1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACTION 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)
(806) 351-2300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Number of shares outstanding of the registrant's common stock, as of June 10,
2001:
Class Shares Outstanding
- --------------------------------------- ----------------------------------
Common Stock, $.01 par value per share 11,839,942
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HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 30, 2001
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2001 (Unaudited) and
January 31, 2001 3
Unaudited Consolidated Statements of Operations for the Three Months
Ended April 30, 2001 and 2000 4
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
April 30, 2001 and 2000 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE PAGE 16
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PART I
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2001 and January 31, 2001
(Dollars in thousands, except par value)
APRIL 30, JANUARY 31,
2001 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 6,955 $ 4,257
Merchandise inventories, net 127,331 130,676
Income taxes receivable 7,479 7,759
Other current assets 5,056 5,461
------------ ------------
Total current assets 146,821 148,153
Property and equipment, net of accumulated depreciation
of $115,554 and $113,007 respectively 61,641 65,319
Other assets 12 12
------------ ------------
$ 208,474 $ 213,484
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $ 154 $ 154
Trade accounts payable 64,266 70,534
Accrued expenses and other current liabilities 27,341 30,898
------------ ------------
Total current liabilities 91,761 101,586
Long term debt, excluding current maturities 35,155 29,456
Other liabilities 6,448 6,651
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 issued and outstanding at January 31, 2001;
11,813,433 shares issued and outstanding at April 30, 2001 118 117
Additional paid-in capital 36,409 36,323
Retained earnings 38,583 39,351
------------ ------------
75,110 75,791
------------ ------------
$ 208,474 $ 213,484
============ ============
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three Months Ended April 30, 2001 and 2000
(In thousands, except per share data)
THREE MONTHS ENDED APRIL 30,
-----------------------------
2001 2000
---------- ----------
Merchandise revenue $ 86,614 $ 88,131
Rental video revenue 22,526 21,954
---------- ----------
Total revenues 109,140 110,085
Merchandise cost of revenue 65,171 66,945
Rental video cost of revenue 10,842 8,270
---------- ----------
Total cost of revenues 76,013 75,215
---------- ----------
Gross profit 33,127 34,870
Selling, general and administrative expenses 33,293 34,693
Pre-opening expenses -- 3
---------- ----------
Operating income (loss) (166) 174
Other income (expense):
Interest expense (627) (961)
Other, net 26 41
---------- ----------
Loss before income taxes (767) (746)
Income tax benefit -- (284)
---------- ----------
Net loss $ (767) $ (462)
========== ==========
Basic and diluted loss per share $ (0.07) $ (0.04)
========== ==========
Weighted-average common shares outstanding--basic and diluted 11,754 11,629
========== ==========
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
Three Months Ended April 30, 2001 and 2000
(Dollars in thousands)
THREE MONTHS ENDED APRIL 30,
-----------------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $ (767) $ (462)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation expense 8,891 8,192
Loss on rental videos lost, stolen and defective 1,304 668
Loss on disposal of non-rental video assets 208 125
Deferred income tax -- 564
Stock compensation 88 9
Changes in operating assets and liabilities:
Merchandise inventory 4,289 19,932
Other current assets 404 449
Trade accounts payable and accrued expenses (9,825) (12,654)
Income taxes receivable 280 (790)
Other assets and liabilities, net (203) (126)
---------- ----------
Net cash provided by operating activities 4,669 15,907
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (7,670) (6,696)
---------- ----------
Net cash used in investing activities (7,670) (6,696)
---------- ----------
Cash flows from financing activities:
Borrowings under revolving credit facility 117,876 46,000
Repayments under revolving credit facility (112,141) (57,200)
Payments under long-term debt and capital lease obligations (36) (86)
---------- ----------
Net cash provided by (used in) financing activities 5,699 (11,286)
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,698 (2,075)
Cash at beginning of period 4,257 7,026
---------- ----------
Cash and cash equivalents at end of period $ 6,955 $ 4,951
========== ==========
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT. INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2001 and 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hastings
Entertainment, Inc. and its subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions in Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such principles and
regulations of the Securities and Exchange Commission. All adjustments,
consisting only of normal recurring adjustments, have been made which, in the
opinion of management, are necessary for a fair presentation of the results of
the interim periods. The results of operations for such interim periods are not
necessarily indicative of the results which may be expected for a full year. The
unaudited consolidated financial statements contained herein should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year 2000.
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.
The Company's fiscal year ends on January 31 and is identified as the fiscal
year for the immediately preceding calendar year. For example, the fiscal year
that will end on January 31, 2002 is referred to as fiscal 2001.
2. CONSOLIDATION POLICY
The unaudited consolidated financial statements present the results of Hastings
Entertainment, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
3. STORE CLOSING RESERVES
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 April 30, 2001 and January
31, 2001 are accruals of $6.6 million each for the net present value of future
minimum lease payments and other costs attributable to closed or relocated
stores, net of estimated sublease income.
There were no additional charges recorded to the accrual for store closings
during the first quarter of fiscal 2001.
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HASTINGS ENTERTAINMENT, INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2001 and 2000
The following tables provide a rollforward of reserves that were established for
these charges for the first quarters of fiscal 2001 and 2000. (dollars in
thousands)
FUTURE LEASE
PAYMENTS OTHER COSTS TOTAL
------------ ------------ ------------
Balance at January 31, 2000 $ 3,671 $ 300 $ 3,971
Additions to provision 632 -- 632
Cash outlay (100) (300) (400)
------------ ------------ ------------
Balance at April 30, 2000
4,203 -- 4,203
Balance at January 31, 2001
Additions to provision
Changes in estimates 6,350 255 6,605
Cash outlay 38 -- 38
Balance at April 30, 2001 (199) (123) (322)
------------ ------------ ------------
$ 6,189 $ 132 $ 6,321
============ ============ ============
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 during the first quarter of fiscal 2001 as incurred.
4. LONG-TERM DEBT
Long-term debt and capitalized lease obligations consisted of the following
(dollars in thousands):
APRIL 30, 2001 JANUARY 31, 2001
-------------- ----------------
Revolving credit facility $ 33,994 $ 28,258
Capitalized lease obligations 1,315 1,352
-------------- ----------------
35,309 29,610
Less current maturities 154 154
-------------- ----------------
$ 35,155 $ 29,456
============== ================
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 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
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HASTINGS ENTERTAINMENT, INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2001 and 2000
4. LONG-TERM DEBT (CONTINUED)
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
April 30, 2001, the Company had $22.0 million in excess availability after the
$10 million availability reserve, under the Facility.
At April 30, 2001 and January 31, 2001, the Company had borrowings outstanding
of $34.0 million and $28.3 million, respectively under the Facility. The
Facility accrued interest at variable rates based on the lender's base rate or
LIBOR. The average rate of interest being charged under the Facility was 7.7%
and 8.4% at April 30, 2001 and January 31, 2001, respectively.
5. LOSS PER SHARE
Options to purchase 1,236,378 shares of Common Stock at exercise prices ranging
from $1.27 per share to $14.03 per share outstanding at April 30, 2001 and
options to purchase 1,996,846 shares of Common Stock at exercise prices ranging
from $3.55 per share to $15.00 per share outstanding at April 30, 2000 were not
included in the computation of diluted loss per share because their inclusion
would have been antidilutive.
6. LITIGATION AND CONTINGENCIES
In 2000, the Company restated its financial statements for the first three
quarters of fiscal 1999 and the prior four fiscal years. Following the Company's
initial announcement in March 2000 of the requirement for such restatements, 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, 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.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest during the three months ended April 30, 2001 and 2000
totaled $0.5 million and $0.8 million, respectively. Cash payments for income
taxes during the three months ended April 30, 2001 and 2000 were approximately
$18,000 and $32,000, respectively.
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HASTINGS ENTERTAINMENT, INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2001 and 2000
8. 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 DVDs. Revenue for Internet operations
is derived solely from the sale of merchandise. Segment information regarding
the Company's retail stores and Internet operations for the three months ended
April 30, 2001 and 2000 is presented below.
For the three months ended April 30, 2001: Retail Internet
(Dollars in thousands) Stores Operations Total
---------- ---------- ----------
Total revenue $ 109,121 $ 19 $ 109,140
Depreciation and amortization $ 8,821 $ 70 $ 8,891
Operating loss $ 62 $ (228) $ (166)
Total assets $ 207,813 $ 657 $ 208,474
Capital expenditures $ 7,670 $ -- $ 7,670
For the three months ended April 30, 2000: Retail Internet
(Dollars in thousands) Stores Operations Total
---------- ---------- ----------
Total revenue $ 110,069 $ 16 $ 110,085
Depreciation and amortization $ 8,107 $ 85 $ 8,192
Operating income (loss) $ 624 $ (450) $ 174
Total assets $ 223,147 $ 961 $ 224,108
Capital expenditures $ 6,696 $ -- $ 6,696
9. 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 became effective in fiscal 2001 and adoption
thereof did not have any impact on our financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere in the Report on Form 10-Q.
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 April 30, 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. We
also operated one college bookstore. Each of the superstores and the college
bookstore is wholly owned by us 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, 2002 is referred to fiscal 2001
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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 the
periods presented herein.
Three Months Ended April 30,
-------------------------------
2001 2000
---------- ----------
Merchandise revenue 79.4% 80.1%
Rental video revenue 20.6 19.9
---------- ----------
Total revenues 100.0 100.0
Merchandise cost of revenue 75.2 76.0
Rental video cost of revenue 48.1 37.7
---------- ----------
Total cost of revenues 69.6 68.3
---------- ----------
Gross profit 30.4 31.7
Selling, general and administrative expenses 30.5 31.5
Pre-opening expenses 0.0 0.0
---------- ----------
30.5 31.5
---------- ----------
Operating income (loss) (0.1) 0.2
Other income (expense):
Interest expense (0.6) (0.9)
Other, net 0.0 0.0
---------- ----------
Loss before income taxes (0.7) (0.7)
Income tax benefit -- (0.3)
---------- ----------
Net loss (0.7)% (0.4)%
========== ==========
Summary of Superstore Activity
Three months ended Year Ended
--------------------------- -------------
April 30, April 30, January 31,
2001 2000 2001
------------ ------------- -------------
Hastings Superstores:
Beginning number of stores 142 147 147
Openings -- -- 1
Closings (1) -- (5) (6)
------------ ------------- -------------
Ending number of stores 142 142 142
============ ============= =============
(1) - We completed the planned closing of two stores as of the end of
May 2001.
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THREE MONTHS ENDED APRIL 30, 2001 COMPARED TO THREE MONTHS ENDED APRIL 30, 2000:
Revenues. Total revenues decreased $1.0 million for the quarter to $109.1
million compared to $110.1 million a year ago due to operating an average of
approximately three fewer superstores during the quarter compared to the same
period last year. Total comparable store revenues ("Comps") were flat for the
quarter; however, Comps for our primary retail categories, merchandise and
rental video, were -0.7% and +4.2%, respectively. The decline in merchandise
Comps was primarily the result of lower sales of music products during the first
quarter of fiscal 2001 compared to a strong first quarter of fiscal 2000, which
included break-out releases from N'Sync, Santana and Dr. Dre along with
significant carryover sales from a fourth quarter fiscal 1999 release from Kid
Rock. Excluding music, which represents approximately 33% of our total revenues,
Merchandise Comps would have been +4.4% for the quarter ending April 30, 2001.
The increase in rental video Comps was primarily the result of increased DVD
rentals, stronger titles compared to last year and additional stores
implementing our multi-night rental program.
Gross Profit. Total gross profit as a percent of total revenue decreased for the
three months ended April 30, 2001 to 30.4% compared to 31.7% for the same period
last year. Contributing to this decrease was a decline in rental video gross
profit from 62.3% in for the first three months of fiscal 2000 to 51.9% for the
first three months of fiscal 2001. The decrease was primarily due to higher than
anticipated rental video depreciation resulting from an increase in DVD
procurement along with an increase in revenue generated by rental videos subject
to revenue sharing agreements, which has lower profit margins, to total rental
video revenue. In addition, shrinkage on rental video increased by approximately
$0.2 million for the current quarter compared to last year.
Offsetting the decline in rental video gross profit was an increase in
merchandise gross profit of 80 basis points. The improvement was primarily due
to a reduction in the cost associated with the return of product of
approximately $1.4 million during the three months ended April 30, 2001 compared
to the same period last year and is attributable to a decrease in the volume of
returns. As a result of the Company's efforts to improve its inventory
performance and reduce the investment in inventory, merchandise returns during
the first quarter of fiscal 2000 exceeded the amount of merchandise returns
during the first quarter of fiscal 2001 resulting in higher returns expense
during the first quarter of fiscal 2000. Additionally, and as an offset to the
decrease in the cost of returns, merchandise writedowns increased by
approximately $0.7 million for the period ending April 30, 2001 compared to the
same period last year. The increase was due to a timely review and evaluation of
our inventory which led to pre-tax charges for the write-down of certain
merchandise inventory to the lower of cost or market.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses decreased by 100 basis points to 30.5% for the
quarter ended April 30, 2001 from 31.5% for the same period last year. The
decrease was primarily the result of a decline of approximately $0.5 million in
accounting and legal fees. Such fees were higher than normal during the first
quarter of fiscal 2000 due to expenses related to accounting restatements. In
addition, a decline of approximately $0.3 million in net advertising costs
contributed to the decrease in SG&A. The decline in advertising costs was
primarily the result of higher than anticipated advertising allowances from
certain media vendors.
Interest Expense. Interest expense was $0.6 million, or 0.6% of revenues, in the
three months ended April 30, 2001, compared to $1.0 million, or 0.9% of
revenues, in the three months ended April 30, 2000. The decrease was attributed
to lower average borrowings for the first quarter of fiscal 2001 over 2000.
Income Taxes. During the fourth quarter of fiscal 2000, we 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). While we
believe the entire deferred tax asset will be realized by future operating
results, due to the cumulative losses incurred in recent years the deferred tax
asset does not currently meet the stringent criteria for recognition under SFAS
109. As a result, no income tax benefit was recorded during the quarter ended
April 30, 2001.
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LIQUIDITY AND CAPITAL RESOURCES
We generate cash from operations exclusively from the sale of merchandise and
the rental of videocassettes, DVDs and video games 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 flows from
operating activities, trade credit from vendors and borrowings under our
revolving credit facility (the "Facility"). We believe our cash flows from
operations and borrowing availability under the Facility will be sufficient to
fund our ongoing operations, new superstores and expansion of certain existing
superstores through fiscal 2001.
Consolidated Cash Flows
Operating Activities. Net cash flows from operating activities decreased $11.2
million from $15.9 million for the three months ended April 30, 2000 to $4.7
million for the three months ended April 30, 2001. The most significant reason
for the decrease was a decline in an orderly reduction of merchandise inventory
of approximately $19.9 million during the three months ended April 30, 2000. The
majority of this reduction was the result of our fiscal 2000 initiative to
increase cash flow and inventory turns by reducing our inventory.
Investing Activities. Net cash used in investing activities increased $1.0
million, or 14.5%, to $7.7 million for the three months ended April 30, 2001
from $6.7 million for the three months ended April 30, 2000. This increase was
the result of an increase in remodeling activity on certain existing superstores
compared to the prior year. 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. We
reduced our average borrowing under lending agreements by $16.0 million from
$47.1 million during the first quarter of fiscal 2000 to $31.1 million for the
same period this year.
At April 30, 2001 and January 31, 2001, we had borrowings outstanding of $34.0
million and $28.3 million under the Facility, respectively. The average rate of
interest being charged under the Facility was 7.6% and 8.4% at April 30, 2001
and January 31, 2001, respectively.
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 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 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 April 30, 2001, the Company had $22.0
million in excess availability after the $10 million availability reserve, under
the Facility.
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SEASONALITY AND INFLATION
As is the case with many retailers, a significant portion of the Company's
revenues, and an even greater portion of its operating profit, is generated in
the fourth fiscal quarter, which includes the Christmas selling season. As a
result, a substantial portion of the Company's annual earnings has been, and
will continue to be, dependent on the results of this quarter. The Company
experiences 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 retailers in general and
the Company in particular.
The Company does not believe that inflation has materially impacted operating
results during the past three years. Substantial increases in costs and expenses
could have a significant impact on the Company's operating results to the extent
such increases are not passed along to customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of its business, the Company is exposed to certain market
risks, primarily changes in interest rates. The Company's exposure to interest
rate risk consists of variable rate debt, at the Company's option, based on the
lenders base rate or LIBOR plus a specified percentage. The annual impact on the
Company's results of operations of a 100 basis point interest rate change on the
April 30, 2001 outstanding balance of the variable rate debt would be
approximately $0.3 million. After an assessment of these risks to the Company's
operations, the Company believes that its 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 the Company's financial position, results of
operations or cash flows for the next fiscal year. The Company is not party to
any derivative or interest rate hedging contracts.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. No report on Form 8-K was filed by the registrant during the quarter of the
fiscal year for which this report on Form 10-Q is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
HASTINGS ENTERTAINMENT, INC.
DATE: June 14, 2001 By: /s/ Dan Crow
--------------------------------------------
Dan Crow
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
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