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Hastings Must Restate Financial Reports

19 Dec, 2005 By: Holly J. Wagner

Hastings Entertainment will have to restate parts of its financial reports for the last three years. The Securities and Exchange Commission (SEC) said the chain has been improperly recording its expenditures on new rental titles.

“The practical effect is nothing — there is no change in earnings, no change in stockholder equity,” said Hastings CFO Dan Crow. Other players in the rental industry record rental purchases in the same way, he said.

Hastings has been recording its expenditure for new release titles as investment activity, rather than as a cost, in its cash flow. Although the company has reported this in its filings, the SEC issued a comment to the company that it would have to change the practice, recording the expenditures as operating cash outflow.

“The [SEC] staff has taken the position that non-catalog rental videos (i.e., video units we estimate will have a rental life of less than one year) are similar to inventory, and the purchase of such videos should be classified as operating cash outflows consistent with our historical presentation of the sale of such videos through our used video offerings as operating cash inflows in our statement of cash flows,” according to a Hastings disclosure.

Hastings' board of directors approved the restatement of three years' worth of statements of cash flows on the advice of its management and audit committee Dec. 2, according to an SEC filing. The restatement will include a change to counting PVTs as property and equipment to merchandise inventories and will date from 2002 through the second quarter of 2005. So far, the change will shift $25.2 million from cash flows for investing to cash flows for operating activities for the nine months ended Oct. 31, 2004. Also, $1.9 million in PVTs will shift from property and equipment to merchandise inventory for the quarters ended Oct. 31, 2004 and Jan. 31, 2006.

It wasn't clear whether the SEC's comment on Hastings might affect the way other companies report.

Blockbuster treats all rental inventory purchases as investing activities and PVTs are logged as rental inventory, a Blockbuster spokesperson said.

Movie Gallery treats new purchases for existing stores as cash outflow and purchases for new stores as investment operations, a Gallery executive said. Once purchased, the inventory is logged as long-term rental inventory under assets.

In an unrelated development, Hastings VP of product Steve Hicks retired from the company Dec. 7 and was replaced with Michael Rigby, who assumed the position of SVP of merchandising at Hastings. Rigby spent five years as SVP of music at movie distributor Alliance Entertainment Corp.

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