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EX-32.1 - EXHIBIT 32.1 - HASTINGS ENTERTAINMENT INC | c18534exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - HASTINGS ENTERTAINMENT INC | c18534exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - HASTINGS ENTERTAINMENT INC | c18534exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
3601 Plains Boulevard, Amarillo, Texas | 79102 | |
(Address of principal executive offices) | (Zip Code) |
(806) 351-2300
(Registrants telephone number, including area code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of accelerated
filer, large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange
Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
Class | Outstanding at April 30, 2011 | |
Common Stock, $.01 par value per share | 8,614,150 shares |
HASTINGS ENTERTAINMENT, INC.
Form 10-Q
For the Quarterly Period Ended April 30, 2011
Form 10-Q
For the Quarterly Period Ended April 30, 2011
INDEX
Page | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
11 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
25 | ||||||||
26 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
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PART I FINANCIAL INFORMATION
ITEM 1 | FINANCIAL STATEMENTS |
HASTINGS ENTERTAINMENT, INC.
Consolidated Balance Sheets
April 30, 2011 and January 31, 2011
(Dollars in thousands, except par value)
April 30, | January 31, | |||||||
2011 | 2011 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,040 | $ | 6,149 | ||||
Merchandise inventories, net |
148,340 | 146,636 | ||||||
Deferred income taxes |
6,433 | 6,022 | ||||||
Prepaid expenses and other current assets |
11,121 | 11,742 | ||||||
Total current assets |
171,934 | 170,549 | ||||||
Rental assets, net of accumulated depreciation of $20,470 and $20,312 at April
30, 2011 and January 31, 2011, respectively |
13,392 | 13,129 | ||||||
Property, equipment and improvements, net of accumulated depreciation
of $208,027 and $204,225 at April 30, 2011 and January 31, 2011, respectively |
40,774 | 41,588 | ||||||
Deferred income taxes |
1,713 | 1,668 | ||||||
Intangible assets, net |
391 | 391 | ||||||
Other assets |
2,318 | 2,358 | ||||||
Total Assets |
$ | 230,522 | $ | 229,683 | ||||
Liabilities and Shareholders Equity | ||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 66,470 | $ | 60,555 | ||||
Accrued expenses and other current liabilities |
26,093 | 26,124 | ||||||
Total current liabilities |
92,563 | 86,679 | ||||||
Long term debt |
26,431 | 31,766 | ||||||
Other liabilities |
6,703 | 6,512 | ||||||
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 8,614,150 shares outstanding at April 30, 2011; 11,944,544 shares issued and 8,743,550 shares outstanding at January 31, 2011 |
119 | 119 | ||||||
Additional paid-in capital |
36,975 | 36,673 | ||||||
Retained earnings |
89,002 | 88,589 | ||||||
Accumulated other comprehensive income |
147 | 107 | ||||||
Treasury stock, at cost
3,330,394 shares and 3,200,994 shares at April 30, 2011
and January 31, 2011, respectively |
(21,418 | ) | (20,762 | ) | ||||
Total Shareholders Equity |
104,825 | 104,726 | ||||||
Total Liabilities and Shareholders Equity |
$ | 230,522 | $ | 229,683 | ||||
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC.
Unaudited Consolidated Statements of Operations
For the Three Months Ended April 30, 2011 and 2010
(Dollars in thousands, except per share amounts)
Three Months Ended April 30, | ||||||||
2011 | 2010 | |||||||
Merchandise revenue |
$ | 104,463 | $ | 108,125 | ||||
Rental revenue |
19,528 | 20,779 | ||||||
Gift card breakage revenue |
146 | 194 | ||||||
Total revenues |
124,137 | 129,098 | ||||||
Merchandise cost of revenue |
72,120 | 74,426 | ||||||
Rental cost of revenue |
7,285 | 7,705 | ||||||
Total cost of revenues |
79,405 | 82,131 | ||||||
Gross profit |
44,732 | 46,967 | ||||||
Selling, general and administrative expenses |
43,710 | 45,436 | ||||||
Pre-opening expenses |
58 | | ||||||
Operating income |
964 | 1,531 | ||||||
Other income (expense): |
||||||||
Interest expense |
(202 | ) | (132 | ) | ||||
Other, net |
19 | 20 | ||||||
Income before income taxes |
781 | 1,419 | ||||||
Income tax expense |
368 | 401 | ||||||
Net income |
$ | 413 | $ | 1,018 | ||||
Basic income per share |
$ | 0.05 | $ | 0.11 | ||||
Diluted income per share |
$ | 0.05 | $ | 0.11 | ||||
Weighted-average common shares outstanding: |
||||||||
Basic |
8,711 | 9,432 | ||||||
Dilutive effect of stock awards |
211 | 236 | ||||||
Diluted |
8,922 | 9,668 | ||||||
See accompanying notes to unaudited consolidated financial statements.
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HASTINGS ENTERTAINMENT, INC.
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2011 and 2010
(Dollars in thousands)
Three Months Ended | ||||||||
April 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 413 | $ | 1,018 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Rental asset depreciation expense |
2,889 | 2,654 | ||||||
Purchases of rental assets |
(5,869 | ) | (5,980 | ) | ||||
Property and equipment depreciation expense |
4,155 | 4,321 | ||||||
Deferred income taxes |
(456 | ) | (637 | ) | ||||
Loss on rental assets lost, stolen and defective |
495 | 470 | ||||||
Loss on disposal or impairment of property and equipment,
excluding rental assets |
34 | 19 | ||||||
Non-cash stock-based compensation |
302 | 143 | ||||||
Changes in operating assets and liabilities: |
||||||||
Merchandise inventories |
519 | (2,105 | ) | |||||
Prepaid expenses and other current assets |
621 | 756 | ||||||
Trade accounts payable |
4,034 | 12,092 | ||||||
Accrued expenses and other current liabilities |
(31 | ) | (1,951 | ) | ||||
Other assets and liabilities, net |
271 | (4 | ) | |||||
Net cash provided by operating activities |
7,377 | 10,796 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property, equipment, and improvements |
(3,376 | ) | (2,260 | ) | ||||
Net cash used in investing activities |
(3,376 | ) | (2,260 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under revolving credit facility |
122,754 | 93,421 | ||||||
Repayments under revolving credit facility |
(128,089 | ) | (105,160 | ) | ||||
Purchase of treasury stock |
(656 | ) | (959 | ) | ||||
Change in cash overdraft |
1,881 | (187 | ) | |||||
Proceeds from exercise of stock options |
| 106 | ||||||
Net cash used in financing activities |
(4,110 | ) | (12,779 | ) | ||||
Net decrease in cash and cash equivalents |
(109 | ) | (4,243 | ) | ||||
Cash and cash equivalents at beginning of period |
6,149 | 8,863 | ||||||
Cash and cash equivalents at end of period |
$ | 6,040 | $ | 4,620 | ||||
See accompanying notes to unaudited consolidated financial statements.
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Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(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 subsidiary (Hastings, the Company, we, our, or us) have been prepared in accordance
with U.S. 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 U.S.
generally accepted accounting principles have been condensed or omitted pursuant to such principles
and regulations of the Securities and Exchange Commission. All adjustments, consisting of normal
recurring adjustments, have been made which, in the opinion of management, are necessary for a fair
presentation of the results of interim periods. The results of operations for such interim periods
are not necessarily indicative of the results that may be expected for a full year because of,
among other things, seasonality factors in the retail business. As is the case with many
retailers, a significant portion of our revenues, and an even greater portion of our operating
earnings, is generated in the fourth fiscal quarter, which includes the holiday selling season.
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 ended January 31, 2011.
The balance sheet at January 31, 2011 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and notes required by U.S.
generally accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2011.
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, 2012 is
referred to as fiscal year 2011.
2. Stock-Based Compensation
We have various stock incentive plans, which allow us to issue stock options, stock appreciation
rights, restricted shares, restricted stock units, performance awards and other awards.
Stock-based compensation is discussed more fully in Note 12 in our Annual Report on Form 10-K for
the fiscal year ended January 31, 2011.
For the three months ended April 30, 2011 and 2010, we recognized approximately $0.3 million and
$0.1 million, respectively, of stock-based compensation expense. These amounts include expense
related to incentive stock options, non-qualified stock options, and restricted stock units.
As of April 30, 2011, we had 304,433 shares available to grant as stock-based compensation awards
under our various stock incentive plans.
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Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
3. Long-term Debt
On July 22, 2010, we entered into the Amended and Restated Loan and Security Agreement (the
Amended Agreement) with Bank of America, N.A., as agent, which amended and restated our Loan and
Security Agreement dated as of August 29, 2000, as otherwise amended (the Prior Agreement). The
Amended Agreement is substantially the same as the Prior Agreement, extends the maturity date of
the Prior Agreement from August 29, 2011 to July 22, 2014, and provides that we may repurchase up
to $10.0 million worth of our common stock. The Amended Agreement also provides that we may
repurchase additional shares of our common stock in the event we meet certain criteria set forth in
the Amended Agreement. The Amended Agreement prohibits the payment of dividends, includes certain
other debt and acquisition limitations and requires a minimum availability of $10.0 million at all
times. The Amended Agreement is secured by substantially all of the assets of the Company and our
subsidiary and is guaranteed by our subsidiary.
The amount outstanding under the Amended Agreement is limited by a borrowing base predicated on the
sum of (a) 85% of Eligible Credit Card Receivables plus (b) (i) 85% multiplied by (ii) the
Appraised Inventory Liquidation Value multiplied by (iii) Eligible Inventory (net of Inventory
Reserves), less (c) Availability Reserves (each term as defined in the Amended Agreement), and is
limited to a ceiling of $100 million, less a $10 million availability reserve. The lender may
increase specifically defined reserves to reduce availability in the event of adverse changes in
our industry or our financial condition that are projected to impact the value of our assets
pledged as collateral. The lender must exercise reasonable judgment and act in good faith with
respect to any changes in the specifically defined reserves.
Interest under the Amended Agreement will accrue, at our election, at a Base Rate or Libor Rate,
plus, in each case, an Applicable Margin, which is determined by reference to the level of
Availability as defined in the Amended Agreement, with the Applicable Margin for Libor Rate loans
ranging from 2.00% to 2.75% and the Applicable Margin for Base Rate loans ranging from 1.00% to
1.75%. In addition, unused line fees ranging from 0.30% to 0.375% (determined by reference to the
level of usage under the Amended Agreement) are also payable on unused commitments.
We utilize standby letters of credit to support certain insurance policies. The aggregate amount
of the letters of credit at April 30, 2011, was approximately $0.7 million, which reduces the
excess availability under the Amended Agreement.
At April 30, 2011, we had approximately $61.9 million in excess availability, after the $10 million
availability reserve, under the Amended Agreement. The average rates of interest incurred for the
three months ended April 30, 2011 and 2010 were 2.6% and 1.9%, respectively. Deferred financing
costs that were amortized into interest expense during the three months ended April 30, 2011 are
excluded from the calculation of the average rate of interest for that period.
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Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
4. Income per Share
The computations for basic and diluted income per share are as follows:
Three Months Ended April 30, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 413 | $ | 1,018 | ||||
Average shares outstanding: |
||||||||
Basic |
8,711 | 9,432 | ||||||
Effect of stock awards |
211 | 236 | ||||||
Diluted |
8,922 | 9,668 | ||||||
Income per share: |
||||||||
Basic |
$ | 0.05 | $ | 0.11 | ||||
Diluted |
$ | 0.05 | $ | 0.11 | ||||
The following options to purchase shares of common stock were not included in the computation of
diluted income per share because their inclusion would have been antidilutive:
Three Months Ended April 30, | ||||||||
2011 | 2010 | |||||||
Shares of common stock underlying
options |
419 | 326 | ||||||
Exercise price range per share |
$ | 4.25 to $8.70 | $ | 3.53 to $12.26 |
5. Fair Value Measurements
We account for certain assets and liabilities at fair value. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The hierarchy below lists three levels of
fair value based on the extent to which inputs used in measuring fair value are observable in the
market. These levels are:
| Level 1 Observable inputs quoted prices in active markets for identical assets and
liabilities; |
||
| Level 2 Observable inputs other than the quoted prices in active markets for
identical assets and liabilities includes quoted prices for similar instruments, quoted
prices for identical or similar instruments in inactive markets, and amounts derived from
valuation models where all significant inputs are observable in active markets; and |
||
| Level 3 Unobservable inputs includes amounts derived from valuation models where
one or more significant inputs are unobservable and require us to develop relevant
assumptions. |
At April 30, 2011 and January 31, 2011, we had approximately $1.5 million and $1.4 million,
respectively, in assets which are carried at fair value on a recurring basis. These assets, which
are reflected in Other Assets in the consolidated balance sheets, consist of available-for-sale
investments related to our non-qualified supplemental executive retirement plan (SERP). The fair
value of these investments was determined using Level 1 inputs.
Our long-term debt approximates fair value as of both April 30, 2011 and January 31, 2011, due to
the instrument bearing interest at variable rates that are comparable to what is currently
available to us. We entered into the
Amended Agreement with Bank of America on July 22, 2010, at which time our current interest rates
were determined. See Note 3 on Debt for a more detailed discussion of the Amended Agreement.
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Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
6. Income Taxes
During the three months ended April 30, 2010, we recorded a discrete tax benefit of approximately
$0.2 million related to amended state returns resulting from an Internal Revenue Service audit of
our previously filed Federal tax returns. No discrete tax items were recorded during the three
months ended April 30, 2011. Primarily as a result of this discrete tax benefit, the effective tax
rate for the first quarter of fiscal 2011 increased to 47.1% compared to 28.3% for the first
quarter of fiscal 2010.
7. Litigation and Contingencies
We are involved in various claims and legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not have a material
adverse effect on our financial position, results of operations or cash flows.
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ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-looking Statements
Certain written and oral statements set forth below or made by Hastings with the approval of an
authorized executive officer constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The words believe, expect, intend,
anticipate, project, will and similar expressions identify forward-looking statements, which
generally are not historical in nature. All statements that address operating performance, events
or developments that we expect or anticipate will occur in the future including statements relating
to the business, expansion, merchandising and marketing strategies of Hastings, industry
projections or forecasts, inflation, effect of critical accounting policies including lower of cost
or market for inventory adjustments, the returns process, rental asset depreciation, store closing
reserves, impairment or disposal of long-lived assets, revenue recognition, and vendor allowances,
sufficiency of cash flow from operations and borrowings under our revolving credit facility and
statements expressing general optimism about future operating results are forward-looking
statements. Such statements are based upon our managements current estimates, assumptions and
expectations, which are based on information available at the time of the disclosure, and are
subject to a number of factors and uncertainties, including, but not limited to, consumer appeal of
our existing and planned product offerings, and the related impact of competitor pricing and
product offerings; overall industry performance and the accuracy of our estimates and judgments
regarding trends; our ability to obtain favorable terms from suppliers; our ability to respond to
changing consumer preferences, including with respect to new technologies and alternative methods
of content delivery, and to effectively adjust our offerings if and as necessary; the application
and impact of future accounting policies or interpretations of existing accounting policies;
whether our assumptions turn out to be correct; our inability to attain such estimates and
expectations; a downturn in market conditions in any industry relating to the products we
inventory, sell or rent; the degree to which we enter into and maintain vendor relationships; the
challenging times that the U.S. and global economies are currently experiencing, the effects of
which have had and will continue to have an adverse impact on spending by Hastings current retail
customer base and potential new customers, and the possibility that general economic conditions
could deteriorate further; volatility of fuel and utility costs; acts of war or terrorism inside
the United States or abroad; unanticipated adverse litigation results or effects; the effect of
inclement weather on the ability of consumers to reach our stores and other factors which may be
outside of our control; any of which could cause actual results to differ materially from those
described herein. We undertake no obligation to affirm, publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
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 this Quarterly
Report on Form 10-Q.
General
Incorporated in 1972, Hastings Entertainment, Inc. (the Company, Hastings, or Hastings
Entertainment) is a leading multimedia entertainment retailer. We operate entertainment
superstores that buy, sell, trade and rent various home entertainment products, including books,
music, software, periodicals, movies on DVD and Blu-ray, video games, video game consoles and
consumer electronics. We also offer consumables and trends products such as apparel, t-shirts,
action figures, posters, greeting cards and seasonal merchandise. As of April 30, 2011, we
operated 146 superstores principally in medium-sized markets located in 20 states, primarily in the
Western and Midwestern United States. We also operate one concept store, Sun Adventure Sports,
located in Amarillo, Texas.
We also operate a multimedia entertainment e-commerce web site offering a broad selection of books,
software, video games, movies on DVD and Blu-ray, music, trends, and consumer electronics. We fill
orders for new and used product placed at this website and also through Amazon Marketplace using
our proprietary goShip program, which allows us to ship directly from stores. We have one
wholly-owned subsidiary, Hastings Internet, Inc.
References herein to fiscal years are to the twelve-month periods that end in January of each
following calendar year. For example, the twelve-month period ending January 31, 2012 is referred
to as fiscal 2011.
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Critical Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. We believe the following critical
accounting estimates comprise our more significant estimates and assumptions used in the
preparation of our financial statements. Our significant estimates and assumptions are reviewed,
and any required adjustments are recorded, on a monthly or quarterly basis.
Lower of Cost or Market for Merchandise Inventory. Our merchandise inventories are recorded at the
lower of cost, which approximates the first-in, first-out (FIFO) method, or market. As with any
retailer, economic conditions, cyclical customer demand and changes in purchasing or distribution
can affect the carrying value of inventory. As circumstances warrant, we record the lower of cost
or market inventory adjustments. In some instances, these adjustments can have a material effect
on the financial results of an annual or interim period. In order to determine such adjustments,
we evaluate the age, inventory turns and estimated market value and returnability of merchandise
inventory by product category and record an adjustment if estimated market value is below cost.
Rental Asset Depreciation. We have established rental asset depreciation policies that match
rental product costs with the related revenues. These policies require that we make significant
estimates, based upon our experience, as to the ultimate amount and timing of revenue to be
generated from our rental product. We utilize an accelerated method of depreciation because it
approximates the pattern of demand for the product, which is higher when the product is initially
released by the studios for rental and declines over time. In establishing salvage values for our
rental product, we consider the sales prices and sales volume of our previously rented product and
other used product.
We currently depreciate the cost of our rental assets on an accelerated basis over six months or
nine months, except for rental assets purchased for the initial stock of a new store, which are
depreciated on a straight-line basis over 36 months. Rental assets, which include DVDs, Books on
CD and Video Games, are depreciated to salvage values ranging from $4 to $10. Rental assets
purchased for less than established salvage values are not depreciated.
We also review the carrying value of our rental assets to ensure that estimated future cash flows
exceed the carrying value. We periodically record adjustments to the value of previously rented
product primarily for estimated obsolescence or excess product based upon changes in our original
assumptions about future demand and market conditions. If future demand or actual market conditions
are less favorable than our original estimates, additional adjustments, including adjustments to
useful lives or salvage values, may be required. We continually evaluate the estimates surrounding
the useful lives and salvage values used in depreciating our rental assets. Changes to these
estimates resulting from changes in consumer demand, changes in customer preferences or the price
or availability of retail products may materially impact the carrying value of our rental assets
and our rental margins.
The costs of rental product purchased pursuant to revenue-sharing arrangements, which are recorded
in rental cost of sales on the consolidated statements of operations, typically include a lower
initial product cost than traditional rental purchases with a certain percentage of the net rental
revenues shared with studios over an agreed period of time. Any up-front costs exceeding the
designated salvage value are amortized on an accelerated basis, and revenue-sharing payments
pursuant to the applicable arrangement are expensed as rental cost of sales as the related revenue
is earned. Additionally, certain titles have performance guarantees. We analyze titles that are
subject to performance guarantees and recognize an estimated expense for under-performing titles
throughout the applicable period based upon our analysis of the estimated rental revenue shortfall.
We revise these estimates on a monthly basis, based on actual results.
Impairment or Disposal of Long-Lived Assets. We evaluate under-performing stores on a quarterly
basis to determine whether projected future cash flows over the remaining lease term are sufficient
to recover the carrying value of the fixed asset investment in each individual store. If
projected future cash flows are less than the carrying value of the fixed asset investment, an
impairment charge is recognized if the estimated fair value is less than the carrying value of such
assets. The carrying value of leasehold improvements, in addition to certain other property and
equipment, is subject to impairment write-down.
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Income Taxes. In determining net income, we make certain estimates and judgments in the
calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred
tax assets that arise from temporary differences between the tax and financial statement
recognition of revenue and expense. We record deferred tax assets and liabilities for future
income tax consequences that are attributable to differences between financial statement carrying
amounts of assets and liabilities and their income tax bases. We base the measurement of deferred
tax assets and liabilities on enacted tax rates that we expect will apply to taxable earnings in
the year when we expect to settle or recover those temporary differences. We recognize the effect
on deferred tax assets and liabilities on any change in income tax rates in the period that
includes the enactment date.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements from
such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood, on a cumulative basis, of being realized upon ultimate settlement. We recognize
interest and penalties relating to any uncertain tax positions as a component of income tax
expense.
Share-Based Compensation. Determining the amount of share-based compensation to be recorded in the
statement of operations requires us to develop estimates that are used in calculating the
grant-date fair value of stock options. In determining the fair value of stock options, we use the
Black-Scholes valuation model, which requires us to make estimates of the following assumptions:
| Expected volatility The estimated stock price volatility is derived based upon our
historical stock prices over the expected life of the option. |
||
| Expected life of the option The estimate of an expected life is calculated based on
historical data relating to grants, exercises and cancellations, as well as the vesting
period and contractual life of the option. |
||
| Risk-free interest rate The risk-free interest rate is based on the yield on
zero-coupon U.S. Treasury securities for a period that is commensurate with the expected
life of the option. |
Our stock price volatility and expected option lives involve managements best estimates at the
grant date, both of which impact the fair value of the option calculated under the Black-Scholes
pricing model and, ultimately, the expense that will be recognized over the vesting period of the
option.
We recognize compensation expense only for the portion of options that are expected to vest.
Therefore, we apply estimated forfeiture rates that are derived from historical employee
termination behavior. If the actual number of forfeitures differs from those estimated by
management, additional adjustments to compensation expense may be required in future periods.
In addition to stock options, we award restricted stock awards, including restricted stock units
and performance-based restricted stock awards. The grant date fair value of restricted stock
awards is equal to the average of the opening and closing stock price on the day on which they are
granted. For performance-based restricted stock awards, compensation expense is recognized if
management deems it probable that the performance conditions will be met. Management must use its
judgment to determine the probability that a performance condition will be met. If actual results
differ from managements assumptions, future results could be materially impacted.
Gift Card Breakage Revenue. We sell gift cards through each of our stores and through our web site
www.goHastings.com. The gift cards we sell have no stated expiration dates or fees and are subject
to potential escheatment rights in some of the jurisdictions in which we operate. Gift card
liabilities are recorded as deferred revenue at the time of sale of such cards, with the costs of
designing, printing and distributing the cards recorded as expense as incurred. Prior to the
fourth quarter of fiscal 2009, the liability was relieved and revenue was recognized only upon
redemption of the gift cards. Beginning in the fourth quarter of fiscal 2009, we had sufficient
historical data to analyze gift card redemption patterns and a final determination of the
escheatment laws applicable to our operations. As a result, during the fourth quarter of fiscal
2009, we recorded approximately $8.5 million of revenue related to the initial change in estimated
breakage on gift cards we previously issued and sold. Subsequent to the initial change in estimate
related to gift card breakage, gift card breakage revenue is recognized as gift cards are redeemed,
based upon an analysis of the aging and utilization of gift cards, our determination that the
likelihood of
future redemption is remote and our determination that such balances are not subject to escheatment
laws applicable to our operations.
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Results of Operations
The following tables present our statement of operations data, expressed as a percentage of
revenue, and the number of superstores open at the end of the periods presented herein.
Three Months Ended | ||||||||
April 30, | ||||||||
2011 | 2010 | |||||||
Merchandise revenue |
84.2 | % | 83.8 | % | ||||
Rental revenue |
15.7 | 16.1 | ||||||
Gift card breakage revenue |
0.1 | 0.1 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Merchandise cost of revenue |
69.0 | 68.8 | ||||||
Rental cost of revenue |
37.3 | 37.1 | ||||||
Total cost of revenues |
64.0 | 63.6 | ||||||
Gross profit |
36.0 | 36.4 | ||||||
Selling, general and administrative
expenses |
35.2 | 35.2 | ||||||
Pre-opening expenses |
| | ||||||
Operating income |
0.8 | 1.2 | ||||||
Other income (expense): |
||||||||
Interest expense |
(0.2 | ) | (0.1 | ) | ||||
Other, net |
| | ||||||
Income before income taxes |
0.6 | 1.1 | ||||||
Income tax expense |
0.3 | 0.3 | ||||||
Net income |
0.3 | % | 0.8 | % | ||||
Summary of Superstore Activity(1)
Three Months Ended | Year Ended | |||||||||||
April 30, | January 31, | |||||||||||
2011 | 2010 | 2011 | ||||||||||
Beginning number of stores |
146 | 149 | 149 | |||||||||
Openings |
1 | | | |||||||||
Closings |
(1 | ) | (2 | ) | (3 | ) | ||||||
Ending number of stores |
146 | 147 | 146 | |||||||||
(1) | We operate one concept store, Sun Adventure Sports, which is not included in the summary
of superstore activity. |
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Financial Results for the First Quarter of Fiscal Year 2011
Operating income was approximately $1.0 million for the first quarter of fiscal 2011 compared to
approximately $1.5 million for the first quarter of fiscal 2010. Adjusted operating income, which
excludes gift card breakage revenue and stock compensation expense, was approximately $1.1 million
for the first quarter of fiscal 2011 compared to approximately $1.5 million in the first quarter of
fiscal 2010. Earnings before interest, taxes, property and equipment depreciation expense and
amortization (EBITDA) was approximately $5.1 million for the first quarter of fiscal 2011
compared to approximately $5.9 million for the first quarter of fiscal 2010. Adjusted EBITDA,
which excludes gift card breakage revenue and stock compensation expense, was approximately $5.3
million for the first quarter of fiscal 2011 compared to approximately $5.8 million for the first
quarter of fiscal 2010.
Reconciliations of non-GAAP financial measures to comparable GAAP financial measures are included
in the tables following this section along with a discussion of why management believes these
measures provide meaningful information regarding the Companys performance.
Revenues. Total revenues for the first quarter decreased approximately $5.0 million, or 3.8%, to
$124.1 million compared to $129.1 million for the first quarter of fiscal 2010. As of April 30,
2011, we operated one less superstore, as compared to April 30, 2010, and operated one concept
store, Sun Adventure Sports, which opened during July 2010. The following is a summary of our
revenues results (dollars in thousands):
Three Months Ended April 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Percent | Percent | Decrease | ||||||||||||||||||||||
Revenues | Of Total | Revenues | Of Total | Dollar | Percent | |||||||||||||||||||
Merchandise Revenue |
$ | 104,463 | 84.2 | % | $ | 108,125 | 83.8 | % | $ | (3,662 | ) | -3.4 | % | |||||||||||
Rental Revenue |
19,528 | 15.7 | % | 20,779 | 16.1 | % | (1,251 | ) | -6.0 | % | ||||||||||||||
Gift Card Breakage
Revenue |
146 | 0.1 | % | 194 | 0.1 | % | (48 | ) | -24.7 | % | ||||||||||||||
Total Revenues |
$ | 124,137 | 100.0 | % | $ | 129,098 | 100.0 | % | $ | (4,961 | ) | -3.8 | % | |||||||||||
Comparable-store
revenues (Comp)
Total |
-3.4 | % | ||
Merchandise |
-2.9 | % | ||
Rental |
-5.8 | % |
Below is a summary of the Comp results for our major merchandise categories:
Three Months Ended April 30, | ||||||||
2011 | 2010 | |||||||
Trends |
11.9 | % | 8.9 | % | ||||
Hardback Café |
5.2 | % | 15.6 | % | ||||
Video Games |
2.5 | % | 25.2 | % | ||||
Music |
1.3 | % | -4.8 | % | ||||
Electronics |
-1.9 | % | 4.1 | % | ||||
Consumables |
-6.0 | % | 9.4 | % | ||||
Movies |
-6.5 | % | 11.1 | % | ||||
Books |
-9.1 | % | -1.2 | % |
Stores included in the Comps calculation are those stores that have been open for a minimum of 60
weeks. Also included are stores that were remodeled or relocated during the comparable period.
Sales via the internet and gift card breakage are not included, and closed stores are removed from
each comparable period for the purpose of calculating Comps.
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Trends Comps increased 11.9% for the quarter primarily driven by increased sales of new and used
comics, apparel, As Seen on TV products including Pillow Pets, and strong sales of shaped rubber
bands and collectible card
games, such as Magic: The Gathering. The increase in new and used comic sales is primarily due to
an expanded comic footprint in 126 stores. Key drivers in the apparel category included hats,
jewelry, and bags. Hardback Café Comps increased 5.2% due to increased sales of specialty café
drinks. Video Game Comps increased 2.5% primarily due to increased sales of video game consoles,
used video games for the Microsoft XBOX 360, Nintendo Wii, and Sony Playstation 3, new and used
video gaming accessories and new Microsoft XBOX 360 video games. These increases were partially
offset by lower sales of new Sony Playstation 3 and Nintendo Wii video games. Sales of new
Nintendo Wii games were impacted by low allocations of Nintendo first party titles. Music Comps
increased 1.3% for the quarter due to increased sales of new CDs partially offset by lower sales of
used CDs. Sales of new music, which have been in decline for several years, were up 4.6% for the
first quarter. Sales of new music were positively impacted by the fact that we are now able to
offer many new release CDs for less than $10. We have worked closely with vendors to negotiate
lower product costs which significantly mitigate the negative impact on gross margins resulting
from lower price points. Electronics Comps decreased 1.9% for the quarter resulting from lower
sales of Blu-ray players and recordable media, partially offset by increased sales of iPods and MP3
players and increased sales of PC Accessories. Sales of Blu-ray players were negatively impacted
by a lower average selling price during the current quarter as compared to the same period in the
prior year. Consumables Comps decreased 6.0% for the quarter primarily driven by lower sales of
fountain drinks and bottled drinks. Movies Comps decreased 6.5% for the quarter primarily due to
lower sales of new DVDs, partially offset by increased sales of new and used DVD boxed set and used
Blu-ray movies. Movie sales were negatively impacted by a 25% drop in box office value of movies
that came to Blu-ray and DVD during the first quarter as compared to the same period in the prior
year. Our top three selling movies during the current quarter generated approximately 54% less
revenue than the top three selling movies during the comparable period in the prior year. Books
Comps decreased 9.1% for the quarter primarily due to lower sales of new and used mass market
books, trade paperbacks and hardbacks. Sales of new books, which decreased 8.6% for the quarter,
were impacted by several books that were made into movies during the first quarter of fiscal 2010.
The movie tie-ins helped drive sales of related books. Some titles with movie tie-ins during the
first three months of fiscal 2010 included Rick Riordans Percy Jackson and the Olympians series,
and Dear John and The Last Song by Nicholas Sparks. There were no comparable strong movie tie-ins
during the current quarter. Sales of new books were also impacted by a weaker slate of new book
releases as compared to the same period in the prior year and the increasing popularity of
electronic book readers. One initiative we are currently working on to help address the increasing
popularity of electronic book readers is to begin selling electronic books via our website,
www.goHastings.com, by the end of the third quarter of fiscal 2011. Sales of used books, which
decreased 19.6% for the quarter, were also impacted by the weaker slate of new book release which
in turn led to a less favorable inventory of used titles. These decreases were partially offset by
increased sales of value books, which increased 8.7% for the period.
Rental Comps decreased 5.8% for the quarter, primarily due to fewer rentals of DVDs and books on CD
partially offset by increased rentals of games and Blu-ray movies. Rental Video Comps decreased
7.0% for the quarter and units rented decreased 9.0%. Rental Video Comps sales were negatively
impacted by fewer titles released in the $20 million to $80 million gross box office range, which
typically represent our best renters. Rental Video Game Comps increased 7.7%, and units rented
increased 2.8%. We are currently exiting the Book on CD category of our rental business.
Gross Profit Merchandise. For the first quarter, total merchandise gross profit dollars
decreased approximately $1.4 million, or 4.2%, to $32.3 million from $33.7 million for the same
period in the prior year, primarily due to lower revenues. As a percentage of total merchandise
revenue, merchandise gross profit decreased to 31.0% for the quarter compared to 31.2% for the same
period in the prior year, resulting primarily from increased costs to return products partially
offset by lower shrinkage expense. The decrease in shrinkage expense is a direct result of our
comprehensive store audit program that assesses store level execution and controls designed to
reduce shrink, with a strong focus on our high-shrinkage stores.
Gross Profit Rental. For the first quarter, total rental gross profit dollars decreased
approximately $0.9 million, or 6.9%, to $12.2 million from $13.1 million for the same period in the
prior year, primarily due to lower revenues. As a percentage of total rental revenue, rental gross
profit decreased to 62.7% for the quarter compared to 62.9% for the same period in the prior year.
Selling, General and Administrative Expenses (SG&A). As a percentage of total revenue, SG&A
remained consistent for the first quarter at 35.2%. SG&A decreased approximately $1.7 million
during the quarter, or 3.7%,
to $43.7 million compared to $45.4 million for the same quarter last year. The primary drivers of
the decrease in total SG&A included a decrease of approximately $0.8 million in store advertising
expense, a decrease of approximately $0.3 million in store labor costs, and a decrease of
approximately $0.2 million in depreciation expense.
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Interest Expense. For the first quarter, interest expense increased approximately $0.1 million, or
100%, to $0.2 million, compared to $0.1 million for the same period in the prior year, primarily as
a result of higher interest rates incurred under our Amended and Restated Loan and Security
Agreement partially offset by lower average debt levels outstanding during the quarter. The
average rate of interest charged for the quarter increased to 2.6% compared to 1.9% for the same
period in the prior year.
Income Tax Expense. During the three months ended April 30, 2010, the Company recorded a discrete
tax benefit of approximately $0.2 million related to amended state returns resulting from an
Internal Revenue Service audit of the Companys previously filed Federal tax returns. No discrete
tax items were recorded during the three months ended April 30, 2011. Primarily as a result of
this discrete tax benefit, the effective tax rate for the first quarter of fiscal 2011 increased to
47.1% compared to 28.3% for the first quarter of fiscal 2010.
Use of Non-GAAP Financial Measures
The Company is providing free cash flow, EBITDA, adjusted EBITDA, and adjusted operating income
(loss) as supplemental non-GAAP financial measures regarding the Companys operational performance.
The Company evaluates its historical and prospective financial performance, and its performance
relative to its competitors, by using such non-GAAP financial measures. Specifically, management
uses these items to further its own understanding of the Companys core operating performance,
which management believes represents the Companys performance in the ordinary, ongoing and
customary course of its operations. Therefore, management excludes from core operating performance
those items, such as those relating to restructuring, investing, stock-based compensation expense
and non-cash activities that management does not believe are reflective of such ordinary, ongoing
and customary activities.
The Company believes that providing this information to its investors, in addition to the
presentation of GAAP financial measures, allows investors to see the Companys financial results
through the eyes of management. The Company further believes that providing this information
allows investors to both better understand the Companys financial performance and to evaluate the
efficacy of the methodology and information used by management to evaluate and measure such
performance.
Free Cash Flow
Management defines free cash flow as net cash provided by operating activities for the period less
purchases of property, equipment and improvements during the period. Purchases of property,
equipment and improvements during the period are netted with any proceeds received from insurance
on casualty loss that are directly related to the reinvestment of new capital expenditures. The
following table reconciles net cash provided by operating activities, a GAAP financial measure, to
free cash flow, a non-GAAP financial measure (in thousands):
Three months ended April 30, | ||||||||
2011 | 2010 | |||||||
Net cash provided by operating activities |
$ | 7,377 | $ | 10,796 | ||||
Purchase of property, equipment and improvements, net |
(3,376 | ) | (2,260 | ) | ||||
Free cash flow |
$ | 4,001 | $ | 8,536 | ||||
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EBITDA and Adjusted EBITDA
EBITDA is defined as net income (loss) before interest expense (net), income tax expense (benefit),
property and equipment depreciation expense and amortization. Adjusted EBITDA, as presented
herein, is EBITDA excluding gift card breakage revenue, stock-based compensation expense and store
asset impairments. The following table
reconciles net income (loss), a GAAP financial measure, to EBITDA and adjusted EBITDA, non-GAAP
financial measures (in thousands):
Three months ended April 30, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 413 | $ | 1,018 | ||||
Adjusted for |
||||||||
Interest expense, net |
202 | 132 | ||||||
Income tax expense |
368 | 401 | ||||||
Property and equipment depreciation expense |
4,155 | 4,321 | ||||||
EBITDA |
5,138 | 5,872 | ||||||
Gift card breakage revenue |
(146 | ) | (194 | ) | ||||
Non-cash stock-based compensation |
302 | 143 | ||||||
Adjusted EBITDA |
$ | 5,294 | $ | 5,821 | ||||
Adjusted Operating Income (Loss)
Adjusted operating income (loss) is defined as operating income (loss) excluding gift card breakage
revenue, stock based compensation expense and store asset impairments. The following table
reconciles operating income (loss), a GAAP financial measure, to adjusted operating income (loss),
a non-GAAP financial measure (in thousands):
Three months ended April 30, | ||||||||
2011 | 2010 | |||||||
Operating income |
$ | 964 | $ | 1,531 | ||||
Adjusted for |
||||||||
Gift card breakage revenue |
(146 | ) | (194 | ) | ||||
Non-cash stock-based compensation |
302 | 143 | ||||||
Adjusted operating income |
$ | 1,120 | $ | 1,480 | ||||
Free cash flow, EBITDA, adjusted EBITDA, and adjusted operating income (loss) are considered
non-GAAP financial measures under the SECs Regulation G and therefore should not be considered in
isolation of, or as a substitute for, net income (loss), operating income (loss), cash flow from
operating activities, or any other measure of financial performance or liquidity presented in
accordance with GAAP. The financial measures of non-GAAP free cash flow, EBITDA, adjusted EBITDA,
and adjusted operating income (loss) may vary among other companies. Therefore, our free cash
flow, EBITDA, adjusted EBITDA, and adjusted operating income (loss) may not be comparable to
similarly titled measures used by other companies.
Liquidity and Capital Resources
We generate cash from operations from the sale of merchandise and the rental of products, most of
which is received in cash and cash equivalents. Our primary sources of working capital are cash
flow from operating activities including trade credit from vendors and borrowings under our
revolving credit facility, with the most significant source during the first quarters of fiscal
2011 and 2010 being cash flow from operating activities. Other than our principal capital
requirements arising from the purchasing, warehousing and merchandising of inventory and rental
products, opening new stores and expanding or reformatting existing stores and updating existing
and implementing new information systems technology, we have no anticipated material capital
commitments, except for the stock buyback programs discussed more fully in Item 2 of Part II of
this Quarterly Report on Form 10-Q. We believe our cash flow from operations and borrowings under
our revolving credit facility will be sufficient to fund our ongoing operations, new stores, store
expansions, and store reformations for the next twelve months.
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At April 30, 2011, total outstanding debt was approximately $26.4 million. We project our
outstanding debt level will be in the range of $23.0 million to $25.0 million by the end of fiscal
2011. At April 30, 2011, we had
approximately $61.9 million in excess availability, after the $10 million availability reserve,
under the Amended Agreement (as defined below).
Consolidated Cash Flows
Operating Activities. Net cash provided by operating activities totaled
approximately $7.4 million for the first quarter, compared to $10.8 million for the first
quarter of fiscal 2010. Net income for the quarter was approximately $0.4 million compared
to $1.0 million for the first quarter of the prior period. Merchandise inventories
decreased approximately $0.5 million for the current quarter, compared to an increase of
$2.1 million during the same period in fiscal 2010, primarily due to lower revenues during
the current period and a continued focus on inventory management. Trade accounts payable
increased $4.0 million for the current quarter compared to an increase of $12.1 million
during the same period in fiscal 2010, primarily due to the difference in inventory build
between the periods and variance in the timing of payments to vendors. Merchandise
inventories, net of trade accounts payable increased approximately $4.6 million for the
current three months compared to an increase of $10.0 million for the same period in the
prior year. Accrued expenses and other liabilities decreased approximately $31,000 during
the quarter compared to a decrease of $2.0 million during the same period in fiscal 2010
primarily due to the timing of payments of federal income taxes and sales taxes. For fiscal
2011, we estimate net cash provided by operations of approximately $25.0 to $27.0 million.
The expected increase from fiscal 2010 net cash provided by operations to estimated fiscal
2011 net cash provided by operations results primarily from projected changes in various
balance sheet accounts and a projected increase in net income for fiscal 2011, partially
offset by projected increases in the purchase of rental inventory during fiscal 2011.
Investing Activities. Net cash used in investing activities increased approximately
$1.1 million from $2.3 million for the three months ended April 30, 2010, to $3.4 million
for the three months ended April 30, 2011. This increase was primarily due to increased
expenditures related to a new store opened during the current quarter. For fiscal 2011, we
project capital expenditures to be approximately $16.1 million. The planned increase is
primarily due to increased expenditures related to our plans to open three stores, remodel
three stores and relocate two stores during fiscal 2011.
Financing Activities. Cash provided by or used in financing activities is primarily
associated with borrowings and payments made under our revolving credit facility (described
below under Capital Structure). For the three months ended April 30, 2011, cash used in
financing activities was approximately $4.1 million compared to cash used in financing
activities of $12.8 million for the three months ended April 30, 2010. For the current
three months, net repayments to our revolving credit facility were approximately $5.3
million compared to net repayments of approximately $11.7 million for same period in the
prior year. Changes in our cash overdraft position increased from a use of $0.2 million for
the three months ended April 30, 2010 to cash provided of $1.9 million for the three months
ended April 30, 2011, due to the timing of payments issued to vendors during the period.
The Company purchased approximately $0.7 million of treasury stock during the three months
ended April 30, 2011 compared to $1.0 million during the three months ended April 30, 2010.
On December 4, 2009, we entered into a stock transfer agreement with the Marmaduke Family Limited
Partnership (the Partnership). Under the stock transfer agreement, for a period of three years
following the death of Mr. John H. Marmaduke, the Companys President and Chief Executive Officer,
the Partnership may tender for purchase to the Company, and, if so tendered, the Company will be
required to purchase, the number of shares of the Companys common stock belonging to the
Partnership that equal an aggregate fair market value of $5.0 million. During this three year
period, the Partnership may elect to tender portions of such shares in various lots and parcels, at
any time and from time to time, and any tender shall not exhaust or limit the Partnerships right
to tender an additional amount of such shares, subject to the limitations set within the stock
transfer agreement. Under the stock transfer agreement, the Company is not obligated to purchase,
and the Partnership does not have the right to tender, any amount of such shares with an aggregate
fair market value in excess of $5.0 million. In the event that Mr. Marmaduke resigns as an officer
or director of the Company prior to his death, the Partnerships right to tender the shares to the
Company shall terminate. The stock transfer agreement shall terminate on the earlier of February
9, 2019, or four years after the death of Mr. Marmaduke. The Company is currently the beneficiary
of a $10 million
key-man life insurance policy on Mr. Marmaduke, a portion of the proceeds of which would be used to
complete any purchases of shares resulting from the stock transfer agreement.
18
Table of Contents
Capital Structure. On July 22, 2010, we entered into the Amended and Restated Loan and Security
Agreement (the Amended Agreement) with Bank of America, N.A., as agent, which amended and
restated our Loan and Security Agreement dated as of August 29, 2000, as otherwise amended (the
Prior Agreement). The Amended Agreement is substantially the same as the Prior Agreement,
extends the maturity date of the Prior Agreement from August 29, 2011 to July 22, 2014, and
provides that we may repurchase up to $10.0 million worth of our common stock. The Amended
Agreement also provides that we may repurchase additional shares of our common stock in the event
we meet certain criteria set forth in the Amended Agreement. The Amended Agreement prohibits the
payment of dividends, includes certain other debt and acquisition limitations and requires a
minimum availability of $10.0 million at all times. The Amended Agreement is secured by
substantially all of the assets of the Company and our subsidiary and is guaranteed by our
subsidiary.
The amount outstanding under the Amended Agreement is limited by a borrowing base predicated on the
sum of (a) 85% of Eligible Credit Card Receivables plus (b) (i) 85% multiplied by (ii) the
Appraised Inventory Liquidation Value multiplied by (iii) Eligible Inventory (net of Inventory
Reserves), less (c) Availability Reserves (each term as defined in the Amended Agreement), and is
limited to a ceiling of $100 million, less a $10 million availability reserve. The lender may
increase specifically defined reserves to reduce availability in the event of adverse changes in
our industry or our financial condition that are projected to impact the value of our assets
pledged as collateral. The lender must exercise reasonable judgment and act in good faith with
respect to any changes in the specifically defined reserves.
Interest under the Amended Agreement will accrue, at our election, at a Base Rate or Libor Rate,
plus, in each case, an Applicable Margin, which is determined by reference to the level of
Availability as defined in the Amended Agreement, with the Applicable Margin for Libor Rate loans
ranging from 2.00% to 2.75% and the Applicable Margin for Base Rate loans ranging from 1.00% to
1.75%. In addition, unused line fees ranging from 0.30% to 0.375% (determined by reference to the
level of usage under the Amended Agreement) are also payable on unused commitments.
At April 30, 2011, we had approximately $61.9 million in excess availability, after the $10 million
availability reserve, under the Amended Agreement. We expect to have approximately $60.0 million
to $63.0 million in excess availability, after the $10 million availability reserve and outstanding
letters of credit, at January 31, 2012. However, excess availability may be reduced in the future
as changes in the borrowing base occur or the lenders increase availability reserves. The average
rates of interest incurred for the three months ended April 30, 2011 and 2010 were 2.6% and 1.9%,
respectively. Deferred financing costs that were amortized into interest expense during the three
months ended April 30, 2011 are excluded from the calculation of the average rate of interest for
that period.
We utilize standby letters of credit to support certain insurance policies. The aggregate amount
of the letters of credit at April 30, 2011, was approximately $0.7 million, which reduces the
excess availability under the Amended Agreement.
At April 30, 2011, our minimum lease commitments for the remainder of fiscal 2011 were
approximately $18.1 million. Total existing minimum operating lease commitments for fiscal years
2011 through 2026 were approximately $164.2 million as of April 30, 2011.
Contractual obligations and off-balance sheet arrangements. We have contractual obligations
associated with ongoing business and financing activities, which will result in cash payments in
future periods. These obligations include long-term debt, operating leases and certain
revenue-sharing agreements. As of April 30, 2011, other than operating leases and standby letters
of credit, we had not entered into any off-balance sheet arrangements or third-party guarantees,
nor does our business ordinarily require us to do so. At April 30, 2011, there have been no
material changes in our contractual obligations or off-balance sheet arrangements from those
reported in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.
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Seasonality
As is the case with many retailers, a significant portion of our revenues, and an even greater
portion of our operating income, is generated in the fourth fiscal quarter, which includes the
holiday selling season. As a result, a substantial portion of our annual earnings has been, and
will continue to be, dependent on the results of the fourth quarter. Less than satisfactory net
sales for such period could have a material adverse effect on the Companys financial condition or
results of operations for the year and may not be sufficient to cover any losses that may have been
incurred in the first three quarters of the year. We experience reduced rental 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, video and video
game titles, as well as the popularity of electronics and trends merchandise, the cost of 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 our operations.
ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the ordinary course of our business, we are exposed to certain market risks, primarily changes
in interest rates. Our exposure to interest rate risk consists of variable rate debt based, at our
option, on the lenders Base Rate or LIBOR, plus a specified percentage. The annual impact on our
results of operations of a 100 basis point interest rate change on the April 30, 2011 outstanding
balance of the variable rate debt would be approximately $0.3 million. After an assessment of
these risks to our operations, we believe that the 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 our financial position, results of operations or cash flows for the next fiscal
year.
ITEM 4 | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We performed an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15
promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act) as of the end of
the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives, and, based upon the
forgoing evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were
effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide
reasonable assurance that the information required to be disclosed by us in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission and such
information is accumulated and communicated to management as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting
Management has implemented a process to monitor and assess both the design and operating
effectiveness of internal control over financial reporting. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
There has not been any change in our internal control over financial reporting during our fiscal
quarter ended April 30, 2011, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1 | LEGAL PROCEEDINGS. |
We are involved in various claims and legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not have a material
adverse effect on our financial position, results of operations, or cash flows.
ITEM 1A | RISK FACTORS. |
Our Annual Report on Form 10-K for the fiscal year ended January 31, 2011 includes a detailed
discussion of our risk factors. Since that time, there have been no material changes to our risk
factors.
ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
A summary of our purchases of shares of common stock for the three months ended April 30, 2011 is
as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Approximate dollar | ||||||||||||||||
Total number of | value of shares that | |||||||||||||||
Average | shares purchased | may yet be | ||||||||||||||
Total number | price | as part of publicly | purchased under | |||||||||||||
of shares | paid per | announced plans | the plans or | |||||||||||||
Period | purchased (1) | share | or programs | programs (2) | ||||||||||||
February 1, 2011
through February 28,
2011 |
| | | N/A | ||||||||||||
March 1, 2011 through
March 31, 2011 |
32,200 | 4.91 | 32,200 | N/A | ||||||||||||
April 1, 2011 through
April 30, 2011 |
97,200 | 5.10 | 97,200 | N/A | ||||||||||||
Total |
129,400 | $ | 5.05 | 129,400 | $ | 7,611,491 | ||||||||||
(1) | All shares were open-market purchases made under a repurchase plan publicly announced
in a press release dated September 28, 2001. Our Board of Directors initially authorized
the repurchase of up to $5.0 million of our common stock. To date, the Board of Directors
has approved the repurchase of up to an additional $32.5 million of our common stock. Each
such authorization to increase amounts was publicly announced in a press release. The
repurchases satisfied the conditions of the safe harbor of Rule 10b-18 under the Exchange
Act. |
|
(2) | A total of 4,808,040 shares have been purchased under the repurchase plan at a total
cost of approximately $29.9 million, or approximately $6.22 per share. |
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ITEM 6 | EXHIBITS. |
a. | The following exhibits are filed herewith or incorporated by reference as indicated as
required by Item 601 of Regulation S-K. Any exhibits designated by an asterisk are
management contracts and/or compensatory plans or arrangement required to be filed as
exhibits to this Quarterly Report on Form 10-Q. |
Exhibit | ||||||||
Number | Description of Documents | |||||||
3.1 | (1 | ) | Third Restated Articles of Incorporation of the Company. |
|||||
3.2 | (2 | ) | Amended and Restated Bylaws of the Company. |
|||||
4.1 | (3 | ) | Specimen of Certificate of Common Stock of the Company. |
|||||
4.2 | (1 | ) | Third Restated Articles of Incorporation of the Company (see 3.1 above). |
|||||
4.3 | (2 | ) | Amended and Restated Bylaws of the Company (see 3.2 above). |
|||||
31.1 | (4 | ) | Principal Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). |
|||||
31.2 | (4 | ) | Principal Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). |
|||||
32.1 | (4 | ) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Previously filed as an exhibit to the Companys Registration Statement on Form S-1, dated
March 18,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are
incorporated herein by reference. |
|
(2) | Previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 000-24381) filed on
January 17, 2008 and incorporated herein by reference. |
|
(3) | Previously filed as an exhibit to the Companys Registration Statement on Form S-1/A, dated
May 19,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are
incorporated herein by reference. |
|
(4) | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized:
HASTINGS ENTERTAINMENT, INC |
||||
Date: June 8, 2011 | /s/ Dan Crow | |||
Dan Crow | ||||
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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INDEX TO EXHIBITS
Exhibit | ||||||||
Number | Description of Documents | |||||||
3.1 | (1 | ) | Third Restated Articles of Incorporation of the Company. |
|||||
3.2 | (2 | ) | Amended and Restated Bylaws of the Company. |
|||||
4.1 | (3 | ) | Specimen of Certificate of Common Stock of the Company. |
|||||
4.2 | (1 | ) | Third Restated Articles of Incorporation of the Company (see 3.1 above). |
|||||
4.3 | (2 | ) | Amended and Restated Bylaws of the Company (see 3.2 above). |
|||||
31.1 | (4 | ) | Principal Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). |
|||||
31.2 | (4 | ) | Principal Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). |
|||||
32.1 | (4 | ) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Previously filed as an exhibit to the Companys Registration Statement on Form S-1, dated
March 18,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are
incorporated herein by reference. |
|
(2) | Previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 000-24381) filed on
January 17, 2008 and incorporated herein by reference. |
|
(3) | Previously filed as an exhibit to the Companys Registration Statement on Form S-1/A, dated
May 19,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are
incorporated herein by reference. |
|
(4) | Filed herewith. |
24