HASTINGS ENTERTAINMENT INC - 10-Q Quarterly Report

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, 2003


o		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 (State or other jurisdiction of incorporation or organization)		75-1386375 (IRS Employer Identification No.)

3601 Plains Boulevard, Amarillo, Texas (Address of principal executive offices)		79102 (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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares outstanding of the registrant’s common stock, as of May 30, 2003:


Class	Shares Outstanding

Common Stock, $.01 par value per share		11,299,726

TABLE OF CONTENTS


PART 1
	ITEM 1 — FINANCIAL STATEMENTS
		Consolidated Balance Sheets April 30, 2003 and 2002, and January 31, 2003
		Unaudited Consolidated Statements of Operations For the Three Months Ended April 30, 2003 and 20
		Unaudited Consolidated Statements of Cash Flows For the Three Months Ended April 30, 2003 and 2002
		Notes to Unaudited Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS
EX-99.1 Certifications Pursuant to Section 906

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Form 10-Q for the Three Months Ended April 30, 2003

INDEX


			Page

PART I — FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of April 30, 2003 (Unaudited), April 30, 2002 (Unaudited) and January 31, 2003		3
		Unaudited Consolidated Statements of Operations for the Three Months Ended April 30, 2003 and 2002		4
		Unaudited Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2003 and 2002		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		18
	Item 4.	Controls and Procedures		18
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings		19
	Item 6.	Exhibits and Reports on Form 8-K		19
SIGNATURE PAGE				20
CERTIFICATIONS				21
INDEX TO EXHIBITS				23

PART 1

ITEM 1 — FINANCIAL STATEMENTS

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2003 and 2002, and January 31, 2003
(Dollars in thousands, except par value)


					April 30,			April 30,			January 31,
					2003			2002			2003

					(Unaudited)			(Unaudited)
				Assets
Current assets:
	Cash				$	2,895		$	6,330		$	4,447
	Merchandise inventories, net					137,596			146,000			148,395
	Income taxes receivable					569			5,377			552
	Prepaid expenses and other current assets					6,108			5,258			5,969

			Total current assets			147,168			162,965			159,363
Property and equipment, net of accumulated depreciation of $139,215, $126,463 and $136,153, respectively						76,000			66,463			76,283
Deferred income taxes, net of valuation allowance						971			1,091			971
Intangible assets, net						696			631			717
Other assets						188			12			188

					$	225,023		$	231,162		$	237,522

				Liabilities and Shareholders’ Equity
Current liabilities:
	Current maturities on capital lease obligations				$	199		$	169		$	193
	Trade accounts payable					67,963			72,392			75,712
	Accrued expenses and other current liabilities					31,020			27,319			32,543

			Total current liabilities			99,182			99,880			108,448
Long term debt, excluding current maturities on capital lease obligations						44,074			47,909			46,519
Other liabilities						3,668			5,448			3,399
Commitments and contingencies
Shareholders’ equity:
	Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued					—			—			—
	Common stock, $.01 par value; 75,000,000 shares authorized;
		11,944,544 shares issued and 11,340,526 shares outstanding at April 30, 2003; 11,944,544 shares issued and 11,330,327 shares outstanding at April 30, 2002; 11,944,544 shares issued and 11,336,473 shares outstanding at January 31, 2003				119			119			119
	Additional paid-in capital					36,740			36,884			36,749
	Retained earnings					44,191			43,937			45,259
	Treasury stock, at cost 604,018 shares, 614,217 and 608,071 shares at April 30, 2003, and 2002 and January 31, 2003, respectively					(2,951	)		(3,015	)		(2,971	)

						78,099			77,925			79,156

					$	225,023		$	231,162		$	237,522

See accompanying notes to unaudited consolidated financial statements.

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
For the Three Months Ended April 30, 2003 and 2002
(Dollars in thousands, except per share amounts)


				Three Months Ended April 30,

				2003			2002

Merchandise revenue				$	91,456		$	89,982
Rental video revenue					25,381			22,863

			Total revenues		116,837			112,845
Merchandise cost of revenue					68,481			66,188
Rental video cost of revenue					9,903			9,049

			Total cost of revenues		78,384			75,237

			Gross profit		38,453			37,608
Selling, general and administrative expenses					38,976			36,583
Pre-opening expenses					113			18

			Operating income (loss)		(636	)		1,007
Other income (expense):
	Interest expense				(490	)		(500	)
	Other, net				58			62

		Income (Loss) before income taxes			(1,068	)		569
Income tax expense (benefit)					—			—

			Net income (loss)	$	(1,068	)	$	569

Basic income (loss) per share				$	(0.09	)	$	0.05

Diluted income (loss) per share				$	(0.09	)	$	0.05

Weighted-average common shares outstanding:
	Basic				11,338			11,311
	Dilutive effect of stock options				—			538

	Diluted				11,338			11,849

See accompanying notes to unaudited consolidated financial statements.

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2003 and 2002
(Dollars in thousands)


				Three Months Ended April 30,

				2003			2002

Cash flows from operating activities:
Net income (loss)				$	(1,068	)	$	569
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation expense				9,838			9,271
	Amortization expense				21			15
	Loss on rental videos lost, stolen and defective				1,219			1,425
	Loss (Gain) on disposal of non-rental video assets				299			(36	)
	Non-cash compensation				10			75
Changes in operating assets and liabilities:
	Merchandise inventory				11,927			3,295
	Other current assets				(139	)		73
	Trade accounts payable				(7,749	)		(11,026	)
	Accrued expenses and other current liabilities				(1,523	)		(2,474	)
	Income taxes receivable				(17	)		—
	Other assets and liabilities, net				269			(418	)

		Net cash provided by operating activities			13,087			769

Cash flows from investing activities:
Purchases of rental video assets					(6,356	)		(7,724	)
Purchases of property and equipment					(5,844	)		(5,620	)

		Net cash used in investing activities			(12,200	)		(13,344	)

Cash flows from financing activities:
Borrowings under revolving credit facility					118,222			130,174
Repayments under revolving credit facility					(120,615	)		(115,486	)
Payments under capital lease obligations					(46	)		(40	)
Purchase of treasury stock					—			(168	)
Proceeds from exercise of stock options					—			105

			Net cash provided by (used in) financing activities		(2,439	)		14,585

Net increase (decrease) in cash					(1,552	)		2,010
Cash at beginning of period					4,447			4,320

Cash at end of period				$	2,895		$	6,330

See accompanying notes to unaudited consolidated financial statements.

Hastings Entertainment, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
April 30, 2003 and 2002
(Tabular amounts in thousands, except per share data or unless otherwise noted)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Hastings Entertainment, Inc. and its subsidiaries (the “Company”, “We”, “Our”, “Us”) 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 because of, among other things, seasonality factors in the retail business. The unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year 2002.

Certain prior year amounts have been reclassified to conform with fiscal 2003 presentation.

Our 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, 2004 is referred to as fiscal 2003.

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. Stock Option Plans

The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Compensation expense is recorded on the date of grant only if the market price of the underlying stock exceeds the exercise price. Under Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-based Compensation, the Company may elect to recognize expense for stock-based compensation based on the fair value of the awards, or continue to account for stock-based compensation under APB 25 and disclose in the financial statements the effects of SFAS 123 as if the recognition provisions were adopted. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123.

The following schedule reflects the impact on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based compensation (in thousands, except per share amounts)


		April 30,

		2003			2002

Reported net income (loss)		$	(1,068	)	$	569
Less: compensation expense per SFAS No. 123, net of tax			(140	)		(143	)

Proforma net income (loss)		$	(1,208	)	$	426

Basic income (loss) per share:
	Reported net income (loss) per share	$	(0.09	)	$	0.05
	Less: compensation expense per SFAS No. 123, net of tax		(0.01	)		(0.01	)

Proforma net income (loss) per share		$	(0.10	)	$	0.04

Diluted income (loss) per share:
	Reported net income (loss) per share	$	(0.09	)	$	0.05
	Less: compensation expense per SFAS No. 123, net of tax		(0.01	)		(0.01	)

Proforma net income (loss) per share		$	(0.10	)	$	0.04

4. Store Closing Reserve

From time to time and in the normal course of business, we evaluate our store base to determine if a need to close a store(s) is present. Such evaluations include, among other factors, current and future profitability, market trends, age of store and lease status.

Amounts in accrued expenses and other liabilities at April 30, 2003 include accruals for the net present value of future minimum lease payments and other costs attributable to closed or relocated stores, net of estimated sublease income.

The following tables provide a rollforward of reserves that were established for these charges for the three months ended April 30, 2003 and 2002.


		Future Lease
		Payments			Other Costs			Total

Balance at January 31, 2002		$	5,919		$	13			5,932
	Changes in estimates		43			—			43
	Additions to provision		—			—			—
	Cash outlay		(418	)		(13	)		(431	)

Balance at April 30, 2002		$	5,544		$	—		$	5,544


		Future Lease
		Payments			Other Costs			Total

Balance at January 31, 2003		$	2,958		$	—			2,958
	Changes in estimates		143			—			143
	Additions to provision		—			87			87
	Cash outlay		(321	)		(87	)		(408	)

Balance at April 30, 2003		$	2,780		$	—		$	2,780

As of April 30, 2003, the reserve balance, which is net of estimated sublease income, is expected to be paid over the next seven years. Other costs are charged against the reserve as incurred.

5. Income (Loss) per Share

The computations for basic and diluted income (loss) per share are as follows:


			Three Months Ended April 30,

			2003			2002

Net income (loss)			$	(1,068	)	$	569

Average shares outstanding:
	Basic			11,338			11,311
		Effect of stock options		—			538

	Diluted			11,338			11,849

Income (Loss) per share:
	Basic		$	(0.09	)	$

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