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 October 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE 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)
(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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares outstanding of the registrant's common stock, as of December 1,
2003:
Class Shares Outstanding
- -------------------------------------- ------------------
Common Stock, $.01 par value per share 11,343,678
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003
INDEX
<Table>
<Caption>
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 2003 (Unaudited),
October 31, 2002 (Unaudited) and January 31, 2003 3
Unaudited Consolidated Statements of Operations for the Three and
Nine Months Ended October 31, 2003 and 2002 4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended October 31, 2003 and 2002 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 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE PAGE 21
INDEX TO EXHIBITS 22
</Table>
2
PART 1
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 2003 and 2002, and January 31, 2003
(Dollars in thousands, except par value)
<Table>
<Caption>
OCTOBER 31, OCTOBER 31, JANUARY 31,
2003 2002 2003
----------- ----------- -----------
ASSETS (UNAUDITED) (UNAUDITED)
Current assets:
Cash $ 3,566 $ 3,421 $ 4,447
Merchandise inventories, net 153,252 166,269 148,395
Income taxes receivable 539 24 552
Prepaid expenses and other current assets 5,705 4,635 5,969
--------- --------- ---------
Total current assets 163,062 174,349 159,363
Property and equipment, net of accumulated depreciation
of $146,013, $132,117 and $136,153 at October 31,
2003, and 2002 and January 31, 2003, respectively 78,237 76,163 76,283
Deferred income taxes, net of valuation allowance 1,036 946 971
Intangible assets, net 652 676 717
Other assets 189 37 188
--------- --------- ---------
$ 243,176 $ 252,171 $ 237,522
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities on capital lease obligations $ 218 $ 169 $ 193
Trade accounts payable 82,915 100,535 75,712
Accrued expenses and other current liabilities 30,758 30,342 32,543
--------- --------- ---------
Total current liabilities 113,891 131,046 108,448
Long term debt, excluding current maturities on
capital lease obligations 51,479 46,475 46,519
Other liabilities 3,315 4,925 3,399
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; 11,944,544 shares issued and 11,342,847
shares outstanding at October 31, 2003; 11,944,544
shares issued and 11,363,729 shares outstanding
October 31, 2002; 11,944,544 shares issued and
11,336,473 shares outstanding at January 31, 2003 119 119 119
Additional paid-in capital 36,635 36,763 36,749
Retained earnings 40,568 35,688 45,259
Treasury stock, at cost
601,697 shares, 580,815 shares and 608,071 shares
at October 31, 2003, and 2002 and January 31,
2003, respectively (2,831) (2,845) (2,971)
--------- --------- ---------
74,491 69,725 79,156
--------- --------- ---------
$ 243,176 $ 252,171 $ 237,522
========= ========= =========
</Table>
See accompanying notes to unaudited consolidated financial statements.
3
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three and Nine Months Ended October 31, 2003 and 2002
(Dollars in thousands, except per share amounts)
<Table>
<Caption>
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Merchandise revenue $ 88,901 $ 86,445 $ 269,904 $ 267,026
Rental video revenue 23,942 24,191 75,173 71,493
--------- --------- --------- ---------
Total revenues 112,843 110,636 345,077 338,519
Merchandise cost of revenue 65,774 66,370 200,029 199,408
Rental video cost of revenue 8,668 10,222 27,708 29,387
--------- --------- --------- ---------
Total cost of revenues 74,442 76,592 227,737 228,795
--------- --------- --------- ---------
Gross profit 38,401 34,044 117,340 109,724
Selling, general and administrative expenses 41,684 40,117 120,449 117,030
Pre-opening expenses 53 150 234 331
--------- --------- --------- ---------
Operating loss (3,336) (6,223) (3,343) (7,637)
Other income (expense):
Interest expense (547) (481) (1,579) (1,497)
Interest income -- 24 -- 1,290
Other, net 73 53 232 164
--------- --------- --------- ---------
Loss before income taxes (3,810) (6,627) (4,690) (7,680)
Income tax expense -- -- -- --
--------- --------- --------- ---------
Net loss $ (3,810) $ (6,627) $ (4,690) $ (7,680)
========= ========= ========= =========
Basic and diluted loss per share $ (0.34) $ (0.58) $ (0.41) $ (0.68)
========= ========= ========= =========
Weighted-average common shares outstanding:
Basic and diluted 11,317 11,364 11,319 11,341
========= ========= ========= =========
</Table>
See accompanying notes to unaudited consolidated financial statements.
4
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 2003 and 2002
(Dollars in thousands)
<Table>
<Caption>
NINE MONTHS ENDED
OCTOBER 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (4,690) $ (7,680)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation expense 28,396 29,078
Amortization expense 65 45
Loss on rental videos lost, stolen and defective 3,237 4,001
Loss on disposal of non-rental video assets 802 253
Non-cash compensation 90 133
Changes in operating assets and liabilities:
Merchandise inventory (1,796) (13,599)
Other current assets 264 697
Trade accounts payable 7,203 17,118
Accrued expenses and other current liabilities (1,785) 549
Income taxes receivable (52) 5,497
Other assets and liabilities, net (85) (1,041)
--------- ---------
Net cash provided by operating activities 31,649 35,051
--------- ---------
Cash flows from investing activities:
Purchases of rental video assets (20,756) (27,992)
Purchases of property and equipment (16,693) (21,100)
--------- ---------
Net cash used in investing activities (37,449) (49,092)
--------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facility 362,112 372,911
Repayments under revolving credit facility (356,985) (359,573)
Payments under capital lease obligations (143) (124)
Purchase of treasury stock (235) (355)
Proceeds from exercise of stock options 170 284
--------- ---------
Net cash provided by financing activities 4,919 13,143
--------- ---------
Net decrease in cash (881) (898)
Cash at beginning of period 4,447 4,319
--------- ---------
Cash at end of period $ 3,566 $ 3,421
========= =========
</Table>
See accompanying notes to unaudited consolidated financial statements.
5
Hastings Entertainment, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
October 31, 2003 and 2002
(Tabular amounts in thousands, except per share data or unless otherwise noted)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hastings
Entertainment, Inc. and its subsidiaries (the "Company," "We," "Our," "Us") 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 because of, among other things, seasonality factors in the retail
business. The unaudited consolidated financial statements contained herein
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in our annual report on Form 10-K for the fiscal year
2002.
Certain prior year amounts have been reclassified to conform with the fiscal
2003 presentation.
Our 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, 2004 is referred to as fiscal 2003.
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. STOCK OPTION PLANS
We account for our stock option plans in accordance with the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), 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, Accounting for Stock-based Compensation ("SFAS 123"), we 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. We have elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS
123. The following schedule reflects the impact on net loss and net loss per
share if we had applied the fair value recognition provisions of SFAS 123 to
stock based compensation.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss, as reported $ (3,810) $ (6,627) $ (4,690) $ (7,680)
Add: Stock-based compensation included in reported net
income -- (17) 90 133
Less: Stock-based compensation expense determined under
fair value based method, net of tax (140) (143) (523) (588)
--------- --------- --------- ---------
Proforma net loss $ (3,950) $ (6,787) $ (5,123) $ (8,135)
========= ========= ========= =========
Loss per share:
Basic, as reported $ (0.34) $ (0.58) $ (0.41) $ (0.68)
Basic, proforma $ (0.35) $ (0.60) $ (0.45) $ (0.72)
Diluted, as reported $ (0.34) $ (0.58) $ (0.41) $ (0.68)
Diluted, proforma $ (0.35) $ (0.60) $ (0.45) $ (0.72)
</Table>
6
Hastings Entertainment, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
October 31, 2003 and 2002
(Tabular amounts in thousands, except per share data or unless otherwise noted)
4. STORE CLOSING RESERVE
From time to time and in the normal course of business, we evaluate our store
base to determine if a need to close a store(s) is present. Such evaluations
include, among other factors, current and future profitability, market trends,
age of store and lease status.
Amounts in accrued expenses and other liabilities at October 31, 2003 include
accruals for the net present value of future minimum lease payments and other
costs attributable to closed or relocated stores, net of estimated sublease
income. Expenses related to store closings are included in selling, general and
administrative expenses in our consolidated statement of operations.
The following tables provide a rollforward of reserves that were established for
these charges for the nine months ended October 31, 2003 and 2002.
<Table>
<Caption>
Future Lease
Payments Other Costs Total
------------ ----------- ---------
Balance at January 31, 2003 $ 2,958 $ -- 2,958
Changes in estimates 173 -- 173
Additions to provision 74 117 191
Cash outlay (975) (117) (1,092)
--------- --------- ---------
Balance at October 31, 2003 $ 2,230 $ -- $ 2,230
========= ========= =========
</Table>
<Table>
<Caption>
Future Lease
Payments Other Costs Total
------------ ----------- ---------
Balance at January 31, 2002 $ 5,919 $ 13 5,932
Changes in estimates (224) -- (224)
Additions to provision 946 134 1,080
Cash outlay (1,178) (117) (1,295)
--------- --------- ---------
Balance at October 31, 2002 $ 5,463 $ 30 $ 5,493
========= ========= =========
</Table>
As of October 31, 2003, the reserve balance, which is net of estimated sublease
income, is expected to be paid over the next six years. Other costs are charged
against the reserve as incurred.
5. LOSS PER SHARE
Options to purchase 1,954,285 and 1,784,784 shares of common stock at exercise
prices ranging from $1.27 per share to $14.03 per share outstanding at October
31, 2003 and 2002, respectively, were not included in the computation of diluted
loss per share because their inclusion would have been antidilutive.
6. LITIGATION AND CONTINGENCIES
In 2000, we restated our consolidated financial statements for the first three
quarters of fiscal 1999 and the prior four fiscal years. As a result, lawsuits
were filed against us and certain of our current and former directors and
officers asserting various claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. We agreed to settle these lawsuits, and the
settlement received final approval by the court on March 10, 2003. The
settlement required a payment of $5.75 million on behalf of the defendants in
the lawsuits ($3.15 million of which was funded from amounts remaining under our
director and officer insurance policy after the payment of litigation expenses).
The settlement resolves all claims against us and our current and former
defendant officers and directors. Based on the foregoing, we recorded loss
contingencies of $2.5 million, or $0.22 per share, and $0.1 million, or $0.00
per share, during the second and fourth fiscal quarters of fiscal 2002,
respectively. All amounts required by the settlement agreement were funded by
January 31, 2003.
7
Hastings Entertainment, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
October 31, 2003 and 2002
(Tabular amounts in thousands, except per share data or unless otherwise noted)
6. LITIGATION AND CONTINGENCIES (CONT'D)
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
financial position, results of operations and cash flows.
7. SEGMENT DISCLOSURES
We have two operating segments, retail stores and Internet operations. Our 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 our retail
stores and Internet operations for the three and nine months ended October 31,
2003 and 2002 is presented below.
<Table>
<Caption>
For the three months ended October 31, 2003: Retail Internet
Stores Operations Total
--------- --------- ---------
Total revenue $ 112,786 $ 57 $ 112,843
Depreciation and amortization 9,579 34 9,613
Operating loss (3,121) (215) (3,336)
Total assets 242,963 213 243,176
Capital expenditures $ 12,569 $ 4 $ 12,573
</Table>
<Table>
<Caption>
For the three months ended October 31, 2002: Retail Internet
Stores Operations Total
--------- --------- ---------
Total revenue $ 110,598 $ 38 $ 110,636
Depreciation and amortization 10,186 61 10,247
Operating loss (5,890) (333) (6,223)
Total assets 251,931 240 252,171
Capital expenditures $ 19,659 $-- $ 19,659
</Table>
<Table>
<Caption>
For the nine months ended October 31, 2003: Retail Internet
Stores Operations Total
--------- --------- ---------
Total revenue $ 344,882 $ 195 $ 345,077
Depreciation and amortization 28,306 155 28,461
Operating loss (2,649) (694) (3,343)
Total assets 242,963 213 243,176
Capital expenditures $ 37,431 $ 18 $ 37,449
</Table>
<Table>
<Caption>
For the nine months ended October 31, 2002: Retail Internet
Stores Operations Total
--------- --------- ---------
Total revenue $ 338,388 $ 131 $ 338,519
Depreciation and amortization 28,928 195 29,123
Operating loss (6,823) (814) (7,637)
Total assets 251,931 240 252,171
Capital expenditures $ 49,090 $ 2 $ 49,092
</Table>
8
Hastings Entertainment, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
October 31, 2003 and 2002
(Tabular amounts in thousands, except per share data or unless otherwise noted)
8. CHANGE IN ACCOUNTING PRINCIPLE
In January 2003, the Emerging Issues Task Force reached a consensus on Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"). The issue provides
guidelines for specific treatment and classification of certain amounts received
by a customer from a vendor in connection with product purchased from the
vendor. EITF 02-16 was effective prospectively for new arrangements entered into
after December 31, 2002. Accordingly, as of October 31, 2003, approximately $1.0
million of our vendor advertising allowances have been recorded as a reduction
of merchandise inventory and the cost of rental videos and will be recognized in
cost of revenues as inventory is sold and as rental videos are rented.
Additionally, as a result of these changes, selling, general and administrative
expenses were increased by approximately $1.1 million and $3.1 million, total
cost of revenues decreased $0.8 million and $2.1 million and net loss was
increased by $0.3 million, or $0.03 per share, and $1.0 million, or $0.09 per
share for the three and nine months ended October 31, 2003, respectively.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATONS
Forward-looking Statements
Certain written and oral statements set forth below or made by Hastings with the
approval of an authorized executive officer constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "intend," "anticipate," "project,"
"will" and similar expressions identify forward-looking statements, which convey
the uncertainty of future events and generally are not historical in nature. All
statements which address operating performance, events or developments that we
expect or anticipate will occur in the future, including statements relating to
the business, expansion, merchandising and marketing strategies of Hastings,
industry projections or forecasts, the impact on our financial statements of any
adjustment to fair value of interest rate swaps, inflation, effect of critical
accounting policies including lower of cost or market for inventory adjustments,
the returns process, rental video amortization, our store closing reserve,
revenue recognition, accounting for vendor allowances, sufficiency of cash flow
from operations and borrowings under our amended revolving credit facility and
statements expressing general optimism about future operating results, are
forward-looking statements. Such statements are based upon our management's
current estimates, assumptions and expectations, which are based on information
available at the time of the disclosure, and are subject to a number of factors
and uncertainties, including, but not limited to:
- - whether our assumptions turn out to be correct;
- - our ability to attain such estimates and expectations;
- - a downturn in market conditions in any industry, including the economic
state of retailing, relating to the products we inventory, sell or
rent;
- - the effects of, or changes in, economic and political conditions in the
U.S. and the markets in which we operate our superstores, including the
effects of inflation, deflation, recession, war, terrorism, changes in
interest and tax rates, the availability of consumer credit and any
other matters that influence customer confidence;
- - our ability to forecast and meet customer demand for products;
- - our ability to access suitable merchandise for acceptable terms from
merchandise vendors;
- - our ability to attract quality employees and control our labor costs;
and
- - our ability to find new sites to lease for our superstores upon
acceptable terms.
Any of foregoing factors and uncertainties could cause actual results to differ
materially from those described herein. We undertake no obligation to affirm,
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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.
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 October 31, 2003, we operated 148
superstores averaging approximately 20,000 square feet in small to medium-sized
markets located in 21 states, primarily in the Western and Midwestern United
States. Each of our superstores is company-operated under the name of Hastings.
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.
10
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
ending January 31, 2004 is referred to as fiscal 2003.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our financial
statements. Our significant estimates and assumptions are reviewed, and any
required adjustments are recorded, on a monthly basis.
Lower of Cost or Market for Merchandise Inventory. Our merchandise inventories
are recorded at the lower of cost or market. As with any retailer, economic
conditions, cyclical customer demand and changes in purchasing or distribution
can affect the carrying value of inventory. As circumstances warrant, we record
lower of cost or market inventory adjustments. In some instances, these
adjustments can have a material effect on the financial results of an annual or
interim period. In order to determine such adjustments, we evaluate the age,
inventory turns and estimated fair value of merchandise inventory by product
category and record an adjustment if estimated market value is below cost.
Through merchandising and an automated-progressive markdown program, we quickly
take the steps necessary to increase the sell-off of slower moving merchandise
to eliminate or lessen the effect of these adjustments.
Returns Process. Merchandise inventory owned by us is generally 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 changes in
product offerings. At the end of any reporting period, cost accruals are
required for inventory that has been returned to vendors, or is in the process
of being returned to vendors, or has been identified to be returned to vendors.
These costs can include freight, valuation and quantity differences, and other
fees charged by a vendor. In order to appropriately match the costs associated
with the return of merchandise with the process of returning such merchandise,
we utilize an allowance for cost of inventory returns. To accrue for such costs
and estimate this allowance, we utilize historical experience adjusted for
significant estimated or contractual modifications. Certain adjustments to the
allowance can have a material effect on the financial results of an annual or
interim period.
Rental Video Asset Cost Amortization. We have a series of direct revenue-sharing
agreements with major studios and we anticipate that our future involvement in
revenue-sharing agreements will be similar to that of fiscal year 2002. 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 allows customer demand for new
releases to be satisfied over a shorter period of time at a time when the new
releases are most popular. Under the terms of the specific contracts with
supplying studios, we expense revenue-sharing payments through rental video cost
of revenue, as revenues are recognized. 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 superstore, which are being
amortized on a straight line basis over 36 months to a salvage value of $4.
Rental video assets purchased for less than $4 are not amortized.
Certain events, including a downturn in the rental video industry as a whole or
in the markets within which we operate our superstores, further consolidation of
rental video retailers, a change in the rental home video distribution window,
which allows rental retailers an exclusive period of time to rent titles prior
to being made available for pay-per-view, video on demand, and premium, basic
cable, network and syndicated television, a substantial change in customer
demand and a change in the mix of rental video revenues, could affect the
salvage value we have assigned to our rental video assets. The effect could
result in a material reduction of the carrying value of our rental video assets
and have a material impact on the financial results of an annual or interim
period. In particular, the growth of the DVD market and the shift of consumer
purchases from VHS (videocassettes) to DVD could result in a decrease in the
salvage value of rental videos. At some point during the rental cycle, a VHS
item, as with DVD and games, is available for purchase by a customer as a
previously viewed tape. Our current experience is that the amount received for a
previously viewed tape is higher than our estimated salvage value of that item
in our rental inventory. Based in part on this factor and sales of previously
viewed tapes, we believe our estimate of salvage value is appropriate.
11
Store Closing Reserve. On a quarterly basis, and in the normal course of
business, we evaluate our store base to determine if a need to close or relocate
a store(s) is present. Management will evaluate, among other factors, current
and future profitability, market trends, age of store and lease status. The
primary expense items associated with the closure of a store relate to the net
present value of minimum lease payments (the present value of remaining lease
payments under an active lease) and the write-off of leasehold improvements and
other assets not remaining in our possession. Prior to December 31, 2002, such
expense items were recorded as of the date that management made the decision to
close or relocate a store. Subsequent to December 31, 2002, and in accordance
with the adoption of SFAS No. 146, we now recognize such expense items at the
time the location is closed or relocated. The amount recorded can fluctuate
based on the age of the closing location, term and remaining years of the lease
and the number of stores being closed or relocated. These charges can have a
material effect on the financial results of an annual or interim period. We
actively pursue sublease tenants on all closed or relocated locations and the
impact of any sublease income is estimated in the determination of the incurred
store closing reserve liability.
Revenue Recognition. We generate revenue primarily from retail sales and rental
of our products. Merchandise and rental revenues are recognized at the point of
sale or rental or at the time merchandise is shipped to the customer. Revenues
are presented net of estimated returns and exclude all taxes. Customers may
return certain merchandise for exchange or refund within our policies, and an
allowance has been established to provide for projected returns. There are no
provisions for uncollectible amounts since payment is received at the time of
sale. We, as with most retailers, also offer gift cards for sale. Deferred
revenue, a current liability, is recognized at the time a gift card is sold with
the costs of designing, printing and distributing the cards recorded as an
expense as incurred. The deferred revenue liability is relieved and revenue is
recognized upon the redemption of the gift cards. From time to time we will
offer sales incentives to customers, in the form of rebates. Revenue is reduced
by the amount of estimated redemptions, based on experience of similar types of
rebate offers, and a deferred revenue liability is established. The deferred
revenue liability is relieved when the customer has completed all criteria
necessary to file a valid rebate claim. Any remaining portion of deferred
revenue is recorded as revenue following the termination of the extended
redemption period and following completion of all outstanding rebate claims.
Comparable-Store Revenue. Stores included in the comparable-store revenues
calculation are those stores that have been open for a minimum of 60 weeks. Also
included are stores that are remodeled or relocated. Sales via the internet are
not included and closed stores are removed from each comparable period for the
purpose of calculating comparable-store revenues.
Vendor Allowances. In 2002, The Emerging Issues Task Force ("EITF") discussed
issue no. 02-16 ("EITF 02-16"), which addresses the accounting for cash
consideration received from a vendor by a reseller for various vendor-funded
allowances, including cooperative advertising support. The EITF determined that
cash consideration received from a vendor should be presumed to be a reduction
of the prices of vendor's products and, therefore, should be shown as a
reduction in the cost of goods sold when recognized in the reseller's income
statements. The only exceptions to this rule are if the reimbursement is for
specific, incremental identifiable costs. If the amount of cash consideration
received exceeds the cost being reimbursed, that excess amount should be
characterized as a reduction of cost of goods sold when recognized in the
reseller's income statements. In January 2003, the EITF issued transition
guidance concluding that this interpretation should be applied to all new or
modified arrangements entered into after December 31, 2002. We adopted EITF
02-16 beginning February 1, 2003. Accordingly, as of October 31, 2003,
approximately $1.0 million of our vendor advertising allowances have been
recorded as a reduction of merchandise inventory and the cost of rental videos
and will be recognized in cost of revenues as inventory is sold and as rental
videos are rented. Additionally, as a result of these changes, selling, general
and administrative expenses were increased by approximately $1.1 million and
$3.1 million, total cost of revenues decreased $0.8 million and $2.1 million and
net loss was increased by $0.3 million, or $0.03 per share, and $1.0 million, or
$0.09 per share for the three and nine months ended October 31, 2003,
respectively.
12
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.
<Table>
<Caption>
Three Months Ended Nine Months Ended
October 31, October 31,
2003 2002 2003 2002
------ ------ ------ ------
Merchandise revenue 78.8% 78.1% 78.2% 78.9%
Rental video revenue 21.2 21.9 21.8 21.1
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Merchandise cost of revenue 74.0 76.8 74.1 74.7
Rental video cost of revenue 36.2 42.3 36.9 41.1
------ ------ ------ ------
Total cost of revenues 66.0 69.2 66.0 67.6
------ ------ ------ ------
Gross profit 34.0 30.8 34.0 32.4
Selling, general and administrative expenses 36.9 36.3 34.9 34.6
Pre-opening expenses 0.1 0.1 0.1 0.1
------ ------ ------ ------
Operating loss (3.0) (5.6) (1.0) (2.3)
Other income (expense):
Interest expense (0.5) (0.4) (0.5) (0.4)
Interest income -- 0.0 -- 0.4
Other, net 0.1 0.0 0.1 0.0
------ ------ ------ ------
Loss before income taxes (3.4) (6.0) (1.4) (2.3)
Income tax expense -- -- -- --
------ ------ ------ ------
Net loss (3.4)% (6.0)% (1.4)% (2.3)%
====== ====== ====== ======
</Table>
Summary of Superstore Activity
<Table>
<Caption>
Three Months Ended Nine Months Ended Year Ended
October 31, October 31, January 31,
2003 2002 2003 2002 2003
---- ---- ---- ---- ----
Beginning number of stores 147 143 146 142 142
Openings 1 3 4 5 7
Closings -- (1) (2) (2) (3)
---- ---- ---- ---- ----
Ending number of stores 148 145 148 145 146
==== ==== ==== ==== ====
</Table>
13
Three months ended October 31, 2003 compared to three months ended October 31,
2002
Revenues. Total revenues increased approximately $2.2 million, or 2.0%, for the
third quarter of fiscal 2003 to $112.8 million compared to $110.6 million for
the third quarter of fiscal 2002. Total comparable-store revenues ("Comps"),
which increased by 1.6% for this year's third quarter as compared to the third
quarter of last year, were comprised of the following:
<Table>
Merchandise Comps 2.4%
Rental video Comps (1.4%)
Total Comps 1.6%
</Table>
Total merchandise revenue for the third quarter increased approximately $2.5
million, or 2.8%, to $88.9 million compared to $86.4 million for the same
quarter last year which was primarily driven by sales of DVDs and video games,
as increases in total sales in these categories during the third quarter of
fiscal 2003 continued to be the highest among all of our merchandise product
lines. Sales of DVDs increased approximately 40% for the three months ended
October 31, 2003 compared to the three months ended October 31, 2002, as
customers continue to convert movie libraries from the VHS format to DVD. Sales
of video games increased 34% for the current third quarter when compared to the
third quarter of last year as a result of increased selection in popular formats
and competitive pricing. In addition, our book Comps increased 0.8% during the
quarter. Offsetting these increases in merchandise Comps was a decline in our
music Comps of 6.3% for the third quarter of fiscal 2003, which we believe
reflects the general state of the music industry.
Total rental revenue decreased by approximately, $0.2 million or 1.0%, to $23.9
million for the three months ended October 31, 2003 compared to $24.2 million
for the three months ended October 31, 2002. This decrease was primarily the
result of lower rental video comps driven by lower rentals of titles in the VHS
and game formats during the current quarter. The reduction in game rentals was
primarily due to fewer popular titles being released during the current quarter
when compared to the same period last year. DVD rentals increased 41% during the
third quarter of the current year compared to the same period last year. The
increase in DVD rentals was offset by a 33% decline in VHS rentals. The
acceptance of DVD by the consumer is the primary reason for the decline in VHS
rental revenue.
Gross Profit. Total gross profit of $38.4 million in the third quarter of fiscal
2003 increased $4.4 million, or 12.8%, from $34.0 million in the third quarter
of fiscal 2002. Total gross profit as a percentage of total revenue increased
for the three months ended October 31, 2003 to 34.0% compared to 30.8% for the
same period last year. Merchandise gross profit as a percentage of merchandise
revenue increased to 26.0% for the third quarter of fiscal 2003 compared to
23.2% for the same quarter last year. Significant changes in the components of
merchandise gross profit are as follows:
(i) a decrease of approximately $0.9 million in the expense
associated with the distribution and return of merchandise
resulting from improved management and controls;
(ii) a reduction of product costs of approximately $0.8 million as
a result of the adoption of EITF 02-16 during fiscal 2003,
which governs the accounting by a customer for certain
consideration received from a vendor;
(iii) lower inventory markdowns during the third quarter of fiscal
2003 of approximately $0.4 million compared to the same period
last year due primarily to a higher level of non-returnable,
non-saleable book items disposed of during the third quarter
of fiscal 2002; and
(iv) a decrease in merchandise shrink of approximately $0.2
million.
Partially offsetting these increases in gross profit were increases in freight
expense, which even though $0.2 million higher than the third quarter of fiscal
year 2002, was less than our internal projections.
Rental video gross profit as a percentage of rental video revenue increased to
63.8% for the third quarter of fiscal 2003 from 57.7% for the same quarter last
year. This increase was primarily due to:
(i) an increase in our rental video pricing, primarily catalog
(non-new release) titles;
14
(ii) lower depreciation and amortization expense of approximately
$1.2 million from improved procurement procedures, inventory
management and an increase in margins on videos acquired under
revenue sharing agreements;
(iii) a reduction of approximately $0.3 million in the cost
associated with the distribution of rental video assets; and
(iv) a decrease in rental video shrinkage of approximately $0.1
million.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the third quarter ended October 31, 2003
increased approximately $1.6 million to $41.7 million, or 36.9% of total
revenues, up from $40.1 million, or 36.3% of total revenues for the third
quarter ended October 31, 2002. This increase was primarily the result of:
(i) an increase of approximately $1.2 million in costs associated
with the operation of a greater number of superstores;
(ii) an increase in net advertising costs of approximately $1.0
million during the third quarter compared to the same period
in fiscal 2002 resulting from the adoption of EITF 02-16; and
(iii) an increase of approximately $0.4 million in the costs
associated with our group healthcare plan, the majority of
which was the result of two large medical claims incurred
during October 2003.
Partially offsetting these increases in SG&A expenses was a decline of
approximately $0.5 million in store closing costs as we closed one superstore
during the three months ended October 31, 2002 as compared to no closings during
the three months ended October 31, 2003. In addition, costs associated with the
remodeling and expansion of certain of our existing superstores decreased
approximately $0.2 million as compared to the third quarter of the prior year.
Pre-opening Expenses. Pre-opening expenses decreased approximately $0.1 million
for the three months ended October 31, 2003, as the Company opened one new
superstore during the period compared to three superstores during the three
months ended October 31, 2002. Pre-opening expenses include human resource
costs, travel, rent, advertising, supplies and certain other costs incurred
prior to a superstore's opening.
Interest Expense. Interest expense remained unchanged at $0.5 million for the
three months ended October 31, 2003, compared to the three months ended October
31, 2002 as higher debt levels during the current quarter compared to last year
were offset by lower interest rates.
Income Taxes. No income tax benefit was recorded during the third quarters of
fiscal 2003 and 2002 due to adjustments in the valuation allowance related to
the net deferred tax asset.
15
Nine months ended October 31, 2003 compared to nine months ended October 31,
2002
Revenues. Total revenues increased $6.6 million, or 1.9%, for the nine months
ended October 31, 2003 to $345.1 million compared to $338.5 million for the same
period last year. Total Comps, which increased by 1.0% for the first nine months
of fiscal 2003 as compared to same period last year, were comprised of the
following:
<Table>
Merchandise Comps 0.2%
Rental video Comps 4.0%
Total Comps 1.0%
</Table>
Total merchandise revenue for the first nine months of fiscal 2003 increased
approximately $2.9 million, or 1.1%, to $269.9 million compared to $267.0
million for the same period last year. Total revenues from the sale of video
games increased 66% for the nine months ended October 31, 2003 compared to the
nine months ended October 31, 2002. In addition, total revenues from sales of
DVDs increased 40% during the nine month period compared to the same period a
year earlier. Book and music Comps declined (1.1%) and (10.9%), respectively,
for the nine months ended October 31, 2003, compared to the nine months ended
October 31, 2002. The music industry reported a decline of approximately (7.4%)
in units shipped for the year and continues to battle on-line and physical music
piracy.
Total rental revenues for the nine months ended October 31, 2003 increased $3.7
million, or 5.1%, to $75.2 million from $71.5 million for the nine months ended
October 31, 2002. This increase was primarily the result of titles released
during the first quarter of fiscal 2003 having significantly stronger box-office
revenues than those titles released during the first quarter of fiscal 2002,
which resulted in higher rental transactions. In addition, an increase in our
rental video pricing, primarily catalog (non-new release) titles, initiated
during the second quarter of fiscal 2003 contributed to the increase. These
increases were partially offset by a decrease during the third quarter of fiscal
2003 resulting from lower rentals of titles in the VHS and game formats during
the current quarter. DVD rentals increased 51% during the nine months ended
October 31, 2003 compared to the same period last year. The increase in DVD
rentals was partially offset by a 26% decline in VHS rentals.
Gross Profit. Total gross profit of $117.3 million for the nine months ended
October 31, 2003 increased $7.6 million, or 6.9%, from $109.7 million for the
nine months ended October 31, 2002. Total gross profit as a percentage of total
revenue increased for the nine months ended October 31, 2003 to 34.0% compared
to 32.4% for the same period last year. Merchandise gross profit as a percentage
of merchandise revenues increased to 25.9% for the first nine months of fiscal
2003 from 25.3% for the same period last year due primarily to:
(i) a reduction of product costs of approximately $2.1 million as
a result of the adoption of EITF 02-16;
(ii) a decrease of approximately $1.6 million in the expense
associated with the distribution and return of merchandise
resulting from improved management and controls; and
(iii) lower merchandise shrinkage of approximately $1.1 million.
Partially offsetting these increases in gross profit were:
(i) an increase in freight expense resulting from higher shipping
costs, which even though $2.0 million higher than the first
nine months of fiscal 2002, was below our internal
projections; and
(ii) lower product margins of approximately $1.0 million resulting
from increased promotional pricing in our book category on new
release titles and a shift in revenue mix primarily from a
decline in music revenues and an increase in revenue from the
sale of video and video games, which have lower margins.
Rental video gross profit increased as a percentage of rental revenues to 63.1%
for the nine months ended October 31, 2003 from 58.9% for the same period last
year. This increase was primarily due to:
(i) an increase in our rental video pricing, primarily catalog
(non-new release) titles;
(ii) lower depreciation and amortization expense of approximately
$2.0 million from improved procurement procedures, inventory
management and an increase in margins on videos acquired under
revenue sharing agreements; and
16
(iii) a reduction of approximately $0.3 million in the cost
associated with the distribution of rental video assets.
Partially offsetting this increase in rental video margin was an increase in
rental video shrinkage of approximately $0.7 million.
SG&A Expenses. SG&A expenses for the nine months ended October 31, 2003
increased approximately $3.4 million to $120.4 million, or 34.9% of total
revenues, compared to $117.0 million, or 34.6% of total revenues, for the same
period a year earlier. The increase was primarily the result of:
(i) an increase in net advertising costs of approximately $3.7
million during the first nine months of fiscal 2003 compared
to the same period in fiscal 2002. Approximately $3.1 million
was the result of the adoption of EITF 02-16 and $0.6 million
from increased advertising expenditures in an attempt to
offset the impact of the war in Iraq and soft merchandise
sales during the first quarter of fiscal 2003;
(ii) an increase of approximately $3.0 million in costs associated
with the operation of a greater number of superstores; and
(iii) higher costs of approximately $0.5 million associated with the
remodeling and expansion of certain of our existing
superstores.
Partially offsetting these increases in SG&A was:
(i) a decline of approximately $2.7 million in accounting and
legal fees that were higher than normal during the first six
months of fiscal 2002 due to a $2.5 million charge for the
settlement of the shareholder class action lawsuits; and
(ii) a decline of approximately $0.5 million in store closing
costs.
Interest Expense. Interest expense increased slightly to $1.6 million for the
nine months ended October 31, 2003 from $1.5 million for the nine months ended
October 31, 2002. The increase was the result of higher debt levels during the
current quarter compared to last year partially offset by lower interest rates.
Interest Income. During the second quarter or fiscal 2002, we recorded
non-recurring interest income of $1.3 million as a result of interest earned on
income tax refunds for amended returns filed for fiscal years 1995 through 1998.
Income Taxes. No income tax benefit was recorded during the third quarters of
fiscal 2003 and 2002 due to adjustments in the valuation allowance related to
the net deferred tax asset.
17
Liquidity and Capital Resources
We generate cash from operations exclusively from the sale of merchandise and
the rental of video products 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 amended revolving
credit facility. We believe our cash flow from operations and borrowings under
our amended revolving credit facility will be sufficient to fund our ongoing
operations, new superstores and superstore expansions through fiscal 2005.
Consolidated Cash Flows
Operating Activities. Net cash flows from operating activities decreased
$3.5 million, from $35.1 million for the nine months ended October 31, 2002
to $31.6 million for the nine months ended October 31, 2003 as we recorded
the receipt of approximately $5.4 million of federal income tax refunds
during the third quarter of fiscal 2002. Increases in inventory were
approximately $11.8 million less during the current nine month period when
compared to the same period last year primarily resulting from having more
balanced merchandise inventories, which required a lesser buildup, entering
the holiday selling season. As a result, trade accounts payable declined
approximately $10.0 million during the first nine months of fiscal 2003
compared to the first nine months of fiscal 2002.
Investing Activities. Net cash used in investing activities decreased $11.6
million, or 23.7%, to $37.5 million for the nine months ended October 31,
2003 from $49.1 million for the nine months ended October 31, 2002. This
decrease was primarily the result of a higher amount of purchases of DVD
rental video assets under revenue sharing agreements, which generally cost
less than non-revenue sharing DVD assets, and improved rental video
inventory procurement procedures. In addition, purchases of computer
hardware and software upgrades were higher during the nine months ended
October 31, 2002.
Financing Activities. Cash provided by financing activities is primarily
associated with borrowings and payments made under debt agreements. For the
nine months ended October 31, 2003, net borrowings under debt agreements
decreased $8.2 million compared to the nine months ended October 31, 2002.
Also included in cash provided by financing activities are amounts for the
repurchase of our common stock. On September 18, 2001 we announced a stock
repurchase program of up to $5.0 million of our common stock. As of October
31, 2003, a total of 796,423 shares have been repurchased at a cost of
approximately $3.8 million, for an average cost of $4.74 per share.
Capital Structure. On August 23, 2002, we executed an amendment to our
syndicated secured Loan and Security Agreement with Fleet Retail Finance, Inc.
and The CIT Group/Business Credit, Inc, (the "Facility"). 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
$80 million, less a $10 million availability reserve. The Facility permits
borrowings at various interest-rate options based on the prime rate or London
Interbank Offering Rate (LIBOR) plus applicable margin depending upon the level
of the Company's minimum availability. 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, which
can be adjusted to reduce availability under the Facility. The Facility contains
no financial covenants, restricts the payment of dividends and includes 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 our subsidiaries and is guaranteed by each of our three consolidated
subsidiaries. The Facility matures on August 20, 2005. At October 31, 2003, we
had $12.7 million in excess availability, after the $10 million availability
reserve, under the Facility. At October 31, 2003 and January 31, 2003,
respectively, we had borrowings outstanding of $50.8 million and $45.7 million
under the Facility. The average rate of interest being charged under the
Facility was 3.6% and 4.1% at October 31, 2003 and January 31, 2003,
respectively.
From time to time, we enter into interest rate swap agreements in order to
obtain a fixed interest rate on a portion of our outstanding floating rate debt,
thereby reducing our exposure to interest rate volatility. On October 4, 2002,
we cancelled, at no cost, two swap agreements entered into in November and
December of 2001 with an aggregate
18
notional amount of $20 million and replaced those agreements with one interest
rate swap agreement with a financial institution. The notional amount of the
swap is $20 million with a fixed interest rate of 2.45% for two years. We have
designated the interest rate swap as a hedging instrument. At October 31, 2003,
the fair value of the interest rate swap was not significant.
At October 31, 2003, our minimum operating lease commitments remaining for
fiscal 2003 were approximately $4.8 million. The present value of total existing
minimum operating lease commitments for fiscal years 2004 through 2018
discounted at 9.0% was approximately $88.2 million as of October 31, 2003.
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
events, such as the war in Iraq, 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 Hastings in
particular.
We do 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 our 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 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 lender's 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 October 31, 2003 outstanding balance
of the variable rate debt would be approximately $0.3 million, including the
effect of our interest rate swap. 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. In addition, we do not
believe that changes in the fair value of our interest rate swap entered into in
October of 2002 with a notional amount of $20 million will be material.
ITEM 4. CONTROLS AND PROCEDURES
As required by Exchange Act Rules 13a-15 and 15d-15, an evaluation was conducted
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of October 31,
2003, and based on this evaluation our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective as of such date to ensure that information required to be
disclosed by us in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
There has not been any change in our internal control over financial reporting
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
19
PART II
ITEM 1. LEGAL PROCEEDINGS
In 2000, we restated our consolidated financial statements for the first three
quarters of fiscal 1999 and the prior four fiscal years. As a result, lawsuits
were filed against us and certain of our current and former directors and
officers asserting various claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934.
We agreed to settle these lawsuits, and the settlement received final approval
by the court on March 10, 2003. The settlement required a payment of $5.75
million on behalf of the defendants in the lawsuits ($3.15 million of which was
funded from amounts remaining under our director and officer insurance policy
after the payment of litigation expenses). The settlement resolves all claims
against us and our current and former defendant officers and directors. Based on
the foregoing, we recorded loss contingencies of $2.5 million, or $0.22 per
share, and $0.1 million, or $0.00 per share, during the second and fourth fiscal
quarters of fiscal 2002, respectively. All amounts required by the settlement
agreement were funded by January 31, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of exhibits
Exhibit
Number Description of Documents
------- ------------------------
31.1 Principal Executive Officer Certification Pursuant to Exchange
Act Rule 13a-14(a)/15d-14(a)
31.2 Principal Financial Officer Certification Pursuant to Exchange
Act Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. On August 26, 2003, the Company filed a current report on Form 8-K
reporting, under "Item 12. Results of Operations and Financial Condition,"
that the Company had announced, among other things, its results for the
quarter ended July 31, 2003.
20
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: December 10, 2003 /s/ Dan Crow
-------------------------------------
Dan Crow
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
21
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit
Number Description of Documents
------- ------------------------
31.1 Principal Executive Officer Certification Pursuant to Exchange
Act Rule 13a-14(a)/15d-14(a)
31.2 Principal Financial Officer Certification Pursuant to Exchange
Act Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</Table>
22