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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2012

OR

 

¨ 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(806) 351-2300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class

   Outstanding at April 30, 2012

Common Stock, $.01 par value per share

   8,208,947 shares

 

 

 


Table of Contents

HASTINGS ENTERTAINMENT, INC.

Form 10-Q

For the Quarterly Period Ended April 30, 2012

INDEX

 

     Page  

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements.

  

Consolidated Balance Sheets as of April 30, 2012 (Unaudited), and January 31, 2012

     3   

Unaudited Consolidated Statements of Earnings for the Three Months Ended April 30, 2012 and 2011

     4   

Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended April 30, 2012 and 2011

     5   

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2012 and 2011

     6   

Notes to the Unaudited Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     11   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     20   

Item 4. Controls and Procedures

     21   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     22   

Item 1A. Risk Factors

     22   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     22   

Item 6. Exhibits

     23   

SIGNATURES

     24   

INDEX TO EXHIBITS

     25   

 

2


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HASTINGS ENTERTAINMENT, INC.

Consolidated Balance Sheets

April 30, 2012 and January 31, 2012

(Dollars in thousands, except par value)

 

     April 30,
2012
    January 31,
2012
 
     (Unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 5,590      $ 4,172   

Merchandise inventories, net

     144,936        151,366   

Prepaid expenses and other current assets

     12,746        15,229   
  

 

 

   

 

 

 

Total current assets

     163,272        170,767   

Rental assets, net of accumulated depreciation of $19,573 and $20,978 at April 30, 2012 and January 31, 2012, respectively

     11,207        12,634   

Property, equipment and improvements, net of accumulated depreciation of $217,111 and $215,525 at April 30, 2012 and January 31, 2012, respectively

     37,201        39,449   

Intangible assets, net

     244        244   

Other assets

     2,347        2,380   
  

 

 

   

 

 

 

Total Assets

   $ 214,271      $ 225,474   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current liabilities:

    

Trade accounts payable

   $ 56,522      $ 51,268   

Accrued expenses and other current liabilities

     26,534        26,150   
  

 

 

   

 

 

 

Total current liabilities

     83,056        77,418   

Long term debt

     35,930        53,279   

Other liabilities

     8,355        8,719   

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 8,208,947 shares outstanding at April 30, 2012; 11,944,544 shares issued and 8,292,147 shares outstanding at January 31, 2012

     119        119   

Additional paid-in capital

     36,395        36,231   

Retained earnings

     71,843        71,010   

Accumulated other comprehensive income

     188        118   

Treasury stock, at cost 3,735,597 shares and 3,652,397 shares at April 30, 2012 and January 31, 2012, respectively

     (21,615     (21,420
  

 

 

   

 

 

 

Total Shareholders’ Equity

     86,930        86,058   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 214,271      $ 225,474   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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HASTINGS ENTERTAINMENT, INC.

Unaudited Consolidated Statements of Earnings

For the Three Months Ended April 30, 2012 and 2011

(Dollars in thousands, except per share amounts)

 

     Three Months Ended April 30,  
     2012     2011  

Merchandise revenue

   $ 99,519      $ 104,463   

Rental revenue

     15,826        19,528   

Gift card breakage revenue

     142        146   
  

 

 

   

 

 

 

Total revenues

     115,487        124,137   

Merchandise cost of revenue

     67,529        72,120   

Rental cost of revenue

     5,515        7,285   
  

 

 

   

 

 

 

Total cost of revenues

     73,044        79,405   
  

 

 

   

 

 

 

Gross profit

     42,443        44,732   

Selling, general and administrative expenses

     41,290        43,710   

Pre-opening expenses

     —          58   
  

 

 

   

 

 

 

Operating income

     1,153        964   

Other income (expense):

    

Interest expense

     (278     (202

Other, net

     24        19   
  

 

 

   

 

 

 

Income before income taxes

     899        781   

Income tax expense

     66        368   
  

 

 

   

 

 

 

Net income

   $ 833      $ 413   
  

 

 

   

 

 

 

Basic income per share

   $ 0.10      $ 0.05   
  

 

 

   

 

 

 

Diluted income per share

   $ 0.10      $ 0.05   
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic

     8,263        8,711   

Dilutive effect of stock awards

     10        211   
  

 

 

   

 

 

 

Diluted

     8,273        8,922   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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HASTINGS ENTERTAINMENT, INC.

Unaudited Consolidated Statements of Comprehensive Income

For the Three Months Ended April 30, 2012 and 2011

(Dollars in thousands, except per share data)

 

     Three months ended April 30,  
     2012     2011  

Net income

   $ 833      $ 413   

Other comprehensive income before income taxes

    

Unrealized gains in investments available for sale in Supplemental Executive Retirement Plan

     70        67   
  

 

 

   

 

 

 

Other comprehensive income, before income taxes

     70        67   

Income taxes related to components of other comprehensive income

     —          27   
  

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     70        40   
  

 

 

   

 

 

 

Comprehensive income

   $ 903      $ 453   
  

 

 

   

 

 

 

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, 2012 and 2011

(Dollars in thousands)

 

     Three Months Ended April 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 833      $ 413   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Rental asset depreciation expense

     1,668        2,889   

Purchases of rental assets

     (2,930     (5,869

Property, equipment and improvements depreciation expense

     3,781        4,155   

Deferred income taxes

     3        (456

Loss on rental assets lost, stolen and defective

     224        495   

Loss on disposal or impairment of property and equipment, excluding rental assets

     77        34   

Non-cash stock-based compensation

     164        302   

Changes in operating assets and liabilities:

    

Merchandise inventories, net

     8,894        519   

Prepaid expenses and other current assets

     2,483        621   

Trade accounts payable

     2,309        4,034   

Accrued expenses and other current liabilities

     384        (31

Other assets and liabilities, net

     (265     271   
  

 

 

   

 

 

 

Net cash provided by operating activities

     17,625        7,377   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, equipment and improvements

     (1,609     (3,376
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,609     (3,376
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under revolving credit facility

     98,194        122,754   

Repayments under revolving credit facility

     (115,543     (128,089

Purchase of treasury stock

     (194     (656

Change in cash overdraft

     2,945        1,881   
  

 

 

   

 

 

 

Net cash used in financing activities

     (14,598     (4,110
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     1,418        (109

Cash and cash equivalents at beginning of period

     4,172        6,149   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 5,590      $ 6,040   
  

 

 

   

 

 

 

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, 2012.

The balance sheet at January 31, 2012 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, 2012.

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, 2013 is referred to as fiscal year 2012.

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 13 to the Audited Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

For the three months ended April 30, 2012 and 2011, we recognized approximately $0.2 million and $0.3 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, 2012, we had 383,821 shares available to grant as stock-based compensation awards under our various stock incentive plans.

3. Store Closing Reserve

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

Amounts in “Accrued expenses and other current liabilities” and “Other liabilities” at April 30, 2012 included accruals for the net present value of future minimum lease payments, net of estimated sublease income, attributable to closed or relocated stores. Expenses related to store closings are included in SG&A expenses in the consolidated statement of operations. There were no accruals for closed stores as of April 30, 2011.

 

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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)

 

The following table provides a roll-forward of our store closing reserves:

 

     Store  Closing
Reserve
 

Balance at January 31, 2012

   $ 2,558   

Additions to provision

     —     

Changes in estimates

     39   

Cash outlay, net

     (192
  

 

 

 

Balance at April 30, 2012

   $ 2,405   
  

 

 

 

4. Long-term Debt

On July 22, 2010, we entered into the Amended and Restated Loan and Security 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”), and on July 21, 2011, we entered into an amendment (the “First Amendment”) to the Amended Agreement with Bank of America, N.A (collectively, the “Amended Agreement”). The First Amendment increased the revolving credit facility from $100 million to $115 million, increased our borrowing base, lowered our interest rates, and allowed for the payment of dividends, which was previously prohibited under the Amended 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 includes certain debt and acquisition limitations and requires a minimum availability of 10% of the lesser of (a) the Borrowing Base, or (b) the Revolving Credit Ceiling, provided however that we must also maintain Availability (each term as defined in the Amended Agreement) that is greater than or equal to $10 million at all times. Our obligations under the Amended Agreement are secured by a pledge of substantially all of the assets of the Company and our subsidiary and are 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) either (i) at all times during the year, other than those stated in (ii), 90% of the liquidation value of eligible inventory or (ii) from September 1st through and including December 27th of each year, 92.5% of the liquidation value of eligible inventory, less (c) Availability Reserves (each term as defined in the Amended Agreement), and is limited to a ceiling of $115 million, less a minimum availability reserve that is greater than or equal to 10% of the lesser of (a) the Borrowing Base, or (b) the Revolving Credit Ceiling, provided however that we must also maintain Availability that is greater than or equal to $10 million at all times. 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 2.50% and the Applicable Margin for Base Rate loans ranging from 1.00% to 1.50%. 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, 2012, was approximately $0.7 million, which reduces the excess availability under the Amended Agreement.

 

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Table of Contents

Hastings Entertainment, Inc

Notes to Unaudited Consolidated Financial Statements

(Tabular amounts in thousands, except per share data or unless otherwise noted)

 

At April 30, 2012, we had approximately $60.1 million in excess availability, after the availability reserve, under the Amended Agreement. The average rates of interest incurred for the three months ended April 30, 2012 and 2011 were 2.5% and 2.6%, respectively. Deferred financing costs that were amortized into interest expense during the three months ended April 30, 2012 and 2011 are excluded from the calculation of the average rate of interest for each respective period.

5. Income per Share

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

 

     Three Months Ended April 30,  
     2012      2011  

Net income

   $ 833       $ 413   
  

 

 

    

 

 

 

Average shares outstanding:

     

Basic

     8,263         8,711   

Effect of stock awards

     10         211   
  

 

 

    

 

 

 

Diluted

     8,273         8,922   
  

 

 

    

 

 

 

Income per share:

     

Basic

   $ 0.10       $ 0.05   
  

 

 

    

 

 

 

Diluted

   $ 0.10       $ 0.05   
  

 

 

    

 

 

 

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,  
     2012      2011  

Shares of common stock underlying options

     540         419   

Exercise price range per share

   $ 3.25 to $9.67       $ 4.25 to $8.70   

6. 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.

 

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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)

 

At April 30, 2012 and January 31, 2012, we had approximately $1.7 million and $1.6 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, 2012 and January 31, 2012, due to the instrument bearing interest at variable rates that are comparable to what is currently available to us. We entered into the First Amendment with Bank of America on July 21, 2011, at which time our current interest rates were determined. See Note 4 on Debt for a more detailed discussion of our bank credit agreement.

7. Income Taxes

The effective tax rate for the first quarter of fiscal 2012 was 7.3% primarily due to Texas state income tax, which is based primarily on gross margin. During the fourth quarter of fiscal 2011 we established a valuation allowance. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we considered all available positive and negative evidence, including our ability to carry back operating losses to prior periods, projected future taxable income, tax planning strategies and the reversal of deferred tax liabilities. Based on this analysis, we determined that it was more likely than not that our deferred tax assets will not be realized and continue to believe that it is more likely than not that these assets will not be realized. As such, we evaluated and increased the valuation allowance to approximately $8.9 million at April 30, 2012. Our effective tax rate is significantly lower than statutory rates due to the valuation allowance. We will reassess the valuation allowance quarterly, and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.

8. 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.

9. Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-04 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company adopted the new ASU 2011-04 disclosure requirements in the first quarter of fiscal 2012 with no material impact on the Company's results of operation and financial condition.

 

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ITEM 2 – MANAGEMENT’S 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 opinions about future operating results are forward-looking statements. Such statements are based upon our management’s 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, 2012, we operated 138 superstores principally in medium-sized markets located in 19 states, primarily in the Western and Midwestern United States. We also operate three concept stores, Sun Adventure Sports, located in Amarillo, Texas and Lubbock, Texas, and TRADESMART, located in Littleton, Colorado.

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, 2013 is referred to as fiscal 2012.

 

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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 $15. 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 (loss), we make certain estimates and judgments in the calculation of the tax provision 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. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider all available positive and negative evidence, including our ability to carry back operating losses to prior periods, projected future taxable income, tax planning strategies and the reversal of deferred tax liabilities.

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 management’s 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 management’s 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,

 
     2012     2011  

Merchandise revenue

     86.2     84.2

Rental revenue

     13.7        15.7   

Gift card breakage revenue

     0.1        0.1   
  

 

 

   

 

 

 

Total revenues

     100.0        100.0   

Merchandise cost of revenue

     67.9        69.0   

Rental cost of revenue

     34.8        37.3   
  

 

 

   

 

 

 

Total cost of revenues

     63.2        64.0   
  

 

 

   

 

 

 

Gross profit

     36.8        36.0   

Selling, general and administrative expenses

     35.8        35.2   
  

 

 

   

 

 

 

Operating income

     1.0        0.8   

Other income (expense):

    

Interest expense

     (0.2     (0.2

Other, net

     —          —     
  

 

 

   

 

 

 

Income before income taxes

     0.8        0.6   

Income tax expense

     0.1        0.3   
  

 

 

   

 

 

 

Net income

     0.7     0.3
  

 

 

   

 

 

 

Summary of Superstore Activity (1)

 

    

Three Months Ended

April 30,

    Year Ended
January 31,
 
     2012     2011     2012  

Beginning number of stores

     140        146        146   

Openings

     —          1        1   

Closings

     (2     (1     (7
  

 

 

   

 

 

   

 

 

 

Ending number of stores

     138        146        140   
  

 

 

   

 

 

   

 

 

 

 

(1) As of April 30, 2012, we operated three concept stores, including two Sun Adventure Sports and one TRADESMART, which were not included in the summary of superstore activity. TRADESMART was opened August 2011. Our two Sun Adventure Sports stores were opened June 2010 and October 2011.

 

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Financial Results for the First Quarter of Fiscal Year 2012

Revenues. Total revenues for the first quarter decreased approximately $8.6 million, or 7.0%, to $115.5 million compared to $124.1 million for the first quarter of fiscal 2011. As of April 30, 2012, we operated 8 less superstores, as compared to April 30, 2011. In addition to our superstores, we operated two additional concept stores, TRADESMART (Littleton) and Sun Adventures Sports (Lubbock), as compared to April 30, 2011. The following is a summary of our revenues results (dollars in thousands):

 

     Three Months Ended April 30,              
     2012     2011     Decrease  
     Revenues      Percent
Of Total
    Revenues      Percent
Of Total
    Dollar     Percent  

Merchandise Revenue

   $ 99,519         86.2   $ 104,463         84.2   $ (4,944     -4.7

Rental Revenue

     15,826         13.7     19,528         15.7     (3,702     -19.0

Gift Card Breakage Revenue

     142         0.1     146         0.1     (4     -2.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 115,487         100.0   $ 124,137         100.0   $ (8,650     -7.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comparable-store revenues (“Comp”)

 

Total

     -6.3

Merchandise

     -4.3

Rental

     -16.5

Below is a summary of the Comp results for our major merchandise categories:

 

      Three Months Ended April 30,  
     2012     2011  

Electronics

     13.1     -1.9

Trends

     12.7     11.9

Hardback Café

     6.8     5.2

Consumables

     -0.5     -6.0

Books

     -0.8     -9.1

Movies

     -3.7     -6.5

Music

     -9.4     1.3

Games

     -21.3     2.5

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. Gift card breakage revenues are not included, and closed stores are removed from each comparable period for the purpose of calculating Comps.

Electronics Comps increased 13.1% for the quarter, resulting primarily from increased sales of headphones and MP3 and phone accessories, along with strong sales of new Apple iPods. These sales were partially offset by a decrease in sales of refurbished Apple iPads. Trends Comps increased 12.7% for the quarter primarily due to increased sales of apparel and accessories, novelty items, and action figures. Key drivers in the apparel and accessories category included licensed apparel, jewelry and t-shirts. Key drivers in the novelty category included Tween merchandise, merchandise associated with movies and television shows, and barware. Hardback Café Comps increased 6.8% for the quarter, primarily due to increased sales of blended and iced specialty café drinks. Consumable Comps decreased 0.5% for the quarter, primarily due to lower sales of assorted candies and bottled drinks. Books Comps decreased 0.8% for the quarter, primarily due to a weaker new release schedule for new books, primarily mass market and trade paperbacks partially offset by an increase in sales of used books and sales of the Nextbook Premium 7 e-reader tablet and related accessories. We started selling the Nextbook Premium 7, in stores and online at www.goHastings.com, during November 2011. Book Comps, excluding sales of the Nextbook Premium 7 and related accessories, decreased 2.2 % for the quarter. Movie Comps decreased 3.7% for the quarter due to lower sales of new and used DVDs, along with DVD boxed sets, partially offset by an increase in sales of new and used Blu-ray movies. Music Comps decreased 9.4% during the quarter, primarily resulting from lower sales of new and used CDs. The decrease in sales of new and used CDs resulted primarily from a shift in sales to lower priced promotional product, along with a weaker slate of new release music during the current quarter. Video Game Comps decreased 21.3% for the quarter primarily resulting from lower sales of new video game consoles, new gaming accessories and new video games. Sales in the video game industry, as a whole, are down significantly due to the lack of new game releases and consoles.

 

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Rental Comps decreased 16.5% during the quarter, primarily due to fewer rentals of DVDs and video games, partially offset by an increase in rentals of Blu-ray movies. Rental Video Comps decreased 15.4% for the quarter and were negatively impacted by a continued lower quality of new releases during the current quarter and by competitor rental kiosks and subscription-based rental services. Rental Video Game Comps decreased 24.6%.

Gross Profit – Merchandise. For the first quarter, total merchandise gross profit dollars decreased approximately $0.3 million, or 0.9%, to $32.0 million from $32.3 million for the same period in the prior year, primarily due to a decrease in revenue partially offset by an increase in margin rates. As a percentage of total merchandise revenue, merchandise gross profit increased to 32.1% for the quarter compared to 31.0% for the same period in the prior year. The increase in gross profit rate resulted primarily from a shift in mix of revenues by category as compared to the same quarter in the prior year, lower costs to return products to vendors and lower distribution center costs partially offset by increased freight expense.

Gross Profit – Rental. For the first quarter, total rental gross profit dollars decreased approximately $1.9 million, or 15.6%, to $10.3 million from $12.2 million for the same period in the prior year, primarily due to a decrease in revenue. As a percentage of total rental revenue, rental gross profit increased to 65.2% for the quarter compared to 62.7% for the same period in the prior year, resulting primarily from lower depreciation and shrinkage expense. Depreciation is a function of rental purchases which were significantly lower for the first quarter of fiscal 2012 than the same quarter in the last year due to lower anticipated rental revenues.

Selling, General and Administrative Expenses (“SG&A”). As a percentage of total revenue, SG&A increased slightly for the first quarter to 35.8% from 35.2% for the same quarter in the prior year, primarily due to deleveraging resulting from lower revenues. SG&A decreased approximately $2.4 million during the quarter, or 5.5%, to $41.3 million compared to $43.7 million for the same quarter last year. The decrease results primarily from a decrease of approximately $1.6 million in store labor costs and a decrease of approximately $0.7 million in occupancy expense including depreciation. The decrease in occupancy expense and to a certain extent the decrease in store labor costs are primarily a result of operating eight fewer superstores this quarter compared to the prior year.

Interest Expense. For the first quarter, interest expense increased approximately $0.1 million to $0.3 million, compared to $0.2 million for the same period in the prior year, primarily as a result of higher average debt levels outstanding during the quarter. The average rate of interest charged for the quarter decreased to 2.5% compared to 2.6% for the same period in the prior year.

Income Tax Expense. The effective tax rate for the quarter was 7.3% primarily due to Texas state income tax, which is based primarily on gross margin. During the fourth quarter of fiscal 2011 we established a valuation allowance. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we considered all available positive and negative evidence, including our ability to carry back operating losses to prior periods, projected future taxable income, tax planning strategies and the reversal of deferred tax liabilities. Based on this analysis, we determined that it was more likely than not that our deferred tax assets will not be realized and continue to believe that it is more likely than not that these assets will not be realized. As such, we evaluated and increased the valuation allowance to approximately $8.9 million at April 30, 2012. Our effective tax rate is significantly lower than statutory rates due to the valuation allowance. We will reassess the valuation allowance quarterly, and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.

 

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Store Closures

During the first quarter, we closed two underperforming stores whose leases expired during the first quarter. Consequently, no material lease impairment charges were recorded during the first quarter of fiscal 2012.

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 Company’s 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 Company’s core operating performance, which management believes represents the Company’s 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 Company’s financial results “through the eyes” of management. The Company further believes that providing this information allows investors to both better understand the Company’s 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,  
     2012     2011  

Net cash provided by operating activities

   $ 17,625      $ 7,377   

Purchase of property, equipment and improvements, net

     (1,609     (3,376
  

 

 

   

 

 

 

Free cash flow

   $ 16,016      $ 4,001   
  

 

 

   

 

 

 

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,  
     2012     2011  

Net income

   $ 833      $ 413   

Adjusted for

    

Interest expense, net

     278        202   

Income tax expense

     66        368   

Property and equipment depreciation expense

     3,781        4,155   
  

 

 

   

 

 

 

EBITDA

     4,958        5,138   

Gift card breakage revenue

     (142     (146

Non-cash stock-based compensation

     164        302   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 4,980      $ 5,294   
  

 

 

   

 

 

 

 

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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 2012 and 2011 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, store expansions, and store reformations for the next twelve months.

At April 30, 2012, total outstanding debt was approximately $35.9 million. We project our outstanding debt level will be in the range of $51.0 million to $53.0 million by the end of fiscal 2012. At April 30, 2012, we had approximately $60.1 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 $17.6 million for the three months ended April 30, 2012, compared to cash provided by operating activities of $7.4 million for the three months ended April 30, 2011. Net income for the current quarter was approximately $0.8 million compared to $0.4 million for same period in fiscal 2011. Merchandise inventories decreased approximately $8.9 million for the current quarter, compared to $0.5 million during the same period in fiscal 2011 primarily due to a reduction in inventory purchases in anticipation of lower revenues. Trade accounts payable increased $2.3 million for the current quarter compared to an increase of $4.0 million during the same period in fiscal 2011. Merchandise inventories, net of trade accounts payable, decreased approximately $11.2 million for the current quarter compared to an decrease of $4.6 million for the same quarter in the prior year primarily due to the higher decrease in merchandise inventories in the current period and differences of timing of payments to vendors surrounding the holiday purchases in the current year compared to the prior year. For fiscal 2012, we estimate net cash provided by operations of approximately $7.0 to $9.0 million as compared to a net use of cash of approximately $4.5 million in fiscal 2011. The expected increase from fiscal 2011 net cash used in operations to estimated fiscal 2012 net cash provided by operations results primarily from projected changes in various balance sheet accounts, primarily lower inventories and a projected decrease in net loss for fiscal 2012.

Investing Activities. Net cash used in investing activities decreased approximately $1.8 million from $3.4 million for the three months ended April 30, 2011, to $1.6 million for the three months ended April 30, 2012. This decrease was primarily due to decreased expenditures relating to new stores and remodels. For fiscal 2012, we project capital expenditures to be approximately $9.4 million. The planned decrease is primarily due to decreased expenditures related to the opening of new stores and relocation of existing stores.

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, 2012, cash used in financing activities was approximately $14.6 million compared to $4.1 million for the three months ended April 30, 2011. For the current three months, net repayments to our revolving credit facility were approximately $17.3 million compared to net repayments of approximately $5.3 million for same quarter in the prior year. Changes in our cash overdraft position increased from cash provided of approximately $1.9 million for the three months ended April 30, 2011 to cash provided of $2.9 million for the three months ended April 30, 2012, due to the timing of payments issued to vendors during the period. The Company purchased approximately $0.2 million of treasury stock during the three months ended April 30, 2012 compared to $0.7 million during the three months ended April 30, 2011.

 

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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 Company’s 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 Company’s 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 Partnership’s 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 Partnership’s 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.

Capital Structure. On July 22, 2010, we entered into the Amended and Restated Loan and Security Agreement (as amended, modified or otherwise supplemented from time to time, 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”), and on July 21, 2011, we entered into an amendment (the “First Amendment”) to the Amended Agreement with Bank of America, N.A (collectively, the “Amended Agreement”). The First Amendment increased the revolving credit facility from $100 million to $115 million, increased our borrowing base, lowered our interest rates, and allowed for the payment of dividends, which was previously prohibited under the Amended 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 includes certain debt and acquisition limitations and requires a minimum availability of 10% of the lesser of (a) the Borrowing Base, and (b) the Revolving Credit Ceiling, provided however that we must also maintain Availability that is greater than or equal to $10 million at all times. Our obligations under the Amended Agreement are secured by a pledge of substantially all of the assets of the Company and our subsidiary and are 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) either (i) at all times during the year, other than those stated in (ii), 90% of the liquidation value of eligible inventory or (ii) from September 1st through and including December 27th of each year, 92.5% of the liquidation value of eligible inventory, less (c) Availability Reserves (each term as defined in the Amended Agreement), and is limited to a ceiling of $115 million, less a minimum availability reserve that is greater than or equal to 10% of the lesser of (a) the Borrowing Base, and (b) the Revolving Credit Ceiling, provided however that we must also maintain Availability that is greater than or equal to $10 million at all times. 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 2.50% and the Applicable Margin for Base Rate loans ranging from 1.00% to 1.50%. 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.

 

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Table of Contents

At April 30, 2012, we had approximately $60.1 million in excess availability, after the availability reserve, under the Amended Agreement. We expect to have approximately $50.0 million to $52.0 million in excess availability, after the availability reserve and outstanding letters of credit, at January 31, 2013. 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, 2012 and 2011 were 2.5% and 2.6%, respectively. Deferred financing costs that were amortized into interest expense during the three months ended April 30, 2012 and 2011 are excluded from the calculation of the average rate of interest for each respective period.

We utilize standby letters of credit to support certain insurance policies. The aggregate amount of the letters of credit at April 30, 2012, was approximately $0.7 million, which reduces the excess availability under the Amended Agreement.

At April 30, 2012, our minimum lease commitments for the remainder of fiscal 2012 were approximately $17.7 million. Total existing minimum operating lease commitments for fiscal years 2012 through 2027 were approximately $143.4 million as of April 30, 2012.

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, 2012, 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, 2012, 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, 2012.

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 Company’s 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 and 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 lender’s 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, 2012 outstanding balance of the variable rate debt would be approximately $0.4 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.

 

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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, 2012, 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, 2012 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, 2012 is as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total number
of shares
purchased (1)
     Average
price
paid per
share
     Total number of
shares purchased
as part of publicly
announced plans
or programs
     Approximate dollar
value of shares that
may yet be
purchased under
the plans or
programs (2)
 

February 1, 2012 through February 29, 2012

     —           —           —           N/A   

March 1, 2012 through March 31, 2012

     50,400         2.33         50,400         N/A   

April 1, 2012 through April 30, 2012

     32,800         2.33         32,800         N/A   
  

 

 

    

 

 

    

 

 

    

Total

     83,200       $ 2.33         83,200       $ 6,094,343   
  

 

 

    

 

 

    

 

 

    

 

  (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 5,426,949 shares have been purchased under the repurchase plan at a total cost of approximately $31.4 million, or approximately $5.79 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.
101.INS    (5)    XBRL Instance Document
101.SCH    (5)    XBRL Taxonomy Extension Schema
101.CAL    (5)    XBRL Taxonomy Extension Calculation Linkbase
101.LAB    (5)    XBRL Taxonomy Extension Label Linkbase
101.PRE    (5)    XBRL Taxonomy Extension Presentation Linkbase

 

(1) Previously filed as an exhibit to the Company’s 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 Company’s 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 Company’s 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.
(5) In accordance with Regulation S-T, the XBRL-related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

 

      HASTINGS ENTERTAINMENT, INC
Date: June 6, 2012       /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.
101.INS    (5)    XBRL Instance Document
101.SCH    (5)    XBRL Taxonomy Extension Schema
101.CAL    (5)    XBRL Taxonomy Extension Calculation Linkbase
101.LAB    (5)    XBRL Taxonomy Extension Label Linkbase
101.PRE    (5)    XBRL Taxonomy Extension Presentation Linkbase

 

(1) Previously filed as an exhibit to the Company’s 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 Company’s 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 Company’s 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.
(5) In accordance with Regulation S-T, the XBRL-related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”

 

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