<PAGE> 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 July 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 September 1,
1998:
Class Shares Outstanding
- -------------------------------------- ------------------------
Common Stock, $.01 par value per share 11,552,429
<PAGE> 2
HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1998 and January 31, 1998 3
Consolidated Statements of Income for the Three Months ended
July 31, 1998 and 1997 and the Six Months ended July 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six Months ended
July 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 8-13
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports of Form 8-K 14
SIGNATURE PAGE 15
Index to Exhibits 16
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND JANUARY 31, 1998
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
July 31, 1998 January 31, 1998
---------------- -------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,110 $ 3,840
Merchandise inventories 129,002 126,835
Other current assets 4,060 3,889
--------- ---------
Total current assets 135,172 134,564
Property and equipment, net of accumulated depreciation
of $82,793 and $78,863, respectively 81,797 80,703
Other assets
35 31
--------- ---------
$ 217,004 $ 215,298
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 13,102 $ 301
Trade accounts payable 42,693 60,747
Accrued expenses and other liabilities 18,052 17,590
Deferred income taxes 974 1,305
Income taxes payable 712 3,428
--------- ---------
Total current liabilities 75,533 83,371
Long term debt, excluding current maturities 22,062 51,311
Deferred income taxes 773 898
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; 11,794,400 and
8,652,914 shares issued in 1998 and 1997, respectively; 11,607,212 and
8,465,189 shares outstanding in 1998 and 1997, respectively
117 87
Additional paid-in capital 37,535 1,654
Retained earnings 83,168 80,168
Treasury stock, at cost (2,184) (2,191)
Redemption value of common stock held by estate of Company's founder -- (8,000)
--------- ---------
118,636 71,718
Commitments and contingencies -- --
$ 217,004 $ 215,298
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JULY 31, 1998 AND 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Merchandise revenue $ 71,688 $ 63,676 $142,522 $125,252
Video rental revenue 19,499 17,977 38,052 34,838
-------- -------- -------- --------
Total revenues 91,187 81,653 180,574 160,090
Merchandise cost of revenue 48,312 42,800 98,491 85,973
Rental video cost of revenue 7,404 5,806 14,942 11,924
-------- -------- -------- --------
Total cost of revenues 55,716 48,606 113,433 97,897
-------- -------- -------- --------
Gross profit 35,471 33,047 67,141 62,193
Selling, general and administrative expenses 31,003 29,533 59,376 56,127
Pre-opening expenses 536 431 695 564
-------- -------- -------- --------
31,539 29,964 60,071 56,691
-------- -------- -------- --------
Operating income 3,932 3,083 7,070 5,502
Interest expense 955 1,021 2,155 1,955
-------- -------- -------- --------
Income before income taxes 2,977 2,062 4,915 3,547
Income taxes 1,179 783 1,915 1,348
-------- -------- -------- --------
Net income $ 1,798 $ 1,279 $ 3,000 $ 2,199
======== ======== ======== ========
Basic earnings per share $ 0.18 $ 0.15 $ 0.32 $ 0.26
======== ======== ======== ========
Diluted earnings per share $ 0.17 $ 0.15 $ 0.31 $ 0.25
======== ======== ======== ========
Weighted average number of common shares 10,166 8,560 9,358 8,559
outstanding--basic
Dilutive effect of stock options 191 222 210 228
-------- -------- -------- --------
Weighted average number of common shares
outstanding--diluted 10,357 8,782 9,568 8,787
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended July 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,000 $ 2,199
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 17,344 14,482
Loss on rental videos lost, stolen and defective 2,451 1,569
Loss on disposal of other assets 2,037 8
Deferred income taxes (456) --
Changes in operating assets and liabilities:
Merchandise inventory (2,167) (7,032)
Other assets (175) 388
Trade accounts payable, accrued expenses
and other liabilities (17,592) 10,408
Income taxes payable (2,716) (240)
---------- ----------
Net cash provided by operations 1,726 21,782
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (22,926) (26,107)
---------- ----------
Net cash used in investing activities (22,926) (26,107)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 182,400 129,850
Repayments under revolving credit facility (198,600) (128,450)
Principal payments under long-term debt and capital lease
obligations (248) (153)
Proceeds from initial public offering 35,911 --
Dividends and treasury stock transactions 7 (145)
---------- ----------
Net cash provided by financing activities 19,470 1,102
---------- ----------
Net decrease in cash and cash equivalents (1,730) (3,223)
Cash and cash equivalents at beginning of period 3,840 4,972
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,110 $ 1,749
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
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 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 videos. Under this new method, the Company depreciates all rental videos
on a straight-line basis to their estimated salvage value of $5. Videos
identified as base stock (including the first four copies per store of hit
titles) are depreciated over 36 months, and new releases (hit titles five copies
per store and up) are depreciated over six months. The Company believes this
accelerated methodology is appropriate for matching revenues and expenses.
Adoption of the new method was not material to retained earnings at February 1,
1998, or to results of operations for the first six months of fiscal 1998.
3. CONSOLIDATION POLICY
The Company established one wholly-owned subsidiary during the second quarter of
fiscal 1998, Hastings College Stores, Inc. The Company had 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
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 July 31, 1998,
the outstanding balance under the Facility was $7.8 million. Other financing
arrangements remained unchanged during the quarter.
6
<PAGE> 7
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.
7
<PAGE> 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 July 31, 1998, the Company operated
123 superstores averaging 21,300 square feet in small to medium-sized markets
located throughout the Midwestern and Western United States. The Company opened
six new superstores in the fiscal quarter ending July 31, 1998.
SUMMARY OF STORE ACTIVITY
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Year Ended
---------------------- ---------------------- ----------
July 31, July 31, July 31, July 31, January 31,
1998 1997 1998 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Hastings Superstores:
Beginning number of stores 117 112 117 111 111
Openings 6 3 6 4 8
Closings -- -- -- -- (2)
------- ------- ------- ------- -------
Ending number of stores 123 115 123 115 117
======= ======= ======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's unaudited
consolidated statements of income as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Merchandise revenue 78.6% 78.0 % 78.9% 78.2 %
Video rental revenue 21.4 22.0 21.1 21.8
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
Merchandise cost of revenue 67.4 67.2 69.1 68.6
Rental video cost of revenue 38.0 32.3 39.3 34.2
-------- -------- -------- --------
Total cost of revenues 61.1 59.5 62.8 61.2
-------- -------- -------- --------
Gross profit 38.9 40.5 37.2 38.8
Selling, general and administrative expenses 34.0 36.2 32.9 35.1
Pre-opening expenses 0.6 0.5 0.4 0.4
-------- -------- -------- --------
34.6 36.7 33.3 35.4
-------- -------- -------- --------
Operating income 4.3 3.8 3.9 3.4
Interest expense 1.0 1.3 1.2 1.2
-------- -------- -------- --------
Income before income taxes 3.3 2.5 2.7 2.2
Income taxes 1.3 1.0 1.1 0.8
-------- -------- -------- --------
Net income 2.0% 1.6 % 1.7% 1.4 %
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1997:
Total revenues in the three months ended July 31, 1998 increased $9.5 million,
or 11.7%, to $91.2 million from $81.7 million during the three months ended July
31, 1997. Merchandise revenue for the three months ended July 31, 1998 totaled
$71.7 million, an increase of $8.0 million or 12.6%, from $63.7 million for the
three months ended July 31, 1997. Revenues from the rental of videotapes in the
three months ended July 31, 1998 increased $1.5 million or 8.5%, to $19.5
million from $18.0 million in the three months ended July 31, 1997.
Comparable store revenues increased by 6% for the three months ended July 31,
1998, compared to the three months ended July 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 $7.1 million, or 14.6%, to $55.7 million in
the three months ended July 31, 1998, compared with $48.6 million in the three
months ended July 31, 1997. Gross profit as a percentage of revenues was 38.9%
in the three months ended July 31, 1998, compared to 40.5% in the three months
ended July 31, 1997. Gross profit from merchandise revenue increased to $23.4
million, or 32.6% of merchandise revenue in the three months ended July 31,
1998, compared to gross profit from merchandise revenue of $20.9 million or
32.8% of merchandise revenue for the three months ended July 31, 1997.
Management attributes the slight decrease in merchandise gross profit percentage
to a slight reduction in vendor cost allowances and vendor display allowances.
Video rental gross profit in the three months ended July 31, 1998 decreased to
$12.1 million from $12.2 million in the three months ended July 31, 1997. The
video rental gross profit percentage decreased to 62.0% in the three months
ended July 31, 1998 from 67.7% in the three months ended July 31, 1997,
primarily as a result of lower margin rental video leasing arrangements that
commenced in August 1997 and increased videotape shrinkage expense.
Selling, general and administrative expenses ("SG&A"), excluding pre-opening
expenses related to new stores, totaled $31.0 million in the three months ended
July 31, 1998, compared to $29.5 million in the three months ended July 31,
1997. SG&A, excluding pre-opening expenses related to new stores, as a
percentage of revenues dropped to 34.0% in the three months ended July 31, 1998
from 36.2% in the three months ended July 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 advertising expenses. Pre-opening expenses increased slightly to $0.5
million in the three months ended July 31, 1998, from $0.4 million in the three
months ended July 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 six new superstores in the three months
ended July 31, 1998 and three new superstores the three months ended July 31,
1997.
Net interest expense was $1.0 million, or 1.0% of revenues, in the three months
ended July 31, 1998, versus $1.0 million, or 1.3% of revenues, in the three
months ended July 31, 1997. Income tax expense was $1.2 million, or 39.6% of net
income before income taxes, in the three months ended July 31,1998, versus $0.8
million, or 38.0% of net income before taxes, in the three months ended July 31,
1997.
9
<PAGE> 10
SIX MONTHS ENDED JULY 31, 1998 COMPARED TO SIX MONTHS ENDED JULY 31, 1997:
Total revenues in the six months ended July 31, 1998 increased $20.5 million, or
12.8%, to $180.6 million from $160.1 million during the six months ended July
31, 1997. Merchandise revenue totaled $142.5 million in the six months ended
July 31, 1998, an increase of $17.3 million, or 13.8%, from $125.3 million for
the six months ended July 31, 1997. Revenue from the rental of videotapes
increased $3.2 million, or 9.2%, to $38.1 million in the six months ended July
31, 1998 from $34.8 million in the six months ended July 31, 1997.
Comparable store sales increased by 8% for the six months ended July 31, 1998,
compared to the six months ended July 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 $15.5 million, or 15.9%, to $113.4 million
in the six months ended July 31, 1998, compared with $97.9 million in the six
months ended July 31, 1997. Gross profit as a percentage of revenues was 37.2%
in the six months ended July 31, 1998, compared to 38.8% in the six months ended
July 31, 1997. Gross profit from merchandise revenue in the six months ended
July 31, 1998 increased to $44.0 million, or 30.9% of merchandise revenue,
compared to gross profit from merchandise revenue of $39.3 million, or 31.4% of
merchandise revenue for the six months ended July 31, 1997. Management
attributes the reduction in merchandise gross profit percentage to a slight
increase in inventory shrinkage and a slight decrease in vendor cost allowances
and vendor display allowances.
Video rental gross profit was $23.1 million in the six months ended July 31,
1998, an increase of $0.2 million, or 0.9%, compared to $22.9 million for the
six months ended July 31, 1997. Video rental gross profit percentage decreased
to 60.7% in the six months ended July 31, 1998 from 65.8% in the six months
ended July 31, 1997. This margin reduction was primarily a result of lower
margin rental video leasing arrangements that commenced in August 1997 and
increased videotape shrinkage expense.
Selling, general and administrative expenses ("SG&A"), excluding pre-opening
expenses related to new stores, totaled $59.4 million in the six months ended
July 31, 1998, compared to $56.1 million in the six months ended July 31, 1997.
SG&A, excluding pre-opening expenses related to new stores, as a percentage of
revenues dropped to 32.9% in the six months ended July 31, 1998 from 35.1% in
the six months ended July 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 and product
return expenses combined with on-going leverage of corporate overhead.
Pre-opening expenses for the six months ended July 31, 1998, increased to $0.7
million from $0.6 million posted in the six months ended July 31, 1997. The
Company opened six new superstores in the six months ended July 31, 1998,
compared to four new superstores opened in the six months ended July 31, 1997.
Pre-opening expenses include labor, rent, utilities, supplies and certain other
costs incurred prior to a superstore's opening.
Net interest expense was $2.2 million, or 1.2% of revenues, in the six months
ended July 31, 1998, compared to $2.0 million, or 1.2% of revenues, in the six
months ended July 31, 1997. Income tax expense was $1.9 million, or 39.0% of net
income before income taxes, in the six months ended July 31, 1998, compared to
$1.3 million, or 38.0% of net income before income taxes, in the six months
ended July 31, 1997.
10
<PAGE> 11
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 July 31, 1998, the Company's total debt
capacity consisted of $25.0 million of its unsecured Series A Senior Notes due
2003 and its unsecured $45.0 million Revolving Credit Facility.
Net cash provided by operations for the six months ended July 31, 1998 was $1.7
million, compared with net cash provided from operations of $21.8 million in the
six months ended July 31, 1997. The primary operating cash inflows for the six
months ended July 31, 1998 reflect net income and depreciation and other
non-cash expenses. Operating cash outflows during the six months ended July 31,
1998 were 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 and increased credit for return of product during the first quarter of
1998.
Net cash used in investing activities for the six months ended July 31, 1998 was
$22.9 million, primarily related to the purchase of rental video tapes and the
expansion of superstores, compared to $26.1 million in the six months ended July
31, 1997. Primary components of the reduced investment for the period were
reduced purchases of rental videos due to the leasing of rental videos through
revenue sharing programs. The Company opened six superstores in the six months
ended July 31, 1998, compared to four superstores opened in the six months ended
July 31, 1997.
Net cash provided by financing activities in the six months ended July 31, 1998
was $19.5 million, compared to net cash provided by financing activities of $1.1
million in the six months ended July 31, 1997. Net cash provided by or used in
financing activities results primarily from net borrowings or repayments under
the Company's unsecured $45.0 million Revolving Credit Facility (the "Facility")
and the proceeds from the Company's initial public offering.
During the six months ended July 31, 1998, the Company's net repayments under
the Facility were $16.2 million. On April 15, 1998, the Company amended the
Facility to extend the termination date of the Facility from April 30, 1999 to
June 30, 1999. All other terms and conditions remained unchanged.
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. At July 31, 1998, $7.8 million
was outstanding under the under the Facility.
The stock redemption agreement with the estate of the Company's founder was
terminated upon completion of the Company's initial public offering.
11
<PAGE> 12
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 working capital requirements and to support
management's superstore expansion program 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 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.
12
<PAGE> 13
YEAR 2000 COMPLIANCE
Due to the recent development and implementation of its proprietary information
system corporate infrastructure, the Company has taken measures to ensure its
Year 2000 compliance. The Company believes its systems to be Year 2000 compliant
and does not anticipate any material or adverse effect associated with the
transition to the new millennium. The Company understands exposure for Year 2000
compliance extends beyond its own systems. During calendar years 1998 and 1999,
the Company is requiring its major vendors to validate their Year 2000
compliance and compliance process. Upon completion of the process, each vendor
is required to provide confirmation of its Year 2000 compliance. 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 will be obtained
from alternative and compliant vendors, or will be converted to a manual system.
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. Currently, all systems are undergoing internal quality assurance
testing. Mechanical systems such as HVAC, telecommunications, power supplies and
thermostats are being checked individually, and with each manufacturer.
Estimated additional costs for Year 2000 compliance are estimated to be less
than $100,000, and will focus on testing, vendor compliance procedures, and
potentially hiring workers to handle temporary, additional load from manual
conversions. 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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 17, 1998, the Company completed an initial public offering of its Common
Stock, $.01 par value, 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. Through July 31, 1998, the
Company incurred underwriting discounts and commissions of $2,806,440 and other
costs, including charges for accountants, attorneys, printing, postage, travel,
fees and other expenses, of $1.4 million related to the initial public offering.
Proceeds to the Company were $35.9 million, net of offering expenses and
underwriting discounts.
The Company used such proceeds from the initial public offering to repay
outstanding indebtedness under its Revolving Credit Facility.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 30, 1998, at
which election of directors listed below was submitted to a vote of the
stockholders with the voting results as indicated.
(1) Election of directors for a three-year term expiring at the Company's Year
2001 Annual Meeting of Shareholders:
<TABLE>
<CAPTION>
Nominee For Against Abstain
------- --- ------- -------
<S> <C> <C> <C>
Ron G. Stegall 7,617,189 0 70,937
Peter A. Dallas 7,642,105 4,836 41,185
Craig R. Lenzsch 7,617,189 0 70,937
</TABLE>
Directors whose term of office continued after the meeting are Phillip Hill,
Stephen S. Marmaduke, Leonard L. Berry, John H. Marmaduke, Gaines L. Godfrey and
Jeffrey G. Shrader.
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.
14
<PAGE> 15
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: September 12, 1998 By: /s/ Dennis McGill
-----------------------
Dennis McGill
Vice President, Chief Financial Officer,
Treasurer and Secretary
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------ ------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS AND OF THE SIX MONTHS ENDED JULY 31, 1998.
</LEGEND>
<CIK> 0001054579
<NAME> HASTINGS ENTERTAIMENT, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 2,110
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 129,002
<CURRENT-ASSETS> 135,172
<PP&E> 164,590
<DEPRECIATION> 82,793
<TOTAL-ASSETS> 217,004
<CURRENT-LIABILITIES> 75,533
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 118,519
<TOTAL-LIABILITY-AND-EQUITY> 217,004
<SALES> 180,574
<TOTAL-REVENUES> 180,574
<CGS> 113,433
<TOTAL-COSTS> 113,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,155
<INCOME-PRETAX> 4,915
<INCOME-TAX> 1,915
<INCOME-CONTINUING> 3,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,000
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
