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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
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission file number: 000-24381
 HASTINGS ENTERTAINMENT, INC.
  Texas
(State or other jurisdiction of
incorporation or organization)
    
    75-1386375
(IRS Employer
Identification No.)3601 Plains Boulevard, Amarillo, Texas
(Address of principal executive offices)
    
    79102
(Zip Code)
 (806) 351-2300
 None
   Title of each class
Common Stock, $.01 par value per share
    
    Name of each exchange on which registered
Nasdaq National Market
 o þ
 o þ
 þ o
 þ
 o o þ
 o þ
   Class
    
    Outstanding at March 31, 2006Common Stock, $.01 par value per share
    
    11,395,172
  Document
    
    Parts Into Which IncorporatedPortions of the Proxy Statement for the annual meeting of
    
    Part II and Part IIShareholders of the registrant to be held in 2006




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HASTINGS ENTERTAINMENT, INC.
Form 10-K Annual Report
For the Fiscal Year Ended January 31, 2006
  
 INDEX
 PAGEPART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    9Item 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
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operation
    
    
    18Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 8. Financial Statements and Supplementary Data
    
    
    29Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    50Item 9A. Controls and Procedures
    
    
    50PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    51Item 11. Executive Compensation
    
    
    51Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    51Item 13. Certain Relationships and Related Transactions
    
    
    51Item 14. Principal Accountant Fees and Services
    
    
    51PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    52SIGNATURES
    
    
    55Severance Agreement and Release - Robert BermanAmended Loan and Security AgreementSeverance Agreement and Release - Steve HicksAmended Loan and Security AgreementConsent of Ernst and Young LLPCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of CEO and CFO Pursuant to Section 906




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PART I
   
 ITEM 1. BUSINESS.
 
   Music
 Books
 1




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Rental Video
 (i)
    
    Despite increases in the sale of movies detailed below under Sale Video and Video
Games, according to Kagan, rental transactions continued to exceed sales transactions
during 2005. For the industry, rental transactions represented approximately 64.4% of
total rental and sell-through transactions during 2005 compared to approximately 69.6% in
2004. We believe renting videos provides consumers with low-cost entertainment, a factor
that will continue to drive rental transactions in the future.(ii)
    
    DVD continued its accelerated acceptance rate with DVD households as a percentage
of U.S. television households approximating 75% in 2005 compared to approximately 65% in
2004. Kagan projects that this number will increase to approximately 84% in 2006 and
exceed 94% by 2010. This penetration is moving far beyond consumers that were early
adopters of the DVD format, and with price points on DVD hardware continuing to decline,
we believe more consumers will be renting classic movies and personal favorites in the DVD
format for the first time. We also believe that later-adopting DVD households are less
likely to purchase DVDs at the high rates of early-adopters.(iii)
    
    We believe that the DVD format, with its superior picture and sound quality
compared to previous movie formats, as well as extra features such as outtakes, director
commentary and scene selection, will drive continued growth in the industry.(iv)
    
    We believe rental video will continue to be a favored entertainment medium for
millions of consumers due to its relatively inexpensive price points, broad selection of
new release and catalog (older) movies and ability for viewer control of the experience
(i.e., start, stop, scene selection, and audio setup).(v)
    
    We believe video game rentals will continue to play an important role in the
rental industry. Due to the relatively high purchase prices for game software, rental
pricing is an attractive option for consumers, especially those wanting to preview a game
prior to making a purchase.
 Sale Video and Video Games
  2




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Superior Multimedia Concept.
 Minimum
    
    MaximumProduct Category
    
    Title Count
    
    Title CountBooks
    
    
    11,000
    
    
    
    72,000Music
    
    
    7,000
    
    
    
    30,000Sale VHS, DVD and Video Games
    
    
    6,000
    
    
    
    17,000Rental VHS, DVD, Video Games
    
    
    10,000
    
    
    
    20,000Used CDs, DVD, Video Games
    
    
    4,000
    
    
    
    28,000Used Books
    
    
    1,000
    
    
    
    23,000Boutique, Consumables and Accessories
    
    
    3,000
    
    
    
    8,000Periodicals
    
    
    1,000
    
    
    
    4,000Software
    
    
    
    
    
    
    1,000
  Fiscal YearProduct Category
    
    2005
    
    2004
    
    2003Music
    
    
    25
    %
    
    
    25
    %
    
    
    26
    %Books
    
    
    22
    %
    
    
    22
    %
    
    
    23
    %Video
    
    
    19
    %
    
    
    18
    %
    
    
    17
    %Rental
    
    
    17
    %
    
    
    19
    %
    
    
    20
    %Video Games
    
    
    9
    %
    
    
    8
    %
    
    
    6
    %Boutique
    
    
    4
    %
    
    
    4
    %
    
    
    4
    %Consumables
    
    
    3
    %
    
    
    2
    %
    
    
    2
    %Other
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
  Small to Medium-Sized Market Focus.
 3




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Customer-Oriented Format.
 Low Pricing.
 Used and Budget-Priced Products.
 Internet. www.gohastings.com www.gohastings.com
   4




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New Release Allocation.
 Rental Asset Purchasing System.
 Store Replenishment.
 Selection Management.
 Model Stock Calculation/Ordering.
 5




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Inventory Management.
 Store Systems.
 Accounting and Finance.
 Warehouse Management.
    6




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7




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Name
    
    Age
    
    PositionJohn H. Marmaduke
    
    
    58
    
    
    Chairman of the Board, President and Chief Executive OfficerMichael Rigby
    
    
    50
    
    
    Senior Vice President of MerchandisingDan Crow
    
    
    59
    
    
    Vice President of Finance and Chief Financial OfficerJeff Ostler
    
    
    42
    
    
    Vice President of StoresAlan Van Ongevalle
    
    
    38
    
    
    Vice President of Information Technology & DistributionKevin Ball
    
    
    49
    
    
    Vice President of Marketing
  John H. Marmaduke
 Michael Rigby
 Dan Crow
 Jeff Ostler
 Alan Van Ongevalle
 Kevin Ball
 8




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www.sec.gov
 www.gohastings.com
 
 ITEM 1A. RISK FACTORS.
 CAUTIONARY STATEMENTS
  Our growth is dependent on our ability to execute our expansion strategy.
   Our business is dependent upon renewing or entering into new leases on favorable terms.
  9




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Our business is highly seasonal.
  Intense competition from traditional retail sources and the Internet may adversely affect our
business.
  Our business is dependent on consumer spending patterns.
  We rely on certain key personnel.
  Our business could be negatively impacted if the in-store video retailer distribution window is
reduced or eliminated.
  10




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Our business is subject to changes in current rental video studio pricing policies.
    11




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Our business could be negatively impacted by new technology that provides alternate methods of
video delivery.
  Changes to Information Technology Systems May Disrupt the Supply Chain.
  
 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
    
    
    1Missouri
    
    
    7Montana
    
    
    6Nebraska
    
    
    4New Mexico
    
    
    15Oklahoma
    
    
    12Tennessee
    
    
    6Texas
    
    
    43Utah
    
    
    2Washington
    
    
    9Wyoming
    
    
    3Total
    
    
    153
     Number of Stores
    
    OptionsFiscal Year 2006
    
    
    6
    
    
    
    6Fiscal Year 2007
    
    
    18
    
    
    
    18Fiscal Year 2008
    
    
    15
    
    
    
    14Fiscal Year 2009
    
    
    32
    
    
    
    30Fiscal Year 2010
    
    
    16
    
    
    
    12Thereafter
    
    
    66
    
    
    
    60Total
    
    
    153
    
    
    
    140
 13




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ITEM 3. LEGAL PROCEEDINGS.
    
 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
    
    Low2005:First Quarter
    
    $
    8.47
    
    
    $
    5.99Second Quarter
    
    $
    6.80
    
    
    $
    5.05Third Quarter
    
    $
    6.59
    
    
    $
    5.26Fourth Quarter
    
    $
    5.80
    
    
    $
    4.342004:First Quarter
    
    $
    7.30
    
    
    $
    4.40Second Quarter
    
    $
    10.25
    
    
    $
    6.29Third Quarter
    
    $
    8.07
    
    
    $
    5.37Fourth Quarter
    
    $
    9.99
    
    
    $
    6.45
    15




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ITEM 6. SELECTED FINANCIAL DATA.
  Fiscal Year(In thousands, except per share and square foot data)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Income Statement Data:Merchandise revenue
    
    $
    444,291
    
    
    $
    440,596
    
    
    $
    404,977
    
    
    $
    395,548
    
    
    $
    379,322Rental asset revenue
    
    
    93,640
    
    
    
    101,420
    
    
    
    103,341
    
    
    
    99,846
    
    
    
    92,326Total revenues
    
    
    537,931
    
    
    
    542,016
    
    
    
    508,318
    
    
    
    495,394
    
    
    
    471,648Merchandise cost of revenue
    
    
    314,328
    
    
    
    322,632
    
    
    
    299,055
    
    
    
    294,647
    
    
    
    281,654Rental asset cost of revenue
    
    
    34,458
    
    
    
    36,266
    
    
    
    37,727
    
    
    
    39,893
    
    
    
    39,904Total cost of revenues
    
    
    348,786
    
    
    
    358,898
    
    
    
    336,782
    
    
    
    334,540
    
    
    
    321,558Gross profit
    
    
    189,145
    
    
    
    183,118
    
    
    
    171,536
    
    
    
    160,854
    
    
    
    150,090Selling, general and administrative expenses(1)
    
    
    176,684
    
    
    
    171,293
    
    
    
    162,616
    
    
    
    158,025
    
    
    
    144,223Pre-opening expenses
    
    
    92
    
    
    
    409
    
    
    
    277
    
    
    
    479
    
    
    
    182Operating income
    
    
    12,369
    
    
    
    11,416
    
    
    
    8,643
    
    
    
    2,350
    
    
    
    5,685Interest expense
    
    
    (2,616
    )
    
    
    (1,918
    )
    
    
    (2,048
    )
    
    
    (1,987
    )
    
    
    (2,090
    )Interest income (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,291
    
    
    
    Other, net
    
    
    399
    
    
    
    293
    
    
    
    324
    
    
    
    237
    
    
    
    252Income before income taxes
    
    
    10,152
    
    
    
    9,791
    
    
    
    6,919
    
    
    
    1,891
    
    
    
    3,847Income tax expense (benefit)(3)
    
    
    4,457
    
    
    
    3,982
    
    
    
    (1,358
    )
    
    
    
    
    
    
    (66
    )Net income
    
    $
    5,695
    
    
    $
    5,809
    
    
    $
    8,277
    
    
    $
    1,891
    
    
    $
    3,913Basic income per share
    
    $
    0.50
    
    
    $
    0.51
    
    
    $
    0.73
    
    
    $
    0.17
    
    
    $
    0.33Diluted income per share
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.72
    
    
    $
    0.16
    
    
    $
    0.33Weighted-average common shares outstanding  basic
    
    
    11,421
    
    
    
    11,411
    
    
    
    11,327
    
    
    
    11,343
    
    
    
    11,742Weighted-average common shares outstanding  diluted
    
    
    11,667
    
    
    
    11,942
    
    
    
    11,483
    
    
    
    11,779
    
    
    
    11,898Other Data:Depreciation (4)
    
    $
    38,209
    
    
    $
    41,917
    
    
    $
    38,675
    
    
    $
    40,223
    
    
    $
    35,613Capital expenditures (5)
    
    $
    17,097
    
    
    $
    24,729
    
    
    $
    22,093
    
    
    $
    26,969
    
    
    $
    19,010Store Data:Total selling square footage at end of period
    
    
    3,101,627
    
    
    
    3,039,582
    
    
    
    2,915,884
    
    
    
    2,846,955
    
    
    
    2,727,446Comparable-store revenues increase (decrease) (6)
    
    
    (1.4
    %)
    
    
    5.0
    %
    
    
    1.9
    %
    
    
    5.0
    %
    
    
    4.7
    %
 January 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Balance Sheet Data:Working capital (7)
    
    $
    52,508
    
    
    $
    52,404
    
    
    $
    39,756
    
    
    $
    52,829
    
    
    $
    51,431Total assets
    
    $
    254,661
    
    
    $
    251,299
    
    
    $
    233,491
    
    
    $
    234,014
    
    
    $
    226,042Total long-term debt, including
current maturities on capital lease
obligations
    
    $
    28,151
    
    
    $
    37,029
    
    
    $
    28,775
    
    
    $
    45,699
    
    
    $
    32,119Total shareholders equity
    
    $
    94,693
    
    
    $
    89,774
    
    
    $
    83,946
    
    
    $
    75,583
    
    
    $
    73,770
 16




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(1)
    
    We recorded pre-tax charges of $2.6 million in fiscal 2002 related to the settlement of
shareholder class action lawsuits. These charges reduced net income by $2.6 million or
approximately $0.22 per diluted share.(2)
    
    We recorded interest income of approximately $1.3 million in the second quarter of fiscal
2002 as a result of interest earned on income tax refunds for amended returns filed for fiscal
years 1995 through 1998. As a result, net income was increased by approximately $0.11 per
diluted share.(3)
    
    The results for fiscal year 2003 reflect an income tax benefit of approximately $1.4 million,
or $0.12 per diluted share, primarily due to the reversal of a valuation allowance of
approximately $4.4 million previously applied against our deferred tax assets.(4)
    
    Includes amounts associated with our rental asset cost depreciation.(5)
    
    Includes purchases of property, equipment, and improvements, as well as purchases of retail
locations.(6)
    
    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.(7)
    
    Working capital is calculated as total current assets less total current liabilities. 17




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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.
 Returns Process.
 18




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Rental Asset Depreciation.
    Store Closing Reserve.
  Impairment or Disposal of Long-Lived Assets
 19




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Revenue Recognition.
 Comparable-Store Revenue.
 Vendor Allowances.
 20




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Fiscal Year2005
    
    2004
    
    2003Merchandise revenue
    
    
    82.6
    %
    
    
    81.3
    %
    
    
    79.7
    %Rental asset revenue
    
    
    17.4
    
    
    
    18.7
    
    
    
    20.3Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Merchandise cost of revenue
    
    
    70.7
    
    
    
    73.2
    
    
    
    73.8Rental asset cost of revenue
    
    
    36.8
    
    
    
    35.8
    
    
    
    36.5Total cost of revenues
    
    
    64.8
    
    
    
    66.2
    
    
    
    66.2Gross profit
    
    
    35.2
    
    
    
    33.8
    
    
    
    33.8Selling, general and administrative expenses
    
    
    32.8
    
    
    
    31.6
    
    
    
    32.0Pre-opening expenses
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.132.9
    
    
    
    31.7
    
    
    
    32.1Operating income
    
    
    2.3
    
    
    
    2.1
    
    
    
    1.7Other income (expense):Interest expense
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.4
    )Interest income
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1(0.4
    )
    
    
    (0.3
    )
    
    
    (0.3
    )Income before income taxes
    
    
    1.9
    
    
    
    1.8
    
    
    
    1.4Income tax expense (benefit)
    
    
    0.8
    
    
    
    0.7
    
    
    
    (0.2
    )Net income
    
    
    1.1
    %
    
    
    1.1
    %
    
    
    1.6
    %
 Fiscal Year2005
    
    
    2004
    
    
    2003Hastings Stores:Beginning number of stores
    
    
    152
    
    
    
    148
    
    
    
    146Openings
    
    
    1
    
    
    
    5
    
    
    
    5Closings
    
    
    
    
    
    
    (1
    )
    
    
    (3
    )Ending number of stores
    
    
    153
    
    
    
    152
    
    
    
    148
 21




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Revenues.
 Fiscal Year2005
    
    
    2004
    
    
    Increase/(Decrease)Percent of
    
    
    
    
    
    
    Percent ofRevenues
    
    
    Total
    
    
    Revenues
    
    
    Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    444,291
    
    
    
    82.6
    %
    
    $
    440,596
    
    
    
    81.3
    %
    
    $
    3,695
    
    
    
    0.8
    %Rental revenue
    
    
    93,640
    
    
    
    17.4
    %
    
    
    101,420
    
    
    
    18.7
    %
    
    
    (7,780
    )
    
    
    -7.7
    %Total revenues
    
    $
    537,931
    
    
    
    100.0
    %
    
    $
    542,016
    
    
    
    100.0
    %
    
    $
    (4,085
    )
    
    
    -0.8
    %
 Comparable-store revenues:Total
    
    
    -1.4
    %Merchandise
    
    
    0.1
    %Rental
    
    
    -7.5
    %
  Fiscal Year2005
    
    2004Music
    
    
    -1.8
    %
    
    
    1.8
    %Books
    
    
    -0.2
    %
    
    
    1.5
    %Video for sale
    
    
    1.9
    %
    
    
    15.4
    %Video games
    
    
    5.2
    %
    
    
    29.6
    %Sidelines
    
    
    5.2
    %
    
    
    9.8
    %
     Gross Profit.
 22




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Selling, General and Administrative expenses (SG&A).
 Interest Expense.
 Income Taxes.
  Revenues.
 Fiscal Year2004
    
    
    2003Percent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/(Decrease)Revenues
    
    
    Total
    
    
    Revenues
    
    
    Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    440,596
    
    
    
    81.3
    %
    
    $
    404,977
    
    
    
    79.7
    %
    
    $
    35,619
    
    
    
    8.8
    %Rental revenue
    
    
    101,420
    
    
    
    18.7
    %
    
    
    103,341
    
    
    
    20.3
    %
    
    
    (1,921
    )
    
    
    -1.9
    %Total revenues
    
    $
    542,016
    
    
    
    100.0
    %
    
    $
    508,318
    
    
    
    100.0
    %
    
    $
    33,698
    
    
    
    6.6
    %
 Comparable-store revenues:Merchandise
    
    
    7.5
    %Rental
    
    
    -4.5
    %Total
    
    
    5.0
    %
  Fiscal Year2004
    
    2003Music
    
    
    1.8
    %
    
    
    -7.5
    %Books
    
    
    1.5
    %
    
    
    0.7
    %Video for sale
    
    
    15.4
    %
    
    
    17.7
    %Video games
    
    
    29.6
    %
    
    
    34.4
    %Sidelines
    
    
    9.8
    %
    
    
    5.2
    %
  23




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Gross Profit.
 Selling, General and Administrative expenses (SG&A).
 Interest Expense.
 Income Taxes.
    24




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Consolidated Cash Flows
 Operating Activities .
 Investing Activities.
 Financing Activities .
  Capital Structure.
   25




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##### Table of Contents



Contractual Obligations and Off-Balance Sheet Arrangements
  Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt (principal only) (1)
    
    $
    28,057
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,057Operating leases
    
    
    156,593
    
    
    
    24,634
    
    
    
    42,461
    
    
    
    28,630
    
    
    
    60,868Capital leases (principal and interest)
    
    
    96
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    Revenue sharing (2)
    
    
    1,126
    
    
    
    1,126
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    185,872
    
    
    $
    25,856
    
    
    $
    42,461
    
    
    $
    28,630
    
    
    $
    88,925
 
 (1)
    
    Based on our internal forecasts, we estimate interest payments for FY 2006 to be
approximately $3.3 million.(2)
    
    As of January 31, 2006 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 2005. 26




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##### Table of Contents



QuarterFiscal year 2005:
    
    First
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    129,124
    
    
    $
    122,726
    
    
    $
    114,587
    
    
    $
    171,494Operating income (loss)
    
    $
    1,623
    
    
    $
    1,721
    
    
    $
    (3,818
    )
    
    $
    12,843% of full year:Total revenues
    
    
    24.0
    %
    
    
    22.8
    %
    
    
    21.3
    %
    
    
    31.9
    %Operating income (loss)
    
    
    13.1
    %
    
    
    13.9
    %
    
    
    (30.8
    %)
    
    
    103.8
    %
 QuarterFiscal year 2004:
    
    First
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    126,937
    
    
    $
    122,412
    
    
    $
    119,579
    
    
    $
    173,088Operating income (loss)
    
    $
    3,476
    
    
    $
    1,318
    
    
    $
    (2,112
    )
    
    $
    8,734% of full year:Total revenues
    
    
    23.4
    %
    
    
    22.6
    %
    
    
    22.1
    %
    
    
    31.9
    %Operating income (loss)
    
    
    30.4
    %
    
    
    11.5
    %
    
    
    (18.4
    %)
    
    
    76.5
    %
   27




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  28




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##### 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
    
    
    30Consolidated Balance Sheets as of January 31, 2006 and 2005
    
    
    31Consolidated Statements of Operations
for the years ended January 31, 2006, 2005 and 2004
    
    
    32Consolidated Statements of Shareholders Equity
for the years ended January 31, 2006, 2005 and 2004
    
    
    33Consolidated Statements of Cash Flows
for years ended January 31, 2006, 2005 and 2004
    
    
    34Notes to Consolidated Financial Statements
    
    
    35ScheduleFinancial Statement Schedule II  The Financial Statement Schedule filed as part of
this report is listed under Part IV, Item 15. Exhibits and Financial Statement Schedules.
    
    
    54
 29




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ Ernst & Young LLP
 
 30




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 
 January 31,2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    3,617
    
    
    $
    6,726Merchandise inventories
    
    
    165,049
    
    
    
    155,452Deferred income taxes
    
    
    4,234
    
    
    
    3,198Prepaid expenses and other current assets
    
    
    7,016
    
    
    
    6,945Total current assets
    
    
    179,916
    
    
    
    172,321Rental assets, net of accumulated depreciation of $26,501 and $31,499 at
January 31, 2006 and 2005, respectively
    
    
    12,606
    
    
    
    13,754Property and equipment, net
    
    
    60,013
    
    
    
    64,358Deferred income taxes
    
    
    1,492
    
    
    
    308Intangible assets, net
    
    
    454
    
    
    
    542Other assets
    
    
    180
    
    
    
    16$
    254,661
    
    
    $
    251,299Liabilities and Shareholders EquityCurrent liabilities
Current maturities on capital lease obligations
    
    $
    94
    
    
    $
    243Trade accounts payable
    
    
    88,991
    
    
    
    86,082Accrued expenses and other current liabilities
    
    
    38,323
    
    
    
    33,592Total current liabilities
    
    
    127,408
    
    
    
    119,917Long-term debt, excluding current maturities on capital lease obligations
    
    
    28,057
    
    
    
    36,786Other liabilities
    
    
    4,503
    
    
    
    4,822Shareholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 75,000,000 shares authorized;
    
    
    119
    
    
    
    11911,944,544 shares in fiscal 2005 and 2004 issued;
11,383,172 in fiscal 2005 and
11,455,569 shares in fiscal 2004, outstanding
Additional paid-in capital
    
    
    36,076
    
    
    
    36,382Retained earnings
    
    
    61,466
    
    
    
    55,771Other comprehensive income
    
    
    141
    
    
    
    Treasury stock, at cost
    
    
    (3,109
    )
    
    
    (2,498
    )94,693
    
    
    
    89,774$
    254,661
    
    
    $
    251,299
  31




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    Fiscal Year2005
    
    
    2004
    
    
    2003Merchandise revenue
    
    $
    444,291
    
    
    $
    440,596
    
    
    $
    404,977Rental asset revenue
    
    
    93,640
    
    
    
    101,420
    
    
    
    103,341Total revenues
    
    
    537,931
    
    
    
    542,016
    
    
    
    508,318Merchandise cost of revenue
    
    
    314,328
    
    
    
    322,632
    
    
    
    299,055Rental asset cost of revenue
    
    
    34,458
    
    
    
    36,266
    
    
    
    37,727Total cost of revenues
    
    
    348,786
    
    
    
    358,898
    
    
    
    336,782Gross profit
    
    
    189,145
    
    
    
    183,118
    
    
    
    171,536Selling, general and administrative expenses
    
    
    176,684
    
    
    
    171,293
    
    
    
    162,616Pre-opening expenses
    
    
    92
    
    
    
    409
    
    
    
    277Operating income
    
    
    12,369
    
    
    
    11,416
    
    
    
    8,643Other income (expense):Interest expense
    
    
    (2,616
    )
    
    
    (1,918
    )
    
    
    (2,048
    )Other, net
    
    
    399
    
    
    
    293
    
    
    
    324Income before income taxes
    
    
    10,152
    
    
    
    9,791
    
    
    
    6,919Income tax expense (benefit)
    
    
    4,457
    
    
    
    3,982
    
    
    
    (1,358
    )Net income
    
    $
    5,695
    
    
    $
    5,809
    
    
    $
    8,277Basic income per share
    
    $
    0.50
    
    
    $
    0.51
    
    
    $
    0.73Diluted income per share
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.72
  32




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    Additional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury Stock
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    EquityBalances at January 31,
2003
    
    
    11,944,544
    
    
    $
    119
    
    
    $
    36,749
    
    
    $
    41,685
    
    
    $
    
    
    
    
    608,071
    
    
    $
    (2,971
    )
    
    $
    75,582Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (25,002
    )
    
    
    118
    
    
    
    90Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,000
    
    
    
    (235
    )
    
    
    (235
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    (75,137
    )
    
    
    355
    
    
    
    232Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,277Balances at January 31, 2004
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,598
    
    
    
    49,962
    
    
    
    
    
    
    
    580,932
    
    
    
    (2,733
    )
    
    
    83,946Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    (7,344
    )
    
    
    35
    
    
    
    60Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,600
    
    
    
    (904
    )
    
    
    (904
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    (225,213
    )
    
    
    1,104
    
    
    
    863Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,809
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,809Balances at January 31, 2005
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,382
    
    
    
    55,771
    
    
    
    
    
    
    
    488,975
    
    
    
    (2,498
    )
    
    
    89,774Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (4,655
    )
    
    
    26
    
    
    
    28Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344,440
    
    
    
    (2,069
    )
    
    
    (2,069
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    (267,388
    )
    
    
    1,432
    
    
    
    1,007Other stock-based compensation
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,695Unrealized gain on
interest rate cap, net of
$98 in deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    141Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,836Balances at January 31, 2006
    
    
    11,944,544
    
    
    $
    119
    
    
    $
    36,076
    
    
    $
    61,466
    
    
    $
    141
    
    
    
    561,372
    
    
    $
    (3,109
    )
    
    $
    94,693
  33




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    Fiscal Year2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    5,695
    
    
    $
    5,809
    
    
    $
    8,277Adjustments to reconcile net income to net cash provided
by operating activities:Rental asset depreciation expense
    
    
    18,472
    
    
    
    22,842
    
    
    
    21,006Purchases of rental assets
    
    
    (28,900
    )
    
    
    (35,142
    )
    
    
    (31,363
    )Property and equipment depreciation expense
    
    
    19,737
    
    
    
    19,075
    
    
    
    17,669Amortization expense
    
    
    88
    
    
    
    88
    
    
    
    87Loss on rental assets lost, stolen and defective
    
    
    672
    
    
    
    1,221
    
    
    
    1,842Loss on disposal or impairment of property and equipment, excluding rental assets
    
    
    1,463
    
    
    
    835
    
    
    
    929Deferred income taxes
    
    
    (2,220
    )
    
    
    1,427
    
    
    
    (1,724
    )Non-cash compensation
    
    
    145
    
    
    
    60
    
    
    
    90Changes in operating assets and liabilities:Merchandise inventories
    
    
    1,240
    
    
    
    (3,077
    )
    
    
    17,365Other current assets
    
    
    (71
    )
    
    
    151
    
    
    
    (616
    )Trade accounts payable
    
    
    420
    
    
    
    4,010
    
    
    
    6,360Accrued expenses and other liabilities
    
    
    4,810
    
    
    
    725
    
    
    
    1,807Other assets and liabilities, net
    
    
    (342
    )
    
    
    (671
    )
    
    
    (88
    )Net cash provided by operating activities
    
    
    21,209
    
    
    
    17,353
    
    
    
    41,641Cash flows from investing activities:Purchase of property, equipment and improvements
    
    
    (17,097
    )
    
    
    (24,729
    )
    
    
    (22,093
    )Net cash used in investing activities
    
    
    (17,097
    )
    
    
    (24,729
    )
    
    
    (22,093
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    556,224
    
    
    
    574,643
    
    
    
    510,459Repayments under revolving credit facility
    
    
    (564,583
    )
    
    
    (566,170
    )
    
    
    (527,188
    )Payments under long-term debt and capital lease obligations
    
    
    (210
    )
    
    
    (219
    )
    
    
    (195
    )Purchase of treasury stock
    
    
    (2,069
    )
    
    
    (904
    )
    
    
    (235
    )Change in cash overdraft
    
    
    2,489
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    928
    
    
    
    697
    
    
    
    232Net cash provided by (used in) financing activities
    
    
    (7,221
    )
    
    
    8,047
    
    
    
    (16,927
    )Net increase (decrease) in cash
    
    
    (3,109
    )
    
    
    671
    
    
    
    2,621Cash at beginning of year
    
    
    6,726
    
    
    
    6,055
    
    
    
    3,434Cash at end of year
    
    $
    3,617
    
    
    $
    6,726
    
    
    $
    6,055
  34




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##### Table of Contents



(1)
    
    Operations and Summary of Significant Accounting Policies
 (a)
    
    GeneralHastings Entertainment, Inc. and subsidiaries operate a chain of retail stores in 20
states, primarily in the Western and Midwestern United States. Revenues are generated
from the sale of new and used music, books, DVDs, videogames, and videocassettes, as
well as new software, periodicals, consumables, and accessory products. In addition,
our revenues include the rental of DVDs, video games and videocassettes.(b)
    
    Basis of ConsolidationThe consolidated financial statements present the results of Hastings Entertainment,
Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.(c)
    
    Basis of PresentationCertain prior year amounts have been reclassified to conform with the fiscal 2005
presentation. During the fourth quarter of fiscal 2005, we reclassified an in-transit
cash item as a reduction in cash and long-term debt. The reclassification at January
31, 2005 was approximately $2.8 million. We also reclassified a portion of our accrued
straight-line rent from short-term to long-term. The reclassification at January 31,
2005 was approximately $2.6 million. Additionally, we reclassified costs associated
with our previously viewed tapes from cost of rental revenues to cost of merchandise
revenues. This reclassification for the years ended January 31, 2005 and 2004 was
approximately $3.5
and $1.5 million, respectively.We consider our retail and internet operations to be our operating segments for purposes
of determining reportable segments based on the criteria of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. We determined that the
Internet segment was immaterial for segment reporting purposes. Therefore, we combine
both operating segments into one reporting segment.Our fiscal years ended January 31, 2006, 2005 and 2004 are referred to as fiscal 2005,
2004 and 2003, respectively.(d)
    
    Cash and Cash EquivalentsThe Company considers all credit card receivables of $1.0 million for both fiscal 2005
and 2004 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. Negative cash balances are reclassified to trade accounts payable.(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 projected merchandise returns.Gift card liabilities are recorded 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.
 35




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##### Table of Contents



(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; shrinkage; inventory markdowns and write-offs;
freight charges; receiving costs; inspection costs; and internal transfer costs. In
addition, the Company includes 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.The Company transfers rental assets that have been converted to previously viewed tapes
for sale, from Property and equipment to Merchandise inventories. The transfer to
Merchandise Inventories is recorded at the time of conversion, which is the first date
the product is available for sale. During fiscal 2005, 2004, and 2003, $10.8 million,
$12.2 million, and $7.5 million, respectively, were transferred from rental assets to
merchandise inventory at the lower of net book value or market.(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.
Rental assets, except for the initial purchases for new stores, are depreciated over six
months using an accelerated methodology designed to match the revenue stream of the
rental asset. The initial purchases of rental assets for new stores are depreciated
over 36 months using the straight-line method.Expenditures for maintenance, repairs and renewals that do not materially prolong the
original useful lives of assets are charged to expense as incurred.Property recorded pursuant to capital lease obligations is stated at the present value
of the minimum lease payments at the inception of each lease, not in excess of fair
value, and amortized on a straight-line basis over the related lease term.In accordance with SFAS No. 144, we evaluate poor performing stores on a quarterly basis
to determine whether projected future cash flows over the remaining initial 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 carrying value is
less than the fair value of such assets. The carrying value of leasehold improvements
as well as certain other property and equipment is subject to impairment write-down.
 36




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##### Table of Contents



(h)
    
    Financial InstrumentsThe carrying amount of long-term debt approximates fair value as of January 31, 2006 and
2005 due to the instruments bearing interest at variable market rates. The carrying
amount of accounts payable approximates fair value because of its short maturity period.From time to time, we enter into interest rate agreements with financial institutions in
order to obtain a fixed interest rate on a portion of our outstanding floating rate
debt, thereby reducing our exposure to interest rate volatility. On June 29, 2005, the
Company entered into a two-year interest rate cap agreement, expiring June 29, 2007,
with a major bank to hedge $20 million of the Companys variable-rate debt (30-day
LIBOR) against interest rate increases. The bank will cap the Companys interest rate
at 4.00% for the first $20 million of outstanding debt over the term of the rate cap.
Should the 30-day LIBOR rate remain at 4.00% or lower, the interest rate cap will result
in no settlement. Should the rate climb above 4.00% during the term of the rate cap,
the bank will settle with the Company at the end of each month. At January 31, 2006 the
30-day LIBOR was 4.57%. The Company designates this transaction as a hedge in
accordance with SFAS 133, which requires the effective portion of the hedge to be
accounted for initially as a component of other comprehensive income on the balance
sheet. Subsequently, it will be reclassified into the earnings when the transaction
affects earnings. Any ineffective portion of the gain or loss is to be reported in
earnings immediately. At January 31, 2006, the Company deemed the hedge to be fully
effective. For the fiscal year ended January 31, 2006, the Company recognized
approximately $141,000, net of tax, as other comprehensive income related to the hedge
agreement.(i)
    
    Stock Option PlansWe account for our stock option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25),
and related interpretations. Compensation expense is recorded for stock options on the
date of grant only if the market price of the underlying stock exceeds the exercise
price. Under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation(SFAS 123), we may elect to recognize expense for stock-based
compensation based on the fair value of the awards, or continue to account for
stock-based compensation under APB 25 and disclose in the financial statements the
effects of SFAS 123 as if the recognition provisions were adopted. We have elected to
continue to apply the provisions of APB 25 and provide the pro forma disclosure
provisions of SFAS 123.On January 27, 2006, the Companys Board of Directors, upon the recommendation of the
Compensation Committee of the Board, unanimously approved the acceleration of the
vesting date of all outstanding and unvested options issued on or before January 27,
2006, under all current stock option plans, effective the same day. The Company
believes that the decision to accelerate the vesting of these options, many of which
have exercise prices that are higher than the Companys current stock price, will give
employees increased performance incentives and will enhance current retention. The
Company also implemented the acceleration program to eliminate non-cash compensation
expense that would have to be recorded in future periods following the Companys
adoption of Financial Accounting Standards Board Statement No. 123, Share Based Payment
(revised 2004), (FAS 123R) in the first quarter of fiscal 2006. As a result of this
acceleration, the Company recognized a charge to stock compensation expense of
approximately $117,000 for the year ended January 31, 2006.
 37




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##### Table of Contents



Fiscal Year2005
    
    
    2004
    
    
    2003Net income, as reported
    
    $
    5,695
    
    
    $
    5,809
    
    
    $
    8,277Add: Stock-based compensation included
in reported net income, net of tax
    
    
    81
    
    
    
    35
    
    
    
    55Less: Stock-based compensation expense
determined under fair value based
method, net of tax
    
    
    (1,523
    )
    
    
    (687
    )
    
    
    (369
    )Pro forma net income
    
    $
    4,253
    
    
    $
    5,157
    
    
    $
    7,963Income per share:Basic, as reported
    
    $
    0.50
    
    
    $
    0.51
    
    
    $
    0.73Basic, pro forma
    
    $
    0.37
    
    
    $
    0.45
    
    
    $
    0.70Diluted, as reported
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.72Diluted, pro forma
    
    $
    0.36
    
    
    $
    0.44
    
    
    $
    0.70
 (j)
    
    Advertising CostsAdvertising costs for newspaper, television and other media are expensed as
incurred. Gross advertising expenses for the fiscal years 2005, 2004, and 2003 were
$9.8 million, $8.6 million and $9.8 million, respectively.We receive payments and credits from vendors pursuant to cooperative advertising
programs and display allowances. During fiscal years 2005, 2004 and 2003, we received a
total of approximately $7.8 million, $6.6 million and $6.8 million, respectively for
such payments and credits. To the extent such payments are a reimbursement for
specific, identifiable costs, such amounts are recorded as a reduction in SG&A expenses.
The remainder of these payments and allowances are recorded as a reduction of
merchandise inventory and the cost of rental assets in accordance with Emerging Issues
Task Force Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor (EITF 02-16).(k)
    
    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.(l)
    
    Income Per ShareBasic income per share is computed by dividing net income by the weighted-average number
of common shares outstanding during the period. Diluted income per share is similarly
computed, but includes the effect, when dilutive, of our weighted average number of
stock options outstanding.(m)
    
    Use of Management EstimatesThe preparation of the financial statements in conformity with generally accepted
accounting principles 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.
 38




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##### Table of Contents



(n)
    
    Impact of Recently Issued Accounting StandardsIn November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151), an
amendment of Accounting Research Bulletin No. 43, Chapter 44. SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and requires the allocation of
fixed production overheads to inventory based on the normal capacity of the production
facilities. The statement will be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company has evaluated the provisions
of SFAS 151 and does not anticipate that adoption will have an impact on its
consolidated balance sheets or statements of operations, shareholders equity and cash
flows.In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123R). This statement replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all companies to measure compensation cost for
all share-based payments, including stock options, at fair value. The statement will be
effective for public companies no later than the beginning of the first fiscal year
commencing after June 15, 2005, which for the Company is the beginning of fiscal 2006.
The Company plans to adopt the modified prospective method and is currently evaluating
the effect that SFAS 123R will have on its consolidated balance sheets and its
statements of shareholders equity and cash flows. The Company believes the adoption of
SFAS 123R will not have a material impact on results of operations, unless significant
future stock grants occur. SFAS 123R also requires that the benefits associated with
the tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce operating cash flows and increase net
financing cash flows in periods after the effective date. These future amounts cannot
be estimated, because they depend on, among other things, when employees exercise stock
options. However, the amount of operating cash flows recognized for such excess tax
deductions for the years ended January 31, 2006, 2005, and 2004 was not material.
 (2)
    
    Merchandise Inventories
  January 31,2006
    
    
    2005Books
    
    $
    67,973
    
    
    $
    58,898Videos
    
    
    48,973
    
    
    
    40,612Music
    
    
    41,657
    
    
    
    42,642Other
    
    
    9,950
    
    
    
    16,016168,553
    
    
    
    158,168Less
allowance for
inventory
shrinkage and
obsolescence
    
    
    3,504
    
    
    
    2,716$
    165,049
    
    
    $
    155,452
  39




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##### Table of Contents



(3)
    
    Property and Equipment
  January 31,2006
    
    
    2005Furniture, equipment and software
    
    $
    135,569
    
    
    $
    122,408Leasehold improvements
    
    
    61,863
    
    
    
    59,405Buildings and land
    
    
    258
    
    
    
    258Work in progress
    
    
    255
    
    
    
    5,275Property under capital leases
    
    
    1,246
    
    
    
    2,126199,191
    
    
    
    189,472Less accumulated depreciation
    
    
    139,178
    
    
    
    125,114Property and equipment, net
    
    $
    60,013
    
    
    $
    64,358
 (4)
    
    Accrued Expenses and Other Current Liabilities
  January 31,2006
    
    
    2005Allowance for cost of inventory returns
    
    $
    1,276
    
    
    $
    2,057Deferred gift card revenue
    
    
    14,769
    
    
    
    13,022Salaries, vacation, bonus and benefits
    
    
    7,371
    
    
    
    6,655Short term lease obligations
    
    
    1,077
    
    
    
    1,517Sales taxes payable
    
    
    1,923
    
    
    
    2,059Federal income tax payable
    
    
    5,254
    
    
    
    2,281Other accrued expenses
    
    
    6,653
    
    
    
    6,001Total
    
    $
    38,323
    
    
    $
    33,592
   40




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##### Table of Contents



(5)
    
    Store Closing ReserveFrom time to time and in the normal course of business, we evaluate our store base to
determine if we need to close a store. Such evaluations include consideration of, among other
factors, current and future profitability, market trends, age of store and lease status.Amounts in Accrued expenses and other current liabilities and Other liabilities at January
31, 2006 and 2005 include accruals for the net present value of future minimum lease payments,
net of estimated sublease income, and other costs attributable to closed or relocated stores. Expenses related to store
closings are included in SG&A expenses in our consolidated statement of operations.The following table provides a rollforward of reserves that were established for these charges
for fiscal 2005, 2004 and 2003:
 Future LeasePayments
    
    
    Other Costs
    
    
    TotalBalance at January 31, 2003
    
    $
    2,958
    
    
    $
    
    
    
    $
    2,958Additions to provision
    
    
    240
    
    
    
    150
    
    
    
    390Changes in estimates
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Cash outlay, net
    
    
    (1,178
    )
    
    
    (137
    )
    
    
    (1,315
    )Balance at January 31, 2004
    
    
    2,015
    
    
    
    13
    
    
    
    2,028Additions to provision
    
    
    143
    
    
    
    
    
    
    
    143Changes in estimates
    
    
    (94
    )
    
    
    79
    
    
    
    (15
    )Cash outlay, net
    
    
    (781
    )
    
    
    (92
    )
    
    
    (873
    )Balance at January 31, 2005
    
    
    1,283
    
    
    
    
    
    
    
    1,283Additions to provision
    
    
    253
    
    
    
    
    
    
    
    253Changes in estimates
    
    
    191
    
    
    
    8
    
    
    
    199Cash outlay, net
    
    
    (1,018
    )
    
    
    (8
    )
    
    
    (1,026
    )Balance at January 31, 2006
    
    $
    709
    
    
    $
    
    
    
    $
    709
  41




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##### Table of Contents



(6)
    
    Long-term DebtLong-term debt and capitalized lease obligations consist of the following:
 January 31,2006
    
    
    2005Revolving credit facility
    
    $
    28,057
    
    
    $
    36,415Capitalized lease obligations
    
    
    94
    
    
    
    61428,151
    
    
    
    37,029Less current maturities
    
    
    94
    
    
    
    243$
    28,057
    
    
    $
    36,786
     2006
    
    $
    942007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    28,057$
    28,151
 42




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##### Table of Contents



(7)
    
    LeasesWe lease retail space under operating leases with terms ranging from three to 15 years, with
certain leases containing renewal options. Lease agreements generally provide for minimum
rentals. Some leases also include additional contingent rental amounts based upon specified
percentages of sales above predetermined levels. Operating leases are accounted for in
conformity with FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period,
which requires rental costs associated with operating leases that are incurred
during a construction period to be recognized as rental expense. Rental expense for operating
leases is comprised of the following:
 Fiscal Year2005
    
    
    2004
    
    
    2003Minimum rentals
    
    $
    22,474
    
    
    $
    20,962
    
    
    $
    19,595Contingent rentals
    
    
    588
    
    
    
    648
    
    
    
    855Less sublease income
    
    
    (95
    )
    
    
    (87
    )
    
    
    (81
    )Rental expense
    
    $
    22,967
    
    
    $
    21,523
    
    
    $
    20,369
  Capital
    
    
    Operatingleases
    
    
    leases2006
    
    $
    96
    
    
    $
    24,6342007
    
    
    
    
    
    
    22,6072008
    
    
    
    
    
    
    19,8542009
    
    
    
    
    
    
    16,2762010
    
    
    
    
    
    
    12,354Thereafter
    
    
    
    
    
    
    60,868Total minimum lease payments
    
    
    96
    
    
    
    156,593Less sublease income
    
    
    
    
    
    
    2,328Net minimum lease payments under
operating leases
    
    
    
    
    
    $
    154,265Less amount representing imputed interest
    
    
    2Total obligations under capital leases
    
    
    94Less current principal maturities of capital
lease obligations
    
    
    94Obligations under capital leases,
excluding current maturities
    
    $
    
  43




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##### Table of Contents



(8)
    
    Income TaxesIncome tax expense (benefit) is comprised of the following:
 Fiscal Year2005
    
    
    2004
    
    
    2003Current federal
    
    $
    5,759
    
    
    $
    1,970
    
    
    $
    14Current state and local
    
    
    918
    
    
    
    586
    
    
    
    352Deferred federal
    
    
    (2,199
    )
    
    
    1,229
    
    
    
    (1,581
    )Deferred state and local
    
    
    (21
    )
    
    
    197
    
    
    
    (143
    )$
    4,457
    
    
    $
    3,982
    
    
    $
    (1,358
    )
  Fiscal Year2005
    
    
    2004
    
    
    2003Computed expected income tax expense
    
    $
    3,553
    
    
    $
    3,427
    
    
    $
    2,422State and local income taxes, net of
federal income tax effect
    
    
    583
    
    
    
    509
    
    
    
    533Other
    
    
    321
    
    
    
    46
    
    
    
    123Changes in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (4,436
    )$
    4,457
    
    
    $
    3,982
    
    
    $
    (1,358
    )
  Fiscal Year2005
    
    
    2004Deferred tax assets:Gift cards
    
    $
    1,056
    
    
    $
    938Abandoned leases
    
    
    273
    
    
    
    494Deferred rent and lease incentives
    
    
    1,875
    
    
    
    1,947Inventories
    
    
    2,078
    
    
    
    1,573Other
    
    
    1,100
    
    
    
    1,185Total deferred tax assets
    
    
    6,382
    
    
    
    6,137Deferred tax liabilities:Property and equipment
    
    
    (656
    )
    
    
    (2,631
    )Total deferred tax liabilities
    
    
    (656
    )
    
    
    (2,631
    )Net deferred tax assets
    
    $
    5,726
    
    
    $
    3,506
 44




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##### Table of Contents



(9)
    
    Income Per ShareThe computations of basic and diluted income per share are as follows:
 Fiscal Year2005
    
    
    2004
    
    
    2003Net income
    
    $
    5,695
    
    
    $
    5,809
    
    
    $
    8,277Average shares outstanding:Basic
    
    
    11,421
    
    
    
    11,411
    
    
    
    11,327Effect of stock options
    
    
    246
    
    
    
    531
    
    
    
    156Diluted
    
    
    11,667
    
    
    
    11,942
    
    
    
    11,483Income per share:Basic
    
    $
    0.50
    
    
    $
    0.51
    
    
    $
    0.73Diluted
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.72
  (10)
    
    401k and ASOP
    45




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##### Table of Contents



11)
    
    Shareholders EquityWe have six stock option plans: the 1991 and 1994 Stock Option Plans, the 1996 and 2002
Incentive Stock Plan and the 1996 and 2002 Outside Directors Plan (for non-employee
directors). A total of 505,900 shares may be granted under each of the 1991 and 1994 Stock
Option Plans, 632,375 shares may be granted under the 1996 Incentive Stock Plan, 500,000
shares may be granted under the 2002 Incentive Stock Plan, 101,180 shares may be granted under
the 1996 Outside Directors Plan and 150,000 shares may be granted under the 2002 Outside
Directors Plan. As of January 31, 2006, we had 437,494 options available for future issuances
under all stock option plans.The 1991 and 1994 Stock Option Plans and the 1996 and 2002 Incentive Stock Plan authorize the
award of both incentive stock options and non-qualified stock options to purchase common stock
to officers, other associates and directors of the Company. The exercise price per share of
incentive stock options may not be less than the market price of our common stock on the date
the option is granted. The term of each option is determined by the Board of Directors and
generally will not exceed ten years from the date of grant. In general, each option award
vests at 20% per year over five years.The 1996 Incentive Stock Plan also authorizes the granting of stock appreciation rights,
restricted stock, dividend equivalent rights, stock awards, and other stock-based awards to
officers, other associates, directors, and consultants of the Company. There have been no
grants of these awards under this plan.We also have a management stock purchase plan that authorizes the issuance of up to 227,655
shares of common stock, pursuant to agreements providing for the purchase of restricted stock
units (RSUs). The cost of each RSU is equal to 75% of the fair market value of the common
stock of the Company on the date the RSU is awarded. During fiscal years 2005, 2004 and 2003,
there were no RSUs awarded under the Plan. Compensation expense is then recognized using the
straight-line method over three years, which is the vesting period of the RSUs. Under this
methodology, we recorded approximately $0, $18 and $218 of compensation expense in fiscal year
2005, 2004 and 2003, respectively. As of January 31, 2006, 2005 and 2004, there were 0, 0,
and 552 RSUs outstanding under the plan, respectively.A summary of information with respect to all stock option plans is as follows:
 Weighted-averageexercise priceOptions
    
    
    (in dollars)Outstanding at January 31, 2003
    
    
    1,755,339
    
    
    $
    5.97Granted
    
    
    367,779
    
    
    
    3.42Exercised
    
    
    (75,137
    )
    
    
    3.12Forfeited and expired
    
    
    (130,529
    )
    
    
    4.20Outstanding at January 31, 2004
    
    
    1,917,452
    
    
    $
    5.71Granted
    
    
    310,493
    
    
    
    6.03Exercised
    
    
    (225,213
    )
    
    
    3.10Forfeited and expired
    
    
    (115,517
    )
    
    
    4.92Outstanding at January 31, 2005
    
    
    1,887,215
    
    
    $
    6.12Granted
    
    
    144,680
    
    
    
    5.52Exercised
    
    
    (267,388
    )
    
    
    3.47Forfeited and expired
    
    
    (160,640
    )
    
    
    6.20Outstanding at January 31, 2006
    
    
    1,603,867
    
    
    $
    6.50Options available for grant at January 31, 2006
    
    
    437,494
 46




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##### Table of Contents



Weighted-
    
    Weighted-averageaverage exercise
    
    remainingOptions
    
    price (in dollars)
    
    contractual lifeRange: $1.27 to $4.99Options outstanding and exercisable at January 31, 2006
    
    
    587,814
    
    
    $
    3.24
    
    
    5.46 yearsRange: $5.00 to $9.99Options outstanding and exercisable at January 31, 2006
    
    
    577,973
    
    
    $
    6.24
    
    
    7.24 yearsPrice: $10.00 to $14.03Options outstanding and exercisable at January 31, 2006
    
    
    438,080
    
    
    $
    11.24
    
    
    1.03 years
    Weighted Average Exercise price for
    
    Weighted Average Fair value forFiscal Year
    
    Fiscal Year2005
    
    2004
    
    2003
    
    2005
    
    2004
    
    2003Options granted at
market price
    
    $
    5.52
    
    
    $
    5.99
    
    
    $
    3.41
    
    
    $
    3.03
    
    
    $
    3.34
    
    
    $
    2.13Options granted at
prices exceeding market
price
    
    $
    
    
    
    $
    6.31
    
    
    $
    3.72
    
    
    $
    
    
    
    $
    2.98
    
    
    $
    0.08Total options granted
    
    $
    5.52
    
    
    $
    6.03
    
    
    $
    3.42
    
    
    $
    3.03
    
    
    $
    3.31
    
    
    $
    2.12
  Fiscal Year2005
    
    2004
    
    2003Expected dividend yield
    
    $
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    4.27
    %
    
    
    2.71
    %
    
    
    3.24
    %Expected life in years
    
    
    4.98
    
    
    
    5.28
    
    
    
    4.96Volatility
    
    
    .60
    
    
    
    .62
    
    
    
    .74
 47




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##### Table of Contents



(12)
    
    Supplemental Cash Flow InformationCash payments for interest during fiscal 2005, 2004 and 2003 totaled $2.6 million, $2.1
million and $2.1 million, respectively. Cash payments for income taxes during fiscal 2005,
2004 and 2003 totaled $3,513,481; $259,780; and $187,558, respectively.(13)
    
    Commitments and ContingenciesThe Company is obligated to pay certain studios minimum amounts associated with certain
revenue-sharing agreements related to rental assets. As of January 31, 2006, such minimum
future payments approximated $1,126,000, which are expected to be paid during fiscal 2006.During the past fiscal year, we were named as defendants in lawsuits alleging that our
extended viewing fees for movie and game rentals are illegal under the Uniform Commercial
Code. On October 27, 2005, the Company petitioned the court for summary judgment in one such
lawsuit pending in the state of New Mexico. On November 28, 2005, the judge granted the
Companys petition for summary judgment and dismissed all pending claims in that lawsuit.
The plaintiff has subsequently appealed the courts summary judgment.While we intend to vigorously defend all outstanding legal matters and anticipate favorable
results, the ultimate outcome of these matters cannot be estimated at this time. In the event
an adverse judgment was rendered, the impact on the Companys consolidated financial
statements could be material.We are also involved in various other claims and legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on our financial position, results of operations and cash
flows.
 48




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##### Table of Contents



(14)
    
    Interim Financial Results (Unaudited)
 Fiscal year 2005:
    
    QuarterFirst
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    129,124
    
    
    $
    122,726
    
    
    $
    114,587
    
    
    $
    171,494Total cost of revenues
    
    
    85,086
    
    
    
    77,625
    
    
    
    73,538
    
    
    
    112,537Selling, general and administrative expenses
    
    
    42,327
    
    
    
    43,376
    
    
    
    44,867
    
    
    
    46,114Pre-opening expenses
    
    
    88
    
    
    
    4
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    1,623
    
    
    
    1,721
    
    
    
    (3,818
    )
    
    
    12,843Interest (expense) and other income, net
    
    
    (392
    )
    
    
    (607
    )
    
    
    (712
    )
    
    
    (506
    )Income (loss) before taxes
    
    
    1,231
    
    
    
    1,114
    
    
    
    (4,530
    )
    
    
    12,337Income tax expense (benefit)
    
    
    477
    
    
    
    443
    
    
    
    (1,799
    )
    
    
    5,336Net income (loss)
    
    
    754
    
    
    
    671
    
    
    
    (2,731
    )
    
    
    7,001Basic income (loss) per share
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    (0.24
    )
    
    $
    0.61Diluted income (loss) per share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    (0.24
    )
    
    $
    0.61
 Fiscal year 2004:
    
    QuarterFirst
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    126,937
    
    
    $
    122,412
    
    
    $
    119,579
    
    
    $
    173,088Total cost of revenues
    
    
    82,426
    
    
    
    78,665
    
    
    
    79,415
    
    
    
    118,392Selling, general and administrative expenses
    
    
    40,941
    
    
    
    42,189
    
    
    
    42,250
    
    
    
    45,913Pre-opening expenses
    
    
    94
    
    
    
    240
    
    
    
    26
    
    
    
    49Operating income (loss)
    
    
    3,476
    
    
    
    1,318
    
    
    
    (2,112
    )
    
    
    8,734Interest (expense) and other income, net
    
    
    (257
    )
    
    
    (381
    )
    
    
    (483
    )
    
    
    (504
    )Income (loss) before taxes
    
    
    3,219
    
    
    
    937
    
    
    
    (2,595
    )
    
    
    8,230Income tax expense (benefit)
    
    
    1,257
    
    
    
    305
    
    
    
    (973
    )
    
    
    3,393Net income (loss)
    
    
    1,962
    
    
    
    632
    
    
    
    (1,622
    )
    
    
    4,837Basic income (loss) per share
    
    $
    0.17
    
    
    $
    0.06
    
    
    $
    (0.14
    )
    
    $
    0.42Diluted income (loss) per share
    
    $
    0.17
    
    
    $
    0.05
    
    
    $
    (0.14
    )
    
    $
    0.40
 49




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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.
   50




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
  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.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  51




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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.
    
    
    30Consolidated Balance Sheets as of January 31, 2006 and 2005
    
    
    31Consolidated Statements of Operations for the years ended
January 31, 2006, 2005 and 2004.
    
    
    32Consolidated Statements of Shareholders Equity for the years
ended January 31, 2006, 2005 and 2004
    
    
    33Consolidated Statements of Cash Flows for the years ended
January 31, 2006, 2005 and 2004
    
    
    34Notes to Consolidated Financial Statements.
    
    
    352.
    
    
    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
    
    
    54
  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.3.2
    
    
    
    
    (1
    )
    
    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
    
    
    
    
    (1
    )
    
    Amended and Restated Bylaws of the Company (see 3.2 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.
 52




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##### Table of Contents



ExhibitNumber
    
    
    
    
    
    
    
    Description10.17
    
    *
    
    
    (2
    )
    
    Form of Employment Agreement by and between the Company and certain of its executives.10.18
    
    
    
    
    (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.21.1
    
    
    
    
    (2
    )
    
    Subsidiaries of the Company.23.1
    
    
    
    
    (9
    )
    
    Consent of Ernst and Young LLP.24.1
    
    
    
    
    (9
    )
    
    Powers of Attorney (included on signature page).31.1
    
    
    
    
    (9
    )
    
    Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).31.2
    
    
    
    
    (9
    )
    
    Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).32.1
    
    
    
    
    (9
    )
    
    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.(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)
    
    Filed herewith. 53




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 Fiscal Year2005
    
    
    2004
    
    
    2003Reserves deducted from assets:Allowance for shrinkage and inventory
obsolescence:Balance at the beginning of period
    
    $
    3,055
    
    
    $
    3,405
    
    
    $
    3,884Additions charged to costs and expenses
    
    
    11,759
    
    
    
    12,345
    
    
    
    10,799Deductions for write-offs
    
    
    (10,925
    )
    
    
    (12,695
    )
    
    
    (11,278
    )Balance at end of period
    
    $
    3,889
    
    
    $
    3,055
    
    
    $
    3,405Reserves added to liabilities:Allowance for costs of inventory returns:Balance at the beginning of period
    
    $
    2,057
    
    
    $
    3,658
    
    
    $
    4,729Additions charged to costs and expenses
    
    
    4,198
    
    
    
    5,776
    
    
    
    6,247Deductions for write-offs and payments
    
    
    (4,979
    )
    
    
    (7,377
    )
    
    
    (7,318
    )Balance at end of period
    
    $
    1,276
    
    
    $
    2,057
    
    
    $
    3,658
 54




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##### Table of Contents



SIGNATURES
  HASTINGS ENTERTAINMENT, INC.Date: April 20, 2006
    
    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 7, 2006/s/ Gaines L. Godfrey

Gaines L. Godfrey
    
    Director
    
    April 7, 2006/s/ Danny W. Gurr

Danny W. Gurr
    
    Director
    
    April 7, 2006/s/ Daryl L. Lansdale

Daryl L. Lansdale
    
    Director
    
    April 7, 2006/s/ Ann S. Lieff

Ann S. Lieff
    
    Director
    
    April 7, 2006/s/ Frank O. Marrs

Frank O. Marrs
    
    Director
    
    April 7, 2006/s/ Jeffrey G. Shrader

Jeffrey G. Shrader
    
    Director
    
    April 7, 2006
 55