<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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACTION OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER 000-24381
HASTINGS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1386375
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 PLAINS BOULEVARD, AMARILLO, TEXAS 79102
(Address of principal executive offices) (Zip Code)
(806) 351-2300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( )
Number of shares outstanding of the registrant's common stock, as of September
3, 1999:
<TABLE>
<CAPTION>
Class Shares Outstanding
- ---------------------------------------------------- ----------------------------------------
<S> <C>
Common Stock, $.01 par value per share 11,628,973
</TABLE>
<PAGE> 2
HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
FORM 10-Q FOR THE PERIOD ENDED JULY 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1999 (Unaudited) and
January 31, 1999 3
Unaudited Consolidated Statements of Income for the Three Months and the
Six Months ended July 31, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the Six Months ended
July 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 7-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
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
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 AND JANUARY 31, 1999
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999
------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 3,802 $ 5,394
Merchandise inventories 139,143 145,432
Income taxes receivable -- 807
Deferred income taxes 244 1,636
Other current assets 5,934 4,599
--------- ---------
Total current assets 149,123 157,868
--------- ---------
Property and equipment, net of accumulated depreciation
of $112,136 and $113,872 respectively 74,374 64,124
Other assets 18 159
--------- ---------
$ 223,515 $ 222,151
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 5,349 $ 5,345
Trade accounts payable 29,676 42,406
Accrued expenses and other liabilities 15,379 17,937
Income taxes payable 957 --
--------- ---------
Total current liabilities 51,361 65,688
--------- ---------
Long term debt, excluding current maturities 51,518 39,634
Deferred income taxes 622 696
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, 11,623,962 and 11,553,168 shares
outstanding in 1999 and 1998, respectively 117 117
Additional paid-in capital 36,938 37,530
Retained earnings 84,427 80,633
Treasury stock, at cost (1,468) (2,147)
--------- ---------
120,014 116,133
Commitments and contingencies
--------- ---------
$ 223,515 $ 222,151
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JULY 31, 1999 AND 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- --------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Merchandise revenue $ 82,034 $ 71,688 $ 162,854 $ 142,522
Rental video revenue 20,404 19,499 40,163 38,052
-------- -------- --------- ---------
Total revenues 102,438 91,187 203,017 180,574
Merchandise cost of revenue 56,079 48,312 112,556 98,491
Rental video cost of revenue 7,595 7,404 13,314 14,942
-------- -------- --------- ---------
Total cost of revenues 63,674 55,716 125,870 113,433
-------- -------- --------- ---------
Gross profit 38,764 35,471 77,147 67,141
Selling, general and administrative expenses 33,912 30,928 68,544 59,212
Pre-opening expenses 538 611 717 859
-------- -------- --------- ---------
34,450 31,539 69,261 60,071
-------- -------- --------- ---------
Operating income 4,314 3,932 7,886 7,070
Interest expense 955 955 1,776 2,155
-------- -------- --------- ---------
Income before income taxes 3,359 2,977 6,110 4,915
Income taxes 1,271 1,179 2,316 1,915
-------- -------- --------- ---------
Net income $ 2,088 $ 1,798 $ 3,794 $ 3,000
======== ======== ========= =========
Basic earnings per share $ 0.18 $ 0.18 $ 0.33 $ 0.32
======== ======== ========= =========
Diluted earnings per share $ 0.18 $ 0.17 $ 0.32 $ 0.31
======== ======== ========= =========
Weighted average number of common shares
outstanding--basic 11,626 10,166 11,613 9,358
Dilutive effect of stock options 230 191 188 210
-------- -------- --------- ---------
Weighted average number of common shares
outstanding--diluted 11,856 10,357 11,801 9,568
======== ======== ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months ended July 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,794 $ 3,000
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 14,377 17,344
Loss on rental videos lost, stolen and defective 1,034 2,451
Loss on disposal of other assets 235 2,037
Deferred income taxes 1,318 (456)
Changes in operating assets and liabilities:
Merchandise inventory 6,289 (2,167)
Other current assets (528) (175)
Trade accounts payable, accrued expenses
and other liabilities (15,254) (17,592)
Income taxes payable/receivable 957 (2,716)
--------- ---------
Net cash provided by operations 12,222 1,726
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (25,896) (22,926)
Decrease in other assets 141 --
--------- ---------
Net cash used in investing activities (25,755) (22,926)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 128,750 182,400
Repayments under revolving credit facility (111,750) (198,600)
Payments under long-term debt and capital lease obligations (5,112) (248)
Proceeds from initial public offering -- 35,911
Treasury stock transactions 53 7
--------- ---------
Net cash provided by financing activities 11,941 19,470
--------- ---------
Net decrease in cash (1,592) (1,730)
Cash at beginning of period 5,394 3,840
--------- ---------
CASH AT END OF PERIOD $ 3,802 $ 2,110
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
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 acquire the majority of its rental video assets 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 will allow 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 to be
received over a reduced rental period, the Company has 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.
The Company anticipates that as a greater percentage of rental videos are
introduced under its revenue-sharing agreements, rental video asset
amortization, combined with revenue-sharing expense, will increase as a
percentage of total rental video revenue in fiscal 1999, as compared to fiscal
1998, due to the change in accounting method and the terms of the
revenue-sharing agreements.
6
<PAGE> 7
Options to purchase 751,728 shares of common stock were outstanding at July 31,
1999, but were not included in the quarter computations of diluted EPS because
the option exercise prices were greater than or equal to the average market
price of the common shares.
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 six months ended July 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 six months ended July 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. 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."
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 July 31, 1999, the Company operated 138 superstores
averaging 21,500 square feet in small to medium-sized markets located throughout
the United States. The Company opened seven new superstores in the three months
ended July 31, 1999, for a total of nine new superstores opened year-to-date in
fiscal 1999.
SUMMARY OF STORE ACTIVITY
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Year Ended
-------------------------- --------------------------- ----------------
July 31, July 31, July 31, July 31, January 31,
1999 1998 1999 1998 1999
------------ ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Hastings Superstores:
Beginning number of stores 131 117 129 117 117
Openings 7 6 9 6 12
Closings -- -- -- -- --
---- ---- ---- ---- ----
Ending number of stores 138 123 138 123 129
==== ==== ==== ==== ====
</TABLE>
7
<PAGE> 8
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,
--------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Merchandise revenue 80.1% 78.6% 80.2% 78.9%
Rental video revenue 19.9 21.4 19.8 21.1
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
Merchandise cost of revenue 68.4 67.4 69.1 69.1
Rental video cost of revenue 37.2 38.0 33.2 39.3
------- ------- ------- -------
Total cost of revenues 62.2 61.1 62.0 62.8
------- ------- ------- -------
Gross profit 37.8 38.9 38.0 37.2
Selling, general and administrative expenses 33.1 33.9 33.8 32.8
Pre-opening expenses 0.5 0.7 0.3 0.5
------- ------- ------- -------
33.6 34.6 34.1 33.3
------- ------- ------- -------
Operating income 4.2 4.3 3.9 3.9
Interest expense 0.9 1.0 0.9 1.2
------- ------- ------- -------
Income before income taxes 3.3 3.3 3.0 2.7
Income taxes 1.3 1.3 1.1 1.0
------- ------- ------- -------
Net income 2.0% 2.0% 1.9% 1.7%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THREE MONTHS ENDED JULY 31, 1998:
Revenues and Gross Profit:
For the three months ended July 31, 1999, total revenues increased $11.2
million, or 12.3%, to $102.4 million from $91.2 million during the three months
ended July 31, 1998. Merchandise revenue in the three months ended July 31, 1999
totaled $82.0 million, an increase of $10.3 million or 14.4%, from $71.7 million
for the three months ended July 31, 1998. Each significant merchandise category
exhibited growth, with sale video and video games providing the largest gains on
a percentage basis. Rental video revenue for the three months ended July 31,
1999 increased $0.9 million, or 4.6%, to $20.4 million from $19.5 million in the
three months ended July 31, 1998.
Comparable-store revenues increased by 4.9% for the three months ended July 31,
1999, compared to the three months ended July 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 $8.0 million, or 14.3%, to $63.7 million in
the three months ended July 31, 1999, compared with $55.7 million in the three
months ended July 31, 1998. Gross profit as a percentage of revenues was 37.8%
in the three months ended July 31, 1999, compared to 38.9% for the
8
<PAGE> 9
same period in fiscal 1998. Gross profit from merchandise revenue increased to
$26.0 million, or 31.6% of merchandise revenue, in the three months ended July
31, 1999, compared to gross profit from merchandise revenue of $23.4 million, or
32.6% of merchandise revenue, for the three months ended July 31, 1998.
Management attributes the decline in merchandise gross profit percentage to
increased promotional coupon activity and increased purchase cost of music
products sold.
Rental video gross profit increased 5.9% to $12.8 million in the three months
ended July 31, 1999, from $12.1 million in the three months ended July 31, 1998.
Rental video gross profit as a percentage of rental video revenue improved to
62.8% of rental video revenue in the three months ended July 31, 1999 from 62.0%
in the three months ended July 31, 1998. Management attributes the increase in
rental video margin to lower depreciation expense and higher than anticipated
revenue from videocassettes purchased prior to January 31, 1999.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses ("SG&A") totaled $33.9 million in
the three months ended July 31, 1999, compared to $30.9 million in the three
months ended July 31, 1998. SG&A, excluding pre-opening expenses related to new
stores, as a percentage of revenues decreased to 33.1% of total revenues in the
three months ended July 31, 1999 from 33.9% in the three months ended July 31,
1998. The primary factor contributing to this decrease in SG&A as a percentage
of revenues was lower product return expenses. Pre-opening expenses were $0.5
million in the three months ended July 31, 1999, compared to $0.6 million in the
three months ended July 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 seven new superstores in the
three months ended July 31, 1999 compared to six new superstores opened in the
three months ended July 31, 1998.
Interest expense was $1.0 million, or 0.9% of revenues, in the three months
ended July 31, 1999, compared to $1.0 million, or 1.0% of revenues, in the three
months ended July 31, 1998. Income tax expense was $1.3 million, or 37.8% of
income before income taxes, in the three months ended July 31, 1999, versus $1.2
million, or 39.6% of income before taxes, in the three months ended July 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.
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED JULY 31, 1998:
Revenues and Gross Profit:
For the six months ended July 31, 1999, total revenues increased $22.4 million,
or 12.4%, to $203.0 million from $180.6 million during the six months ended July
31, 1998. Merchandise revenue in the six months ended July 31, 1999 totaled
$162.9 million, an increase of $20.3 million or 14.3%, from $142.5 million for
the six months ended July 31, 1998. Each significant merchandise category
exhibited growth, with sale video providing the largest gain on a percentage
basis. Rental video revenue for the six months ended July 31, 1999 increased
$2.1 million, or 5.5%, to $40.2 million from $38.1 million in the six months
ended July 31, 1998.
Comparable-store revenues increased by 5.2% for the six months ended July 31,
1999, compared to the six months ended July 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 $12.4 million, or 11.0%, to $125.9 million
in the six months ended July 31, 1999, compared with $113.4 million in the six
months ended July 31, 1998. Gross profit as a percentage of revenues was 38.0%
in the six months ended July 31, 1999, compared to 37.2% for the
9
<PAGE> 10
same period in fiscal 1998. Gross profit from merchandise revenue was $50.3
million, or 30.9% of merchandise revenue, in the six months ended July 31, 1999,
compared to gross profit from merchandise revenue of $44.0 million, or 30.9% of
merchandise revenue, for the six months ended July 31, 1998. Gross profit from
rental video revenue was $26.9, or 66.9% of rental video revenue, in the six
months ended July 31, 1999, compared to gross profit from rental video revenue
of $23.1, or 60.7% of rental video revenue, for the six months ended July 31,
1998. Management attributes the increase in rental video margin to lower
depreciation expense and higher than anticipated revenue from videocassettes
purchased prior to January 31, 1999.
Selling, General and Administrative Expenses:
SG&A totaled $68.5 million in the six months ended July 31, 1999, compared to
$59.2 million in the six months ended July 31, 1998. SG&A, excluding pre-opening
expenses related to new stores, as a percentage of revenues increased to 33.8%
of total revenues in the six months ended July 31, 1999 from 32.8% in the six
months ended July 31, 1998. The primary factors contributing to this increase in
SG&A as a percentage of revenues were higher product return expenses and net
advertising expense in the first quarter of fiscal 1999. Pre-opening expenses
were $0.7 million in the six months ended July 31, 1999, compared to $0.9
million in the six months ended July 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 nine new
superstores in the six months ended July 31, 1999 compared to six new
superstores opened in the six months ended July 31, 1998.
Interest expense was $1.8 million, or 0.9% of revenues, in the six months ended
July 31, 1999, compared to $2.2 million, or 1.2% of revenues, in the six months
ended July 31, 1998. Income tax expense was $2.3 million, or 37.9% of income
before income taxes, in the six months ended July 31, 1999, versus $1.9 million,
or 39.0% of income before taxes, in the six months ended July 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 inventory and rental video assets, opening new superstores,
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, for fiscal 1998,
proceeds from the issuance of common stock.
As of July 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 July 31, 1999 under the Notes and the Facility was $54.7
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.
10
<PAGE> 11
As amended on December 16, 1998, the Facility provides for the following levels
of revolving credit:
<TABLE>
<CAPTION>
FACILITY TIME FRAME MAXIMUM CREDIT UNDER FACILITY
------------------- -----------------------------
<S> <C>
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
</TABLE>
The Facility bears interest at variable rates based on the lender's base rate
(8.0% at July 31, 1998 and 1999) and LIBOR (6.6% and 5.8% at July 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.
At July 31, 1999, the Company had one other debt obligation totaling $0.4
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 $1.5 million
at July 31, 1999.
Net cash provided by operations for the six months ended July 31, 1999 was $12.2
million, compared with net cash provided by operations of $1.7 million in the
six months ended July 31, 1998. The primary operating cash inflows for the six
months ended July 31, 1999 reflect net income, and other working capital
accounts, including inventory, accrued expenses and other liabilities which
improved in the six months ended July 31, 1999 compared to the six months ending
July 31, 1998.
Net cash used in investing activities for the six months ended July 31, 1999 was
$25.8 million compared to $22.9 million in the six months ended July 31, 1998.
The increase in cash used in investing activities is due primarily to capital
expenditures related to the opening of superstores.
Net cash provided by financing activities in the six months ended July 31, 1999
was $11.9 million, primarily relating to net borrowings under the Facility used
to fund new store expansion, compared to net cash provided by financing
activities of $19.5 million during the six months ended July 31, 1998,
primarily related to $35.9 million of proceeds from the Company's initial public
offering which was used to repay debt.
During the six months ended July 31, 1999, the Company's net borrowing under the
Facility was $17.0 million compared to net repayment of $16.2 million in the six
months ended July 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 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 is effective
11
<PAGE> 12
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 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 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:
The Company has established a project team comprised of both internal staff and
outside consultants to address Year 2000 issues and document their remediation.
These issues include:
1. Software compliance within the Company's enterprise systems;
2. Compliance within 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.
12
<PAGE> 13
Inventories, assessment and testing of Year 2000 compliance have been
substantially 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 that were 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 are being 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 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
that fails to provide compliance certification by October 31, 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.
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 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 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 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 the
ability of one or more the Company's business partners to provide products or
services. Comprehensive contingency plans for review were initiated during the
first quarter of fiscal 1999, completion is anticipated 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 expects assessment and
planning costs to be absorbed in normal operations and certain costs of its
contingency plans to be less than $100,000. See - "Statements Regarding
Forward-Looking Disclosure" below.
13
<PAGE> 14
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 a number of factors and uncertainties, including those set forth
under the heading "Risk Factors" in the Company's Registration Statement on Form
S-1 (File No. 333-47969) declared effective on June 11, 1998, and as described
in the Company's subsequent annual and quarterly reports on file with the
Securities and Exchange Commission.
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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
Phillip Hill, Senior Vice President, Chief Operating Officer and member of the
Board of Directors, resigned in July 1999 to pursue other interests.
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.
15
<PAGE> 16
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 14, 1999 By: /s/ Dennis McGill
-------------------
Dennis McGill
Vice President, Chief Financial Officer,
Treasurer and Secretary
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS AS AND OF THE THREE MONTHS ENDED JULY 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 3,802
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 139,143
<CURRENT-ASSETS> 149,123
<PP&E> 186,510
<DEPRECIATION> 112,136
<TOTAL-ASSETS> 223,515
<CURRENT-LIABILITIES> 51,361
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 119,897
<TOTAL-LIABILITY-AND-EQUITY> 223,515
<SALES> 102,438
<TOTAL-REVENUES> 102,438
<CGS> 63,674
<TOTAL-COSTS> 63,674
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 955
<INCOME-PRETAX> 3,359
<INCOME-TAX> 1,271
<INCOME-CONTINUING> 2,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,088
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
