-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rcya5xf8hTAFMHAQlspDw5mn+8g61D/kqOwAX7K6ed8xznpx16rC5/30BbxaYOuo RRKHEp+Ba3vrQ2yYzZZGkw== 0000950134-00-010694.txt : 20001225 0000950134-00-010694.hdr.sgml : 20001225 ACCESSION NUMBER: 0000950134-00-010694 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20001222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HASTINGS ENTERTAINMENT INC CENTRAL INDEX KEY: 0001054579 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 751386375 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-24381 FILM NUMBER: 794570 BUSINESS ADDRESS: STREET 1: 3601 PLANS BLVD STREET 2: SUITE 1 CITY: AMARILLO STATE: TX ZIP: 79102 BUSINESS PHONE: 8063512300 MAIL ADDRESS: STREET 1: P O BOX 35350 CITY: AMARILLO STATE: TX ZIP: 79120-5350 10-Q/A 1 d82817ae10-qa.txt AMENDMENT TO FORM 10-Q QUARTER END 7/31/00 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q/A (Mark One) (X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACTION OF 1934 For the transition period from __________________ to __________________ COMMISSION FILE NUMBER 000-24381 HASTINGS ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter)
TEXAS 75-1386375 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
3601 PLAINS BOULEVARD, AMARILLO, TEXAS 79102 (Address of principal executive offices) (Zip Code) (806) 351-2300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Number of shares outstanding of the registrant's common stock, as of September 7, 2000:
Class Shares Outstanding - -------------------------------------- ------------------ Common Stock, $.01 par value per share 11,642,644
2 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 31, 2000 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of July 31, 2000 (Unaudited) and January 31, 2000 3 Unaudited Consolidated Statements of Operations for the Three Months and Six Months Ended July 31, 2000 and 1999 4 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2000 and 1999 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 19 Item 3. Defaults Upon Senior Securities 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURE PAGE 21 INDEX TO EXHIBITS 22
2 3 PART I ITEM 1 - FINANCIAL STATEMENTS HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Balance Sheets July 31, 2000 and January 31, 2000 (Dollars in thousands, except par value)
JULY 31, JANUARY 31, 2000 2000 ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash $ 1,336 $ 7,026 Merchandise inventories, net 125,211 152,065 Income taxes receivable 7,730 6,272 Deferred income taxes -- 656 Other current assets 4,570 4,968 --------- --------- Total current assets 138,847 170,987 Property and equipment, net of accumulated depreciation of $112,283 and $112,730, respectively 68,377 73,242 Deferred income taxes 4,161 3,026 Other assets 581 678 --------- --------- $ 211,966 $ 247,933 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities on long-term debt $ 140 $ 5,372 Trade accounts payable 51,807 66,568 Accrued expenses and other current liabilities 29,663 31,752 Deferred income taxes 232 -- --------- --------- Total current liabilities 81,842 103,692 Long term debt, excluding current maturities 38,237 48,888 Other liabilities 4,503 5,262 Shareholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 75,000,000 shares authorized; 11,736,923 shares issued; 11,642,644 and 11,623,962 shares outstanding at July 31, 2000 and January 31, 2000, respectively 117 117 Additional paid-in capital 37,250 37,402 Retained earnings 51,199 53,951 Treasury stock, at cost (1,182) (1,379) --------- --------- 87,384 90,091 Commitments and contingencies -- -- --------- --------- $ 211,966 $ 247,933 ========= =========
See accompanying notes to unaudited consolidated financial statements. 3 4 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations Three Months and Six Months ended July 31, 2000 and 1999 (In thousands, except per share data)
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31, --------------------------- ------------------------ 2000 1999 2000 1999 ----------- ---------- --------- ---------- Merchandise revenue $ 85,363 $ 82,035 $ 173,495 $ 162,854 Rental video revenue 21,780 20,403 44,143 40,163 --------- --------- --------- --------- Total revenues 107,143 102,438 217,638 203,017 Merchandise cost of revenue 61,399 58,061 123,211 113,844 Rental video cost of revenue 9,472 7,319 17,742 12,736 --------- --------- --------- --------- Total cost of revenues 70,871 65,380 140,953 126,580 --------- --------- --------- --------- Gross profit 36,272 37,058 76,685 76,437 Selling, general and administrative expenses 39,140 34,152 79,376 68,283 Pre-opening expenses -- 538 3 717 --------- --------- --------- --------- Operating income (loss) (2,868) 2,368 (2,694) 7,437 Other income (expense): Interest expense (889) (955) (1,850) (1,777) Other, net 65 59 106 95 --------- --------- --------- --------- Income (loss) before income taxes (3,692) 1,472 (4,438) 5,755 Income tax expense (benefit) (1,402) 606 (1,686) 2,191 --------- --------- --------- --------- Net income (loss) $ (2,290) $ 866 $ (2,752) $ 3,564 ========= ========= ========= ========= Basic income (loss) per share $ (0.20) $ 0.07 $ (0.24) $ 0.31 ========= ========= ========= ========= Diluted income (loss) per share $ (0.20) $ 0.07 $ (0.24) $ 0.30 ========= ========= ========= ========= Weighted average number of common shares outstanding--basic 11,643 11,626 11,636 11,613 Dilutive effect of stock options -- 230 -- 188 --------- --------- --------- --------- Weighted average number of common shares outstanding--diluted 11,643 11,856 11,636 11,801 ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements. 4 5 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows Three Months and Six Months Ended July 31, 2000 and 1999 (Dollars in thousands)
SIX MONTHS ENDED JULY 31, ------------------------- 2000 1999 ---------- --------- Cash flows from operating activities: Net income (loss) $ (2,752) $ 3,564 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 16,083 13,459 Loss on rental videos lost, stolen and defective 822 3,484 Loss on disposal of non-rental video assets 21 234 Deferred income tax (247) 1,187 Non cash compensation 46 36 Changes in operating assets and liabilities: Merchandise inventory 26,854 6,794 Other current assets 398 (1,327) Trade accounts payable and accrued expenses (16,850) (15,512) Income taxes receivable (1,458) 1,771 Other assets and liabilities, net (664) 20 --------- --------- Net cash provided by operating activities 22,253 13,710 --------- --------- Cash flows from investing activities: Purchases of property and equipment (12,060) (27,241) --------- --------- Net cash used in investing activities (12,060) (27,241) --------- --------- Cash flows from financing activities: Borrowings under revolving credit facility 86,867 118,750 Repayments under revolving credit facility (97,567) (101,750) Payments under long-term debt and capital lease obligations (5,183) (5,112) Purchase of treasury stock 68 Additional Paid in Capital -- (17) --------- --------- Net cash provided by (used in) financing activities (15,883) 11,939 --------- --------- Net decrease in cash and cash equivalents (5,690) (1,592) Cash at beginning of period 7,026 5,394 --------- --------- Cash and cash equivalents at end of period $ 1,336 $ 3,802 ========= =========
See accompanying notes to unaudited consolidated financial statements. 5 6 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements July 31, 2000 and 1999 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Hastings Entertainment, Inc. and its subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions in Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations of the Securities and Exchange Commission. All adjustments, consisting only of normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods. The results of operations for such interim periods are not necessarily indicative of the results which may be expected for a full year. The unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year 1999. The results for the three month and six month periods ended July 31, 1999 have been restated as disclosed in the Company's annual report on Form 10-K for fiscal year 1999. The Company's fiscal year ends on January 31 and is identified as the fiscal year for the immediately preceding calendar year. For example, the fiscal year that will end on January 31, 2001 is referred to as fiscal 2000. Certain prior-year amounts have been reclassified to conform to the presentation used for the current year. 2. CONSOLIDATION POLICY The unaudited consolidated financial statements present the results of Hastings Entertainment, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. 3. STORE CLOSING RESERVES In the fourth quarter of fiscal 1999, the Company recorded charges related to the closing of five stores, all of which were closed in the first quarter of 2000. The following table provides a rollforward of reserves that were established for these charges. (dollars in thousands)
ADDITIONS CHARGED TO JANUARY 31, 2000 COST AND EXPENSE CASH OUTLAYS JULY 31, 2000 ---------------- -------------------- ------------ ------------- Future lease payments (1) $ 2,500 $ 301 $ (321) $ 2,480 Other costs 300 -- (300) -- ------- ------- ------- ------- $ 2,800 $ 301 $ (621) $ 2,480 ======= ======= ======= =======
(1) Reserve balances are included as a component of accrued expenses and other current liabilities and other liabilities. In connection with the store closings, the Company established a reserve for the net present value of future minimum lease payments. Costs are being charged against the reserve as incurred and the interest component related to lease payments is recorded as rent expense. In the second quarter, $0.3 million in lease payments were charged against the reserve. Payments during the next five years that are to be charged against the reserve are expected to be approximately $0.6 million per year. Other costs were charged against the reserve in the first quarter of 2000 as incurred. 6 7 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements July 31, 2000 and 1999 4. LONG-TERM DEBT Long-term debt and capitalized lease obligations consisted of the following (dollars in thousands):
JULY 31, 2000 JANUARY 31, 2000 ------------- ---------------- Revolving credit facility $21,550 $32,250 Series A senior notes 15,000 20,000 Capitalized lease obligations 1,423 1,492 Other 404 518 ------- ------- 38,377 54,260 Less current maturities 140 5,372 ------- ------- $38,237 $48,888 ======= =======
At July 31, 2000 and January 31, 2000, the Company had borrowings outstanding of $21.6 million and $32.3 million, respectively, under a revolving credit facility (the "Facility"). The Facility accrued interest at variable rates based on the lender's base rate or LIBOR plus a percentage. The average rate of interest being charged under the Facility was 9.7% and 6.9% at July 31, 2000 and January 31, 2000, respectively. The interest rate increase was due to financial covenant defaults and resulting amendment to the Facility discussed below. Also, at July 31, 2000 and January 31, 2000, the Company had outstanding with a financial institution $15 million and $20 million, respectively, aggregate principal amount of Series A Senior Notes due June 13, 2003, as amended (the "Senior Notes"), bearing interest at 10.25% and 7.75%, respectively. The interest rate increase was due to financial covenant defaults and resulting amendment to the Senior Notes discussed below. At April 30, 2000 and January 31, 2000, the Company was not in compliance with certain financial covenants under its Facility and the Senior Notes. The Company obtained a series of waivers on its non-compliance with certain covenant requirements through June 12, 2000. Effective as of June 12, 2000, the Company entered into an amendment of the Facility and an amendment and restatement of the Note Purchase Agreement for the Senior Notes. As part of the amendments to the Facility and the Senior Notes, the combined borrowings are jointly collateralized on a pari passu basis by substantially all of the assets of the Company and its subsidiaries. As of July 31, 2000 and through August 29, 2000, the Facility, as amended, allowed for maximum borrowings of up to $50 million. The aggregate amount outstanding under the Facility and the Senior Notes was limited to a borrowing base predicated on eligible inventory, as defined, and rental video assets, net. The Facility bore interest based on the lender's base rate plus 1.0% (base rate plus 1.75% on the amount in excess of the normal advance rate amount in the over-advance period) or LIBOR plus 2.50% (LIBOR plus 3.25% on the amount in excess of the normal advance rate amount in the over-advance period), at the Company's option. In addition, the Company was required to pay a quarterly commitment fee of 0.50% on the unused Facility amount. Borrowings under the Facility were limited to an advance rate of 55% of eligible inventory (eligible inventory is defined as 61.22% of inventory, net and 50% of rental video assets net of accumulated amortization) less the outstanding borrowings under the Senior Notes and any required rental reserve. The Facility provided for an increase in the advance rate to cover additional working capital requirements through the Christmas selling season. The advance rate increased to 65% of eligible inventory from August 1 through September 30, 2000 and 2001, respectively, and to 70% of eligible inventory from October 1 through December 31, 2000 and December 16, 2001, respectively (the over-advance periods). The Facility included revised covenants requiring the maintenance of specific financial ratios and minimum tangible net worth requirements. In addition, a covenant was added to the Facility requiring the Company's income before 7 8 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements July 31, 2000 and 1999 4. LONG-TERM DEBT (CONTINUED) interest, taxes, depreciation and amortization (EBITDA) be at least equal to specified levels for future periods. Further, the Facility imposed certain restrictions with respect to indebtedness, dividend payments, investment and capital expenditures. The Facility was to expire on December 16, 2001. The Senior Notes, as amended, had a stated interest rate of 10.25% retroactive to March 13, 2000. The amended and restated Note Purchase Agreement evidencing the amended Senior Notes had financial covenants that are the same as those contained in the amended Facility including financial ratios, minimum adjusted net worth requirements and restrictions on indebtedness, investment, capital expenditures, and the payment of dividends. As of July 31, 2000, the Company believed it would be able to comply with the financial covenants relating to the amended Facility and the amended Senior Notes for the next twelve months; however, there could be no assurance of such compliance. The breach of any of the covenants contained in the amended Facility and the amended Senior Notes could result in a default under the amended Facility and the amended Senior Notes which could result in further advances under the Facility no longer being available and could enable the respective lenders to require immediate repayment of the borrowings including accrued interest under the agreements. If the lenders were to accelerate the repayment of borrowings including accrued interest, the Company could not be certain that its assets would be sufficient to repay such obligations. In addition, the ability of the Company to satisfy its capital requirements would be dependent upon the future financial performance of the Company, which in turn would be subject to general economic conditions and to financial issues and other factors, including factors beyond the Company's control. The amended Facility and the amended Senior Notes were guaranteed by each of the Company's three consolidated subsidiaries and were in part secured by first priority liens on all of the capital stock and substantially all of the assets of each subsidiary. On August 29, 2000, the Company entered into a three-year syndicated, secured Loan and Security Agreement (the "New Facility) with Fleet Retail Finance, Inc. and The CIT Group/Business Credit, Inc. (the "Lenders"). The initial proceeds from the New Facility were used to prepay the total amounts outstanding under the Facility and the Senior Notes at August 29, 2000. The amount outstanding under the New Facility is limited by a borrowing base predicated on eligible inventory, as defined, and rental video and assets, net of accumulated depreciation and is limited to a ceiling of $70 million, which increases to $80 million between October 15 and December 15 of each year of the New Facility, less a $10 million availability reserve. The New Facility bears interest based on the prevailing prime rate or LIBOR plus 2.00% at the Company's option. The borrowing base under the New Facility is limited to an advance rate of 65% of eligible inventory and rental video assets net of accumulated amortization less specifically defined reserves. The New Facility contains no financial covenants and requires a minimum availability of $10 million at all times. The New Facility is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by each of the Company's three consolidated subsidiaries. The New Facility expires on August 29, 2003. At September 7, 2000, the Company had $31.4 million available under the New Facility. The long-term debt in the accompanying consolidated financial statements has been reclassified in accordance with the terms of the New Facility. 5. INCOME (LOSS) PER SHARE Options to purchase 1,907,154 shares of Common Stock at exercise prices ranging from $3.13 per share to $15.00 per share outstanding at July 31, 2000 and options to purchase 751,728 shares of Common Stock at exercise prices ranging from $5.34 per share to $15.00 per share outstanding at July 31, 1999 were not included in the computation of diluted income per share because their inclusion would have been antidilutive. 8 9 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements July 31, 2000 and 1999 6. LITIGATION AND CONTINGENCIES On March 7, 2000, the Company announced that its fourth quarter and fiscal 1999 results (and the previous four fiscal years' results) would be negatively impacted by certain accounting adjustments. Following the Company's initial announcement in March 2000 of the requirement for the accounting restatements, six purported class action lawsuits were filed in the United States District Court for the Northern District of Texas against the Company and certain of the current and former directors and officers of the Company asserting various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Although four of the lawsuits were originally filed in the Dallas Division of the Northern District of Texas, all of the five pending actions have been or will be transferred to the Amarillo Division of the Northern District and should be consolidated. One of the Section 10(b) and 20(a) lawsuits filed in the Dallas Division was voluntarily dismissed. On May 15, 2000, a lawsuit was filed in the United States District Court for the Northern District of Texas against the Company, its current and former directors and officers at the time of the Company's June 1998 initial public offering and three underwriters, Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz, LLC asserting various claims under Sections 11, 12(2) and 15 of the Securities Act of 1933. None of the six pending complaints specify the amount of damages sought. Although it is not feasible to predict or determine the final outcome of the proceedings or to estimate the potential range of loss with respect to these matters, an adverse outcome with respect to such proceedings could have a material adverse impact on the Company's financial position, results of operations and cash flows. The Company is also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on the Company's financial position, results of operations and cash flows. 7. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest during the six months ended July 31, 2000 and 1999 totaled $1.9 million and $1.7 million, respectively. Cash payments for income taxes during the six months ended July 31, 2000 and 1999 were $0.3 million and $36,000, respectively. Non-cash financing activities during the six months ended July 31, 2000 includes the issuance of treasury stock to pay outside director fees of approximately $37,000. Non-cash financing activities during the six months ended July 31, 1999 includes the receipt of shares of the Company's common stock valued at $1.0 million relating to the exercise of stock options and the issuance of treasury stock to pay outside director fees of approximately $35,000. 8. INVENTORY MARKDOWN During the second quarter ended July 31, 2000, the Company recognized a pre-tax charge to earnings of $0.9 million related to the markdown of inventory to the lower of cost or market. Lower than anticipated sales volume during the second quarter of fiscal 2000 and higher than anticipated merchandise returns volume associated with the Company's initiative to improve inventory turnover in order to improve cash flow, increase liquidity and profits and balance the inventory offering all contributed to this write down. Inventory from the stores closed during fiscal 2000 was returned to the Company's return center during the first and second quarter of fiscal 2000 with the intent of returning the product for credit to the original vendor. During the second quarter, it was determined that certain merchandise was not returnable. Consequently, the Company evaluated other opportunities for maximizing recovery value of the merchandise. During the second quarter, the Company contracted with a liquidator to market $1.3 million of merchandise. Based upon the estimated recovery value provided by the liquidator, the Company wrote the inventory down to the estimated recovery value of approximately $0.4 million, reflecting the $0.9 million charge. 9 10 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements July 31, 2000 and 1999 9. SEGMENT DISCLOSURES The Company has two operating segments, retail stores and Internet operations. The Internet operations became a reportable segment in fiscal 1999. The Company's chief operating decision maker, as that term is defined in the relevant accounting standard, regularly reviews financial information about each of the above operating segments for assessing performance and allocating resources. Revenue for retail stores is derived from the sale of merchandise and rental of videocassettes, video games and DVDs. Revenue for Internet operations is derived solely from the sale of merchandise. Segment information regarding the Company's retail stores and Internet operations for the three months and six months ended July 31, 2000 and 1999 is presented below.
For the three months ended July 31, 2000: Retail Internet (Dollars in thousands) Stores Operations Total --------- ---------- --------- Total revenue $ 107,123 $ 20 $ 107,143 Depreciation and amortization $ 7,728 $ 69 $ 7,797 Operating loss $ (2,513) $ (355) $ (2,868) Total assets $ 211,215 $ 1,307 $ 212,522 Capital expenditures $ 6,405 $ 251 $ 6,656
For the three months ended July 31, 1999: Retail Internet (Dollars in thousands) Stores Operations Total -------- ---------- -------- Total revenue $102,409 $ 29 $102,438 Depreciation and amortization $ 8,466 $ 59 $ 8,525 Operating income (loss) $ 2,967 $ (599) $ 2,368 Total assets $233,921 $ 700 $234,621 Capital expenditures $ 17,060 $ 98 $ 17,158
For the six months ended July 31, 2000: Retail Internet (Dollars in thousands) Stores Operations Total --------- ---------- --------- Total revenue $ 217,602 $ 36 $ 217,638 Depreciation and amortization $ 15,929 $ 154 $ 16,083 Operating loss $ (1,889) $ (805) $ (2,694) Total assets $ 211,215 $ 1,307 $ 212,522 Capital expenditures $ 11,809 $ 251 $ 12,060
10 11 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements July 31, 2000 and 1999 9. SEGMENT DISCLOSURES (CONTINUED)
For the six months ended July 31, 1999: Retail Internet (Dollars in thousands) Stores Operations Total -------- ---------- -------- Total revenue $202,987 $ 30 $203,017 Depreciation and amortization $ 13,384 $ 75 $ 13,459 Operating income (loss) $ 8,151 $ (714) $ 7,437 Total assets $233,921 $ 700 $234,621 Capital expenditures $ 29,935 $ 98 $ 30,033
11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements of the Company and the related notes thereto appearing elsewhere in the Report on Form 10-Q. The results of operations for the three month and six month periods ended July 31, 1999 have been restated as disclosed in the Company's annual report on Form 10-K for fiscal year 1999. This Report contains certain forward-looking statements concerning the intentions, hopes, beliefs, expectations, strategies, predictions or any other variation thereof or comparable phraseology of the future activities or other future events or conditions of the Company within the meaning of Section 27A of the Securities Act of 1993, as amended (the "1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"), which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including, without limitation, variations in quarterly results, volatility of stock price, development by competitors of superior services or product offerings, the entry into the market by new competitors, the sufficiency of the Company's working capital, the ability to retain management, to implement our business strategy, to attract and retain customers, to increase revenue, and to successfully defend our company in ongoing and future litigation and the risk factors described in the Company's annual report on Form 10-K for fiscal year 1999. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company's objectives and plans will be achieved and all forward-looking statements in this discussion are expressly qualified in their entirety by the cautionary statements set forth above. General The Company is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals, videocassettes, video games and DVDs with the rental of videocassettes, video games and DVDs in a superstore and Internet Web site format. As of July 31, 2000, the Company operated 143 superstores averaging 21,500 square feet in small to medium-sized markets located in 22 states, primarily in the Western and Midwestern United States. The Company also operated one college bookstore. Each of the superstores and the college bookstore is wholly owned by the Company and operates under the name of Hastings. The Company's e-commerce Web site, www.gohastings.com, became operational in May 1999. On March 7, 2000, the Company announced that its fourth quarter and fiscal 1999 results (and the previous four fiscal years' results) would be negatively impacted by certain accounting adjustments. Following the Company's initial announcement in March 2000 of the requirement for the accounting restatements, six purported class action lawsuits were filed in the United States District Court for the Northern District of Texas against the Company and certain of the current and former directors and officers of the Company asserting various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Although four of the lawsuits were originally filed in the Dallas Division of the Northern District of Texas, all of the five pending actions have been or will be transferred to the Amarillo Division of the Northern District and should be consolidated. One of the Section 10(b) and 20(a) lawsuits filed in the Dallas Division was voluntarily dismissed. On May 15, 2000, a lawsuit was filed in the United States District Court for the Northern District of Texas against the Company, its current and former directors and officers at the time of the Company's June 1998 initial public offering and three underwriters, Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz, LLC asserting various claims under Sections 11, 12(2) and 15 of the Securities Act of 1933. None of the six pending complaints specify the amount of damages sought. Although it is not feasible to predict or determine the final outcome of the proceedings or to estimate the potential range of loss with respect to these matters, an adverse outcome with respect to such proceedings could have a material adverse impact on the Company's financial position, results of operations and cash flows. 12 13 Results of Operations The following tables present the Company's statement of operations data, expressed as a percentage of revenue, and the number of superstores open at the end of the periods presented herein.
Three Months Ended July 31, Six Months Ended July 31, --------------------------- ------------------------- 2000 1999 2000 1999 ---------- ----------- --------- ---------- Merchandise revenue 79.7% 80.1% 79.7% 80.2% Rental video revenue 20.3 19.9 20.3 19.8 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 Merchandise cost of revenue 71.9 70.8 71.0 69.9 Rental video cost of revenue 43.5 35.9 40.2 31.7 ----- ----- ----- ----- Total cost of revenues 66.2 63.8 64.8 62.4 ----- ----- ----- ----- Gross profit 33.8 36.2 35.2 37.6 Selling, general and administrative expenses 36.5 33.3 36.5 33.6 Pre-opening expenses 0.0 0.6 0.0 0.4 ----- ----- ----- ----- 36.5 33.9 36.5 34.0 ----- ----- ----- ----- Operating income (loss) (2.7) 2.3 (1.3) 3.6 Other income (expense): Interest expense (0.8) (0.9) (0.8) (0.8) Other, net 0.1 0.1 0.1 0.0 ----- ----- ----- ----- Income (loss) before income taxes (3.4) 1.5 (2.0) 2.8 Income tax expense (benefit) (1.3) 0.6 (0.8) 1.1 ----- ----- ----- ----- Net income (loss) (2.1)% 0.9% (1.2)% 1.7% ===== ===== ===== =====
Summary of Superstore Activity
Quarter Ended Six Months Ended Year Ended -------------------- --------------------- ----------- July 31, July 31, July 31, July 31, January 31, 2000 1999 2000 1999 2000 -------- -------- -------- -------- ----------- Hastings Superstores: Beginning number of stores 143 131 147 129 129 Openings -- 7 -- 9 20 Closings -- -- (4) -- (2) ---- ---- ---- ---- ---- Ending number of stores 143 138 143 138 147 ==== ==== ==== ==== ====
13 14 THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THREE MONTHS ENDED JULY 31, 1999: Revenues. For the three months ended July 31, 2000, total revenues increased $4.7 million, or 4.6%, to $107.1 million from $102.4 million during the three months ended July 31, 1999. The revenue growth consisted of a 4.1% increase in merchandise revenue and a 6.7% increase in rental video revenue. The increase in revenue was primarily due to the opening of 11 Hastings superstores subsequent to the second quarter of fiscal 1999. The categories of rental video, video games, and sale video lead other categories in revenue increases over last year. Gross Profit. Total gross profit as a percent of total revenue decreased for the three months ended July 31, 2000 to 33.8% compared to 36.2% for the same period last year. The decline is primarily due to rental video gross profit decreasing as a percent of rental video revenue from 64.1% to 56.5%. Contributing to this decrease was (i) an increase in rental video revenue sharing to total rental video revenue which has lower profit margins and (ii) the gross profit margin on traditional rental video was higher in the second quarter of fiscal 1999 as compared to the second quarter of fiscal 2000, which resulted from higher than anticipated revenue from videocassettes purchased prior to January 31, 1999, for which the Company had recorded a pre-tax charge of $18.5 million in the fourth quarter of fiscal 1998, relating to the Company's change in method of amortization. In addition, during the second quarter ended July 31, 2000, the Company recognized a pre-tax charge to earnings of $0.9 million related to the markdown of inventory to the lower of cost or market. Lower than anticipated sales volume during the second quarter of fiscal 2000 and higher than anticipated merchandise returns volume associated with the Company's initiative to improve inventory turnover in order to improve cash flow, increase liquidity and profits and balance the inventory offering all contributed to this write down. Inventory from the stores closed during fiscal 2000 was returned to the Company's return center during the first and second quarter of fiscal 2000 with the intent of returning the product for credit to the original vendor. During the second quarter, it was determined that certain merchandise was not returnable. Consequently, the Company evaluated other opportunities for maximizing recovery value of the merchandise. During the second quarter, the Company contracted with a liquidator to market $1.3 million of merchandise. Based upon the estimated recovery value provided by the liquidator, the Company wrote the inventory down to the estimated recovery value of approximately $0.4 million, reflecting the $0.9 million charge. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased to 36.5% of total revenues for the three months ended July 31, 2000 from 33.9% for the same period last year. Accounting and legal fees associated with the accounting restatement, as described in Note 1 and in the Company's annual report on Form 10-K for fiscal 1999, contributed to the increase in SG&A. Amounts incurred during the three months ended July 31, 2000 for the restatement totaled approximately $2.3 million, or 2.2% of revenues and $0.12 per diluted share, net of tax. In addition, as a result of the Company's efforts to improve its inventory performance and reduce the investment in inventory, merchandise returns during the second quarter of fiscal 2000 exceeded the amount of merchandise returns during the second quarter of fiscal 1999 resulting in higher returns expense. Pre-opening Expenses. Pre-opening expenses were insignificant for the three months ended July 31, 2000, as the Company did not open any new superstores during the period. For the three months ended July 31, 1999, pre-opening expenses were $0.5 million or .6% of revenues. Pre-opening expenses include human resource costs, travel, rent, advertising, supplies and certain other costs incurred prior to a superstore's opening. Interest Expense. Interest expense was $0.9 million, or 0.8% of revenues, in the three months ended July 31, 2000, compared to $1.0 million, or 0.9% of revenues, in the three months ended July 31, 1999. Although a higher rate of interest was being charged under the Facility and Senior Notes during the second quarter of fiscal 2000 over 1999 because of the covenant defaults and resulting amendments to the Facility and the Senior Notes, the amount of interest expense was slightly less due to a decrease in the average amount of indebtedness outstanding for such comparable fiscal quarters. SIX MONTHS ENDED JULY 31, 2000 COMPARED TO SIX MONTHS ENDED JULY 31, 1999: Revenues. For the six months ended July 31, 2000, total revenues increased $14.6 million, or 7.2%, to $217.6 million from $203.0 million during the six months ended July 31, 1999. The revenue growth consisted of a 6.5% increase in merchandise revenue and a 9.9% increase in rental video revenue. The increase in revenue was primarily 14 15 due to a comparable store revenue growth of 0.6% and the opening of 10 Hastings superstores subsequent to the six months ended July 31, 1999. The categories of rental video, video games, sale video and music lead other categories in revenue increases over last year. Gross Profit. Total gross profit as a percent of total revenue decreased for the six months ended July 31, 2000 to 35.2% compared to 37.6% for the same period last year. The decline is primarily due to rental video gross profit decreasing as a percent of rental video revenue from 68.3% to 59.8%. Contributing to this decrease was (i) an increase in rental video revenue sharing to total rental video revenue which has lower profit margins and (ii) the gross profit margin on traditional rental video was higher in the first six months of fiscal 1999 as compared to the fist six months of fiscal 2000, which resulted from higher than anticipated revenue from videocassettes purchased prior to January 31, 1999, for which the Company had recorded a pre-tax charge of $18.5 million in the fourth quarter of fiscal 1998, relating to the Company's change in method of amortization. In addition, during the second quarter ended July 31, 2000, the Company recognized a pre-tax charge to earnings of $0.9 million related to the markdown of inventory to the lower of cost or market. Lower than anticipated sales volume during the second quarter of fiscal 2000 and higher than anticipated merchandise returns volume associated with the Company's initiative to improve inventory turnover in order to improve cash flow, increase liquidity and profits and balance the inventory offering all contributed to this write down. Inventory from the stores closed during fiscal 2000 was returned to the Company's return center during the first and second quarter of fiscal 2000 with the intent of returning the product for credit to the original vendor. During the second quarter, it was determined that certain merchandise was not returnable. Consequently, the Company evaluated other opportunities for maximizing recovery value of the merchandise. During the second quarter, the Company contracted with a liquidator to market $1.3 million of merchandise. Based upon the estimated recovery value provided by the liquidator, the Company wrote the inventory down to the estimated recovery value of approximately $0.4 million, reflecting the $0.9 million charge. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased to 36.5% of total revenues for the six months ended July 31, 2000 from 34.0% for the same period last year. As a result of the Company's efforts to improve its inventory performance and reduce the investment in inventory, merchandise returns during the first six months of fiscal 2000 exceeded the amount of merchandise returns during the first six months of fiscal 1999. The higher returns coupled with higher return fees incurred on return of music product resulted in higher returns expense. Secondly, accounting and legal fees associated with the accounting restatement, as described in Note 1 and in the Company's annual report on Form 10-K for fiscal 1999, contributed to the increase in SG&A. Amounts incurred during the first six months of fiscal 2000 for the restatement totaled approximately $2.7 million, or 1.2% of revenue and $0.14 per diluted share, net of tax. Finally, an increase in the costs associated with the operation of the Company's Internet segment during the first quarter of fiscal 2000 over 1999 contributed to the increase in SG&A. Pre-opening Expenses. Pre-opening expenses were insignificant for the six months ended July 31, 2000, as the Company did not open any new superstores during the period. For the six months ended July 31, 1999, pre-opening expenses were $0.7 million or 0.4% of revenues. Pre-opening expenses include human resource costs, travel, rent, advertising, supplies and certain other costs incurred prior to a superstore's opening. Interest Expense. Interest expense was $1.9 million, or 0.8% of revenues, in the six months ended July 31, 2000, compared to $1.8 million, or 0.8% of revenues, in the six months ended July 31, 1999. The increase was primarily due to a higher rate of interest being charged under the Facility and Senior Notes during the second quarter of fiscal 2000 over 1999 because of the covenant defaults and resulting amendments to the Facility and the Senior Notes, even though there was a decrease in the average outstanding indebtedness for such comparable periods. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements arise from purchasing, warehousing and merchandising inventory and rental videos, opening new superstores, expanding existing superstores, and funding the expansion of its Internet operations. The Company's primary sources of working capital are currently cash flows from operating activities, trade credit from vendors and borrowings from its Revolving Credit Facility (the "Facility"). Cash flow from operations was $22.3 million and $16.5 million, for the six months ended July 31, 2000 and 1999, respectively. Capital expenditures, including purchase of rental video assets, were $12.1 million and $30.0 million for the six 15 16 months ended July 31, 2000 and 1999, respectively. Cash flows from financing activities for the comparable periods primarily resulted from borrowings made under the Facility. Net activity under the Facility resulted in net payments of $10.7 million for the six months ended July 31, 2000 and net borrowings of $17.0 million for the six months ended July 31, 1999, respectively. At July 31, 2000 and January 31, 2000, the Company had borrowings outstanding of $21.6 million and $32.3 million, respectively, under a revolving credit facility (the "Facility"). The Facility accrued interest at variable rates based on the lender's base rate or LIBOR plus a percentage. The average rate of interest being charged under the Facility was 9.7% and 6.9% at July 31, 2000 and January 31, 2000, respectively. The interest rate increase was due to financial covenant defaults and resulting amendment to the Facility discussed below. Also, at July 31, 2000 and January 31, 2000, the Company had outstanding with a financial institution $15 million and $20 million, respectively, aggregate principal amount of Series A Senior Notes due June 13, 2003, as amended (the "Senior Notes"), bearing interest at 10.25% and 7.75%, respectively. The interest rate increase was due to financial covenant defaults and resulting amendment to the Senior Notes discussed below. At April 30, 2000 and January 31, 2000, the Company was not in compliance with certain financial covenants under its Facility and the Senior Notes. The Company obtained a series of waivers on its non-compliance with certain covenant requirements through June 12, 2000. Effective as of June 12, 2000, the Company entered into an amendment of the Facility and an amendment and restatement of the Note Purchase Agreement for the Senior Notes. As part of the amendments to the Facility and the Senior Notes, the combined borrowings are jointly collateralized on a pari passu basis by substantially all of the assets of the Company and its subsidiaries. As of July 31, 2000 and through August 29, 2000, the Facility, as amended, allowed for maximum borrowings of up to $50 million. The aggregate amount outstanding under the Facility and the Senior Notes was limited to a borrowing base predicated on eligible inventory, as defined, and rental video assets, net. The Facility bore interest based on the lender's base rate plus 1.0% (base rate plus 1.75% on the amount in excess of the normal advance rate amount in the over-advance period) or LIBOR plus 2.50% (LIBOR plus 3.25% on the amount in excess of the normal advance rate amount in the over-advance period), at the Company's option. In addition, the Company was required to pay a quarterly commitment fee of 0.50% on the unused Facility amount. Borrowings under the Facility were limited to an advance rate of 55% of eligible inventory (eligible inventory is defined as 61.22% of inventory, net and 50% of rental video assets net of accumulated amortization) less the outstanding borrowings under the Senior Notes and any required rental reserve. The Facility provided for an increase in the advance rate to cover additional working capital requirements through the Christmas selling season. The advance rate increased to 65% of eligible inventory from August 1 through September 30, 2000 and 2001, respectively, and to 70% of eligible inventory from October 1 through December 31, 2000 and December 16, 2001, respectively (the over-advance periods). The Facility included revised covenants requiring the maintenance of specific financial ratios and minimum tangible net worth requirements. In addition, a covenant was added to the Facility requiring the Company's income before interest, taxes, depreciation and amortization (EBITDA) be at least equal to specified levels for future periods. Further, the Facility imposed certain restrictions with respect to indebtedness, dividend payments, investment and capital expenditures. The Facility was to expire on December 16, 2001. The Senior Notes, as amended, had a stated interest rate of 10.25% retroactive to March 13, 2000. The amended and restated Note Purchase Agreement evidencing the amended Senior Notes had financial covenants that are the same as those contained in the amended Facility including financial ratios, minimum adjusted net worth requirements and restrictions on indebtedness, investment, capital expenditures, and the payment of dividends. As of July 31, 2000, the Company believed it would be able to comply with the financial covenants relating to the amended Facility and the amended Senior Notes for the next twelve months; however, there could be no assurance of such compliance. The breach of any of the covenants contained in the amended Facility and the amended Senior Notes could result in a default under the amended Facility and the amended Senior Notes which could result in further advances under the Facility no longer being available and could enable the respective lenders to require immediate repayment of the borrowings including accrued interest under the agreements. If the lenders 16 17 were to accelerate the repayment of borrowings including accrued interest, the Company could not be certain that its assets would be sufficient to repay such obligations. In addition, the ability of the Company to satisfy its capital requirements would be dependent upon the future financial performance of the Company, which in turn would be subject to general economic conditions and to financial issues and other factors, including factors beyond the Company's control. The amended Facility and the amended Senior Notes were guaranteed by each of the Company's three consolidated subsidiaries and were in part secured by first priority liens on all of the capital stock and substantially all of the assets of each subsidiary. On August 29, 2000, the Company entered into a three-year syndicated secured Loan and Security Agreement (the "New Facility) with Fleet Retail Finance, Inc. and The CIT Group/Business Credit, Inc. (the "Lenders"). The proceeds from the New Facility were primarily used to prepay the total amounts outstanding under the Facility and the Senior Notes at August 29, 2000. The amount outstanding under the New Facility is limited by a borrowing base predicated on eligible inventory, as defined, and rental video and assets, net of accumulated depreciation and is limited to a ceiling of $70 million, which increases to $80 million between October 15 and December 15 of each year of the New Facility, less a $10 million availability reserve. The New Facility bears interest based on the prevailing prime rate or LIBOR plus 2.00% at the Company's option. The borrowing base under the New Facility is limited to an advance rate of 65% of eligible inventory and rental video assets net of accumulated amortization less specifically defined reserves. The New Facility contains no financial covenants and requires a minimum availability of $10 million at all times. The New Facility is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by each of the Company's three consolidated subsidiaries. The New Facility expires on August 29, 2003. At September 7, 2000, the Company had $31.4 million available under the New Facility. The long-term debt in the accompanying consolidated financial statements has been reclassified in accordance with the terms of the New Facility. The Company's primary sources of liquidity are, currently, cash flows from operating activities and borrowings under the Facility. As of September 7, 2000, $38.6 million was borrowed under the New Facility. The Company believes that, based on current and anticipated financial performance, cash flows from operating activities and borrowings under the New Facility will be adequate to meet anticipated requirements for capital expenditures, working capital and required principal and interest payments under New Facility. The ability of the Company to satisfy its capital requirements will be dependent upon future financial performance of the Company, which in turn is subject to general economic conditions and to financial issues and other factors, including factors beyond the Company's control. As previously disclosed, the Company plans to slow its growth rate from that previously described and focus on the expansion and remodeling of its existing superstores. The Company invests generally between $1 million and $2 million in a new superstore, with the largest components of that amount being merchandise, videos, fixtures and leasehold improvements. The Company plans to expand approximately four superstores in fiscal 2000. The Company generally invests between $0.5 million to $1.0 million to expand a superstore. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" that impacts the Company's accounting treatment and/or its disclosure obligations. The statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement, as amended, will be adopted in the first quarter of fiscal 2001. The adoption of SFAS No. 133 is not expected to have a material impact on the Company. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). Among other issues, this interpretation clarifies the definition of employee for purposes of applying APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequence of various modifications to the terms of previously fixed stock options or awards, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation became 17 18 effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occurred after either December 15, 1998, or January 12, 2000. Management believes that FIN 44 will not have a material effect on the financial position or the results of operations of the Company. SEASONALITY AND INFLATION As is the case with many retailers, a significant portion of the Company's revenues, and an even greater portion of its operating profit, is generated in the fourth fiscal quarter, which includes the Christmas selling season. As a result, a substantial portion of the Company's annual earnings has been, and will continue to be, dependent on the results of this quarter. The Company experiences reduced rentals of video activity in the spring because customers spend more time outdoors. Major world or sporting events, such as the Super Bowl, the Olympic Games or the World Series, also have a temporary adverse effect on revenues. Future operating results may be affected by many factors, including variations in the number and timing of store openings, the number and popularity of new book, music and videocassette titles, the cost of the new release or "best renter" titles, changes in comparable-store revenues, competition, marketing programs, increases in the minimum wage, weather, special or unusual events, and other factors that may affect retailers in general and the Company in particular. The Company does not believe that inflation has materially impacted net income (loss) during the past three years. Substantial increases in costs and expenses could have a significant impact on the Company's operating results to the extent such increases are not passed along to customers. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of its business, the Company is exposed to certain market risks, primarily changes in interest rates. The Company's exposure to interest rate risk consists of variable rate debt, at the Company's option, based on the lender's base rate or LIBOR plus a specified percentage. The annual impact on the Company's results of operations of a 100 basis point interest rate change on the July 31, 2000 outstanding balance of the variable rate debt would be approximately $0.2 million. After an assessment of these risks to the Company's operations, the Company believes that its primary market risk exposures (within the meaning of Regulation S-K Item 305) are not material and are not expected to have any material adverse impact on the Company's financial position, results of operations or cash flows for the next fiscal year. The Company is not party to any derivative or interest rate hedging contracts. 18 19 PART II ITEM 1. LEGAL PROCEEDINGS In the Company's annual report on Form 10-K filed with the Securities and Exchange Commission, the Company discussed legal proceedings regarding certain shareholder complaints. There have been no material developments in these proceedings during the first quarter of fiscal year 2000 other than as set forth in the Company's annual report on Form 10-K. For a description of the legal proceedings applicable under this item, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES At April 30, 2000, January 31, 2000 and at various prior quarters, the Company was not in compliance with certain financial covenants under its Facility and the Senior Notes including Fixed Coverage Ratio, Minimum Tangible Net Worth, Funded Debt to Adjusted EBITDA, Adjusted Net Worth and Fixed Charges Coverage Ratio. The Company obtained a series of waivers on its non-compliance with certain covenant requirements through June 12, 2000. An amendment to the Facility and an amended and restated Senior Note Agreement were executed on June 12, 2000 including revised covenant requirements. For a description of the amended agreements applicable under this item, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in this report. On August 29, 2000, the Company entered into a three-year syndicated secured Loan and Security Agreement (the "New Facility) with Fleet Retail Finance, Inc. and The CIT Group/Business Credit, Inc. (the "Lenders"). The proceeds from the New Facility were primarily used to prepay the total amounts outstanding under the Facility and the Senior Notes at August 29, 2000. The amount outstanding under the New Facility is limited by a borrowing base predicated on eligible inventory, as defined, and rental video and assets, net of accumulated depreciation and is limited to a ceiling of $70 million, which increases to $80 million between October 15 and December 15 of each year of the New Facility, less a $10 million availability reserve. The New Facility bears interest based on the prevailing prime rate or LIBOR plus 2.00% at the Company's option. The borrowing base under the New Facility is limited to an advance rate of 65% of eligible inventory and rental video assets net of accumulated amortization less specifically defined reserves. The New Facility contains no financial covenants and requires a minimum availability of $10 million at all times. The New Facility is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by each of the Company's three consolidated subsidiaries. The New Facility expires on August 29, 2003. At September 7, 2000, the Company had $31.4 million available under the New Facility. The long-term debt in the accompanying consolidated financial statements has been reclassified in accordance with the terms of the New Facility. ITEM 5. OTHER INFORMATION The Company's Common Stock began trading on The Nasdaq National Market (Nasdaq) on June 12, 1998 under the symbol "HAST." On May 18, 2000, the Company was notified by Nasdaq that its Common Stock would be delisted on May 30, 2000 unless the Company's fiscal 1999 Form 10-K, the filing of which was delayed pending completion of the accounting restatements described herein, was filed with the Securities and Exchange Commission by May 25, 2000. Under Nasdaq rules, the Company requested, and was subsequently granted, an oral hearing with the appropriate Nasdaq panel. The hearing was scheduled for June 22, 2000. On June 20, 2000, as a result of the Company's filing of the fiscal 1999 Form 10-K, the Company was notified by Nasdaq of the cancellation of the hearing and withdrawal of the delisting notice. 19 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Listing of Exhibits 10.27 Loan and Security Agreement dated August 29, 2000 between Hastings Entertainment, Inc. and Fleet Retail Finance, Inc., Agent. 27 Financial Data Schedule for the Three Months Ended July 31, 2000. 27.1 Restated Financial Data Schedule for the Three Months Ended July 31, 1999. b. No report on Form 8-K was filed by the registrant during the quarter of the fiscal year for which this report on Form 10-Q is filed. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, on behalf of the registrant and as registrant's principal financial and accounting officer, thereunto duly authorized: HASTINGS ENTERTAINMENT, INC. DATE: December 22, 2000 By: /s/ Dan Crow --------------------- Dan Crow Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) 21 22 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.27 Loan and Security Agreement dated August 29, 2000 between Hastings Entertainment, Inc. and Fleet Retail Finance, Inc., Agent. 27 Financial Data Schedule for the Three Months Ended July 31, 2000. 27.1 Restated Financial Data Schedule for the Three Months Ended July 31, 1999.
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