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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-24381
 HASTINGS ENTERTAINMENT, INC.
  Texas
(State or other jurisdiction of 
incorporation or organization)
    
    75-1386375
(I.R.S. Employer
Identification No.)3601 Plains Boulevard, Amarillo, Texas
(Address of principal executive offices)
    
    79102
(Zip Code)
 (806) 351-2300
  None
   Title of each class 
Common Stock, $.01 par value per share
    
    Name of each exchange on which registered
The NASDAQ Stock Market LLC
   o þ
  o þ
  þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ
   Class
    
    Outstanding at March 31, 2009Common Stock, $.01 par value per share
    
    9,748,034
  Document
    
    Parts Into Which IncorporatedPortions of the Proxy Statement for the annual meeting of 
Shareholders of the registrant to be held in 2009
    
    Part III




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##### 



HASTINGS ENTERTAINMENT, INC.
Form 10-K Annual Report
For the Fiscal Year Ended January 31, 2009
 INDEX
 PAGEPART IItem 1.    Business
    
    1Item 1A. Risk Factors
    
    8Item 1B. Unresolved Staff Comments
    
    12Item 2.    Properties
    
    13Item 3.    Legal Proceedings
    
    14Item 4.    Submission of Matters to a Vote of Security Holders
    
    14PART IIItem 5.    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    15Item 6.    Selected Financial Data
    
    17Item 7.    Managements Discussion and Analysis of Financial Condition and
Results of Operation
    
    19Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 8.    Financial Statements and Supplementary Data
    
    32Item 9.    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    58Item 9A.  Controls and Procedures
    
    58Item 9A(T)    Controls and Procedures
    
    59PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    60Item 11. Executive Compensation
    
    60Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    60Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    60Item 14. Principal Accountant Fees and Services
    
    60PART IVItem 15. Exhibits and Financial Statement Schedules
    
    61SIGNATURES
    
    65EX-10.29EX-10.30EX-10.31EX-10.32EX-10.33EX-10.34EX-10.35EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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PART I
   
 ITEM 1. BUSINESS.
     Superior Multimedia Concept.
 1




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Minimum
    
    MaximumProduct Category
    
    Title Count
    
    Title CountBooks
    
    
    15,000
    
    
    
    63,000Rental DVD and Video Games
    
    
    10,000
    
    
    
    22,000Used DVD, Video Games, Music
    
    
    9,000
    
    
    
    32,000DVD and Video Games
    
    
    6,000
    
    
    
    11,000Music
    
    
    5,000
    
    
    
    15,000Trends and Consumables
    
    
    3,000
    
    
    
    8,000Used Books
    
    
    3,000
    
    
    
    26,000Periodicals
    
    
    1,000
    
    
    
    4,000Consumer Electronics
    
    
    1,000
    
    
    
    2,000Software
    
    
    
    
    
    
    1,000
  Fiscal YearProduct Category
    
    2008
    
    2007
    
    2006Books
    
    
    23
    %
    
    
    22
    %
    
    
    22
    %Video
    
    
    22
    %
    
    
    22
    %
    
    
    21
    %Rental
    
    
    16
    %
    
    
    16
    %
    
    
    17
    %Music
    
    
    15
    %
    
    
    17
    %
    
    
    20
    %Video Games
    
    
    11
    %
    
    
    11
    %
    
    
    9
    %Trends
    
    
    5
    %
    
    
    4
    %
    
    
    4
    %Electronics
    
    
    4
    %
    
    
    3
    %
    
    
    3
    %Consumables and Hardback Café
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Other
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %
  Medium-Sized Market Focus.
 Customer-Oriented Format.
 2




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Low Pricing.
 Used and Budget-Priced Products.
 Internet.
    3




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New Release Allocation.
 Rental Asset Purchasing System.
 Store Replenishment.
 Selection Management .
 Model Stock Calculation/Ordering .
 Inventory Management .
 4




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Used Inventory Management
 Store Systems.
 Warehouse Management.
 Data Center.
 goShip
    5




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6




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Name
    
    Age
    
    PositionJohn H. Marmaduke
    
    
    61
    
    
    Chairman of the Board, President and Chief Executive
OfficerAlan Van Ongevalle
    
    
    41
    
    
    Senior Vice President of MerchandisingDan Crow
    
    
    62
    
    
    Vice President of Finance and Chief Financial OfficerSue Dasse
    
    
    55
    
    
    Vice President of StoresKevin Ball
    
    
    52
    
    
    Vice President of MarketingPhil McConnell
    
    
    46
    
    
    Vice President, Divisional Merchandise ManagerJohn Hintz
    
    
    44
    
    
    Vice President of Information TechnologyVictor Fuentes
    
    
    42
    
    
    Vice President, Divisional Merchandise Manager
  John H. Marmaduke
 Alan Van Ongevalle
 Dan Crow
 Sue Dasse
 Kevin Ball
 Phil McConnell
 John Hintz
 7




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Victor Fuentes,
  www.sec.gov
 www.gohastings.com
 
 ITEM 1A. RISK FACTORS.
 CAUTIONARY STATEMENTS
  Our business is highly seasonal.
  Our business is dependent on consumer spending patterns.
  8




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Intense competition from traditional retail sources and the Internet may adversely affect our
business.
  Our business could be negatively impacted if the in-store video retailer distribution window is
reduced or eliminated.
    Our business is subject to changes in current rental video studio pricing policies.
   9




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Our business could be negatively impacted by new technology that provides alternate methods of
video and music delivery.
   We rely on certain key personnel.
  Our growth is dependent on our ability to execute our expansion strategy.
  10




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Changes to information technology systems may disrupt the supply chain.
  Our business is dependent upon renewing or entering into new leases on favorable terms.
  We cannot predict the impact of the recent downturn in the financial markets and the resulting
costs or constraints in obtaining financing on our business and financial results.
  The current financial crisis and economic downturn may likely affect our consumer base and
suppliers, and could materially affect our profits.
  11




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The U.S. governments proposed plan to address the financial crisis may not be effective to
stabilize the financial markets or to increase the availability of credit
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  12




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ITEM 2. PROPERTIES.
  Name of State
    
    Number of StoresAlabama
    
    
    1Arkansas
    
    
    11Arizona
    
    
    7Colorado
    
    
    4Georgia
    
    
    1Idaho
    
    
    9Indiana
    
    
    1Iowa
    
    
    1Kansas
    
    
    10Kentucky
    
    
    1Louisiana
    
    
    1Missouri
    
    
    7Montana
    
    
    6Nebraska
    
    
    4New Mexico
    
    
    15Oklahoma
    
    
    12Tennessee
    
    
    7Texas
    
    
    42Utah
    
    
    2Washington
    
    
    8Wyoming
    
    
    3Total
    
    
    153
     Number of Stores
    
    OptionsFiscal Year 2009
    
    
    25
    
    
    
    24Fiscal Year 2010
    
    
    10
    
    
    
    10Fiscal Year 2011
    
    
    10
    
    
    
    9Fiscal Year 2012
    
    
    14
    
    
    
    14Fiscal Year 2013
    
    
    14
    
    
    
    12Thereafter
    
    
    80
    
    
    
    76Total
    
    
    153
    
    
    
    145
 13




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ITEM 3. LEGAL PROCEEDINGS.
 Form 10-K,
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  14




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    Low2008:First Quarter
    
    $
    9.18
    
    
    $
    7.36Second Quarter
    
    $
    8.91
    
    
    $
    7.88Third Quarter
    
    $
    8.85
    
    
    $
    3.22Fourth Quarter
    
    $
    5.19
    
    
    $
    1.262007:First Quarter
    
    $
    7.53
    
    
    $
    5.53Second Quarter
    
    $
    7.80
    
    
    $
    6.40Third Quarter
    
    $
    9.68
    
    
    $
    6.00Fourth Quarter
    
    $
    10.00
    
    
    $
    6.53
     Total number of
    
    
    Approximateshares
    
    
    dollar value ofpurchased as
    
    
    shares that mayTotal
    
    
    Average
    
    
    part of publicly
    
    
    yet be purchasednumber of shares
    
    
    price paid
    
    
    announced plans
    
    
    under the plans orPeriod
    

purchased (1)
    
    
    per share
    
    
    or programs
    
    
    programs (2)November 1 to November 30,
2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    N/ADecember 1 to December 31,
2008
    
    
    156,200
    
    
    
    1.67
    
    
    
    156,200
    
    
    
    N/AJanuary 1 to January 31, 2009
    
    
    84,100
    
    
    
    2.33
    
    
    
    84,100
    
    
    
    N/ATotal
    
    
    240,300
    
    
    $
    1.90
    
    
    
    240,300
    
    
    $
    5,707,700
 
 (1)
    
    All share purchases 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 worth of our common stock, and prior to fiscal
2008 the Board of Directors had approved additional increases of $17.5 million. On December
8, 2008, the Board approved an additional increase in such limitation of $5.0 million. 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 3,419,949 shares have been purchased under the repurchase plan at a total cost of
approximately $21.6 million, or approximately $6.32 per share. 15




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Comparison of Cumulative Five Year Total Return
 
 Fiscal Years EndedJanuary 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Hastings
    
    
    $
    100.00
    
    
    
    $
    173.68
    
    
    
    $
    112.63
    
    
    
    $
    124.21
    
    
    
    $
    184.00
    
    
    
    $
    53.05S&P 500 Index
    
    
    
    100.00
    
    
    
    
    104.43
    
    
    
    
    113.17
    
    
    
    
    127.15
    
    
    
    
    121.87
    
    
    
    
    73.01Nasdaq Composite
    
    
    
    100.00
    
    
    
    
    99.82
    
    
    
    
    111.60
    
    
    
    
    119.25
    
    
    
    
    115.67
    
    
    
    
    71.46
   16




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ITEM 6. SELECTED FINANCIAL DATA.
  Fiscal Year(In thousands, except per share and square foot data)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Income Statement Data:Merchandise revenue
    
    $
    451,492
    
    
    $
    458,076
    
    
    $
    454,142
    
    
    $
    444,291
    
    
    $
    440,596Rental asset revenue
    
    
    87,256
    
    
    
    89,609
    
    
    
    94,190
    
    
    
    93,640
    
    
    
    101,420Total revenues
    
    
    538,748
    
    
    
    547,685
    
    
    
    548,332
    
    
    
    537,931
    
    
    
    542,016Merchandise cost of revenue
    
    
    315,780
    
    
    
    321,438
    
    
    
    326,025
    
    
    
    314,328
    
    
    
    322,632Rental asset cost of revenue
    
    
    30,948
    
    
    
    31,107
    
    
    
    33,862
    
    
    
    34,458
    
    
    
    36,266Total cost of revenues
    
    
    346,728
    
    
    
    352,545
    
    
    
    359,887
    
    
    
    348,786
    
    
    
    358,898Gross profit
    
    
    192,020
    
    
    
    195,140
    
    
    
    188,445
    
    
    
    189,145
    
    
    
    183,118Selling, general and administrative expenses(1)
    
    
    182,511
    
    
    
    177,028
    
    
    
    177,467
    
    
    
    176,684
    
    
    
    171,293Pre-opening expenses
    
    
    233
    
    
    
    120
    
    
    
    94
    
    
    
    92
    
    
    
    409Operating income
    
    
    9,276
    
    
    
    17,992
    
    
    
    10,884
    
    
    
    12,369
    
    
    
    11,416Interest expense
    
    
    (1,961
    )
    
    
    (2,919
    )
    
    
    (3,260
    )
    
    
    (2,616
    )
    
    
    (1,918
    )Other, net
    
    
    193
    
    
    
    123
    
    
    
    642
    
    
    
    399
    
    
    
    293Income before income taxes
    
    
    7,508
    
    
    
    15,196
    
    
    
    8,266
    
    
    
    10,152
    
    
    
    9,791Income tax expense(2)
    
    
    3,449
    
    
    
    4,951
    
    
    
    3,247
    
    
    
    4,457
    
    
    
    3,982Net income
    
    $
    4,059
    
    
    $
    10,245
    
    
    $
    5,019
    
    
    $
    5,695
    
    
    $
    5,809Basic income per share
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    0.45
    
    
    $
    0.50
    
    
    $
    0.51Diluted income per share
    
    $
    0.39
    
    
    $
    0.93
    
    
    $
    0.44
    
    
    $
    0.49
    
    
    $
    0.49Weighted-average common shares outstanding  basic
    
    
    10,122
    
    
    
    10,797
    
    
    
    11,244
    
    
    
    11,421
    
    
    
    11,411Weighted-average common shares outstanding  diluted
    
    
    10,324
    
    
    
    11,055
    
    
    
    11,518
    
    
    
    11,667
    
    
    
    11,942Other Data:Depreciation (3)
    
    $
    20,019
    
    
    $
    19,400
    
    
    $
    19,865
    
    
    $
    19,737
    
    
    $
    19,075Capital expenditures (4)
    
    $
    25,539
    
    
    $
    15,256
    
    
    $
    18,566
    
    
    $
    17,097
    
    
    $
    24,729Store Data:Total selling square footage at end of period
    
    
    3,137,692
    
    
    
    3,134,912
    
    
    
    3,121,737
    
    
    
    3,101,627
    
    
    
    3,039,582Comparable-store revenues increase (decrease)
(5)
    
    
    (1.6
    %)
    
    
    (0.1
    %)
    
    
    1.8
    %
    
    
    (1.4
    %)
    
    
    5.0
    %Sales per selling square footage
    
    $
    171.69
    
    
    $
    174.70
    
    
    $
    175.63
    
    
    $
    173.41
    
    
    $
    178.29
 January 31,2009
    
    2008
    
    2007
    
    2006
    
    2005Balance Sheet Data:Working capital (6)
    
    $
    75,373
    
    
    $
    76,983
    
    
    $
    71,941
    
    
    $
    52,508
    
    
    $
    52,404Total assets
    
    $
    253,703
    
    
    $
    260,221
    
    
    $
    257,498
    
    
    $
    254,661
    
    
    $
    251,299Total long-term debt
    
    $
    44,507
    
    
    $
    40,616
    
    
    $
    41,922
    
    
    $
    28,151
    
    
    $
    37,029Dividends declared
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total shareholders equity(2)
    
    $
    102,036
    
    
    $
    101,808
    
    
    $
    97,553
    
    
    $
    94,693
    
    
    $
    89,774
 17




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(1)
    
    Includes approximately $800,000, $900,000, and $400,000 of impairment charges for fiscal
2008, 2006, and 2005, respectively. No impairment charges were recognized during fiscal 2007
or 2004.(2)
    
    The results for fiscal 2008 reflect a discrete tax charge of approximately $800,000 related
to an Internal Revenue Service audit of previously filed federal tax returns. The IRS audit
resulted in a change in our tax method used to account for gift cards and the $800,000
represents interest due as a result of the audit. On February 1, 2007, we recognized an
increase in the liability for uncertain tax positions plus interest and penalties totaling
$838,000 as a result of FIN 48 adoption, with a corresponding adjustment to retained earnings.
The results for fiscal 2007 reflect an income tax benefit of approximately $0.9 million
related to a favorable settlement of a prior years state tax liability.(3)
    
    Excludes amounts associated with our rental asset cost depreciation of $15,000, $13,000,
$16,000, $18,000, and $23,000 for fiscal 2008, 2007, 2006, 2005, and 2004, respectively.(4)
    
    Includes purchases of property, equipment, and improvements.(5)
    
    Stores included in the comparable-store revenues calculation are those stores that have been
open for a minimum of 60 weeks. Also included are stores that are remodeled or relocated.
Sales via the internet are not included and closed stores are removed from each comparable
period for the purpose of calculating comparable-store revenues.(6)
    
    Working capital is calculated as total current assets less total current liabilities. 18




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
       Lower of Cost or Market for Merchandise Inventory.
 19




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Rental Asset Depreciation.
    Impairment or Disposal of Long-Lived Assets
 Income Taxes.
  Share-Based Compensation.
 20




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
    
    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.
    21




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Fiscal Year2008
    
    
    2007
    
    
    2006Merchandise revenue
    
    
    83.8
    %
    
    
    83.6
    %
    
    
    82.8
    %Rental asset revenue
    
    
    16.2
    
    
    
    16.4
    
    
    
    17.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Merchandise cost of revenue
    
    
    69.9
    
    
    
    70.2
    
    
    
    71.8Rental asset cost of revenue
    
    
    35.5
    
    
    
    34.7
    
    
    
    36.0Total cost of revenues
    
    
    64.4
    
    
    
    64.4
    
    
    
    65.6Gross profit
    
    
    35.6
    
    
    
    35.6
    
    
    
    34.4Selling, general and administrative expenses
    
    
    33.9
    
    
    
    32.3
    
    
    
    32.4Pre-opening expenses
    
    
    
    
    
    
    
    
    
    
    33.9
    
    
    
    32.3
    
    
    
    32.4Operating income
    
    
    1.7
    
    
    
    3.3
    
    
    
    2.0Other income (expense):Interest expense
    
    
    (0.3
    )
    
    
    (0.5
    )
    
    
    (0.6
    )Other, net
    
    
    
    
    
    
    
    
    
    
    0.1(0.3
    )
    
    
    (0.5
    )
    
    
    (0.5
    )Income before income taxes
    
    
    1.4
    
    
    
    2.8
    
    
    
    1.5Income tax expense
    
    
    0.6
    
    
    
    0.9
    
    
    
    0.6Net income
    
    
    0.8
    %
    
    
    1.9
    %
    
    
    0.9
    %
 Fiscal Year2008
    
    
    2007
    
    
    2006Hastings Stores:Beginning number of stores
    
    
    153
    
    
    
    154
    
    
    
    153Openings
    
    
    2
    
    
    
    1
    
    
    
    1Closings
    
    
    (2
    )
    
    
    (2
    )
    
    
    Ending number of stores
    
    
    153
    
    
    
    153
    
    
    
    154
 22




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Revenues.
 Fiscal Year Ended January 31,2009
    
    
    2008
    
    
    (Decrease)Percent of
    
    
    
    
    
    Percent ofRevenues
    
    
    Total
    
    

    Revenues
    
    
    Total
    
    

    Dollar
    
    

    PercentMerchandise revenue
    
    $
    451,492
    
    
    
    83.8
    %
    
    $
    458,076
    
    
    
    83.6
    %
    
    $
    (6,584
    )
    
    
    -1.4
    %Rental revenue
    
    
    87,256
    
    
    
    16.2
    %
    
    
    89,609
    
    
    
    16.4
    %
    
    
    (2,353
    )
    
    
    -2.6
    %Total revenues
    
    $
    538,748
    
    
    
    100.0
    %
    
    $
    547,685
    
    
    
    100.0
    %
    
    $
    (8,937
    )
    
    
    -1.6
    %
  Total
    
    
    -1.6
    %Merchandise
    
    
    -1.5
    %Rental
    
    
    -2.5
    %
  Fiscal Year Ended January 31,2009
    
    2008Trends
    
    
    22.6
    %
    
    
    8.1
    %Consumables
    
    
    14.6
    %
    
    
    3.8
    %Electronics
    
    
    12.9
    %
    
    
    20.3
    %Hard Back Café
    
    
    8.7
    %
    
    
    10.9
    %Books
    
    
    1.3
    %
    
    
    2.1
    %Video Games
    
    
    0.5
    %
    
    
    17.3
    %Movies
    
    
    -2.4
    %
    
    
    4.0
    %Music
    
    
    -16.3
    %
    
    
    -15.3
    %
 The Twilight Saga The Shack The New Earth
  23




---



##### Table of Contents



Gross Profit  Merchandise.
 Gross Profit  Rental.
 Selling, General and Administrative expenses (SG&A).
 Interest Expense.
 Income Tax Expense.
  Revenues.
 24




---



##### Table of Contents



Fiscal Year Ended January 31,2008
    
    

2007
    
    
    Increase/(Decrease)Percent of
    
    
    
    
    
    Percent ofRevenues
    
    
    Total
    
    

    Revenues
    
    
    Total
    
    

    Dollar
    
    

    PercentMerchandise revenue
    
    $
    458,076
    
    
    
    83.6
    %
    
    $
    454,142
    
    
    
    82.8
    %
    
    $
    3,934
    
    
    
    0.9
    %Rental revenue
    
    
    89,609
    
    
    
    16.4
    %
    
    
    94,190
    
    
    
    17.2
    %
    
    
    (4,581
    )
    
    
    -4.9
    %Total revenues
    
    $
    547,685
    
    
    
    100.0
    %
    
    $
    548,332
    
    
    
    100.0
    %
    
    $
    (647
    )
    
    
    -0.1
    %
  Total
    
    
    -0.1
    %Merchandise
    
    
    0.8
    %Rental
    
    
    -4.8
    %
  Fiscal Year Ended January 31,2008
    
    2007Electronics
    
    
    20.3
    %
    
    
    27.3
    %Video Games
    
    
    17.3
    %
    
    
    8.7
    %Hard Back Café
    
    
    10.9
    %
    
    
    25.6
    %Trends
    
    
    8.1
    %
    
    
    -3.3
    %Movies
    
    
    4.0
    %
    
    
    13.1
    %Books
    
    
    2.1
    %
    
    
    0.4
    %Consumables
    
    
    3.8
    %
    
    
    -1.6
    %Music
    
    
    -15.3
    %
    
    
    -9.3
    %
    Gross Profit  Merchandise.
 25




---



##### Table of Contents



Gross Profit  Rental.
 Selling, General and Administrative expenses (SG&A).
 Income Tax Expense
 26




---



##### Table of Contents



Consolidated Cash Flows
 Operating Activities .
 Investing Activities.
 Financing Activities .
 27




---



##### Table of Contents



Capital Structure.
   28




---



##### Table of Contents



Contractual Obligations and Off-Balance Sheet Arrangements
  Payments due by periodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt (principal
only) (1)
    
    $
    44,507
    
    
    
    
    
    
    
    44,507
    
    
    
    
    
    
    
    Operating leases (2)
    
    
    173,910
    
    
    
    24,173
    
    
    
    43,448
    
    
    
    33,765
    
    
    
    72,524Revenue sharing (3)
    
    
    709
    
    
    
    709
    
    
    
    
    
    
    
    
    
    
    
    Total (4)
    
    $
    219,126
    
    
    
    24,882
    
    
    
    87,955
    
    
    
    33,765
    
    
    
    72,524
 
 (1)
    
    Based on our internal forecasts, we estimate interest payments for FY 2009 to be
approximately $1.9 million.(2)
    
    Amounts include the direct lease obligations, excluding any taxes, insurance, maintenance and
other related expenses. For the fiscal year ended January 31, 2009, payments for taxes,
insurance, maintenance, and other related expenses, which are variable in nature, were
approximately $5.6 million. Amounts exclude future rent reductions, unexecuted as of January
31, 2009, of approximately $1.1 million, which will be realized over the remaining lives of
certain leases.(3)
    
    As of January 31, 2009, we were a party to revenue-sharing arrangements with various studios.
These agreements include minimum purchase requirements, based upon the box office results of
the title, at a lower initial product cost as compared to non-revenue sharing purchases. In
addition, these contracts require net rental revenues to be shared with the studios over an
agreed period of time. We have included amounts owed and an estimate of our contractual
obligation under these agreements for performance guarantees and minimum purchase requirements
for the period in which they can reasonably be estimated, which is approximately two months in
the future. Although these contracts may extend beyond the estimated two month period, we
cannot reasonably estimate these amounts due to the uncertainty of purchases that will be made
under these agreements. The amounts presented above do not include revenue sharing accruals
for rental revenues recorded during fiscal 2009.(4)
    
    FIN 48 obligations including unrecognized tax benefits of $186,000 and accrued interest and
penalties related to unrecognized tax benefits of $211,000, as of January 31, 2009, were not
included in this table. Due to the uncertainty surrounding the timing of any future cash
outflows related to FIN 48 liabilities, we are not able to reasonably estimate the period of
cash settlement with the respective taxing authority. 29




---



##### Table of Contents



Fiscal year 2008:
    
    QuarterFirst
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    131,936
    
    
    $
    125,666
    
    
    $
    114,268
    
    
    $
    166,878Operating income
    
    $
    5,317
    
    
    $
    1,528
    
    
    $
    (4,687
    )
    
    $
    7,118% of full year:Total revenues
    
    
    24.5
    %
    
    
    23.3
    %
    
    
    21.2
    %
    
    
    31.0
    %Operating income
    
    
    57.3
    %
    
    
    16.5
    %
    
    
    (50.5
    %)
    
    
    76.7
    %
 Fiscal year 2007:
    
    QuarterFirst
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    128,012
    
    
    $
    125,905
    
    
    $
    122,275
    
    
    $
    171,493Operating income
    
    $
    4,779
    
    
    $
    2,363
    
    
    $
    812
    
    
    $
    10,038% of full year:Total revenues
    
    
    23.4
    %
    
    
    23.0
    %
    
    
    22.3
    %
    
    
    31.3
    %Operating income
    
    
    26.6
    %
    
    
    13.1
    %
    
    
    4.5
    %
    
    
    55.8
    %
  30




---



##### Table of Contents



Fair Value Measurements Effective Date of FASB
Statement No. 157
  
    
    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.
  The Fair Value Option for Financial Assets and
Financial Liabilities
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  31




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 HASTINGS ENTERTAINMENT, INC.
Index to Consolidated Financial Statements
and Financial Statement Schedule
 PageReport of Independent Registered Public Accounting Firm
    
    33Consolidated Balance Sheets as of January 31, 2009 and 2008
    
    34Consolidated Statements of Earnings
for the years ended January 31, 2009, 2008, and 2007
    
    35Consolidated Statements of Shareholders Equity
for the years ended January 31, 2009, 2008, and 2007
    
    36Consolidated Statements of Cash Flows
for years ended January 31, 2009, 2008, and 2007
    
    37Notes to Consolidated Financial Statements
    
    38ScheduleFinancial Statement Schedule II  The Financial Statement Schedule filed as part of
this report is listed under Part IV, Item 15 (a). Exhibits and Financial Statement Schedules
    
    64
 32




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 33




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
 
 January 31,2009
    
    
    2008AssetsCurrent assetsCash and cash equivalents
    
    $
    7,449
    
    
    $
    3,982Merchandise inventories
    
    
    147,957
    
    
    
    171,557Deferred income taxes
    
    
    11,180
    
    
    
    3,441Prepaid expenses and other current assets
    
    
    11,224
    
    
    
    11,042Total current assets
    
    
    177,810
    
    
    
    190,022Rental assets, net of accumulated depreciation of $22,647 and $22,139 at
January 31, 2009 and 2008, respectively
    
    
    15,463
    
    
    
    13,236Property and equipment, net
    
    
    56,585
    
    
    
    52,572Deferred income taxes
    
    
    2,434
    
    
    
    2,756Intangible assets
    
    
    391
    
    
    
    391Other assets
    
    
    1,020
    
    
    
    1,244$
    253,703
    
    
    $
    260,221Liabilities and Shareholders EquityCurrent liabilitiesTrade accounts payable
    
    $
    61,823
    
    
    $
    76,364Accrued expenses and other current liabilities
    
    
    40,614
    
    
    
    36,675Total current liabilities
    
    
    102,437
    
    
    
    113,039Long-term debt
    
    
    44,507
    
    
    
    40,616Other liabilities
    
    
    4,723
    
    
    
    4,758Shareholders 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 in fiscal 2008 and 2007;
9,766,818 shares outstanding in fiscal 2008 and
10,389,339 shares outstanding in fiscal 2007
    
    
    119
    
    
    
    119Additional paid-in capital
    
    
    36,651
    
    
    
    37,125Retained earnings
    
    
    79,951
    
    
    
    75,892Accumulated other comprehensive loss
    
    
    (67
    )
    
    
    (15
    )Treasury stock, at cost
    
    
    (14,618
    )
    
    
    (11,313
    )102,036
    
    
    
    101,808$
    253,703
    
    
    $
    260,221
  34




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
 
 Fiscal Year2008
    
    
    2007
    
    
    2006Merchandise revenue
    
    $
    451,492
    
    
    $
    458,076
    
    
    $
    454,142Rental asset revenue
    
    
    87,256
    
    
    
    89,609
    
    
    
    94,190Total revenues
    
    
    538,748
    
    
    
    547,685
    
    
    
    548,332Merchandise cost of revenue
    
    
    315,780
    
    
    
    321,438
    
    
    
    326,025Rental asset cost of revenue
    
    
    30,948
    
    
    
    31,107
    
    
    
    33,862Total cost of revenues
    
    
    346,728
    
    
    
    352,545
    
    
    
    359,887Gross profit
    
    
    192,020
    
    
    
    195,140
    
    
    
    188,445Selling, general and administrative expenses
    
    
    182,511
    
    
    
    177,028
    
    
    
    177,467Pre-opening expenses
    
    
    233
    
    
    
    120
    
    
    
    94Operating income
    
    
    9,276
    
    
    
    17,992
    
    
    
    10,884Other income (expense):Interest expense
    
    
    (1,961
    )
    
    
    (2,919
    )
    
    
    (3,260
    )Other, net
    
    
    193
    
    
    
    123
    
    
    
    642Income before income taxes
    
    
    7,508
    
    
    
    15,196
    
    
    
    8,266Income tax expense
    
    
    3,449
    
    
    
    4,951
    
    
    
    3,247Net income
    
    $
    4,059
    
    
    $
    10,245
    
    
    $
    5,019Basic income per share
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    0.45Diluted income per share
    
    $
    0.39
    
    
    $
    0.93
    
    
    $
    0.44
  35




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
 
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury Stock
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Shares
    
    
    Amount
    
    
    EquityBalances at January
31, 2006
    
    
    11,944,544
    
    
    $
    119
    
    
    $
    36,076
    
    
    $
    61,466
    
    
    $
    141
    
    
    
    561,372
    
    
    $
    (3,109
    )
    
    $
    94,693Issuance of stock
to directors
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    (13,741
    )
    
    
    83
    
    
    
    100Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595,600
    
    
    
    (4,237
    )
    
    
    (4,237
    )Exercise of stock
options and other,
net of taxes
    
    
    
    
    
    
    
    
    
    
    758
    
    
    
    
    
    
    
    
    
    
    
    (210,040
    )
    
    
    1,239
    
    
    
    1,997Other stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,019Change in
interest rate
cap,
net of $55 in
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,945Balances at January
31, 2007
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,906
    
    
    
    66,485
    
    
    
    67
    
    
    
    933,191
    
    
    
    (6,024
    )
    
    
    97,553Issuance of stock
to directors
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (6,905
    )
    
    
    45
    
    
    
    50Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    778,687
    
    
    
    (6,336
    )
    
    
    (6,336
    )Exercise of stock
options and other,
net of taxes
    
    
    
    
    
    
    
    
    
    
    (164
    )
    
    
    
    
    
    
    
    
    
    
    (149,768
    )
    
    
    1,002
    
    
    
    838Other stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378FIN 48 Adjustment
(Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (838
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (838
    )Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,245Change in
interest rate
cap,
net of $43 in
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    
    
    
    
    (67
    )Unrealized
loss ininvestments
held for
sale in
Supplemental
Executive
Retirement Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,163Balances at January
31, 2008
    
    
    11,944,544
    
    
    
    119
    
    
    
    37,125
    
    
    
    75,892
    
    
    
    (15
    )
    
    
    1,555,205
    
    
    
    (11,313
    )
    
    
    101,808Issuance of stock
to directors
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    (5,750
    )
    
    
    43
    
    
    
    50Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764,199
    
    
    
    (4,350
    )
    
    
    (4,350
    )Exercise of stock
options and other,
net of taxes
    
    
    
    
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    
    
    
    
    (88,428
    )
    
    
    652
    
    
    
    458Grant of
performance-based
restricted stock
    
    
    
    
    
    
    
    
    
    
    (350
    )
    
    
    
    
    
    
    
    
    
    
    (47,500
    )
    
    
    350
    
    
    
    Other stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,059Unrealized
losses in
investments
held for sale
in Supplemental
Executive
Retirement
Plan, net of
$42 in taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    (52
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,007Balances at January
31, 2009
    
    
    11,944,544
    
    
    $
    119
    
    
    $
    36,651
    
    
    $
    79,951
    
    
    $
    (67
    )
    
    
    2,177,726
    
    
    $
    (14,618
    )
    
    $
    102,036
  36




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
 
 Fiscal Year2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    4,059
    
    
    $
    10,245
    
    
    $
    5,019Adjustments to reconcile net income to net cash provided
by operating activities:Rental asset depreciation expense
    
    
    14,833
    
    
    
    13,441
    
    
    
    15,771Purchases of rental assets
    
    
    (30,695
    )
    
    
    (27,276
    )
    
    
    (28,689
    )Property and equipment depreciation expense
    
    
    20,019
    
    
    
    19,400
    
    
    
    19,865Amortization expense
    
    
    
    
    
    
    20
    
    
    
    43Loss on rental assets lost, stolen and defective
    
    
    1,198
    
    
    
    1,218
    
    
    
    1,224Loss on disposal or impairment of property and equipment, excluding rental assets
    
    
    1,620
    
    
    
    709
    
    
    
    1,295Deferred income taxes
    
    
    (7,417
    )
    
    
    (542
    )
    
    
    70Non-cash stock-based compensation
    
    
    113
    
    
    
    428
    
    
    
    155Changes in operating assets and liabilities:Merchandise inventories
    
    
    35,924
    
    
    
    7,030
    
    
    
    10,138Other current assets
    
    
    (182
    )
    
    
    (409
    )
    
    
    (3,617
    )Trade accounts payable
    
    
    (16,445
    )
    
    
    2,224
    
    
    
    (9,379
    )Accrued expenses and other liabilities
    
    
    4,071
    
    
    
    (1,215
    )
    
    
    22Excess tax benefit from stock option exercises
    
    
    (132
    )
    
    
    (127
    )
    
    
    Other assets and liabilities, net
    
    
    137
    
    
    
    (563
    )
    
    
    (402
    )Net cash provided by operating activities
    
    
    27,103
    
    
    
    24,583
    
    
    
    11,515Cash flows from investing activities:Purchase of property, equipment and improvements
    
    
    (25,539
    )
    
    
    (15,256
    )
    
    
    (18,566
    )Net cash used in investing activities
    
    
    (25,539
    )
    
    
    (15,256
    )
    
    
    (18,566
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    556,589
    
    
    
    565,488
    
    
    
    585,927Repayments under revolving credit facility
    
    
    (552,698
    )
    
    
    (566,794
    )
    
    
    (572,062
    )Payments under long-term debt and capital lease obligations
    
    
    
    
    
    
    
    
    
    
    (94
    )Purchase of treasury stock
    
    
    (4,350
    )
    
    
    (6,336
    )
    
    
    (4,237
    )Change in cash overdraft
    
    
    1,904
    
    
    
    (2,378
    )
    
    
    (3,094
    )Proceeds from exercise of stock options
    
    
    326
    
    
    
    711
    
    
    
    831Excess tax benefit from stock option exercises
    
    
    132
    
    
    
    127
    
    
    
    Net cash provided by (used in) financing activities
    
    
    1,903
    
    
    
    (9,182
    )
    
    
    7,271Net increase in cash and cash equivalents
    
    
    3,467
    
    
    
    145
    
    
    
    220Cash and cash equivalents at beginning of year
    
    
    3,982
    
    
    
    3,837
    
    
    
    3,617Cash and cash equivalents at end of year
    
    $
    7,449
    
    
    $
    3,982
    
    
    $
    3,837
  37




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(1) Operations and Summary of Significant Accounting Policies
 (a)
    
    GeneralHastings Entertainment, Inc. operates a chain of retail stores in 21 states, primarily
in the Western and Midwestern United States. Revenues are generated from the sale of
new and used books, music, DVDs, video games, and video game consoles, and new software,
periodicals, consumables, and trends products. In addition, our revenues include the
rental of DVDs, Blu-ray DVDs, and video games.(b)
    
    Basis of ConsolidationThe consolidated financial statements present the results of Hastings Entertainment,
Inc. and its wholly-owned subsidiary. All inter-company transactions and balances have
been eliminated in consolidation.(c)
    
    Basis of PresentationWe operate in one reportable segment. Our fiscal years ended January 31, 2009, 2008 and
2007 are referred to as fiscal 2008, 2007, and 2006, respectively. Certain amounts
previously reported have been reclassified to conform to the current year presentation.
The reclassifications did not have any effect on our statements of earnings for any of
the periods presented.(d)
    
    Cash and Cash EquivalentsWe consider all debit and credit card receivables totaling $2.9 and $1.2 million at
January 31, 2009 and 2008, respectively, from MasterCard, Visa, Discover, and American
Express, and all highly liquid investments with an original maturity date of three
months or less to be cash equivalents. All balances related to debit and credit card
receivables, as listed above, typically settle within five days. We utilize a cash
management process under which a book cash overdraft may exist for our primary
disbursement accounts. These overdrafts represent un-cleared checks in excess of cash
balances in bank accounts at the end of the reporting period and have been reclassified
to accounts payable on the consolidated balance sheets. We transfer cash on an
as-needed basis to fund clearing checks.(e)
    
    Revenue RecognitionMerchandise and rental asset revenue are recognized at the point of sale or rental or at
the time merchandise is shipped to the customer. Additionally, revenues are presented
net of estimated returns and exclude all sales taxes. An allowance has been established
to provide for expected merchandise returns.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. The liability is relieved and revenue is recognized upon redemption of the
gift cards.We reduce our revenue through reserves for the estimated utilization of early return
credits received by renters for early return of rentals. The deferred revenue liability
is relieved upon the redemption of these early return credits.We provide our customers with the opportunity to trade in used DVDs, video games, CDs
and books in exchange for cash consideration or store credit in the form of a gift card.
Merchandise inventory is recorded at a cost equal to the cash offer to the customer.
If a customer chooses store credit, a gift card is issued for the amount of the cash
offer plus a premium. Premiums associated with gift cards issued as a result of
trade-in transactions are recorded as a reduction of revenue in the period in which the
related gift cards are redeemed.
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(f)
    
    Merchandise InventoriesMerchandise inventories are recorded at the lower of cost, which approximates the
first-in, first-out (FIFO) method, or market. Amounts are presented net of the
allowance for shrinkage and obsolescence.Expenses included in cost of revenues include cost of product purchased from vendors;
rental asset depreciation expense; revenue-sharing payments; shrinkage; inventory
markdowns and write-offs; freight charges; receiving costs; inspection costs; and
internal transfer costs. In addition, we include in cost of goods sold all expenses
associated with our distribution center, including freight, warehouse personnel costs,
supplies, maintenance, depreciation, occupancy, property tax, and utility costs; as well
as costs associated with our returns center, including vendor refused product, handling
charges, return fees, freight, return center personnel costs, supplies, maintenance,
depreciation, rent, and utilities. We include occupancy costs for retail locations in
SG&A expenses.We transfer rental assets that have been converted to previously viewed titles for sale,
from Rental Assets to Merchandise Inventories. The transfer to Merchandise
Inventories is recorded at the time of conversion, which is the first date the product
is made available for sale. During fiscal 2008, 2007, and 2006, $12.3 million, $11.3
million, and $12.4 million, respectively, were transferred from rental assets to
merchandise inventory at the lower of net book value or market.Merchandise inventory owned by us is generally returnable based upon return agreements
with our merchandise vendors. We continually return merchandise to vendors based on,
among other factors, current and projected sales trends, overstock situations,
authorized return timelines or changes in product offerings. At the end of any
reporting period, cost accruals are required for inventory that has been returned to
vendors, is in the process of being returned to vendors, or has been identified to be
returned to vendors. These costs can include freight, valuation and quantity
differences, and other fees charged by a vendor. In order to appropriately match the
costs associated with the return of merchandise with the process of returning such
merchandise, we utilize an allowance for cost of inventory returns. To accrue for such
costs and estimate this allowance, we utilize historical experience adjusted for
significant estimated or contractual modifications. Certain adjustments to the
allowance can have a material effect on the financial results of an annual or interim
period.(g)
    
    Property and EquipmentProperty and equipment are recorded at cost and depreciated using the straight-line
method, except for rental assets, which are depreciated using an accelerated
depreciation method. Furniture, fixtures, equipment and software are depreciated over
their estimated useful lives of three to seven years. Leasehold improvements are
amortized over the shorter of the related lease term or their estimated useful lives.Expenditures for maintenance, repairs and renewals that do not materially extend the
original useful lives of assets are charged to expense as incurred.We evaluate underperforming 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 fair value is less than the carrying value of such assets.
The carrying value of leasehold improvements as well as certain other property and
equipment is subject to impairment write-down.
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##### Table of Contents



(h)
    
    Rental Asset DepreciationRental assets, except for the initial purchases for new stores, are depreciated using an
accelerated method over six months or nine months. The initial purchases of rental
assets for new stores are depreciated over 36 months using the straight-line method.
Rental assets, which include DVDs, Books on CD, and video games, are depreciated to
salvage values ranging from $4 to $10. Rental assets purchased for less than
established salvage values are not depreciated. During the fourth quarter of fiscal
2008, we expensed approximately $54,000 related to approximately 51,000 remaining VHS
rental units in our stores.(i)
    
    Financial InstrumentsThe carrying amount of long-term debt approximates fair value as of January 31, 2009 and
2008 due to the instrument bearing interest at variable rates. The carrying amount of
accounts payable approximates fair value because of its short maturity period.(j)
    
    Stock Based CompensationDetermining the amount of share-based compensation to be recorded in the statement of
earnings 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 option lives involve managements best estimates at that
time, 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 life 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 performance-based stock awards. The grant date
fair value of performance-based stock awards is equal to the average of the opening and
closing stock price on the day on which they are granted. Compensation expense is
recognized for these awards if management deems it probable that the performance
conditions will be met. Management must use their 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.
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(k)
    
    Advertising CostsAdvertising costs for newspaper, television and other media are expensed as incurred.
Advertising expenses, net of allowances from vendors, for the fiscal years 2008, 2007,
and 2006 were $7.4 million, $6.3 million, and $7.7 million, respectively.We receive payments and credits from vendors pursuant to cooperative advertising
programs and display allowance agreements. During fiscal years 2008, 2007 and 2006, we
received a total of approximately $8.5 million, $8.6 million, and $9.0 million,
respectively, for such payments and credits. To the extent such payments are a
reimbursement for a specific incremental and identifiable cost such amounts are recorded
as a reduction in SG&A expenses at the time the associated advertisement is publicly
released. The remainder of these payments and allowances are recorded as a reduction of
merchandise inventory and the cost of rental assets and recognized in income as the
related merchandise is sold or rented.(l)
    
    Pre-opening CostsPre-opening expenses include human resource costs, travel, rent, advertising, supplies
and certain other costs incurred prior to a stores opening and are expensed as
incurred.(m)
    
    Earnings Per ShareBasic earnings per share is computed by dividing net earnings by the weighted-average
number of common shares outstanding during the period. Diluted earnings per share is
similarly computed, but includes the dilutive effect of stock options outstanding and
restricted stock awards.(n)
    
    Use of Management EstimatesThe 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.(o)
    
    Impact of Recently Issued Accounting StandardsEffective February 1, 2008, we adopted SFAS 157, Fair Value Measurements(SFAS 157)
and its related amendments for financial assets and liabilities measured at fair value
on a recurring basis. In February 2008, the FASB issued FASB Statement Position No.
157-2, Effective Date of FASB Statement No. 157, which delayed for one year the
effective date of SFAS 157 for non-financial assets and liabilities measured at fair
value on a non-recurring basis. As a result, we will adopt the provisions of SFAS 157
for non-financial assets and liabilities as of February 1, 2009. SFAS 157 defines fair
value, establishes a market-based hierarchy for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is applicable whenever another
accounting pronouncement requires or permits assets and liabilities to be measured at
fair value, but does not require any new fair value measurements. The adoption of FAS
157 had no impact on our results of operations or financial position.The fair-value hierarchy established in SFAS 157 prioritizes the inputs used in
valuation techniques into three levels as follows:
 
    
    Level 1  Observable inputs  quoted prices in active markets for identical
assets and liabilities;
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##### Table of Contents




    
    Level 2  Observable inputs other than the quoted prices in active markets for
identical assets and liabilities  includes quoted prices for similar instruments,
quoted prices for identical or similar instruments in inactive markets, and amounts
derived from valuation models where all significant inputs are observable in active
markets; and
    
    Level 3  Unobservable inputs  includes amounts derived from valuation models
where one or more significant inputs are unobservable and require us to develop
relevant assumptions.
 At January 31, 2009 and 2008, we had approximately $0.7 million and $0.5 million,
respectively in assets which are carried at fair value on a recurring basis. These
assets 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.In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities(SFAS 159). SFAS 159 allows companies to elect to measure
certain assets and liabilities at fair value and is effective for fiscal years beginning
after November 15, 2007. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. We elected not to measure any
additional assets or liabilities at fair value that are not already measured at fair
value under existing standards. Therefore, the adoption of SFAS 159 had no impact on
our results of operations, financial position, or cash flow.In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which requires,
among other things, the acquiring entity in a business combination to recognize the full
fair value of the assets acquired, liabilities assumed and any non-controlling interest
as of the acquisition date; the immediate expense recognition of transaction costs; and
accounting for restructuring plans separately from the business combination. This
statement applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early adoption is not allowed. This standard will have an impact only
if we enter into a business combination.
 (2)   Merchandise Inventories
  January 31,2009
    
    
    2008Books
    
    $
    56,339
    
    
    $
    62,175Videos
    
    
    34,847
    
    
    
    43,224Video Games
    
    
    19,523
    
    
    
    19,206Music
    
    
    22,281
    
    
    
    28,758Trends
    
    
    10,865
    
    
    
    9,948Consumer Electronics
    
    
    7,485
    
    
    
    7,507Other
    
    
    1,953
    
    
    
    5,983153,293
    
    
    
    176,801Less allowance for inventory shrinkage and obsolescence
    
    
    5,336
    
    
    
    5,244$
    147,957
    
    
    $
    171,557
  42




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(3)   Property and Equipment
  January 31,2009
    
    
    2008Furniture, equipment and software
    
    $
    164,332
    
    
    $
    149,997Leasehold improvements
    
    
    68,462
    
    
    
    66,054Buildings and land
    
    
    258
    
    
    
    258Work in progress
    
    
    799
    
    
    
    890233,851
    
    
    
    217,199Less accumulated depreciation
    
    
    177,266
    
    
    
    164,627Property and equipment, net
    
    $
    56,585
    
    
    $
    52,572
  43




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##### Table of Contents



(4) Accrued Expenses and Other Current Liabilities
  January 31,2009
    
    
    2008Allowance for cost of inventory returns
    
    $
    962
    
    
    $
    1,343Deferred gift card revenue
    
    
    18,735
    
    
    
    17,901Salaries, vacation, bonus and benefits
    
    
    4,241
    
    
    
    4,447Short term lease obligations
    
    
    1,001
    
    
    
    1,043Sales taxes payable
    
    
    1,810
    
    
    
    1,493Federal income tax payable
    
    
    7,807
    
    
    
    3,449Other accrued expenses
    
    
    6,058
    
    
    
    6,999Total
    
    $
    40,614
    
    
    $
    36,675
   44




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##### Table of Contents



(5)   Store Closing Reserve
    Future LeasePaymentsBalance at January 31, 2006
    
    $
    709Additions to provision
    
    
    176Changes in estimates
    
    
    243Cash outlay, net
    
    
    (452
    )Balance at January 31, 2007
    
    
    676Additions to provision
    
    
    195Changes in estimates
    
    
    (82
    )Cash outlay, net
    
    
    (412
    )Balance at January 31, 2008
    
    
    377Additions to provision
    
    
    107Changes in estimates
    
    
    49Cash outlay, net
    
    
    (501
    )Balance at January 31, 2009
    
    $
    32
  45




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(6)   Long-term Debt
    46




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(7)   Leases
  Fiscal Year2008
    
    
    2007
    
    
    2006Minimum rentals
    
    $
    25,903
    
    
    $
    24,892
    
    
    $
    23,759Contingent rentals
    
    
    267
    
    
    
    297
    
    
    
    491Less sublease income
    
    
    (130
    )
    
    
    (162
    )
    
    
    (109
    )Rental expense
    
    $
    26,040
    
    
    $
    25,027
    
    
    $
    24,141
  2009
    
    $
    24,1732010
    
    
    22,5682011
    
    
    20,8802012
    
    
    18,1702013
    
    
    15,595Thereafter
    
    
    72,524Total minimum lease payments
    
    
    173,910Less sublease income
    
    
    254Net minimum lease payments under
operating leases
    
    $
    173,656
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##### Table of Contents



(8)   Income Taxes
 Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
 Fiscal Year2008
    
    
    2007Unrecognized tax positions at beginning of period
    
    $
    186
    
    
    $
    808Increases in tax positions from prior years
    
    
    
    
    
    
    Decreases in tax positions from prior years
    
    
    
    
    
    
    Increases in tax positions from current year
    
    
    
    
    
    
    Settlements with taxing authorities
    
    
    
    
    
    
    (622
    )Lapse in statute of limitations
    
    
    
    
    
    
    Unrecognized tax positions at end of period
    
    $
    186
    
    
    $
    186
    Fiscal Year2008
    
    
    2007
    
    
    2006Current federal
    
    $
    10,589
    
    
    $
    5,870
    
    
    $
    2,883Current state and local
    
    
    235
    
    
    
    (377
    )
    
    
    294Deferred federal, state, and local
    
    
    (7,375
    )
    
    
    (542
    )
    
    
    70$
    3,449
    
    
    $
    4,951
    
    
    $
    3,247
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##### Table of Contents



Fiscal Year2008
    
    2007
    
    2006Computed expected income tax expense
    
    $
    2,628
    
    
    
    35.0
    %
    
    $
    5,319
    
    
    
    35.0
    %
    
    $
    2,893
    
    
    
    35.0
    %State and local income taxes, net of
federal income tax effect
    
    
    238
    
    
    
    3.2
    %
    
    
    471
    
    
    
    3.1
    %
    
    
    300
    
    
    
    3.6
    %Interest on settlement of federal tax exam
    
    
    800
    
    
    
    10.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other tax reserve adjustments
    
    
    (217
    )
    
    
    (3.0
    %)
    
    
    (839
    )
    
    
    (5.5
    %)
    
    
    54
    
    
    
    0.7
    %$
    3,449
    
    
    
    45.9
    %
    
    $
    4,951
    
    
    
    32.6
    %
    
    $
    3,247
    
    
    
    39.3
    %
  Fiscal Year2008
    
    
    2007Deferred tax assets:Gift cards
    
    $
    7,238
    
    
    $
    1,178Abandoned leases
    
    
    12
    
    
    
    145Deferred rent and lease incentives
    
    
    1,879
    
    
    
    1,899Inventories
    
    
    2,269
    
    
    
    1,037Property and equipment
    
    
    8,654
    
    
    
    7,803Other
    
    
    1,557
    
    
    
    1,310Total deferred tax assets
    
    
    21,609
    
    
    
    13,372Deferred tax liabilities:Rental assets
    
    
    (7,995
    )
    
    
    (7,175
    )Total deferred tax liabilities
    
    
    (7,995
    )
    
    
    (7,175
    )Net deferred tax assets
    
    $
    13,614
    
    
    $
    6,197
  49




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(9)   Earnings Per Share
  Fiscal Year2008
    
    
    2007
    
    
    2006Net earnings
    
    $
    4,059
    
    
    $
    10,245
    
    
    $
    5,019Average shares outstanding:Basic
    
    
    10,122
    
    
    
    10,797
    
    
    
    11,244Effect of dilutive stock-based
awards
    
    
    202
    
    
    
    258
    
    
    
    274Diluted
    
    
    10,324
    
    
    
    11,055
    
    
    
    11,518Earnings per share:Basic
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    0.45Diluted
    
    $
    0.39
    
    
    $
    0.93
    
    
    $
    0.44
  (10)   Benefit Plans
     50




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##### Table of Contents



11)   Shareholders Equity
     51




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12)  Stock Based Compensation
  Stock Options
   Fiscal Year2008
    
    
    2007
    
    
    2006Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    2.08
    %
    
    
    3.30
    %
    
    
    4.79
    %Expected life in years
    
    
    4.57
    
    
    
    4.47
    
    
    
    4.92Historical Volatility
    
    
    0.47
    
    
    
    0.44
    
    
    
    0.51
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##### Table of Contents



Weighted-average exerciseOptions (in
    
    
    priceactual shares)
    
    
    (in dollars)Outstanding at January 31, 2006
    
    
    1,603,867
    
    
    $
    6.50Granted
    
    
    107,680
    
    
    
    7.31Exercised
    
    
    (210,040
    )
    
    
    3.96Forfeited and expired
    
    
    (453,006
    )
    
    
    10.78Outstanding at January 31, 2007
    
    
    1,048,501
    
    
    $
    5.26Granted
    
    
    75,150
    
    
    
    9.39Exercised
    
    
    (149,768
    )
    
    
    4.74Forfeited and expired
    
    
    (68,510
    )
    
    
    8.37Outstanding at January 31, 2008
    
    
    905,373
    
    
    $
    5.45Granted
    
    
    162,650
    
    
    
    3.08Exercised
    
    
    (88,428
    )
    
    
    3.70Forfeited and expired
    
    
    (18,150
    )
    
    
    9.44Outstanding at January 31, 2009
    
    
    961,445
    
    
    $
    5.14
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##### Table of Contents



Weighted-
    
    
    Weighted-
    
    
    Aggregateaverage exercise
    
    
    average remaining
    
    
    intrinsic valueOptions
    
    
    price (in dollars)
    
    
    contractual life
    
    
    (in thousands)Range: $1.33 to $4.99Options outstanding and
exercisable at January
31, 2009
    
    
    291,720
    
    
    $
    3.25
    
    
    3.06 years
    
    $
    602Options outstanding and
unexercisable at
January 31, 2009
    
    
    130,000
    
    
    $
    1.72
    
    
    8.95 years
    
    $
    103,956Range: $5.00 to $9.99Options outstanding and
exercisable at January
31, 2009
    
    
    398,781
    
    
    $
    6.40
    
    
    4.43 years
    
    
    Options outstanding and
unexercisable at
January 31, 2009
    
    
    121,888
    
    
    $
    8.29
    
    
    8.23 years
    
    
    Price: $10.00 to $10.64Options outstanding and
exercisable at January
31, 2008
    
    
    6,195
    
    
    $
    10.64
    
    
    3.85 years
    
    
    Options outstanding and
unexercisable at
January 31, 2008
    
    
    12,861
    
    
    $
    10.64
    
    
    3.85 years
    
    
    
   Weighted Average
Exercise price for
    
    Weighted Average Fair valuefor Fiscal Year
    
    Fiscal Year2008
    
    2007
    
    2006
    
    2008
    
    2007
    
    2006Options granted at
market price
    
    $
    3.29
    
    
    $
    8.97
    
    
    $
    7.29
    
    
    $
    1.36
    
    
    $
    3.86
    
    
    $
    3.64Options granted at
prices exceeding
market price
    
    $
    1.86
    
    
    $
    10.64
    
    
    $
    7.94
    
    
    $
    0.53
    
    
    $
    2.83
    
    
    $
    3.06Total options granted
    
    $
    3.08
    
    
    $
    9.39
    
    
    $
    7.39
    
    
    $
    1.24
    
    
    $
    3.60
    
    
    $
    3.55
 Performance-based Restricted Stock Awards
  54




---



##### Table of Contents



Weighted-averageAwards
    
    
    grant date fair value(in actual shares)
    
    
    (in dollars)Outstanding at January 31, 2006
    
    
    
    
    
    $
    Granted
    
    
    130,830
    
    
    
    6.55Vested
    
    
    
    
    
    
    Forfeited and expired
    
    
    
    
    
    
    Outstanding at January 31, 2007
    
    
    130,830
    
    
    $
    6.55Granted
    
    
    152,500
    
    
    
    9.67Vested
    
    
    
    
    
    
    Forfeited and expired
    
    
    
    
    
    
    Outstanding at January 31, 2008
    
    
    283,330
    
    
    $
    8.23Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited and expired
    
    
    (108,330
    )
    
    
    7.78Outstanding at January 31, 2009
    
    
    175,000
    
    
    $
    8.50
   (13)   Supplemental Cash Flow Information
  55




---



##### Table of Contents



(14)   Commitments and Contingencies
     56




---



##### Table of Contents



(15)   Interim Financial Results (Unaudited)
 Fiscal year 2008:
    
    QuarterFirst
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    131,936
    
    
    $
    125,666
    
    
    $
    114,268
    
    
    $
    166,878Total cost of revenues
    
    
    82,923
    
    
    
    79,779
    
    
    
    72,997
    
    
    
    111,029Gross profit
    
    
    49,013
    
    
    
    45,887
    
    
    
    41,271
    
    
    
    55,849Selling, general and administrative expenses
    
    
    43,694
    
    
    
    44,348
    
    
    
    45,860
    
    
    
    48,609Pre-opening expenses
    
    
    2
    
    
    
    11
    
    
    
    98
    
    
    
    122Operating income (loss)
    
    
    5,317
    
    
    
    1,528
    
    
    
    (4,687
    )
    
    
    7,118Interest (expense) and other income, net
    
    
    (455
    )
    
    
    (430
    )
    
    
    (444
    )
    
    
    (439
    )Income (loss) before taxes
    
    
    4,862
    
    
    
    1,098
    
    
    
    (5,131
    )
    
    
    6,679Income tax expense (benefit)
    
    
    1,873
    
    
    
    438
    
    
    
    (1,475
    )
    
    
    2,613Net income (loss)
    
    
    2,989
    
    
    
    660
    
    
    
    (3,656
    )
    
    
    4,066Basic income (loss) per share
    
    $
    0.29
    
    
    $
    0.06
    
    
    $
    (0.36
    )
    
    $
    0.41Diluted income (loss) per share
    
    $
    0.28
    
    
    $
    0.06
    
    
    $
    (0.36
    )
    
    $
    0.41
 Fiscal year 2007:
    
    QuarterFirst
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    128,012
    
    
    $
    125,905
    
    
    $
    122,275
    
    
    $
    171,493Total cost of revenues
    
    
    80,297
    
    
    
    80,272
    
    
    
    77,867
    
    
    
    114,109Gross profit
    
    
    47,715
    
    
    
    45,633
    
    
    
    44,408
    
    
    
    57,384Selling, general and administrative expenses
    
    
    42,936
    
    
    
    43,270
    
    
    
    43,591
    
    
    
    47,231Pre-opening expenses
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    115Operating income
    
    
    4,779
    
    
    
    2,363
    
    
    
    812
    
    
    
    10,038Interest (expense) and other income, net
    
    
    (681
    )
    
    
    (802
    )
    
    
    (701
    )
    
    
    (612
    )Income before taxes
    
    
    4,098
    
    
    
    1,561
    
    
    
    111
    
    
    
    9,426Income tax expense (benefit)
    
    
    1,614
    
    
    
    (308
    )
    
    
    38
    
    
    
    3,607Net income
    
    
    2,484
    
    
    
    1,869
    
    
    
    73
    
    
    
    5,819Basic income per share
    
    $
    0.23
    
    
    $
    0.17
    
    
    $
    0.01
    
    
    $
    0.55Diluted income per share
    
    $
    0.22
    
    
    $
    0.17
    
    
    $
    0.01
    
    
    $
    0.54
 57




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
      Changes in Internal Control over Financial Reporting
  58




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##### Table of Contents



ITEM 9A(T). CONTROLS AND PROCEDURES.
  59




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics and Other Corporate Governance Information
  
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  60




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a
    )
    
    1. The
following consolidated financial statements of the Company are
included in Part II, Item 8:Report of Independent Registered Public Accounting Firm
    
    33Consolidated Balance Sheets as of January 31, 2009 and 2008
    
    34Consolidated Statements of Earnings for the years ended
January 31, 2009, 2008, and 2007
    
    35Consolidated Statements of Shareholders Equity for the years
ended January 31, 2009, 2008, and 2007
    
    36Consolidated Statements of Cash Flows for the years ended
January 31, 2009, 2008, and 2007
    
    37Notes to Consolidated Financial Statements
    
    382. The following financial statement schedule and other information
required to be filed by Items 8 and 15(d) of Form 10-K are
included in Part IV:Financial Statement Schedule II  Valuation and Qualifying Accounts
and Reserves
    
    64All other schedules are omitted because they are not applicable, not required or the
required information is included in the Consolidated Financial Statements and notes thereto.3. The following exhibits are filed herewith or incorporated by reference as indicated
as required by Item 601 of Regulation S-K. The exhibits designated by an asterisk are
management contracts and/or compensatory plans or arrangements required to be filed as
exhibits to this report.
 ExhibitNumber
    
    
    
    
    
    
    Description3.1
    
    
    
    (1)

    
    Third Restated Articles of Incorporation of the Company.3.1
    
    
    
    (11)

    
    Amended and Restated Bylaws of the Company.4.1
    
    
    
    (2)

    
    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
    
    
    
    (11)

    
    Amended and Restated Bylaws of the Company (see 3.1 above).10.1
    
    
    
    (1)

    
    Form of Indemnification Agreement by and between the Company and its
directors and executive officers.10.2
    
    *
    
    (1)

    
    Hastings Amended 1996 Incentive Stock Plan.10.3
    
    *
    
    (2)

    
    Hastings 1994 Stock Option Plan.10.4
    
    *
    
    (2)

    
    Hastings 1991 Stock Option Plan.10.5
    
    *
    
    (1)

    
    Hastings Entertainment, Inc. Associates 401(k) Plan and Trust.10.6
    
    *
    
    (1)

    
    Hastings Employee Stock Ownership Plan Trust Agreement.10.7
    
    *
    
    (2)

    
    Chief Executive Officer Stock Option, as amended.10.8
    
    *
    
    (1)

    
    Corporate Officer Incentive Plan.10.9
    
    *
    
    (1)

    
    Management Stock Purchase Plan.10.10
    
    *
    
    (1)

    
    Management Incentive Plan.10.11
    
    *
    
    (1)

    
    Salary Incentive Plan.10.12
    
    *
    
    (1)

    
    Hastings Entertainment, Inc. Stock Option Plan for Outside Directors.10.13
    
    *
    
    (3)

    
    Agreement, dated January 31, 2001 between John H. Marmaduke and the Company10.14
    
    
    
    (4)

    
    Lease Agreement, dated August 3, 1994, as amended, between Omni Capital Corporation and
the Company, for warehouse space located at Sunset Center in Amarillo, Texas.10.15
    
    
    
    (1)

    
    Lease Agreement, dated May 28, 1992, between the City of Amarillo and the Company for
space located at 1900 W. 7th Avenue in Amarillo, Texas.10.16
    
    *
    
    (2)

    
    Stock Grant Plan for Outside Directors.10.17
    
    *
    
    (2)

    
    Form of Employment Agreement by and between the Company and certain of its executives.
 61




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##### Table of Contents



ExhibitNumber
    
    
    
    


    Description10.18
    
    
    (5)

    Amended Lease Agreement, dated October 13, 1999, between Omni Capital Corporation and
the Company, for office space located at Sunset Center in Amarillo, Texas.10.19
    
    
    (6)

    Loan and Security Agreement, dated August 29, 2000 between Hastings Entertainment, Inc.
and Fleet Retail Finance, Inc., Agent.10.20
    
    
    (7)

    International Swap Dealers Association, Inc. Master Agreement between Hastings
Entertainment, Inc. and Fleet National Bank.10.21
    
    
    (8)

    Amended Loan and Security Agreement, dated December 9, 2003, between Hastings
Entertainment, Inc. and Fleet Retail Finance, Inc., Agent.10.22
    
    
    (9)

    Severance Agreement and Release with Robert Berman, dated March 19, 2005.10.23
    
    
    (9)

    Amended Loan and Security Agreement, dated July 11, 2005, between Hastings Entertainment,
Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc., Co-Agent.10.24
    
    
    (9)

    Severance Agreement and Release with Steve Hicks, dated December 16, 2005.10.25
    
    
    (9)

    Amended Loan and Security Agreement, dated February 28, 2006, between Hastings
Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc.,
Co-Agent.10.26
    
    
    (10)

    Severance Agreement and Release with David Moffatt, dated April 5, 2006.10.27
    
    
    (10)

    Employment Agreement with Michael Rigby, dated December 5, 2005.10.28
    
    
    (10)

    Amended Loan and Security Agreement, dated February 27, 2007, between Hastings
Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc.,
Co-Agent.10.29
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and Dan Crow,
dated August 1, 2008.10.30
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and Alan Van
Ongevalle (as described in the Form 8-K filed by the Company on February 9, 2007), dated
August 1, 2008.10.31
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and Susan Dasse
(as described in the Form 8-K filed by the Company on May 2, 2008), dated August 1, 2008.10.32
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and Kevin Ball,
dated August 1, 2008.10.33
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and John Hintz (as
described in the Form 8-K filed by the Company on February 9, 2007), dated August 1, 2008.10.34
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and Victor Fuentes
(as described in the Form 8-K filed by the Company on October 18, 2007), dated August 1,
2008.10.35
    
    
    (13)

    Amendments to the Employment Agreement by and between the Company and Philip
McConnell (as described in the Form 8-K filed by the Company on June 12, 2006), dated
August 1, 2008.10.36
    
    
    (12)

    Amendments to the Employment Agreement by and between the Company and John H
Marmaduke, dated February 1, 2009.21.1
    
    
    (13)

    Subsidiaries of the Company.23.1
    
    
    (13)

    Consent of Ernst & Young LLP.24.1
    
    
    (13)

    Powers of Attorney (included on signature page).31.1
    
    
    (13)

    Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-
14(a).31.2
    
    
    (13)
    
    Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-
14(a).32.1
    
    
    (13)

    Certification of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 (1)
    
    Previously filed as an exhibit to the 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 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. 62




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##### Table of Contents



ExhibitNumber
    
    
    
    


    Description(3)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2001, and incorporated herein by reference.(4)
    
    Previously filed as an exhibit to the Companys Registration Statement on Form
S-1/A, dated June 11, 1998 (File No. 333-47969) and with a corresponding exhibit number
herein and are incorporated herein by reference.(5)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K, as
amended, for the fiscal year ended January 31, 2000, and incorporated herein by
reference.(6)
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q,
as amended, for the quarterly period ended July 31, 2000, and incorporated herein by
reference.(7)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2002, and incorporated herein by reference.(8)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2004, and incorporated herein by reference.(9)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2006, and incorporated herein by reference.(10)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2007, and incorporated herein by reference.(11)
    
    Previously filed as an exhibit to the Companys Form 8-K (File No. 000-24381)
filed on January 17, 2008, and incorporated herein by reference.(12)
    
    Previously filed as an exhibit to the Companys Form 8-K (File No. 000-24381)
filed on April 16, 2009, and incorporated herein by reference.(13)
    
    Filed herewith. 63




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 Fiscal Year2008
    
    
    2007
    
    
    2006Reserves deducted from assets:Allowance for shrinkage and inventory
obsolescence:Balance at the beginning of period
    
    $
    5,612
    
    
    $
    4,916
    
    
    $
    3,889Additions charged to costs and expenses
    
    
    13,481
    
    
    
    13,816
    
    
    
    12,957Deductions for write-offs
    
    
    (13,343
    )
    
    
    (13,120
    )
    
    
    (11,930
    )Balance at end of period
    
    $
    5,750
    
    
    $
    5,612
    
    
    $
    4,916Reserves added to liabilities:Allowance for costs of inventory returns:Balance at the beginning of period
    
    $
    1,343
    
    
    $
    1,586
    
    
    $
    1,276Additions charged to costs and expenses
    
    
    5,247
    
    
    
    4,665
    
    
    
    5,241Deductions for write-offs and payments
    
    
    (5,628
    )
    
    
    (4,908
    )
    
    
    (4,931
    )Balance at end of period
    
    $
    962
    
    
    $
    1,343
    
    
    $
    1,586
 64




---



##### Table of Contents



SIGNATURES
  HASTINGS ENTERTAINMENT, INC.Date: April 21, 2009
    By:
    /s/ Dan CrowDan CrowVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) POWER OF ATTORNEY
   Signature
    
    
    
    Title
    
    Date/s/ John H. Marmaduke

John H. Marmaduke
    
    
    
    Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
    
    April 21, 2009/s/ Danny W. Gurr

Danny W. Gurr
    
    
    
    Director
    
    April 21, 2009/s/ Daryl L. Lansdale

Daryl L. Lansdale
    
    
    
    Director
    
    April 21, 2009/s/ Ann S. Lieff

Ann S. Lieff
    
    
    
    Director
    
    April 21, 2009/s/ Frank O. Marrs

Frank O. Marrs
    
    
    
    Director
    
    April 21, 2009/s/ Jeffrey G. Shrader
    
    
    
    Director
    
    April 21, 2009Jeffrey G. Shrader
 65




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##### Table of Contents



INDEX
TO EXHIBITS
 ExhibitNumber
    
    
    
    
    
    
    Description3.1
    
    
    
    (1
    )
    
    Third Restated Articles of Incorporation of the Company.3.1
    
    
    
    (11
    )
    
    Amended and Restated Bylaws of the Company.4.1
    
    
    
    (2
    )
    
    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
    
    
    
    (11
    )
    
    Amended and Restated Bylaws of the Company (see 3.1 above).10.1
    
    
    
    (1
    )
    
    Form of Indemnification Agreement by and between the Company and its
directors and executive officers.10.2
    
    *
    
    (1
    )
    
    Hastings Amended 1996 Incentive Stock Plan.10.3
    
    *
    
    (2
    )
    
    Hastings 1994 Stock Option Plan.10.4
    
    *
    
    (2
    )
    
    Hastings 1991 Stock Option Plan.10.5
    
    *
    
    (1
    )
    
    Hastings Entertainment, Inc. Associates 401(k) Plan and Trust.10.6
    
    *
    
    (1
    )
    
    Hastings Employee Stock Ownership Plan Trust Agreement.10.7
    
    *
    
    (2
    )
    
    Chief Executive Officer Stock Option, as amended.10.8
    
    *
    
    (1
    )
    
    Corporate Officer Incentive Plan.10.9
    
    *
    
    (1
    )
    
    Management Stock Purchase Plan.10.10
    
    *
    
    (1
    )
    
    Management Incentive Plan.10.11
    
    *
    
    (1
    )
    
    Salary Incentive Plan.10.12
    
    *
    
    (1
    )
    
    Hastings Entertainment, Inc. Stock Option Plan for Outside Directors.10.13
    
    *
    
    (3
    )
    
    Agreement, dated January 31, 2001 between John H. Marmaduke and the Company10.14
    
    
    
    (4
    )
    
    Lease Agreement, dated August 3, 1994, as amended, between Omni Capital Corporation and
the Company, for warehouse space located at Sunset Center in Amarillo, Texas.10.15
    
    
    
    (1
    )
    
    Lease Agreement, dated May 28, 1992, between the City of Amarillo and the Company for
space located at 1900 W. 7th Avenue in Amarillo, Texas.10.16
    
    *
    
    (2
    )
    
    Stock Grant Plan for Outside Directors.10.17
    
    *
    
    (2
    )
    
    Form of Employment Agreement by and between the Company and certain of its executives.




---



##### Table of Contents



ExhibitNumber
    
    
    
    
    

    Description10.18
    
    
    (5
    )
    
    Amended Lease Agreement, dated October 13, 1999, between Omni Capital Corporation and
the Company, for office space located at Sunset Center in Amarillo, Texas.10.19
    
    
    (6
    )
    
    Loan and Security Agreement, dated August 29, 2000 between Hastings Entertainment, Inc.
and Fleet Retail Finance, Inc., Agent.10.20
    
    
    (7
    )
    
    International Swap Dealers Association, Inc. Master Agreement between Hastings
Entertainment, Inc. and Fleet National Bank.10.21
    
    
    (8
    )
    
    Amended Loan and Security Agreement, dated December 9, 2003, between Hastings
Entertainment, Inc. and Fleet Retail Finance, Inc., Agent.10.22
    
    
    (9
    )
    
    Severance Agreement and Release with Robert Berman, dated March 19, 2005.10.23
    
    
    (9
    )
    
    Amended Loan and Security Agreement, dated July 11, 2005, between Hastings Entertainment,
Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc., Co-Agent.10.24
    
    
    (9
    )
    
    Severance Agreement and Release with Steve Hicks, dated December 16, 2005.10.25
    
    
    (9
    )
    
    Amended Loan and Security Agreement, dated February 28, 2006, between Hastings
Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc.,
Co-Agent.10.26
    
    
    (10
    )
    
    Severance Agreement and Release with David Moffatt, dated April 5, 2006.10.27
    
    
    (10
    )
    
    Employment Agreement with Michael Rigby, dated December 5, 2005.10.28
    
    
    (10
    )
    
    Amended Loan and Security Agreement, dated February 27, 2007, between Hastings
Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc.,
Co-Agent.10.29
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and Dan Crow,
dated August 1, 2008.10.30
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and Alan Van
Ongevalle (as described in the Form 8-K filed by the Company on February 9, 2007), dated
August 1, 2008.10.31
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and Susan Dasse
(as described in the Form 8-K filed by the Company on May 2, 2008), dated August 1, 2008.10.32
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and Kevin Ball,
dated August 1, 2008.10.33
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and John Hintz (as
described in the Form 8-K filed by the Company on February 9, 2007), dated August 1, 2008.10.34
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and Victor Fuentes
(as described in the Form 8-K filed by the Company on October 18, 2007), dated August 1,
2008.10.35
    
    
    (13
    )
    
    Amendments to the Employment Agreement by and between the Company and Philip
McConnell (as described in the Form 8-K filed by the Company on June 12, 2006), dated
August 1, 2008.10.36
    
    
    (12
    )
    
    Amendments to the Employment Agreement by and between the Company and John H
Marmaduke, dated February 1, 2009.21.1
    
    
    (13
    )
    
    Subsidiaries of the Company.23.1
    
    
    (13
    )
    
    Consent of Ernst & Young LLP.24.1
    
    
    (13
    )
    
    Powers of Attorney (included on signature page).31.1
    
    
    (13
    )
    
    Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-
14(a).31.2
    
    
    (13
    )
    
    Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-
14(a).32.1
    
    
    (13
    )
    
    Certification of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 (1)
    
    Previously filed as an exhibit to the 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 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.




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##### Table of Contents



ExhibitNumber
    
    
    
    


    Description(3)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2001, and incorporated herein by reference.(4)
    
    Previously filed as an exhibit to the Companys Registration Statement on Form
S-1/A, dated June 11, 1998 (File No. 333-47969) and with a corresponding exhibit number
herein and are incorporated herein by reference.(5)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K, as
amended, for the fiscal year ended January 31, 2000, and incorporated herein by
reference.(6)
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q,
as amended, for the quarterly period ended July 31, 2000, and incorporated herein by
reference.(7)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2002, and incorporated herein by reference.(8)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2004, and incorporated herein by reference.(9)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2006, and incorporated herein by reference.(10)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for
the fiscal year ended January 31, 2007, and incorporated herein by reference.(11)
    
    Previously filed as an exhibit to the Companys Form 8-K (File No. 000-24381)
filed on January 17, 2008, and incorporated herein by reference.(12)
    
    Previously filed as an exhibit to the Companys Form 8-K (File No. 000-24381)
filed on April 16, 2009, and incorporated herein by reference.(13)
    
    Filed herewith.