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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-K/A
 (Amendment No. 1)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF 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
  Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.01 par value per share
    
    Nasdaq National Market(Title of Class)
    
    (Name of Exchange on which registered)
 þ o
 o þ
 o þ
 o þ
 o þ
 þ




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##### Table of Contents



Explanatory Note




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##### 



HASTINGS ENTERTAINMENT, INC.
Form 10-K/A Annual Report
For the Fiscal Year Ended January 31, 2005
 INDEX
 PAGEPART IIItem 6.
    
    Selected Financial Data
    
    
    2Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    4Item 8.
    
    Financial Statements and Supplementary Data
    
    
    17Item 9A.
    
    Controls and Procedures
    
    
    40PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    41SIGNATURES
    
    
    43CERTIFICATIONSConsent of Ernst and Young LLPCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO & CFO Pursuant to Section 906




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PART II
 
 ITEM 6. SELECTED FINANCIAL DATA
  Fiscal Year(In thousands, except per share and square foot data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(restated)(1)
    
    
    
    
    
    
    (restated)(1)
    
    
    (restated)(1)Income Statement Data:Merchandise revenue
    
    $
    440,596
    
    
    $
    404,977
    
    
    $
    395,548
    
    
    $
    379,322
    
    
    $
    370,512Rental video revenue
    
    
    101,420
    
    
    
    103,341
    
    
    
    99,846
    
    
    
    92,326
    
    
    
    87,691Total revenues
    
    
    542,016
    
    
    
    508,318
    
    
    
    495,394
    
    
    
    471,648
    
    
    
    458,203Merchandise cost of revenue
    
    
    319,107
    
    
    
    297,523
    
    
    
    292,888
    
    
    
    280,054
    
    
    
    280,459Rental video cost of revenue
    
    
    39,791
    
    
    
    39,259
    
    
    
    41,652
    
    
    
    41,504
    
    
    
    38,022Total cost of revenues
    
    
    358,898
    
    
    
    336,782
    
    
    
    334,540
    
    
    
    321,558
    
    
    
    318,481Gross profit
    
    
    183,118
    
    
    
    171,536
    
    
    
    160,854
    
    
    
    150,090
    
    
    
    139,722Selling, general and administrative expenses(3) (4)
    
    
    171,293
    
    
    
    162,616
    
    
    
    158,025
    
    
    
    144,223
    
    
    
    149,205Pre-opening expenses
    
    
    409
    
    
    
    277
    
    
    
    479
    
    
    
    182
    
    
    
    33Operating income (loss)
    
    
    11,416
    
    
    
    8,643
    
    
    
    2,350
    
    
    
    5,685
    
    
    
    (9,516
    )Interest expense
    
    
    (1,918
    )
    
    
    (2,048
    )
    
    
    (1,987
    )
    
    
    (2,090
    )
    
    
    (3,485
    )Interest income (5)
    
    
    
    
    
    
    
    
    
    
    1,291
    
    
    
    
    
    
    
    Other, net
    
    
    293
    
    
    
    324
    
    
    
    237
    
    
    
    252
    
    
    
    197Income (loss) before income taxes
    
    
    9,791
    
    
    
    6,919
    
    
    
    1,891
    
    
    
    3,847
    
    
    
    (12,804
    )Income tax expense (benefit)(6)
    
    
    3,982
    
    
    
    (1,358
    )
    
    
    
    
    
    
    (66
    )
    
    
    1,942Net income (loss)
    
    $
    5,809
    
    
    $
    8,277
    
    
    $
    1,891
    
    
    $
    3,913
    
    
    $
    (14,746
    )Basic income (loss) per share
    
    $
    0.51
    
    
    $
    0.73
    
    
    $
    0.17
    
    
    $
    0.33
    
    
    $
    (1.27
    )Diluted income (loss) per share
    
    $
    0.49
    
    
    $
    0.72
    
    
    $
    0.16
    
    
    $
    0.33
    
    
    $
    (1.27
    )Weighted-average common shares outstanding  basic
    
    
    11,411
    
    
    
    11,327
    
    
    
    11,343
    
    
    
    11,742
    
    
    
    11,645Weighted-average common shares outstanding  diluted
    
    
    11,942
    
    
    
    11,483
    
    
    
    11,779
    
    
    
    11,898
    
    
    
    11,645Other Data:Depreciation (7)
    
    $
    41,917
    
    
    $
    38,675
    
    
    $
    40,223
    
    
    $
    35,613
    
    
    $
    33,501Capital expenditures (restated) (8)
    
    $
    24,729
    
    
    $
    22,093
    
    
    $
    26,969
    
    
    $
    19,010
    
    
    $
    8,941Store Data:Total selling square footage at end of period
    
    
    3,039,582
    
    
    
    2,915,884
    
    
    
    2,846,955
    
    
    
    2,727,446
    
    
    
    2,759,735Comparable-store revenues increase (9)
    
    
    5.0
    %
    
    
    1.9
    %
    
    
    5.0
    %
    
    
    4.7
    %
    
    
    0.1
    %
 January 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(restated)(2)
    
    
    (restated)(1) (2)
    
    
    (restated)(1) (2)
    
    
    (restated)(1) (2)
    
    
    (restated)(1) (2)Balance Sheet Data:Working capital (restated) (10)
    
    $
    52,647
    
    
    $
    38,191
    
    
    $
    51,488
    
    
    $
    50,445
    
    
    $
    45,995Total assets
    
    
    254,116
    
    
    
    234,560
    
    
    
    235,027
    
    
    
    227,355
    
    
    
    211,142Total long-term debt, including current
maturities on capital lease obligations
    
    
    39,846
    
    
    
    29,844
    
    
    
    46,712
    
    
    
    33,432
    
    
    
    29,610Total shareholders equity
    
    $
    89,774
    
    
    $
    83,946
    
    
    $
    75,583
    
    
    $
    73,770
    
    
    $
    72,321
 2




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(1)
    
    In fiscal 2004, like many other retailers, the Company restated its financial statements as the
result of clarification from the office of the Chief Accountant of the Securities and Exchange
Commission regarding certain lease accounting matters and their application under generally
accepted accounting principles. These restatements primarily affected depreciation expense,
rent expense, net income, and equity. Fiscal 2001 and 2000 earnings per diluted share decreased
$0.01 and $0.02, respectively. See Note 1 of the accompanying financial statements for
additional information.(2)
    
    Working capital amounts reflect reclassification of rental assets that have been converted to
previously viewed tapes for sale, from Property and equipment to Merchandise inventories,
as discussed in Note 1 of the accompanying financial statements.(3)
    
    We recorded pre-tax charges of $2.6 million in fiscal 2002 related to the settlement of
shareholder class action lawsuits. These charges reduced net income by $2.6 million or
approximately $0.22 per diluted share.(4)
    
    In fiscal 2000, we recorded $2.7 million in accounting and legal fees associated with the
restatement of the first three quarters of fiscal 1999 and the prior four fiscal years. As a
result of these fees, fiscal year 2000 net losses were increased by $2.7 million, or $0.23 per
diluted share.(5)
    
    We recorded interest income of approximately $1.3 million in the second quarter of fiscal
2002 as a result of interest earned on income tax refunds for amended returns filed for fiscal
years 1995 through 1998. As a result, net income was increased by approximately $0.11 per
diluted share.(6)
    
    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. Based on our
past three fiscal years of profitability and our projections of future taxable income, we
believe that a valuation allowance is no longer required as of January 31, 2004 as the
realization of our deferred tax assets is now considered more likely than not.(7)
    
    Includes amounts associated with our rental video cost amortization.(8)
    
    Includes purchases of property, equipment, and improvements, as well as purchases of retail
locations.(9)
    
    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.(10)
    
    Working capital is calculated as total current assets less total current liabilities.
 3




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  CAUTIONARY STATEMENTS
  Expansion Strategy.
  Seasonality.
 Competition.
 Consumer Spending Patterns.
 4




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Reliance on Key Personnel.
 Home Video Retailer Distribution Window.
   Current Rental Video Studio Pricing Policies.
  5




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Alternate Methods of Video Delivery.
 Amortization and Salvage Value of Rental Video.
 6




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Lower of Cost or Market for Merchandise Inventory.
 Returns Process.
 Rental Asset Depreciation.
 7




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Store Closing Reserve.
  Revenue Recognition.
 Comparable-Store Revenue.
 Vendor Allowances.
 8




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9




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Lease Accounting.
    Fiscal Year2004
    
    

2003
    
    
    2002(restated)Merchandise revenue
    
    
    81.3
    %
    
    
    79.7
    %
    
    
    79.8
    %Rental video revenue
    
    
    18.7
    
    
    
    20.3
    
    
    
    20.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Merchandise cost of revenue
    
    
    72.4
    
    
    
    73.5
    
    
    
    74.0Rental video cost of revenue
    
    
    39.2
    
    
    
    38.0
    
    
    
    41.7Total cost of revenues
    
    
    66.2
    
    
    
    66.2
    
    
    
    67.5Gross profit
    
    
    33.8
    
    
    
    33.8
    
    
    
    32.5Selling, general and administrative expenses
    
    
    31.6
    
    
    
    32.0
    
    
    
    31.9Pre-opening expenses
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.131.7
    
    
    
    32.1
    
    
    
    32.0Operating income
    
    
    2.1
    
    
    
    1.7
    
    
    
    0.5Other income (expense):Interest expense
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )Interest income
    
    
    
    
    
    
    
    
    
    
    0.3Other, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.0(0.3
    )
    
    
    (0.3
    )
    
    
    (0.1
    )Income before income taxes
    
    
    1.8
    
    
    
    1.4
    
    
    
    0.4Income tax expense (benefit)
    
    
    0.7
    
    
    
    (0.2
    )
    
    
    Net income
    
    
    1.1
    %
    
    
    1.6
    %
    
    
    0.4
    %
 10




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Fiscal Year2004
    
    
    2003
    
    
    2002Hastings Superstores:Beginning number of stores
    
    
    148
    
    
    
    146
    
    
    
    142Openings
    
    
    5
    
    
    
    5
    
    
    
    7Closings
    
    
    (1
    )
    
    
    (3
    )
    
    
    (3
    )Ending number of stores
    
    
    152
    
    
    
    148
    
    
    
    146
  Revenues.
 Fiscal Year Ended January 31,2005
    
    
    2004
    
    
    Increase/(Decrease)Percent of
    
    
    
    
    
    
    Percent ofRevenues
    
    
    Total
    
    
    Revenues
    
    
    Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    440,596
    
    
    
    81.3
    %
    
    $
    404,977
    
    
    
    79.7
    %
    
    $
    35,619
    
    
    
    8.8
    %Rental revenue
    
    
    101,420
    
    
    
    18.7
    %
    
    
    103,341
    
    
    
    20.3
    %
    
    
    (1,921
    )
    
    
    -1.9
    %Total revenues
    
    $
    542,016
    
    
    
    100.0
    %
    
    $
    508,318
    
    
    
    100.0
    %
    
    $
    33,698
    
    
    
    6.6
    %Comparable-store revenues:Merchandise
    
    
    7.5
    %Rental
    
    
    -4.5
    %Total
    
    
    5.0
    %
  Fiscal Year Ended January 31,2005
    
    2004Music
    
    
    1.8
    %
    
    
    -7.5
    %Books
    
    
    1.5
    %
    
    
    0.7
    %Video for sale
    
    
    15.4
    %
    
    
    17.7
    %Video games
    
    
    29.6
    %
    
    
    34.4
    %Sidelines
    
    
    9.8
    %
    
    
    5.2
    %
  Gross Profit.
 11




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Selling, General and Administrative expenses (SG&A).
 Interest Expense.
 Income Taxes.
  Revenues.
 Fiscal Year Ended January 31,2004
    
    
    2003
    
    
    Increase/(Decrease)Percent of
    
    
    
    
    
    
    Percent ofRevenues
    
    
    Total
    
    
    Revenues
    
    
    Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    404,977
    
    
    
    79.7
    %
    
    $
    395,548
    
    
    
    79.8
    %
    
    $
    9,429
    
    
    
    2.4
    %Rental revenue
    
    
    103,341
    
    
    
    20.3
    %
    
    
    99,846
    
    
    
    20.2
    %
    
    
    3,495
    
    
    
    3.5
    %Total revenues
    
    $
    508,318
    
    
    
    100.0
    %
    
    $
    495,394
    
    
    
    100.0
    %
    
    $
    12,924
    
    
    
    2.6
    %Comparable-store revenues:Merchandise
    
    
    1.7
    %Rental
    
    
    2.7
    %Total
    
    
    1.9
    %
  Fiscal Year Ended January 31,2004
    
    2003Music
    
    
    -7.5
    %
    
    
    -6.3
    %Books
    
    
    0.7
    %
    
    
    3.6
    %Video for sale
    
    
    17.7
    %
    
    
    20.5
    %Video games
    
    
    34.4
    %
    
    
    97.8
    %Sidelines
    
    
    5.2
    %
    
    
    11.0
    %
  Gross Profit.
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Selling, General and Administrative expenses (SG&A). 02-16
 Interest Expense.
 Income Taxes.
    Consolidated Cash Flows
 Operating Activities .
 Investing Activities.
 Financing Activities .
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Capital Structure.
    Contractual Obligations and Off-Balance Sheet Arrangements
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Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt
    
    $
    39,232
    
    
    $
    
    
    
    $
    39,232
    
    
    $
    
    
    
    $
    Operating leases
    
    
    157,132
    
    
    
    24,203
    
    
    
    43,361
    
    
    
    32,142
    
    
    
    57,426Capital leases (1)
    
    
    689
    
    
    
    283
    
    
    
    336
    
    
    
    70
    
    
    
    Revenue sharing (2)
    
    
    784
    
    
    
    784
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    197,837
    
    
    $
    25,270
    
    
    $
    82,929
    
    
    $
    32,212
    
    
    $
    57,426
 
 (1)
    
    Includes both principal and interest.(2)
    
    As of January 31, 2005 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 2004.   Fiscal year 2004:
    
    QuarterFirst
    
    Second
    
    Third
    
    Fourth(restated)
    
    (restated)
    
    (restated)Total revenues
    
    $
    126,937
    
    
    $
    122,412
    
    
    $
    119,579
    
    
    $
    173,088Operating income (loss)
    
    
    3,476
    
    
    
    1,318
    
    
    
    (2,112
    )
    
    
    8,734% of full year:Total revenues
    
    
    23.4
    %
    
    
    22.6
    %
    
    
    22.1
    %
    
    
    31.9
    %Operating income (loss)
    
    
    30.4
    %
    
    
    11.5
    %
    
    
    (18.4
    )%
    
    
    76.5
    %
 Fiscal year 2003:
 Fiscal year 2004:
    
    QuarterFirst
    
    Second
    
    Third
    
    Fourth(restated)
    
    (restated)
    
    (restated)
    
    (restated)Total revenues
    
    $
    116,837
    
    
    $
    115,397
    
    
    $
    112,843
    
    
    $
    163,241Operating income (loss)
    
    
    (422
    )
    
    
    843
    
    
    
    (3,122
    )
    
    
    11,344% of full year:Total revenues
    
    
    23.0
    %
    
    
    22.7
    %
    
    
    22.2
    %
    
    
    32.1
    %Operating income (loss)
    
    
    (4.9
    )%
    
    
    9.7
    %
    
    
    (36.1
    )%
    
    
    131.3
    %
    15




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 HASTINGS ENTERTAINMENT, INC.
Index to Consolidated Financial Statements
and Financial Statement Schedule
 PageIndependent Registered Public Accounting Firms Report
    
    
    18Consolidated Balance Sheets as of January 31, 2005 and 2004
    
    
    19Consolidated Statements of Operations for the years ended January 31, 2005, 2004 and 2003
    
    
    20Consolidated Statements of Shareholders Equity for the years ended January 31, 2005, 2004 and 2003
    
    
    21Consolidated Statements of Cash Flows for years ended January 31, 2005, 2004 and 2003
    
    
    22Notes to Consolidated Financial Statements
    
    
    23ScheduleFinancial Statement Schedule  The Financial Statement Schedule filed as part of
this report is listed under Part IV, Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
    
    
    42
 17




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Report of Independent Registered Public Accounting Firm
 
     /s/ Ernst & Young LLP
 
 18




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HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    January 31,2005
    
    
    2004(restated)
    
    
    (restated)AssetsCurrent assetsCash and cash equivalents
    
    $
    9,543
    
    
    $
    7,124Merchandise inventories
    
    
    155,452
    
    
    
    140,152Deferred income taxes
    
    
    3,198
    
    
    
    1,779Prepaid expenses and other current assets
    
    
    6,945
    
    
    
    7,096Total current assets
    
    
    175,138
    
    
    
    156,151Property and equipment, net
    
    
    78,112
    
    
    
    74,437Deferred income taxes
    
    
    308
    
    
    
    3,154Intangible assets, net
    
    
    542
    
    
    
    630Other assets
    
    
    16
    
    
    
    188$
    254,116
    
    
    $
    234,560Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities on capital lease obligations
    
    $
    243
    
    
    $
    221Trade accounts payable
    
    
    86,082
    
    
    
    82,072Accrued expenses and other current liabilities
    
    
    36,166
    
    
    
    35,667Total current liabilities
    
    
    122,491
    
    
    
    117,960Long-term debt, excluding current maturities on capital lease obligations
    
    
    39,603
    
    
    
    29,623Other liabilities
    
    
    2,248
    
    
    
    3,031Shareholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 75,000,000 shares authorized;
    
    
    119
    
    
    
    11911,944,544 shares in fiscal 2004 and 2003 issued;
11,455,569 in fiscal 2004 and
11,363,612 shares in fiscal 2003, outstandingAdditional paid-in capital
    
    
    36,382
    
    
    
    36,598Retained earnings
    
    
    55,771
    
    
    
    49,962Treasury stock, at cost
    
    
    (2,498
    )
    
    
    (2,733
    )89,774
    
    
    
    83,946$
    254,116
    
    
    $
    234,560
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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    Fiscal Year2004
    
    
    2003
    
    
    2002(restated)Merchandise revenue
    
    $
    440,596
    
    
    $
    404,977
    
    
    $
    395,548Rental video revenue
    
    
    101,420
    
    
    
    103,341
    
    
    
    99,846Total revenues
    
    
    542,016
    
    
    
    508,318
    
    
    
    495,394Merchandise cost of revenue
    
    
    319,107
    
    
    
    297,523
    
    
    
    292,888Rental video cost of revenue
    
    
    39,791
    
    
    
    39,259
    
    
    
    41,652Total cost of revenues
    
    
    358,898
    
    
    
    336,782
    
    
    
    334,540Gross profit
    
    
    183,118
    
    
    
    171,536
    
    
    
    160,854Selling, general and administrative expenses
    
    
    171,293
    
    
    
    162,616
    
    
    
    158,025Pre-opening expenses
    
    
    409
    
    
    
    277
    
    
    
    479Operating income
    
    
    11,416
    
    
    
    8,643
    
    
    
    2,350Other income (expense):Interest income
    
    
    
    
    
    
    
    
    
    
    1,291Interest expense
    
    
    (1,918
    )
    
    
    (2,048
    )
    
    
    (1,987
    )Other, net
    
    
    293
    
    
    
    324
    
    
    
    237Income before income taxes
    
    
    9,791
    
    
    
    6,919
    
    
    
    1,891Income tax expense (benefit)
    
    
    3,982
    
    
    
    (1,358
    )
    
    
    Net income
    
    $
    5,809
    
    
    $
    8,277
    
    
    $
    1,891Basic income per share
    
    $
    0.51
    
    
    $
    0.73
    
    
    $
    0.17Diluted income per share
    
    $
    0.49
    
    
    $
    0.72
    
    
    $
    0.16
  20




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    Paid-in
    
    Retained
    
    Treasury Stock
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Earnings
    
    Shares
    
    Amount
    
    EquityBalances at January 31, 2002 (restated)
    
    
    11,918,035
    
    
    
    119
    
    
    
    36,850
    
    
    
    39,794
    
    
    
    614,013
    
    
    
    (2,993
    )
    
    
    73,770Issuance of stock to directors
    
    
    26,509
    
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    (11,775
    )
    
    
    58
    
    
    
    145Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,923
    
    
    
    (521
    )
    
    
    (521
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    (99,090
    )
    
    
    485
    
    
    
    297Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,891
    
    
    
    
    
    
    
    
    
    
    
    1,891Balances at January 31, 2003 (restated)
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,749
    
    
    
    41,685
    
    
    
    608,071
    
    
    
    (2,971
    )
    
    
    75,582Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (25,002
    )
    
    
    118
    
    
    
    90Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,000
    
    
    
    (235
    )
    
    
    (235
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    (75,137
    )
    
    
    355
    
    
    
    232Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,277
    
    
    
    
    
    
    
    
    
    
    
    8,277Balances at January 31, 2004 (restated)
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,598
    
    
    
    49,962
    
    
    
    580,932
    
    
    
    (2,733
    )
    
    
    83,946Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    (7,344
    )
    
    
    35
    
    
    
    60Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,600
    
    
    
    (904
    )
    
    
    (904
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (241
    )
    
    
    
    
    
    
    (225,213
    )
    
    
    1,104
    
    
    
    863Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,809
    
    
    
    
    
    
    
    
    
    
    
    5,809Balances at January 31, 2005
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,382
    
    
    
    55,771
    
    
    
    488,975
    
    
    
    (2,498
    )
    
    
    89,774
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##### Table of Contents



HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
 
    Fiscal Year2004
    
    
    2003
    
    
    2002(restated)
    
    
    (restated)
    
    
    (restated)Cash flows from operating activities:Net income
    
    $
    5,809
    
    
    $
    8,277
    
    
    $
    1,891Adjustments to reconcile net income to net cash provided
by operating activities:Rental asset depreciation expense
    
    
    22,842
    
    
    
    21,006
    
    
    
    22,673Purchases of rental inventory
    
    
    (35,142
    )
    
    
    (31,363
    )
    
    
    (37,695
    )Property and equipment depreciation expense
    
    
    19,075
    
    
    
    17,669
    
    
    
    17,550Amortization expense
    
    
    88
    
    
    
    87
    
    
    
    68Loss on rental videos lost, stolen and defective
    
    
    5,774
    
    
    
    4,948
    
    
    
    5,711Loss on disposal of property and equipment, excluding rental videos
    
    
    835
    
    
    
    929
    
    
    
    1,307Deferred income taxes
    
    
    1,427
    
    
    
    (1,724
    )
    
    
    316Non-cash compensation
    
    
    60
    
    
    
    90
    
    
    
    127Changes in operating assets and liabilities:Merchandise inventories
    
    
    (7,630
    )
    
    
    14,259
    
    
    
    5,820Other current assets
    
    
    151
    
    
    
    (616
    )
    
    
    (638
    )Trade accounts payable
    
    
    4,010
    
    
    
    6,360
    
    
    
    (7,706
    )Accrued expenses and other liabilities
    
    
    665
    
    
    
    2,087
    
    
    
    7,379Other assets and liabilities, net
    
    
    (611
    )
    
    
    (368
    )
    
    
    (2,782
    )Net cash provided by operating activities
    
    
    17,353
    
    
    
    41,641
    
    
    
    14,021Cash flows from investing activities:Purchase of property, equipment and improvements
    
    
    (24,729
    )
    
    
    (22,093
    )
    
    
    (26,969
    )Net cash used in investing activities
    
    
    (24,729
    )
    
    
    (22,093
    )
    
    
    (26,969
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    574,643
    
    
    
    510,459
    
    
    
    542,241Repayments under revolving credit facility
    
    
    (564,422
    )
    
    
    (527,132
    )
    
    
    (528,791
    )Payments under long-term debt and capital lease obligations
    
    
    (219
    )
    
    
    (195
    )
    
    
    (168
    )Purchase of treasury stock
    
    
    (904
    )
    
    
    (235
    )
    
    
    (521
    )Proceeds from exercise of stock options
    
    
    697
    
    
    
    232
    
    
    
    315Net cash provided by (used in) financing activities
    
    
    9,795
    
    
    
    (16,871
    )
    
    
    13,076Net increase in cash
    
    
    2,419
    
    
    
    2,677
    
    
    
    128Cash at beginning of year
    
    
    7,124
    
    
    
    4,447
    
    
    
    4,319Cash at end of year
    
    $
    9,543
    
    
    $
    7,124
    
    
    $
    4,447
  22




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##### Table of Contents



(1)
    
    Operations and Summary of Significant Accounting Policies
 (a)
    
    GeneralHastings Entertainment, Inc. and subsidiaries operates a chain of retail superstores in
20 states, primarily in the Western and Midwestern United States. Revenues are
generated from the sale of new software, periodicals, and accessory products, as well as
new and used books, music, DVDs, video games and videocassettes. 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 subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.(c)
    
    Basis of PresentationCertain prior year amounts have been reclassified to conform with the fiscal 2004
presentation.Our fiscal years ended January 31, 2005, 2004 and 2003 are referred to as fiscal 2004,
2003 and 2002, respectively.(d)
    
    Restatement of Financial InformationOn February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange
Commission (SEC) issued a letter to the American Institute of Certified Public
Accountants expressing its views regarding certain operating lease accounting issues and
their application under generally accepted accounting principles (GAAP). In light of
this letter, the Companys management initiated a review of its lease-related accounting
and determined that its historical method of accounting for rent holidays and leasehold
improvements, as more fully described below, was not in accordance with GAAP. As a
result, the Company restated its previously filed Consolidated Financial Statements for
the years ended January 31, 2004 and January 31, 2003. The Company also restated its
quarterly financial information for Fiscal 2003 and the first three quarters of Fiscal
2004, as shown in Note 14 of the Consolidated Financial Statements. The restatement
also affects periods prior to Fiscal 2002. The impact of the restatement on prior
periods has been reflected as a cumulative adjustment of $3.6 million to decrease
retained earnings as of February 1, 2002 in the Consolidated Statement of Shareholders
Equity.Historically, the Company has recorded rent expense on a straight-line basis over
the initial non-cancelable lease term, with the term commencing when rent payments
began. Rent payments typically began on the store opening date, which had the effect of
excluding the build-out period (or rent holiday period) from the calculation of the rent
period. Additionally, the Company had amortized certain leasehold improvements over a
period longer than allowed by the SECs interpretation of related accounting guidance.The Company did not amend its previously filed Annual Reports on Form 10-K or
Quarterly Reports on Form 10-Q for the restatement. Accordingly, the financial
statements and related financial information contained in such reports should no longer
be relied upon. All referenced amounts for prior periods in this Annual Report on Form
10-K are presented on a restated basis.The following is a summary of the effects of the restatement adjustments on our
Consolidated Statement of Operations. Net income for fiscal 2002 was not restated as
impact of such issues was immaterial.
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##### Table of Contents



Consolidated Statements of OperationsAs PreviouslyReported
    
    Adjustments
    
    As RestatedFiscal year ended January 31, 2004Income before income taxes
    
    $
    6,062
    
    
    $
    857
    
    
    $
    6,919Net income
    
    
    7,750
    
    
    
    527
    
    
    
    8,277Diluted income per share
    
    
    0.68
    
    
    
    0.04
    
    
    
    0.72
 Furthermore, in response to an SEC comment letter received in August 2005, the Company
reevaluated its historical presentation of purchases of rental assets in the Statement
of Cash Flows. Our reevaluation concluded that the presentation of the Statement of
Cash Flows was not in accordance with SFAS 95, Statement of Cash Flows. Accordingly,
the Company restated its presentation of purchases of rental assets not associated with
new store openings to reclassify these purchases in the operating section of the
Companys Statement of Cash Flows, which is a change from our historical presentation of
inclusion of such purchases in the investing section. Purchases and sales of rental
assets placed as initial stock in new stores, if material, will be presented in the
investing section of the Statement of Cash Flows. The net impact of this
reclassification decreased cash flows provided by operating activities and decreased
cash flows used in investing activities by $35.1 million, $31.4 million, and $37.7
million for the fiscal years ended January 31, 2005, 2004, and 2003, respectively. In
addition, we have reclassified $1.9 million and $1.6 million on the Consolidated Balance
Sheets for January 31, 2005 and 2004, respectively, for rental assets that have been
converted to previously viewed tapes for sale, from Property and equipment to
Merchandise inventories. The transfer to Merchandise Inventories is now recorded at
the time of conversion, which is the first date the product is available for sale.(e)
    
    Cash and Cash EquivalentsThe Company considers all credit card receivables of $1.0 million and $2.1 million for
fiscal 2004 and 2003, 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.(f)
    
    Revenue RecognitionMerchandise and rental video 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 taxes. An allowance has been established to
provide for projected merchandise returns.Gift card liabilities are recorded at the time of sale of such cards with the costs of
designing, printing and distributing the cards recorded as expense as incurred. The
liability is relieved and revenue is recognized upon redemption of the gift cards.(g)
    
    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. Shipping and handling costs related to
inventory procurement are included in cost of revenues.
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##### Table of Contents



(h)
    
    Property and EquipmentProperty and equipment are recorded at cost and depreciated using the straight-line
method, except for rental video assets, which are depreciated using an accelerated
depreciation method. Furniture, fixtures, equipment and software are depreciated over
their estimated useful lives of three to seven years. Leasehold improvements are
amortized over the shorter of the related lease term or their estimated useful lives.
Rental video assets, except for the initial purchases for new stores, are depreciated
over six months using an accelerated methodology designed to match the revenue stream of
the rental asset. The initial purchases of rental video assets for new stores are
depreciated over 36 months using the straight-line method.The majority of rental videos are converted to merchandise inventory and sold through
our retail locations as previously viewed tapes. Such revenues and related cost of
revenues are included in merchandise revenue and cost of revenues. During fiscal 2004,
2003, and 2002, $9.3 million, $6.0 million, and $5.2 million, respectively, were
transferred from rental videos to merchandise inventory at the lower of net book value
or market.Expenditures for maintenance, repairs and renewals that do not materially prolong the
original useful lives of assets are charged to expense as incurred.Property recorded pursuant to capital lease obligations is stated at the present value
of the minimum lease payments at the inception of each lease, not in excess of fair
value, and amortized on a straight-line basis over the related lease term.We review long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of the
asset to future net undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.(i)
    
    Financial InstrumentsThe carrying amount of long-term debt approximates fair value as of January 31, 2005 and
2004 due to the instruments bearing interest at variable market rates. The carrying
amount of accounts payable approximates fair value because of its short maturity period.From time to time, we enter into interest rate swap agreements with financial
institutions in order to obtain a fixed interest rate on a portion of our outstanding
floating rate debt, thereby reducing our exposure to interest rate volatility. Our most
recent interest rate swap agreement expired October 1, 2004, and was accounted for as a
hedging instrument. No interest rate swaps exist at January 31, 2005.
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##### Table of Contents



(j)
    
    Stock Option PlansWe account for our stock option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25),
and related interpretations. Compensation expense is recorded on the date of grant only
if the market price of the underlying stock exceeds the exercise price. Under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation
(SFAS 123), we may elect to recognize expense for stock-based compensation based on
the fair value of the awards, or continue to account for stock-based compensation under
APB 25 and disclose in the financial statements the effects of SFAS 123 as if the
recognition provisions were adopted. We have elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123.The following schedule reflects the impact on net income and net income per share if we
had applied the fair value recognition provisions of SFAS 123 to stock based
compensation.
 Fiscal Year2004
    
    
    2003
    
    
    2002(restated)Net income, as reported
    
    $
    5,809
    
    
    $
    8,277
    
    
    $
    1,891Add: Stock-based compensation
included in reported net
income, net of tax
    
    
    35
    
    
    
    55
    
    
    
    127Less: Stock-based compensation
expense determined under fair
value based method, net of tax
    
    
    (687
    )
    
    
    (369
    )
    
    
    (505
    )Proforma net income
    
    $
    5,157
    
    
    $
    7,963
    
    
    $
    1,513Income per share:Basic, as reported
    
    $
    0.51
    
    
    $
    0.73
    
    
    $
    0.17Basic, proforma
    
    $
    0.45
    
    
    $
    0.70
    
    
    $
    0.14Diluted, as reported
    
    $
    0.49
    
    
    $
    0.72
    
    
    $
    0.16Diluted, proforma
    
    $
    0.44
    
    
    $
    0.70
    
    
    $
    0.13
 (k)
    
    Advertising CostsAdvertising costs for newspaper, television and other media are expensed as
incurred. Gross advertising expenses for the fiscal years 2004, 2003, and 2002 were
$8.6 million, $9.8 million and $11.0 million, respectively.We receive payments and credits from vendors pursuant to cooperative advertising
programs and display allowances. During fiscal years 2004, 2003 and 2002, we received a
total of approximately $6.6 million, $6.8 million and $8.3 million, respectively for
such payments and credits. During fiscal 2003, we began recording certain of these
payments and allowances as a reduction of merchandise inventory and the cost of rental
videos in accordance with Emerging Issues Task Force Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF
02-16), which was adopted during fiscal 2003. As a result of adoption, selling,
general and administrative expenses increased approximately $4.4 million, total cost of
revenues decreased by $2.2 million and net income for fiscal 2003 decreased by
approximately $1.4 million, or $0.12 per diluted share, net of tax.
 26




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##### Table of Contents



(l)
    
    Pre-opening CostsPre-opening expenses include human resource costs, travel, rent, advertising, supplies
and certain other costs incurred prior to a superstores opening and are expensed as
incurred.(m)
    
    Income Per ShareBasic income per share is computed by dividing net income by the weighted-average number
of common shares outstanding during the period. Diluted income per share is similarly
computed, but includes the effect, when dilutive, of our weighted average number of
stock options outstanding.(n)
    
    Use of Management EstimatesThe preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.(o)
    
    Impact of Recently Issued Accounting StandardsIn November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151), an
amendment of Accounting Research Bulletin No. 43, Chapter 44. SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and requires the allocation of
fixed production overheads to inventory based on the normal capacity of the production
facilities. The statement will be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company has evaluated the provisions of SFAS
151 and does not anticipate that adoption will have an impact on its consolidated
balance sheets or statements of operations, shareholders equity and cash flows.In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123R). This statement replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all companies to measure compensation cost for
all share-based payments, including stock options, at fair value. The statement will be
effective for public companies no later than the beginning of the first fiscal year
commencing after June 15, 2005, which for the Company is the beginning of fiscal 2006.
The Company is currently evaluating the effect that SFAS 123R will have on its
consolidated balance sheets and its statements of shareholders equity and cash flows.
The Company believes the adoption of SFAS 123R in the future will not have a materially
different impact on results of operations than what the Company has disclosed in its
proforma footnote disclosures regarding stock compensation assuming expense recognition
provisions of FAS 123 had been adopted. SFAS 123R also requires that the benefits
associated with the tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required
under current literature. This requirement will reduce operating cash flows and
increase net financing cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other things, when employees
exercise stock options. However, the amount of operating cash flows recognized for such
excess tax deductions for the years ended January 31, 2005, 2004, and 2003 was not
material.
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##### Table of Contents



(2)
    
    Merchandise InventoriesMerchandise inventories consisted of the following:
 January 31,2005
    
    
    2004(restated)
    
    
    (restated)Books
    
    $
    58,898
    
    
    $
    57,272Music
    
    
    42,642
    
    
    
    38,683Videos
    
    
    40,612
    
    
    
    33,775Other
    
    
    16,016
    
    
    
    13,607158,168
    
    
    
    143,337Less
allowance for
inventory
shrinkage and
obsolescence
    
    
    2,716
    
    
    
    3,185$
    155,452
    
    
    $
    140,152
 During fiscal 2004 and 2003, we purchased approximately 22% and 23%, respectively, of all
products (defined herein as merchandise inventories and rental videos) from three suppliers.
 (3)
    
    Property and EquipmentProperty and equipment consists of the following:
 January 31,2005
    
    
    2004(restated)
    
    
    (restated)Rental videos
    
    $
    45,253
    
    
    $
    54,075Furniture, equipment and software
    
    
    122,408
    
    
    
    108,621Leasehold improvements
    
    
    59,405
    
    
    
    56,044Buildings and land
    
    
    258
    
    
    
    258Work in progress
    
    
    5,275
    
    
    
    3,070Property under capital leases
    
    
    2,126
    
    
    
    2,126234,725
    
    
    
    224,194Less accumulated
depreciation and
amortization
    
    
    156,613
    
    
    
    149,757$
    78,112
    
    
    $
    74,437
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##### Table of Contents



(4)
    
    Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following:
 January 31,2005
    
    
    2004(restated)Allowance for cost of inventory returns
    
    $
    2,057
    
    
    $
    3,658Deferred gift card revenue
    
    
    13,022
    
    
    
    11,611Salaries, vacation, bonus and benefits
    
    
    6,655
    
    
    
    7,397Short term lease obligations
    
    
    4,091
    
    
    
    4,039Sales taxes payable
    
    
    2,059
    
    
    
    1,996Federal income tax payable
    
    
    2,281
    
    
    
    214Other accrued expenses
    
    
    6,001
    
    
    
    6,752Total
    
    $
    36,166
    
    
    $
    35,667
 Merchandise inventories that are not sold can normally be returned to the suppliers. The
allowance for cost of inventory returns represents estimated costs related to merchandise
returned or to be returned to suppliers for which credit from the supplier 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 suppliers 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 suppliers may change in the near term. During fiscal 2004 and
2003, we reduced merchandise cost of revenues by approximately $2.1 million and $4.2 million,
respectively, related to favorable differences between actual settlements with vendors as
compared to amounts accrued. Approximately $0.9 million of the fiscal 2004 reduction in cost
of revenues was recorded in the fourth quarter.
 29




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##### Table of Contents



(5)
    
    Store Closing ReserveFrom time to time and in the normal course of business, we evaluate our store base to
determine if we need to close a store. Such evaluations include consideration of, among other
factors, current and future profitability, market trends, age of store and lease status.Amounts in Accrued expenses and other current liabilities and Other liabilities at January
31, 2005 and 2004 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 selling, general and administrative
expenses in our consolidated statement of operations.Charges related to superstore closings in fiscal 2004 and 2003 were not significant.Charges related to superstore closings in fiscal 2002 amounted to approximately $2.4 million,
including $1.2 million in accruals for the net present value of minimum lease payments and
$1.3 million for the write-off of leasehold improvements and other assets.Offsetting these fiscal 2002 charges were changes in estimates in the store closing reserve of
approximately $2.0 million, primarily as a result of sublease activities for certain closed
and relocated superstores.The following table provides a rollforward of reserves that were established for these charges
for fiscal 2004, 2003 and 2002:
 Future LeasePayments
    
    
    Other Costs
    
    
    TotalBalance at January 31, 2002
    
    $
    5,919
    
    
    $
    13
    
    
    $
    5,932Additions to provision
    
    
    1,197
    
    
    
    217
    
    
    
    1,414Changes in estimates
    
    
    (1,930
    )
    
    
    
    
    
    
    (1,930
    )Cash outlay, net
    
    
    (2,228
    )
    
    
    (230
    )
    
    
    (2,458
    )Balance at January 31, 2003
    
    
    2,958
    
    
    
    
    
    
    
    2,958Additions to provision
    
    
    240
    
    
    
    150
    
    
    
    390Changes in estimates
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Cash outlay, net
    
    
    (1,178
    )
    
    
    (137
    )
    
    
    (1,315
    )Balance at January 31, 2004
    
    
    2,015
    
    
    
    13
    
    
    
    2,028Additions to provision
    
    
    143
    
    
    
    
    
    
    
    143Changes in estimates
    
    
    (94
    )
    
    
    79
    
    
    
    (15
    )Cash outlay, net
    
    
    (781
    )
    
    
    (92
    )
    
    
    (873
    )Balance at January 31, 2005
    
    $
    1,283
    
    
    $
    
    
    
    $
    1,283
 As of January 31, 2005, the reserve balance, which is net of estimated sublease income, is
expected to be paid over the next five years.
 30




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##### Table of Contents



(6)
    
    Long-term DebtLong-term debt and capitalized lease obligations consisted of the following:
 January 31,2005
    
    
    2004Revolving credit facility
    
    $
    39,232
    
    
    $
    29,011Capitalized lease obligations
    
    
    614
    
    
    
    83339,846
    
    
    
    29,844Less current maturities
    
    
    243
    
    
    
    221$
    39,603
    
    
    $
    29,623
 On December 9, 2003, we executed an amendment to our syndicated secured Loan and Security
Agreement with Fleet Retail Finance, Inc. and The CIT Group/Business Credit, Inc, (the
Facility). The amount outstanding under the Facility is limited by a borrowing base
predicated on eligible inventory, as defined, and certain rental video assets, net of
accumulated depreciation less specifically defined reserves and is limited to a ceiling of $80
million, less a $10 million availability reserve. 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 video 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, restricts the payment of dividends and includes certain other debt and
acquisition limitations, allows for the repurchase of up to $7.5 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 three consolidated subsidiaries. The Facility matures on August 29, 2007. At January
31, 2005, we had $21.6 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,
2005 and 2004 was 3.8%.We utilize standby letters of credit to support certain insurance policies. The aggregate
amount of the letters of credit at January 31, 2005 was approximately $1.1 million and reduces
the excess availability of the Facility.The capitalized lease obligations represent two leases on certain retail space with initial
terms of 15 years.The aggregate maturities of long-term debt and capitalized lease obligations for years
subsequent to fiscal 2004 are as follows:
 2005
    
    $
    2432006
    
    
    1952007
    
    
    39,3412008
    
    
    672009
    
    
    Thereafter
    
    
    $
    39,846
 31




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##### Table of Contents



(7)
    
    LeasesWe lease retail space under operating leases with terms ranging from three to 15 years, with
certain leases containing renewal options. Lease agreements generally provide for minimum
rentals. Some leases also include additional contingent rental amounts based upon specified
percentages of sales above predetermined levels. Rental expense for operating leases is
comprised of the following:
 Fiscal Year2004
    
    
    2003
    
    
    2002Minimum rentals
    
    $
    20,962
    
    
    $
    19,595
    
    
    $
    18,007Contingent rentals
    
    
    648
    
    
    
    855
    
    
    
    1,434Less sublease income
    
    
    (87
    )
    
    
    (81
    )
    
    
    (52
    )Rental expense
    
    $
    21,523
    
    
    $
    20,369
    
    
    $
    19,389
 Future minimum lease payments under non-cancelable operating leases and the present value of
future minimum capital lease payments as of January 31, 2005 are:
 Capital
    
    
    Operatingleases
    
    
    leases2005
    
    $
    283
    
    
    $
    24,2032006
    
    
    216
    
    
    
    22,8452007
    
    
    120
    
    
    
    20,5162008
    
    
    70
    
    
    
    17,8232009
    
    
    
    
    
    
    14,319Thereafter
    
    
    
    
    
    
    57,426Total minimum lease payments
    
    
    689
    
    
    
    157,132Less sublease income
    
    
    
    
    
    
    2,757Net minimum lease payments under
operating leases
    
    
    
    
    
    $
    154,375Less amount representing imputed interest
    
    
    75Total obligations under capital leases
    
    
    614Less current principal maturities of capital
lease obligations
    
    
    243Obligations under capital leases,
excluding current maturities
    
    $
    371
 A director of the Company is a limited partner in various limited partnerships that lease land
and improvements to us under certain lease agreements. During fiscal 2004, 2003 and 2002, we
made lease payments of $0.5 million, $0.6 million and $0.5 million, respectively related to
these lease agreements.
 32




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##### Table of Contents



(8)
    
    Income TaxesIncome tax expense (benefit) is comprised of the following:
 Fiscal Year2004
    
    
    2003
    
    
    2002(restated)Current federal
    
    $
    1,970
    
    
    $
    14
    
    
    $
    (287
    )Current state and local
    
    
    586
    
    
    
    352
    
    
    
    (29
    )Deferred federal
    
    
    1,229
    
    
    
    (1,581
    )
    
    
    287Deferred state and local
    
    
    197
    
    
    
    (143
    )
    
    
    29$
    3,982
    
    
    $
    (1,358
    )
    
    $
    
 The difference between expected federal income tax expense (benefit) (computed by applying the
statutory rate of 35% to income before income taxes) and actual income tax expense (benefit)
is as follows:
 Fiscal Year20032004
    
    
    (restated)
    
    
    2002Computed expected income tax expense
    
    $
    3,427
    
    
    $
    2,422
    
    
    $
    643State and local income taxes, net of
federal income tax effect
    
    
    509
    
    
    
    533
    
    
    
    66Other
    
    
    46
    
    
    
    123
    
    
    
    Changes in valuation allowance
    
    
    
    
    
    
    (4,436
    )
    
    
    (709
    )$
    3,982
    
    
    $
    (1,358
    )
    
    $
    
  January 31,2005
    
    
    2004(restated)Deferred tax assets:Gift cards
    
    $
    938
    
    
    $
    984Abandoned leases
    
    
    494
    
    
    
    781Deferred rent and lease incentives
    
    
    1,947
    
    
    
    1,940Inventories
    
    
    1,573
    
    
    
    181Net operating loss carryforward
    
    
    
    
    
    
    1,749Other
    
    
    1,087
    
    
    
    1,470Total deferred tax assets
    
    
    6,039
    
    
    
    7,105Deferred tax liabilities:Property and equipment
    
    
    (2,533
    )
    
    
    (2,172
    )Total deferred tax liabilities
    
    
    (2,533
    )
    
    
    (2,172
    )Net deferred tax assets
    
    $
    3,506
    
    
    $
    4,933
 33




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##### Table of Contents



(9) Income Per Share
  Fiscal Year2004
    
    
    2003
    
    
    2002(restated)Net income
    
    $
    5,809
    
    
    $
    8,277
    
    
    $
    1,891Average shares outstanding:Basic
    
    
    11,411
    
    
    
    11,327
    
    
    
    11,343Effect of stock options
    
    
    531
    
    
    
    156
    
    
    
    436Diluted
    
    
    11,942
    
    
    
    11,483
    
    
    
    11,779Income per share:Basic
    
    $
    0.51
    
    
    $
    0.73
    
    
    $
    0.17Diluted
    
    $
    0.49
    
    
    $
    0.72
    
    
    $
    0.16
  (10) 401k and ASOP
    34




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##### Table of Contents



(11) Shareholders Equity
     35




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##### Table of Contents



Weighted-averageexercisepriceOptions
    
    
    (in dollars)Outstanding at January 31, 2002
    
    
    1,595,285
    
    
    
    5.68Granted
    
    
    353,210
    
    
    
    6.66Exercised
    
    
    (99,090
    )
    
    
    3.47Forfeited and expired
    
    
    (94,066
    )
    
    
    6.23Outstanding at January 31, 2003
    
    
    1,755,339
    
    
    
    5.97Granted
    
    
    367,779
    
    
    
    3.42Exercised
    
    
    (75,137
    )
    
    
    3.12Forfeited and expired
    
    
    (130,529
    )
    
    
    4.20Outstanding at January 31, 2004
    
    
    1,917,452
    
    
    $
    5.71Granted
    
    
    310,493
    
    
    
    6.03Exercised
    
    
    (225,213
    )
    
    
    3.10Forfeited and expired
    
    
    (115,517
    )
    
    
    4.92Outstanding at January 31, 2005
    
    
    1,887,215
    
    
    $
    6.12Options available for grant at January 31, 2005
    
    
    398,454
  Weighted-average
    
    
    Weighted-averageexercise price
    
    
    remainingOptions
    
    
    (in dollars)
    
    
    contractual lifeRange: $1.27 to $4.99Options outstanding at January 31, 2005
    
    
    867,902
    
    
    $
    3.23
    
    
    6.11 yearsOptions exercisable at January 31, 2005
    
    
    377,346
    
    
    $
    3.21Range: $5.00 to $9.99Options outstanding at January 31, 2005
    
    
    563,023
    
    
    $
    6.39
    
    
    6.99 yearsOptions exercisable at January 31, 2005
    
    
    125,440
    
    
    $
    7.00Price: $10.00 to $14.03Options outstanding at January 31, 2005
    
    
    456,290
    
    
    $
    11.30
    
    
    1.96 yearsOptions exercisable at January 31, 2005
    
    
    456,290
    
    
    $
    11.30
   36




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##### Table of Contents



Weighted Average Exercise price for
    
    Weighted Average Fair value forFiscal Year
    
    Fiscal Year2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Options granted at
market price
    
    $
    5.99
    
    
    $
    3.41
    
    
    $
    6.61
    
    
    $
    3.34
    
    
    $
    2.13
    
    
    $
    3.37Options granted at
prices
exceeding market price
    
    $
    6.31
    
    
    $
    3.72
    
    
    $
    7.30
    
    
    $
    2.98
    
    
    $
    0.08
    
    
    $
    0.18Total options granted
    
    $
    6.03
    
    
    $
    3.42
    
    
    $
    6.66
    
    
    $
    3.31
    
    
    $
    2.12
    
    
    $
    3.31
 
 Fiscal Year2004
    
    2003
    
    2002Expected dividend yield
    
    $
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    2.71
    %
    
    
    3.24
    %
    
    
    3.00
    %Expected life in years
    
    
    5.28
    
    
    
    4.96
    
    
    
    4.81Volatility
    
    
    .62
    
    
    
    .74
    
    
    
    .57
 (12) Supplemental Cash Flow Information
  (13) Commitments and Contingencies
    37




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##### Table of Contents



(14) Interim Financial Results (Unaudited)
 Fiscal year 2004:
    
    QuarterFirst
    
    
    Second
    
    
    Third
    
    
    Fourth(restated)
    
    
    (restated)
    
    
    (restated)Total revenues
    
    $
    126,937
    
    
    $
    122,412
    
    
    $
    119,579
    
    
    $
    173,088Total cost of revenues
    
    
    82,426
    
    
    
    78,665
    
    
    
    79,415
    
    
    
    118,392Selling, general and administrative expenses
    
    
    40,941
    
    
    
    42,189
    
    
    
    42,250
    
    
    
    45,913Pre-opening expenses
    
    
    94
    
    
    
    240
    
    
    
    26
    
    
    
    49Operating income (loss)
    
    
    3,476
    
    
    
    1,318
    
    
    
    (2,112
    )
    
    
    8,734Interest (expense) and other income, net
    
    
    (257
    )
    
    
    (381
    )
    
    
    (483
    )
    
    
    (504
    )Income (loss) before taxes
    
    
    3,219
    
    
    
    937
    
    
    
    (2,595
    )
    
    
    8,230Income tax expense (benefit)
    
    
    1,257
    
    
    
    305
    
    
    
    (973
    )
    
    
    3,393Net income (loss)
    
    
    1,962
    
    
    
    632
    
    
    
    (1,622
    )
    
    
    4,837Basic income (loss) per share
    
    $
    0.17
    
    
    $
    0.06
    
    
    $
    (0.14
    )
    
    $
    0.42Diluted income (loss) per share
    
    $
    0.17
    
    
    $
    0.05
    
    
    $
    (0.14
    )
    
    $
    0.40
 Fiscal year 2003:
    
    QuarterFirst
    
    
    Second
    
    
    Third
    
    
    Fourth(restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Total revenues
    
    $
    116,837
    
    
    $
    115,397
    
    
    $
    112,843
    
    
    $
    163,241Total cost of revenues
    
    
    78,384
    
    
    
    74,911
    
    
    
    74,442
    
    
    
    109,045Selling, general and administrative expenses
    
    
    38,762
    
    
    
    39,575
    
    
    
    41,470
    
    
    
    42,809Pre-opening expenses
    
    
    113
    
    
    
    68
    
    
    
    53
    
    
    
    43Operating income (loss)
    
    
    (422
    )
    
    
    843
    
    
    
    (3,122
    )
    
    
    11,344Interest (expense) and other income, net
    
    
    (432
    )
    
    
    (441
    )
    
    
    (474
    )
    
    
    (377
    )Income (loss) before taxes
    
    
    (854
    )
    
    
    402
    
    
    
    (3,596
    )
    
    
    10,967Income tax expense (benefit) (a)
    
    
    82
    
    
    
    82
    
    
    
    82
    
    
    
    (1,604
    )Net income (loss)
    
    
    (936
    )
    
    
    320
    
    
    
    (3,678
    )
    
    
    12,571Basic income (loss) per share
    
    $
    (0.08
    )
    
    $
    0.03
    
    
    $
    (0.33
    )
    
    $
    1.11Diluted income (loss) per share
    
    $
    (0.08
    )
    
    $
    0.03
    
    
    $
    (0.33
    )
    
    $
    1.08
 
 (a)
    
    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. Based on our
past three fiscal years of profitability and our projections of future taxable income, we
believed that a valuation allowance was no longer required as of January 31, 2004 as the
realization of our deferred tax assets is now considered more likely than not.  Effects of Lease Restatement by QuarterAs PreviouslyReported
    
    Adjustments
    
    As RestatedThree months ended October 31, 2004Selling, general and administrative expenses
    
    $
    42,480
    
    
    $
    (230
    )
    
    $
    42,250Operating income (loss)
    
    
    (2,342
    )
    
    
    230
    
    
    
    (2,112
    )Income (loss) before taxes
    
    
    (2,825
    )
    
    
    230
    
    
    
    (2,595
    )Net income (loss)
    
    
    (1,763
    )
    
    
    141
    
    
    
    (1,622
    )Diluted income (loss) per share
    
    
    (0.15
    )
    
    
    0.01
    
    
    
    (0.14
    )
 38




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##### Table of Contents



Effects of Lease Restatement by QuarterAs PreviouslyReported
    
    
    Adjustments
    
    
    As RestatedThree months ended July 31, 2004Selling, general and administrative expenses
    
    $
    42,419
    
    
    $
    (230
    )
    
    $
    42,189Operating income
    
    
    1,088
    
    
    
    230
    
    
    
    1,318Income before taxes
    
    
    707
    
    
    
    230
    
    
    
    937Net income
    
    
    491
    
    
    
    141
    
    
    
    632Diluted income per share
    
    
    0.04
    
    
    
    0.01
    
    
    
    0.05Three months ended April 30, 2004Selling, general and administrative expenses
    
    $
    41,171
    
    
    $
    (230
    )
    
    $
    40,941Operating income
    
    
    3,246
    
    
    
    230
    
    
    
    3,476Income before taxes
    
    
    2,989
    
    
    
    230
    
    
    
    3,219Net income
    
    
    1,821
    
    
    
    141
    
    
    
    1,962Diluted income per share
    
    
    0.15
    
    
    
    0.02
    
    
    
    0.17Three months ended January 31, 2004Selling, general and administrative expenses
    
    $
    43,024
    
    
    $
    (215
    )
    
    $
    42,809Operating income
    
    
    11,129
    
    
    
    215
    
    
    
    11,344Income before taxes
    
    
    10,752
    
    
    
    215
    
    
    
    10,967Net income (loss)
    
    
    12,440
    
    
    
    131
    
    
    
    12,571Diluted income (loss) per share
    
    
    1.07
    
    
    
    0.01
    
    
    
    1.08Three months ended October 31, 2003Selling, general and administrative expenses
    
    $
    41,684
    
    
    $
    (214
    )
    
    $
    41,470Operating income (loss)
    
    
    (3,336
    )
    
    
    214
    
    
    
    (3,122
    )Income (loss) before taxes
    
    
    (3,810
    )
    
    
    214
    
    
    
    (3,596
    )Net income (loss)
    
    
    (3,810
    )
    
    
    132
    
    
    
    (3,678
    )Diluted income (loss) per share
    
    
    (0.34
    )
    
    
    0.01
    
    
    
    (0.33
    )Three months ended July 31, 2003Selling, general and administrative expenses
    
    $
    39,789
    
    
    $
    (214
    )
    
    $
    39,575Operating income
    
    
    629
    
    
    
    214
    
    
    
    843Income before taxes
    
    
    188
    
    
    
    214
    
    
    
    402Net income
    
    
    188
    
    
    
    132
    
    
    
    320Diluted income per share
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.03Three months ended April 30, 2003Selling, general and administrative expenses
    
    $
    38,976
    
    
    $
    (214
    )
    
    $
    38,762Operating income (loss)
    
    
    (636
    )
    
    
    214
    
    
    
    (422
    )Income (loss) before taxes
    
    
    (1,068
    )
    
    
    214
    
    
    
    (854
    )Net income (loss)
    
    
    (1,068
    )
    
    
    132
    
    
    
    (936
    )Diluted income (loss) per share
    
    
    (0.09
    )
    
    
    0.01
    
    
    
    (0.08
    )
 39




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##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES
   40




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
  (a)
    1.
    The following consolidated financial statements of the Company are included in Part II,
Item 8:Independent Registered Public Accounting Firms Report
    
    
    18Consolidated Balance Sheets as of January 31, 2005 and 2004
    
    
    19Consolidated Statements of Operations for the years ended
January 31, 2005, 2004 and 2003
    
    
    20Consolidated Statements of Shareholders Equity for the years
ended January 31, 2005, 2004 and 2003
    
    
    21Consolidated Statements of Cash Flows for the years ended
January 31, 2005, 2004 and 2003
    
    
    22Notes to Consolidated Financial Statements
    
    
    232.
    The following financial statement schedules and other information
required to be filed by Items 8 and 15(d) of Form 10-K are
included in Part IV:Schedule II  Valuation and Qualifying Accounts
    
    
    42
  3.
    The following exhibits are filed herewith or incorporated by reference as indicated
as required by Item 601 of Regulation S-K.
 ExhibitNumber
    
    
    
    
    
    Description23.1
    
    
    (1
    )
    
    Consent of Ernst and Young LLP.24.1
    
    
    (1
    )
    
    Powers of Attorney (included on signature page).31.1
    
    
    (1
    )
    
    Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).31.2
    
    
    (1
    )
    
    Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).32.1
    
    
    (1
    )
    
    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.
 
 (i)
    
    Filed herewith. 41




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 Fiscal Year2004
    
    
    2003
    
    
    2002Reserves deducted from assets:Allowance for shrinkage and inventory
obsolescence:Balance at the beginning of period
    
    $
    3,405
    
    
    $
    3,884
    
    
    $
    4,580Additions charged to costs and expenses
    
    
    12,345
    
    
    
    10,799
    
    
    
    10,697Deductions for write-offs
    
    
    (12,695
    )
    
    
    (11,278
    )
    
    
    (11,393
    )Balance at end of period
    
    $
    3,055
    
    
    $
    3,405
    
    
    $
    3,884Reserves added to liabilities:Allowance for costs of inventory returns:Balance at the beginning of period
    
    $
    3,658
    
    
    $
    4,729
    
    
    $
    5,128Additions charged to costs and expenses
    
    
    5,776
    
    
    
    6,247
    
    
    
    6,396Deductions for write-offs and payments
    
    
    (7,377
    )
    
    
    (7,318
    )
    
    
    (6,795
    )Balance at end of period
    
    $
    2,057
    
    
    $
    3,658
    
    
    $
    4,729
 42




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##### Table of Contents



SIGNATURES
  HASTINGS ENTERTAINMENT, INC.Date: January 13, 2006
    
    By:
    
    /s/ Dan CrowDan Crow
Vice President and Chief Financial Officer
 (Principal Financial and Accounting Officer)
 POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ John H. Marmaduke
    
    Chairman of the Board, President
and chief Executive Officer (Principal Executive Officer)
    
    January 13, 2006John H. Marmaduke/s/ Gaines L. GodfreyGaines L. Godfrey
    
    Director
    
    January 13, 2006/s/ Daryl L. LansdaleDaryl L. Lansdale
    
    Director
    
    January 13, 2006/s/ Ann S. LieffAnn S. Lieff
    
    Director
    
    January 13, 2006/s/ Stephen S. MarmadukeStephen S. Marmaduke
    
    Director
    
    January 13, 2006/s/ Frank O. MarrsFrank O. Marrs
    
    Director
    
    January 13, 2006/s/ Jeffrey G. ShraderJeffrey G. Shrader
    
    Director
    
    January 13, 2006
 43