<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, 2000
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 15,
2000:
Class Shares Outstanding
-------------------------------------- --------------------
Common Stock, $.01 par value per share 11,642,644
<PAGE> 2
HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2000 (Unaudited) and
January 31, 2000 3
Unaudited Consolidated Statements of Operations for the Three Months
Ended April 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
April 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 3. Defaults Upon Senior Securities 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
INDEX TO EXHIBITS 19
</TABLE>
2
<PAGE> 3
PART 1
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2000 and January 31, 2000
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
2000 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,951 $ 7,026
Merchandise inventories, net 132,777 152,065
Income taxes receivable 7,062 6,272
Deferred income taxes -- 656
Other current assets 4,519 4,968
------------ ------------
Total current assets 149,309 170,987
Property and equipment, net of accumulated depreciation
of $111,572 and $112,730 respectively 70,309 73,242
Deferred income taxes 3,905 3,026
Other assets 585 678
------------ ------------
$ 224,108 $ 247,933
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $ 5,372 $ 5,372
Trade accounts payable 57,526 66,568
Accrued expenses and other current liabilities 28,139 31,752
Deferred income taxes 787 --
------------ ------------
Total current liabilities 91,824 103,692
Long term debt, excluding current maturities 37,602 48,888
Other liabilities 5,044 5,262
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; 11,628,973 shares outstanding at
April 30, 2000 and January 31, 2000 117 117
Additional paid-in capital 37,402 37,402
Retained earnings 53,489 53,951
Treasury stock, at cost (1,370) (1,379)
------------ ------------
89,638 90,091
Commitments and contingencies -- --
------------ ------------
$ 224,108 $ 247,933
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three Months Ended April 30, 2000 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Merchandise revenue $ 88,132 $ 80,819
Rental video revenue 22,363 19,760
------------- -------------
Total revenues 110,495 100,579
Merchandise cost of revenue 61,812 55,783
Rental video cost of revenue 8,270 5,417
------------- -------------
Total cost of revenues 70,082 61,200
------------- -------------
Gross profit 40,413 39,379
Selling, general and administrative expenses 40,236 34,131
Pre-opening expenses 3 179
------------- -------------
Operating income 174 5,069
Other income (expense):
Interest expense (961) (822)
Other, net 41 36
------------- -------------
Income (loss) before income taxes (746) 4,283
Income tax expense (benefit) (284) 1,585
------------- -------------
Net income (loss) $ (462) $ 2,698
============= =============
Basic income (loss) per share $ (0.04) $ 0.23
============= =============
Diluted income (loss) per share $ (0.04) $ 0.23
============= =============
Weighted-average common shares outstanding--basic 11,629 11,599
Dilutive effect of stock options -- 148
------------- -------------
Weighted-average common shares outstanding--diluted 11,629 11,747
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
Three Months Ended April 30, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (462) $ 2,698
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 8,286 5,898
Loss on rental videos lost, stolen and defective 47 757
Loss on disposal of non-rental video assets 4 102
Deferred income tax 564 1,239
Changes in operating assets and liabilities:
Merchandise inventory 19,288 687
Other current assets 449 (217)
Trade accounts payable and accrued expenses (12,646) (8,891)
Income taxes receivable (790) 344
Other assets and liabilities, net (125) 140
------------- -------------
Net cash provided by operating activities 14,615 2,757
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (5,404) (12,136)
------------- -------------
Net cash used in investing activities (5,404) (12,136)
------------- -------------
Cash flows from financing activities:
Borrowings under revolving credit facility 61,200 70,400
Repayments under revolving credit facility (72,400) (63,750)
Payments under long-term debt and capital lease obligations (86) (102)
Purchase of treasury stock -- 2
------------- -------------
Net cash provided by (used in) financing activities (11,286) 6,550
------------- -------------
Net decrease in cash and cash equivalents (2,075) (2,829)
Cash at beginning of period 7,026 5,394
------------- -------------
Cash and cash equivalents at end of period $ 4,951 $ 2,565
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
HASTINGS ENTERTAINMENT. INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2000 and 1999
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
unaudited consolidated financial statements contained herein should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year 1999.
The results for the three month period ended April 30, 1999 have been restated
as disclosed in the Company's annual report on Form 10-K for fiscal year 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, 2001 is referred to as fiscal 2000.
Certain prior-year amounts have been reclassified to conform to the
presentation used for the current year.
2. CONSOLIDATION POLICY
The unaudited consolidated financial statements present the results of
Hastings Entertainment, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
3. STORE CLOSING RESERVES
In the fourth quarter of fiscal 1999, the Company recorded charges related
to the closing of five stores, all of which were closed in the first quarter of
2000. The following table provides a rollforward of reserves that were
established for these charges. (Dollars in thousands)
<TABLE>
<CAPTION>
JANUARY 31, 2000 CASH OUTLAYS APRIL 30, 2000
---------------- ------------- --------------
<S> <C> <C> <C>
Future lease payments (1) $ 2,500 $ (100) $ 2,400
Other costs (2) 300 (300) --
------------- ------------- -------------
$ 2,800 $ (400) $ 2,400
============= ============= =============
</TABLE>
(1) Reserve balances are included as a component of accrued expenses and other
current liabilities and other liabilities.
(2) Reserve balances are included as a component of accrued expenses and other
current liabilities.
In connection with the store closings, the Company established a reserve
for the net present value of future minimum lease payments. Costs are being
charged against the reserve as incurred; the interest component related to lease
payments is recorded as rent expense in the period incurred with no
corresponding increase in the reserve. During the first quarter of 2000,
approximately $0.1 million in lease payments were charged against the reserve.
Payments during the next five years are expected to be approximately $0.6
million per year. Other costs were charged against the reserves in the first
quarter of 2000 as incurred.
6
<PAGE> 7
HASTINGS ENTERTAINMENT, INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2000 and 1999
4. LONG-TERM DEBT
Long-term debt and capitalized lease obligations consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
APRIL 30, 2000 JANUARY 31, 2000
-------------- ----------------
<S> <C> <C>
Revolving credit facility $ 21,050 $ 32,250
Series A senior notes 20,000 20,000
Capitalized lease obligations 1,463 1,492
Other 461 518
------------- -------------
42,974 54,260
Less current maturities 5,372 5,372
------------- -------------
$ 37,602 $ 48,888
============= =============
</TABLE>
At April 30, 2000 and January 31, 2000, the Company had borrowings
outstanding of $21.1 million and $32.3 million, respectively, under a revolving
credit facility (the "Facility"). The Facility accrued interest at variable
rates based on the lender's base rate or LIBOR. The average rate of interest
being charged under the Facility was 6.9% at April 30, 2000 and January 31,
2000.
Also, at April 30, 2000 and January 31, 2000, the Company had outstanding
with a financial institution $20 million aggregate principal amount of unsecured
Series A Senior Notes due June 13, 2003 (the "Senior Notes") bearing interest at
7.75% until amended as discussed below.
At April 30, 2000, January 31, 2000 and at various prior quarters, the
Company was not in compliance with certain financial covenants under its
Facility and the Senior Notes. The Company obtained a series of waivers on its
non-compliance with certain covenant requirements through June 12, 2000.
Effective as of June 12, 2000, the Company entered into an amendment of the
Facility and an amendment and restatement of the Note Purchase Agreement for the
Senior Notes. As part of the amendments to the Facility and the Senior Notes,
the combined borrowings are jointly collateralized on a pari passu basis by
substantially all of the assets of the Company and its subsidiaries.
The Facility, as amended, allows for maximum borrowings of up to $50
million. The aggregate amount outstanding under the Facility and the Senior
Notes is limited to a borrowing base predicated on eligible inventory, as
defined, and rental video assets, net. The Facility bears interest based on the
lender's base rate plus 1.0% (base rate plus 1.75% on the amount in excess of
the normal amount in the over-advance period) or LIBOR plus 2.50% (LIBOR plus
3.25% on the amount in excess of the normal advance rate amount in the
over-advance period), at the Company's option. In addition the Company is
required to pay a quarterly commitment fee of 0.50% on the unused Facility.
Borrowings under the Facility are limited to an advance rate of 55% of eligible
inventory (eligible inventory is defined as 61.22% of inventory, net) and 50% of
rental video assets net of accumulated amortization, less the outstanding
borrowings under the Senior Notes and any required rental reserve. The Facility
provides for an increase in the advance rate to cover additional working capital
requirements through the Christmas selling season (the seasonal over-advance).
The advance rate increases to 65% of eligible inventory from August 1 through
September 30, 2000 and 2001, respectively, and to 70% of eligible inventory from
October 1 through December 31, 2000 and December 16, 2001, respectively (the
seasonal over-advance periods). The Facility includes revised covenants
requiring the maintenance of specific financial ratios and minimum tangible net
worth requirements. In addition, a covenant was added to the Facility requiring
the Company's income before interest, taxes, depreciation and amortization
(EBITDA) be at least
7
<PAGE> 8
HASTINGS ENTERTAINMENT, INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2000 and 1999
4. LONG-TERM DEBT (CONTINUED)
equal to specified levels for future periods. Further, the Facility imposes
certain restrictions with respect to indebtedness, dividend payments, investment
and capital expenditures. The Facility expires on December 16, 2001.
The Senior Notes, as amended, have a stated interest rate of 10.25%
retroactive to March 13, 2000. The amended and restated Note Purchase Agreement
evidencing the amended Senior Notes has financial covenants that are the same as
those contained in the amended Facility including financial ratios, minimum
adjusted net worth requirements and restrictions on indebtedness, investment,
capital expenditures, and the payment of dividends.
The Company believes it will be able to comply with the financial covenants
relating to both the amended Facility and the amended Senior Notes for the next
twelve months; however, there can be no assurance of such compliance. The breach
of any of the covenants contained in the amended Facility or the amended Senior
Notes could result in a default under the amended Facility and the amended
Senior Notes which could result in further advances under the Facility no longer
being available and could enable the respective lenders to require immediate
repayment of the borrowings including accrued interest under the agreements. If
the lenders were to accelerate the repayment of borrowings including accrued
interest, the Company cannot be certain that its assets would be sufficient to
repay such obligations. In addition, the ability of the Company to satisfy its
capital requirements will be dependent upon the future financial performance of
the Company, which in turn is subject to general economic conditions and to
financial issues and other factors, including factors beyond the Company's
control. The amended Facility and the amended Senior Notes are guaranteed by
each of the Company's three consolidated subsidiaries, and are in part secured
by first priority liens on all of the capital stock and substantially all of the
assets of each subsidiary.
5. INCOME (LOSS) PER SHARE
Options to purchase 1,996,846 shares of Common Stock at exercise prices
ranging from $3.55 per share to $15.00 per share outstanding at April 30, 2000
and options to purchase 1,102,605 shares of Common Stock at exercise prices
ranging from $5.34 per share to $10.75 per share outstanding at April 30, 1999
were not included in the computation of diluted income per share because their
inclusion would have been antidilutive.
6. LITIGATION AND CONTINGENCIES
On March 7, 2000, the Company announced that its fourth quarter and fiscal
1999 results (and the previous four fiscal years' results) would be negatively
impacted by certain accounting adjustments. Following the Company's initial
announcement in March 2000 of the requirement for the accounting restatements,
six purported class action lawsuits were filed in the United States District
Court for the Northern District of Texas against the Company and certain of the
current and former directors and officers of the Company asserting various
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
Although four of the lawsuits were originally filed in the Dallas Division of
the Northern District of Texas, all of the five pending actions have been or
will be transferred to the Amarillo Division of the Northern District and should
be consolidated. One of the Section 10(b) and 20(a) lawsuits filed in the Dallas
Division was voluntarily dismissed. On May 15, 2000, a lawsuit was filed in the
United States District Court for the Northern District of Texas against the
Company, its current and former directors and officers at the time of the
Company's June 1998 initial public offering and three underwriters, Salomon
Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz, LLC asserting various
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933.
8
<PAGE> 9
HASTINGS ENTERTAINMENT, INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2000 and 1999
6. LITIGATION AND CONTINGENCIES (CONTINUED)
None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest during the three months ended April 30, 2000 and
1999 totaled $0.8 million for each period. Cash payments for income taxes during
the three months ended April 30, 2000 and 1999 were $32,000 and $3,000,
respectively.
There were no non-cash financing activities in the three months ended April
30, 2000. Non-cash financing activities during the three months ended April 30,
1999 includes the receipt of shares of the Company's common stock valued at $1.0
million relating to the exercise of stock options and the issuance of treasury
stock to pay outside director fees of approximately $35,000.
9
<PAGE> 10
HASTINGS ENTERTAINMENT. INC.
Notes to Unaudited Consolidated Financial Statements
April 30, 2000 and 1999
8. SEGMENT DISCLOSURES
The Company has two operating segments, retail stores and Internet
operations. The Internet operations became a reportable segment in fiscal 1999.
The Company's chief operating decision maker, as that term is defined in the
relevant accounting standard, regularly reviews financial information about each
of the above operating segments for assessing performance and allocating
resources. Revenue for retail stores is derived from the sale of merchandise and
rental of videocassettes, video games and DVDs. Revenue for Internet operations
is derived solely from the sale of merchandise. Segment information regarding
the Company's retail stores and Internet operations for the first quarter of
fiscal years 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
For the three months ended April 30, 2000: Retail Internet
(Dollars in thousands) Stores Operations Total
------------- ------------- -------------
<S> <C> <C> <C>
Total revenue $ 110,479 $ 16 $ 110,495
Depreciation and amortization $ 8,201 $ 85 $ 8,286
Operating income (loss) $ 624 $ (450) $ 174
Total assets $ 223,147 $ 961 $ 224,108
Capital expenditures $ 5,404 $ -- $ 5,404
</TABLE>
<TABLE>
<CAPTION>
For the three months ended April 30, 1999: Retail Internet
(Dollars in thousands) Stores Operations Total
------------- ------------- -------------
<S> <C> <C> <C>
Total revenue $ 100,578 $ 1 $ 100,579
Depreciation and amortization $ 5,882 $ 16 $ 5,898
Operating income (loss) $ 5,185 $ (116) $ 5,069
Total assets $ 235,112 $ 225 $ 235,337
Capital expenditures $ 12,136 $ -- $ 12,136
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere in the Report on Form 10-Q. The results of operations for
the three month period ended April 30, 1999 have been restated as disclosed in
the Company's annual report on Form 10-K for fiscal year 1999.
This Report contains certain forward-looking statements concerning the
intentions, hopes, beliefs, expectations, strategies, predictions or any other
variation thereof or comparable phraseology of the future activities or other
future events or conditions of the Company within the meaning of Section 27A of
the Securities Act of 1993, as amended (the "1933 Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), which are intended
to be covered by the safe harbors created thereby. Investors are cautioned that
all forward-looking statements involve risks and uncertainty, including, without
limitation, variations in quarterly results, volatility of stock price,
development by competitors of superior services or product offerings, the entry
into the market by new competitors, the sufficiency of the Company's working
capital, the ability to retain management, to implement our business strategy,
to attract and retain customers, to increase revenue, and to successfully defend
our company in ongoing and future litigation and the risk factors described in
the Company's annual report on Form 10-K for fiscal year 1999. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate,
and, therefore, there can be no assurance that the forward-looking statements
included in this Report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the Company's objectives and plans will be
achieved and all forward-looking statements in this discussion are expressly
qualified in their entirety by the cautionary statements set forth above.
General
The Company is a leading multimedia entertainment retailer that combines
the sale of books, music, software, periodicals, videocassettes, video games and
DVDs with the rental of videocassettes, video games and DVDs in a superstore and
Internet Web site format. As of April 30, 2000, the Company operated 143
superstores averaging 21,500 square feet in small to medium-sized markets
located in 22 states, primarily in the Western and Midwestern United States. The
Company also operated one college bookstore. Each of the superstores and the
college bookstore is wholly owned by the Company and operates under the name of
Hastings. The Company's e-commerce Web site, www.gohastings.com, became
operational in May 1999.
On March 7, 2000, the Company announced that its fourth quarter and fiscal
1999 results (and the previous four fiscal years' results) would be negatively
impacted by certain accounting adjustments. Following the Company's initial
announcement in March 2000 of the requirement for the accounting restatements,
six purported class action lawsuits were filed in the United States District
Court for the Northern District of Texas against the Company and certain of the
current and former directors and officers of the Company asserting various
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
Although four of the lawsuits were originally filed in the Dallas Division of
the Northern District of Texas, all of the five pending actions have been or
will be transferred to the Amarillo Division of the Northern District and should
be consolidated. One of the Section 10(b) and 20(a) lawsuits filed in the Dallas
Division was voluntarily dismissed. On May 15, 2000, a lawsuit was filed in the
United States District Court for the Northern District of Texas against the
Company, its current and former directors and officers at the time of the
Company's June 1998 initial public offering and three underwriters, Salomon
Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz, LLC asserting various
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933.
None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
11
<PAGE> 12
Results of Operations
The following tables present the Company's statement of operations data,
expressed as a percentage of revenue, and the number of superstores open at the
end of the periods presented herein.
<TABLE>
<CAPTION>
Three Months Ended April 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Merchandise revenue 79.8% 80.4%
Rental video revenue 20.2 19.6
------------- -------------
Total revenues 100.0 100.0
Merchandise cost of revenue 70.1 69.0
Rental video cost of revenue 37.0 27.4
------------- -------------
Total cost of revenues 63.4 60.8
------------- -------------
Gross profit 36.6 39.2
Selling, general and administrative expenses 36.4 33.9
Pre-opening expenses 0.0 0.2
------------- -------------
36.4 34.1
------------- -------------
Operating income 0.2 5.1
Other income (expense):
Interest expense (0.9) (0.8)
Other, net 0.0 0.0
------------- -------------
Income (loss) before income taxes (0.7) 4.3
Income tax expense (benefit) (0.3) 1.6
------------- -------------
Net income (loss) (0.4)% 2.7%
============= =============
</TABLE>
Summary of Superstore Activity
<TABLE>
<CAPTION>
Three months ended Year Ended
------------------------ ----------
April 30, April 30, January 31,
2000 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Hastings Superstores:
Beginning number of stores 147 129 129
Openings -- 2 20
Closings (4) -- (2)
---------- ---------- ----------
Ending number of stores 143 131 147
========== ========== ==========
</TABLE>
12
<PAGE> 13
THREE MONTHS ENDED APRIL 30, 2000 COMPARED TO THREE MONTHS ENDED APRIL 30, 1999:
Revenues. For the three months ended April 30, 2000, total revenues
increased $9.9 million, or 9.9%, to $110.5 million from $100.6 million during
the three months ended April 30, 1999. The revenue growth consisted of a 9.0%
increase in merchandise revenue and a 13.2% increase in rental video revenue.
The increase in revenue was primarily due to a comparable store revenue growth
of 1.6% and the opening of 18 Hastings superstores subsequent to the first
quarter of fiscal 1999. The categories of rental video, video games, sale video
and music lead other categories in revenue increases over last year.
Gross Profit. Total gross profit as a percent of total revenue decreased
for the three months ended April 30, 2000 to 36.6% compared to 39.2% for the
same period last year. The decline is primarily due to rental video gross profit
decreasing as a percent of rental video revenue from 72.6% to 63.0%.
Contributing to this decrease was (i) an increase in rental video revenue
sharing to total rental video revenue which has lower profit margins and (ii)
the gross profit margin on traditional rental video was higher in the first
quarter of fiscal 1999 as compared to the first quarter of fiscal 2000, which
resulted from higher than anticipated revenue from videocassettes purchased
prior to January 31, 1999, for which the Company had recorded a pre-tax charge
of $18.5 million in the fourth quarter of fiscal 1998, relating to the Company's
change in method of amortization. In addition, higher product costs related to
merchandise contributed to the decrease in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased to 36.4% of total revenues for the
three months ended April 30, 2000 from 33.9% for the same period last year. As a
result of the Company's efforts to improve its inventory performance and reduce
the investment in inventory, merchandise returns during the first quarter of
fiscal 2000 exceeded the amount of merchandise returns during the first quarter
of fiscal 1999 resulting in higher returns expense. Other factors contributing
to the increase in SG&A during the fiscal 2000 quarter were an increase in the
costs associated with the operation of the Company's Internet segment and an
increase in accounting and legal fees associated with the accounting
restatement, as described in Note 1 and in the Company's annual report on Form
10-K for fiscal 1999.
Pre-opening Expenses. Pre-opening expenses were insignificant for the three
months ended April 30, 2000 as the Company did not open any new superstores
during the period. For the three months ended April 30, 1999, pre-opening
expenses were $0.2 million or .2% of revenues. Pre-opening expenses include
human resource costs, travel, rent, advertising, supplies and certain other
costs incurred prior to a superstore's opening.
Interest Expense. Interest expense was $1.0 million, or 0.9% of revenues,
in the three months ended April 30, 2000, compared to $0.8 million, or 0.8% of
revenues, in the three months ended April 30, 1999. The increase was primarily
due to higher average borrowings for the first quarter of fiscal 2000 over 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements arise from purchasing,
warehousing and merchandising inventory and rental videos, opening new
superstores, expanding existing superstores, and funding the expansion of its
Internet operations. The Company's primary sources of working capital are
currently cash flows from operating activities, trade credit from vendors and
borrowings from its Revolving Credit Facility (the "Facility"). Cash flow from
operations was $14.6 million and $2.8 million for the three months ended April
30, 2000 and 1999, respectively. Capital expenditures, including purchase of
rental video assets, were $5.4 million and $12.1 million for the three months
ended April 30, 2000 and 1999, respectively. Cash flows from financing
activities for the comparable periods primarily resulted from borrowings made
under the Facility. Net activity under the Facility resulted in net payments of
$11.2 million for the three months ended April 30, 2000 and net borrowings of
$6.7 million for the three months ended April 30, 1999, respectively.
At April 30, 2000 and January 31, 2000, the Company had borrowings
outstanding of $21.1 million and $32.3 million, respectively, under the
Facility. The Facility accrued interest at variable rates based on the lender's
base rate and LIBOR. The average rate of interest being charged under the
Facility was 6.9% at April 30, 2000 and January 31, 2000.
13
<PAGE> 14
Also, at April 30, 2000, the Company had outstanding $20 million aggregate
principal amount of Series A Senior Notes due June 13, 2003 (the "Senior Notes")
with a financial institution. The Company began making required $5.0 million
annual principal payments on June 13, 1999, and the final payment is due June
13, 2003. The Senior Notes had a stated interest rate of 7.75% until amended as
discussed below. On June 13, 2000 the Company made its required annual principal
payment on the Senior Notes.
At April 30, 2000, January 31, 2000 and at various prior quarters, the
Company was not in compliance with certain financial covenants under its
Facility and the Senior Notes. The Company obtained a series of waivers on its
non-compliance with certain covenant requirements to January 31, 2000 and
through June 12, 2000.
Effective as of June 12, 2000, the Company entered into an amendment of the
Facility and an amendment and restatement of the Note Purchase Agreement for the
Senior Notes. As part of the amendments to the Facility and the Senior Notes,
the combined borrowings are jointly collateralized on a pari passu basis by
substantially all of the assets of the Company and its subsidiaries.
The Facility, as amended, allows for maximum borrowings of up to $50
million. The aggregate amount outstanding under the Facility and the Senior
Notes is limited to a borrowing base predicated on eligible inventory, as
defined, and rental video assets, net. The Facility bears interest based on the
lender's base rate plus 1.0% (base rate plus 1.75% on the amount in excess of
the normal amount in the over-advance period) or LIBOR plus 2.50% (LIBOR plus
3.25% on the amount in excess of the normal advance rate amount in the
over-advance period), at the Company's option. In addition the Company is
required to pay a quarterly commitment fee of 0.50% on the unused Facility.
Borrowings under the Facility are limited to an advance rate of 55% of eligible
inventory (eligible inventory is defined as 61.22% of inventory, net) and 50% of
rental video assets net of accumulated amortization, less the outstanding
borrowings under the Senior Notes and any required rental reserve. The Facility
provides for an increase in the advance rate to cover additional working capital
requirements through the Christmas selling season (the seasonal over-advance).
The advance rate increases to 65% of eligible inventory from August 1 through
September 30, 2000 and 2001, respectively, and to 70% of eligible inventory from
October 1 through December 31, 2000 and December 16, 2001 (the Facility's
expiration date), respectively (the seasonal over-advance periods). The Facility
includes revised covenants requiring the maintenance of specific financial
ratios and minimum tangible net worth requirements. In addition, a covenant was
added to the Facility requiring the Company's income before interest, taxes,
depreciation and amortization (EBITDA) to be at least equal to specified levels
for future periods. Further, the Facility imposes certain restrictions with
respect to indebtedness, dividend payments, investment and capital expenditures.
The Facility expires on December 16, 2001.
The Senior Notes, as amended, have a stated interest rate of 10.25%
retroactive to March 13, 2000. The amended and restated Note Purchase Agreement
evidencing the amended Senior Notes has financial covenants that are the same as
those contained in the amended Facility including financial ratios, minimum
adjusted net worth requirements and restrictions on indebtedness, investment,
capital expenditures, and the payment of dividends.
The Company believes it will be able to comply with the financial covenants
relating to both the amended Facility and the amended Senior Notes for the next
twelve months; however, there can be no assurance of such compliance. The breach
of any of the covenants contained in the amended Facility or the amended Senior
Notes could result in default under the amended Facility and the amended Senior
Notes which could result in further advances under the amended Facility no
longer being available and could enable the Facility and Senior Notes lenders to
require immediate repayment of the borrowings including accrued interest under
the agreements. If the lenders were to accelerate the repayment of borrowings,
including accrued interest, the Company cannot be certain that its assets would
be sufficient to repay such obligations. In addition, the ability of the Company
to satisfy its capital requirements will be dependent upon the future financial
performance of the Company, which in turn is subject to general economic
conditions and to financial issues and other factors, including factors beyond
the Company's control. The amended Facility and the amended Senior Notes are
guaranteed by each of the Company's three consolidated subsidiaries, and are in
part secured by first priority liens on all of the capital stock and
substantially all of the assets of each subsidiary.
The Company's primary sources of liquidity are, currently, cash flows from
operating activities and borrowings under the Facility. As of June 16, 2000,
$23.9 million was borrowed under the Facility. The Company believes that,
14
<PAGE> 15
based on current and anticipated financial performance, cash flows from
operating activities and borrowings under the amended Facility will be adequate
to meet anticipated requirements for capital expenditures, working capital and
required principal and interest payments under the amended Senior Notes and the
amended Facility. The ability of the Company to satisfy its capital requirements
will be dependent upon future financial performance of the Company, which in
turn is subject to general economic conditions and to financial issues and other
factors, including factors beyond the Company's control.
As previously disclosed, the Company plans to slow its growth rate from
that previously described and focus on the expansion and remodeling of its
existing superstores. The Company invests generally between $1 million and $2
million in a new superstore, with the largest components of that amount being
merchandise, videos, fixtures and leasehold improvements. The Company plans to
expand approximately four superstores in fiscal 2000. The Company generally
invests between $0.5 million to $1.0 million to expand a superstore.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" that impacts the Company's
accounting treatment and/or its disclosure obligations. The statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is
not expected to have a material impact on the Company.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25" ("FIN 44"). Among other issues, this interpretation clarifies
the definition of employee for purposes of applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards, and the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that
occurred after either December 15, 1998, or January 12, 2000. Management
believes that FIN 44 will not have a material effect on the financial position
or the results of operations of the Company upon adoption.
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 rentals of video activity in the spring because customers
spend more time outdoors. Major world or sporting events, such as the Super
Bowl, the Olympic Games 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.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of its business, the Company is exposed to certain
market risks, primarily changes in interest rates. The Company's exposure to
interest rate risk consists of variable rate debt, at the Company's option,
based on the lenders' base rate or LIBOR, plus in each case a specified
percentage. The annual impact on the Company's results of operations of a 100
basis point interest rate change on the April 30, 2000 outstanding balance of
the variable rate debt would be approximately $0.2 million. After an assessment
of these risks to the Company's operations, the Company believes that its
primary market risk exposures (within the meaning of Regulation S-K Item 305)
are not material and are not expected to have any material adverse impact on
the Company's financial position, results of operations or cash flows for the
next fiscal year. The Company is not party to any derivative or interest rate
hedging contracts.
16
<PAGE> 17
PART II
ITEM 1. LEGAL PROCEEDINGS
In the Company's annual report on Form 10-K filed with the Securities and
Exchange Commission, the Company discussed legal proceedings regarding certain
shareholder complaints. There have been no material developments in these
proceedings during the first quarter of fiscal year 2000 other than as set forth
in the Company's annual report on Form 10-K. For a description of the legal
proceedings applicable under this item, reference is made "Part 1, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and to "Part 1, Item 3. Legal Proceedings" in the Company's annual
report on Form 10-K for fiscal year 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At April 30, 2000, January 31, 2000 and at various prior quarters, the
Company was not in compliance with certain financial covenants under its
Facility and the Senior Notes including Fixed Coverage Ratio, Minimum Tangible
Net Worth, Funded Debt to Adjusted EBITDA, Adjusted Net Worth and Fixed Charges
Coverage Ratio. The Company obtained a series of waivers on its non-compliance
with certain covenant requirements through June 12, 2000. Amended Facility and
amended and restated Senior Note agreements were executed on June 12, 2000
including revised covenant requirements. For a description of the amended
agreements applicable under this item, reference is made to "Part 1, Item 3.
Legal Proceedings" in the Company's annual report on Form 10-K for fiscal year
1999.
ITEM 5. OTHER INFORMATION
The Company's Common Stock began trading on The Nasdaq National Market
(Nasdaq) on June 12, 1998 under the symbol "HAST." On May 18, 2000, the Company
was notified by Nasdaq that its Common Stock would be delisted on May 30, 2000
unless the Company's fiscal 1999 Form 10-K, the filing of which was delayed
pending completion of the accounting restatements described herein, was filed
with the Securities and Exchange Commission by May 25, 2000. As part of this
process, on May 22, 2000 the Company's ticker symbol was changed from "HAST" to
"HASTE". Under Nasdaq rules, the Company requested, and was subsequently
granted, an oral hearing with the appropriate Nasdaq panel. The hearing is
scheduled for June 22, 2000. The scheduling of this hearing automatically stays
the delisting of the Company's Common Stock until the hearing panel makes a
ruling. The Company believes the filing of the Company's fiscal 1999 Form 10-K
will result in cancellation of the scheduled Nasdaq hearing and withdrawal of
the delisting notice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
10.23 First Amendment to Credit Agreement and waiver agreement
dated as of May 2, 2000 between Hastings Entertainment,
Inc. and Bank of America, N.A., as administrative agent
10.24 Second Amendment to Credit Agreement dated as of June 12,
2000 between Hastings Entertainment, Inc. and Bank of
America, N.A., as administrative agent.
10.25 Amended and Restated Note Purchase Agreement dated as of
June 12, 2000 between Hastings Entertainment, Inc. and
Metropolitan Life Insurance Company and Metropolitan
Insurance and Annuity Company
10.26 Security Agreement dated as of May 26, 2000 between
Hastings Entertainment, Inc. and Subsidiaries and Bank of
America, N.A.
27 Financial Data Schedule for the Three Months Ended April 30,
2000.
27.1 Restated Financial Data Schedule for the Three Months Ended
April 30, 1999.
99 Item 3 of Hastings Entertainment, Inc. annual report on Form
10-K for fiscal year 1999. Incorporated by reference on
Form 10-K.
b. On March 8, 2000, registrant filed a current report on Form 8-K reporting,
under "Item 5. Other Events," the issuance of a press release dated March
7, 2000 with respect to its accounting adjustments.
17
<PAGE> 18
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
and accounting officer, thereunto duly authorized:
HASTINGS ENTERTAINMENT, INC.
DATE: June 19, 2000 By: /s/ Gaines L. Godfrey
------------------------------------
Gaines L. Godfrey
Senior Vice President, Chief
Financial Officer
(Principal Financial and Accounting
Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<S> <C>
10.23 First Amendment to Credit Agreement and waiver agreement
dated as of May 2, 2000 between Hastings Entertainment, Inc.
and Bank of America, N.A., as administrative agent
10.24 Second Amendment to Credit Agreement dated as of June 12,
2000 between Hastings Entertainment, Inc. and Bank of
America, N.A., as administrative agent.
10.25 Amended and Restated Note Purchase Agreement dated as of
June 12, 2000 between Hastings Entertainment, Inc. and
Metropolitan Life Insurance Company and Metropolitan
Insurance and Annuity Company
10.26 Security Agreement dated as of May 26, 2000 between
Hastings Entertainment, Inc. and Subsidiaries and Bank of
America, N.A.
27 Financial Data Schedule for the Three Months Ended April 30,
2000.
27.1 Restated Financial Data Schedule for the Three Months Ended
April 30, 1999.
99 Item 3 of Hastings Entertainment, Inc. annual report on Form
10-K for fiscal year 1999. Incorporated by reference on
Form 10-K.
</TABLE>
