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 October 31, 1998
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, SUITE 1, 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 issuer's common stock, as of December 11,
1998:
Class Shares Outstanding
- -------------------------------------- -------------------------------
Common Stock, $.01 par value per share 11,552,718
2
HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998 and January 31, 1998 3
Consolidated Statements of Income for the Three Months ended October 31,
1998 and 1997 and the Nine Months ended October 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Nine Months ended
October 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports of Form 8-K 15
SIGNATURE PAGE 16
INDEX TO EXHIBITS 17
2
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND JANUARY 31, 1998
(Dollars in thousands, except par value)
October 31, 1998 January 31, 1998
------------------ -----------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 3,133 $ 3,840
Merchandise inventories 153,661 126,835
Other current assets 3,446 3,889
--------------- -----------------
Total current assets 160,240 134,564
Property and equipment, net of accumulated depreciation
of $90,820 and $78,863, respectively 84,031 80,703
Other assets 22 31
--------------- -----------------
$ 244,293 $ 215,298
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 24,863 $ 301
Trade accounts payable 59,646 60,747
Accrued expenses and other liabilities 15,965 17,590
Deferred income taxes 725 1,305
Income taxes payable 579 3,428
--------------- -----------------
Total current liabilities 101,778 83,371
Long term debt, excluding current maturities 21,946 51,311
Deferred income taxes 582 898
Redemption value of common stock held by estate of Company's founder -- 8,000
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued -- --
Common stock, $.01 par value; 75,000,000 shares authorized; 11,736,922
and 8,652,914 shares issued in 1998 and 1997, respectively; 11,552,718
and 8,465,189 shares outstanding in 1998 and 1997, respectively 117 87
Additional paid-in capital 37,535 1,654
Retained earnings 84,486 80,168
Treasury stock, at cost (2,151) (2,191)
Redemption value of common stock held by estate of Company's founder -- (8,000)
--------------- -----------------
119,987 71,718
Commitments and contingencies -- --
--------------- -----------------
$ 244,293 $ 215,298
=============== =================
See accompanying notes to consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(In thousands, except per share data)
(Unaudited)
Three Months Ended October 31, Nine Months Ended October 31,
----------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Merchandise revenue $ 72,786 $ 62,717 $ 215,308 $ 187,968
Rental video revenue 18,836 17,803 56,888 52,641
--------------- --------------- --------------- ---------------
Total revenues 91,622 80,520 272,196 240,609
Merchandise cost of revenue 49,056 42,861 147,546 128,953
Rental video cost of revenue 7,399 7,242 22,342 19,046
--------------- --------------- --------------- ---------------
Total cost of revenues 56,455 50,103 169,888 147,999
--------------- --------------- --------------- ---------------
Gross profit 35,167 30,417 102,308 92,610
Selling, general and administrative expenses 31,590 28,931 90,966 85,056
Pre-opening expenses 647 203 1,342 768
--------------- --------------- --------------- ---------------
32,237 29,134 92,308 85,824
--------------- --------------- --------------- ---------------
Operating income 2,930 1,283 10,000 6,786
Interest expense 746 1,138 2,901 3,093
--------------- --------------- --------------- ---------------
Income before income taxes 2,184 145 7,099 3,693
Income taxes 866 55 2,781 1,404
--------------- --------------- --------------- ---------------
Net income $ 1,318 $ 90 $ 4,318 $ 2,289
=============== =============== =============== ===============
Basic earnings per share $ 0.11 $ 0.01 $ 0.43 $ 0.27
=============== =============== =============== ===============
Diluted earnings per share $ 0.11 $ 0.01 $ 0.42 $ 0.26
=============== =============== =============== ===============
Weighted average number of common shares
outstanding--basic 11,553 8,500 10,060 8,539
Dilutive effect of stock options 70 228 140 231
--------------- --------------- --------------- ---------------
Weighted average number of common shares
outstanding--diluted 11,623 8,728 10,200 8,770
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements.
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5
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
Nine Months ended October 31,
-------------------------------------
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,318 $ 2,289
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 27,005 23,607
Loss on rental videos lost, stolen and defective 2,843 2,008
Loss on disposal of other assets 195 171
Deferred income taxes (896) 1
Changes in operating assets and liabilities:
Merchandise inventory (26,826) (19,568)
Other assets 452 (451)
Trade accounts payable, accrued expenses
and other liabilities (2,726) 14,460
Income taxes payable (2,849) (1,337)
--------------- ---------------
Net cash provided by operations 1,516 21,180
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (33,371) (38,362)
--------------- ---------------
Net cash used in investing activities (33,371) (38,362)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 226,500 210,450
Repayments under revolving credit facility (231,271) (195,421)
Principal payments under long-term debt and capital lease
obligations (32) 1,743
Proceeds from initial public offering 35,911 --
Dividends and treasury stock transactions 40 (1,416)
--------------- ---------------
Net cash provided by financing activities 31,148 15,356
--------------- ---------------
Net decrease in cash and cash equivalents (707) (1,826)
Cash and cash equivalents at beginning of period 3,840 4,972
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,133 $ 3,146
=============== ===============
See accompanying notes to consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hastings
Entertainment, Inc. and 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 rules and
regulations. 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 period. The results of operations for
such interim periods are not necessarily indicative of the results which may be
expected for a full year. The financial statements contained herein should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Registration Statement on Form S-1 (File no.
333-47969) as filed with the Securities and Exchange Commission and declared
effective on June 11, 1998. The Company's fiscal year ends on January 31 and is
identified as the fiscal year for the immediately preceding fiscal year. For
example, the fiscal year ended January 31, 1999 is referred to as fiscal year
1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of February 1, 1998, the Company adopted a new method of depreciation for its
rental video assets. Under this new method, the Company depreciates all rental
videos on a straight-line basis to their estimated salvage value of $5. Copies
of video titles identified as base stock (the first four copies per store of
each title) are depreciated over 36 months, and additional copies of each title
(all videotapes which represent copies five and up of each title at each store)
are depreciated over six months. The Company believes this accelerated
methodology is appropriate for matching revenue and expense. Adoption of the new
method was not material to retained earnings at February 1, 1998, or to results
of operations for the first nine months of fiscal 1998.
Options to purchase 1,706,132 shares of common stock were outstanding at October
31, 1998 but were not included in the quarter or year-to-date computations of
diluted EPS because the option exercise prices were greater than or equal to the
average market price of the common shares.
3. CONSOLIDATION POLICY
The Company established one wholly-owned subsidiary during the second quarter of
fiscal 1998, Hastings College Stores, Inc. The Company established two
wholly-owned subsidiaries during the first quarter of fiscal 1998, Hastings
Properties, Inc. and Hastings Internet, Inc. The consolidated financial
statements present the results of Hastings Entertainment, Inc. and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation
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4. MODIFICATION OF BORROWING ARRANGEMENT
On April 15, 1998, the Company amended its unsecured, $45.0 million Revolving
Credit Facility (the "Facility") placed with a syndicate of banks. The amendment
extended the termination date of the Facility from April 30, 1999 to June 30,
1999. All other terms and conditions remained unchanged. As of October 31, 1998,
the outstanding balance under the Facility was $19.4 million. Other financing
arrangements remained unchanged during the quarter.
5. TERMINATION OF STOCK REDEMPTION AGREEMENT
The stock redemption agreement with the estate of the Company's founder was
terminated upon completion of the Company's initial public offering.
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Hastings is a multimedia entertainment retailer that combines the sale of books,
music, software, periodicals, and videotapes with the rental of videotapes and
video games in a superstore format. As of October 31, 1998, the Company operated
128 superstores averaging 21,200 square feet in small to medium-sized markets
located throughout the Midwestern and Western United States. The Company opened
five new superstores in the fiscal quarter ended October 31, 1998.
SUMMARY OF STORE ACTIVITY
Quarter Ended Nine Months Ended Year Ended
--------------------------- ----------------------------- -------------
October 31, October 31, October 31, October 31, January 31,
1998 1997 1998 1997 1998
------------- ----------- -------------- ------------- -------------
Hastings Superstores:
Beginning number of stores 123 115 117 111 111
Openings 5 2 11 6 8
Closings - - - - (2)
------------- ----------- -------------- ------------- -------------
Ending number of stores 128 117 128 117 117
============= =========== ============== ============= =============
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's unaudited
consolidated statements of income as a percentage of revenues:
Three Months Ended October 31, Nine Months Ended October 31,
----------------------------------- -------------------------------
1998 1997 1998 1997
----------------- --------------- --------------- -------------
Merchandise revenue 79.4% 77.9% 79.1% 78.1%
Rental video revenue 20.6 22.1 20.9 21.9
----------------- --------------- --------------- -------------
Total revenues 100.0 100.0 100.0 100.0
Merchandise cost of revenue 67.4 68.3 68.5 68.6
Rental video cost of revenue 39.3 40.7 39.3 36.2
----------------- --------------- --------------- -------------
Total cost of revenues 61.6 62.2 62.4 61.5
----------------- --------------- --------------- -------------
Gross profit 38.4 37.8 37.6 38.5
Selling, general and administrative expenses 34.5 35.9 33.4 35.4
Pre-opening expenses 0.7 0.3 0.5 0.3
----------------- --------------- --------------- -------------
35.2 36.2 33.9 35.7
----------------- --------------- --------------- -------------
Operating income 3.2 1.6 3.7 2.8
Interest expense 0.8 1.4 1.1 1.3
----------------- --------------- --------------- -------------
Income before income taxes 2.4 0.2 2.6 1.5
Income taxes 1.0 0.1 1.0 .5
----------------- --------------- --------------- -------------
Net income 1.4% 0.1% 1.6% 1.0%
================= =============== =============== =============
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THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997:
Total revenues increased $11.1 million, or 13.8%, to $91.6 million in the three
months ended October 31, 1998, from $80.5 million during the three months ended
October 31, 1997. Merchandise revenue in the quarter ended October 31, 1998
totaled $72.8 million, an increase of $10.1 million or 16.1%, from $62.7
million for the quarter ended October 31, 1997. Rental video revenue for the
three months ended October 31, 1998 increased $1.0 million, or 5.8%, to $18.8
million from $17.8 million in the three months ended October 31, 1997.
Comparable store revenues increased by 6% for the three months ended October
31, 1998, compared to the three months ended October 31, 1997. A store's
revenue is included in the comparable store revenue growth calculation after it
has been open for 60 weeks.
Total cost of revenues increased by $6.4 million to $56.5 million in the three
months ended October 31, 1998, compared with $50.1 million in the three months
ended October 31, 1997. Gross profit as a percentage of revenues was 38.4% in
the three months ended October 31, 1998, compared to 37.8% for the same period
in fiscal 1997. Gross profit from merchandise revenue increased to $23.7
million, or 32.6% of merchandise revenue in the three months ended October 31,
1998, compared to gross profit from merchandise revenue of $19.9 million or
31.7% of merchandise revenue for the three months ended October 31, 1997.
Management attributes the improvement in merchandise gross profit percentage to
strategic buying decisions, increased efficiencies in the distribution of
product and improvement in inventory control procedures.
Rental video gross profit increased to $11.4 million in the three months ended
October 31, 1998, from $10.6 million in the three months ended October 31,
1997. Rental video gross profit as a percentage of rental video revenue
improved to 60.7% of rental video revenue in the three months ended October 31,
1998 from 59.3% in the three months ended October 31, 1997. Management
attributes the improvement in rental video margin primarily to reduced
videotape inventory shrinkage and improved terms of its rental video leasing
agreements as revised in August 1998.
Selling, general and administrative expenses ("SG&A"), excluding pre-opening
expenses related to new stores, totaled $31.6 million in the three months ended
October 31, 1998, compared to $28.9 million in the three months ended October
31, 1997. SG&A, excluding pre-opening expenses related to new stores, as a
percentage of revenues decreased to 34.5% of total revenues in the three months
ended October 31, 1998 from 35.9% in the three months ended October 31, 1997.
The primary factors contributing to this decrease in SG&A as a percentage of
revenues were lower corporate human resource costs related to deferred
compensation and reduced overall net advertising. Pre-opening expenses
increased to $0.6 million in the three months ended October 31, 1998 from $0.2
million in the three months ended October 31, 1997. Pre-opening expenses
include human resource costs, travel, rent, advertising, supplies and certain
other costs incurred prior to a superstore's opening. The Company opened five
new superstores in the three months ended October 31, 1998 compared to two new
superstores opened in the three months ended October 31, 1997.
Interest expense decreased to $0.7 million, or 0.8% of revenues, in the three
months ended October 31, 1998, versus $1.1 million, or 1.4% of revenues, in the
three months ended October 31, 1997. The decline in interest expense was due to
lower average borrowing levels. Income tax expense was $0.9 million, or 39.7%
of income before income taxes, in the three months ended October 31,1998,
versus $0.1 million, or 37.9% of income before taxes, in the three months ended
October 31, 1997.
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NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1997:
Total revenues increased $31.6 million, or 13.1%, to $272.2 million in the nine
months ended October 31, 1998 from $240.6 million during the nine months ended
October 31, 1997. Merchandise revenue totaled $215.3 million in the nine months
ended October 31, 1998, an increase of $27.3 million, or 14.5%, from $188.0
million in the nine months ended October 31, 1997. Rental video revenue
increased $4.2 million, or 8.1%, to $56.9 million for the nine months ended
October 31, 1998 from $52.6 million for the nine months ended October 31, 1997.
Comparable store sales increased by 7% for the nine months ended October 31,
1998, compared to the nine months ended October 31, 1997. A store's revenue is
included in the comparable store revenue growth calculation after it has been
open for 60 weeks.
Total cost of revenues increased by $21.9 million to $170.0 million for the
nine months ended October 31, 1998, compared with $148.0 million for the nine
months ended October 31, 1997. Gross profit as a percentage of revenues was
37.6% in the nine months ended October 31, 1998, compared to 38.5% in the nine
months ended October 31, 1997. Gross profit from merchandise revenue in the
nine months ended October 31, 1998 increased to $67.8 million, or 31.5% of
merchandise revenue, compared to gross profit from merchandise revenue of $59.0
million, or 31.4% of merchandise revenue in the three months ended October 31,
1997. Management attributes the slight increase in merchandise gross profit
percentage to modest reductions in the cost of certain music and software
products.
Rental video gross profit was $34.5 million in the nine months ended October
31, 1998, an increase of $0.9 million compared to $33.6 million for the nine
months ended October 31, 1997. Rental video gross profit as a percentage of
rental video revenue decreased to 60.7% in the nine months ended October 31,
1998 from 63.8% in the nine months ended October 31, 1997. The reduction in
margin is primarily due to the Company's rental video leasing program in effect
from August 1997 through August 1998.
SG&A, excluding pre-opening expenses related to new stores, totaled $91.0
million in the nine months ended October 31, 1998, compared to $85.1 million in
the nine months ended October 31, 1997. SG&A, excluding pre-opening expenses
related to new stores, as a percentage of revenues decreased to 33.4% in the
nine months ended October 31, 1998 from 35.4% in the nine months ended October
31, 1997. The primary factors contributing to this decrease in SG&A as a
percentage of revenues were lower corporate human resource costs related to
deferred compensation, reduced overall advertising combined with on-going
leverage of corporate overhead. Pre-opening expenses increased to $1.3 million
in the nine months ended October 31, 1998 from $0.8 million posted in the nine
months ended October 31, 1997. The Company opened eleven new superstores in the
nine months ended October 31, 1998, compared to six new superstores opened in
the nine months ended October 31, 1997.
Interest expense was $2.9 million, or 1.1% of revenues, in the nine months
ended October 31, 1998, compared to $3.1 million, or 1.3% of revenues, in the
nine months ended October 31, 1997. This decline in interest expense is due to
lower average borrowing levels and lower average interest rates. Income tax
expense was $2.8 million, or 39.2% of income before income taxes, in the nine
months ended October 31, 1998, compared to $1.4 million, or 38.0% of income
before income taxes, in the nine months ended October 31, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital needs,
the opening of new superstores, and the expansion and refurbishment of existing
superstores. The Company's primary sources of working capital are cash flow
from operations, trade credit from vendors, proceeds from the Company's initial
public offering of common stock described below and borrowings from its
Revolving Credit Facility. As of October 31, 1998, the Company's total debt
capacity consisted of $25.0 million of unsecured Series A Senior Notes due 2003
and its unsecured $45.0 million Revolving Credit Facility.
Net cash provided by operations for the nine months ended October 31, 1998 was
$1.5 million, compared with net cash provided from operations of $21.1 million
in the nine months ended October 31, 1997. The primary operating cash inflows
for the nine months ended October 31, 1998 reflect net income and depreciation
and other non-cash expenses. The increase in comparable operating cash outflows
during the nine months ended October 31, 1998 was primarily a result of a
significant decrease in trade accounts payable due to strategic buying and
payment decisions made during the fourth quarter of 1997, increased credit for
return of product during the first quarter of 1998, and an increase in
inventory due to the fact that the Company opened eleven superstores in the
nine months ended October 31, 1998, compared to six superstores opened in the
nine months ended October 31, 1997.
Net cash used in investing activities for the nine months ended October 31,
1998 was $33.4 million, primarily related to the purchase of rental video
tapes, the opening of new superstores and the expansion of superstores,
compared to $38.4 million in the nine months ended October 31, 1997. The
decrease in cash used in investing activities for the comparable nine month
periods is due to lower levels of rental video tape purchases due to leased
video programs that commenced in August of 1997 which offset the increase in
capital expenditures related to the opening and expansion of superstores.
Net cash provided by financing activities in the nine months ended October 31,
1998 was $31.1 million, compared to net cash provided by financing activities
of $15.4 million in the nine months ended October 31, 1997. The increase in net
cash provided by financing activities resulted primarily from the proceeds of
the Company's initial public offering described below.
During the nine months ended October 31, 1998, the Company's net repayments
under the Facility were $4.8 million. On April 15, 1998, the Company amended
the Facility to extend the termination date from April 30, 1999 to June 30,
1999, all other terms and conditions remained unchanged. As of October 31,
1998, the outstanding balance under the Facility was $19.4 million.
The Company completed an initial public offering as described in the Company's
Registration Statement on Form S-1 (File no. 333-47969) as filed with the
Securities and Exchange Commission and declared effective on June 11, 1998. Net
proceeds after transaction costs from the initial public offering were $35.9
million as the Company sold 3,084,000 shares of Common Stock, $.01 par value
per share, at an offering price of $13.00 per share. In addition, 293,333
shares of Common Stock were sold in the public offering by the estate of the
Company's founder, a non-management shareholder of the Company. The Company did
not receive any of the proceeds from the sale of shares by the selling
shareholder. The Common Stock is listed on The Nasdaq National Market under the
symbol "HAST." The Company is using the net proceeds from the offering to fund
the opening of new superstores, the expansion and remodeling of existing
superstores and for working capital and general corporate purposes.
The stock redemption agreement with the estate of the Company's founder was
terminated upon completion of the Company's initial public offering.
11
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Based upon the Company's current operating levels and superstore expansion
plans, management believes net cash flows from operating activities, the $45.0
million Facility, and the $25.0 million unsecured Series A Senior Notes will be
sufficient to meet the Company's capital requirements through January 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued several
Statements of Financial Accounting Standards (SFAS's) that may impact the
Company's accounting treatment and/or its disclosure obligations. The new
SFAS's impacting the Company are as follows:
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" was issued in June 1997 and supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." The new rules change the
manner in which operating segments are defined and reported externally to be
consistent with the basis on which they are reported and evaluated internally.
The new rules are effective for periods beginning after December 15, 1997.
Adoption of this statement does not result in significant additional disclosure
by the Company. However, the Company considers the initiation of the sale of
products on its Web site to be a separate segment and when and if such
operations are material will include the disclosure required by the statement.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998. The statement establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The adoption is not expected to have a material impact on the Company.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5 in April 1998. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The SOP is
effective for financial statements for fiscal years beginning after December
15, 1998. The adoption will not have a material impact on the Company.
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 videotape rental in the Spring because customers generally
spend more time outdoors. Major world or sporting events, such as the Super
Bowl, the Olympics 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 videotape titles, the cost of the new release
or "best renter" titles, changes in comparable store revenue, 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 net income
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.
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YEAR 2000 COMPLIANCE
The Year 2000 issue is primarily the result of Information Technology, ("IT"),
and non-IT systems of various kinds, using a two digit format rather than a
four digit format to define a specific year. For example, "98" to represent the
calendar year 1998, as opposed to a four digit format "1998." Such systems will
be unable to accurately interpret or process dates beyond the year 1999, which
could cause a system failure, or other computer errors, and result in a
disruption of the system(s).
State of Readiness:
Hastings has established an internally staffed project team to address Year
2000 issues. These issues include:
1. Software compliance within Hastings enterprise systems;
2. Compliance within internal IT and non-IT operating systems and
application programs purchased from outside entities;
3. Business risks regarding potential failure of vendor's and
supplier's systems and services.
Hastings' Year 2000 plan addresses the Year 2000 issues in multiple phases,
including:
1. An inventory of Hastings' systems and equipment that may be
vulnerable to Year 2000 issues;
2. Assessment of systems and equipment to determine risks associated
with their failure to be Year 2000 compliant;
3. Testing of systems, equipment and their components to determine if
they are Year 2000 compliant;
4. Implementation of a change within the system or equipment, or the
replacement of the system or equipment;
5. A census and assessment of business partner's state of readiness;
6. Contingency planning to assess worst case scenarios.
Inventories, assessment and testing of Year 2000 compliance have been
substantially completed for all Hastings' internal and external IT systems,
hardware and operating systems. Most of Hastings' internal IT systems have been
developed and implemented since 1994, with a goal of implementation including
Year 2000 compliance. Two internal systems were identified that contained
potential risks, one of these has been completely replaced and the other was
previously scheduled for replacement in early 1999. Two external systems were
found to be non-compliant, both systems were previously scheduled to be
replaced in the first quarter of 1999. Mechanical systems such as HVAC,
telecommunications, power supplies and thermostats are being checked
individually and with each manufacturer.
Hastings is tracking the Year 2000 compliance status of its vendors and
suppliers using a census and tracking system provided by the National Retail
Federation, of which the Company is a member. Vendor and service provider Year
2000 compliance status is being determined by means of a survey being conducted
by the National Retail Federation. Contingency plans are in place for any
vendor which fails to provide compliance certification by June 1999, or which
subsequently demonstrates a failure in product delivery systems. If a major
vendor cannot prove its compliance, it is expected that the vendor will be
removed as an authorized vendor of the Company and products obtained from
alternative and compliant vendors, or the vendor will be converted to a manual
system.
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Risks of Hastings' Year 2000 issues:
Hastings is in the process of determining its contingency plans which will
include the identification of its most likely worst case scenarios. Currently,
the most likely source of risk to Hastings would be the failure of a critical
vendor, such as a wholesale distributor, to be able to provide product for
which Hastings has no alternative supplier.
While the Company believes its Year 2000 projects will be completed on a timely
basis, failure to successfully complete significant portions of its Year 2000
program could have a material adverse effect on various phases of the Company's
retail operation, and therefore on its operating results and financial
condition. Also, there can be no assurances that IT and non-IT systems of third
parties that the Company may rely upon will be Year 2000 compliant in a timely
manner, and therefore the Company could be adversely affected by failure of a
significant third party to become Year 2000 compliant. Possible consequences of
Year 2000 issues causing business interruption include, but are not limited to,
loss of communications links with certain store locations, inability to process
transactions, send purchase orders, or engage in similar normal business
activities. In addition, since there is no uniform definition of Year 2000
compliance, not all situations can be anticipated.
Contingency Plans:
Hastings is preparing its contingency plans to identify the most likely worst
case scenarios, and the proper response to each. Preliminary plans are being
reviewed, and primarily revolve around responses to a failure in one or more
business partner's ability to provide products or services. Comprehensive
contingency plans are scheduled for review during the first quarter of 1999.
Costs:
Most of the Company's expenditures on Year 2000 compliance were incurred as
development expense on new systems between 1993 and 1996. Specific Year 2000
costs were absorbed in the conversion of each system as it was written and
implemented. Hastings does not expect the additional costs associated with its
Year 2000 efforts to be material. Hastings expects that assessment and planning
costs to be absorbed in normal operations, and potential implementation costs
for manually initiating orders, receiving goods and processing invoices in its
contingency plans to be less than $100,000. See "- Statements Regarding
Forward-Looking Disclosure."
STATEMENTS REGARDING FORWARD-LOOKING DISCLOSURE
Certain of the statements set forth above are forward looking statements within
the meaning of the Securities Exchange Act of 1934. Such statements are based
upon management's current expectations and are subject to a number of factors
and uncertainties which could cause actual results to differ materially from
those described herein. The forward-looking statements set forth above are
subject to the factors and uncertainties set forth under the heading "Risk
Factors" in the Company's Registration Statement on Form S-1 (File No.
333-47969) as filed with the Securities and Exchange Commission and declared
effective on June 11, 1998.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
27.1 Financial Data Schedule
b. No report on Form 8-K was filed by the registrant during the fiscal quarter
for which this report 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, on behalf of the registrant and as registrant's Principal
Financial Officer, thereunto duly authorized:
HASTINGS ENTERTAINMENT, INC.
DATE: December 14, 1998 By: /s/ Dennis McGill
---------------------------
Dennis McGill
Vice President, Chief Financial Officer,
Treasurer and Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
27.1 Financial Data Schedule