (12,566) (3,524) (6,954)
Income tax expense (benefit) 2,034 (1,359) (2,649)
--------- --------- ---------
Net loss $ (14,600) $ (2,165) $ (4,305)
========= ========= =========
Basic loss per share $ (1.25) $ (0.19) $ (0.41)
========= ========= =========
Diluted loss per share $ (1.25) $ (0.19) $ (0.41)
========= ========= =========
Weighted-average common shares outstanding - basic 11,645 11,621 10,436
Dilutive effect of stock options -- -- --
--------- --------- ---------
Weighted-average common shares outstanding - diluted 11,645 11,621 10,436
========= ========= =========
See accompanying notes to consolidated financial statements.
28
29
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended January 31, 2001, 2000 and 1999
(In thousands, except share data)
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- ---------- ---------- ----------
Balances at January 31, 1998 8,652,923 $ 87 $ 1,654 $ 60,421
Issuance of common stock 3,084,000 30 36,135 --
Issuance of treasury stock to directors -- -- -- --
Receipt of treasury shares upon
exercise of stock options -- -- -- --
Exercise of stock options -- -- (6) --
Termination of common stock
Redemption agreement -- -- -- --
Net loss -- -- -- (4,305)
---------- ---------- ---------- ----------
Balances at January 31, 1999 11,736,923 $ 117 $ 37,783 $ 56,116
Issuance of treasury stock to directors -- -- (39) --
Receipt of treasury shares upon
exercise of stock options -- -- -- --
Exercise of stock options, including
tax benefits of $0.3 million -- -- (342) --
Net loss -- -- -- (2,165)
---------- ---------- ---------- ----------
Balances at January 31, 2000 11,736,923 $ 117 $ 37,402 $ 53,951
Issuance of treasury stock to directors -- -- (152) --
Issuance of stock to employees 14,927 -- (310) --
Exercise of stock options -- -- (617) --
Net loss -- -- -- (14,600)
---------- ---------- ---------- ----------
Balances at January 31, 2001 11,751,850 $ 117 $ 36,323 $ 39,351
========== ========== ========== ==========
REDEMPTION
VALUE OF
COMMON STOCK
TREASURY STOCK HELD BY ESTATE TOTAL
----------------------------- OF COMPANY'S SHAREHOLDERS'
SHARES AMOUNT FOUNDER EQUITY
---------- ---------- ---------- ----------
Balances at January 31, 1998 187,725 $ (2,191) $ (8,000) $ 51,971
Issuance of common stock -- -- -- 36,165
Issuance of treasury stock to directors (2,695) 31 -- 31
Receipt of treasury shares upon
exercise of stock options 12,453 (148) -- (148)
Exercise of stock options (13,728) 161 -- 155
Termination of common stock
Redemption agreement -- -- 8,000 8,000
Net loss -- -- -- (4,305)
---------- ---------- ---------- ----------
Balances at January 31, 1999 183,755 $ (2,147) -- $ 91,869
Issuance of treasury stock to directors (3,893) 163 -- 124
Receipt of treasury shares upon
exercise of stock options 65,454 (996) -- (996)
Exercise of stock options, including
tax benefits of $0.3 million (137,366) 1,601 -- 1,259
Net loss -- -- -- (2,165)
---------- ---------- ---------- ----------
Balances at January 31, 2000 107,950 $ (1,379) $ -- 90,091
Issuance of treasury stock to directors (13,672) 186 -- 34
Issuance of stock to employees (44,278) 513 -- 203
Exercise of stock options (50,000) 680 -- 63
Net loss -- -- -- (14,600)
---------- ---------- ---------- ----------
Balances at January 31, 2001 -- $ -- $ -- $ 75,791
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
29
30
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended January 31, 2001, 2000 and 1999
(Dollars in thousands)
FISCAL YEAR
---------------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (14,600) $ (2,165) $ (4,305)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation expense 33,155 31,626 55,331
Gain on sale of mall stores, net -- -- (454)
Loss on rental videos lost, stolen and defective 1,877 4,068 3,459
Loss on disposal of non-rental video assets 3,375 3,272 297
Deferred income tax 3,681 (2,541) (3,354)
Stock compensation expense 235 124 31
Changes in operating assets and liabilities:
Merchandise inventories 21,389 (2,464) (21,090)
Other current assets (492) (462) (692)
Trade accounts payable and accrued expenses 3,112 3,897 (8,835)
Income taxes receivable (1,487) 243 (7,064)
Other assets and liabilities, net 2,055 3,917 1,260
--------- --------- ---------
Net cash provided by operating activities 52,300 39,515 14,584
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (30,482) (47,427) (42,568)
--------- --------- ---------
Net cash used in investing activities (30,482) (47,427) (42,568)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facility 296,867 267,950 283,600
Repayments under revolving credit facility (311,041) (253,350) (289,950)
Payments under long-term debt and capital lease obligations (10,476) (5,319) (283)
Proceeds from exercise of stock options 63 263 6
Proceeds from issuance of stock -- -- 36,165
--------- --------- ---------
Net cash provided by (used in) financing activities (24,587) 9,544 29,538
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,769) 1,632 1,554
Cash at beginning of year 7,026 5,394 3,840
--------- --------- ---------
Cash at end of year $ 4,257 $ 7,026 $ 5,394
========= ========= =========
See accompanying notes to consolidated financial statements.
30
31
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Hastings Entertainment, Inc. and subsidiaries (the "Company")
operates a chain of retail stores in 22 states, primarily in the
Western and Midwestern United States, with revenues originating
from the sale of music, books, software, periodicals,
videocassette, video game and DVD products and the rental of
videocassettes, video games and DVDs.
(b) BASIS OF CONSOLIDATION
The consolidated financial statements present the results of
Hastings Entertainment, Inc. and its subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
The Company's fiscal years ended January 31, 2001, 2000 and 1999
are referred to as fiscal 2000, 1999 and 1998, respectively.
(c) BASIS OF PRESENTATION
Certain prior year amounts have been reclassified to conform
with fiscal 2000 presentation including reclassification of
returns expense from "Selling, general and administrative
expenses" to "Merchandise cost of revenue," the reclassification
of certain coupon expense from "Selling, general and
administrative expenses" to "Rental video revenue," and the
reclassification of certain advertising allowances and buying,
marketing and merchandising human resource costs from
"Merchandise cost of revenue" to "Selling, general and
administrative expenses" as set forth in the Statement of
Operations.
(d) REVENUE RECOGNITION
Merchandise and rental video revenue are recognized at the point
of sale or rental or at the time merchandise is shipped to the
customer. Additionally, revenues are presented net of returns
and exclude all taxes. An allowance has been established to
provide for projected merchandise returns.
(e) CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with original
maturities of three months or less (primarily money market
mutual funds) to be cash equivalents.
(f) MERCHANDISE INVENTORIES
Merchandise inventories are recorded at the lower of standard
cost (which approximates the first-in, first-out (FIFO method))
or market.
(g) PROPERTY AND EQUIPMENT
Property and equipment, excluding rental video assets (see note
2), are recorded at cost and depreciated using the straight-line
method. Furniture, fixtures and equipment are depreciated over
their estimated useful lives of 3 to 5 years. Leasehold
improvements are amortized over the shorter of the related lease
term or their estimated useful lives.
Property recorded pursuant to capital lease obligations is
stated at the present value of the minimum lease payments at the
inception of each lease, not in excess of fair value, and
amortized on a straight-line basis over related lease term.
31
32
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected
to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
(i) FINANCIAL INSTRUMENTS
The carrying amount of long-term debt approximates fair value as
of January 31, 2001 and 2000 due to the instruments bearing
interest at market rates. The carrying amount of accounts
payable approximates fair value because of its short maturity
period.
(j) STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance
with the provisions of Accounting Principles Board Opinion No.
25 (APB 25), Accounting for Stock Issued to Employees, and
related interpretations. Compensation expense is recorded on the
date of grant only if the market price of the underlying stock
exceeds the exercise price. Under Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-based Compensation, the Company may elect to recognize
expense for stock-based compensation based on the fair value of
the awards, or continue to account for stock-based compensation
under APB 25 and disclose in the financial statements the
effects of SFAS 123 as if the recognition provisions were
adopted. The Company has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure
provisions of SFAS 123.
(k) ADVERTISING COSTS
Advertising costs for newspaper, television and other media are
expensed as incurred. Gross advertising expenses for the fiscal
years 2000, 1999, and 1998 were $5.9 million, $4.4 million and
$1.4 million, respectively.
(l) PRE-OPENING COSTS
Pre-opening expenses include human resource costs, travel, rent,
advertising, supplies and certain other costs incurred prior to
a superstore's opening and are expensed as incurred.
(m) LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the
period. Diluted loss per share is similarly computed, but
includes the effect, when dilutive, of the Company's weighted
average number of stock options outstanding.
32
33
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
Options to purchase 1,087,083 shares of Common Stock at exercise
prices ranging from $1.27 per share to $14.03 per share
outstanding at January 31, 2001; 1,813,965 shares of Common
Stock at exercise prices ranging from $5.25 per share to $15.00
per share outstanding at January 31, 2000; and 1,916,684 shares
of Common Stock at exercise prices ranging from $0.20 per share
to $15.00 per share outstanding at January 31, 1999, were not
included in the computation of diluted EPS because their
inclusion would have been antidilutive.
(n) USE OF MANAGEMENT ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(o) COMPREHENSIVE INCOME
Comprehensive loss is equal to net loss for all periods
presented.
(p) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, which is required to be adopted in
fiscal 2001. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or
the financial position of the Company.
(2) CHANGE IN ACCOUNTING METHOD
The Company adopted a new, accelerated method of amortizing its rental
video assets in the fourth quarter of fiscal 1998. The Company adopted
the new method upon implementation of a new business model, which
includes revenue-sharing agreements with major studios. Revenue sharing
increases the number of videos in the stores and satisfies customer
demand over a shorter period of time. Revenue sharing allows the Company
to acquire videos at a lower initial cost than traditional buying
arrangements. The Company then shares with studios a percentage of the
actual net rental revenues generated over a contractually determined
period of time. Revenue sharing results in a greater proportion of
rental revenue received over a reduced rental period and, accordingly,
the Company has changed its method of amortizing rental videos in order
to better match expenses with revenues.
Under the new amortization method, revenue-sharing payments are expensed
as revenues are earned under the terms of the specific contracts with
supplying studios. The capitalized cost of all videos is being amortized
on an accelerated basis over six months to a salvage value of $4 per
unit, except for videos purchased for the initial stock of a new store,
which are being amortized on a straight-line basis over 36 months to a
salvage value of $4 per unit.
The adoption of the new amortization method was accounted for as a
change in accounting estimate effected by a change in accounting
principle and, accordingly, the Company recorded a non-cash pre-tax
charge of $18.5 million, which is included in rental video cost of
revenues in the fourth quarter of fiscal 1998, increasing net loss and
diluted loss per share for fiscal 1998 by $11.5 million and $1.10 per
share, respectively.
During fiscal 1998, prior to adopting the new method of amortization in
the fourth quarter, the capitalized cost of base unit rental video
assets (copies one through four of a title for each store) was amortized
on a straight-
33
34
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
line basis over 36 months to a salvage value of $5. The capitalized cost
of non-base unit rental video assets (copies five and above of a title
for each store) was amortized on a straight-line basis over six months
to a salvage value of $5.
(3) MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following (dollars in
thousands):
2000 1999
-------- --------
Merchandise inventories:
Music $ 45,231 $ 51,921
Books 53,757 59,069
Videos 20,919 24,525
Other 14,219 19,094
-------- --------
134,126 154,609
Less allowance for inventory shrinkage and
obsolescence 3,450 2,544
-------- --------
$130,676 $152,065
======== ========
During fiscal 2000 and 1999, the Company purchased approximately 25% and
20%, respectively, of all products (defined herein as merchandise
inventories and rental videos) from three suppliers.
During the fourth quarter of fiscal 1999, the Company recorded a $3.5
million pre-tax charge related to valuing inventory at the lower of cost
or market. Lower than anticipated sales volume in the fourth quarter of
fiscal 1999 resulted in management's decision to increase promotional
discounts on certain products to stimulate sales and to increase
inventory turnover and enhance cash flows. Such discounts resulted in
lower of cost or market inventory adjustments.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (dollars in thousands):
2000 1999
-------- --------
Rental videos $ 53,670 $ 58,452
Furniture and equipment 75,066 78,984
Leasehold improvements 47,464 46,410
Property under capital leases 2,126 2,126
-------- --------
178,326 185,972
Less accumulated depreciation and amortization
(note 2) 113,007 112,730
-------- --------
$ 65,319 $ 73,242
======== ========
Accumulated depreciation and amortization of property and equipment
includes $1.2 million and $1.1 million of accumulated amortization of
equipment under capital leases at January 31, 2001 and 2000,
respectively.
During the fourth quarter of fiscal 2000, the Company's retail store
segment recorded a $1.0 million pre-tax charge included in selling,
general and administrative expenses related to the impairment of
leasehold
34
35
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
improvements for three stores in accordance with SFAS 121, "Impairment
of Long Lived Assets." These stores continue to operate but did not
project cash flow amounts sufficient to cover the book value of the
specific assets. Other amounts for impaired assets were recognized in
connection with the closing of superstores. Please refer to Note 6 for a
description of these amounts.
Also at January 31, 2001, the Company's Internet segment recorded a $0.4
million pre-tax charge included in selling, general and administrative
expenses related to the impairment of information systems equipment and
development costs in accordance with SFAS 121, "Impairment of Long Lived
Assets." The Internet segment will continue to operate but did not
project cash flow amounts sufficient to cover the book value of the
specific assets.
(5) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the
following (dollars in thousands):
2000 1999
------- -------
Allowance for cost of inventory returns $ 7,543 $ 9,463
Deferred gift card revenue 7,659
5,726
Store closing reserve 6,605 3,971
Salaries, vacation and bonus 4,388
3,748
Other 4,703 8,844
------- -------
Total $30,898 $31,752
======= =======
Merchandise inventories that are not sold can normally be returned to
the suppliers. The allowance for cost of inventory returns represents
estimated costs related to merchandise returned or to be returned to
suppliers for which credit is pending. Because the amount of credit to
be received requires estimates, it is reasonably possible that the
Company's estimate of the ultimate settlement with its suppliers may
change in the near term.
(6) STORE CLOSING RESERVE
From time to time and in the normal course of business, the Company
evaluates its store base to determine if a need to close a store(s) is
present. Management will evaluate, among other factors, current and
future profitability, market trends, age of store and lease status.
Included in accrued expenses and other liabilities at January 31, 2001
and 2000 are accruals of $6.6 million and $4.0 million, respectively,
for the net present value of future minimum lease payments and other
costs attributable to closed or relocated stores, net of estimated
sublease income. Charges related to store closings in fiscal 2000
amounted to $6.5 million, of which $3.4 million was recorded in the
fourth quarter. Contained in the $6.5 million were $4.6 million in
accruals for the net present value of minimum lease payments related to
the closing of two underperforming superstores closed in the fourth
quarter and four underperforming stores that management had approved for
closure in the fourth quarter that will be closed by the end of the
second quarter of fiscal 2001. Additionally, fiscal 2000 charges
included $1.6 million for the write-off of leasehold improvements and
$0.3 million of other related costs. The fourth quarter charge of $3.4
million included $1.9 million in accruals for the net present value of
future minimum lease payments, $1.3 million in write-offs of leasehold
improvements and $0.2 million of other related costs.
Offsetting these fiscal 2000 charges were changes in estimates in the
store closing reserve of $1.6 million, of which $0.8 million was
recorded in the fourth quarter, as a result of negotiating early
buy-outs of certain lease liabilities and sublease activities for
certain closed stores.
35
36
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
In fiscal 1999, charges related to store closings were $5.1 million,
which was all recorded during the fourth quarter. Contained in the $5.1
million was $2.5 million in accruals for the net present value of
minimum lease payments related to the closing of two underperforming
superstores closed at January 31, 2000 and four underperforming stores
that management had approved for closure in the fourth quarter that were
closed by the end of the first quarter of fiscal 2000. Additionally,
charges included $2.3 million for the write-off of leasehold
improvements and $0.3 million of other related costs.
The following tables provide a rollforward of reserves that were
established for these charges for fiscal 2000 and 1999. (dollars in
thousands)
FUTURE LEASE
PAYMENTS OTHER COSTS TOTAL
------------ ----------- -------
Balance at January 31, 1999 $ 1,581 $ -- $ 1,581
Additions to provision 2,500 300 2,800
Cash outlay (409) -- (409)
------- ------- -------
Balance at January 31, 2000 $ 3,672 $ 300 $ 3,972
Additions to provision 4,617 272 4,889
Changes in estimates (1,571) -- (1,571)
Cash outlay (368) (317) (685)
------- ------- -------
Balance at January 31, 2001 $ 6,350 $ 255 $ 6,605
======= ======= =======
Payments during the next five years that are to be charged against the
reserve are expected to be approximately $1.0 million per year. Other
costs were charged against the reserve in fiscal 2000 as incurred.
(7) LONG-TERM DEBT
Long-term debt and capitalized lease obligations consisted of the
following (dollars in thousands):
2000 1999
------- -------
Revolving credit facility $28,258 $32,250
Series A senior notes -- 20,000
Capitalized lease obligations (note 4 and 8) 1,352 1,492
Other -- 518
------- -------
29,610 54,260
Less current maturities 154 5,372
------- -------
$29,456 $48,888
======= =======
On August 29, 2000, the Company entered into a three-year syndicated,
secured Loan and Security Agreement with Fleet Retail Finance, Inc.
and The CIT Group/Business Credit, Inc. (the "Facility"). The initial
proceeds from the Facility were used by the Company to terminate and
prepay fully the total amounts outstanding under a prior revolving
credit facility, with Bank of America and a consortium of banks and
under its Series A Senior Notes, (the "Senior Notes") with a
financial institution. The amount outstanding under the Facility is
limited by a borrowing base predicated on eligible inventory, as
defined, and certain rental video assets, net of accumulated
depreciation less specifically defined reserves and is limited to a
ceiling of $70 million, which increases to $80 million between
October 15 and December 15 of each year of the Facility, less a $10
million availability reserve. The Facility bears interest based on
the prevailing prime rate or LIBOR plus 2.00% at the Company's
option. The borrowing base under the Facility is limited to an
advance rate of 65% of eligible inventory and certain rental video
assets net of accumulated amortization
36
37
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
less specifically defined reserves. The Facility contains no
financial covenants, restricts the payment of dividends and certain
other debt and acquisition limitations, allows for the repurchase of
up to $7.5 million of the Company's common stock and requires a
minimum availability of $10 million at all times. The Facility is
secured by substantially all of the assets of the Company and its
subsidiaries and is guaranteed by each of the Company's three
consolidated subsidiaries. The Facility expires on August 29, 2003.
At January 31, 2001, the Company had $26.1 million in excess
availability after the $10 million availability reserve, under the
Facility.
At January 31, 2001 and 2000, the Company had borrowings outstanding
of $28.3 million and $32.3 million, respectively, under revolving
credit facilities (the "Facilities"). The Facilities accrued interest
at variable rates based on the lender agreements. The average rate of
interest being charged under the Facilities at January 31, 2001 and
2000 was 8.4% and 6.9%, respectively.
At January 31, 2000, the Company had $20 million aggregate principal
amount of unsecured Series A Senior Notes due June 13, 2001 (the
"Senior Notes) outstanding with a financial institution. The Company
began making required $5.0 million annual principal payments on June
13, 1999. The senior notes had a stated interest rate of 7.75% at
January 31, 2000. The Company made the June 13, 2000 required
principal payment, however, on August 29, 2000 the Company pre-paid
the remaining balance on the Senior Notes with proceeds from the New
Facility.
The capitalized lease obligations represent two leases on certain
retail space with initial terms of 15 years.
The aggregate maturities of long-term debt and capitalized lease
obligations for years subsequent to fiscal 2000 are as follows
(dollars in thousands):
2001 $ 154
2002 169
2003 28,451
2004 221
2005 243
Thereafter 372
-------
$29,610
=======
(8) LEASES
The Company leases retail space under operating leases with terms
ranging from three to fifteen years, with certain leases containing
renewal options. Lease agreements generally provide for minimum rentals.
Some leases also include additional contingent rental amounts based upon
specified percentages of sales above predetermined levels. Rental
expense for operating leases consists of the following (dollars in
thousands):
2000 1999 1998
-------- -------- --------
Minimum rentals $ 16,783 $ 15,444 $ 13,280
Contingent rentals 1,595 1,728 1,769
Less: sublease income (324) (279) (138)
-------- -------- --------
Rental expense $ 18,054 $ 16,893 $ 14,911
======== ======== ========
37
38
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
Future minimum lease payments under non-cancelable operating leases and
the present value of future minimum capital lease payments as of January
31, 2001 are (dollars in thousands):
CAPITAL OPERATING
LEASES LEASES
------- -------
2001 $ 257 $16,227
2002 259 14,785
2003 268 13,241
2004 280 11,120
2005 283 9,462
Thereafter 405 22,961
------- -------
Total minimum lease payments 1,752 87,796
Less net present value of sublease income 453
-------
Net minimum lease payments under
operating leases $87,343
=======
Less amount representing imputed interest 246
-------
Total obligations under capital leases 1,506
Less current principal maturities of capital lease
Obligations 154
-------
Obligations under capital leases,
excluding current maturities $ 1,352
=======
A director of the Company is a limited partner in various limited
partnerships that lease land and improvements to the Company under
certain lease agreements. During fiscal 2000, 1999 and 1998, the Company
made lease payments of $0.6 million, $0.6 million and $0.5 million,
respectively, to these partnerships.
(9) INCOME TAXES
Income tax expense (benefit) consists of the following (dollars in
thousands):
2000 1999 1998
------- ------- -------
Current federal $(1,075) $ 1,214 $ 600
Current state and local (573) (32) 105
Deferred federal 3,130 (2,156) (2,861)
Deferred state and local 552 (385) (493)
------- ------- -------
$ 2,034 $(1,359) $(2,649)
======= ======= =======
38
39
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
The difference between expected income tax expense (computed by applying
the statutory rate of 34% to loss before income taxes) and actual income
tax expense (benefit) is as follows (dollars in thousands):
2000 1999 1998
------- ------- -------
Computed "expected" tax benefit $(4,272) $(1,198) $(2,364)
State and local income taxes, net of federal
income tax effect (566) (275) (255)
Increase in valuation allowance 6,666 -- --
Other 206 114 (30)
------- ------- -------
$ 2,034 $(1,359) $(2,649)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below (dollars in thousands):
2000 1999
------ ------
Deferred tax assets:
Gift cards $ 590 $ 431
Abandoned leases 3,296 2,461
Deferred rent 573 586
Compensated absences 559 492
Deferred compensation 400 392
Deferred lease incentives 566 971
Inventories 1,226 --
Property and equipment, principally due to
different depreciation methods for financial
reporting and income tax purposes
491 --
Other -- 132
------ ------
Total deferred tax assets 7,701 5,465
Valuation allowance of deferred tax assets 6,666 --
------ ------
Deferred tax assets net of valuation allowance
1,035 5,465
Deferred tax liabilities:
Inventories -- 1,274
Property and equipment -- 509
Other 1,035 --
------ ------
Total deferred tax liabilities 1,035 1,783
------ ------
Net deferred tax assets $ -- $3,682
====== ======
39
40
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
In fiscal 1997, the Company elected to change from the LIFO cost method
to the FIFO cost method of inventory accounting for financial reporting
and income tax purposes. The $4.7 million deferred tax liability related
to the tax LIFO reserve at January 31, 1997 is being included in taxable
income ratably over a four-year period beginning in fiscal 1997.
During fiscal 2000, the Company reviewed the net deferred tax asset
under the provisions set forth in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Due to
cumulative losses incurred in recent years, the current balance of the
net deferred tax asset does not meet the criteria for recognition under
SFAS 109. As a result, the Company recorded a valuation allowance of
$6.7 million to fully reserve the balance of the net deferred tax asset.
(10) 401k AND ASOP
Beginning February 1, 2001, full-time employees who have attained age 21
and part-time employees who have worked a minimum of 1,000 hours in a
year and have attained age 21 are eligible to participate in the
Company's 401k plan and may elect to contribute up to 15 percent of
their salary, subject to federal limitations, to the plan. Employer
contributions include a quarterly guaranteed match of 25% of employee
contributions up to a maximum of 6% deferral of compensation and a
discretionary match based on specific criteria reviewed every fiscal six
month period by the Company and approved by the Board of Directors. This
discretionary match is allocated solely to those employees who are
participating in the plan and are employed on the last day of the
six-month period. Prior to February 1, 2001, employees who had attained
age 21 were eligible to participate in the Company's 401k plan and could
elect to contribute up to 15 percent of their salary, subject to federal
limitations, to the plan. Employer contributions were a discretionary
match determined by the Company and allocated solely to those employees
who were participating in the plan, had completed one year of service
and were employed on the last day of the plan year. Amounts expensed
related to the plan were $0.4 million, $0.2 million and $0.3 million
during fiscal 2000, 1999 and 1998, respectively.
The Company's Associate Stock Ownership Plan (ASOP) permits employees
who have attained age 21 and completed one year of service, or 1000
hours in 12 consecutive months for part-time associates, to participate
in the ASOP. Employer contributions are determined at the discretion of
the Company. The Board of Directors has determined that the level of
contributions will be made based on attaining operational profit goals
as set by the Board of Directors. The contribution is based on a
percentage of participants' eligible compensation. Amounts expensed
related to the Plan were $0.5 million, $0.3 million and $0.4 million
during fiscal 2000, 1999 and 1998, respectively. Common shares held by
the ASOP were 199,269, 124,410 and 92,825 at January 31, 2001, 2000 and
1999, respectively.
(11) SHAREHOLDERS' EQUITY
The Company has four stock option plans: the 1991 and 1994 Stock Option
Plans, the 1996 Incentive Stock Plan and the Outside Directors Plan (for
non-employee directors). A total of 505,900 shares may be granted under
each of the 1991 and 1994 Stock Option Plans, 632,375 shares may be
granted under the 1996 Incentive Stock Plan, and 101,180 shares may be
granted under the Outside Directors Plan.
The 1991 and 1994 Stock Option Plans and the 1996 Incentive Stock Plan
authorize the award of both incentive stock options and non-qualified
stock options to purchase common stock to officers, other associates and
directors of the Company. The exercise price per share of incentive
stock options may not be less than the market price of the Company's
common stock on the date the option is granted. The exercise price per
share of non-qualified stock options is determined by the Board of
Directors, or a committee thereof. The term of each option is determined
by the Board of Directors and generally will not exceed ten years from
the date of grant. In general, each option award vests at 20% per year
over five years. The exercise price of
40
41
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
options issued to certain executive officers of the Company included
fixed annual increases, which were eliminated in fiscal 1997.
The 1996 Incentive Stock Plan also authorizes the granting of stock
appreciation rights, restricted stock, dividend equivalent rights, stock
awards, and other stock-based awards to officers, other associates,
directors, and consultants of the Company. There have been no grants of
these awards under this plan.
The Company has a management stock purchase plan that authorizes the
issuance of up to 227,655 shares of common stock, pursuant to agreements
providing for the purchase of restricted stock units (RSU's). The cost
of each RSU is equal to 75% of the fair market value of the common stock
of the Company on the date the RSU is awarded. As of January 31, 2001,
2000 and 1999 there were 3,881, 6,830 and 8,025 RSU's awarded under the
Plan, respectively. The Company recorded approximately $8,800, $52,000
and $50,000 of compensation expense at the time the RSU's were awarded
for fiscal year 2000, 1999 and 1998, respectively. As of January 31,
2001, 2000 and 1999, there were 13,576, 11,654 and 8,025 RSU's
outstanding under the plan, respectively.
On October 2, 2000, the Company exchanged restricted stock for
outstanding options granted to associates having an exercise price of
$9.00 or more per share. The ratio of restricted stock issued in the
exchange varied with the option exercise price of the outstanding
options but in the aggregate was approximately 1:4. Options beneficially
owned by the Chief Executive Officer and the Directors of the Company
were excluded from the exchange. As a result of the exchange, 122,269
shares of restricted stock were issued and options for 504,694 shares
were cancelled and returned to the Company's 1991, 1994 and 1996 Stock
Option Plans. Rights in the restricted stock vested 50% on January 31,
2001 and 50% on April 30, 2001. The restricted stock is subject to
restrictions and may be resold only in accordance with Rule 144 under
the Securities Exchange Act of 1934 or other applicable exemption. In
connection with the exchange, the Company recognized $0.2 million in
compensation expense in fiscal 2000.
A summary of information with respect to all stock option plans is as
follows:
WEIGHTED-AVERAGE
EXERCISE
OPTIONS PRICE
----------- ----------------
Outstanding at January 31, 1998 $ 1,797,554 $11.72
Granted 787,162 11.05
Exercised (13,728) 13.35
Forfeited (654,304) 13.56
----------- ------
Outstanding at January 31, 1999 1,916,684 10.80
Granted 372,540 9.52
Exercised (137,366) 7.61
Forfeited (337,893) 11.39
----------- ------
Outstanding at January 31, 2000 1,813,965 10.67
Granted 569,376 3.20
Exercised (50,000) 1.27
Forfeited (1,246,258) 10.50
----------- ------
Outstanding at January 31, 2001 $ 1,087,083 $ 7.39
=========== ======
Reserved and available for grant at
January 31, 2001 1,162,603
41
42
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
At January 31, 2001, the options outstanding and options exercisable, and their
related weighted-average exercise price, and the weighted-average remaining
contractual life for the ranges of exercise prices are shown in the table below.
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE REMAINING
OPTIONS EXERCISE PRICE CONTRACTUAL LIFE
------- ------ ----------
RANGE: $1.27 TO $4.99
Options outstanding at January 31, 2001 476,359 $ 3.37 9.12 years
Options exercisable at January 31, 2001 2,859 $ 2.22
RANGE: $5.00 TO $9.99
Options outstanding at January 31, 2001 102,401 $ 6.61 6.59 years
Options exercisable at January 31, 2001 41,510 $ 6.79
PRICE: $10.00 TO $14.03
Options outstanding at January 31, 2001 508,323 $11.32 5.94 years
Options exercisable at January 31, 2001 479,347 $11.24
At January 31, 2001, 2000 and 1999, the number of options exercisable was
523,716, 1,067,915 and 980,139, respectively, and the weighted-average exercise
price of those options was $10.84, $10.57 and $9.98, respectively.
The Company applies APB 25 and related interpretations in accounting for its
Plans. Since the Company generally grants stock options, except for RSUs as
described above, with an exercise price equal to or greater than the current
market price of the stock on the grant date, compensation expense is not
recorded. Had the Company determined compensation cost based on the fair value
at the date of grant for its stock options under SFAS 123, the Company's net
loss and loss per share would have been changed as set forth in pro forma
amounts indicated below (in thousands except per share data):
2000 1999 1998
---------- ------ ------
Net loss:
As reported $ (14,600) (2,165) (4,305)
Pro forma (15,143) (3,419) (5,196)
Loss per share:
As reported - basic (1.25) (0.19) (0.41)
As reported - diluted (1.25) (0.19) (0.41)
Pro forma - basic (1.30) (0.29) (0.50)
Pro forma - diluted (1.30) (0.29) (0.50)
42
43
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
The per share weighted-average exercise price and the per share
weighted-average minimum and fair value of stock options at the date of
grant, using the Black-Scholes option-pricing model for SFAS 123
disclosure purposes, is as follows:
EXERCISE PRICE FAIR VALUE
------------------------------- ------------------------------
2000 1999 1998 2000 1999 1998
----- ---- ----- ---- ---- ----
Options granted at
market price $3.21 9.54 10.55 1.98 6.41 7.06
Options granted at prices
exceeding market price 0.00 12.00 12.94 0.00 0.31 2.82
Options granted at prices below
market price 2.27 7.62 6.19 1.52 5.71 4.55
Total options granted 3.20 9.52 11.05 1.98 6.19 7.58
The following assumptions were used in the calculation:
2000 1999 1998
------- ------- -------
Expected dividend yield $ -- -- --
Risk-free interest rate 5.07% 6.62% 5.26%
Expected life in years 3 to 10 3 to 10 3 to 10
Volatility .60 .58 .59
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest during fiscal 2000, 1999 and 1998 totaled
$3.2 million, $3.6 million and $3.8 million, respectively. Cash payments
for income taxes during fiscal 2000, 1999 and 1998 totaled $0.2 million,
$0.7 million and $7.8 million, respectively.
(13) LITIGATION AND CONTINGENCIES
The Company's employees are covered under a self-insured health plan.
Claims in excess of $100,000 per employee are insured by a managing
underwriter. Estimated claims incurred but not reported have been
accrued in the accompanying financial statements. Health insurance
expense during fiscal 2000, 1999 and 1998 was $2.2 million, $2.0 million
and $1.4 million, respectively.
The Company is partially self-insured for workers' compensation. Claims
in excess of $100,000 per accident and $1.1 million in the aggregate
annually are insured by an insurance company. Estimated claims and
claims incurred but not paid have been accrued in the accompanying
consolidated financial statements. Workers' compensation expense during
fiscal 2000, 1999 and 1998 was $0.4 million, $0.3 million and $0.1
million, respectively.
Following the Company's initial announcement on March 7, 2000 of the
requirement for accounting restatements, reflected in the fiscal 1999
Annual Report on Form 10-K, six purported class action lawsuits were
filed in the United States District Court for the Northern District of
Texas against the Company and certain of the current and former
directors and officers of the Company asserting various claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
Although four of the lawsuits were originally filed in the Dallas
Division of the Northern District of Texas, all of the five pending
actions have been transferred to the Amarillo Division of the Northern
District and have been consolidated. One of the Section 10(b) and 20(a)
lawsuits filed in the Dallas Division was voluntarily dismissed. On May
15, 2000, a lawsuit was filed in the United States District Court for
the Northern District of Texas against the Company,
43
44
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
its current and former directors and officers at the time of the
Company's June 1998 initial public offering and three underwriters,
Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz, LLC
asserting various claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933.
None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of
the proceedings or to estimate the potential range of loss with respect
to these matters, an adverse outcome with respect to such proceedings
could have a material adverse impact on the Company's financial
position, results of operations and cash flows.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
(14) SEGMENT DISCLOSURES
The Company has two operating segments, retail stores and Internet
operations. The Company's chief operating decision maker, as that term
is defined in the relevant accounting standard, regularly reviews
financial information about each of the above operating segments for
assessing performance and allocating resources. Revenue for retail
stores is derived from the sale of merchandise and rental of
videocassettes, video games and DVD. Revenue for Internet operations is
derived solely from the sale of merchandise. Segment information
regarding the Company's retail stores and Internet operations for fiscal
years 2000, 1999 and 1998 is presented below.
2000: RETAIL INTERNET
(Dollars in thousands) STORES OPERATIONS TOTAL
------ ---------- -----
Total revenue $ 458,021 182 $ 458,203
Depreciation and amortization $ 32,759 396 $ 33,155
Operating loss $ (7,287) (1,991) $ (9,278)
Total assets $ 212,679 805 $ 213,484
Capital expenditures $ 29,803 679 $ 30,482
1999: RETAIL INTERNET
(Dollars in thousands) STORES OPERATIONS TOTAL
------ ---------- -----
Total revenue $445,280 145 $445,425
Depreciation and amortization $ 31,367 259 $ 31,626
Operating income (loss) $ 1,712 (1,733) $ (21)
Total assets $246,858 1,075 $247,933
Capital expenditures $ 46,487 823 $ 47,310
1998: RETAIL INTERNET
(Dollars in thousands) STORES OPERATIONS TOTAL
------ ---------- -----
Total revenue $ 399,036 30 $ 399,066
Depreciation and amortization $ 55,291 40 $ 55,331
Operating loss $ (3,685) (228) $ (3,913)
Total assets $ 233,256 223 $ 233,479
Capital expenditures $ 42,325 243 $ 42,568
44
45
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
(15) INTERIM FINANCIAL RESULTS (UNAUDITED)
FISCAL 2000: QUARTER
---------------------------------------------------------------
Dollars in thousands, except per share data First Second Third Fourth
--------- --------- --------- ---------
Total revenues $ 110,085 $ 106,771 $ 100,080 $ 141,267
Total cost of revenues 75,215 74,020 73,984 95,262
Selling, general and administrative expenses(a)(b) 34,694 35,621 37,318 41,334
Pre-opening expenses 2 (2) 33 --
Operating income (loss) 174 (2,868) (11,255) 4,671
Interest and other expense, net 920 824 772 773
Income (loss) before taxes (746) (3,692) (12,027) 3,897
Income tax expense (benefit)(c) (284) (1,402) -- 3,720
Net income (loss) (462) (2,290) (12,027) 177
Basic income (loss) per share $ (0.04) $ (0.20) $ (1.03) $ 0.02
Diluted income (loss) per share $ (0.04) $ (0.20) $ (1.03) $ 0.02
FISCAL 1999: QUARTER
---------------------------------------------------------------
Dollars in thousands, except per share data First Second Third Fourth
--------- --------- --------- -----------
Total revenues $ 100,406 $ 101,882 $ 100,406 $ 142,732
Total cost of revenues(d) 64,102 66,698 68,370 103,082
Selling, general and administrative expenses(b) 31,108 32,301 34,719 43,386
Pre-opening expenses 127 515 717 323
Operating income (loss) 5,069 2,368 (3,400) (4,059)
Interest and other expense, net 786 896 982 838
Income (loss) before taxes 4,283 1,472 (4,382) (4,897)
Income tax expense (benefit) 1,585 606 (1,646) (1,904)
Net income (loss) 2,698 866 (2,736) (2,993)
Basic income (loss) per share $ 0.23 $ 0.07 $ (0.24) $ (0.26)
Diluted income (loss) per share $ 0.23 $ 0.07 $ (0.24) $ (0.26)
(a) The Company recorded a pre-tax charge of approximately $3.1 million in the
third quarter of fiscal year 2000. This charge related to the closing of
two of its superstores during the fourth quarter of fiscal 2000 and
includes the net present value of future minimum lease payments, write-off
of property and equipment, and other costs associated with the closing of
these locations.
(b) The Company recorded pre-tax charges of approximately $3.4 million and $5.1
million in the fourth quarter of fiscal years 2000 and 1999, respectively.
These charges related to the closing of superstores as described in Note 6.
(c) During the third and fourth quarter of fiscal 2000, the Company reviewed
the net deferred tax asset under the provisions set forth in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Due to cumulative losses incurred in recent years, the current
balance of the net deferred tax asset did not meet the criteria for
recognition under SFAS 109. As a result, the Company recorded no income tax
benefit in the third quarter and recorded a valuation allowance of $3.7
million during the fourth quarter of fiscal 2000 to fully reserve the
balance of the net deferred tax asset.
(d) The Company recorded pre-tax charges of approximately $3.5 million for the
write down of inventory to the lower of cost or market in the fourth
quarter of fiscal year 1999.
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46
Hastings Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 2001 and 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 22, 2000, with the recommendation of the Audit Committee and
approval of the Board of Directors, we dismissed KPMG, LLP (KPMG) as our
independent auditors. On October 19, 2000, we engaged Ernst and Young LLP as our
independent auditors. We filed reports on Form 8-K with the Securities and
Exchange Commission on September 29, 2000 and October 24, 2000 as a result of
these events, respectively.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding our directors will be set forth
in our Proxy Statement for our 2001 Annual Meeting of Shareholders, to be filed
within 120 days after the end of fiscal 2000 (our "Proxy Statement"), under the
heading "Proposal No. 1: Election of Three Directors," which information is
incorporated herein by reference. The information required by this item
regarding compliance with Section 16(a) of the Securities Exchange Act of 1934
will be set forth in our Proxy Statement under the heading "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," which is incorporated
herein by reference. The information required by this item regarding our
executive officers is set forth under the heading "Executive Officers of the
Company" in Part I of this Form 10-K, which information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding our directors will be set forth
in our Proxy Statement under the headings "Executive Compensation," "Executive
Compensation - Director Compensation," "Executive Compensation - Employee
Contracts and Change of Control Arrangements," and "Executive Compensation -
Compensation Committee Interlocks and Insider Participation," which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding our directors will be set forth
in our Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management," which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in our Proxy Statement
under the heading "Certain Relationships and Related Transactions," which
information is incorporated herein by reference.
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47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following consolidated financial statements of the Company are
included in Part II, Item 8:
Independent Auditors' Reports................................. 25
Consolidated Balance Sheets as of January 31, 2001 and 2000... 27
Consolidated Statements of Operations for the years ended
January 31, 2001, 2000 and 1999........................... 28
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 2001, 2000 and 1999..................... 29
Consolidated Statements of Cash Flows for the years ended
January 31, 2001, 2000 and 1999........................... 30
Notes to Consolidated Financial Statements.................... 31
2. The following financial statement schedules and other information
required to be filed by Items 8 and 14(d) of Form 10-K are
included in Part IV: Schedule II - Valuation and Qualifying
Accounts
All other schedules are omitted because they are not applicable, not
required or the required information is included in the Consolidated
Financial Statements and notes thereto.
3. The following exhibits are filed herewith or incorporated by
reference as indicated as required by Item 601 of Regulation S-K.
The exhibits designated by an asterisk are management contracts
and/or compensatory plans or arrangements required to be filed as
exhibits to this report.
Exhibit
Number Description
------ -----------
3.1 (1) Third Restated Articles of Incorporation of the
Company.
3.2 (1) Amended and Restated Bylaws of the Company.
4.1 (1) Specimen of Certificate of Common Stock of the
Company.
4.2 (1) Third Restated Articles of Incorporation of the
Company (see 3.1 above).
4.3 (1) Amended and Restated Bylaws of the Company (see 3.2
above).
10.1 (1) Form of Indemnification Agreement by and between the
Company and its directors and executive officers.
10.2 (1) Note Purchase Agreement regarding $25,000,000 7.75%
Senior Notes Due June 13, 2003
10.3 (1) Credit Agreement among Hastings Entertainment, Inc.
and NationsBank as of December 16, 1998
10.4 * (1) Hastings Amended 1996 Incentive Stock Plan.
10.5 * (1) Hastings 1994 Stock Option Plan.
10.6 * (1) Hastings 1991 Stock Option Plan.
10.7 * (1) Hastings Entertainment, Inc. Associates' 401(k) Plan
and Trust.
10.8 * (1) Hastings Employee Stock Ownership Plan Trust Agreement.
10.9 * (1) Chief Executive Officer Stock Option, as amended.
10.10 * (1) Corporate Officer Incentive Plan.
10.11 * (1) Management Stock Purchase Plan.
10.12 * (1) Management Incentive Plan.
10.13 * (1) Salary Incentive Plan.
10.14 * (1) Hastings Entertainment, Inc. Stock Option Plan for
Outside Directors.
10.15 * (4) Agreement dated January 31, 2001 between John H.
Marmaduke and the Company
10.16 (1) Lease Agreement, dated August 3, 1994, as amended,
between Omni Capital Corporation and the Company, for
warehouse space located at Sunset Center in Amarillo,
Texas.
47
48
10.17 (1) Stock Redemption Agreement dated May 3, 1994, as
amended, between John H. Marmaduke, Independent
Executor of the Estate of Sam Marmaduke, Deceased,
and the Company.
10.18 (1) Lease Agreement, dated May 28, 1992, between the City
of Amarillo and the Company for space located at 1900
W. 7th Avenue in Amarillo, Texas.
10.19 (1) $1,600,000 Promissory Note and Security Agreement in
favor of First Interstate Bank of Texas, NA.
10.20 (1) Stock Grant Plan for Outside Directors.
10.21 (1) Form of Employment Agreement by and between the
Company and certain of its executives.
10.22 (2) Amended Lease Agreement, dated October 13, 1999,
between Omni Capital Corporation and the Company, for
office space located at Sunset Center in Amarillo,
Texas.
10.23 (2) First Amendment to Credit Agreement and waiver
agreement dated as of May 2, 2000 between Hastings
Entertainment, Inc. and Bank of America, N.A., as
administrative agent
10.24 (2) Second Amendment to Credit Agreement dated as of June
12, 2000 between Hastings Entertainment, Inc. and
Bank of America, N.A., as administrative agent.
10.25 (2) Amended and Restated Note Purchase Agreement dated as
of June 12, 2000 between Hastings Entertainment, Inc.
and Metropolitan Life Insurance Company and
Metropolitan Insurance and Annuity Company
10.26 (2) Security Agreement dated as of May 26, 2000 between
Hastings Entertainment, Inc. and Subsidiaries and
Bank of America, N.A.
10.27 (3) Loan and Security Agreement dated August 29, 2000
between Hastings Entertainment, Inc. and Fleet Retail
Finance, Inc., Agent.
21.1 (1) Subsidiaries of the Company.
23.1 (4) Consent of Ernst and Young LLP
23.2 (4) Consent of KPMG LLP
24.1 (4) Powers of Attorney (included on signature pages)
- ------------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference. The financial
statements set forth under Item 8 of this report on Form 10-K are
incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, as amended, for the fiscal year ended January 31, 2000, and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, as amended, for the quarterly period ended July 31, 2000,
and incorporated herein by reference.
(4) Filed herewith.
(b) Reports on Form 8-K
(i) No report on Form 8-K was filed by the registrant during the last
quarter of the fiscal year for which this report on Form 10-K is filed.
48
49
Financial Statement Schedule II -
HASTINGS ENTERTAINMENT, INC.
Valuation and Qualifying Accounts and Reserves
Years Ended January 31, 2001, 2000 and 1999
(Amounts in thousands)
FISCAL YEAR
------------------------------------------
Description 2000 1999 1998
-------- -------- --------
Reserves deducted from assets:
Allowance for shrinkage and inventory obsolescence:
Balance at the beginning of period $ 2,544 $ 2,146 $ 2,755
Additions charged to costs and expenses 14,698 11,958 12,749
Deductions for write-offs (13,709) (11,560) (13,358)
-------- -------- --------
Balance at end of period $ 3,533 $ 2,544 $ 2,146
======== ======== ========
Reserves added to liabilities:
Allowance for cost of inventory returns:
Balance at the beginning of period $ 9,463 $ 11,418 $ 4,040
Additions charged to costs and expenses (1) 10,247 7,170 8,748
Deductions for write-offs (12,167) (9,125) (1,370)
-------- -------- --------
Balance at end of period $ 7,543 $ 9,463 $ 11,418
======== ======== ========
(1) Total returns expense was $12.2 million, $9.1 million and $10.6 million for
the fiscal years 2000, 1999 and 1998, respectively. The table does not
include the cost of operating our return center ($2.0 million, $1.9 million
and $1.9 million for the fiscal years 2000, 1999 and 1998, respectively),
which is recorded directly to returns expense.
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50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, on behalf of the registrant, thereunto duly
authorized:
HASTINGS ENTERTAINMENT, INC.
DATE: May 1, 2001 By: /s/ John H. Marmaduke
-------------------------------------
John H. Marmaduke
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and
constitutes John H. Marmaduke and Dan Crow, and each of them singly, his true
and lawful attorneys-in-fact with full power of substitution and redistribution,
for him and in his name, place and stead, in any and all capacities to sign and
file any and all amendments to this report with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and he hereby ratifies and confirms all that said attorneys-in-fact or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John H. Marmaduke Chairman of the Board, President and Chief Executive Officer
- --------------------------- (Principal Executive Officer) May 1, 2001
John H. Marmaduke
/s/ Gaines L. Godfrey Director May 1, 2001
- ---------------------------
Gaines L. Godfrey
/s/ Peter A. Dallas Director May 1, 2001
- ---------------------------
Peter A. Dallas
/s/ Craig R. Lentzsch Director May 1, 2001
- ---------------------------
Craig R. Lentzsch
/s/ Stephen S. Marmaduke Director May 1, 2001
- ---------------------------
Stephen S. Marmaduke
/s/ Jeffrey G. Shrader Director May 1, 2001
- ---------------------------
Jeffrey G. Shrader
/s/ Ron G. Stegall Director May 1, 2001
- ---------------------------
Ron G. Stegall
/s/ Daryl L. Lansdale Director May 1, 2001
- ---------------------------
Daryl L. Lansdale
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51
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 (1) Third Restated Articles of Incorporation of the
Company.
3.2 (1) Amended and Restated Bylaws of the Company.
4.1 (1) Specimen of Certificate of Common Stock of the
Company.
4.2 (1) Third Restated Articles of Incorporation of the
Company (see 3.1 above).
4.3 (1) Amended and Restated Bylaws of the Company (see 3.2
above).
10.1 (1) Form of Indemnification Agreement by and between the
Company and its directors and executive officers.
10.2 (1) Note Purchase Agreement regarding $25,000,000 7.75%
Senior Notes Due June 13, 2003
10.3 (1) Credit Agreement among Hastings Entertainment, Inc.
and NationsBank as of December 16, 1998
10.4 * (1) Hastings Amended 1996 Incentive Stock Plan.
10.5 * (1) Hastings 1994 Stock Option Plan.
10.6 * (1) Hastings 1991 Stock Option Plan.
10.7 * (1) Hastings Entertainment, Inc. Associates' 401(k) Plan
and Trust.
10.8 * (1) Hastings Employee Stock Ownership Plan Trust Agreement.
10.9 * (1) Chief Executive Officer Stock Option, as amended.
10.10 * (1) Corporate Officer Incentive Plan.
10.11 * (1) Management Stock Purchase Plan.
10.12 * (1) Management Incentive Plan.
10.13 * (1) Salary Incentive Plan.
10.14 * (1) Hastings Entertainment, Inc. Stock Option Plan for
Outside Directors.
10.15 * (4) Agreement dated January 31, 2001 between John H.
Marmaduke and the Company
10.16 (1) Lease Agreement, dated August 3, 1994, as amended,
between Omni Capital Corporation and the Company, for
warehouse space located at Sunset Center in Amarillo,
Texas.
52
10.17 (1) Stock Redemption Agreement dated May 3, 1994, as
amended, between John H. Marmaduke, Independent
Executor of the Estate of Sam Marmaduke, Deceased,
and the Company.
10.18 (1) Lease Agreement, dated May 28, 1992, between the City
of Amarillo and the Company for space located at 1900
W. 7th Avenue in Amarillo, Texas.
10.19 (1) $1,600,000 Promissory Note and Security Agreement in
favor of First Interstate Bank of Texas, NA.
10.20 (1) Stock Grant Plan for Outside Directors.
10.21 * (1) Form of Employment Agreement by and between the
Company and certain of its executives.
10.22 (2) Amended Lease Agreement, dated October 13, 1999,
between Omni Capital Corporation and the Company, for
office space located at Sunset Center in Amarillo,
Texas.
10.23 (2) First Amendment to Credit Agreement and waiver
agreement dated as of May 2, 2000 between Hastings
Entertainment, Inc. and Bank of America, N.A., as
administrative agent
10.24 (2) Second Amendment to Credit Agreement dated as of June
12, 2000 between Hastings Entertainment, Inc. and
Bank of America, N.A., as administrative agent.
10.25 (2) Amended and Restated Note Purchase Agreement dated as
of June 12, 2000 between Hastings Entertainment, Inc.
and Metropolitan Life Insurance Company and
Metropolitan Insurance and Annuity Company
10.26 (2) Security Agreement dated as of May 26, 2000 between
Hastings Entertainment, Inc. and Subsidiaries and
Bank of America, N.A.
10.27 (3) Loan and Security Agreement dated August 29, 2000
between Hastings Entertainment, Inc. and Fleet Retail
Finance, Inc., Agent.
21.1 (1) Subsidiaries of the Company.
23.1 (4) Consent of Ernst and Young LLP
23.2 (4) Consent of KPMG LLP
24.1 (4) Powers of Attorney (included on signature pages)
- ------------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference. The financial
statements set forth under Item 8 of this report on Form 10-K are
incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, as amended, for the fiscal year ended January 31, 2000, and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, as amended, for the quarterly period ended July 31, 2000,
and incorporated herein by reference.
(4) Filed herewith.