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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, 2008
 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
    
    75-1386375(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3601 Plains Boulevard, Amarillo, Texas
    
    79102(Address of principal executive offices)
    
    (Zip Code)
 (806) 351-2300
 None
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.01 par value per share
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   Class
    
    Outstanding at March 31, 2008Common Stock, $.01 par value per share
    
    10,371,039
  Document
    
    Parts Into Which IncorporatedPortions of the Proxy Statement for the annual meeting of
    
    Part IIIShareholders of the registrant to be held in 2008




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##### 



HASTINGS ENTERTAINMENT, INC.
Form 10-K Annual Report
For the Fiscal Year Ended January 31, 2008
 INDEX
 PAGEPART IItem 1. Business
    
    1Item 1A. Risk Factors
    
    8Item 1B. Unresolved Staff Comments
    
    11Item 2. Properties
    
    12Item 3. Legal Proceedings
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    13PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    14Item 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
    
    29Item 8. Financial Statements and Supplementary Data
    
    30Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    55Item 9A. Controls and Procedures
    
    55Item 9A(T) Controls and Procedures
    
    56PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    57Item 11. Executive Compensation
    
    57Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    57Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    57Item 14. Principal Accountant Fees and Services
    
    57PART IVItem 15. Exhibits and Financial Statement Schedules
    
    58SIGNATURES
    
    61CERTIFICATIONS
    
    63Consent of Ernst & Young LLPCertification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a)Certification of CEO and CFO Pursuant to Section 906




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




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Minimum
    
    MaximumProduct Category
    
    Title Count
    
    Title CountBooks
    
    
    14,000
    
    
    
    64,000DVD, Video Games, VHS
    
    
    8,000
    
    
    
    16,000Rental DVD, Video Games, VHS
    
    
    8,000
    
    
    
    23,000Used CDs, DVD, Video Games
    
    
    8,000
    
    
    
    31,000Music
    
    
    6,000
    
    
    
    16,000Trends, Consumables and Accessories
    
    
    3,000
    
    
    
    6,000Used Books
    
    
    2,000
    
    
    
    20,000Periodicals
    
    
    1,000
    
    
    
    3,000Electronics
    
    
    
    
    
    
    1,000Software
    
    
    
    
    
    
    1,000
  Fiscal YearProduct Category
    
    2007
    
    2006
    
    2005Books
    
    
    22
    %
    
    
    22
    %
    
    
    22
    %Video
    
    
    22
    %
    
    
    21
    %
    
    
    19
    %Music
    
    
    17
    %
    
    
    20
    %
    
    
    23
    %Rental
    
    
    16
    %
    
    
    17
    %
    
    
    17
    %Video Games
    
    
    11
    %
    
    
    9
    %
    
    
    9
    %Trends
    
    
    4
    %
    
    
    4
    %
    
    
    4
    %Consumables
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Electronics
    
    
    3
    %
    
    
    3
    %
    
    
    2
    %Other
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %
  Medium-Sized Market Focus.
 Customer-Oriented Format.
 2




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Low Pricing.
 Used and Budget-Priced Products.
 Internet. www.gohastings.com www.gohastings.com
      3




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




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Warehouse Management.
 Data Center.
 goShip
        5




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6




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Name
    
    Age
    
    PositionJohn H. Marmaduke
    
    
    60
    
    
    Chairman of the Board, President and Chief Executive
OfficerAlan Van Ongevalle
    
    
    40
    
    
    Senior Vice President of MerchandisingDan Crow
    
    
    61
    
    
    Vice President of Finance and Chief Financial OfficerKevin Ball
    
    
    51
    
    
    Vice President of MarketingPhil McConnell
    
    
    45
    
    
    Vice President, Divisional Merchandise ManagerJohn Hintz
    
    
    43
    
    
    Vice President of Information TechnologyVictor Fuentes
    
    
    41
    
    
    Vice President, Divisional Merchandise Manager
  John H. Marmaduke
 Alan Van Ongevalle
 Dan Crow
 Kevin Ball
 Phil McConnell
 John Hintz
 Victor Fuentes,
 7




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##### Table of Contents



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.
  Intense competition from traditional retail sources and the Internet may adversely affect our
business.
  8




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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.
   Changes to information technology systems may disrupt the supply chain.
  10




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Our business is dependent upon renewing or entering into new leases on favorable terms.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  11




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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
    
    
    7Texas
    
    
    42Utah
    
    
    2Washington
    
    
    9Wyoming
    
    
    3Total
    
    
    153
     Number of Stores
    
    OptionsFiscal Year 2008
    
    
    9
    
    
    
    8Fiscal Year 2009
    
    
    33
    
    
    
    30Fiscal Year 2010
    
    
    16
    
    
    
    12Fiscal Year 2011
    
    
    16
    
    
    
    12Fiscal Year 2012
    
    
    22
    
    
    
    20Thereafter
    
    
    57
    
    
    
    53Total
    
    
    153
    
    
    
    135
 12




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ITEM 3. LEGAL PROCEEDINGS.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  13




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    Low2007:First Quarter
    
    $
    7.53
    
    
    $
    5.53Second Quarter
    
    $
    7.80
    
    
    $
    6.40Third Quarter
    
    $
    9.68
    
    
    $
    6.00Fourth Quarter
    
    $
    10.00
    
    
    $
    6.532006:First Quarter
    
    $
    6.24
    
    
    $
    4.75Second Quarter
    
    $
    8.00
    
    
    $
    5.51Third Quarter
    
    $
    8.17
    
    
    $
    5.60Fourth Quarter
    
    $
    8.40
    
    
    $
    5.43
    Total number of
    
    
    Approximateshares
    
    
    dollar value ofpurchased as
    
    
    shares that mayTotal number
    
    
    Average
    
    
    part of publicly
    
    
    yet be purchasedof shares
    
    
    price paid
    
    
    announced plans
    
    
    under the plans orPeriod
    
    purchased (1)
    
    
    per share
    
    
    or programs
    
    
    programs (2)November 1 to November 30, 2007
    
    
    41,500
    
    
    $
    8.72
    
    
    
    41,500
    
    
    
    N/ADecember 1 to December 31, 2007
    
    
    96,187
    
    
    
    9.83
    
    
    
    96,187
    
    
    
    N/AJanuary 1 to January 31, 2008
    
    
    124,900
    
    
    
    8.84
    
    
    
    124,900
    
    
    
    N/ATotal
    
    
    262,587
    
    
    $
    9.18
    
    
    
    262,587
    
    
    $
    5,236,787
 
 (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 of our common stock. Since that time, the
Board of Directors has approved additional increases in the amounts of $2.5 million on April
4, 2005; $5.0 million on March 15, 2006; $2.5 million on October 3, 2006; and $7.5 million on
November 20, 2007. Each such authorization to increase amounts was publicly announced in a
press release. The purchases satisfied the conditions of the safe harbor of Rule 10b-18 under
the Securities Exchange Act of 1934.(2)
    
    A total of 2,655,750 shares have been purchased under the repurchase plan at a total cost of
approximately $17.3 million, or approximately $6.50 per share. 14




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Comparison of Cumulative Five Year Total Return
 
 Fiscal Years EndedJanuary 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Hastings
    
    $
    100.00
    
    
    $
    109.20
    
    
    $
    189.66
    
    
    $
    122.99
    
    
    $
    135.63
    
    
    $
    200.92S&P 500 Index
    
    
    100.00
    
    
    
    132.19
    
    
    
    138.05
    
    
    
    149.59
    
    
    
    168.08
    
    
    
    161.10Nasdaq Composite
    
    
    100.00
    
    
    
    156.42
    
    
    
    156.14
    
    
    
    174.56
    
    
    
    186.53
    
    
    
    180.93
   15




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ITEM 6. SELECTED FINANCIAL DATA.
  Fiscal Year(In thousands, except per share and square foot data)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Income Statement Data:Merchandise revenue
    
    $
    458,076
    
    
    $
    454,142
    
    
    $
    444,291
    
    
    $
    440,596
    
    
    $
    404,977Rental asset revenue
    
    
    89,609
    
    
    
    94,190
    
    
    
    93,640
    
    
    
    101,420
    
    
    
    103,341Total revenues
    
    
    547,685
    
    
    
    548,332
    
    
    
    537,931
    
    
    
    542,016
    
    
    
    508,318Merchandise cost of revenue
    
    
    321,438
    
    
    
    326,025
    
    
    
    314,328
    
    
    
    322,632
    
    
    
    299,055Rental asset cost of revenue
    
    
    31,107
    
    
    
    33,862
    
    
    
    34,458
    
    
    
    36,266
    
    
    
    37,727Total cost of revenues
    
    
    352,545
    
    
    
    359,887
    
    
    
    348,786
    
    
    
    358,898
    
    
    
    336,782Gross profit
    
    
    195,140
    
    
    
    188,445
    
    
    
    189,145
    
    
    
    183,118
    
    
    
    171,536Selling, general and administrative expenses
    
    
    177,028
    
    
    
    177,467
    
    
    
    176,684
    
    
    
    171,293
    
    
    
    162,616Pre-opening expenses
    
    
    120
    
    
    
    94
    
    
    
    92
    
    
    
    409
    
    
    
    277Operating income
    
    
    17,992
    
    
    
    10,884
    
    
    
    12,369
    
    
    
    11,416
    
    
    
    8,643Interest expense
    
    
    (2,919
    )
    
    
    (3,260
    )
    
    
    (2,616
    )
    
    
    (1,918
    )
    
    
    (2,048
    )Other, net
    
    
    123
    
    
    
    642
    
    
    
    399
    
    
    
    293
    
    
    
    324Income before income taxes
    
    
    15,196
    
    
    
    8,266
    
    
    
    10,152
    
    
    
    9,791
    
    
    
    6,919Income tax expense (benefit)(1)
    
    
    4,951
    
    
    
    3,247
    
    
    
    4,457
    
    
    
    3,982
    
    
    
    (1,358
    )Net income
    
    $
    10,245
    
    
    $
    5,019
    
    
    $
    5,695
    
    
    $
    5,809
    
    
    $
    8,277Basic income per share
    
    $
    0.95
    
    
    $
    0.45
    
    
    $
    0.50
    
    
    $
    0.51
    
    
    $
    0.73Diluted income per share
    
    $
    0.93
    
    
    $
    0.44
    
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.72Weighted-average common shares outstanding  basic
    
    
    10,797
    
    
    
    11,244
    
    
    
    11,421
    
    
    
    11,411
    
    
    
    11,327Weighted-average common shares outstanding  diluted
    
    
    11,055
    
    
    
    11,518
    
    
    
    11,667
    
    
    
    11,942
    
    
    
    11,483Other Data:Depreciation (2)
    
    $
    19,400
    
    
    $
    19,865
    
    
    $
    19,737
    
    
    $
    19,075
    
    
    $
    18,806Capital expenditures (3)
    
    $
    15,256
    
    
    $
    18,566
    
    
    $
    17,097
    
    
    $
    24,729
    
    
    $
    22,093Store Data:Total selling square footage at end of period
    
    
    3,134,912
    
    
    
    3,121,737
    
    
    
    3,101,627
    
    
    
    3,039,582
    
    
    
    2,915,884Comparable-store revenues increase (decrease) (4)
    
    
    (0.1
    %)
    
    
    1.8
    %
    
    
    (1.4
    %)
    
    
    5.0
    %
    
    
    1.9
    %Sales per selling square footage
    
    $
    174.70
    
    
    $
    175.63
    
    
    $
    173.41
    
    
    $
    178.29
    
    
    $
    174.32January 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Balance Sheet Data:Working capital (5)
    
    $
    77,728
    
    
    $
    71,941
    
    
    $
    52,508
    
    
    $
    52,404
    
    
    $
    39,756Total assets
    
    $
    260,221
    
    
    $
    257,498
    
    
    $
    254,661
    
    
    $
    251,299
    
    
    $
    233,491Total long-term debt
    
    $
    40,616
    
    
    $
    41,922
    
    
    $
    28,151
    
    
    $
    37,029
    
    
    $
    28,775Dividends declared
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total shareholders equity(1)
    
    $
    101,808
    
    
    $
    97,553
    
    
    $
    94,693
    
    
    $
    89,774
    
    
    $
    83,946
 16




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(1)
    
    On February 1, 2007, we recognized an increase in the liability for uncertain tax positions
plus total interest and penalties totaling $838,000 as a result of FIN 48 adoption, with a
corresponding adjustment to retained earnings. The results for fiscal year 2007 reflect an
income tax benefit of approximately $0.9 million, or $0.08 per diluted share, related to a
favorable settlement of a prior years state tax liability. 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.(2)
    
    Excludes amounts associated with our rental asset cost depreciation of $13,441, $15,771,
$18,472, $22,842, and $21,007 for fiscal 2007, 2006, 2005, 2004, and 2003, respectively.(3)
    
    Includes purchases of property, equipment, and improvements.(4)
    
    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.(5)
    
    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.
 18




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Rental Asset Depreciation.
     Impairment or Disposal of Long-Lived Assets
 Income Taxes.
 19




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Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
 Share-Based Compensation.
 
    
    Expected volatility  The estimated stock price volatility was derived based upon
actual historical stock prices over the expected life of the option.
    
    Expected life of the option  The estimate of an expected life was 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.
    20




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Fiscal Year2007
    
    2006
    
    2005Merchandise revenue
    
    
    83.6
    %
    
    
    82.8
    %
    
    
    82.6
    %Rental asset revenue
    
    
    16.4
    
    
    
    17.2
    
    
    
    17.4Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Merchandise cost of revenue
    
    
    70.2
    
    
    
    71.8
    
    
    
    70.7Rental asset cost of revenue
    
    
    34.7
    
    
    
    36.0
    
    
    
    36.8Total cost of revenues
    
    
    64.4
    
    
    
    65.6
    
    
    
    64.8Gross profit
    
    
    35.6
    
    
    
    34.4
    
    
    
    35.2Selling, general and administrative expenses
    
    
    32.3
    
    
    
    32.4
    
    
    
    32.8Pre-opening expenses
    
    
    
    
    
    
    
    
    
    
    0.132.3
    
    
    
    32.4
    
    
    
    32.9Operating income
    
    
    3.3
    
    
    
    2.0
    
    
    
    2.3Other income (expense):Interest expense
    
    
    (0.5
    )
    
    
    (0.6
    )
    
    
    (0.5
    )Other, net
    
    
    
    
    
    
    0.1
    
    
    
    0.1(0.5
    )
    
    
    (0.5
    )
    
    
    (0.4
    )Income before income taxes
    
    
    2.8
    
    
    
    1.5
    
    
    
    1.9Income tax expense
    
    
    0.9
    
    
    
    0.6
    
    
    
    0.8Net income
    
    
    1.9
    %
    
    
    0.9
    %
    
    
    1.1
    %
 Fiscal Year2007
    
    2006
    
    2005Hastings Stores:Beginning number of stores
    
    
    154
    
    
    
    153
    
    
    
    152Openings
    
    
    1
    
    
    
    1
    
    
    
    1Closings
    
    
    (2
    )
    
    
    
    
    
    
    Ending number of stores
    
    
    153
    
    
    
    154
    
    
    
    153
 21




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Revenues.
 Fiscal Year Ended January 31,2008
    
    
    2007Percent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/(Decrease)Revenues
    
    
    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
    %Comparable-store
revenues: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
    %
    22




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##### Table of Contents



Gross Profit  Merchandise.
 Gross Profit  Rental.
 Selling, General and Administrative expenses (SG&A).
 Income Tax Expense
  Revenues.
 Fiscal Year Ended January 31,2007
    
    
    2006Percent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/(Decrease)Revenues
    
    
    Total
    
    
    Revenues
    
    
    Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    454,142
    
    
    
    82.8
    %
    
    $
    444,291
    
    
    
    82.6
    %
    
    $
    9,851
    
    
    
    2.2
    %Rental revenue
    
    
    94,190
    
    
    
    17.2
    %
    
    
    93,640
    
    
    
    17.4
    %
    
    
    550
    
    
    
    0.6
    %Total revenues
    
    $
    548,332
    
    
    
    100.0
    %
    
    $
    537,931
    
    
    
    100.0
    %
    
    $
    10,401
    
    
    
    1.9
    %Comparable-store
revenues:Total
    
    
    1.8
    %Merchandise
    
    
    2.2
    %Rental
    
    
    0.2
    %
 23




---



##### Table of Contents



Fiscal Year Ended January 31,2007
    
    2006Electronics
    
    
    27.3
    %
    
    
    8.2
    %Hard Back Café
    
    
    25.6
    %
    
    
    35.0
    %Movies
    
    
    13.1
    %
    
    
    2.0
    %Video Games
    
    
    8.7
    %
    
    
    5.4
    %Books
    
    
    0.4
    %
    
    
    -0.3
    %Consumables
    
    
    -1.6
    %
    
    
    1.9
    %Trends
    
    
    -3.3
    %
    
    
    5.2
    %Music
    
    
    -9.3
    %
    
    
    -2.9
    %
    Gross Profit  Merchandise.
 Gross Profit  Rental.
 Selling, General and Administrative expenses (SG&A).
 Interest Expense.
 Income Taxes.
 24




---



##### Table of Contents



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




---



##### Table of Contents



Capital Structure.
   26




---



##### Table of Contents



Contractual Obligations and Off-Balance Sheet Arrangements
  1 to 3
    
    3 to 5
    
    More thanContractual Obligations
    
    Total
    
    Less than 1 year
    
    Years
    
    Years
    
    5 YearsLong-term debt (principal
only) (1)
    
    $
    40,616
    
    
    
    
    
    
    
    
    
    
    
    40,616
    
    
    Operating leases (2)
    
    
    177,475
    
    
    
    24,253
    
    
    
    44,752
    
    
    
    34,166
    
    
    
    74,304Revenue sharing (3)
    
    
    642
    
    
    
    642
    
    
    
    
    
    
    
    
    
    
    Total (4)
    
    $
    218,733
    
    
    
    24,895
    
    
    
    44,752
    
    
    
    74,782
    
    
    
    74,304
 
 (1)
    
    Based on our internal forecasts, we estimate interest payments for FY 2008 to be
approximately $2.9 million.(2)
    
    Amounts include the direct lease obligations, excluding any taxes, insurance, maintenance and
other related expenses. For the fiscal year ended January 31, 2008, payments for taxes,
insurance, maintenance, and other related expenses, which are variable in nature, were
approximately $5.4 million.(3)
    
    As of January 31, 2008, 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 2007.(4)
    
    FIN 48 obligations including unrecognized tax benefits of $186,000 and accrued interest and
penalties related to unrecognized tax benefits of $192,000, as of January 31, 2008, 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. 27




---



##### Table of Contents



QuarterFiscal year 2007:
    
    First
    
    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
    %
 QuarterFiscal year 2006:
    
    First
    
    Second
    
    Third
    
    FourthTotal revenues
    
    $
    131,412
    
    
    $
    123,094
    
    
    $
    119,636
    
    
    $
    174,190Operating income (loss)
    
    $
    3,749
    
    
    $
    588
    
    
    $
    (2,787
    )
    
    $
    9,334% of full year:Total revenues
    
    
    24.0
    %
    
    
    22.4
    %
    
    
    21.8
    %
    
    
    31.8
    %Operating income (loss)
    
    
    34.4
    %
    
    
    5.4
    %
    
    
    (25.6
    %)
    
    
    85.8
    %
  28




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##### Table of Contents



Fair Value Measurements Effective Date of FASB
Statement No. 157,
 The Fair Value Option for Financial Assets and
Financial Liabilities
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  29




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
and Financial Statement Schedule
 PageReport of Independent Registered Public Accounting Firm
    
    
    31Consolidated Balance Sheets as of January 31, 2008 and 2007
    
    
    32Consolidated Statements of Earnings
for the years ended January 31, 2008, 2007, and 2006
    
    
    33Consolidated Statements of Shareholders Equity
for the years ended January 31, 2008, 2007, and 2006
    
    
    34Consolidated Statements of Cash Flows
for years ended January 31, 2008, 2007, and 2006
    
    
    35Notes to Consolidated Financial Statements
    
    
    36ScheduleFinancial 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.
    
    
    60
 30




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 31




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 
 January 31,2008
    
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    $
    3,982
    
    
    $
    3,837Merchandise inventories
    
    
    171,958
    
    
    
    167,277Deferred income taxes
    
    
    3,441
    
    
    
    3,891Prepaid expenses and other current assets
    
    
    11,386
    
    
    
    10,633Total current assets
    
    
    190,767
    
    
    
    185,638Rental assets, net of accumulated depreciation of $22,139 and $22,604 at
January 31, 2008 and 2007, respectively
    
    
    13,236
    
    
    
    11,931Property and equipment, net
    
    
    52,572
    
    
    
    57,422Deferred income taxes
    
    
    2,756
    
    
    
    1,765Intangible assets, net
    
    
    391
    
    
    
    411Other assets
    
    
    499
    
    
    
    331$
    260,221
    
    
    $
    257,498Liabilities and Shareholders EquityCurrent liabilitiesTrade accounts payable
    
    $
    76,364
    
    
    $
    76,518Accrued expenses and other current liabilities
    
    
    36,675
    
    
    
    37,179Total current liabilities
    
    
    113,039
    
    
    
    113,697Long-term debt
    
    
    40,616
    
    
    
    41,922Other liabilities
    
    
    4,758
    
    
    
    4,326Shareholders 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 2007 and 2006;
10,389,339 shares outstanding in fiscal 2007 and
11,011,353 shares outstanding in fiscal 2006
    
    
    119
    
    
    
    119Additional paid-in capital
    
    
    37,125
    
    
    
    36,906Retained earnings
    
    
    75,892
    
    
    
    66,485Accumulated other comprehensive income (loss)
    
    
    (15
    )
    
    
    67Treasury stock, at cost
    
    
    (11,313
    )
    
    
    (6,024
    )101,808
    
    
    
    97,553$
    260,221
    
    
    $
    257,498
  32




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 
 Fiscal Year2007
    
    
    2006
    
    
    2005Merchandise revenue
    
    $
    458,076
    
    
    $
    454,142
    
    
    $
    444,291Rental asset revenue
    
    
    89,609
    
    
    
    94,190
    
    
    
    93,640Total revenues
    
    
    547,685
    
    
    
    548,332
    
    
    
    537,931Merchandise cost of revenue
    
    
    321,438
    
    
    
    326,025
    
    
    
    314,328Rental asset cost of revenue
    
    
    31,107
    
    
    
    33,862
    
    
    
    34,458Total cost of revenues
    
    
    352,545
    
    
    
    359,887
    
    
    
    348,786Gross profit
    
    
    195,140
    
    
    
    188,445
    
    
    
    189,145Selling, general and administrative
expenses
    
    
    177,028
    
    
    
    177,467
    
    
    
    176,684Pre-opening expenses
    
    
    120
    
    
    
    94
    
    
    
    92Operating income
    
    
    17,992
    
    
    
    10,884
    
    
    
    12,369Other income (expense):Interest expense
    
    
    (2,919
    )
    
    
    (3,260
    )
    
    
    (2,616
    )Other, net
    
    
    123
    
    
    
    642
    
    
    
    399Income before income taxes
    
    
    15,196
    
    
    
    8,266
    
    
    
    10,152Income tax expense
    
    
    4,951
    
    
    
    3,247
    
    
    
    4,457Net income
    
    $
    10,245
    
    
    $
    5,019
    
    
    $
    5,695Basic income per share
    
    $
    0.95
    
    
    $
    0.45
    
    
    $
    0.50Diluted income per share
    
    $
    0.93
    
    
    $
    0.44
    
    
    $
    0.49
  33




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury Stock
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income(Loss)
    
    
    Shares
    
    
    Amount
    
    
    EquityBalances 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
and other, net of taxes
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    (267,388
    )
    
    
    1,432
    
    
    
    1,007Other stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,695Change in interest
rate cap, net of $98
in taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    141Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,836Balances at January 31,
2006
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,076
    
    
    
    61,466
    
    
    
    141
    
    
    
    561,372
    
    
    
    (3,109
    )
    
    
    94,693Issuance 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 in
investments held for
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
    )
    
    $
    101,808
  34




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
 
 Fiscal Year2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    10,245
    
    
    $
    5,019
    
    
    $
    5,695Adjustments to reconcile net income to net cash provided
by operating activities:Rental asset depreciation expense
    
    
    13,441
    
    
    
    15,771
    
    
    
    18,472Purchases of rental assets
    
    
    (27,276
    )
    
    
    (28,689
    )
    
    
    (28,900
    )Property and equipment depreciation expense
    
    
    19,400
    
    
    
    19,865
    
    
    
    19,737Amortization expense
    
    
    20
    
    
    
    43
    
    
    
    88Loss on rental assets lost, stolen and defective
    
    
    1,218
    
    
    
    1,224
    
    
    
    672Loss on disposal or impairment of property and equipment, excluding rental assets
    
    
    709
    
    
    
    1,295
    
    
    
    1,463Deferred income taxes
    
    
    (542
    )
    
    
    70
    
    
    
    (2,220
    )Non-cash stock-based compensation
    
    
    428
    
    
    
    155
    
    
    
    145Changes in operating assets and liabilities:Merchandise inventories
    
    
    6,629
    
    
    
    10,138
    
    
    
    1,240Other current assets
    
    
    (753
    )
    
    
    (3,617
    )
    
    
    (71
    )Trade accounts payable
    
    
    2,224
    
    
    
    (9,379
    )
    
    
    420Accrued expenses and other liabilities
    
    
    (1,215
    )
    
    
    22
    
    
    
    4,810Excess tax benefit from stock option exercises
    
    
    (127
    )
    
    
    
    
    
    
    Other assets and liabilities, net
    
    
    182
    
    
    
    (402
    )
    
    
    (342
    )Net cash provided by operating activities
    
    
    24,583
    
    
    
    11,515
    
    
    
    21,209Cash flows from investing activities:Purchase of property, equipment and improvements
    
    
    (15,256
    )
    
    
    (18,566
    )
    
    
    (17,097
    )Net cash used in investing activities
    
    
    (15,256
    )
    
    
    (18,566
    )
    
    
    (17,097
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    565,488
    
    
    
    585,927
    
    
    
    556,224Repayments under revolving credit facility
    
    
    (566,794
    )
    
    
    (572,062
    )
    
    
    (564,583
    )Payments under long-term debt and capital lease obligations
    
    
    
    
    
    
    (94
    )
    
    
    (210
    )Purchase of treasury stock
    
    
    (6,336
    )
    
    
    (4,237
    )
    
    
    (2,069
    )Change in cash overdraft
    
    
    (2,378
    )
    
    
    (3,094
    )
    
    
    2,489Proceeds from exercise of stock options and other
    
    
    711
    
    
    
    831
    
    
    
    928Excess tax benefit from stock option exercises
    
    
    127
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (9,182
    )
    
    
    7,271
    
    
    
    (7,221
    )Net increase (decrease) in cash and cash equivalents
    
    
    145
    
    
    
    220
    
    
    
    (3,109
    )Cash and cash equivalents at beginning of year
    
    
    3,837
    
    
    
    3,617
    
    
    
    6,726Cash and cash equivalents at end of year
    
    $
    3,982
    
    
    $
    3,837
    
    
    $
    3,617
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(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, video games, and video game consoles,
as well as new software, periodicals, consumables, and trends 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 intercompany transactions and balances have
been eliminated in consolidation.(c)
    
    Basis of PresentationWe operate in one reportable segment. Our fiscal years ended January 31, 2008, 2007 and
2006 are referred to as fiscal 2007, 2006, and 2005, respectively.(d)
    
    Cash and Cash EquivalentsWe considers all debit and credit card receivables totaling $1.2 million and $1.2
million at January 31, 2007 and 2006, 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 uncleared 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 CDs, DVDs, video games
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
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 available for sale. During fiscal 2007, 2006, and 2005, $11.3 million, $12.4
million, and $10.8 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 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 more than the fair value
(determined using a discounted cash flow technique) 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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(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, video games, and VHS, are depreciated to
salvage values ranging from $2.50 to $10. Rental assets purchased for less than
established salvage values are not depreciated.Beginning with the fourth quarter of 2006, we changed the estimated useful life of
rental video games from six months to nine months to better reflect the products
extended rental life. In addition, we increased the salvage value on rental video games
from $4 to $10 to better match the recovery rate on higher cost games released on new
gaming systems. All other rental assets, which include DVDs, VHS units, and Books on
CD, continue to be depreciated on an accelerated basis over six months to salvage values
of either $2.50 for VHS units or $4.00 for DVD units and Books on CD. These changes in
estimates related to our rental assets did not have a material impact on our
consolidated financial statements.(i)
    
    Financial InstrumentsThe carrying amount of long-term debt approximates fair value as of January 31, 2008 and
2007 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 CompensationPrior to February 1, 2006, we applied the disclosure-only provisions of SFAS 123,
Accounting for Stock-Based Compensation(SFAS 123). In accordance with the provisions
of SFAS 123, we applied APB 25, Accounting for Stock Issued to Employees(APB 25) and
related interpretations in accounting for its plans and, accordingly, did not recognize
compensation expense for these plans because all options were issued at exercise prices
equal to or greater than market value at date of grant.Effective February 1, 2006, we adopted SFAS 123 (revised 2004), Share-Based Payments
(SFAS 123R), which revises SFAS 123 and supersedes APB 25. SFAS 123R requires all
share-based payments to employees to be recognized in the financial statements based on
their fair values using an option-pricing model, such as the Black-Scholes model, at the
date of grant. We elected to use the modified prospective method for adoption, which
required compensation expense to be recorded for all unvested stock options and
restricted shares beginning in the first quarter of adoption.We recognized approximately $55,000, before income taxes, related to the adoption of
SFAS 123R in fiscal 2006.(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 2007, 2006,
and 2005 were $6.3 million, $7.7 million, and $7.8 million, respectively.We receive payments and credits from vendors pursuant to cooperative advertising
programs and display allowances. During fiscal years 2007, 2006 and 2005, we received a
total of approximately $8.6 million, $9.0 million, and $7.8 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
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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 and/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.(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, 2007, we adopted Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109(FIN 48).
FIN 48 addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under FIN 48,
we may recognize the tax benefit from an uncertain tax position only if it is more
likely then not the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty percent likelihood, on a cumulative basis, of
being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes. We recognize
interest and penalties relating to any uncertain tax positions as a component of income
tax expense.In September 2006, the FASB issued SFAS 157, Fair Value Measurements(SFAS 157), which
defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 applies only when other standards
require or permit the fair value measurements. The provisions of SFAS 157 are generally
effective for fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157,which delays
the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial
liabilities, except for those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company is in the process of evaluating
the provisions of SFAS 157 but does not anticipate that adoption will have a material
impact on its consolidated balance sheets or statements of operations, shareholders
equity and cash flows.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. The Company does not expect a
material impact to its consolidated balance sheets or statements of operations,
shareholders equity and cash flows upon adoption.
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(2)
    
    Merchandise InventoriesMerchandise inventories consist of the following:
 January 31,2008
    
    
    2007Books
    
    $
    62,175
    
    
    $
    64,707Videos
    
    
    43,224
    
    
    
    39,499Video Games
    
    
    19,206
    
    
    
    15,366Music
    
    
    28,758
    
    
    
    34,924Trends
    
    
    9,948
    
    
    
    7,632Consumer Electronics
    
    
    7,507
    
    
    
    6,257Other
    
    
    6,384
    
    
    
    3,357177,202
    
    
    
    171,742Less allowance for inventory shrinkage and obsolescence
    
    
    5,244
    
    
    
    4,465$
    171,958
    
    
    $
    167,277
 During fiscal 2007 and 2006, we purchased approximately 18% and 19%, respectively, of all
products (defined herein as merchandise inventories and rental assets) from the top three
vendors for each year.
 (3)
    
    Property and EquipmentProperty and equipment consist of the following:
 January 31,2008
    
    
    2007Furniture, equipment and software
    
    $
    149,997
    
    
    $
    143,522Leasehold improvements
    
    
    66,054
    
    
    
    63,755Buildings and land
    
    
    258
    
    
    
    258Work in progress
    
    
    890
    
    
    
    621217,199
    
    
    
    208,156Less accumulated depreciation
    
    
    164,627
    
    
    
    150,734Property and equipment, net
    
    $
    52,572
    
    
    $
    57,422
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(4)
    
    Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consist of the following:
 January 31,2008
    
    
    2007Allowance for cost of inventory returns
    
    $
    1,343
    
    
    $
    1,586Deferred gift card revenue
    
    
    17,901
    
    
    
    16,354Salaries, vacation, bonus and benefits
    
    
    4,447
    
    
    
    7,664Short term lease obligations
    
    
    1,043
    
    
    
    1,209Sales taxes payable
    
    
    1,493
    
    
    
    2,062Federal income tax payable
    
    
    3,449
    
    
    
    2,138Other accrued expenses
    
    
    6,999
    
    
    
    6,166Total
    
    $
    36,675
    
    
    $
    37,179
 Merchandise inventories that are not sold can normally be returned to the vendors. The
allowance for cost of inventory returns represents estimated costs related to merchandise
returned or to be returned to vendors for which credit from the vendor is pending. Because
the amount of credit to be received requires estimates, it is reasonably possible that our
estimate of the ultimate settlement with our vendors may change in the near term.In the ordinary course of business, we accrue estimated amounts for settlements with certain
vendors related to disputed merchandise purchases and returns. Because the ultimate
settlement amount requires estimates, it is reasonably possible that our estimate of the
ultimate settlement with our vendors may change in the near term. During fiscal 2007, 2006,
and 2005 we reduced merchandise cost of revenues by approximately $1.2 million, $1.6 million,
and $2.2 million, respectively, related to favorable differences between actual settlements
with vendors as compared to amounts accrued.
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(5)
    
    Store Closing Reserve
 From time to time and in the normal course of business, we evaluate our store base to
determine if we need to close a store. Such evaluations include consideration of, among other
factors, current and future profitability, market trends, age of store and lease status.Amounts in Accrued expenses and other current liabilities and Other liabilities at January
31, 2008 and 2007 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 the consolidated statement
of earnings.The following table provides a rollforward of reserves that were established for these charges
for fiscal 2007, 2006 and 2005:
 Future Lease PaymentsBalance at January 31, 2005
    
    $
    1,283Additions to provision
    
    
    253Changes in estimates
    
    
    199Cash outlay, net
    
    
    (1,026
    )Balance 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
    
    $
    377
 As of January 31, 2008, the reserve balance, which is net of estimated sublease income, is
expected to be paid over the next three years.
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##### Table of Contents



(6)
    
    Long-term Debt
 On January 31, 2008 and January 31, 2007, the balance on the revolving credit facility was
$40.6 million and $41.9 million, respectively.We have a syndicated secured Loan and Security Agreement with Fleet Retail Finance, Inc. Due
to the acquisition of Fleet Retail Finance by Bank of America, on January 8, 2008, we executed
an amendment to our secured Loan and Security Agreement which changed ownership of the
Revolving Credit Facility from Fleet Retail Group to Bank of America. The amount outstanding
under the Facility is limited by a borrowing base predicated on eligible inventory, as defined
in the Facility, and certain rental assets, net of accumulated depreciation less specifically
defined reserves and is limited to a ceiling of $100 million, less a $10 million availability
reserve, as amended. The Facility permits borrowings at various interest-rate options based
on the prime rate or London Interbank Offering Rate (LIBOR) plus applicable margin depending
upon the level of our minimum availability. The borrowing base under the Facility is limited
to an advance rate of 65% of eligible inventory and certain rental assets net of accumulated
amortization less specifically defined reserves, which can be adjusted to reduce availability
under the Facility. Lenders may increase specifically defined reserves to reduce availability
in the event of adverse changes in our industry that are projected to impact the value of our
assets pledged as collateral. The Facility contains no financial covenants, prohibits the
payment of dividends and includes certain other debt and acquisition limitations, allows for
the repurchase of up to $30 million of our common stock and requires a minimum availability of
$10 million at all times. The Facility is secured by substantially all of the assets of the
Company and our subsidiaries and is guaranteed by each of our consolidated subsidiaries.
Unless the Facility is amended and the maturity extended, the Facility matures on August 29,
2011, at which time any remaining outstanding amounts would be due. At January 31, 2008, we
had $41.2 million in excess availability, after the $10 million availability reserve, under
the Facility. However, excess availability may be reduced in the future as changes in the
borrowing base occur or the lenders increase availability reserves. The average rate of
interest being charged under the Facility for fiscal years ending January 31, 2008 and 2007
was 6.6% and 7.0%, respectively.We utilize standby letters of credit to support certain insurance policies. The aggregate
amount of the letters of credit at January 31, 2008 was approximately $1.0 million, which
reduces the excess availability under the Facility.
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##### Table of Contents



(7)
    
    Leases
 We lease retail space under operating leases with terms ranging from five to fifteen years,
with certain leases containing renewal options. Renewal options are typically for five years
and contain lease terms similar to those of the original lease. Lease agreements generally
provide for minimum rentals. Some leases also include additional contingent rental amounts
based upon specified percentages of sales above predetermined levels. Rental costs associated
with operating leases that are incurred during a construction period are recognized as rental
expense. Rental expense for operating leases is comprised of the following:
 Fiscal Year2007
    
    
    2006
    
    
    2005Minimum rentals
    
    $
    24,892
    
    
    $
    23,759
    
    
    $
    22,474Contingent rentals
    
    
    297
    
    
    
    491
    
    
    
    588Less sublease income
    
    
    (162
    )
    
    
    (109
    )
    
    
    (95
    )Rental expense
    
    $
    25,027
    
    
    $
    24,141
    
    
    $
    22,967
 Future minimum lease payments under non-cancelable operating leases as of January 31, 2008
are:
 2008
    
    $
    24,2532009
    
    
    24,2682010
    
    
    20,4842011
    
    
    18,4522012
    
    
    15,714Thereafter
    
    
    74,304Total minimum lease payments
    
    
    177,475Less sublease income
    
    
    813Net minimum lease payments under
operating leases
    
    $
    176,662
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##### Table of Contents



(8)
    
    Income Taxes
 Effective February 1, 2007, we adopted Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109(FIN 48). FIN 48
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, the Company may
recognize the benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a greater than
fifty percent likelihood, on a cumulative basis, of being realized upon ultimate settlement.
FIN 48 also provides guidance on de-recognition, classification, interest and penalties on
income taxes. Upon adoption of FIN 48 on February 1, 2007, we recognized an increase in the
liability for uncertain tax positions plus total interest and penalties which totaled $838,000
with a corresponding adjustment to retained earnings as of February 1, 2007.During the second quarter of 2007, we settled a liability with a state amnesty program which
resulted in a net tax benefit of $0.9 million. As of January 31, 2008, the Company had gross
unrecognized tax benefits related to certain state jurisdictions in the amount of $186,000.
If recognized, this amount would result in a favorable effect on our effective tax rate. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(in thousands):
 Unrecognized tax positions at February 1, 2007
    
    $
    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 limitation
    
    
    Unrecognized tax positions at January 31, 2008
    
    $
    186
 We have adopted an accounting policy to classify interest expense and penalties related to our
uncertain tax positions as a component of income tax expense in the statement of operations.
As of January 31, 2008 we have current liabilities for penalties and interest in the amount of
$192,000.Income tax expense is comprised of the following:
 Fiscal Year2007
    
    
    2006
    
    
    2005Current federal
    
    $
    5,870
    
    
    $
    2,883
    
    
    $
    5,759Current state and local
    
    
    (377
    )
    
    
    294
    
    
    
    918Deferred federal, state, and local
    
    
    (542
    )
    
    
    70
    
    
    
    (2,220
    )$
    4,951
    
    
    $
    3,247
    
    
    $
    4,457
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The difference between expected federal income tax expense based upon statutory rates and actual
income tax expense is as follows:
 Fiscal Year2007
    
    2006
    
    2005Computed expected income tax expense
    
    $
    5,319
    
    
    
    35.0
    %
    
    $
    2,893
    
    
    
    35.0
    %
    
    $
    3,553
    
    
    
    35.0
    %State and local income taxes, net of federal income tax effect
    
    
    471
    
    
    
    3.1
    %
    
    
    300
    
    
    
    3.6
    %
    
    
    583
    
    
    
    5.7
    %Effect of settling tax exams and other tax reserve adjustments
    
    
    (898
    )
    
    
    (5.9
    )%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    59
    
    
    
    0.4
    %
    
    
    54
    
    
    
    0.7
    %
    
    
    321
    
    
    
    3.2
    %$
    4,951
    
    
    
    32.6
    %
    
    $
    3,247
    
    
    
    39.3
    %
    
    $
    4,457
    
    
    
    43.9
    %
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented below:
 Fiscal Year2007
    
    
    2006Deferred tax assets:Gift cards
    
    $
    1,178
    
    
    $
    1,182Abandoned leases
    
    
    145
    
    
    
    260Deferred rent and lease incentives
    
    
    1,899
    
    
    
    1,776Inventories
    
    
    1,037
    
    
    
    983Property and equipment
    
    
    7,803
    
    
    
    6,299Other
    
    
    1,310
    
    
    
    1,248Total deferred tax assets
    
    
    13,372
    
    
    
    11,748Deferred tax liabilities:Rental assets
    
    
    (7,175
    )
    
    
    (6,092
    )Total deferred tax liabilities
    
    
    (7,175
    )
    
    
    (6,092
    )Net deferred tax assets
    
    $
    6,197
    
    
    $
    5,656
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(9)
    
    Earnings Per Share
 The computations of basic and diluted earnings per share are as follows:
 Fiscal Year2007
    
    
    2006
    
    
    2005Net earnings
    
    $
    10,245
    
    
    $
    5,019
    
    
    $
    5,695Average shares outstanding:Basic
    
    
    10,797
    
    
    
    11,244
    
    
    
    11,421Effect of stock-based compensation
    
    
    258
    
    
    
    274
    
    
    
    246Diluted
    
    
    11,055
    
    
    
    11,518
    
    
    
    11,667Earnings per share:Basic
    
    $
    0.95
    
    
    $
    0.45
    
    
    $
    0.50Diluted
    
    $
    0.93
    
    
    $
    0.44
    
    
    $
    0.49
 Options to purchase 185,794 shares of Common Stock at exercise prices ranging from $7.215 to
$13.00 per share outstanding at January 31, 2008; 184,156 shares of Common Stock at exercise
prices ranging from $6.82 to $13.64 per share outstanding at January 31, 2007; and 726,980
shares of Common Stock at exercise prices ranging from $6.095 per share to $14.03 per share
outstanding at January 31, 2006, were not included in the computation of diluted income per
share because their inclusion would have been antidilutive.
 (10)
    
    Benefit Plans
 Our 401(k) plan permits full-time employees who have attained age 21 and part-time employees
who have worked a minimum of 1,000 hours in a year and have attained age 21 to participate in
the 401(k) plan and elect to contribute up to 25% of their salary, subject to federal
limitations, to the plan. Employer contributions include a quarterly guaranteed match of 25%
of employee contributions up to a maximum of 6% deferral of compensation and are allocated
solely to those employees who are participating in the plan and are employed on the last day
of the plan quarter or who became disabled, died, or retired during the plan quarter. Also
included is a discretionary match based on specific criteria reviewed every fiscal six-month
period by management and approved by the Board of Directors. This discretionary match is
allocated solely to those employees who are participating in the plan and are employed on the
last day of the six-month period.Our Associate Stock Ownership Plan (ASOP) permits full-time employees who have attained age 21
and completed one year of service and part-time employees who have worked a minimum of 1,000
hours in a year and have attained age 21 to participate in the ASOP. Employer contributions
are determined at the discretion of the Board of Directors (Board). The Board elected not
to contribute to the ASOP plan during fiscal 2007, nor do they plan to contribute to the plan
during fiscal 2008. The contribution is based on a percentage of participants eligible
compensation. Common shares held by the ASOP were 512,368, 552,896, and 490,997 at January
31, 2008, 2007, and 2006, respectively. Shares issued and held under the ASOP plan are
included as outstanding shares for the purposes of calculating income per share.Amounts expensed related to the 401k and ASOP Plans were approximately $0.3 million, $0.7
million, and $1.3 million for fiscal 2007, 2006, and 2005, respectively.Effective January 1, 2006, we adopted a defined contribution supplemental executive retirement
plan (SERP). The SERP provides eligible executives with supplemental pension benefits in
addition to amounts
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received under our other retirement plans. Annual contributions range
from 5% to 10% of base pay plus
bonus depending upon the participants age. For each of the five plan years beginning January
1, 2006 and ending December 31, 2010, we will contribute as a transitional contribution an
additional 10% of base pay plus bonus for participants, the sum of whose age and service with
the Company was at least 60 on January 1, 2006. Contributions into the SERP plan are invested
in available-for-sale securities. As of January 31, 2008, we had approximately $0.5 million
in SERP plan assets, which are recorded at fair market value on the consolidated balance
sheets in Other Assets. The SERP plan accounts vest on the earliest occurrence of (i) the
date the sum of the participants age and service with the Company equals 60, (ii) the
participants death, (iii) the participants disability, (iv) the date of involuntary
termination occurring within two years from the date of a change in control, or (v) the date
the participants employment is terminated without cause, all as defined in the SERP plan.
During fiscal 2007 and 2006, we recorded an expense related to the SERP of approximately $0.3
million and $0.3 million, respectively.
 11)
    
    Shareholders Equity
 We have seven stock option plans: the 1991 and 1994 Stock Option Plans; the 1996, 2002, and
2006 Incentive Stock Plans; and the 1996 and 2002 Outside Directors Plans (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 each of the 2002 and 2006 Incentive Stock Plans, 101,180 shares
may be granted under the 1996 Outside Directors Plan and 200,000 shares may be granted under
the 2002 Outside Directors Plan. As of January 31, 2008, we had 616,091 options available for
future grants under all stock option plans.The 1991 and 1994 Stock Option Plans and the 1996, 2002, and 2006 Incentive Stock Plans
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 twenty percent 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 seventy-five percent of the fair market
value of the common stock of the Company on the date the RSU is awarded. During fiscal years
2007, 2006 and 2005, there were no RSUs awarded under the Plan. Compensation expense is
recognized using the straight-line method over three years, which is the vesting period of the
RSUs. Under this methodology, we recorded no compensation expense related to RSUs in fiscal
year 2007, 2006 and 2005. As of January 31, 2008, 2007 and 2006, there were no RSUs
outstanding under the plan.
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##### Table of Contents



12)
    
    Stock Based Compensation
 Prior to February 1, 2006, we accounted for stock-based compensation in accordance with
Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to Employees
(APB No. 25) and followed the disclosure-only provisions of Statement of Financial
Accounting Standard (SFAS) No. 123 Accounting for Stock-Based Compensation (SFAS No.
123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. Accordingly, compensation expense was not recognized in our consolidated
statement of earnings in connection with stock options that were granted under our stock-based
compensation plan.Effective with our fiscal year beginning February 1, 2006, we adopted SFAS No. 123(R)
Share-Based Payment (SFAS No. 123(R)), which no longer permits use of the intrinsic value
method under APB No. 25. We used the modified prospective method to adopt SFAS No. 123(R),
which requires that compensation expense be recorded for all stock-based compensation granted
on or after February 1, 2006, as well as the unvested portion of previously granted options.
On January 27, 2006, our Board of Directors (the Board) approved a resolution to vest all
stock options outstanding as of that date. The Board decided to fully vest these options,
many of which had exercise prices that were higher than the Companys stock price, to minimize
the expense to our consolidated financial statements upon adoption of SFAS No. 123(R). This
acceleration of vesting affected 587,609 unvested stock options. As a result, there is no
compensation expense associated with stock options granted prior to February 1, 2006 in the
consolidated statements of earnings. Effective with the current fiscal year, compensation
expense will be recognized for amortization of the fair value of stock options granted during
fiscal 2006 and fiscal years thereafter. The Company recognized approximately $55,000, before
income taxes, related to the adoption of SFAS 123R in fiscal 2006.Under the modified prospective method, the financial statements for periods prior to February
1, 2006, will not include compensation cost calculated under the fair value method. The
following table illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation (in thousands) prior to February 1, 2006:
 Fiscal Year2005Net income, as reported
    
    $
    5,695Add: Stock-based compensation included in reported net income, net of tax
    
    
    81Less: Stock-based compensation expense determined under fair value based method, net of tax
    
    
    (1,523
    )Pro forma net income
    
    $
    4,253Income per share:Basic, as reported
    
    $
    0.50Basic, pro forma
    
    $
    0.37Diluted, as reported
    
    $
    0.49Diluted, pro forma
    
    $
    0.36
 Under the Companys stock plans, options may be granted to directors, officers and employees
at the fair market value of the Companys common stock on the date of grant. Stock option
grants generally vest ratably over five years and expire within ten years after the date of
grant. Shares issued upon exercise of options are issued from treasury shares. The fair
value of each option award is estimated on the date of grant
 49




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using the Black-Scholes
option-pricing model, which is consistent with the valuation techniques that were previously
utilized for options in footnote disclosures required under SFAS No. 123.
 The following assumptions were used in the calculation of fair value:
 Fiscal Year2007
    
    2006
    
    2005Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    3.30
    %
    
    
    4.79
    %
    
    
    4.27
    %Expected life in years
    
    
    4.47
    
    
    
    4.92
    
    
    
    4.98Historical Volatility
    
    
    .44
    
    
    
    .51
    
    
    
    .60
 A summary of information with respect to all stock option plans and performance based
restricted stock is as follows:
 Options and
    
    
    Weighted-performance
    
    
    average exercisebased restricted
    
    
    pricestock
    
    
    (in dollars)Outstanding at January 31, 2005
    
    
    1,887,215
    
    
    $
    6.12Granted
    
    
    192,180
    
    
    
    5.52Exercised
    
    
    (267,388
    )
    
    
    3.47Forfeited and expired
    
    
    (160,640
    )
    
    
    6.20Outstanding at January 31, 2006
    
    
    1,651,367
    
    
    $
    6.50Granted
    
    
    191,010
    
    
    
    7.31Exercised
    
    
    (210,040
    )
    
    
    3.96Forfeited and expired
    
    
    (453,006
    )
    
    
    10.78Outstanding at January 31, 2007
    
    
    1,179,331
    
    
    $
    5.26Granted
    
    
    227,650
    
    
    
    9.39Exercised
    
    
    (149,768
    )
    
    
    4.74Forfeited and expired
    
    
    (68,510
    )
    
    
    8.37Outstanding at January 31, 2008
    
    
    1,188,703
    
    
    $
    5.45Options available for grant at January 31, 2008
    
    
    616,091
 The total intrinsic value of stock options exercised for the fiscal years ended January 31,
2008, 2007, and 2006 was $438,796, $674,241, and $729,711, respectively. The total fair
value of stock options granted for the fiscal years ended January 31, 2008, 2007, and 2006 was
$270,654, $372,752, and $437,938, respectively. As of January 31, 2008 and 2007, we had a
total of 151,715 option shares with a weighted average exercise price of $8.38; and 105,150
shares with a weighted average exercise price of $7.39, respectively, that were unvested.
Weighted average exercised prices listed in the above table exclude performance based
restricted shares which are discussed more fully below.As of January 31, 2008, there was $609,785 of total unrecognized compensation expense related
to unvested stock options granted and performance based stock grants for which the associated
performance condition had been met. That expense is expected to be recognized over a weighted
average period of 3.3 years.
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For fiscal 2007, 2006, and 2005 respectively, options granted includes 152,500 shares with a
weighted average grant date fair value of $9.67; 83,330 shares with a weighted average grant
date fair value of $7.22; and 47,500 shares with a weighted average grant date fair value of
$5.37, which are subject to performance conditions and are therefore not currently
exercisable. During fiscal 2007, management determined that
achieving the performance conditions related to 155,830 option shares was probable and as a
result, recognized $254,511 of stock compensation expense. As of January 31, 2008, we had
total unrecognized compensation expense related to unvested performance based stock grants,
for which the performance conditions have not yet been met, of $1,896,189 which is expected to
be recognized over a weighted average period of 3.5 years. Of this amount, $1,232,925 is
related to performance based stock grants for which we estimate that it is not currently
probable that the performance condition will be met, and therefore no compensation expense has
been recognized.For the year ending January 31, 2008, the performance conditions related to 47,500 shares were
met. These shares will be issued during fiscal 2008, and will vest fifty percent over two
years from the date the performance condition is met. Compensation expense related to these
awards is recognized over the life of the award, from the date of authorization through the
vesting date, once it is deemed probable that the performance condition will be met. We had a
total of 283,330 shares with a weighted average grant date fair value of $8.23; and 130,830
shares with a weighted average grant date fair value of $6.55, related to performance based
stock shares, that were unvested as of January 31, 2008 and 2007, respectively.At January 31, 2008, the options outstanding and options exercisable, and their related
weighted-average exercise price, and the weighted-average remaining contractual life for the
ranges of exercise prices are shown in the table below.
 Weighted-Weighted-
    
    average
    
    Aggregateaverage exercise
    
    remaining
    
    intrinsic valueOptions
    
    price (in dollars)
    
    contractual life
    
    (in thousands)Range: $1.33 to $4.99Options outstanding
and exercisable at
January 31, 2008
    
    
    364,126
    
    
    $
    3.22
    
    
    3.63 years
    
    $
    1,911,041Range: $5.00 to $9.99Options outstanding
and exercisable at
January 31, 2008
    
    
    393,774
    
    
    $
    6.27
    
    
    5.22 years
    
    $
    865,119Options outstanding
and unexercisable at
January 31, 2008
    
    
    119,327
    
    
    $
    8.18
    
    
    8.65 years
    
    $
    34,833Price: $10.00 to $13.00Options outstanding
and exercisable at
January 31, 2008
    
    
    9,090
    
    
    $
    12.50
    
    
    0.38 years
    
    
    Options outstanding
and unexercisable at
January 31, 2008
    
    
    19,056
    
    
    $
    10.64
    
    
    4.85 years
    
    
    
 At January 31, 2008, 2007, and 2006, the number of options exercisable was 766,990, 943,351;
and 1,603,867, respectively, and the weighted-average exercise price of those options was
$4.90, $5.26, and $6.50, respectively.
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##### Table of Contents



Weighted Average Exercise price for
    
    Weighted Average Fair value forFiscal Year
    
    Fiscal Year2007
    
    2006
    
    2005
    
    2007
    
    2006
    
    2005Options granted at
market price
    
    $
    8.97
    
    
    $
    7.29
    
    
    $
    5.52
    
    
    $
    3.86
    
    
    $
    3.64
    
    
    $
    3.03Options granted at
prices exceeding
market price
    
    $
    10.64
    
    
    $
    7.94
    
    
    $
    
    
    
    $
    2.83
    
    
    $
    3.06
    
    
    $
    Total options granted
    
    $
    9.39
    
    
    $
    7.39
    
    
    $
    5.52
    
    
    $
    3.60
    
    
    $
    3.55
    
    
    $
    3.03
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##### Table of Contents



(13)
    
    Supplemental Cash Flow Information
 Cash payments for interest during fiscal 2007, 2006 and 2005 totaled $3.2 million, $3.5
million, and $2.6 million, respectively. Cash payments for income taxes during fiscal 2007,
2006 and 2005 totaled $4.8 million; $6.1 million; and $3.5 million, respectively.
 (14)
    
    Commitments and Contingencies
 The Company is obligated to pay certain studios minimum amounts associated with certain
revenue-sharing agreements related to rental assets. As of January 31, 2008, such minimum
future payments approximated $0.6 million, which are expected to be paid during fiscal 2008.During fiscal 2005, we were named as a defendant in lawsuits in the states of New Mexico and
Texas 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 subsequently appealed the courts summary judgment. The
plaintiff in the other lawsuit, which was filed in the state of Texas, filed an amended
petition wherein he abandoned all but one claim. On May 15, 2006, he filed a motion for class
certification.The Company settled all litigation regarding the matters described above, including the
dropping of the motion for class certification, with prejudice for $0.1 million in February
2007.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 or cash flows.
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(15)
    
    Interim Financial Results (Unaudited)
 QuarterFirst
    
    Second
    
    Third
    
    FourthFiscal year 2007:Total 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
 QuarterFirst
    
    Second
    
    Third
    
    FourthFiscal year 2006:Total revenues
    
    $
    131,412
    
    
    $
    123,094
    
    
    $
    119,636
    
    
    $
    174,190Total cost of revenues
    
    
    84,790
    
    
    
    79,641
    
    
    
    77,836
    
    
    
    117,620Selling, general and administrative expenses
    
    
    42,873
    
    
    
    42,786
    
    
    
    44,572
    
    
    
    47,236Pre-opening expenses
    
    
    
    
    
    
    79
    
    
    
    15
    
    
    
    Operating income (loss)
    
    
    3,749
    
    
    
    588
    
    
    
    (2,787
    )
    
    
    9,334Interest (expense) and other income, net
    
    
    (595
    )
    
    
    (265
    )
    
    
    (845
    )
    
    
    (913
    )Income (loss) before taxes
    
    
    3,154
    
    
    
    323
    
    
    
    (3,632
    )
    
    
    8,421Income tax expense (benefit)
    
    
    1,229
    
    
    
    144
    
    
    
    (1,432
    )
    
    
    3,306Net income (loss)
    
    
    1,925
    
    
    
    179
    
    
    
    (2,200
    )
    
    
    5,115Basic income (loss) per share
    
    $
    0.17
    
    
    $
    0.02
    
    
    $
    (0.20
    )
    
    $
    0.46Diluted income (loss) per share
    
    $
    0.17
    
    
    $
    0.02
    
    
    $
    (0.20
    )
    
    $
    0.45
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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
  55




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ITEM 9A(T). CONTROLS AND PROCEDURES
  56




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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.
 The information required by this item will be set forth in our Proxy Statement under the heading
Principal Accountant Fees and Services, which information is incorporated herein by reference.
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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
    
    
    31Consolidated Balance Sheets as of January 31, 2008 and 2007
    
    
    32Consolidated Statements of Earnings for the years ended
January 31, 2008, 2007, and 2006
    
    
    33Consolidated Statements of Shareholders Equity for the years
ended January 31, 2008, 2007, and 2006
    
    
    34Consolidated Statements of Cash Flows for the years ended
January 31, 2008, 2007 and 2006
    
    
    35Notes to Consolidated Financial Statements
    
    
    362. 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
    
    
    60
 All 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.
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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.21.1
    
    
    (2
    )
    
    Subsidiaries of the Company.23.1
    
    
    (12
    )
    
    Consent of Ernst & Young LLP.24.1
    
    
    (12
    )
    
    Powers of Attorney (included on signature page).31.1
    
    
    (12
    )
    
    Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule
13a-14(a)/15d- 14(a).31.2
    
    
    (12
    )
    
    Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule
13a-14(a)/15d- 14(a).32.1
    
    
    (12
    )
    
    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)
    
    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)
    
    Filed herewith. 59




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##### Table of Contents



Financial Statement Schedule II 
 HASTINGS ENTERTAINMENT, INC.
 Fiscal Year2007
    
    
    2006
    
    
    2005Reserves deducted from assets:Allowance for shrinkage and inventory obsolescence:Balance at the beginning of period
    
    $
    4,916
    
    
    $
    3,889
    
    
    $
    3,055Additions charged to costs and expenses
    
    
    13,816
    
    
    
    12,957
    
    
    
    11,759Deductions for write-offs
    
    
    (13,120
    )
    
    
    (11,930
    )
    
    
    (10,925
    )Balance at end of period
    
    $
    5,612
    
    
    $
    4,916
    
    
    $
    3,889Reserves added to liabilities:Allowance for costs of inventory returns:Balance at the beginning of period
    
    $
    1,586
    
    
    $
    1,276
    
    
    $
    2,057Additions charged to costs and expenses
    
    
    4,665
    
    
    
    5,241
    
    
    
    4,198Deductions for write-offs and payments
    
    
    (4,908
    )
    
    
    (4,931
    )
    
    
    (4,979
    )Balance at end of period
    
    $
    1,343
    
    
    $
    1,586
    
    
    $
    1,276
 60




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##### Table of Contents



SIGNATURES
  HASTINGS ENTERTAINMENT, INC.Date: April 21, 2008
    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 18, 2008/s/ Danny W. Gurr
    
    Director
    
    April 18, 2008Danny W. Gurr/s/ Daryl L. Lansdale
    
    Director
    
    April 18, 2008Daryl L. Lansdale/s/ Ann S. Lieff
    
    Director
    
    April 18, 2008Ann S. Lieff/s/ Frank O. Marrs
    
    Director
    
    April 18, 2008Frank O. Marrs/s/ Jeffrey G. Shrader
    
    Director
    
    April 18, 2008Jeffrey G. Shrader
 61