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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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACTION OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 000-24381
HASTINGS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1386375
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 PLAINS BOULEVARD, AMARILLO, TEXAS 79102
(Address of principal executive offices) (Zip Code)
(806) 351-2300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Number of shares outstanding of the registrant's common stock, as of
December 6, 1999:
Class Shares Outstanding
- -------------------------------------- -------------------------------------
Common Stock, $.01 par value per share 11,699,921
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HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
FORM 10-Q FOR THE PERIOD ENDED OCTOBER 31, 1999
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1999 (Unaudited) and
January 31, 1999 3
Unaudited Consolidated Statements of Income (Loss) for the Three Months
and Nine Months ended October 31, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended
October 31, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURE PAGE 16
INDEX TO EXHIBITS 17
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND JANUARY 31, 1999
(Dollars in thousands, except par value)
October 31, 1999 January 31, 1999
---------------- ----------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 3,664 $ 5,394
Merchandise inventories 158,219 145,432
Income taxes receivable 1,249 807
Deferred income taxes -- 1,636
Other current assets 4,139 4,599
--------- ---------
Total current assets 167,271 157,868
--------- ---------
Property and equipment, net of accumulated depreciation
of $111,908 and $113,872 respectively 77,617 64,124
Deferred income taxes 677 --
Other assets 19 159
--------- ---------
$ 245,584 $ 222,151
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 5,349 $ 5,345
Trade accounts payable 50,625 42,406
Accrued expenses and other liabilities 15,475 17,937
Deferred income taxes 455 --
--------- ---------
Total current liabilities 71,904 65,688
--------- ---------
Long term debt, excluding current maturities 55,919 39,634
Deferred income taxes -- 696
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 75,000,000 shares authorized; 11,736,923
shares issued in 1999 and 1998, 11,628,973 and 11,553,168 shares
outstanding in 1999 and 1998, respectively 117 117
Additional paid-in capital 36,940 37,530
Retained earnings 82,173 80,633
Treasury stock, at cost (1,469) (2,147)
--------- ---------
117,761 116,133
Commitments and contingencies
--------- ---------
$ 245,584 $ 222,151
========= =========
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(In thousands, except per share data)
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1999 1998 1999 1998
----------- ------------ ---------- ----------
Merchandise revenue $ 81,219 $ 72,786 $ 244,073 $ 215,308
Rental video revenue 19,642 18,836 59,805 56,888
--------- --------- --------- ---------
Total revenues 100,861 91,622 303,878 272,196
Merchandise cost of revenue 54,732 49,056 167,288 147,546
Rental video cost of revenue 9,336 7,399 22,650 22,342
--------- --------- --------- ---------
Total cost of revenues 64,068 56,455 189,938 169,888
--------- --------- --------- ---------
Gross profit 36,793 35,167 113,940 102,308
Selling, general and administrative expenses 38,604 31,590 107,152 90,966
Pre-opening expenses 801 647 1,514 1,342
--------- --------- --------- ---------
39,405 32,237 108,666 92,308
--------- --------- --------- ---------
Operating income (loss) (2,612) 2,930 5,274 10,000
Interest expense 1,026 746 2,802 2,901
--------- --------- --------- ---------
Income (loss) before income taxes (3,638) 2,184 2,472 7,099
Income tax expense (benefit) (1,384) 866 932 2,781
--------- --------- --------- ---------
Net income (loss) $ (2,254) $ 1,318 $ 1,540 $ 4,318
========= ========= ========= =========
Income (Loss) per common share
Basic $ (0.19) $ 0.11 $ 0.13 $ 0.43
========= ========= ========= =========
Diluted $ (0.19) $ 0.11 $ 0.13 $ 0.42
========= ========= ========= =========
Weighted average number of common shares
outstanding--basic 11,629 11,553 11,618 10,060
Dilutive effect of stock options -- 70 91 140
--------- --------- --------- ---------
Weighted average number of common shares
outstanding--diluted 11,629 11,623 11,709 10,200
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(Dollars in thousands)
Nine Months ended October 31,
-----------------------------
1999 1998
---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,540 $ 4,318
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 23,412 27,005
Loss on rental videos lost, stolen and defective 2,068 2,843
Loss on disposal of other assets 410 195
Deferred income taxes 718 (896)
Changes in operating assets and liabilities:
Merchandise inventory (12,787) (26,826)
Other current assets 460 452
Trade accounts payable, accrued expenses
and other liabilities 5,791 (2,726)
Income taxes payable/receivable (442) (2,849)
--------- ---------
Net cash provided by operations 21,170 1,516
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (39,383) (33,371)
Decrease in other assets 140 --
--------- ---------
Net cash used in investing activities (39,243) (33,371)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 209,950 226,500
Repayments under revolving credit facility (189,850) (231,271)
Advances under long-term lease incentives 1,190 --
Payments under long-term debt and capital lease obligations (5,001) (32)
Proceeds from initial public offering -- 35,911
Treasury stock transactions 54 40
--------- ---------
Net cash provided by financing activities 16,343 31,148
--------- ---------
Net decrease in cash (1,730) (707)
Cash at beginning of period 5,394 3,840
--------- ---------
CASH AT END OF PERIOD $ 3,664 $ 3,133
========= =========
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hastings
Entertainment, Inc. and its subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions in Form 10-Q and Article 10 of Regulation
S-X. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such principles and
regulations of the Securities and Exchange Commission. All adjustments,
consisting only of normal recurring adjustments, have been made which, in the
opinion of management, are necessary for a fair presentation of the results of
the interim periods. The results of operations for such interim periods are not
necessarily indicative of the results which may be expected for a full year.
The financial statements contained herein should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1999. The
Company's fiscal year ends on January 31 and is identified as the fiscal year
for the immediately preceding calendar year. For example, the fiscal year that
will end on January 31, 2000 is referred to as fiscal 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company adopted a new method of amortizing its rental video assets in the
fourth quarter of fiscal 1998. In late fiscal 1998, the Company completed a
series of direct revenue-sharing agreements with major studios under which the
Company expects to have acquired approximately 50% of its rental video asset
units during fiscal 1999. The Company anticipates that its involvement in
revenue-sharing agreements will continue into the future. Revenue sharing
allows the Company to acquire rental video assets at a lower up-front capital
cost than traditional buying arrangements. The Company then shares with studios
a percentage of the actual net rental revenues generated over a contractually
determined period of time. The increased copy depth under revenue-sharing
agreements allows customer demand for new releases to be satisfied over a
shorter period of time. Because this new business model results in a greater
proportion of rental revenue being received over a reduced rental period, in
the fourth quarter of fiscal 1998 the Company changed its method of amortizing
rental video assets in order to better match expenses with revenues.
Under the new amortization method, the Company is continuing to expense
revenue-sharing payments as revenues are recognized under the terms of the
specific contracts with supplying studios. The capitalized cost of all rental
video assets acquired for a fixed price is being amortized on an accelerated
basis over six months to a salvage value of $4.00 per unit, except for rental
video assets purchased for the initial stock of a new store, which is being
amortized on a straight line basis over 36 months to a salvage value of $4.00.
Under the old amortization method, the capitalized cost of base rental video
assets (typically copies one through four of a title for each store) was
amortized on a straight line basis over 36 months to a salvage value of $5.00.
The capitalized cost of non-base units (typically copies five and above of a
title for each store) was amortized on a straight line basis over six months to
a salvage value of $5.00.
As an increasing percentage of rental videos have been introduced throughout
fiscal 1999 under these revenue-sharing agreements, the Company's rental video
asset amortization, combined with revenue-sharing expense, has increased as a
percentage of total rental video revenue, as compared to fiscal 1998, due to
the change in accounting method and the terms of the revenue-sharing
agreements.
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Options to purchase 1,723,547 and 1,706,132 shares of common stock were
outstanding at October 31, 1999 and 1998 respectively, but were not included in
the computation of diluted earnings per share (EPS) for the three-months ended
October 31, 1999 and 1998, respectively, because the option exercise prices
were greater than or equal to the average market price of the common shares.
Options to purchase 1,111,200 and 1,706,132 shares of common stock were
outstanding at October 31, 1999 and 1998, respectively, but were not included
in the computation of diluted EPS for the nine months ended October 31, 1999
and 1998, respectively, because the option exercise prices were greater than or
equal to the average market price of the common shares.
The effect of stock options for the three-month period ended October 31, 1999
was anti-dilutive.
Certain prior-year amounts have been reclassified to conform to the
presentation used for the current year.
3. CONSOLIDATION POLICY
The Company operates three wholly owned subsidiaries established in fiscal
1998: Hastings College Stores, Inc., 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.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash financing activities during the nine months ended October 31, 1999
includes the receipt of shares of the Company's common stock valued at $996,000
relating to the exercise of stock options and the issuance of treasury stock to
pay outside director fees of approximately $35,000. There were no non-cash
financing activities in the nine months ended October 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto appearing elsewhere in
the Report on Form 10-Q.
The Company's actual results and the timing of certain events could differ
materially from those discussed in the forward-looking statements as a result of
certain factors, including those set forth under the heading "Risk Factors" in
the Company's filings with the Securities and Exchange Commission. Additional
information concerning factors that could cause results to differ materially
from those forward-looking statements is contained below under the paragraph
captioned "Statements Regarding Forward-looking Disclosure." All forward-looking
statements in this discussion are expressly qualified in their entirety by the
cautionary statements set forth below in such paragraph.
GENERAL
The Company is a multimedia entertainment superstore and Internet retailer that
combines the sale of books, music, software, periodicals, videocassettes and
DVDs with the rental of videocassettes, video games and DVDs. By offering a
broad array of products within several distinct but complementary categories,
the Company strives to appeal to a wide range of customers and position its
superstores as destination entertainment stores in its targeted small to
medium-sized markets. As of October 31, 1999,
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the Company operated 146 superstores averaging 21,500 square feet in small to
medium-sized markets located throughout the United States. The Company opened
eight new superstores in the three months ended October 31, 1999, for a total
of 17 new superstores opened year-to-date in fiscal 1999.
SUMMARY OF STORE ACTIVITY
Quarter Ended Nine Months Ended Year Ended
-------------------------- ---------------------------- --------------
October 31, October 31, October 31, October 31, January 31,
1999 1998 1999 1998 1999
------------ ------------ ------------- ------------- --------------
Hastings Superstores:
Beginning number of stores 138 123 129 117 117
Openings 8 5 17 11 12
Closings - - - - -
------------ ------------ ------------- ------------- --------------
Ending number of stores 146 128 146 128 129
============ ============ ============= ============= ==============
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's unaudited
consolidated statements of income (loss) as a percentage of revenues:
Three Months Ended October 31, Nine Months Ended October 31,
----------------------------------- -----------------------------
1999 1998 1999 1998
--------------- --------------- ------------- ------------
Merchandise revenue 80.5% 79.4% 80.3% 79.1%
Rental video revenue 19.5 20.6 19.7 20.9
--------------- --------------- ------------- ------------
Total revenues 100.0 100.0 100.0 100.0
Merchandise cost of revenue 67.4 67.4 68.5 68.5
Rental video cost of revenue 47.5 39.3 37.9 39.3
--------------- --------------- ------------- ------------
Total cost of revenues 63.5 61.6 62.5 62.4
--------------- --------------- ------------- ------------
Gross profit 36.5 38.4 37.5 37.6
Selling, general and administrative expenses 38.3 34.5 35.3 33.4
Pre-opening expenses 0.8 0.7 0.5 0.5
--------------- --------------- ------------- ------------
39.1 35.2 35.8 33.9
--------------- --------------- ------------- ------------
Operating income (loss) (2.6) 3.2 1.7 3.7
Interest expense 1.0 0.8 0.9 1.1
--------------- --------------- ------------- ------------
Income (loss) before income taxes (3.6) 2.4 0.8 2.6
Income tax expense (benefit) (1.4) 1.0 0.3 1.0
--------------- --------------- ------------- ------------
Net income (loss) (2.2)% 1.4% 0.5% 1.6%
=============== =============== ============= ============
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THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1998:
Revenues and Gross Profit:
For the three months ended October 31, 1999, total revenues increased $9.2
million, or 10.1%, to $100.9 million from $91.6 million during the three months
ended October 31, 1998.
Merchandise revenue in the three months ended October 31, 1999 totaled $81.2
million, an increase of $8.4 million or 11.6%, from $72.8 million for the three
months ended October 31, 1998. Each significant merchandise category exhibited
growth, with video games, software and music providing the largest gains on a
percentage basis.
Rental video revenue for the three months ended October 31, 1999 increased $0.8
million, or 4.3%, to $19.6 million from $18.8 million in the three months ended
October 31, 1998.
Comparable-store revenues increased by 2.2% for the three months ended October
31, 1999, compared to the three months ended October 31, 1998. 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 $7.6 million, or 13.5%, to $64.1 million in
the three months ended October 31, 1999, compared with $56.5 million in the
three months ended October 31, 1998. Gross profit as a percentage of revenues
was 36.5% in the three months ended October 31, 1999, compared to 38.4% for the
same period in fiscal 1998.
Gross profit from merchandise revenue increased 11.6% to $26.5 million, or
32.6% of merchandise revenue, in the three months ended October 31, 1999, from
$23.7 million, or 32.6% of merchandise revenue, for the three months ended
October 31, 1998.
Rental video gross profit decreased 9.9% to $10.3 million in the three months
ended October 31, 1999, from $11.4 million in the three months ended October
31, 1998. Rental video gross profit as a percentage of rental video revenue
decreased to 52.5% of rental video revenue in the three months ended October
31, 1999 from 60.7% in the three months ended October 31, 1998. A portion of
the decline in rental video gross profit in total and as a percent of revenue
was anticipated due to the Company's continued increase in participation in
revenue sharing programs, which yield lower margins. The increase in revenue
sharing combined with higher than anticipated purchases under non-revenue
sharing methods which resulted in increased depreciation expense, and increased
rental video discount programs negatively impacted gross profit for the three
months ended October 31, 1999.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses ("SG&A") totaled $38.6 million in
the three months ended October 31, 1999, compared to $31.6 million in the three
months ended October 31, 1998. SG&A as a percentage of revenues increased to
38.3% of total revenues in the three months ended October 31, 1999 from 34.5%
in the three months ended October 31, 1998. The primary factors contributing to
this increase in SG&A as a percentage of revenues were higher than anticipated
expenses associated with the return of product to vendors, advertising
expenses, human resource expenses and costs associated with the Company's
Internet web site. Pre-opening expenses were $0.8 million in the three months
ended October 31, 1999, compared to $0.6 million in the three months ended
October 31, 1998. Pre-opening expenses include human resource costs, travel,
rent, advertising, supplies and certain other costs incurred
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prior to a superstore's opening. The Company opened eight new superstores in
the three months ended October 31, 1999 compared to five new superstores opened
in the three months ended October 31, 1998.
Interest expense was $1.0 million, or 1.0% of revenues, in the three months
ended October 31, 1999, compared to $0.7 million, or 0.8% of revenues, in the
three months ended October 31, 1998. Income tax expense was $(1.4) million, or
38.0% of loss before income taxes, in the three months ended October 31, 1999,
versus $0.9 million, or 39.7% of income before taxes, in the three months ended
October 31, 1998.
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1998:
Revenues and Gross Profit:
For the nine months ended October 31, 1999, total revenues increased $31.7
million, or 11.6%, to $303.9 million from $272.2 million during the nine months
ended October 31, 1998.
Merchandise revenue in the nine months ended October 31, 1999 totaled $244.1
million, an increase of $28.8 million or 13.4%, from $215.3 million for the
nine months ended October 31, 1998. Each significant merchandise category
exhibited growth, with video games, sale video and music providing the largest
gain on a percentage basis.
Rental video revenue for the nine months ended October 31, 1999 increased $2.9
million, or 5.1%, to $59.8 million from $56.9 million in the nine months ended
October 31, 1998.
Comparable-store revenues increased by 4.2% for the nine months ended October
31, 1999, compared to the nine months ended October 31, 1998. 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 $20.0 million, or 11.8%, to $189.9 million
in the nine months ended October 31, 1999, compared with $169.9 million in the
nine months ended October 31, 1998. Gross profit as a percentage of revenues
was 37.5% in the nine months ended October 31, 1999, compared to 37.6% for the
same period in fiscal 1998.
Gross profit from merchandise revenue was $76.8 million, or 31.5% of
merchandise revenue, in the nine months ended October 31, 1999, compared to
gross profit from merchandise revenue of $67.8 million, or 31.5% of merchandise
revenue, for the nine months ended October 31, 1998.
Gross profit from rental video revenue was $37.2, or 62.1% of rental video
revenue, in the nine months ended October 31, 1999, compared to gross profit
from rental video revenue of $34.5 million, or 60.7% of rental video revenue,
for the nine months ended October 31, 1998. Management attributes the increase
in rental video gross profit for the nine months ended October 31, 1999 to
lower depreciation expense and higher than anticipated revenues on videos
purchased prior to January 31, 1999, experienced in the earlier portion of the
year. This effect has been partially offset by increased participation
throughout the year in revenue sharing programs that yield lower margins,
higher than anticipated purchases under non-revenue sharing methods which
result in higher depreciation expense, as well as increased rental video
discount programs.
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Selling, General and Administrative Expenses:
SG&A totaled $107.1 million in the nine months ended October 31, 1999, compared
to $91.0 million in the nine months ended October 31, 1998. SG&A, excluding
pre-opening expenses related to new stores, as a percentage of revenues
increased to 35.3% of total revenues in the nine months ended October 31, 1999
from 33.4% in the nine months ended October 31, 1998. The primary factors
contributing to this increase in SG&A as a percentage of revenues were higher
than anticipated product return expenses, net advertising expenses and costs
associated with the Company's Internet web site. Pre-opening expenses were $1.5
million in the nine months ended October 31, 1999, compared to $1.3 million in
the nine months ended October 31, 1998. 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 17 new superstores
in the nine months ended October 31, 1999 compared to 11 new superstores opened
in the nine months ended October 31, 1998.
Interest expense was $2.8 million, or 0.9% of revenues, in the nine months
ended October 31, 1999, compared to $2.9 million, or 1.1% of revenues, in the
nine months ended October 31, 1998. Income tax expense was $0.9 million, or
37.7% of income before income taxes, in the nine months ended October 31, 1999,
versus $2.8 million, or 39.2% of income before taxes, in the nine months ended
October 31, 1998. This decline in income taxes as a percentage of income before
taxes is a result of tax planning initiated in the fiscal year ended January
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements arise from purchasing, warehousing
and merchandising product inventory and rental video assets, opening new
superstores and expanding existing superstores, and funding the expansion of
its Internet Web site. The Company's primary sources of working capital are
cash flow from operations, trade credit from vendors, borrowings from its
unsecured $45.0 million Revolving Credit Facility (the "Facility") and proceeds
from the issuance of common stock in fiscal 1998.
As of October 31, 1999, the Company's total debt capacity consisted of $20.0
million of its unsecured Series A Senior Notes (the "Notes") due 2003 with an
effective interest rate of 7.53% and its Facility. Total outstanding
indebtedness as of October 31, 1999 under the Notes and the Facility was $57.8
million. The Notes provide for annual mandatory payments of principal of $5.0
million beginning June 13, 1999 and contain a number of covenants that restrict
the operations of the Company. These covenants address, among other matters,
the maintenance of specified financial ratios and net worth requirements and
certain restrictions with respect to additional indebtedness, transactions with
related parties, investments and capital expenditures.
As amended on December 16, 1998, the Facility provides for the following levels
of revolving credit:
FACILITY TIME FRAME MAXIMUM CREDIT UNDER FACILITY
------------------- -----------------------------
December 17, 1998 to December 16, 1999 $45 million
December 17, 1999 to December 16, 2000 $60 million
December 17, 2000 to December 16, 2001 $75 million
The Facility bears interest at variable rates based on the lender's base rate
(8.0% at October 31, 1998 and 8.25% at October 31, 1999, respectively) and
LIBOR (6.22% and 6.24% at October 31, 1998 and 1999, respectively) and expires
on December 16, 2001. The Facility includes provisions that, among other
things, require the maintenance of specified financial ratios and net worth
requirements. Further, the Facility imposes certain restrictions with respect
to additional indebtedness, transactions with related parties, investments and
capital expenditures.
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At October 31, 1999, the Company had one other debt obligation totaling $0.6
million. The principal on this obligation is payable quarterly until maturity
in May 2002. In addition, the Company maintains two capitalized lease
obligations with terms of 15 years. The total amount of these obligations was
$1.8 million at October 31, 1999.
Net cash provided by operations for the nine months ended October 31, 1999 was
$21.2 million, compared with net cash provided by operations of $1.5 million in
the nine months ended October 31, 1998. The primary operating cash inflows for
the nine months ended October 31, 1999 reflect net income, and other working
capital accounts, including inventory, accrued expenses and other liabilities
which improved in the nine months ended October 31, 1999 compared to the nine
months ending October 31, 1998.
Net cash used in investing activities for the nine months ended October 31,
1999 was $39.2 million compared to $33.4 million in the nine months ended
October 31, 1998. The increase in cash used in investing activities is due
primarily to capital expenditures related to the opening or remodeling of
superstores.
Net cash provided by financing activities during the nine months ended October
31, 1999 was $16.3 million. This related primarily to net borrowings under the
Facility used to fund the opening or remodeling of superstores. For the nine
months ended October 31, 1998, net cash provided by financing activities was
$31.1 million, related primarily to $35.9 million of proceeds from the
Company's June 1998 initial public offering which was used to repay debt.
During the nine months ended October 31, 1999, the Company's net borrowing
under the Facility was $20.1 million compared to net repayment of $4.8 million
in the nine months ended October 31, 1998.
The Company believes that cash flow from operations and borrowings under the
Facility will be sufficient to fund its ongoing operations, new superstores and
superstore expansions through fiscal 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
on Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is
not expected to 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 videocassette 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
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on revenues. Future operating results may be affected by many factors,
including variations in the number and timing of store openings, the number and
popularity of new book, music and videocassette titles, the cost of the new
release or "best renter" titles, changes in comparable-store revenues,
competition, marketing programs, increases in the minimum wage, weather,
special or unusual events, and other factors that may affect retailers in
general and the Company in particular.
The Company does not believe that inflation has materially impacted 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.
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, "99" represents the
calendar year 1999, as opposed to a four-digit format "1999." Such systems may
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 relevant system(s).
State of Readiness:
The Company established a project team comprised of both internal staff and
outside consultants to address Year 2000 issues and document their remediation.
These issues included:
1. Software compliance within the Company's enterprise systems;
2. Compliance of internal IT and non-IT operating systems and application
programs purchased from outside entities; and
3. Business risks regarding potential failure of vendor and supplier systems
and services.
The Company's Year 2000 plan addresses Year 2000 issues in multiple phases,
including:
1. An inventory of the Company's 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 partners' state of readiness; and
6. Contingency planning to assess worst-case scenarios.
Inventories, assessment and testing of Year 2000 compliance have been completed
for all the Company's internal and external IT systems, hardware and operating
systems. Most of the Company's internal IT systems have been developed and
implemented since 1994, with a goal of implementation including Year 2000
compliance. Non-compliant systems determined to have contained potential risks
have been replaced and the replacement systems tested to assure Year 2000
compliance. Mechanical systems such as HVAC, telecommunications, power supplies
and thermostats have been checked individually and with each manufacturer.
The Company is tracking the Year 2000 compliance status of its vendors and
suppliers using a census and tracking survey system provided by the National
Retail Federation, of which the Company is a member. Contingency plans are in
place for any vendor that fails or has failed to provide compliance
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certification, or which subsequently demonstrates a failure in product delivery
systems. If a major vendor cannot prove its compliance before the end of
calendar 1999, 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.
Risks of Year 2000 issues:
The Company could experience material and adverse effects on its business
operating results and financial condition as a result of the Year 2000 problem.
Currently, the most likely source of risk to the Company would be the failure
of a critical vendor, such as a publisher or music company, to be able to
provide product for which the Company has no alternative supplier.
While the Company believes its Year 2000 projects have been completed, failure
to accurately assess the effect of 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 and the 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:
The Company has prepared its contingency plans to identify the most likely
worst-case scenarios and the proper response to each. Plans have been prepared,
and primarily revolve around responses to a failure in the ability of one or
more the Company's business partners to provide products or services.
Comprehensive contingency plans were reviewed and completed during the third
quarter of fiscal 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. The Company does not expect the additional costs associated with
its Year 2000 efforts to be material. The Company has absorbed assessment,
planning and implementation costs in normal operations and expects certain
costs of its contingency plans to be less than $100,000. See - "Statements
Regarding Forward-Looking Disclosure" below.
STATEMENTS REGARDING FORWARD-LOOKING DISCLOSURE
This filing contains certain forward-looking statements such as the Company's
or management's intentions, hopes, beliefs, expectations, strategies,
predictions or any other variations thereof or comparable phraseologies of the
Company's future activities or other future events or conditions within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty including without limitation those set
forth under the heading "Risk Factors" in the Company's Form S-1 Registration
Statement (File No. 333-47969) declared effective on June 11, 1998, and those
described in the Company's subsequent reports on file with the Securities and
Exchange Commission. Although the Company presently believes
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that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and, therefore,
there can be no assurance that the forward-looking statements included in this
filing will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any person that the objectives and plans of the Company will be achieved.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in the Company's inherent market risks since the
disclosures made in the Company's Annual Report on Form 10-K for the year ended
January 31, 1999 and no additional disclosure is required by the Company at
this time.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
Dennis McGill, Vice President, Chief Financial Officer, Treasurer and
Secretary, resigned in October 1999 to pursue other interests.
Mr. McGill was replaced by Thomas D. Nugent effective November 15, 1999. Mr.
Nugent will serve as Vice President of Finance, Chief Financial Officer,
Secretary and Treasurer. Prior to assuming this role, Mr. Nugent served as
Executive Vice President and Chief Financial Officer for Rentx Industries, Inc.
(Denver, Colorado). From 1991 to 1997, he served in various positions,
including Co-Founder and Executive Vice President of Teach & Play Smart, Inc.
(Hurst, Tex.) and Senior Vice President of Operations and Chief Financial
Officer at BizMart, Inc. (Arlington, Tex.). From 1986 to 1991 Mr. Nugent was
associated with The Wholesale Club, Inc. (Indianapolis, Ind.) in the capacities
of Executive Vice President and Chief Financial Officer and as a member of the
Board of Directors.
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, 1999 By: /s/ Thomas D. Nugent
-----------------------
Thomas D. Nugent
Vice President, Chief Financial
Officer, Treasurer and Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
27.1 Financial Data Schedule
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