<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(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, 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)
<TABLE>
<CAPTION>
TEXAS 75-1386375
<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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
7, 2000:
<TABLE>
<CAPTION>
Class Shares Outstanding
-------------------------------------- ------------------
<S> <C>
Common Stock, $.01 par value per share 11,642,644
</TABLE>
<PAGE> 2
HASTINGS ENTERTAINMENT, INC.
AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 2000 (Unaudited) and
January 31, 2000 3
Unaudited Consolidated Statements of Operations for the Three Months and
Six Months Ended July 31, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
July 31, 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 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 3. Defaults Upon Senior Securities 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE PAGE 21
INDEX TO EXHIBITS 22
</TABLE>
2
<PAGE> 3
PART I
ITEM 1 - FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 2000 and January 31, 2000
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
2000 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,336 $ 7,026
Merchandise inventories, net 125,211 152,065
Income taxes receivable 7,730 6,272
Deferred income taxes -- 656
Other current assets 4,570 4,968
--------- ---------
Total current assets 138,847 170,987
Property and equipment, net of accumulated depreciation
of $112,283 and $112,730, respectively 68,377 73,242
Deferred income taxes 4,161 3,026
Other assets 581 678
--------- ---------
$ 211,966 $ 247,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $ 140 $ 5,372
Trade accounts payable 51,807 66,568
Accrued expenses and other current liabilities 29,663 31,752
Deferred income taxes 232 --
--------- ---------
Total current liabilities 81,842 103,692
Long term debt, excluding current maturities 38,237 48,888
Other liabilities 4,503 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; 11,642,644 and 11,623,962 shares outstanding
at July 31, 2000 and January 31, 2000, respectively 117 117
Additional paid-in capital 37,250 37,402
Retained earnings 51,199 53,951
Treasury stock, at cost (1,182) (1,379)
--------- ---------
87,384 90,091
Commitments and contingencies -- --
--------- ---------
$ 211,966 $ 247,933
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months and Six Months ended July 31, 2000 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
--------------------------- ------------------------
2000 1999 2000 1999
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Merchandise revenue $ 85,363 $ 82,035 $ 173,495 $ 162,854
Rental video revenue 21,780 20,403 44,143 40,163
--------- --------- --------- ---------
Total revenues 107,143 102,438 217,638 203,017
Merchandise cost of revenue 61,399 58,061 123,211 113,844
Rental video cost of revenue 9,472 7,319 17,742 12,736
--------- --------- --------- ---------
Total cost of revenues 70,871 65,380 140,953 126,580
--------- --------- --------- ---------
Gross profit 36,272 37,058 76,685 76,437
Selling, general and administrative expenses 39,140 34,152 79,376 68,283
Pre-opening expenses -- 538 3 717
--------- --------- --------- ---------
Operating income (loss) (2,868) 2,368 (2,694) 7,437
Other income (expense):
Interest expense (889) (955) (1,850) (1,777)
Other, net 65 59 106 95
--------- --------- --------- ---------
Income (loss) before income taxes (3,692) 1,472 (4,438) 5,755
Income tax expense (benefit) (1,402) 606 (1,686) 2,191
--------- --------- --------- ---------
Net income (loss) $ (2,290) $ 866 $ (2,752) $ 3,564
========= ========= ========= =========
Basic income (loss) per share $ (0.20) $ 0.07 $ (0.24) $ 0.31
========= ========= ========= =========
Diluted income (loss) per share $ (0.20) $ 0.07 $ (0.24) $ 0.30
========= ========= ========= =========
Weighted average number of common shares
outstanding--basic 11,643 11,626 11,636 11,613
Dilutive effect of stock options -- 230 -- 188
--------- --------- --------- ---------
Weighted average number of common shares
outstanding--diluted 11,643 11,856 11,636 11,801
========= ========= ========= =========
</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 and Six Months Ended July 31, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31,
-------------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,752) $ 3,564
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 16,083 13,459
Loss on rental videos lost, stolen and defective 822 3,484
Loss on disposal of non-rental video assets 21 234
Deferred income tax (247) 1,187
Non cash compensation 46 36
Changes in operating assets and liabilities:
Merchandise inventory 26,854 6,794
Other current assets 398 (1,327)
Trade accounts payable and accrued expenses (16,850) (15,512)
Income taxes receivable (1,458) 1,771
Other assets and liabilities, net (664) 20
--------- ---------
Net cash provided by operating activities 22,253 13,710
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (12,060) (27,241)
--------- ---------
Net cash used in investing activities (12,060) (27,241)
--------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facility 86,867 118,750
Repayments under revolving credit facility (97,567) (101,750)
Payments under long-term debt and capital lease obligations (5,183) (5,112)
Purchase of treasury stock 68
Additional Paid in Capital -- (17)
--------- ---------
Net cash provided by (used in)
financing activities (15,883) 11,939
--------- ---------
Net decrease in cash and cash equivalents (5,690) (1,592)
Cash at beginning of period 7,026 5,394
--------- ---------
Cash and cash equivalents at end of period $ 1,336 $ 3,802
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
July 31, 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 and six month periods ended July 31, 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>
ADDITIONS CHARGED TO
JANUARY 31, 2000 COST AND EXPENSE CASH OUTLAYS JULY 31, 2000
---------------- -------------------- ------------ -------------
<S> <C> <C> <C> <C>
Future lease payments (1) $ 2,500 $ 301 $ (321) $ 2,480
Other costs 300 -- (300) --
------- ------- ------- -------
$ 2,800 $ 301 $ (621) $ 2,480
======= ======= ======= =======
</TABLE>
(1) Reserve balances are included as a component of accrued expenses and
other current liabilities and other 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 and the interest component related to
lease payments is recorded as rent expense. In the second quarter, $0.3 million
in lease payments were charged against the reserve. Payments during the next
five years that are to be charged against the reserve are expected to be
approximately $0.6 million per year. Other costs were charged against the
reserve in the first quarter of 2000 as incurred.
6
<PAGE> 7
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
July 31, 2000 and 1999
4. LONG-TERM DEBT
Long-term debt and capitalized lease obligations consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
JULY 31, 2000 JANUARY 31, 2000
------------- ----------------
<S> <C> <C>
Revolving credit facility $21,550 $32,250
Series A senior notes 15,000 20,000
Capitalized lease obligations 1,423 1,492
Other 404 518
------- -------
38,377 54,260
Less current maturities 140 5,372
------- -------
$38,237 $48,888
======= =======
</TABLE>
At July 31, 2000 and January 31, 2000, the Company had borrowings
outstanding of $21.6 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 plus a percentage. The average
rate of interest being charged under the Facility was 9.7% and 6.9% at July 31,
2000 and January 31, 2000, respectively. The interest rate increase was due to
financial covenant defaults and resulting amendment to the Facility discussed
below.
Also, at July 31, 2000 and January 31, 2000, the Company had outstanding
with a financial institution $15 million and $20 million, respectively,
aggregate principal amount of Series A Senior Notes due June 13, 2003, as
amended (the "Senior Notes"), bearing interest at 10.25% and 7.75%,
respectively. The interest rate increase was due to financial covenant defaults
and resulting amendment to the Senior Notes discussed below.
At April 30, 2000 and January 31, 2000, 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.
As of July 31, 2000 and through August 29, 2000, the Facility, as amended,
allowed for maximum borrowings of up to $50 million. The aggregate amount
outstanding under the Facility and the Senior Notes was limited to a borrowing
base predicated on eligible inventory, as defined, and rental video assets, net.
The Facility bore interest based on the lender's base rate plus 1.0% (base rate
plus 1.75% on the amount in excess of the normal advance rate 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 was required to pay a quarterly
commitment fee of 0.50% on the unused Facility amount. Borrowings under the
Facility were 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 provided for an
increase in the advance rate to cover additional working capital requirements
through the Christmas selling season. The advance rate increased 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 over-advance periods). The
Facility included 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
7
<PAGE> 8
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
July 31, 2000 and 1999
4. LONG-TERM DEBT (CONTINUED)
interest, taxes, depreciation and amortization (EBITDA) be at least equal to
specified levels for future periods. Further, the Facility imposed certain
restrictions with respect to indebtedness, dividend payments, investment and
capital expenditures. The Facility was to expire on December 16, 2001.
The Senior Notes, as amended, had a stated interest rate of 10.25%
retroactive to March 13, 2000. The amended and restated Note Purchase Agreement
evidencing the amended Senior Notes had 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.
As of July 31, 2000, the Company believed it would be able to comply with
the financial covenants relating to the amended Facility and the amended Senior
Notes for the next twelve months; however, there could be no assurance of such
compliance. The breach of any of the covenants contained in the amended Facility
and 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 could not be certain that
its assets would be sufficient to repay such obligations. In addition, the
ability of the Company to satisfy its capital requirements would be dependent
upon the future financial performance of the Company, which in turn would be
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 were guaranteed by each of the Company's three
consolidated subsidiaries and were in part secured by first priority liens on
all of the capital stock and substantially all of the assets of each subsidiary.
On August 29, 2000, the Company entered into a three-year syndicated,
secured Loan and Security Agreement (the "New Facility) with Fleet Retail
Finance, Inc. and The CIT Group/Business Credit, Inc. (the "Lenders"). The
initial proceeds from the New Facility were used to prepay the total amounts
outstanding under the Facility and the Senior Notes at August 29, 2000. The
amount outstanding under the New Facility is limited by a borrowing base
predicated on eligible inventory, as defined, and rental video and assets, net
of accumulated depreciation and is limited to a ceiling of $70 million, which
increases to $80 million between October 15 and December 15 of each year of the
New Facility, less a $10 million availability reserve. The New Facility bears
interest based on the prevailing prime rate or LIBOR plus 2.00% at the Company's
option. The borrowing base under the New Facility is limited to an advance rate
of 65% of eligible inventory and rental video assets net of accumulated
amortization less specifically defined reserves. The New Facility contains no
financial covenants and requires a minimum availability of $10 million at all
times. The New Facility is secured by substantially all of the assets of the
Company and its subsidiaries and is guaranteed by each of the Company's three
consolidated subsidiaries. The New Facility expires on August 29, 2003. At
September 7, 2000, the Company had $31.4 million available under the New
Facility. The long-term debt in the accompanying consolidated financial
statements has been reclassified in accordance with the terms of the New
Facility.
5. INCOME (LOSS) PER SHARE
Options to purchase 1,907,154 shares of Common Stock at exercise prices
ranging from $3.13 per share to $15.00 per share outstanding at July 31, 2000
and options to purchase 751,728 shares of Common Stock at exercise prices
ranging from $5.34 per share to $15.00 per share outstanding at July 31, 1999
were not included in the computation of diluted income per share because their
inclusion would have been antidilutive.
8
<PAGE> 9
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
July 31, 2000 and 1999
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.
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 six months ended July 31, 2000 and
1999 totaled $1.9 million and $1.7 million, respectively. Cash payments for
income taxes during the six months ended July 31, 2000 and 1999 were $0.3
million and $36,000, respectively.
Non-cash financing activities during the six months ended July 31, 2000
includes the issuance of treasury stock to pay outside director fees of
approximately $37,000. 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 $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.
8. INVENTORY MARKDOWN
During the second quarter ended July 31, 2000, the Company recognized a
pre-tax charge to earnings of $0.9 million related to the markdown of inventory
to the lower of cost or market. Lower than anticipated sales volume during the
second quarter of fiscal 2000 and higher than anticipated merchandise returns
volume associated with the Company's initiative to improve inventory turnover in
order to improve cash flow, increase liquidity and profits and balance the
inventory offering all contributed to this write down. Inventory from the stores
closed during fiscal 2000 was returned to the Company's return center during the
first and second quarter of fiscal 2000 with the intent of returning the product
for credit to the original vendor. During the second quarter, it was determined
that certain merchandise was not returnable. Consequently, the Company evaluated
other opportunities for maximizing recovery value of the merchandise. During the
second quarter, the Company contracted with a liquidator to market $1.3 million
of merchandise. Based upon the estimated recovery value provided by the
liquidator, the Company wrote the inventory down to the estimated recovery value
of approximately $0.4 million, reflecting the $0.9 million charge.
9
<PAGE> 10
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
July 31, 2000 and 1999
9. 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 three months and six
months ended July 31, 2000 and 1999 is presented below.
<TABLE>
<CAPTION>
For the three months ended July 31, 2000: Retail Internet
(Dollars in thousands) Stores Operations Total
--------- ---------- ---------
<S> <C> <C> <C>
Total revenue $ 107,123 $ 20 $ 107,143
Depreciation and amortization $ 7,728 $ 69 $ 7,797
Operating loss $ (2,513) $ (355) $ (2,868)
Total assets $ 211,215 $ 1,307 $ 212,522
Capital expenditures $ 6,405 $ 251 $ 6,656
</TABLE>
<TABLE>
<CAPTION>
For the three months ended July 31, 1999: Retail Internet
(Dollars in thousands) Stores Operations Total
-------- ---------- --------
<S> <C> <C> <C>
Total revenue $102,409 $ 29 $102,438
Depreciation and amortization $ 8,466 $ 59 $ 8,525
Operating income (loss) $ 2,967 $ (599) $ 2,368
Total assets $233,921 $ 700 $234,621
Capital expenditures $ 17,060 $ 98 $ 17,158
</TABLE>
<TABLE>
<CAPTION>
For the six months ended July 31, 2000: Retail Internet
(Dollars in thousands) Stores Operations Total
--------- ---------- ---------
<S> <C> <C> <C>
Total revenue $ 217,602 $ 36 $ 217,638
Depreciation and amortization $ 15,929 $ 154 $ 16,083
Operating loss $ (1,889) $ (805) $ (2,694)
Total assets $ 211,215 $ 1,307 $ 212,522
Capital expenditures $ 11,809 $ 251 $ 12,060
</TABLE>
10
<PAGE> 11
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
July 31, 2000 and 1999
9. SEGMENT DISCLOSURES (CONTINUED)
<TABLE>
<CAPTION>
For the six months ended July 31, 1999: Retail Internet
(Dollars in thousands) Stores Operations Total
-------- ---------- --------
<S> <C> <C> <C>
Total revenue $202,987 $ 30 $203,017
Depreciation and amortization $ 13,384 $ 75 $ 13,459
Operating income (loss) $ 8,151 $ (714) $ 7,437
Total assets $233,921 $ 700 $234,621
Capital expenditures $ 29,935 $ 98 $ 30,033
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and six month periods ended July 31, 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 July 31, 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.
12
<PAGE> 13
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 July 31, Six Months Ended July 31,
--------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Merchandise revenue 79.7% 80.1% 79.7% 80.2%
Rental video revenue 20.3 19.9 20.3 19.8
----- ----- ----- -----
Total revenues
100.0 100.0 100.0 100.0
Merchandise cost of revenue 71.9 70.8 71.0 69.9
Rental video cost of revenue 43.5 35.9 40.2 31.7
----- ----- ----- -----
Total cost of revenues 66.2 63.8 64.8 62.4
----- ----- ----- -----
Gross profit 33.8 36.2 35.2 37.6
Selling, general and administrative expenses 36.5 33.3 36.5 33.6
Pre-opening expenses 0.0 0.6 0.0 0.4
----- ----- ----- -----
36.5 33.9 36.5 34.0
----- ----- ----- -----
Operating income (loss) (2.7) 2.3 (1.3) 3.6
Other income (expense):
Interest expense (0.8) (0.9) (0.8) (0.8)
Other, net 0.1 0.1 0.1 0.0
----- ----- ----- -----
Income (loss) before income taxes (3.4) 1.5 (2.0) 2.8
Income tax expense (benefit) (1.3) 0.6 (0.8) 1.1
----- ----- ----- -----
Net income (loss) (2.1)% 0.9% (1.2)% 1.7%
===== ===== ===== =====
</TABLE>
Summary of Superstore Activity
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Year Ended
-------------------- --------------------- -----------
July 31, July 31, July 31, July 31, January 31,
2000 1999 2000 1999 2000
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Hastings Superstores:
Beginning number of stores 143 131 147 129 129
Openings -- 7 -- 9 20
Closings -- -- (4) -- (2)
---- ---- ---- ---- ----
Ending number of stores 143 138 143 138 147
==== ==== ==== ==== ====
</TABLE>
13
<PAGE> 14
THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THREE MONTHS ENDED JULY 31, 1999:
Revenues. For the three months ended July 31, 2000, total revenues
increased $4.7 million, or 4.6%, to $107.1 million from $102.4 million during
the three months ended July 31, 1999. The revenue growth consisted of a 4.1%
increase in merchandise revenue and a 6.7% increase in rental video revenue. The
increase in revenue was primarily due to the opening of 11 Hastings superstores
subsequent to the second quarter of fiscal 1999. The categories of rental video,
video games, and sale video 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 July 31, 2000 to 33.8% compared to 36.2% 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 64.1% to 56.5%.
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 second
quarter of fiscal 1999 as compared to the second 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, during the second quarter ended
July 31, 2000, the Company recognized a pre-tax charge to earnings of $0.9
million related to the markdown of inventory to the lower of cost or market.
Lower than anticipated sales volume during the second quarter of fiscal 2000 and
higher than anticipated merchandise returns volume associated with the Company's
initiative to improve inventory turnover in order to improve cash flow, increase
liquidity and profits and balance the inventory offering all contributed to this
write down. Inventory from the stores closed during fiscal 2000 was returned to
the Company's return center during the first and second quarter of fiscal 2000
with the intent of returning the product for credit to the original vendor.
During the second quarter, it was determined that certain merchandise was not
returnable. Consequently, the Company evaluated other opportunities for
maximizing recovery value of the merchandise. During the second quarter, the
Company contracted with a liquidator to market $1.3 million of merchandise.
Based upon the estimated recovery value provided by the liquidator, the Company
wrote the inventory down to the estimated recovery value of approximately $0.4
million, reflecting the $0.9 million charge.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased to 36.5% of total revenues for the
three months ended July 31, 2000 from 33.9% for the same period last year.
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, contributed to the increase in SG&A. Amounts incurred during the three
months ended July 31, 2000 for the restatement totaled approximately $2.3
million, or 2.2% of revenues and $0.12 per diluted share, net of tax. In
addition, as a result of the Company's efforts to improve its inventory
performance and reduce the investment in inventory, merchandise returns during
the second quarter of fiscal 2000 exceeded the amount of merchandise returns
during the second quarter of fiscal 1999 resulting in higher returns expense.
Pre-opening Expenses. Pre-opening expenses were insignificant for the three
months ended July 31, 2000, as the Company did not open any new superstores
during the period. For the three months ended July 31, 1999, pre-opening
expenses were $0.5 million or .6% 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 $0.9 million, or 0.8% of revenues,
in the three months ended July 31, 2000, compared to $1.0 million, or 0.9% of
revenues, in the three months ended July 31, 1999. Although a higher rate of
interest was being charged under the Facility and Senior Notes during the second
quarter of fiscal 2000 over 1999 because of the covenant defaults and resulting
amendments to the Facility and the Senior Notes, the amount of interest expense
was slightly less due to a decrease in the average amount of indebtedness
outstanding for such comparable fiscal quarters.
SIX MONTHS ENDED JULY 31, 2000 COMPARED TO SIX MONTHS ENDED JULY 31, 1999:
Revenues. For the six months ended July 31, 2000, total revenues increased
$14.6 million, or 7.2%, to $217.6 million from $203.0 million during the six
months ended July 31, 1999. The revenue growth consisted of a 6.5% increase in
merchandise revenue and a 9.9% increase in rental video revenue. The increase in
revenue was primarily
14
<PAGE> 15
due to a comparable store revenue growth of 0.6% and the opening of 10 Hastings
superstores subsequent to the six months ended July 31, 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 six months ended July 31, 2000 to 35.2% compared to 37.6% 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 68.3% to 59.8%.
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 six
months of fiscal 1999 as compared to the fist six months 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, during the second quarter ended
July 31, 2000, the Company recognized a pre-tax charge to earnings of $0.9
million related to the markdown of inventory to the lower of cost or market.
Lower than anticipated sales volume during the second quarter of fiscal 2000 and
higher than anticipated merchandise returns volume associated with the Company's
initiative to improve inventory turnover in order to improve cash flow, increase
liquidity and profits and balance the inventory offering all contributed to this
write down. Inventory from the stores closed during fiscal 2000 was returned to
the Company's return center during the first and second quarter of fiscal 2000
with the intent of returning the product for credit to the original vendor.
During the second quarter, it was determined that certain merchandise was not
returnable. Consequently, the Company evaluated other opportunities for
maximizing recovery value of the merchandise. During the second quarter, the
Company contracted with a liquidator to market $1.3 million of merchandise.
Based upon the estimated recovery value provided by the liquidator, the Company
wrote the inventory down to the estimated recovery value of approximately $0.4
million, reflecting the $0.9 million charge.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased to 36.5% of total revenues for the
six months ended July 31, 2000 from 34.0% 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 six months of
fiscal 2000 exceeded the amount of merchandise returns during the first six
months of fiscal 1999. The higher returns coupled with higher return fees
incurred on return of music product resulted in higher returns expense.
Secondly, 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, contributed to the increase in SG&A. Amounts incurred during the
first six months of fiscal 2000 for the restatement totaled approximately $2.7
million, or 1.2% of revenue and $0.14 per diluted share, net of tax. Finally, an
increase in the costs associated with the operation of the Company's Internet
segment during the first quarter of fiscal 2000 over 1999 contributed to the
increase in SG&A.
Pre-opening Expenses. Pre-opening expenses were insignificant for the six
months ended July 31, 2000, as the Company did not open any new superstores
during the period. For the six months ended July 31, 1999, pre-opening expenses
were $0.7 million or 0.4% 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 $1.9 million, or 0.8% of revenues,
in the six months ended July 31, 2000, compared to $1.8 million, or 0.8% of
revenues, in the six months ended July 31, 1999. The increase was primarily due
to a higher rate of interest being charged under the Facility and Senior Notes
during the second quarter of fiscal 2000 over 1999 because of the covenant
defaults and resulting amendments to the Facility and the Senior Notes, even
though there was a decrease in the average outstanding indebtedness for such
comparable periods.
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 $22.3 million and $16.5 million, for the six months ended July
31, 2000 and 1999, respectively. Capital expenditures, including purchase of
rental video assets, were $12.1 million and $30.0 million for the six
15
<PAGE> 16
months ended July 31, 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
$10.7 million for the six months ended July 31, 2000 and net borrowings of $17.0
million for the six months ended July 31, 1999, respectively.
At July 31, 2000 and January 31, 2000, the Company had borrowings
outstanding of $21.6 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 plus a percentage. The average
rate of interest being charged under the Facility was 9.7% and 6.9% at July 31,
2000 and January 31, 2000, respectively. The interest rate increase was due to
financial covenant defaults and resulting amendment to the Facility discussed
below.
Also, at July 31, 2000 and January 31, 2000, the Company had outstanding
with a financial institution $15 million and $20 million, respectively,
aggregate principal amount of Series A Senior Notes due June 13, 2003, as
amended (the "Senior Notes"), bearing interest at 10.25% and 7.75%,
respectively. The interest rate increase was due to financial covenant defaults
and resulting amendment to the Senior Notes discussed below.
At April 30, 2000 and January 31, 2000, 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.
As of July 31, 2000 and through August 29, 2000, the Facility, as amended,
allowed for maximum borrowings of up to $50 million. The aggregate amount
outstanding under the Facility and the Senior Notes was limited to a borrowing
base predicated on eligible inventory, as defined, and rental video assets, net.
The Facility bore interest based on the lender's base rate plus 1.0% (base rate
plus 1.75% on the amount in excess of the normal advance rate 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 was required to pay a quarterly
commitment fee of 0.50% on the unused Facility amount. Borrowings under the
Facility were 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 provided for an
increase in the advance rate to cover additional working capital requirements
through the Christmas selling season. The advance rate increased 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 over-advance periods). The
Facility included 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 equal to
specified levels for future periods. Further, the Facility imposed certain
restrictions with respect to indebtedness, dividend payments, investment and
capital expenditures. The Facility was to expire on December 16, 2001.
The Senior Notes, as amended, had a stated interest rate of 10.25%
retroactive to March 13, 2000. The amended and restated Note Purchase Agreement
evidencing the amended Senior Notes had 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.
As of July 31, 2000, the Company believed it would be able to comply with
the financial covenants relating to the amended Facility and the amended Senior
Notes for the next twelve months; however, there could be no assurance of such
compliance. The breach of any of the covenants contained in the amended Facility
and 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
16
<PAGE> 17
were to accelerate the repayment of borrowings including accrued interest, the
Company could not be certain that its assets would be sufficient to repay such
obligations. In addition, the ability of the Company to satisfy its capital
requirements would be dependent upon the future financial performance of the
Company, which in turn would be 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 were guaranteed by
each of the Company's three consolidated subsidiaries and were in part secured
by first priority liens on all of the capital stock and substantially all of the
assets of each subsidiary.
On August 29, 2000, the Company entered into a three-year syndicated
secured Loan and Security Agreement (the "New Facility) with Fleet Retail
Finance, Inc. and The CIT Group/Business Credit, Inc. (the "Lenders"). The
proceeds from the New Facility were primarily used to prepay the total amounts
outstanding under the Facility and the Senior Notes at August 29, 2000. The
amount outstanding under the New Facility is limited by a borrowing base
predicated on eligible inventory, as defined, and rental video and assets, net
of accumulated depreciation and is limited to a ceiling of $70 million, which
increases to $80 million between October 15 and December 15 of each year of the
New Facility, less a $10 million availability reserve. The New Facility bears
interest based on the prevailing prime rate or LIBOR plus 2.00% at the Company's
option. The borrowing base under the New Facility is limited to an advance rate
of 65% of eligible inventory and rental video assets net of accumulated
amortization less specifically defined reserves. The New Facility contains no
financial covenants and requires a minimum availability of $10 million at all
times. The New Facility is secured by substantially all of the assets of the
Company and its subsidiaries and is guaranteed by each of the Company's three
consolidated subsidiaries. The New Facility expires on August 29, 2003. At
September 7, 2000, the Company had $31.4 million available under the New
Facility. The long-term debt in the accompanying consolidated financial
statements has been reclassified in accordance with the terms of the New
Facility.
The Company's primary sources of liquidity are, currently, cash flows from
operating activities and borrowings under the Facility. As of September 7, 2000,
$38.6 million was borrowed under the New Facility. The Company believes that,
based on current and anticipated financial performance, cash flows from
operating activities and borrowings under the New Facility will be adequate to
meet anticipated requirements for capital expenditures, working capital and
required principal and interest payments under New 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, will be adopted in the
first quarter of fiscal 2001. 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 became
17
<PAGE> 18
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.
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 (loss) 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.
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 lender's base rate or LIBOR plus a specified percentage. The annual
impact on the Company's results of operations of a 100 basis point interest rate
change on the July 31, 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.
18
<PAGE> 19
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 to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
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. An amendment to the
Facility and an amended and restated Senior Note Agreement 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in this report.
On August 29, 2000, the Company entered into a three-year syndicated
secured Loan and Security Agreement (the "New Facility) with Fleet Retail
Finance, Inc. and The CIT Group/Business Credit, Inc. (the "Lenders"). The
proceeds from the New Facility were primarily used to prepay the total amounts
outstanding under the Facility and the Senior Notes at August 29, 2000. The
amount outstanding under the New Facility is limited by a borrowing base
predicated on eligible inventory, as defined, and rental video and assets, net
of accumulated depreciation and is limited to a ceiling of $70 million, which
increases to $80 million between October 15 and December 15 of each year of the
New Facility, less a $10 million availability reserve. The New Facility bears
interest based on the prevailing prime rate or LIBOR plus 2.00% at the Company's
option. The borrowing base under the New Facility is limited to an advance rate
of 65% of eligible inventory and rental video assets net of accumulated
amortization less specifically defined reserves. The New Facility contains no
financial covenants and requires a minimum availability of $10 million at all
times. The New Facility is secured by substantially all of the assets of the
Company and its subsidiaries and is guaranteed by each of the Company's three
consolidated subsidiaries. The New Facility expires on August 29, 2003. At
September 7, 2000, the Company had $31.4 million available under the New
Facility. The long-term debt in the accompanying consolidated financial
statements has been reclassified in accordance with the terms of the New
Facility.
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. Under Nasdaq rules,
the Company requested, and was subsequently granted, an oral hearing with the
appropriate Nasdaq panel. The hearing was scheduled for June 22, 2000. On June
20, 2000, as a result of the Company's filing of the fiscal 1999 Form 10-K, the
Company was notified by Nasdaq of the cancellation of the hearing and withdrawal
of the delisting notice.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
10.27 Loan and Security Agreement dated August 29, 2000 between Hastings
Entertainment, Inc. and Fleet Retail Finance, Inc., Agent.
27 Financial Data Schedule for the Three Months Ended July 31, 2000.
27.1 Restated Financial Data Schedule for the Three Months Ended July 31,
1999.
b. No report on Form 8-K was filed by the registrant during the quarter of
the fiscal year for which this report on Form 10-Q is filed.
20
<PAGE> 21
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: December 22, 2000 By: /s/ Dan Crow
---------------------
Dan Crow
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.27 Loan and Security Agreement dated August 29, 2000 between Hastings
Entertainment, Inc. and Fleet Retail Finance, Inc., Agent.
27 Financial Data Schedule for the Three Months Ended July 31, 2000.
27.1 Restated Financial Data Schedule for the Three Months Ended July 31,
1999.
</TABLE>
22
