Notes to the Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
(1)
|
Operations and Summary of Significant Accounting Policies
|
Hastings Entertainment, Inc. (the “Company,” “Hastings,” or “Hastings Entertainment”) operates a chain of retail stores in 19 states, primarily in the Western and Midwestern United States. Revenues are generated from the sale of new and used books, music, DVDs, video games, and video game consoles, and new software, periodicals, consumables, lifestyles and trends products. In addition, our revenues include the rental of DVDs, Blu-ray DVDs, and video games.
|
(b)
|
Basis of Consolidation
|
The consolidated financial statements present the results of Hastings and its wholly-owned subsidiary. All inter-company transactions and balances have been eliminated in consolidation.
|
(c)
|
Basis of Presentation
|
We operate in one reportable segment. Our fiscal years ended January 31, 2014, 2013 and 2012 are referred to as fiscal 2013, 2012 and 2011, respectively.
(d)
Reclassifications
Certain prior period amounts have been reclassified to conform to the current presentation.
|
(e)
|
Cash and Cash Equivalents
|
We consider all debit and credit card receivables totaling approximately $1.5 million and $1.2 million at January 31, 2014 and 2013, respectively, from MasterCard, Visa, Discover, and American Express to be cash equivalents. All balances related to debit and credit card receivables typically settle within five days. We utilize a cash management process under which a book cash overdraft may exist for our primary disbursement accounts. These overdrafts represent un-cleared checks in excess of cash balances in bank accounts at the end of the reporting period and have been reclassified to accounts payable on the consolidated balance sheets. We transfer cash on an as-needed basis to fund clearing checks.
Merchandise and rental asset revenues 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.
We reduce our rental revenue through reserves for the estimated utilization of early return credits received by renters for early return of rentals. The reserve is relieved upon the redemption of these early return credits.
We provide our customers with the opportunity to trade in used DVDs, video games, CDs and books in exchange for cash consideration or store credit in the form of a gift card. Used merchandise inventory is recorded at a cost equal to the cash offer to the customer. If a customer chooses store credit, a gift card is issued for the amount of the cash offer plus a premium. Premiums associated with gift cards issued as a result of trade-in transactions are recorded as a reduction of revenue in the period in which the related gift cards are redeemed.
|
(g)
|
Gift Cards and Breakage Revenue
|
We sell gift cards through each of our stores and through our web site www.goHastings.com. The gift cards we sell have no stated expiration dates or fees and are subject to potential escheatment rights in some of the jurisdictions in which we operate. Gift card liabilities are recorded as deferred revenue at the
41
time of sale of such cards with the costs of designing, printing and distributing the cards recorded as expense as incurred. Revenue from sales of gift cards is recognized when the gift card is redeemed by the customer, or the likelihood of a gift card being redeemed by the customer is remote (gift card breakage). Gift card breakage revenue is recognized as gift cards are redeemed, based upon an analysis of the aging and utilization of gift cards, our determination that the likelihood of future redemption is remote and our determination that such balances are not subject to escheatment laws applicable to our operations. For fiscal 2013, 2012 and 2011, we recorded approximately $0.3 million, ($0.1) million and $0.8 million, respectively, of revenue related to gift card breakage. During fiscal 2012, we discontinued recognition of gift card breakage for our Colorado stores per state escheat laws and we decreased the overall gift card breakage percentage, causing a negative amount for the fiscal year. Unredeemed gift cards, net of estimated gift card breakage, approximated $11.9 million at January 31, 2014 and $11.6 million at January 31, 2013.
|
(h)
|
Merchandise Inventories
|
Merchandise inventories are recorded at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. Amounts are presented net of an 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 revenues all expenses associated with our distribution center, including freight, warehouse personnel costs, supplies, maintenance, depreciation, occupancy, property tax, and utility costs, in addition to 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 Selling, General and Administrative (“SG&A”) expenses.
We transfer rental assets that have been converted to previously viewed titles for sale, from ‘Rental Assets’ to ‘Merchandise Inventories.’ The transfer to ‘Merchandise Inventories’ is recorded at the time of conversion, which is the first date the product is made available for sale. During fiscal 2013, 2012, and 2011, $4.4 million, $5.2 million, and $10.3 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, in order to appropriately match the costs associated with the return of merchandise with the process of returning such merchandise, returns expense 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. 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. There were no material adjustments in fiscal 2013, 2012, or 2011.
|
(i)
|
Property and Equipment
|
Property 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. The cost of property and equipment includes the purchase price and all direct incremental expenditures necessary to render the asset suitable for its intended use and location.
Furniture, fixtures, equipment and software are depreciated over their estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of the related lease term or their estimated useful lives.
Expenditures for maintenance, repairs and renewals that do not materially extend the original useful lives of assets are charged to expense as incurred.
We evaluate underperforming stores on a quarterly basis to determine whether projected future cash flows over the remaining lease term are sufficient to recover the carrying value of the fixed asset investment in each individual store. If projected future cash flows are less than the carrying value of the
42
fixed asset investment, an impairment charge is recognized if the estimated fair value is less than the carrying value of such assets. The carrying value of leasehold improvements as well as certain other property and equipment is subject to impairment write-down.
|
(j)
|
Rental Asset Depreciation
|
Rental assets, except for 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, Blu-rays, and video games, are depreciated to salvage values ranging from $4 to $15. Rental assets purchased for less than established salvage values are not depreciated.
|
(k)
|
Financial Instruments
|
Our financial instruments include cash and cash equivalents, available for sale investments related to our non-qualified supplemental executive retirement plan, accounts payable, and long-term debt. The fair value of cash and cash equivalents and accounts payable approximates carrying values due to their short-term duration. See Note 7 Fair Value Measurements for discussion of the fair value of the available for sale investments and long-term debt.
|
(l)
|
Stock Based Compensation
|
Determining the amount of stock-based compensation expense requires us to develop estimates that are used in calculating the grant-date fair value of stock options. In determining the fair value of stock options, we use the Black-Scholes valuation model, which requires us to make estimates of the following assumptions:
·
|
Expected volatility – The estimated stock price volatility is derived based upon our historical stock prices over the expected life of the option.
|
·
|
Expected life of the option – The estimate of an expected life is calculated based on historical data relating to grants, exercises, and cancellations and 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.
|
·
|
Expected dividend yield – The estimated rate based on the stock’s current market price and forecasted dividend payout.
|
Our stock price volatility and expected option lives involve management’s best estimates at the time the valuation is conducted, both of which impact the fair value of the option calculated under the Black-Scholes pricing model and, ultimately, the expense that will be recognized over the vesting period of the option.
We recognize compensation expense only for the portion of options that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In addition to stock options, we award restricted stock units. The grant date fair value of restricted stock units is equal to the average of the opening and closing stock price on the day on which they are granted.
Advertising costs for newspaper, television and other media are expensed as incurred. Advertising expenses, net of reimbursement allowances from vendors, for fiscal years 2013, 2012, and 2011 were $4.4 million, $6.0 million, and $7.2 million, respectively.
We receive payments and credits from vendors pursuant to cooperative advertising programs and display allowance agreements. During fiscal years 2013, 2012, and 2011, we received a total of approximately $6.2 million, $6.6 million, and $6.7 million, respectively, for such payments and credits. To the extent
43
such payments are a reimbursement for a specific incremental and identifiable cost such amounts are recorded as a reduction in SG&A expenses at the time the associated advertisement is publicly released. The remainder of these payments and allowances are recorded as a reduction of merchandise inventory and the cost of rental assets and recognized in income as the related product is sold or rented.
Basic 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-based awards.
|
(o)
|
Use of Management Estimates
|
The 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.
|
(p)
|
Impact of Recently Issued Accounting Standards
|
During February 2013, the Financial Accounting Standards Board (“FASB”) issued
ASU 2013-02: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,
which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period.
In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11:
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,
which requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.
(2)
|
Merchandise Inventories
|
Merchandise inventories consist of the following:
|
January 31,
|
|
|
2014
|
|
|
2013
|
|
Books
|
$
|
41,623
|
|
|
$
|
47,537
|
|
Videos
|
|
37,921
|
|
|
|
39,171
|
|
Video Games
|
|
13,758
|
|
|
|
12,570
|
|
Music
|
|
18,092
|
|
|
|
19,631
|
|
Trends
|
|
24,237
|
|
|
|
18,232
|
|
Consumer Electronics
|
|
13,790
|
|
|
|
10,183
|
|
Other
|
|
6,390
|
|
|
|
1,851
|
|
|
|
155,811
|
|
|
|
149,175
|
|
Less allowance for inventory shrinkage and obsolescence
|
|
3,673
|
|
|
|
3,838
|
|
|
$
|
152,138
|
|
|
$
|
145,337
|
|
44
During fiscal 2013 and 2012, we purchased approximately 21% and 18%, respectively, of all products (defined herein as merchandise inventories and rental assets) from our top three vendors.
(3)
|
Property and Equipment
|
Property and equipment consist of the following:
|
January 31,
|
|
|
2014
|
|
|
2013
|
|
Furniture, equipment and software
|
$
|
191,465
|
|
|
$
|
188,438
|
|
Leasehold improvements
|
|
68,100
|
|
|
|
69,855
|
|
Buildings and land
|
|
258
|
|
|
|
258
|
|
Work in progress
|
|
360
|
|
|
|
1,016
|
|
|
|
260,183
|
|
|
|
259,567
|
|
Less accumulated depreciation
|
|
230,971
|
|
|
|
227,468
|
|
Property and equipment, net
|
$
|
29,212
|
|
|
$
|
32,099
|
|
During fiscal 2013, 2012, and 2011, we recorded impairment charges of approximately $0.3 million, $1.4 million, and $0.8 million, respectively, which are included in SG&A expenses. See Note 7 on Fair Value Measurements for a discussion of the inputs used to estimate the fair value of store assets and the related impairment charges.
(4)
|
Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the following:
|
January 31,
|
|
|
2014
|
|
|
2013
|
|
Deferred gift card revenue
|
$
|
11,885
|
|
|
$
|
11,610
|
|
Salaries, vacation, bonus and benefits
|
|
4,956
|
|
|
|
4,604
|
|
Supplemental executive retirement plan
|
|
1,607
|
|
|
|
—
|
|
Early return credit reserve
|
|
1,567
|
|
|
|
1,741
|
|
Real property tax
|
|
1,533
|
|
|
|
1,354
|
|
Short term lease obligations
|
|
1,190
|
|
|
|
1,814
|
|
Sales taxes payable
|
|
930
|
|
|
|
1,052
|
|
Allowance for cost of inventory returns
|
|
597
|
|
|
|
813
|
|
State income tax payable
|
|
332
|
|
|
|
754
|
|
Other accrued expenses
|
|
3,762
|
|
|
|
3,654
|
|
Total
|
$
|
28,359
|
|
|
$
|
27,396
|
|
Merchandise inventories that are not sold generally can 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 estimation, it is reasonably possible that our estimate of the ultimate settlement with our vendors may change in the near term. See Note 1 Merchandise Inventories for additional discussion.
Deferred gift card revenue as of the end of each period reflects our estimate of breakage on previously issued and sold gift cards.
(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 expected profitability, market trends, age of store and lease status.
45
Amounts in “Accrued expenses and other current liabilities” and “Other liabilities” at January 31, 2014 included the current and long-term portions, respectively, of accruals for the net present value of future minimum lease payments, net of estimated sublease income, attributable to closed stores. Expenses related to store closings are included in SG&A expenses.
The following table provides a roll-forward of our store closing reserve:
|
Store Closing
Reserve
|
|
Balance at January 31, 2012
|
$
|
2,558
|
|
Additions to provision
|
|
—
|
|
Changes in estimates
|
|
339
|
|
Cash outlay, net
|
|
(792
|
)
|
Balance at January 31, 2013
|
$
|
2,105
|
|
Additions to provision
|
|
—
|
|
Changes in estimates
|
|
382
|
|
Cash outlay, net
|
|
(1,374
|
)
|
Balance at January 31, 2014
|
$
|
1,113
|
|
On January 31, 2014 and January 31, 2013, the outstanding borrowings on our revolving credit facility were $51.7 million and $41.8 million, respectively.
We have entered into an Amended and Restated Loan and Security Agreement with Bank of America, N.A., as agent (as subsequently amended, the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility of $115 million, allows for the payment of dividends, has a maturity date of January 4, 2017, and provides that we may repurchase up to $10.0 million worth of our common stock. The Credit Agreement also provides that we may repurchase additional shares of our common stock in the event we meet certain criteria set forth in the Credit Agreement. The Credit Agreement includes certain debt and acquisition limitations and requires a minimum Availability (as defined in the Credit Agreement) that is greater than or equal to $10.0 million at all times. Our obligations under the Credit Agreement are secured by a pledge of substantially all of the assets of the Company and our subsidiary and are guaranteed by our subsidiary.
The amount outstanding under the Credit Agreement is limited by a borrowing base predicated on the sum of (a) 85% of Eligible Credit Card Receivables plus (b) either (i) at all times during the year, other than those stated in (ii), 90% of the liquidation value of eligible inventory or (ii) from September 1
st
through and including December 27
th
of each year, 92.5% of the liquidation value of eligible inventory, less (c) Availability Reserves and is limited to a ceiling of $115 million, less a minimum availability reserve that is greater than or equal to 10% of the lesser of (a) the Borrowing Base, or (b) the Revolving Credit Ceiling (each term as defined in the Credit Agreement), provided however that we must also maintain Availability that is greater than or equal to $10 million at all times. The lender may increase specifically defined reserves to reduce availability in the event of adverse changes in our industry or our financial condition that are projected to impact the value of our assets pledged as collateral. The lender must exercise reasonable judgment and act in good faith with respect to any changes in the specifically defined reserves.
Interest under the Credit Agreement will accrue, at our election, at a Base Rate or Libor Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Credit Agreement, with the Applicable Margin for Libor Rate loans ranging from 2.00% to 2.50% and the Applicable Margin for Base Rate loans ranging from 1.00% to 1.50%. In addition, unused line fees ranging from 0.30% to 0.375% (determined by reference to the level of usage under the Credit Agreement) are also payable on unused commitments.
We utilize standby letters of credit to support certain insurance policies. The aggregate amount of the letters of credit at January 31, 2014, was approximately $0.8 million, which reduces the excess availability under the Credit Agreement.
46
At January 31, 2014, we had approximately $49.7 million in excess availability, after the availability reserve, under the Credit Agreement. The average rate of interest incurred for both fiscal years ended January 31, 2014 and 2013 was 2.5%. Deferred financing costs that were amortized into interest expense during the fiscal years ended January 31, 2014 and 2013 are excluded from the calculation of the average rate of interest for the respective period.
(7)
|
Fair Value Measurements
|
We account for certain assets and liabilities at fair value on either a recurring or non-recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. These levels are:
·
|
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;
|
·
|
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
|
·
|
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
|
At January 31, 2014 and 2013, we had approximately $1.9 million and $2.1 million, respectively, in assets that are carried at fair value on a recurring basis. These assets consist of available-for-sale investments related to our non-qualified supplemental executive retirement plan (“SERP”). The fair value of these investments was determined using Level 1 inputs.
During fiscal 2013, 2012 and 2011, we recognized charges for non-financial assets measured at fair value on a non-recurring basis, related to our store asset impairments. The store asset impairment calculation compared the carrying amount of property and equipment to the individual stores’ fair values based on projected cash flows that we estimated would be used by a market participant in valuing these assets, a Level 3 input. Projected cash flows consist of store level EBIT which is then adjusted for depreciation and corporate overhead allocation and then multiplied by the remaining lease life to arrive at projected cash flows for impairment analysis purposes.
During fiscal 2013, 2012 and 2011, we also recognized charges for non-financial liabilities measured at fair value on a non-recurring basis, related to our store closing reserve. Amounts recognized included accruals for the net present value of minimum lease payments, net of estimated sublease income, attributable to closed stores. These inputs are classified as Level 3 inputs.
The carrying value of our long-term debt approximates its fair value as of January 31, 2014 and 2013, due to the instrument bearing interest at variable rates that are comparable to what is currently available to us. On January 4, 2013, we entered into an amendment to our Credit Agreement, at which time our current interest rates were determined. See Note 6 on Debt for a more detailed discussion of the Credit Agreement.
47
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 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 Year
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Minimum rentals
|
$
|
25,409
|
|
|
$
|
26,125
|
|
|
$
|
27,253
|
|
Contingent rentals
|
|
17
|
|
|
|
31
|
|
|
|
37
|
|
Less sublease income
|
|
(111
|
)
|
|
|
(145
|
)
|
|
|
(71
|
)
|
Rental expense
|
$
|
25,315
|
|
|
$
|
26,011
|
|
|
$
|
27,219
|
|
Future minimum lease payments under non-cancelable operating leases as of January 31, 2014 are:
2014
|
$
|
25,724
|
|
2015
|
|
22,868
|
|
2016
|
|
20,726
|
|
2017
|
|
18,623
|
|
2018
|
|
15,296
|
|
Thereafter
|
|
25,396
|
|
Total minimum lease payments
|
|
128,633
|
|
Less sublease income
|
|
—
|
|
Net minimum lease payments under operating leases
|
$
|
128,633
|
|
Income tax expense (benefit) is comprised of the following:
|
Fiscal Year
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current federal
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
(3,124
|
|
)
|
Current state and local
|
|
(254
|
)
|
|
|
|
289
|
|
|
|
283
|
|
|
Deferred federal, state, and local
|
|
10
|
|
|
|
|
8
|
|
|
|
7,725
|
|
|
|
$
|
(244
|
)
|
|
|
$
|
297
|
|
|
$
|
4,884
|
|
|
The difference between expected federal income tax expense based upon statutory rates and actual income tax expense is as follows:
|
Fiscal Year
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected federal income tax benefit at statutory rate
|
$
|
(3,545
|
)
|
|
|
(34.0
|
%)
|
|
$
|
(3,065
|
)
|
|
|
(34.0
|
%)
|
|
$
|
(4,316
|
)
|
|
|
(34.0
|
%)
|
State and local income tax benefits, net of federal income tax effect
|
|
(140
|
)
|
|
|
(1.3
|
%)
|
|
|
(86
|
)
|
|
|
(1.0
|
%)
|
|
|
(164
|
)
|
|
|
(1.3
|
%)
|
Valuation allowance
|
|
3,729
|
|
|
|
35.8
|
%
|
|
|
3,189
|
|
|
|
35.4
|
%
|
|
|
8,617
|
|
|
|
67.9
|
%
|
Return to provision adjustment
|
|
—
|
|
|
|
0.0
|
%
|
|
|
38
|
|
|
|
0.4
|
%
|
|
|
485
|
|
|
|
3.8
|
%
|
Other
|
|
(288)
|
|
|
|
(2.8
|
%)
|
|
|
221
|
|
|
|
2.5
|
%
|
|
|
262
|
|
|
|
2.1
|
%
|
|
$
|
(244)
|
|
|
|
(2.3
|
%)
|
|
$
|
297
|
|
|
|
3.3
|
%
|
|
$
|
4,884
|
|
|
|
38.5
|
%
|
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in
48
taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we considered all available positive and negative evidence, including our ability to carry back operating losses to prior periods, projected future taxable income, tax planning strategies and the reversal of deferred tax liabilities. Based on this analysis, we determined that it was more likely than not that our deferred tax assets will not be realized. As such, we established a valuation allowance of approximately $8.6 million as of January 31, 2012, which has increased to $14.3 million by January 31, 2014. We reassess the valuation allowance quarterly, and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly. 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 Year
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Deferred gift card revenue
|
$
|
3,604
|
|
|
$
|
3,410
|
|
Deferred rent and lease incentives
|
|
1,993
|
|
|
|
2,122
|
|
Inventories
|
|
2,212
|
|
|
|
1,439
|
|
Property and equipment
|
|
6,500
|
|
|
|
6,385
|
|
Abandoned leases
|
|
417
|
|
|
|
789
|
|
Operating loss carryforwards
|
|
2,484
|
|
|
|
422
|
|
Other
|
|
2,006
|
|
|
|
2,250
|
|
Total deferred tax assets
|
|
19,216
|
|
|
|
16,817
|
|
Valuation allowance
|
|
(14,357
|
)
|
|
|
(11,019
|
)
|
Net deferred tax assets
|
|
4,859
|
|
|
|
5,798
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Rental assets
|
|
(4,919
|
)
|
|
|
(5,848
|
)
|
Total deferred tax liabilities
|
|
(4,919
|
)
|
|
|
(5,848
|
)
|
Net deferred tax liabilities
|
$
|
(60
|
)
|
|
$
|
(50
|
)
|
Included in total deferred tax assets are net U.S. operating loss carryforwards of $11.4 million that expire in fiscal years 2030-2032.
We follow the provisions of ASC 740,
Income Taxes,
which clarifies the accounting and disclosure for uncertainty in income taxes. Below is a reconciliation of the beginning and ending amount of unrecognized tax benefits relating to uncertain tax positions, which are recorded in our Consolidated Balance Sheets.
|
Fiscal Year
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Unrecognized tax positions at beginning of period
|
$
|
186
|
|
|
$
|
186
|
|
|
$
|
186
|
|
Increases in tax positions from prior years
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Decreases in tax positions from prior years
|
|
181
|
|
|
|
—
|
|
|
|
—
|
|
Increases in tax positions from current year
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Settlements with taxing authorities
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Lapse in statute of limitations
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unrecognized tax positions at end of period
|
$
|
5
|
|
|
$
|
186
|
|
|
$
|
186
|
|
As of January 31, 2014 and January 31, 2013, the Company had unrecognized tax benefits related to certain state jurisdictions in the amount of approximately $5,000 and $186,000, respectively. If recognized, this amount would result in a favorable effect on our effective tax rate.
We 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, 2014 and 2013, we had current liabilities for penalties and interest in the amount of approximately $6,000 and $284,000, respectively. We recognized approximately $(278,000), $12,000, and $12,000 of interest and penalties as a component of income tax during each of the fiscal years ended January 31, 2014, 2013, and 2012, respectively.
49
Hastings and its subsidiary file a consolidated U.S. Federal income tax return as well as separate, unitary and combined income tax returns in several state jurisdictions. The Company has substantially concluded all federal income tax matters and is no longer subject to U.S. federal income tax examination by tax authorities for fiscal years prior to fiscal 2011. State jurisdictions have statutes of limitations generally ranging from three to five years.
(10) Other Comprehensive Income
Changes in the balances of each component of other comprehensive income (“OCI”) included in accumulated OCI for the year ended January 31, 2014 are presented below. All amounts are net of tax.
|
Net Unrealized Gain (Loss) on
Available-for Sale Securities in
Supplemental Executive
Retirement Plan
|
|
Balance at January 31, 2013
|
$
|
247
|
|
Other comprehensive income before reclassifications
|
|
143
|
|
Amounts reclassified from accumulated OCI, included in Other Income (Expense)
|
|
(43
|
)
|
Balance as of January 31, 2014
|
$
|
347
|
|
(11)
|
Earnings (Loss) Per Share
|
The computations of basic and diluted loss per share are as follows:
|
Fiscal Year
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net income (loss)
|
$
|
(10,183
|
)
|
|
$
|
(9,313
|
)
|
|
$
|
(17,579
|
)
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
8,142
|
|
|
|
8,202
|
|
|
|
8,556
|
|
Diluted
|
|
8,142
|
|
|
|
8,202
|
|
|
|
8,556
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(1.25
|
)
|
|
$
|
(1.14
|
)
|
|
$
|
(2.05
|
)
|
Diluted
|
$
|
(1.25
|
)
|
|
$
|
(1.14
|
)
|
|
$
|
(2.05
|
)
|
Options to purchase 520,777, 782,443, and 655,083 shares of common stock outstanding at January 31, 2014, 2013, and 2012, respectively, were not included in the computation of diluted income per share because their inclusion would have been anti-dilutive.
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 or have 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. Discretionary matching amounts are not material to the financial statements or results of operations. Amounts expensed related to the 401(k) plan were approximately $0.2 million, $0.3 million, and $0.2 million for fiscal 2013, 2012, and 2011, respectively.
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
50
and have attained age 21 to participate in the ASOP. Employer contributions are determined at the discretion of the Board of Directors. The Board of Directors elected not to contribute to the ASOP during fiscal years 2013, 2012 or 2011, nor do they plan to contribute to the plan during fiscal 2014. The contribution is based on a percentage of participants’ eligible compensation. Common shares held by the ASOP were 323,266, 350,372, and 352,414, at January 31, 2014, 2013, and 2012, respectively. Shares issued and held under the ASOP are included as outstanding shares for the purposes of calculating earnings per share.
Until February 25, 2013, we maintained a defined contribution supplemental executive retirement plan (“SERP”). The SERP provided eligible executives with supplemental pension benefits in addition to amounts received under our other retirement plans. Annual contributions ranged 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 contributed, 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 were invested in available-for-sale securities. As of January 31, 2014, we had approximately $1.9 million in SERP assets, which are recorded at fair value on the consolidated balance sheets in “Current Assets.” As of January 31, 2013, we had approximately $2.1 million in SERP assets, which were recorded at fair value on the consolidated balance sheets in “Other Assets.” The SERP accounts vested 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. We recorded expenses related to the SERP of approximately $0.1 million, $0.3 million and $0.2 million during the fiscal years ended January 31, 2014, 2013, and 2012, respectively. As of February 25, 2013, the Board of Directors elected to terminate the SERP. The SERP assets were distributed in September 2013 to the four officers who were terminated as a result of the February 2013 restructuring, and the remaining SERP assets were distributed in February 2014.
(13)
|
Shareholders’ Equity
|
We have three stock award plans: the 2006 and 2010 Incentive Stock Plans; and the 2012 Outside Directors Plans (for non-employee directors). A total of 500,000 shares may be granted under each of the 2006 and 2010 Incentive Stock Plans and 50,000 shares may be granted under the 2012 Outside Directors Plan. As of January 31, 2014, we had 296,396 shares available for future grants under all stock award plans.
The 2006 and 2010 Incentive Stock Plans and the 2012 Outside Directors Plan (for non-employee directors only) 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 2006 and 2010 Incentive Stock Plans and the 2012 Outside Directors Plan (for non-employee directors only) also authorize 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.
We also have one stock grant plan, the 2012 Stock Grant Plan for Outside Directors, which authorizes the granting of shares of stock to outside directors. We issue annual grants of shares of common stock valued at $10,000 per outside director from this plan. As of January 31, 2014, we have 20,180 shares remaining under the 2012 Stock Grant Plan for Outside Directors.
On December 4, 2009, we entered into a stock transfer agreement with the Marmaduke Family Limited Partnership (the “Partnership”). Under the stock transfer agreement, for a period of three years following the death of Mr. John H. Marmaduke, the Company’s Chief Executive Officer, the Partnership may tender for purchase to the Company, and, if so tendered, the Company will be required to purchase, the number of shares of the Company’s common stock belonging to the Partnership that equal an aggregate fair market value of $5.0 million. During this three year period, the Partnership may elect to tender portions of such shares in various lots and parcels, at any time and from time to time, and any tender shall not exhaust or limit the Partnership’s right to tender an additional amount of such shares, subject to the limitations set within the stock transfer agreement. Under the stock transfer agreement, the Company is not obligated to purchase, and the Partnership
51
does not have the right to tender, any amount of such shares with an aggregate fair market value in excess of $5.0 million. In the event that Mr. Marmaduke resigns as an officer or director of the Company prior to his death, the Partnership’s right to tender the shares to the Company shall terminate. The stock transfer agreement shall terminate on the earlier of February 9, 2019, or four years after the death of Mr. Marmaduke. The Company is currently the beneficiary of a $10 million key-man life insurance policy on Mr. Marmaduke, a portion of the proceeds of which would be used to complete any purchases of shares resulting from the stock transfer agreement.
We did not pay any dividend during the fiscal year ending January 31, 2014. An annual dividend of $0.02 per share and a special dividend of $0.35 per share were paid during the fiscal year ending January 31, 2013. Under the Merger Agreement described under the heading “Merger Agreement” in Item 1 of this Annual Report on Form 10-K, the Company is not permitted to pay dividends without Parent’s consent..
(14)
|
Stock-Based Compensation
|
Compensation expense for all stock option awards is measured at fair value on the date of the grant and such cost is recognized over the service period for awards that are expected to vest. The fair value of restricted stock units is based on the number of shares granted and the average of the opening and closing stock price on the day on which they are granted. We use the Black-Scholes valuation model in order to determine the fair value of stock option grants on the date of grant.
Stock Options
Under our incentive stock plans, options may be granted to directors, officers and associates with an exercise price equal to the fair market value of our 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 following assumptions were used in the calculation of fair value:
|
Fiscal Year
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected dividend yield
|
|
0.51
|
%
|
|
|
0.94
|
%
|
|
|
—
|
|
Risk-free interest rate
|
|
1.24
|
%
|
|
|
0.75
|
%
|
|
|
1.53
|
%
|
Expected life in years
|
|
5.00
|
|
|
|
5.44
|
|
|
|
5.00
|
|
Historical Volatility
|
|
0.57
|
|
|
|
0.51
|
|
|
|
0.51
|
|
A summary of information with respect to stock option plans for fiscal years 2013, 2012, and 2011, and changes during the periods then ended, is presented below.
|
Options (in
actual shares)
|
|
|
Weighted-
average exercise
price
|
|
Outstanding at January 31, 2011
|
|
777,193
|
|
|
$
|
4.54
|
|
Granted
|
|
10,120
|
|
|
|
4.06
|
|
Exercised
|
|
(12,530
|
)
|
|
|
2.99
|
|
Forfeited and expired
|
|
(119,700
|
)
|
|
|
3.88
|
|
Outstanding at January 31, 2012
|
|
655,083
|
|
|
$
|
4.68
|
|
Granted
|
|
140,420
|
|
|
|
2.08
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
Forfeited and expired
|
|
(13,060
|
)
|
|
|
5.17
|
|
Outstanding at January 31, 2013
|
|
782,443
|
|
|
$
|
4.21
|
|
Granted
|
|
10,120
|
|
|
|
3.85
|
|
Exercised
|
|
(25,000)
|
|
|
|
2.30
|
|
Forfeited and expired
|
|
(246,786
|
)
|
|
|
3.63
|
|
Outstanding at January 31, 2014
|
|
520,777
|
|
|
$
|
4.57
|
|
52
The total intrinsic value of stock options exercised for the fiscal years ended January 31, 2014, 2013 and 2012 was approximately $4,000, $0, and $7,000, respectively. The total fair value of stock options granted for the fiscal years ended January 31, 2014, 2013 and 2012 was approximately $18,000, $129,000 and $19,000, respectively. The total fair value of stock option shares vested during the fiscal years ended January 31, 2014, 2013 and 2012 was approximately $162,000, $210,000 and $241,000, respectively.
As of January 31, 2014 and 2013, we had a total of 157,054 options with a weighted average exercise price of $3.63 and 309,994 options with a weighted average exercise price of $3.90, respectively, that were unvested.
Due to a corporate restructuring initiated on February 15, 2013, options of certain terminated associates were forfeited and are no longer considered outstanding.
At January 31, 2014, the options outstanding, both exercisable and unexercisable, 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.