<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 April 30, 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 June 7,
1999:
Class Shares Outstanding
- -------------------------------------- ---------------------------------
Common Stock, $.01 par value per share 11,626,336
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HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
FORM 10-Q FOR THE PERIOD ENDED APRIL 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1999 (Unaudited) and
January 31, 1999 3
Unaudited Consolidated Statements of Income - Three Months ended
April 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows - Three Months ended
April 30, 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 7-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE 15
INDEX TO EXHIBITS 16
</TABLE>
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999 AND JANUARY 31, 1999
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
--------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 2,565 $ 5,394
Merchandise inventories 144,336 145,432
Income taxes receivable 430 807
Deferred income taxes 797 1,636
Other current assets 4,816 4,599
--------------- ---------------
Total current assets 152,944 157,868
--------------- ---------------
Property and equipment, net of accumulated depreciation
of $113,182 and $113,872 respectively 69,069 64,124
Other assets 19 159
--------------- ---------------
$ 222,032 $ 222,151
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 5,345 $ 5,345
Trade accounts payable 35,337 42,406
Accrued expenses and other liabilities 16,772 17,937
--------------- ---------------
Total current liabilities 57,454 65,688
--------------- ---------------
Long term debt, excluding current maturities 46,182 39,634
Deferred income taxes 522 696
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 36,957 37,530
Retained earnings 82,338 80,633
Treasury stock, at cost (1,538) (2,147)
--------------- ---------------
Commitments and contingencies 117,874 116,133
--------------- ---------------
$ 222,032 $ 222,151
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months ended April 30,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Merchandise revenue $ 80,819 $ 70,834
Rental video revenue 19,760 18,553
-------------- --------------
Total revenues 100,579 89,387
-------------- --------------
Merchandise cost of revenue 56,477 50,180
Rental video cost of revenue 5,720 7,537
-------------- --------------
Total cost of revenues 62,197 57,717
-------------- --------------
Gross profit 38,382 31,670
Selling, general and administrative expenses 34,631 28,373
Pre-opening expense 179 159
-------------- --------------
34,810 28,532
-------------- --------------
Operating income 3,572 3,138
Interest expense 822 1,199
-------------- --------------
Income before income taxes 2,750 1,939
Income taxes 1,045 737
-------------- --------------
Net income $ 1,705 $ 1,202
============== ==============
Basic earnings per share $ 0.15 $ 0.14
============== ==============
Diluted earnings per share $ 0.15 $ 0.14
============== ==============
Weighted-average number of common shares outstanding - basic 11,599 8,466
Dilutive effect of stock options 148 229
============== ==============
Weighted-average number of common shares outstanding - diluted 11,747 8,695
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended April 30,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,705 $ 1,202
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 5,898 9,902
Loss on rental videos lost, stolen and defective 1,111 1,129
Loss on disposal of other assets 182 185
Deferred income taxes 665 --
Changes in operating assets and liabilities:
Merchandise inventory 1,096 1,546
Other current assets (217) (381)
Trade accounts payable, accrued expenses
and other liabilities (8,200) (19,577)
Income taxes payable/receivable 377 (3,429)
-------------- --------------
Net cash provided by (used in) operations 2,617 (9,423)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (12,136) (9,734)
Decrease in other assets 140 --
-------------- --------------
Net cash used in investing activities (11,996) (9,734)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 70,400 101,700
Repayments under revolving credit facility (63,750) (85,000)
Payments under long-term debt and capital lease obligations (102) (19)
Treasury stock transactions 2 4
-------------- --------------
Net cash provided by financing activities 6,550 16,685
-------------- --------------
Net decrease in cash (2,829) (2,472)
Cash at beginning of period 5,394 3,840
-------------- --------------
CASH AT END OF PERIOD $ 2,565 $ 1,368
============== ==============
</TABLE>
See accompanying notes to 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 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 ended January
31, 1999 is referred to as fiscal year 1998.
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 will continue 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 will be 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 will be
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.
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Options to purchase 1,102,605 shares of common stock were outstanding at April
30, 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 three months ended April 30, 1999
includes the acquisition of treasury shares for stock options exercised totaling
approximately $996,000 and the issuance of treasury stock to pay outside
director fees of approximately $34,000. There were no non-cash financing
activities in the three months ended April 30, 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 April 30, 1999, the Company operated 131 superstores
averaging 21,200 square feet in small to medium-sized markets located throughout
the Midwestern and Western United States. The Company opened two new superstores
in the fiscal quarter ended April 30, 1999.
7
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SUMMARY OF STORE ACTIVITY
<TABLE>
<CAPTION>
Three Months Ended Year Ended
--------------------------- ------------------------------
April 30, April 30, January 31, January 31,
1999 1998 1999 1998
------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Hastings Superstores:
Beginning number of stores 129 117 117 111
Openings 2 - 12 8
Closings - - - (2)
============ ========== ============ =============
Ending number of stores 131 117 129 117
============ ========== ============ =============
</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 April 30,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Merchandise revenue 80.4% 79.2%
Rental video revenue 19.6 20.8
-------------- --------------
Total revenues 100.0 100.0
Merchandise cost of revenue 69.9 70.8
Rental video cost of revenue 28.9 40.6
-------------- --------------
Total cost of revenues 61.8 64.6
-------------- --------------
Gross profit 38.2 35.4
Selling, general and administrative expenses 34.4 31.7
Pre-opening expenses 0.2 0.2
-------------- --------------
34.6 31.9
-------------- --------------
Operating income 3.6 3.5
Interest expense 0.8 1.3
-------------- --------------
Income before income taxes 2.7 2.2
Income taxes 1.0 0.8
-------------- --------------
Net income 1.7% 1.3%
============== ==============
</TABLE>
Revenues and Gross Profit:
For the three months ended April 30, 1999, total revenues increased $11.2
million, or 12.5%, to $100.6 million from $89.4 million during the three months
ended April 30, 1998. Each significant merchandise category exhibited growth,
with sale video and video games providing the largest gains on a percentage
basis. Merchandise revenue in the three months ended April 30, 1999 totaled
$80.8 million, an increase of $10.0 million or 14.1%, from $70.8 million for the
three months ended April 30, 1998. Rental video revenue for the three months
ended April 30, 1999 increased $1.2 million, or 6.5%, to $19.8 million from
$18.6 million in the three months ended April 30, 1998.
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Comparable-store revenues increased by 5.5% for the three months ended April 30,
1999, compared to the three months ended April 30, 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 $4.5 million, or 7.8%, to $62.2 million in
the three months ended April 30, 1999, compared with $57.7 million in the three
months ended April 30, 1998. Gross profit as a percentage of revenues was 38.2%
in the three months ended April 30, 1999, compared to 35.4% for the same period
in fiscal 1998. Gross profit from merchandise revenue increased to $24.3
million, or 30.1% of merchandise revenue, in the three months ended April 30,
1999, compared to gross profit from merchandise revenue of $20.7 million, or
29.2% of merchandise revenue, for the three months ended April 30, 1998.
Management attributes the improvement in merchandise gross profit percentage to
better purchasing deals from vendors, introduction of higher-margin products and
increases to certain retail selling prices.
Rental video gross profit increased to $14.0 million in the three months ended
April 30, 1999, from $11.0 million in the three months ended April 30, 1998.
Rental video gross profit as a percentage of rental video revenue improved to
71.1% of rental video revenue in the three months ended April 30, 1999 from
59.4% in the three months ended April 30, 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.
Management believes rental video margin will be in line with original estimates
for the remainder of fiscal year 1999; however, no assurances can be made in
this regard.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses ("SG&A"), totaled $34.6 million in
the three months ended April 30, 1999, compared to $28.4 million in the three
months ended April 30, 1998. SG&A as a percentage of revenues increased to 34.4%
of total revenues in the three months ended April 30, 1999 from 31.7% of total
revenues in the three months ended April 30, 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.
Interest expense decreased to $0.8 million, or 0.8% of revenues, in the three
months ended April 30, 1999, versus $1.2 million, or 1.3% of revenues, in the
three months ended April 30, 1998. The decline in interest expense was primarily
due to lower average borrowing levels. Income tax expense was $1.0 million, or
38.0% of income before income taxes, in the three months ended April 30, 1999,
versus $0.7 million, or 38.0% of income before taxes, in the three months ended
April 30, 1998.
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 Revolving
Credit Facility (the "Facility") and, for fiscal 1998, proceeds from the
issuance of common stock.
As of April 30, 1999, the Company's total debt capacity consisted of $25.0
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 April 30, 1999 under the Notes and the Facility was $49.3
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
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restrictions with respect to additional indebtedness, transactions with related
parties, investments and capital expenditures.
The Facility bears interest at variable rates based on the lender's base rate
(8.5% at April 30, 1998 and 1999) and LIBOR (6.68% and 5.75% at April 30, 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.
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>
At April 30, 1999, the Company had one other debt obligation totaling $0.7
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 April 30, 1999.
Net cash provided by operations for the three months ended April 30, 1999 was
$2.6 million, compared with net cash used in operations of $9.4 million in the
three months ended April 30, 1998. The primary operating cash inflows for the
three months ended April 30, 1999 reflect net income, and other working capital
accounts, including trade accounts payable, accrued expenses and other
liabilities which improved in the three months ended April 30, 1999 compared to
the three months ending April 30, 1998.
Net cash used in investing activities for the three months ended April 30, 1999
was $12.0 million, primarily related to the opening of new superstores and the
purchase of rental video assets compared to $9.7 million in the three months
ended April 30, 1998. The increase in cash used in investing activities for the
comparable three-month periods is due primarily to capital expenditures related
to the opening of superstores.
Net cash provided by financing activities in the three months ended April 30,
1999 was $6.6 million, compared to net cash provided by financing activities of
$16.7 million in the three months ended April 30, 1998. The decrease in net cash
provided by financing activities resulted primarily from reduced borrowing
levels under the Facility.
During the three months ended April 30, 1999, the Company's net borrowing under
the Facility was $6.7 million.
The Company believes that the net proceeds from the June 1998 initial public
offering, 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
The Financial Accounting Standards Board (FASB) issued:
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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 of this
statement 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, "98" represents the
calendar year 1998, as opposed to a four-digit format "1998." Such systems will
be unable to accurately interpret or process dates beyond the year 1999, which
could cause a system failure, or other computer errors, and result in a
disruption of the system(s).
State of Readiness:
The Company has established an internally staffed project team to address Year
2000 issues. 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;
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;
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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;
6. Contingency planning to assess worst-case scenarios.
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. Two internal systems were identified that
contained potential risks; both systems have been replaced, and the replacement
systems have been tested and are Year 2000 compliant. Two non-compliant external
systems were replaced during the three months ended April 30, 1999. 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 June 30, 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 wholesale distributor, 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.
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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 with completion anticipated during the second
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."
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.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
27.1 Financial Data Schedule
b. No report on Form 8-K was filed by the registrant during the fiscal quarter
for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, on behalf of the registrant and as registrant's Principal Financial
Officer, thereunto duly authorized:
HASTINGS ENTERTAINMENT, INC.
DATE: June 14, 1999 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>
16
<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 APRIL 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 2,565
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 144,336
<CURRENT-ASSETS> 152,944
<PP&E> 182,251
<DEPRECIATION> 113,182
<TOTAL-ASSETS> 222,032
<CURRENT-LIABILITIES> 57,454
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 117,757
<TOTAL-LIABILITY-AND-EQUITY> 222,032
<SALES> 100,579
<TOTAL-REVENUES> 100,579
<CGS> 62,197
<TOTAL-COSTS> 62,197
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 822
<INCOME-PRETAX> 2,750
<INCOME-TAX> 1,045
<INCOME-CONTINUING> 1,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,705
<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
