-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NE8Ks1lXnM8J+SZ+j1b/vD9zAk25RQSly32kEGwQdImKJBgJVAiVp00XeOmK58Yd BdrMoyPEOssIv6PufpNVdw== 0000950134-98-002034.txt : 19980317 0000950134-98-002034.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950134-98-002034 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19980313 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HASTINGS ENTERTAINMENT INC CENTRAL INDEX KEY: 0001054579 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 751386475 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-47969 FILM NUMBER: 98565749 BUSINESS ADDRESS: STREET 1: P O BOX 35350 CITY: AMARILLO STATE: TX ZIP: 79120-5350 BUSINESS PHONE: 8063512300 MAIL ADDRESS: STREET 1: P O BOX 35350 CITY: AMARILLO STATE: TX ZIP: 79120-5350 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- HASTINGS ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) TEXAS 5942 75-1386375 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
3601 PLAINS BLVD., SUITE #1 AMARILLO, TEXAS 79102 (806) 351-2300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JOHN H. MARMADUKE PRESIDENT AND CHIEF EXECUTIVE OFFICER HASTINGS ENTERTAINMENT, INC. 3601 PLAINS BLVD., SUITE #1 AMARILLO, TEXAS 79102 (806) 351-2300 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: M. CHARLES JENNINGS, ESQ. JEFFREY A. CHAPMAN, ESQ. LOCKE PURNELL RAIN HARRELL VINSON & ELKINS L.L.P. (A PROFESSIONAL CORPORATION) 3700 TRAMMELL CROW CENTER 2200 ROSS AVENUE, SUITE 2200 2001 ROSS AVENUE DALLAS, TEXAS 75201-6776 DALLAS, TEXAS 75201-2921 (214) 740-8000 (214) 220-7700
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]__________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]__________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]__________ If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box. [X] CALCULATION OF REGISTRATION FEE
======================================================================================================== TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value......................... $58,650,000(1) $17,302 ========================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 13, 1998 PROSPECTUS SHARES HASTINGS ENTERTAINMENT, INC. COMMON STOCK ------------------ Of the shares of Common Stock, $.01 par value per share (the "Common Stock"), offered hereby, shares are being sold by Hastings Entertainment, Inc. (the "Company"), and shares are being sold by a nonmanagement shareholder of the Company (the "Selling Shareholder"). See "Principal Shareholders and Selling Shareholder." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholder. Prior to this offering (the "Offering"), there has not been a public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. Application has been made to have the Common Stock listed on The Nasdaq Stock Market's National Market under the symbol "HAST." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==================================================================================================================== UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER(2) - -------------------------------------------------------------------------------------------------------------------- Per Share $ $ $ $ - -------------------------------------------------------------------------------------------------------------------- Total(3) $ $ $ $ ====================================================================================================================
(1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses estimated at $ , of which $ is payable by the Company and $ is payable by the Selling Shareholder. (3) The Company has granted the Underwriters a 30-day option to purchase up to additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1998, at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. , 1998 3 [STORE SCHEMATIC; INTERIOR/EXTERIOR PHOTOGRAPHS OF STORE; PHOTOGRAPHS OF PRODUCT/ARTISTS; AND/OR MAP OF STORE LOCATIONS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVERALLOTMENTS, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and the notes thereto appearing elsewhere in this Prospectus. The information contained in this Prospectus reflects a five-for-one split of the Company's outstanding Common Stock to be effected immediately prior to the Offering. Unless otherwise indicated, information in this Prospectus assumes no exercise of the Underwriters' option to purchase additional Common Stock to cover over-allotments, if any. The terms "Company" and "Hastings" refer to Hastings Entertainment, Inc. and its predecessors, unless the context otherwise requires. The Company's fiscal year ends on January 31 and is identified as the fiscal year for the immediately preceding calendar year. For example, the fiscal year ended January 31, 1997 is referred to as "fiscal 1996." This Prospectus contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Hastings is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals and videotapes with the rental of videotapes and video games in a superstore format. Founded in 1968, Hastings currently operates 117 superstores averaging 20,700 square feet in small to medium-sized markets located throughout the Midwestern and Western United States. Based on its 30-year operating history, the Company believes that these small to medium-sized markets with populations ranging from 25,000 to 150,000 present an opportunity to profitably operate and expand Hastings' unique entertainment superstore format. These markets are usually underserved by existing book, music, software or video stores with competition generally limited to locally owned specialty stores or single-concept entertainment retailers. In addition, Hastings proprietary purchasing and inventory management systems enable its superstores to typically offer the broadest range of entertainment products in these markets at prices that are competitive with or lower than the lowest prices charged by its competitors. The Company believes it has significant advantages over its competitors, including its unique multimedia retailing concept, extensive product selections, low-pricing strategy, targeted merchandising, efficient operations, superior customer service and substantial operating experience in small to medium-sized markets. A key element of the Company's business strategy is to continue its growth and increase its profitability through the continued expansion of its superstore operations. During the past five years, Hastings' revenues have increased at a 14% compound annual growth rate, growing from $187 million in fiscal 1992 to $358 million in fiscal 1997 as a result of new store openings and comparable store revenue increases. Over this period, the Company increased its superstore selling square footage by 143% from approximately 856,000 square feet in fiscal 1992 to approximately 2,081,000 square feet at the end of fiscal 1997, while comparable store revenue increases for fiscal 1995, 1996 and 1997 were 4%, 6% and 7%, respectively. Hastings intends to continue this growth in the future by opening approximately 60 superstores in the next three years and continuing its ongoing store expansion and remodeling programs. The Company also intends to augment its current award-winning Web site with Internet commerce capabilities during the second quarter of fiscal 1998. Hastings has assembled a strong management team with substantial experience in the retail industry led by John H. Marmaduke, who has served as the Company's President and Chief Executive Officer for the past 22 years. The Company believes that its success throughout its 30-year history has been due in large part to its ability to recognize and respond to prevailing trends in retailing. For example, in response to the growing popularity of the superstore format and its superior profitability, Hastings redirected its resources in the early 1990's to the expansion of its superstores while profitably divesting its mall-based stores in fiscal 1993 and fiscal 1994. Further, to address a slowdown in its rental video business in early 1997, the Company introduced a new rental video merchandising strategy that led to comparable store revenue increases for rental video of over 10% in the fourth quarter of fiscal 1997 compared to the same quarter in fiscal 1996. 3 5 OPERATING STRATEGY The Company's goal is to enhance its position as a leading multimedia entertainment retailer by expanding existing stores, opening new stores in selected markets, and offering its products through the Internet. Each element of the Company's business strategy is designed to build consumer awareness of the Hastings concept and achieve high levels of customer loyalty and repeat business. The key elements of this strategy are the following: Superior Multimedia Concept. The Company's superstores present a wide variety of products tailored to local preferences in a dynamic and comfortable store atmosphere with exceptional customer service. Hastings superstores average approximately 20,700 square feet, with the Company's new stores ranging in size from 18,000 square feet to 35,000 square feet. The Company's superstores offer customers an extensive product assortment of approximately 40,000 book, 28,000 music, 1,000 software, 2,000 periodical and 6,000 videotape titles and 1,300 complementary and accessory items for sale and 15,000 videotape and video game selections for rent. Although the superstores' core product assortment tends to be similar, the merchandise mix of each Hastings superstore is tailored to accommodate the particular demographic profile of the local market in which the superstore operates through the utilization of the Company's proprietary purchasing and inventory management systems. In addition, the Company offers virtually all book, music, software, videotape and video game selections that are available to retailers, consisting of an aggregate of over 2.5 million titles, at its superstores through a special store order program. The Company believes that its multimedia format reduces Hastings' reliance on and exposure to any particular entertainment segment or trend and enables the Company to promptly add exciting new entertainment categories to its product line. Small to Medium-Sized Market Superstore Focus. The Company targets small to medium-sized markets with populations of 25,000 to 150,000 in which the Company's extensive product selection, low pricing strategy, efficient operations and superior customer service enable it to become the market's entertainment destination store. The Company believes that the small to medium-sized markets where it operates the majority of its superstores present an opportunity to profitably operate and expand Hastings' unique entertainment superstore format. These markets typically are underserved by existing book, music or video stores, and competition generally is limited to locally owned specialty stores or single-concept entertainment retailers. The Company bases its merchandising strategy for its superstores on in-depth research of its customers and understanding of its individual markets. Hastings strives to optimize each superstore's merchandise selection by using its proprietary information systems to analyze the sales history, anticipated demand and demographics of each superstore's market. In addition, the Company utilizes flexible layouts that enable each superstore to arrange its products according to local interests and to customize the layout in response to new customer preferences and product lines, such as the Company's growing software department. Customer-Oriented Superstore Format. The Company designs its superstores to provide an easy-to-shop, open store atmosphere by offering major product categories in a "store-within-a-store" format. Most Hastings superstores utilize product-category boutiques positioned around a wide racetrack aisle that is designed to allow customers to view the entire superstore. This store configuration produces significant cross-marketing opportunities among the various entertainment departments, which the Company believes results in higher transaction volumes and impulse purchases. To encourage browsing and the perception of Hastings as a community gathering place, the Company has incorporated amenities in many superstores, such as chairs for reading, complimentary gourmet coffees, music auditioning stations, interactive information kiosks, telephones for free local calls, children's play areas and in-store promotional events. Cost-Effective Operations. The Company is committed to controlling costs in every aspect of its operations while maintaining its customer-oriented philosophy. From 1993 to 1996, Hastings invested $8.5 million to develop and implement proprietary information, purchasing, distribution and inventory control systems that position the Company to continue to grow profitably. These systems enhance profitability by enabling the Company to respond actively to customers' changing desires and to rapid shifts in local and national market conditions. The Company's state-of-the-art 100,000 square-foot distribution center, which adjoins the Company's corporate offices in Amarillo, Texas, provides Hastings with improved store in-stocks, efficient product cross-docking and centralized returns processing. 4 6 Low Pricing. Hastings' pricing strategy at its superstores is to offer value to its customers by maintaining prices that are competitive with or lower than the lowest prices charged by other retailers in the market. The Company determines its prices on a market-by-market basis, depending on the level of competition and other market-specific considerations. The Company believes that its low pricing structure results in part from (i) its ability to purchase directly from publishers, studios and manufacturers as opposed to purchasing from distributors, (ii) its proprietary information systems that enable management to make more precise and targeted purchases for each superstore, and (iii) its consistent focus on maintaining low occupancy and operating costs. EXPANSION STRATEGY Expanded Selling Square Footage. With the relatively recent completion of its corporate infrastructure, the Company is positioned to accelerate its growth strategy. The Company has identified over 500 underserved, small to medium-sized markets that meet its new-market criteria. It plans to open approximately 60 superstores over the next three years in certain of those markets for a total of approximately 170 superstores (net of closings) by the end of fiscal 2000. In addition to opening new superstores, the Company plans to continue expanding and remodeling its existing stores. Between new store openings and store expansions, the Company anticipates increasing its current selling square footage of approximately 2,081,000 by more than 50% by the end of fiscal 2000. The Company believes that with its current information systems and distribution capabilities, Hastings' infrastructure can support the Company's anticipated rate of growth for at least the next five years. Electronic Commerce. With the anticipated initiation of the sale of products on its Web site in the second quarter of fiscal 1998, the Company believes that it will be the first fully integrated, multimedia entertainment retailer offering books, music, software, videotapes and video games through the Internet on a single Web site. Hastings believes that it has significant advantages that position it to succeed in electronic commerce on the Internet, including its strong name recognition in its markets, its unique range and assortment of multimedia products, its advanced information systems and fulfillment capabilities, and its well-established entertainment retailing experience and ability to respond rapidly to customers' evolving entertainment desires. The Company's principal executive offices are located at 3601 Plains Boulevard, Suite #1, Amarillo, Texas 79102, and its telephone number at such location is (806) 351-2300. THE OFFERING Common Stock offered by the Company......................... shares Common Stock offered by the Selling Shareholder............. shares Common Stock outstanding after the Offering(1).............. shares Use of Proceeds............................................. To fund the opening of new superstores and the expansion of existing superstores; to reduce outstanding indebtedness under the Company's unsecured $45.0 million revolving credit facility; and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... HAST
- --------------- (1) Does not include 2,357,720 shares reserved for issuance under the Company's various stock plans. As of January 31, 1998, options for 1,819,160 shares have been granted under these stock plans with a weighted average exercise price per share of $11.88. See "Management -- Stock Plans." 5 7 SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The summary financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1994, 1995 and 1996 and the balance sheet data at January 31, 1996 and 1997 are derived from the audited financial statements included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1992 and 1993 and the balance sheet data at January 31, 1993, 1994 and 1995 are derived from audited financial statements not included herein. The income statement data set forth below for the nine months ended October 31, 1996 and 1997 and the balance sheet data at October 31, 1996 and 1997 are derived from unaudited financial statements included herein. In the opinion of management, such unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting of normal accruals, necessary for a fair presentation of the financial position of the Company and the results of operations for the indicated periods. Operating results for the nine months ended October 31, 1997 are not necessarily indicative of the results that may be expected for fiscal 1997.
NINE MONTHS FISCAL YEAR ENDED OCTOBER 31, ----------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- INCOME STATEMENT DATA(1): Merchandise revenue........................... $150,404 $171,049 $197,311 $232,463 $251,934 $170,940 $187,969 Video rental revenue.......................... 36,790 46,674 57,603 66,449 72,357 53,090 52,641 -------- -------- -------- -------- -------- -------- -------- Total revenues................................ 187,194 217,723 254,914 298,912 324,291 224,030 240,610 Gross profit.................................. 68,237 80,520 95,681 109,753 119,679 87,579 92,680 Selling, general and administrative expenses.................................... 56,083 65,769 80,480 89,325 105,183 80,260 83,877 Development expenses.......................... -- 514 2,811 2,791 2,421 1,866 -- -------- -------- -------- -------- -------- -------- -------- Operating income.............................. 12,154 14,237 12,390 17,637 12,075 5,453 8,803 Interest expense, net......................... (169) (310) (718) (2,588) (3,585) (2,677) (3,093) Gain (loss) on sale of mall stores, net(1).... -- 3,836 4,080 -- (2,500) (2,500) -- Other, net.................................... 603 2,051(2) 148 221 126 -- -- -------- -------- -------- -------- -------- -------- -------- Income before income taxes.................... 12,588 19,814 15,900 15,270 6,116 276 5,710 Income taxes.................................. 4,744 7,205 6,090 5,875 2,320 126 2,282 -------- -------- -------- -------- -------- -------- -------- Net income.................................... $ 7,844 $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 150 $ 3,428 ======== ======== ======== ======== ======== ======== ======== Net income per common share................... ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding.... PERCENTAGE OF REVENUES AND OTHER DATA: Gross profit.................................. 36.5% 37.0% 37.5% 36.7% 36.9% 39.1% 38.5% Operating income.............................. 6.5% 6.5% 4.9% 5.9% 3.7% 2.4% 3.7% Depreciation and amortization(3).............. $ 12,797 $ 19,110 $ 21,560 $ 31,175 $ 32,967 $ 24,567 $ 25,168 Capital expenditures.......................... $ 21,243 $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 32,037 $ 43,427 STORE DATA(1): Number of Stores: Open at beginning of period................. 83 82 91 102 108 108 111 Opened during period........................ 8 13 13 9 4 3 6 Closed during period........................ (9) (4) (2) (3) (1) (1) 0 Open at end of period....................... 82 91 102 108 111 110 117 Comparable store revenues increase(4)......... -- 17% 10% 4% 6% 7% 5%
OCTOBER 31, 1997 ------------------------- ACTUAL AS ADJUSTED(5) -------- -------------- BALANCE SHEET DATA: Working capital............................................. $ 62,437 $ Total assets................................................ 214,854 Total debt.................................................. 68,646 Total shareholders' equity.................................. 66,581
6 8 - --------------- (1) The Company sold 26 of its mall stores in fiscal 1993 and its remaining 16 mall stores in fiscal 1994. The operating results of these mall stores are included in the financial results of the Company until their sale. Store Data does not include these mall stores. In fiscal 1996, the Company established a reserve of $2.5 million ($1.6 million after-tax charge) to cover potential losses related to the leases covering the mall stores that were sold to Camelot Music, which filed for bankruptcy protection in August 1996. See "Business -- Litigation." (2) Includes $1,235,000 in life insurance proceeds received in fiscal 1993 from an insurance policy covering the life of Sam Marmaduke, founder of the Company. (3) Includes total costs associated with the Company's videotape rental expense allocation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General -- Videotape Rental Expense Allocation." (4) Stores open a minimum of 60 weeks. (5) Adjusted to reflect the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and application of the estimated net proceeds therefrom as set forth in "Use of Proceeds." 7 9 RISK FACTORS An investment in the Common Stock involves a high degree of risk. Prospective purchasers of the Common Stock offered hereby should consider carefully the risk factors set forth below, in addition to the other information contained in this Prospectus. This Prospectus contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Prospectus. Expansion Strategy. The Company intends to accelerate its growth in existing and new markets by increasing store revenues, opening new superstores, and expanding and remodeling existing superstores. The Company plans to open approximately 60 superstores during the next three years and will integrate its superstore retail concept with the sale of its products through the Internet beginning in the second quarter of fiscal 1998. See "Business -- Expansion Strategy." The Company has identified over 500 underserved, small to medium-sized markets that meet its new market criteria and plans to open approximately 60 superstores over the next three years in certain of those markets for a total of approximately 170 superstores (net of closings) by the end of fiscal 2000. In addition to opening new superstores, the Company plans to continue expanding and remodeling its existing stores. The Company's planned openings and expansions during the next three years represent an acceleration of its current growth rate. In the past, the Company has opened certain new superstores that either did not become profitable or became profitable only after a longer period of time than the Company had originally estimated. There can be no assurance that the Company will be successful in completing its planned superstore openings and expansions, that newly opened or expanded superstores will achieve revenue or profitability levels comparable to the Company's existing superstores or that they will achieve such revenue or profitability levels within the time periods estimated by the Company. The Company's planned expansion depends upon a number of factors, including, among others, the Company's ability to obtain adequate financing, locate suitable superstore sites, negotiate acceptable lease terms, open and expand superstores on a timely basis, hire, train, integrate and retain employees, and enhance, expand and adapt its information and other operational systems. There can be no assurance that the Company will be able to achieve its growth plans or effectively manage such growth. The Company's failure to achieve its expansion plans or to manage such plans effectively could have a material adverse effect on the Company. Seasonality and Fluctuations in Operating Results. As is the case with many retailers, a significant portion of the Company's revenues, and an even greater portion of its operating profit, are generated in the fourth fiscal quarter, which includes the Christmas selling season. As a result, a substantial portion of the Company's annual earnings has been, and will continue to be, dependent on the results of this quarter. An economic downturn during the fourth quarter could adversely affect the Company to a greater extent than if such downturn occurred at another time of the year. Major world or sporting events, such as the Super Bowl, the Olympics or the World Series, also have a temporary adverse effect on revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality and Inflation." Future operating results may be affected by many factors, including variations in the number and timing of store openings, the amount and timing of net sales contributed by new stores, the level of pre-opening expenses associated with new stores, the number of popular new book, music, software, periodical and videotape titles, the cost of the new arrival titles, changes in comparable store revenues, competition, marketing programs, weather, special or unusual events and other factors that may affect retailers in general and the Company in particular. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Expansion into Electronic Commerce. Beginning in the second quarter of fiscal 1998, the Company anticipates that it will integrate its superstore retail concept with the sale of its products through the Internet. The retail market over the Internet is rapidly evolving and depends upon market acceptance of novel methods for distributing products, which involves a high degree of uncertainty. Although the Company believes that it has developed the electronic and operational infrastructure necessary to offer its products through the Internet in a manner that will be technologically sound and customer oriented, there can be no assurance that the Company's expansion into electronic commerce will be profitable. The success of this expansion strategy depends upon the adoption of the Internet by consumers as a widely used medium for commerce in general, as well as the availability and functionability of the Hastings Web site in particular. Any failure of the Internet 8 10 infrastructure to support increased demands placed on it by continued growth or system interruptions that result in the unavailability of the Company's Web site or reduced performance in the fulfillment of orders could reduce the volume of goods sold and the attractiveness of the Company's electronic commerce service to customers. Increases in the number and frequency of orders placed on the Hastings Web site may require the Company to expand its operating infrastructure, including information systems. There can be no assurance that Hastings will be able to expand its technology at a rate that will accommodate the need for such increases. The success of Internet retailing is dependent upon other factors beyond the control of the Company, including electronic commerce security risks and the impact of technological advances. If the Internet does not become a viable commercial marketplace or if critical issues concerning the commercial use of the Internet are not favorably resolved, the Company could be materially adversely affected. Consumer Spending. The Company's success depends in part on its ability to anticipate and respond to changing merchandise trends and consumer demand in a timely manner. Accordingly, any failure by the Company to identify and respond to emerging trends could adversely affect consumer acceptance of the merchandise in the Company's stores, which in turn could have a material adverse effect on the Company. The sale of books, music, software and periodicals and the sale and rental of videotapes historically have been dependent upon discretionary consumer spending, which may be affected by general economic conditions, consumer confidence and other factors beyond the control of the Company. In addition, spending on these items is affected significantly by the timing, pricing and success of new releases, which are not within the Company's control. A lack of popular new book, music, software, periodical, videotape or video game selections could have a material adverse effect on the Company. Also, a decline in consumer spending on books, music or videotapes or other entertainment-related products could have a material adverse effect on the Company. Supplier Relationships. The Company purchases much of its merchandise directly from manufacturers rather than purchasing from distributors. The inability of the Company to purchase products directly from a manufacturer would require the Company to purchase those products from a distributor, in all likelihood at higher prices. There can be no assurance that the Company will be able to continue to acquire merchandise directly from manufacturers at competitive prices or on competitive terms in the future. The Company's top three suppliers accounted for approximately 26% of the Company's inventory purchased during fiscal 1997. There can be no assurance that in the event of the inability of the Company to purchase merchandise from one of these suppliers the Company would be able to purchase the same or similar products from another supplier at competitive prices or on competitive terms. The inability to locate an alternate supplier with competitive prices could have a material adverse effect on the Company. In addition, the Company's inability to return merchandise to suppliers could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition and Technological Obsolescence. The entertainment retail industry is highly competitive. The Company competes with a wide variety of book, music, software and videotape retailers, including online retailers, independent single store operators, local multi-store operators, regional and national chains, as well as supermarkets, pharmacies, convenience stores, bookstores, mass merchants, mail order operations, warehouse clubs, record clubs, other retailers and various noncommercial sources such as libraries. Many of the Company's competitors have been expanding in both store size and number of outlets, while others have announced their intentions to expand. Increased competition may reduce the Company's revenues, raise store rents and operating expenses and decrease profit margins and profits. Some of the Company's competitors have significantly greater financial and marketing resources, market share and name recognition than the Company. There can be no assurance that the Company will be able to continue to compete successfully with its existing competitors or with new competitors. Although the Company historically has operated in small to medium-sized markets with less competition than would be found in larger cities, there can be no assurance that competition in these markets will not intensify significantly. The Company also competes with cable, satellite and pay-per-view cable television systems. Digital compression technology, combined with fiber optics and other developing technologies, is expected eventually to permit cable companies, direct broadcast satellite companies, telephone companies and other businesses to transmit a greater number of movies to homes at more frequently scheduled intervals throughout the day or on 9 11 demand and potentially at a lower cost than presently offered. Technological advances or changes in the marketing of movies could make these technologies more attractive and economical to consumers, which could have a material adverse effect on the Company. In addition, continuing technological advances may enhance the ability of consumers to shop at home or access, produce and print written works or record music digitally. Such advances could have a material adverse effect on the Company. Some of the Company's traditional competitors have recently started to compete through the Internet, and the Company anticipates that certain of the Company's other traditional competitors will compete soon through the Internet as well. In addition, several of the Company's competitors on the Internet have been operating retail Web sites longer than the Company and may have a greater level of technological expertise, financial and marketing resources and name recognition. There can be no assurance that the Company will be able to compete successfully, technologically or otherwise, with other Internet retailers or with its existing competitors on a cost-effective and timely basis in electronic commerce. See "Business -- Competition." Dependence on Key Personnel. The Company's success is substantially dependent upon the efforts of its senior management and other key personnel, including in particular John H. Marmaduke, who has served as the President and Chief Executive Officer of the Company since 1976. The loss of Mr. Marmaduke's services or the services of one or more of the other members of senior management could have a material adverse effect on the Company. The Company currently does not have an employment agreement with any member of management. With the exception of a $10 million policy on the life of Mr. Marmaduke, the Company currently does not maintain key-man insurance on any of its executive officers. The success of the Company depends, in part, on its ability to retain its key management and attract other personnel to satisfy the Company's current and future needs. The inability to retain key personnel or to attract additional personnel could have a material adverse effect on the Company. See "Management." Control of the Company; Effect of Certain Provisions in Articles of Incorporation and Bylaws. Upon completion of the sale of the shares offered hereby, approximately % of the outstanding Common Stock of the Company will be beneficially owned by John H. Marmaduke, the Estate of Sam Marmaduke, the John H. Marmaduke Family Limited Partnership, the Stephen S. Marmaduke Family Limited Partnership and other members of the Marmaduke family. The holders of a majority of the Company's Common Stock can elect all of the directors of the Company, approve other general matters that are to be acted upon by the shareholders and effectively veto any extraordinary corporate action contemplated by the Company. See "Principal Shareholders and Selling Shareholder" and "Description of Capital Stock." Certain provisions of the Third Restated Articles of Incorporation (the "Articles of Incorporation") and the Amended and Restated Bylaws (the "Bylaws") of the Company may be deemed to have an anti-takeover effect and may delay, discourage or prevent a tender offer or takeover attempt, including attempts that might result in a premium being paid over the market price for the shares held by shareholders. The Articles of Incorporation of the Company provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. The Company's Articles of Incorporation or Bylaws also include advance notice requirements for shareholder proposals and nominations, prohibit the taking of shareholder action by written consent without a meeting and provide that special meetings of shareholders of the Company be called only by the Chairman of the Board of Directors, a majority of the Board of Directors, the Company's President or holders of not less than 25% of the Company's outstanding stock entitled to vote at the proposed meeting. In addition, the Bylaws may be amended or repealed only by the Board. These provisions may not be amended in the Company's Articles of Incorporation or Bylaws without the affirmative vote of the holders of a majority of the outstanding shares of Common Stock. See "Description of Capital Stock -- Certain Provisions of the Articles of Incorporation and Bylaws." The Board of Directors of the Company is authorized (without any further action by the shareholders) to issue Preferred Stock in one or more series and to fix the voting rights and designations, preferences, limitations and relative rights and qualifications, limitations or restrictions and certain other rights and preferences, of the Preferred Stock. Under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board of 10 12 Directors of the Company, without shareholder approval, may issue Preferred Stock with voting, dividend and conversion rights that could adversely affect the holders of Common Stock. As of the date of this Prospectus, no shares of Preferred Stock are outstanding and the Company has no present intention to issue any shares of Preferred Stock. See "Description of Capital Stock." No Prior Public Trading Market and Volatility of Stock Price. Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or, if one does develop, that it will be maintained. The initial public offering price, which will be established by negotiations among the Company, the Selling Shareholder and the Underwriters, may not be indicative of prices that will prevail in the trading market. See "Underwriting." The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In addition, factors such as fluctuations in the Company's operating results, a downturn in the retail industry, failure to meet stock market analysts' earnings estimates, changes in analysts' recommendations regarding the Company, other retail companies or the retail industry in general, and general market and economic conditions may have a material adverse effect on the market price of the Common Stock. Immediate and Substantial Dilution. Purchasers of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price as compared to the increase in the net tangible book value per share that will accrue to existing shareholders. At an initial public offering price of $ per share, such dilution would have been equal to $ per share at October 31, 1997. In addition, the future exercise of stock options and warrants would result in further dilution. See "Dilution." Shares Eligible for Future Sale. Sales of substantial amounts of shares in the public market following the Offering could adversely affect the market price of the Common Stock. Immediately following the Offering, the Company will have shares of Common Stock outstanding. Of these shares, shares will be "restricted securities" as defined by Rule 144 ("Rule 144") adopted under the Securities Act. These shares may be sold in the future in compliance with the volume limitations and other restrictions of Rule 144. The Company is unable to predict the effect that future sales made under Rule 144 or otherwise will have on the market price of the Common Stock prevailing at that time. See "Shares Eligible for Future Sale" and "Underwriting." The Company, its officers and directors, and certain other shareholders including the Selling Shareholder, who collectively hold shares, or % of the outstanding shares of Common Stock prior to this Offering, have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose (or publicly disclose the intention to make any such disposition or transfer) of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Smith Barney Inc. See "Underwriting." Dividend Policy. Subsequent to the Offering, the Company intends to retain its earnings to support operations and finance its growth and does not intend to pay cash dividends on the Common Stock for the foreseeable future. The payment of cash dividends in the future will be at the discretion of the Board of Directors and subject to certain limitations under the Texas Business Corporation Act and will depend upon factors such as earnings levels, capital requirements, the Company's financial condition and other factors deemed relevant by the Board of Directors. The Company's unsecured revolving credit facility and the Note Purchase Agreement (the "Note Agreement") relating to the Company's unsecured Series A Senior Notes due 2003 (the "Notes") restrict the payment of dividends. See "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 11 13 USE OF PROCEEDS Assuming an initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this Prospectus), the net proceeds from the sale of the shares of Common Stock offered by the Company are estimated to be $ million ($ million assuming exercise in full of the over-allotment option) after deducting estimated offering expenses and underwriting discounts and commissions payable by the Company. The Company will not receive any proceeds from the sale of the shares of Common Stock offered by the Selling Shareholder. See "Underwriting" and "Principal Shareholders and Selling Shareholder." The Company plans to use the net proceeds to fund its growth in new superstores and superstore expansions and remodeling and for working capital and general corporate purposes. At the closing of the Offering, the Company intends to repay the outstanding balance under its unsecured $45.0 million revolving credit facility with a group of banks (the "Revolving Credit Facility"), which the Company anticipates will be approximately $35.0 million at the closing. Pending such uses, the Company intends to invest the remaining net proceeds in short-term, interest-bearing investment-grade securities. The Company's $45.0 million Revolving Credit Facility will continue to be available after completion of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for information regarding indebtedness under the Revolving Credit Facility. DIVIDEND POLICY The Company intends to retain its earnings in the future to support operations and finance its growth and does not intend to pay cash dividends on the Common Stock for the foreseeable future. The payment of cash dividends in the future will be at the discretion of the Board of Directors and subject to certain limitations under the Texas Business Corporation Act and will depend upon factors such as earnings levels, capital requirements, the Company's financial condition and other factors deemed relevant by the Board of Directors. The Revolving Credit Facility and the Note Agreement relating to the Company's Notes restrict the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance that the Company will pay any dividends in the future. During the 1995, 1996 and 1997 fiscal years, the Company paid nominal cash dividends of $.014, $.017 and $.018 per share, respectively. 12 14 DILUTION As of October 31, 1997, the Company's net tangible book value was $66.6 million or $7.96 per share. "Net tangible book value" represents the amount of the Company's total tangible assets less total liabilities. After giving effect to (i) the sale by the Company of the shares of Common Stock offered by the Company hereby (at an assumed initial offering price of $ per share and after deducting estimated underwriting discounts and commissions and expenses of the Offering) and (ii) the application of the net proceeds as set forth under "Use of Proceeds," the net tangible book value of the Company as of October 31, 1997 would have been approximately $ or $ per share, which represents an immediate increase of $ per share to existing shareholders and an immediate dilution of $ per share to persons purchasing shares in the public offering. The following table illustrates this dilution per share: Assumed initial public offering price....................... $ Net tangible book value per share at October 31, 1997..... $ ------ Increase attributable to new investors.................... ------ Net tangible book value per share after offering............ ------ Dilution to new investors................................... $ ======
The following table sets forth as of October 31, 1997 the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing shareholders and the new investors purchasing shares in the Offering at an assumed initial public offering price of $ per share (before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ------- -------- --------- (IN THOUSANDS) (IN THOUSANDS) Existing Shareholders.............. 8,366,285 % $1,704 % $0.20 ----- ----- New Investors...................... --------- ----- ------ ----- ----- Total.................... --------- ----- ------ ----- -----
The foregoing assumes no exercise of stock options outstanding at October 31, 1997. At October 31, 1997, there were outstanding stock options to purchase an aggregate of 1,828,840 shares of Common Stock at a weighted average exercise price of $11.94 per share. To the extent these stock options are exercised, there will be further dilution to purchasers in the Offering. See "Management -- Stock Option Plans." See "Principal Shareholders and Selling Shareholder" for information regarding certain existing shareholders. 13 15 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of October 31, 1997 and (ii) as adjusted to give effect to the issuance and sale by the Company of the shares of Common Stock being offered by the Company at an assumed initial public offering price of $ per share and the application of the net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Prospectus.
OCTOBER 31, 1997 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Current maturities of long-term debt and capitalized lease obligations............................................... $ 302 $ 302 -------- ------- Long-term debt and capitalized lease obligations: Revolving Credit Facility(1).............................. 40,900 Series A Senior Notes(2).................................. 25,000 25,000 Other, excluding current maturities....................... 2,444 2,444 Redemption value of common stock held by estate of Company's founder(3)................................................ 8,000 -- Shareholders' Equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized; none issued................................ -- -- Common Stock, $.01 par value, 75,000,000 shares authorized; 8,552,000 shares issued, shares issued as adjusted(4)......................................... 86 Additional paid-in capital................................ 1,656 Retained earnings......................................... 75,040 75,040 Less treasury stock, 185,715 shares, stated at cost....... (2,201) (2,201) Redemption value of common stock held by estate of Company's founder...................................... (8,000) -- -------- ------- Total shareholders' equity............................. 66,581 -------- ------- Total capitalization.............................. $143,227 $ ======== =======
- --------------- (1) The Company estimates that after the application of the net proceeds of the Offering it will have $45.0 million available under the Revolving Credit Facility. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a description of the Company's Revolving Credit Facility. (2) See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (3) Represents estimated maximum potential redemption obligation of the Company under the Stock Redemption Agreement dated May 3, 1994, between John H. Marmaduke, Independent Executor of the Estate of Sam Marmaduke, Deceased, and the Company. The redemption obligation is limited by Section 303 of the Internal Revenue Code of 1986, as amended, and could be reduced based on the resolution of certain pending matters between the Internal Revenue Service and the estate of the Company's founder. If this Offering is consummated, the Redemption Agreement will terminate. (4) Excludes 2,357,720 shares reserved for issuance under the Company's various stock plans. As of October 31, 1997, options for an aggregate 1,828,840 shares have been granted and are outstanding under these stock plans. See "Management -- Stock Plans." 14 16 SELECTED FINANCIAL AND OPERATING DATA The selected financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1994, 1995 and 1996 and the balance sheet data at January 31, 1996 and 1997 are derived from the audited financial statements included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1992 and 1993 and the balance sheet data at January 31, 1993, 1994 and 1995 are derived from audited financial statements not included herein. The income statement data set forth below for the nine months ended October 31, 1996 and 1997 and the balance sheet data at October 31, 1996 and 1997 are derived from unaudited financial statements included herein. In the opinion of management, such unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position of the Company and the results of operations for the indicated periods. Operating results for the nine months ended October 31, 1997 are not necessarily indicative of the results that may be expected for fiscal 1997.
NINE MONTHS ENDED FISCAL YEAR OCTOBER 31, --------------------------------------------------------- --------------------- 1992 1993 1994 1995 1996 1996 1997 -------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) INCOME STATEMENT DATA(1): Merchandise revenue.................... $150,404 $ 171,049 $ 197,311 $ 232,463 $ 251,934 $ 170,940 $ 187,969 Video rental revenue................... 36,790 46,674 57,603 66,449 72,357 53,090 52,641 -------- --------- --------- --------- --------- --------- --------- Total revenues......................... 187,194 217,723 254,914 298,912 324,291 224,030 240,610 Merchandise cost of revenue............ 106,594 119,090 141,910 165,320 182,314 117,604 129,137 Rental video cost of revenue........... 12,363 18,113 17,323 23,839 22,298 18,847 18,793 -------- --------- --------- --------- --------- --------- --------- Total cost of revenues................. 118,957 137,203 159,233 189,159 204,612 136,451 147,930 Gross profit........................... 68,237 80,520 95,681 109,753 119,679 87,579 92,680 Selling, general and administrative expenses............................. 56,083 65,769 80,480 89,325 105,183 80,260 83,877 Development expenses................... -- 514 2,811 2,791 2,421 1,866 -- -------- --------- --------- --------- --------- --------- --------- Operating income....................... 12,154 14,237 12,390 17,637 12,075 5,453 8,803 Interest expense, net.................. (169) (310) (718) (2,588) (3,585) (2,677) (3,093) Gain (loss) on sale of mall stores, net(1)............................... -- 3,836 4,080 -- (2,500) (2,500) -- Other, net............................. 603 2,051(2) 148 221 126 -- -- -------- --------- --------- --------- --------- --------- --------- Income before income taxes............. 12,588 19,814 15,900 15,270 6,116 276 5,710 Income taxes........................... 4,744 7,205 6,090 5,875 2,320 126 2,282 -------- --------- --------- --------- --------- --------- --------- Net income............................. $ 7,844 $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 150 $ 3,428 ======== ========= ========= ========= ========= ========= ========= Net income per common share............ ======== ========= ========= ========= ========= ========= ========= Weighted average common shares outstanding.......................... PERCENTAGE OF REVENUES AND OTHER DATA: Gross profit........................... 36.5% 37.0% 37.5% 36.7% 36.9% 39.1% 38.5% Operating income....................... 6.5% 6.5% 4.9% 5.9% 3.7% 2.4% 3.7% Depreciation and Amortization(3)....... $ 12,797 $ 19,110 $ 21,560 $ 31,175 $ 32,967 $ 24,567 $ 25,168 Capital Expenditures................... $ 21,243 $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 32,037 $ 43,427 STORE DATA(1): Number of stores: Open at beginning of period.......... 83 82 91 102 108 108 111 Opened during period................. 8 13 13 9 4 3 6 Closed during period................. (9) (4) (2) (3) (1) (1) -- Open at end of period................ 82 91 102 108 111 110 117 Total selling square footage at end of period............................... 855,964 1,118,049 1,452,945 1,719,867 1,831,657 1,801,129 2,007,205 Comparable store revenues increase(4).......................... -- 17% 10% 4% 6% 7% 5%
15 17
OCTOBER 31, 1997 ------------------------- ACTUAL AS ADJUSTED(5) -------- -------------- BALANCE SHEET DATA: Working capital............................................. $ 62,437 $ Total assets................................................ 214,854 Total debt.................................................. 68,646 Total shareholders' equity.................................. 66,581
- --------------- (1) The Company sold 26 of its mall stores in fiscal 1993 and its remaining 16 mall stores in fiscal 1994. The operating results of these mall stores are included in the financial results of the Company until their sale. Store Data does not include these mall stores. In fiscal 1996, the Company established a reserve of $2.5 million ($1.6 million after-tax charge) to cover potential losses related to the leases covering the mall stores that were sold to Camelot Music, which filed for bankruptcy protection in August 1996. See "Business -- Litigation." (2) Includes $1,235,000 in life insurance proceeds received in fiscal 1993 from an insurance policy covering the life of Sam Marmaduke, founder of the Company. (3) Includes total costs associated with the Company's videotape rental expense allocation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General -- Videotape Rental Expense Allocation." (4) Stores open a minimum of 60 weeks. (5) Adjusted to reflect the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and application of the estimated net proceeds therefrom as set forth in "Use of Proceeds." 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following discussion and analysis should be read in conjunction with the Company's Financial Statements and Notes thereto appearing elsewhere in this Prospectus. GENERAL History. The Company was founded in 1968 as a retailing division of Western Merchandisers, Inc. ("Western"), a book and music wholesaler. Historically, the Company received corporate and support services from Western, including purchasing, distribution, information systems, accounting, payroll and advertising. In fiscal 1991, Western was acquired by Wal-Mart, and as a result of the acquisition, the Company became an independent entity owned by the former shareholders of Western. The Company continued to rely on Western for numerous corporate and support services, which were provided pursuant to a service agreement. In fiscal 1993, the Company determined that it was in its best interest to operate independently of the service agreement. As a result, the Company began to develop and expand a variety of corporate functions, including a proprietary, fully integrated information system designed to enhance its purchasing, inventory, personnel scheduling, distribution, planning and accounting functions. In fiscal 1994, Western was sold to Anderson News Corporation but continued to provide the Company with corporate and support services under its new name, Anderson Merchandisers, Inc. ("Anderson"). In fiscal 1995, the Company began implementing its information system and opened a new corporate headquarters and a 100,000 square foot distribution center. The Company reduced its use of Anderson's support services during fiscal 1995, and utilized no further services from Anderson after the service agreement expired effective January 31, 1996. As a result of developing and implementing its proprietary information system and corporate infrastructure, the Company expensed an aggregate of $8.5 million of development costs in fiscal years 1993, 1994, 1995 and 1996. The Company is committed to continually enhancing and improving its information systems and other corporate functions. See "Business -- History." Superstores. In its early years, the Company focused on small markets and offered primarily books and music. In the 1980's, the Company's internal growth was supplemented by the acquisition of existing stores, most of which were located in malls. During the mid-1980's, the Company added videotape sales and rentals and complementary product categories to its selection of books and music and developed a larger superstore format to satisfy favorable consumer response to its multimedia retailing concept and provide a more extensive product selection. As a result, beginning in the late 1980's the Company began focusing on opening superstores and on expanding, relocating, selling or closing its smaller mall-based stores. The Company accelerated its shift to a superstore strategy by selling 26 mall stores in fiscal 1993 and its remaining 16 mall stores in fiscal 1994. This resulted in a $2.4 million after-tax gain in fiscal 1993 and a $2.5 million after-tax gain in fiscal 1994. The operating results of these stores were included in the Company's financial results until their sale. While the Company believes that a significant majority of its superstores are appropriately sized for their particular markets, the Company plans to continue its strategy of selectively expanding and relocating existing stores in the future. See "Business -- Expansion Strategy." Store Economics. The Company expects that the capital required to open a new superstore will continue to generally range between $1 million and $2 million, depending upon, among other factors, the site location and condition, amount of leasehold improvements and initial inventory requirements (net of vendor receivables). The Company believes that the capital required to expand its existing superstores will generally range between $500,000 and $1 million per superstore. 17 19 Set forth below is a table reflecting the number of stores (excluding mall stores) open at the beginning of each fiscal year, the number of stores opened and closed during such fiscal year, and the number of stores open at the end of such fiscal year.
STORE OPENING AND CLOSING DATA ------------------------------------ 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Open at beginning of fiscal year.................. 82 91 102 108 111 Opened during fiscal year......................... 13 13 9 4 8 Closed during fiscal year......................... (4) (2) (3) (1) (2) Open at end of fiscal year........................ 91 102 108 111 117
Videotape Rental Expense Allocation. The Company's cost of videotape rentals is primarily video depreciation and markdowns of videotape rental products. The Company uses an expense allocation policy for its videotape rental inventory designed to match the cost of its videotapes to its rental revenue. The average expense allocation periods for rental videotapes in fiscal 1995, fiscal 1996, and the nine months ending October 31, 1997 were nine months, 10 months, and 11 months, respectively. Under this method, all videotapes are recorded at acquisition cost and written off at an initial depreciation rate calculated on a straight-line basis with an 18 month useful life and with a $5 salvage value. After an initial rental period of 20 weeks, the Company conducts a weekly profit and loss analysis of each videotape title based on straight-line depreciation and estimated administrative expenses. If the title does not reflect a profit based on rental revenues over any rolling average four-week period, the superstore's inventory for the title is reduced by the number of copies necessary to result in pro forma profit for the period in question. Unless the reduced copies can be transferred to another superstore, they are revalued from their current net book value to $9.96, the Company's average sale price for previously viewed videotapes and are transferred to the superstore's videotape sales department. This markdown expense is taken monthly and reflected in videotape cost of rentals. Excess copies that can be transferred to another superstore are transferred at their current net book value, and depreciation continues in accordance with the Company's standard policy. The Company expects the average expense allocation period to increase as additional new superstores are opened and store-to-store transfer opportunities increase. The Company believes its expense allocation method is better at approximating the matching of revenues to expenses than the methods used by its publicly traded competitors. Revenues. Revenues include the sale of merchandise and the rental of videotapes, video games and other products. Comparable Store Revenues. The Company defines comparable store revenues as the revenues of the current period compared to the prior period of superstores that have been open a minimum of 60 weeks. The comparable store base includes those stores that have been expanded during the applicable period but excludes the Company's mall-based stores. Pre-opening Costs. Pre-opening costs include labor, rent, utilities, supplies and certain other costs incurred prior to a superstore's opening. The Company expenses pre-opening costs as incurred. Store Openings. The Company opened eight new superstores during the fiscal year ended January 31, 1998 and anticipates that it will open 12 stores during fiscal 1998. New stores build their sales volumes and refine their product selection gradually and, as a result, generally have higher operating expenses as a percentage of sales than more mature stores. The Company will continue to evaluate the profitability of all of its superstores on an ongoing basis and may, from time to time, make decisions regarding expanding, relocating or closing existing stores in accordance with such evaluations. As part of this ongoing strategy, the Company expanded eight superstores during the fiscal year ended January 31, 1998. System Development Expenses. The Company's development expenses, primarily relating to the design and application stages of the Company's new operating systems, were classified separately and expensed as incurred in fiscal 1993, 1994, 1995 and 1996. Beginning in fiscal 1997, post-implementation costs and additional developmental charges associated with the operating system were expensed as incurred and included in selling, general and administrative expenses. 18 20 RESULTS OF OPERATIONS The following discussion of the Company's results of operations for fiscal 1994, 1995 and 1996 and for the nine months ended October 31, 1996 and October 31, 1997 is based upon data derived from the statement of earnings contained in the Company's financial statements appearing elsewhere in this Prospectus. The following table sets forth this data as a percentage of total revenues.
NINE MONTHS -------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Merchandise revenue........................ 77.4% 77.8% 77.7% 76.3% 78.1% Video rental revenue....................... 22.6 22.2 22.3 23.7 21.9 ----- ----- ----- ----- ----- Total revenues............................. 100.0 100.0 100.0 100.0 100.0 Merchandise cost of revenue................ 71.9 71.1 72.4 68.8 68.7 Video rental cost of revenue............... 30.1 35.9 30.8 35.5 35.7 Total cost of revenues..................... 62.5 63.3 63.1 60.9 61.5 ----- ----- ----- ----- ----- Gross profit............................... 37.5 36.7 36.9 39.1 38.5 Selling, general & administrative expenses................................. 31.6 29.9 32.4 35.8 34.8 Development expenses....................... 1.1 0.9 0.7 0.8 -- ----- ----- ----- ----- ----- Operating income........................... 4.9 5.9 3.7 2.4 3.7 Other income (expense): Interest expense, net...................... (0.3) (0.9) (1.1) (1.2) (1.3) Gain (loss) on sale of mall stores, net.... 1.6 -- (0.8) (1.1) -- Other, net................................. 0.1 0.1 -- -- -- ----- ----- ----- ----- ----- Income before income taxes................. 6.2 5.1 1.9 0.1 2.4 Income taxes............................... 2.4 2.0 0.7 -- 1.0 ----- ----- ----- ----- ----- Net income................................. 3.8% 3.1% 1.2% 0.1% 1.4% ===== ===== ===== ===== =====
NINE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO NINE MONTHS ENDED OCTOBER 31, 1996 Revenues. Revenues for the nine months ended October 31, 1997 increased by $16.6 million, or 7.4%, to $240.6 million from $224.0 million for the nine months ended October 31, 1996. The revenue growth consisted of a 10.0% increase in merchandise sales and a 0.8% decrease in video rental revenues. Overall comparable store revenues increased 5% during the nine months ended October 31, 1997. Each significant merchandise category exhibited growth period to period, with software products providing the largest percentage gains. Although rental revenue performance trailed the prior period's revenue performance, video rental revenues firmed during the nine months ended October 31, 1997, and revenues for the three months ended October 31, 1997 outperformed the revenues from the similar period in fiscal 1996. In addition, the Company opened six new superstores during the nine months ended October 31, 1997. Gross Profit. Gross profit as a percentage of revenues was 38.5% for the nine months ended October 31, 1997 as compared to 39.1% for the same period in fiscal 1996. Gross profit as a percentage of revenues for merchandise increased slightly to 31.3% for the nine months ended October 31, 1997 from 31.2% for the nine months ended October 31, 1996. Video rental gross profit as a percentage of revenues of 64.5% in the nine months ended October 31, 1996 decreased to 64.3% in the same period in fiscal 1997. The remaining change in gross profit as a percent of revenues was a result of a slight increase in lower margin merchandise sales as a percentage of overall revenue. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $80.3 million to $83.9 million and decreased as a percentage of revenues to 34.8% in the nine months ended October 31, 1997 from 35.8% in the nine months ended October 31, 1996. Store operating costs as a percentage of revenues declined during the nine months ended October 31, 1997 to 29.4% from 30.9% for the nine months ended October 31, 1996. During the second quarter of fiscal 1997, the Company repriced certain stock options granted to its Chief Executive Officer in fiscal 1992. The Company recognized a one-time pre- 19 21 tax charge of $1,016,800 as deferred compensation expense as a result of this event. See "Management -- Option Grants, Exercises and Holdings." Development Expenses. System development expenses for the nine months ended October 31, 1996 were 0.8% of revenues. Development expenses were not separately classified in the nine months ended October 31, 1997 as most significant elements of the Company's operating system became functional during fiscal 1996. The Company has committed to continually enhancing and improving its information system and other corporate functions and, as a result, anticipates incurring additional system-related expenses in the future which will be included under the general and administrative classification. Interest Expense. Interest expense increased to $3.1 million for the nine months ended October 31, 1997 from $2.7 million for the nine months ended October 31, 1996 due to higher average borrowing balances. Gain (Loss) on Sale of Mall Stores. As a result of the sale of its 42 mall stores to Camelot Music, Inc., the Company booked a total pre-tax gain of $7.9 million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot Music filed for bankruptcy protection in August 1996, and the Company established a reserve of $2.5 million in fiscal 1996 to cover potential losses related to certain mall store leases. See "Business -- Litigation." FISCAL 1996 COMPARED TO FISCAL 1995 Revenues. Revenues in fiscal 1996 increased $25.4 million, or 8.5%, to $324.3 million from $298.9 million in fiscal 1995. The revenues increase consisted of an 8.4% growth in merchandise sales and an 8.9% increase in video rental revenues. Comparable store revenues increased 6% in fiscal 1996, and the Company opened four superstores and closed one superstore during fiscal 1996. Gross Profit. Gross profit as a percentage of revenues increased to 36.9% in fiscal 1996 from 36.7% in fiscal 1995. This improvement was primarily a result of an increase in video rental gross margin in fiscal 1996 due primarily to lower video depreciation and reduced video pilferage. The lower sales merchandise margins in fiscal 1996 were primarily a result of competitive retail price pressures in the music industry and increased corporate return expenses. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $105.2 million in fiscal 1996 from $89.3 million in fiscal 1995 and increased as a percentage of revenues to 32.4% from 29.9% as the Company completed its first year of operating independently from the support services provided by Anderson. The Company's store expenses, which comprise the majority of this category, increased to 27.4% of revenues in fiscal 1996 from 26.0% of revenues in fiscal 1995 primarily as a result of increased store return expenses which occurred because of the Company's transition to purchasing its products primarily from manufacturers rather than distributors. The Company has implemented a new return process in an effort to better control return-related costs. See "Risk Factors -- Supplier Relationships." Development Expenses. Development expenses decreased from $2.8 million or 0.9% of revenues in fiscal 1995 to $2.4 million or 0.7% of revenues in fiscal 1996. The Company has committed to continually enhancing and improving its information system and other corporate functions and, as a result, anticipates incurring additional development and system integration expenses in the future. Interest Expense. Interest expense increased to $3.6 million in fiscal 1996 from $2.6 million in fiscal 1995 due to higher average borrowing balances. Gain (Loss) on Sale of Mall Stores. As a result of the sale of its 42 mall stores to Camelot Music, Inc., the Company booked a total pre-tax gain of $7.9 million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot Music filed for bankruptcy protection in August 1996, and the Company established a reserve of $2.5 million in fiscal 1996 to cover potential losses related to certain mall store leases. See "Business -- Litigation." 20 22 FISCAL 1995 COMPARED TO FISCAL 1994 Revenues. Revenues increased by $44.0 million, or 17.3%, to $298.9 million in fiscal 1995 from $254.9 million in fiscal 1994. This revenue increase consisted of a 17.8% increase in merchandise sales and a 15.4% increase in video rental revenues. All sales product categories exhibited annual growth in excess of 10%, with videotape sales providing the largest increase of 32.0%. Comparable store revenues increased 4% in fiscal 1995, and the Company opened nine superstores and closed three superstores during fiscal 1995. Gross Profit. Gross profit as a percentage of revenues declined to 36.7% in fiscal 1995 from 37.5% in fiscal 1994. The gross profit on merchandise sales increased to 28.9% in fiscal 1995 from 28.1% in fiscal 1994. During the second half of fiscal 1995, the Company was able to reduce the purchase price for its products primarily as a result of the Company's use of its own recently developed purchasing department. Prior to and including a portion of fiscal 1995, the Company purchased the majority of its products from various distributors, including Anderson, at prices that were relatively higher than prices for products purchased directly from manufacturers. Offsetting the lower inventory purchase prices that the Company began to obtain during fiscal 1995 was the continuing downward pressure on music industry retail prices. The Company's videotape rental gross profit also decreased to 64.1% in fiscal 1995 from 69.9% in fiscal 1994 due to higher initial stocking levels in new stores than anticipated and decreased transfer opportunities for overstocked tapes during fiscal 1995. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $89.3 million in fiscal 1995 from $80.5 million in fiscal 1994. These expenses as a percentage of revenues decreased to 29.9% in fiscal 1995 from 31.6% in fiscal 1994. Store expenses, which comprise the majority of this category, declined to 26.1% of revenues in fiscal 1995 from 26.9% of revenues in fiscal 1994 as the Company controlled store expenses while increasing revenues. Development Expenses. Development expenses remained constant at $2.8 million for both fiscal 1995 and fiscal 1994. As a percentage of revenues, development expenses declined to 0.9% in fiscal 1995 from 1.1% in fiscal 1994. The Company has committed to continually enhancing and improving its information system and other corporate functions and, as a result, anticipates incurring additional development and system integration expenses in the future. Gain on Sale of Mall Stores. During fiscal 1994, the Company sold the assets, primarily inventory and leasehold improvements and fixtures, related to its remaining 16 mall stores. Proceeds from the sale were $8.7 million, and the Company recognized a pre-tax gain of $4.1 million and an after-tax gain of $2.5 million. Interest Expense. Interest expense increased to $2.6 million in fiscal 1995 from $0.7 million in fiscal 1994 due to higher average borrowing balances. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements arise from purchasing, warehousing and merchandising inventory and rental videos, opening new superstores and expanding existing superstores. The Company's primary sources of working capital are cash flow from operations, trade credit from vendors and borrowings from its Revolving Credit Facility. Cash flow from operations was $14.7 million, $33.7 million, $28.9 million and $26.2 million for fiscal 1994, fiscal 1995, fiscal 1996 and the nine months ended October 31, 1997, respectively. Capital expenditures, including purchase of rental videotapes, were $40.0 million, $48.4 million, $40.5 million and $43.4 million for fiscal 1994, fiscal 1995, fiscal 1996 and the nine months ended October 31, 1997, respectively. As of October 31, 1997, the Company's total debt capacity consisted of $25.0 million of its unsecured Series A Senior Notes due 2003 with an effective interest rate of 7.53% and its $45.0 million unsecured Revolving Credit Facility. Total outstanding indebtedness as of October 31, 1997 under the Note Agreement and the Revolving Credit Facility was $65.9 million. The Note Agreement provides for annual mandatory payments of principal of $5 million beginning June 13, 1999 and contains a number of covenants that restrict the operations of the Company. These covenants address, among other matters, the amount of indebtedness that the Company may incur and payments by the Company of certain dividends or distributions. In addition, the Note Agreement grants a put option to each noteholder in the event that after an initial public offering, a 21 23 designated control group (including management of the Company and certain of its benefit plans and various affiliated entities) fails to own at least 33 1/3% of the combined voting power of all then-issued and outstanding Common Stock of the Company. The Company's $45.0 million Revolving Credit Facility has a floating interest rate based on certain ratios related to the Company's capital structure. The interest rate under the Revolving Credit Facility at October 31, 1997 was 7.34% per annum. This facility terminates in April 1999. The Company estimates that immediately prior to the completion of the Offering the outstanding balance on the Revolving Credit Facility will be approximately $35.0 million. The Credit Agreement governing the Revolving Credit Facility contains a number of covenants that restrict the operations of the Company. These covenants address, among other matters, the amount of indebtedness the Company may incur and payments by the Company of certain dividends or distributions. The Company plans to use a portion of the net proceeds of the Offering to repay the outstanding balance on the Revolving Credit Facility. See "Use of Proceeds." The Company's $45.0 million Revolving Credit Facility will continue to be available after completion of the Offering until its termination in April 1999. At October 31, 1997, the Company had one other debt obligation totaling $1.1 million. The principal on this obligation is payable quarterly until maturity in May 2002. In addition, the Company maintains two capitalized lease obligations with terms of fifteen years. The total amount of these obligations is $1.7 million at October 31, 1997. The Company has opened eight superstores through the fiscal year ended January 31, 1998 and plans to open 12 additional superstores in fiscal 1998. The Company invests generally between $1 million and $2 million in a new superstore (net of vendor receivables) with the largest components of that amount being merchandise, videos, fixtures and leasehold improvements. In addition, the Company expanded eight superstores through the first nine months of fiscal 1997 and plans to expand approximately six superstores in fiscal 1998. The Company generally invests between $500,000 to $1,000,000 to expand a superstore. Total capital expenditures are estimated to be approximately $51.0 million in fiscal 1997, of which approximately $31.0 million will be used to purchase rental videos. Approximately $43.4 million has been used for capital expenditures during the nine months ended October 31, 1997, of which $21.8 million has been used to purchase rental videos. The Company believes that cash flow from operations, borrowings under the Revolving Credit Facility and the net proceeds from this Offering will be sufficient to fund the Company's ongoing operations, new superstores and superstore expansions through fiscal 1999. SEASONALITY AND INFLATION As is the case with many retailers, a significant portion of the Company's revenues, and an even greater portion of its operating profit, is generated in the fourth fiscal quarter, which includes the Christmas selling season. As a result, a substantial portion of the Company's annual earnings has been, and will continue to be, dependent on the results of this quarter. The Company experiences reduced videotape rentals in the Spring because customers spend more time outdoors. Major world or sporting events, such as the Super Bowl, the Olympic Games or the World Series, also have a temporary adverse effect on revenues. Future operating results may be affected by many factors, including variations in the number and timing of store openings, the number and popularity of new book, music and videotape titles, the cost of the new release or "best renter" titles, changes in comparable store revenue, competition, marketing programs, increases in the minimum wage, weather, special or unusual events and other factors that may affect retailers in general and the Company in particular. See "Risk Factors -- Seasonality and Fluctuations in Operating Results." The 22 24 seasonality of the Company's business is illustrated in the following tables relating to the first three quarters of fiscal 1997, fiscal 1996 and the fourth quarter of fiscal 1995:
Q1 Q2 Q3 Q4 ------- ------- ------- -------- (DOLLARS IN THOUSANDS) FISCAL 1997: Total revenues.............................. $78,436 $81,653 $80,521 Gross profit................................ 28,691 33,203 30,786 Operating income............................ 2,873 3,820 2,110 Operating income as a percentage of revenues.................................. 3.7% 4.7% 2.6% Net income.................................. 1,348 1,352 728 Net income as a percentage of revenues...... 1.7% 1.7% 0.9% FISCAL 1996: Total revenues.............................. $73,875 $76,391 $73,764 $100,261 Gross profit................................ 27,899 29,531 30,149 32,100 Operating income............................ 2,104 1,560 1,789 6,622 Operating income as a percentage of revenues.................................. 2.8% 2.0% 2.4% 6.6% Net income.................................. 833 (1,149) 466 3,646 Net income as a percentage of revenues...... 1.1% (1.5)% 0.6% 3.6% FISCAL 1995: Total revenues.............................. $ 94,243 Gross profit................................ 33,008 Operating income............................ 7,232 Operating income as a percentage of revenues.................................. 7.7% Net income.................................. 3,281 Net income as a percentage of revenues...... 3.5%
The Company does not believe that inflation has materially impacted net income during the past three years. Substantial increases in costs and expenses could have a significant impact on the Company's operating results to the extent such increases are not passed along to customers. YEAR 2000 COMPLIANCE Due to the recent development and implementation of its proprietary information system corporate infrastructure, the Company has taken measures to ensure its Year 2000 compliance. The Company believes its systems to be Year 2000 compliant and does not anticipate any material or adverse effect associated with the transition to the new millennium. The Company understands exposure for Year 2000 compliance extends beyond its own systems. During calendar years 1998 and 1999, the Company is requiring its major vendors to validate their Year 2000 compliance and compliance process. Upon completion of the process, each vendor is required to provide confirmation of its Year 2000 compliance. If a major vendor cannot prove its compliance, the vendor will be removed as an authorized vendor of the Company and products will be obtained from alternate and compliant vendors. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued several Statements of Financial Accounting Standards (SFAS's) in 1997 that may impact the Company's accounting treatment and/or its disclosure obligations. None of these new standards are expected to have a material impact on the Company. The new SFAS's impacting the Company are as follows: SFAS No. 128, "Earnings Per Share" was issued in February 1997 and supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share." The new rules will replace primary and fully diluted earnings per share with basic and diluted earnings per share. SFAS No. 128 is effective for periods ending after December 15, 1997. Previously reported per share amounts will be restated upon adoption. 23 25 SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997. The new rules establish standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for periods beginning after December 15, 1997. 24 26 BUSINESS OVERVIEW Hastings is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals and videotapes with the rental of videotapes and video games in a superstore format. Founded in 1968, Hastings currently operates 117 superstores averaging 20,700 square feet in small to medium-sized markets in the Midwestern and Western United States. Based on its 30-year operating history, the Company believes that these small to medium-sized markets with populations ranging from 25,000 to 150,000 present an opportunity to profitably operate and expand Hastings' unique entertainment superstore format. These markets usually are underserved by existing book, music, software or video stores with competition generally limited to locally owned specialty stores or single-concept entertainment retailers. In addition, Hastings' proprietary purchasing and inventory management systems enable its superstores to typically offer the broadest range of entertainment products in these markets at prices that are competitive with or lower than the lowest prices charged by its competitors. The Company believes that it has significant advantages over its competitors, including its unique multimedia retailing concept, extensive product selections, low-pricing strategy, targeted merchandising, efficient operations, superior customer service and substantial operating experience in small to medium-sized markets. A key element of the Company's business strategy is to continue its growth and increase its profitability through the continued expansion of its superstore operations. During the past five years, Hastings' revenues have increased at a 14% compound annual growth rate, growing from $187 million in fiscal 1992 to $358 million in fiscal 1997 as a result of new store openings and comparable store revenue increases. Over this period, the Company increased its superstore selling square footage by 143% from approximately 856,000 square feet in fiscal 1992 to approximately 2,081,000 square feet at the end of fiscal 1997, while comparable store revenue increases for fiscal 1995, 1996 and 1997 were 4%, 6% and 7%, respectively. Hastings intends to continue this growth in the future by opening approximately 60 superstores in the next three years and continuing its ongoing store expansion and remodeling programs. The Company also intends to augment its current award-winning Web site with Internet commerce capabilities during the second quarter of fiscal 1998. See "Risk Factors -- Expansion Strategy" and "-- Expansion into Electronic Commerce." Hastings has assembled a strong management team with substantial experience in the retail industry led by John H. Marmaduke, who has served as the Company's President and Chief Executive Officer for the past 22 years. See "Risk Factors -- Dependence on Key Personnel." The Company believes that its success throughout its 30-year history has been due in large part to its ability to recognize and respond to prevailing trends in retailing. For example, in response to the growing popularity of the superstore format and its superior profitability, Hastings redirected its resources to the expansion of its superstores while successfully divesting its mall-based stores in fiscal 1993 and fiscal 1994. Further, to address a slowdown in its rental video business in early 1997, the Company introduced a new rental video merchandising strategy that led to comparable store revenue increases for rental video of over 10% in the fourth quarter of fiscal 1997 compared to the same quarter in fiscal 1996. HISTORY Hastings was founded in 1968 as a retailing division of Western, a wholesaler of books and music. The Company's original retail concept included the sale of books, music and periodicals in an upscale store format located primarily in small and medium-sized markets. The Company purchased products from Western and utilized Western's purchasing, distribution and general administrative departments. The Company grew steadily through internal growth and the acquisition of existing stores, most of which were located in malls. During the mid-1980's, the Company began to add videotape rental and videotape sales to its book and music stores. Additional product lines and higher volume resulted in the need for larger store floor plans. The synergy of multiple product lines, increased market penetration and greater profitability of larger stores compared to mall stores caused management to revise its retail strategy. Beginning in the late 1980's, the Company developed a superstore format with increased emphasis on discount pricing and new product lines, 25 27 including computer software and video games. The Company accelerated its discount superstore strategy by selling 26 of its mall stores in fiscal 1993 and its remaining 16 mall stores in fiscal 1994. In 1991, Western was acquired by Wal-Mart Stores, Inc. ("Wal-Mart"), and as a condition of the sale, the Company became a separate entity owned by the former shareholders of Western. Following the sale, the Company continued to depend on Western for all its support services, including accounting, information systems, purchasing, distribution, printing and advertising, which were provided pursuant to a service agreement. In fiscal 1993, the Company began to develop its own information system and expand its corporate infrastructure to improve merchandising, increase operating efficiencies and pursue what it believed were significant expansion opportunities. In June 1994, Western was sold by Wal-Mart to Anderson News Corporation and renamed Anderson Merchandisers, Inc. As a result of this transaction, the Company accelerated the development and implementation of its own support services, which it completed by January 1996. INDUSTRY As a retailer of multimedia entertainment products, the Company competes in the music, book, periodical, software and video industries. In 1996, consumers spent an estimated $45.8 billion on merchandise in these categories. Forecasted spending in 2001 is estimated to grow to $73.9 billion, a compound annual growth rate of 12.3%. According to the Veronis, Suhler & Associates Communications Industry Forecast (the "Veronis, Suhler Forecast"), sales of recorded music, including CD's, cassettes, LP's, singles and music videos, grew from $7.8 billion in 1991 to $12.5 billion in 1996, for a compound annual growth rate of 9.9%. The Veronis, Suhler Forecast projects that sales of recorded music will grow to $16.5 billion by 2001, for a compound annual growth rate of 5.7% from 1996, with such growth anticipated to stem from annual price increases of 1.2% and annual shipment increases of 3.8%. Sales of consumer books in the United States have grown from $12.7 billion in 1991 to $16.3 billion in 1996, according to the Veronis, Suhler Forecast, for a compound annual growth rate of 5.1%. The Veronis, Suhler Forecast projects that consumer spending on books will grow to $21.2 billion by 2001, for a compound annual growth rate of 5.4%, with the expected growth to be comprised mainly of price increases of 4.3% and increased shipments of 1.1%. The Veronis, Suhler Forecast states that sales and rentals of video cassettes have grown from $10.6 billion in 1991 to $15.2 billion in 1996, for a compound annual growth rate of 7.5%, and that consumer video spending is projected to grow to $22.3 billion by 2001, for a compound annual growth rate of 8.0%. According to the Veronis, Suhler Forecast, growth in video spending through 2001 will stem from increased numbers of transactions, increased average prices of rentals and continued growth in video sales. Consumer sales of software grew from $400 million in 1991 to $1.8 billion in 1996, according to the Veronis, Suhler Forecast, for a compound annual growth rate of 35.1%. Due to moderating sales of personal computers, sales of consumer software is projected by the Veronis, Suhler Forecast to grow to $2.2 billion by 2001, for a compound annual growth rate of 4.1%. Demographic trends in the United States support the opportunity for continued growth in the merchandising categories within which the Company participates. According to the 1996 U.S. Department of Commerce, Bureau of the Census, Population Division Statistical Information Office report, there are currently 75.7 million individuals under the age of 19, which represents the largest portion of video rental and sales consumers, and 132.5 million individuals between the ages of 20 and 54, the largest segment of retail music and book consumers. These figures are projected to grow to 79.8 million and 137.5 million, respectively, by the year 2000. See "Risk Factors -- Consumer Spending." BUSINESS STRATEGY The Company's goal is to enhance its position as a leading multimedia entertainment retailer by expanding existing stores, opening new stores in selected markets, and offering its products through the Internet. Each element of the Company's business strategy is designed to build consumer awareness of the 26 28 Hastings concept and achieve high levels of customer loyalty and repeat business. The key elements of this strategy are the following: Superior Multimedia Concept. The Company's superstores present a wide variety of products tailored to local preferences in a dynamic and comfortable store atmosphere with exceptional service. Hastings superstores average approximately 20,700 square feet, with the Company's new stores ranging in size from 18,000 square feet to 35,000 square feet. The Company's superstores offer customers an extensive product assortment of approximately 40,000 book, 28,000 music, 1,000 software, 2,000 periodical and 6,000 videotape titles and 1,300 complementary and accessory items for sale and 15,000 videotape and video game selections for rent. Although the superstores' core product assortments tend to be similar, the merchandise mix of each Hastings superstore is tailored to accommodate the particular demographic profile of the local market in which the superstore operates through the utilization of the Company's proprietary purchasing and inventory management systems. In addition, the Company offers virtually all book, music, software, videotape and video game selections that are available to retailers, consisting of an aggregate of over 2.5 million titles, at its superstores through a special store order program. The Company believes that its multimedia format reduces Hastings' reliance on and exposure to any particular entertainment segment and enables the Company to promptly add exciting new entertainment categories to its product line. Small to Medium-Sized Market Superstore Focus. The Company targets small to medium-sized markets with populations of 25,000 to 150,000 in which the Company's extensive product selection, low pricing strategy, efficient operations and superior customer service enable it to become the market's entertainment destination store. The Company believes that the small to medium-sized markets where it operates the majority of its superstores present an opportunity to profitably operate and expand Hastings' unique entertainment superstore format. These markets typically are underserved by existing book, music or video stores, and competition generally is limited to locally owned specialty stores or single-concept entertainment retailers. The Company bases its merchandising strategy for its superstores on an in-depth understanding of its customers and its individual markets. Hastings strives to optimize each superstore's merchandise selection by using its proprietary information systems to analyze the sales history, anticipated demand and demographics of each superstore's market. In addition, the Company utilizes flexible layouts that enable each superstore to arrange its products according to local interests and to customize the layout in response to new customer preferences and product lines, such as the Company's growing software department. Customer-Oriented Superstore Format. The Company designs its superstores to provide an easy-to-shop, open store atmosphere by offering major product categories in a "store-within-a-store" format. Most Hastings superstores utilize product-category boutiques positioned around a wide racetrack aisle that is designed to allow customers to view the entire superstore. This store configuration produces significant cross-marketing opportunities among the various entertainment departments, which the Company believes results in higher transaction volumes and impulse purchases. To encourage browsing and the perception of Hastings as a community gathering place, the Company has incorporated amenities in many superstores, such as chairs for reading, complimentary gourmet coffees, music auditioning stations, interactive information kiosks, telephones for free local calls, children's play areas and in-store promotional events. Cost-Effective Operations. The Company is committed to controlling costs in every aspect of its operations while maintaining its customer-oriented philosophy. From 1993 to 1996, Hastings invested $8.5 million to develop and implement proprietary information, purchasing, distribution and inventory control systems that position the Company to continue to grow profitably. These systems enhance profitability by enabling the Company to respond actively to customers' changing desires and to rapid shifts in local and national market conditions. The Company's state-of-the-art 100,000 square-foot distribution center, which adjoins the Company's corporate offices in Amarillo, Texas, provides Hastings with improved store in-stocks, efficient product cross-docking and centralized returns processing. Low Pricing. Hastings' pricing strategy at its superstores is to offer value to its customers by maintaining prices that are competitive with or lower than the lowest prices charged by other retailers in the market. The Company determines its prices on a market-by-market basis, depending on the level of competition and other market-specific considerations. The Company believes that its low pricing structure results in part from (i) its 27 29 ability to purchase directly from publishers, studios and manufacturers as opposed to purchasing from distributors, (ii) its proprietary information systems that enable management to make more precise and targeted purchases for each superstore, and (iii) its consistent focus on maintaining low occupancy and operating costs. EXPANSION STRATEGY Expanded Selling Square Footage. With the relatively recent completion of its corporate infrastructure, the Company is positioned to accelerate its growth strategy. The Company has identified over 500 underserved, small to medium-sized markets that meet its new-market criteria. It plans to open approximately 60 superstores over the next three years in certain of those markets for a total of approximately 170 superstores (net of closings) by the end of fiscal 2000. In addition to opening new superstores, the Company plans to continue expanding and remodeling its existing stores. Between new store openings and store expansions, the Company anticipates increasing its current selling square footage of approximately 2,081,000 by greater than 50% by the end of fiscal 2000. The Company believes that with its current information systems and distribution capabilities, Hastings' infrastructure can support the Company's anticipated rate of growth for at least the next five years. Electronic Commerce. With the anticipated initiation of the sale of products on its Web site in the second quarter of fiscal 1998, the Company believes it will be the first fully integrated, multimedia entertainment retailer offering books, music, software, videotapes and video games through the Internet on a single Web site. The Hastings Web site was selected as one of "The Premier 100" Web sites by ComputerWorld Magazine for 1997. Hastings believes that it has significant advantages that position it to succeed in electronic commerce on the Internet, including its strong name recognition in its markets, its unique range and assortment of multimedia products, its advanced information systems and fulfillment capabilities, and its well-established entertainment retailing experience and ability to respond rapidly to customers' evolving entertainment desires. MERCHANDISING Hastings is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals and videotapes with the rental of videotapes and video games. In addition, the Company offers virtually all book, music, software, periodical, videotape and video game selections that are available to retailers, consisting of an aggregate of over 2.5 million titles, at its superstores through a special store order program. By offering a broad array of products within several distinct but complementary categories, the Company strives to appeal to a wide range of customers and position its superstores as destination entertainment stores in its targeted small to medium-sized markets. The following table sets forth the approximate amount of total Company revenues contributed by each of the following product categories for the periods presented:
NINE MONTHS FISCAL YEAR ENDED ---------------------------------------------------------- OCTOBER 31, 1994 1995 1996 1997 ---------------- ---------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) Merchandise Revenues: Music....................... $ 97,585 38.3% $112,827 37.7% $119,474 36.8% $ 89,562 37.2% Books....................... 64,658 25.4 76,684 25.7 85,404 26.3 63,358 26.3 Video....................... 16,280 6.4 21,488 7.2 23,420 7.2 15,873 6.6 Software.................... 8,845 3.4 10,767 3.6 13,465 4.2 12,314 5.1 Other....................... 9,943 3.9 10,697 3.6 10,171 3.2 6,862 2.9 -------- ----- -------- ----- -------- ----- -------- ----- Total Merchandise Revenue..... $197,311 77.4 $232,463 77.8 $251,934 77.7 $187,969 78.1 Video Rental Revenue.......... 57,603 22.6 66,449 22.2 72,357 22.3 52,641 21.9 -------- ----- -------- ----- -------- ----- -------- ----- Total Revenues................ $254,914 100.0% $298,912 100.0% $324,291 100.0% $240,610 100.0%
Superstore Product Selection. Although all Hastings superstores carry a similar core product assortment, the merchandise mix of book, music, software, videotape and video game selections of each superstore is 28 30 tailored continually to accommodate the particular demographic profile of the local market in which the superstore operates. The Company accomplishes this customization through its proprietary purchasing and inventory management system. The purchasing system analyzes historic consumer purchasing patterns at each individual superstore to forecast customer demand for new releases and anticipate seasonal changes in demand. In addition, the Company's inventory management process continually monitors product sales and videotape rentals to identify slow-moving books, music, software and sale videotapes for return to vendors and rental videotapes for sale or transfer to other superstores. See "Business -- Information System." The Company believes that this ability to customize the inventory and manage slow-moving products in each of its superstores ensures a customer-driven product selection that maximizes profitability. The Company's superstores offer an extensive selection of items in each of its entertainment categories. The typical Hastings superstore offers for sale approximately 40,000 current book titles in a variety of subject categories, 28,000 music titles in a broad range of music categories, 2,000 periodical titles, 6,000 new and previously viewed videotape titles and 1,000 software titles. Additionally, the typical Hastings superstore carries approximately 15,000 videotape and video game rental titles. The typical Hastings superstore also offers approximately 1,300 complementary and accessory items, including greeting cards, consumables and audio and video accessories. New releases and special offerings in each entertainment product category are prominently displayed and arranged by product category. In addition to its primary product lines, Hastings continually adds new product offerings to better serve its customers. Products for sale in these categories include promotional t-shirts, licensed plush toys, greeting cards, used compact discs, audio books and consumables, including soft drinks, chips, popcorn and candy. Accessory items for sale include blank videotapes, video cleaning equipment and audio cassette and compact disc carrying cases. Many of these products generate impulse purchases and produce higher margins. The rental of video cassette players and video game players is provided as a service to Hastings customers. Internet Merchandising. Since its inception, the Company's Web site, selected as one of "The Premier 100" Web sites by ComputerWorld Magazine for 1997, has offered information on books, music, video and software products. As an extension of the Company's strategy of meeting its customers' desires, beginning in the second quarter of fiscal 1998 Hastings anticipates that it will offer for sale a full range of merchandise through its Web site. This additional sales channel will enhance the assortment and accessibility of products for each current and potential Hastings customer. The Company's Web site operation will be consistent with the Hastings philosophy of offering a full range of multimedia merchandise at competitive prices with a high degree of customer service. Hastings believes that it has significant advantages that position it to succeed in electronic commerce on the Internet, including Hastings' strong name recognition in its markets, its unique range and assortment of multimedia products, advanced information system and fulfillment capabilities and the Company's well-established entertainment retailing experience and ability to respond to customers' evolving entertainment desires. See "Risk Factors -- Competition and Technological Obsolescence." STORE LAYOUT The Company designs its superstores to provide an easy-to-shop, open store atmosphere by offering major product categories in a "store-within-a-store" format. Most Hastings superstores utilize product-category boutiques positioned around a wide racetrack aisle which is designed to allow customers a view throughout the entire superstore. This store configuration produces significant cross-marketing opportunities among the various entertainment departments, which the Company believes results in higher transaction volumes and impulse purchases. [STORE SCHEMATIC] The book department offers an extensive selection of titles arranged alphabetically by category in attractive, well-signed displays. The music department also is organized alphabetically within music categories and incorporates boutiques with lower height fixtures that allow visibility and promote an open atmosphere. Additionally, the video rental department is arranged by prominently displaying new release, "best renter" and video game selections and organizing other titles by category. The Company also offers a selection of software 29 31 titles organized by applications and utilities in a separate section of the store. In addition, the Company dedicates areas of its superstores to children's products and customer service stations. At the superstore's checkout counters, impulse products and higher margin products are displayed on line dividers and register stands. Chips, popcorn, candy, soft drinks and other packaged consumables also are available near the checkout areas. In addition, some superstores have overhead video monitors designed to entertain the customer with movie and book previews interspersed with Hastings promotional messages. Hastings superstores average approximately 20,700 square feet, which typically includes retail selling space, receiving and stocking areas, an associate break room and manager offices. The size of the Company's enhanced store format ranges from 18,000 to 35,000 selling square feet, depending on the size of the market and the real estate available. The store format is flexible and enables the Company to adjust the size and merchandising mix of each superstore to the particular demographic profile of a specific market. MARKETING Low Pricing. Hastings' pricing strategy at its superstores is to offer value to its customers by maintaining prices that are competitive with or lower than the lowest prices charged by other retailers in the market. The Company determines its prices on a market-by-market basis, depending on the level of competition and other market-specific considerations. The Company believes that its low pricing structure results in part from (i) its ability to purchase directly from publishers, studios and manufacturers as opposed to purchasing from distributors, (ii) its proprietary information systems that enable management to make more precise and targeted purchases for each superstore, and (iii) its consistent focus on maintaining low occupancy and operating costs. Customer Service. The Company is committed to providing the highest level of customer service to increase customer loyalty. Hastings devotes significant resources to associate training and measuring customer satisfaction. All Hastings superstore associates undergo training when hired and are required to participate in frequent training programs. The Company's ongoing customer service program, "Quality Service Everytime," empowers every superstore associate to utilize the Company's flexible return and refund policies to resolve any customer problem. The Company believes that these programs, together with the Company's low pricing strategy and superstore amenities, such as reading chairs, complimentary coffees, and free local telephone calls to permit customers to confirm their entertainment selections with family and friends, are important components of the customer service Hastings provides. Advertising/Promotion. The Company participates in cooperative advertising programs and merchandise display allowance programs offered by its vendors. Hastings advertising programs are market-focused and emphasize the price competitiveness, extensive product assortment and comfortable atmosphere of the Company's superstores. The Company benefits from market display allowances provided by vendors because of its superstores' high traffic volume and its effective display implementation. The Company utilizes radio, television, newspaper and direct mail advertising and in-store point-of-sale promotional materials. INFORMATION SYSTEM The Company believes that its proprietary purchasing and information management system provides a significant competitive advantage over other entertainment retailers by enabling it to manage its inventory at every stage, from the shipment of products to their placement in superstores and, if appropriate, to their transfer to other superstores or return to vendors. The Company's information system, which the Company believes to be Year 2000 compliant, also is designed to provide operating and cost efficiencies and furnish flexibly formatted, timely financial information. The Company's expert information system is built upon a multi-tiered, distributed processing architecture and was designed with the latest in client/server tools. All locations are connected using a wide area 30 32 network which allows interchange of current information. The primary components of the information system are as follows: New Release Allocation. Hastings' buyers use the new release allocation system to purchase new release products for the superstores. Buyers have the ability within the system to utilize up to 15 different methods of forecasting demand. By using store-specific sales history, factoring in specific market traits, applying sales curves for similar titles or groups of products and minimizing subjectivity and human emotion for a transaction, the system customizes purchases for each individual superstore to satisfy customer demand. The process provides the flexibility to allow store management to anticipate customer needs, including tracking missed sales and factoring in regional influences. The Company believes that the new release allocation system enables Hastings to increase revenues by having the optimum levels and selection of products available in each superstore at the appropriate time to satisfy customers' entertainment needs. Rental Videotape Purchasing System. The Company's rental videotape purchasing system uses store specific performance on individual rental videotape titles to anticipate customer demand for new release rental videotapes. The primary method of purchasing analyzes the first eight weeks' performance of a similar title and factors in the effect of such influences as seasonal trends, box office draw and prominence of the movie's cast to customize an optimum inventory for each individual superstore. The system also allows for the customized purchasing of other catalog rental videotapes on an individual store basis. The Company believes that its rental videotape purchasing system allows Hastings to efficiently plan and stock each superstore's rental videotape inventory, thereby improving performance and reducing exposure from excess inventory. Store Replenishment. Store replenishment covers three main areas for controlling a superstore's inventory. Selection Management. Selection management constantly analyzes store-specific sales, traits and seasonal trends to determine title selection and inventory levels for each individual superstore. By forecasting annual sales of products and consolidating recommendations from store management, the system enables the Company to identify overstocked or understocked items to prompt required store actions and optimize inventory levels. The system tailors each store's individual inventory to the market utilizing over 2,000 product categories. Model Stock Calculation/Ordering. Model stock calculation uses store-specific sales, seasonal trends and sophisticated curve fitting to forecast orders. It also accounts for turnaround time from a vendor or the Hastings distribution center and tracks historical missed sales to adjust orders to adequately fulfill sales potential. Orders are currently calculated on a weekly basis and transmitted by all superstores to the corporate office to establish a source vendor for the product. Currently, over 85% of both new and replenishment orders are transmitted electronically to vendors, thus providing speed and immediate order acknowledgment on each purchase order. Inventory Management. Inventory management systems interface with other store systems and accommodate electronic receiving and returns to maintain accurate perpetual inventory information. Cycle counting procedures allow the Company to perform all physical inventory functions, with the Company counting each superstore's inventory up to four times per year. The system provides immediate feedback on any variances, and the system provides several research tools to assist in controlling inventory. Store Systems. Each superstore has a dedicated server within the store for processing information connected through a wide area network. This connectivity provides consolidation of individual transactions and allows store management and corporate office associates easy access to the information needed to make informed decisions. Transactions at the store are summarized and used to assist in staff scheduling, loss prevention and inventory control. All point of sale transactions utilize scanning technology allowing for maximum customer efficiency at checkout. The Company also utilizes an automated system for scheduling store management and sales associates. This system was developed to assist in controlling personnel costs while maintaining desired levels of customer service by preventing overscheduling or underscheduling sales, stocking and customer service associates. 31 33 Accounting. The Company's financial accounting software has a flexible, open-systems architecture. The Company prepares a variety of daily management reports covering store and corporate performance. Detailed financial information for each superstore, as well as for the distribution center and the corporate office, are generated on a monthly basis. The Company's payroll, accounts payable, cash control and tax functions are performed in-house. Warehouse Management. The Company's warehouse management systems provide support for high-volume retail transactions, including shipments, receipts and returns to vendors. Software to perform these functions was customized through a joint effort of the Company's purchasing, distribution and information systems departments. The warehouse system incorporates exact cube sizes of product containers, utilizing flow-through racks and technologically advanced conveyor systems. SITE SELECTION As of January 31, 1998, the Company operated 117 superstores in 16 states located as indicated in the following table:
NAME OF STATE NUMBER OF STORES ------------- ---------------- Arkansas.................................................... 7 Arizona..................................................... 7 Colorado.................................................... 3 Iowa........................................................ 1 Idaho....................................................... 7 Kansas...................................................... 6 Missouri.................................................... 8 Montana..................................................... 5 Nebraska.................................................... 2 New Mexico.................................................. 13 Oklahoma.................................................... 11 Tennessee................................................... 1 Texas....................................................... 35 Utah........................................................ 3 Washington.................................................. 6 Wyoming..................................................... 2 --- Total............................................. 117
The Company leases sites for all of its superstores. These sites typically are located in pre-existing, stand-alone buildings or strip shopping centers. The Company's primary market areas are small and medium-sized communities with populations typically ranging from 25,000 to 150,000. The Company has developed a systematic approach using its site selection criteria to evaluate and identify potential sites for new superstores. Key demographic criteria for Company superstores include community population, community and regional retail sales, personal and household disposable income levels, education levels, median age and proximity of colleges or universities. Other site selection factors include current competition in the community, visibility, available parking, ease of access and other neighbor tenants. To maintain its low occupancy costs, Hastings typically concentrates on leasing existing locations that have been operated previously by other retailers. The Company typically is able to open a superstore within 120 days after entering into a lease by utilizing cross-functional, in-house teams to manage the individual new superstore development process. These teams provide assistance in space planning, construction management, fixture procurement and installation, product merchandising, information systems installation and initial store operations. The Company operates its own fixture manufacturing facility that produces approximately 80% of a new superstore's display fixturing and prototypical fixture designs. The Company actively manages its existing stores and from time to time considers closing stores. Over the last three years, the Company has closed one to three stores each year. 32 34 The terms of the Company's superstore leases vary considerably. The Company strives to maintain maximum location flexibility by entering into leases with short initial terms and multiple short-term extension options. The Company has been able to enter into leases with these terms in part because Hastings generally bears a substantial portion of the cost of preparing the site for a superstore. The following table sets forth as of January 31, 1998 the number of superstores that have current lease terms that will expire during each of the following fiscal years and the associated number of superstores for which the Company has options to extend the lease term:
NUMBER OF STORES OPTIONS ---------------- ------- Fiscal Year 1998............................................ 10 7 Fiscal Year 1999............................................ 11 10 Fiscal Year 2000............................................ 15 13 Fiscal Year 2001............................................ 8 8 Fiscal Year 2002............................................ 18 16 Thereafter.................................................. 55 54 --- --- Total....................................................... 117 108 === ===
The Company has not experienced any significant difficulty renewing or extending leases on a satisfactory basis. The Company's headquarters and distribution center are located in Amarillo, Texas in a leased facility consisting of approximately 33,000 square feet for office space and 100,000 square feet for the distribution center. The lease for this property terminates in September 2003, and the Company has the option to renew this lease through March 2008. DISTRIBUTION AND SUPPLIERS The Company's distribution center is strategically located in a 100,000 square foot facility adjacent to Hastings' corporate headquarters in Amarillo, Texas. This central location and the local labor pool enable Hastings to realize relatively low transportation and labor costs. The distribution center is utilized primarily for receiving, storing and distributing approximately 14,000 products offered in substantially every Hastings superstore. The distribution center also is used in distributing large purchases, including forward buys, close-outs and other bulk purchases. In addition, the distribution facility is used to receive, process and ship items to be returned to manufacturers and distributors as well as to transfer and redistribute videotapes among the Company's superstores. This facility currently provides inventory to all 117 Hastings superstores and is designed to be capable of providing distribution to over 250 superstores without significant additional investment. The Company ships products weekly to each Hastings superstore, facilitating quick and responsive inventory replenishment. Approximately 15% of the Company's total product, based on store receipts, is distributed through the distribution center. Approximately 85% of the Company's total product is shipped directly from the vendors to the superstores. The Company outsources all product transportation from its distribution center to various freight companies. Hastings' information systems and corporate infrastructure facilitate the Company's ability to purchase products directly from manufacturers, which contributes to its low pricing structure. In fiscal 1997, the Company purchased the majority of its products directly from manufacturers rather than through distributors. The Company's top three suppliers accounted for approximately 26% of the Company's total products purchased during fiscal 1997. While selections from a particular artist or author generally are produced by a single manufacturer, the Company strives to maintain supplier relationships that can provide an alternate source of supply. In general, the Company's products are returnable to the supplying vendor, in some cases with the payment of a return fee. See "Risk Factors -- Supplier Relationships." 33 35 STORE OPERATIONS Each Hastings superstore employs one store manager and one or more assistant store managers. Store managers and assistant store managers are responsible for the execution of all operational, merchandising and marketing strategies for the superstore in which they work. Superstores also generally have department managers, who are individually responsible for their respective book, music, software, video, customer service and stocking departments within each superstore. Hastings superstores are generally open daily from 10:00 a.m. to 11:00 p.m. However, several superstores are open 9:00 a.m. to 11:00 p.m. or 10:00 a.m. to 10:00 p.m. The only days that Hastings' superstores are closed are Thanksgiving and Christmas. ASSOCIATES The Company refers to its employees as associates because of the critical role they play in the success of each Hastings superstore and the Company as a whole. As of January 31, 1998, the Company employed approximately 5,330 associates. Of this number, approximately 4,950 were employed at retail superstores, 110 were employed at the Company's distribution center and 270 were employed at the Company's corporate offices. None of the Company's associates are represented by a labor union or are subject to a collective bargaining agreement. The Company believes that its relations with its associates are good. COMPETITION The entertainment retail industry is highly competitive. The Company competes with a wide variety of book retailers, music retailers, software retailers and videotape retailers that rent or sell videotapes, including independent single store operations, local multi-store operators, regional and national chains, as well as supermarkets, pharmacies, convenience stores, bookstores, mass merchants, mail order operations, warehouse clubs, record clubs, other retailers and various noncommercial sources such as libraries. With regard to its videotape sales and rental products in particular, the Company competes with cable, satellite and pay-per-view cable television systems. In addition, continuing technological advances that enhance the ability of consumers by home computer through the Internet or telephonic transmission to shop at home or access, produce and print written works or record music digitally could provide competition to the Company in the future. See "Risk Factors -- Competition and Technological Obsolescence." The Company competes in most of its markets with either national entertainment retailers or significant retailers of general merchandise or both. Hastings competes in its sale of books with retailers such as Barnes & Noble, Inc., Borders Group, Inc., Walden Books and B. Dalton Bookseller. The Company competes in its sale of music with music retailers, such as Blockbuster Music, Camelot Music, Inc., Trans World Entertainment and Musicland Stores Corporation, and consumer electronics stores, including Best Buy and Circuit City. The Company's principal competitors in the sale and rental of videotapes are Blockbuster Video and Hollywood Entertainment Corp. In addition, the Company competes in the sale of books, music and videotapes and the rental of videotapes and video games with local entertainment retailers and significant retailers of general merchandise, such as Wal-Mart. In the past year, retailers such as Amazon.com, Inc., Barnes & Noble, Inc. and N2K, Inc., have begun retail sales of entertainment products, such as books and music, via the Internet, and the Company anticipates that additional traditional competitors of the Company will compete soon via the Internet as well. The Company competes with other entertainment retailers on the basis of title selection, the number of copies of popular selections available, store location, visibility and pricing. TRADEMARKS AND SERVICEMARKS The Company believes its trademarks and servicemarks, including the servicemarks "Hastings Books Music Video," "Hastings, Your Entertainment Superstore" and "Hastings Entertainment," have significant value and are important to its marketing efforts. The Company has registered "Hastings Books Music Video" and "Hastings, Your Entertainment Superstore" as servicemarks with the United States Patent and Trademark Office and is in the process of registering "Hastings Entertainment." The Company maintains a policy of pursuing registration of its principal marks and opposing any infringement of its marks. 34 36 LITIGATION From time to time, the Company is party to certain legal proceedings arising in the ordinary course of business. Although the amount of any liability that could arise with respect to these proceedings cannot be predicted accurately, in the opinion of the Company any liability that might result from any pending claims will not have a material adverse effect on the Company. In fiscal 1993 and fiscal 1994, the Company sold its remaining 42 mall stores to Camelot Music, Inc. In connection with such sales, the Company assigned the underlying leases on such stores to Camelot Music, Inc. Camelot Music, Inc. commenced a proceeding under Chapter 11 of the Bankruptcy Code on August 9, 1996, and the Bankruptcy Court approved its plan of reorganization on December 12, 1997. The Company may be contingently liable for certain of the leases that have not yet expired or been amended, or where the Company has not otherwise been released by the lessors. As of October 31, 1997, 17 of such leases remained in effect where the Company may have contingent liability. Various lessors have alleged that Camelot Music Inc. has defaulted on certain of its obligations under such leases. The Company established a reserve of $2.5 million during fiscal 1996, which management believes is adequate for any amounts that may be payable by Hastings in connection with these leases. The Company cannot predict the extent to which lessors under the leases assigned to Camelot Music, Inc. will allege defaults thereunder on the part of Camelot Music, Inc. and look to the Company for payment under such leases, or the extent of the Company's total liability on such leases. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is information concerning the executive officers and directors of the Company:
NAME AGE POSITION ---- --- -------- John H. Marmaduke(1)....................... 50 Chairman of the Board, President and Chief Executive Officer Phillip G. Hill............................ 35 Senior Vice President, Chief Operating Officer and Director Dennis McGill.............................. 49 Vice President of Finance, Chief Financial Officer, Treasurer and Secretary Robert A. Berman........................... 48 Vice President of Store Operations Michael Woods.............................. 36 Vice President of Information Systems Timothy R. Hoelscher....................... 40 Vice President of Real Estate/Construction Leonard L. Berry(2)........................ 55 Director Peter A. Dallas(3)......................... 62 Director Gaines L. Godfrey(1)(3).................... 64 Director Craig R. Lentzsch(2)....................... 49 Director Stephen S. Marmaduke....................... 47 Director Jeffrey G. Shrader(1)(2)................... 47 Director Ron G. Stegall(1)(3)....................... 50 Director
- --------------- (1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. The Company's Articles of Incorporation provide that the Board of Directors is divided into three classes, designated by the Company as Class I, Class II and Class III. Each class of directors consists of three directors who serve for a one, two or three year period or until their successors are elected and qualified. Thereafter, directors serve staggered three-year terms. Accordingly, Phillip Hill, Stephen S. Marmaduke and Leonard L. Berry presently hold office as Class II Directors until the 1998 annual shareholders meeting; Ron G. Stegall, Peter A. Dallas and Craig R. Lentzsch presently hold office as Class III Directors until the 35 37 1999 annual shareholders meeting; and John H. Marmaduke, Gaines L. Godfrey and Jeffrey G. Shrader presently hold office as Class I Directors until the 2000 annual shareholders meeting. All executive officers are chosen by the Board of Directors and serve at the Board's discretion. JOHN H. MARMADUKE has served as President and Chief Executive Officer of the Company since July 1976 and as Chairman of the Board since October 1993. Mr. Marmaduke served as President of Hastings' former parent company, Western, from 1982 through June 1994, including the years 1991 through 1994 when Western was a division of Wal-Mart. Mr. Marmaduke also serves as a director of Cross-Continent Auto Retailers, Inc. Mr. Marmaduke has been active in the entertainment retailing industry with the Company and its predecessor company for over 24 years. PHILLIP G. HILL has served as Chief Operating Officer of the Company since December 1996 and as Chief Operating Officer -- Systems and Support of the Company from May 1996 through December 1996 and as Senior Vice President of the Company since October 1992. Mr. Hill was elected a Director of the Company in December 1996. From January 1990 to October 1992, Mr. Hill served as Vice President of Store Operations of the Company. From January 1988 to January 1990, Mr. Hill served as Director of Administration of the Company. From April 1986 to January 1988, Mr. Hill served as a District Manager of the Company. Prior to joining the Company, Mr. Hill served as Director of Operations for Gateway Books Inc., a 120-store chain of bookstores, and Director of Store Operations of Hallmark Card Shops based in Knoxville, Tennessee. DENNIS MCGILL has served as Vice President of Finance, Chief Financial Officer, Treasurer and Secretary of the Company since November 1995. From March 1994 to October 1995 Mr. McGill served as a financial consultant to the toy manufacturing, bedding and waste management industries. From December 1989 to February 1994, Mr. McGill served as President and Chief Executive Officer of the Bed Outlet, an 18-store bedroom furniture retailer in California. From August 1986 to December 1989, Mr. McGill served as the Senior Vice President -- Finance and Chief Financial Officer of San Francisco-based Lewis Galoob Toys, Inc., a New York Stock Exchange-listed, international toy manufacturing company. ROBERT A. BERMAN has served the Company as Vice President of Store Operations since January 1997. From June 1995 to January 1997, Mr. Berman was self-employed in the financial services industry. From January 1989 to June 1995, Mr. Berman served as Vice President and Senior Vice President of Store Operations for Builders Square, Inc., a chain of 185 building material superstores. At Builders Square, Inc., Mr. Berman was responsible for store operations, store planning and design, purchasing and construction. MICHAEL WOODS has served as Vice President of Information Systems of the Company since October 1992. From August 1990 to October 1992, Mr. Woods served as Director of Microsystems for the Company, focusing on store systems development. From October 1989 to August 1990, Mr. Woods served as a programming specialist and analyst for the Company. TIMOTHY R. HOELSCHER has served as Vice President of Real Estate/Construction of the Company since October 1992. From August 1991 to October 1992, Mr. Hoelscher served as Director of Real Estate/Construction. From June 1988 to August 1991, Mr. Hoelscher served as Director of Construction of the Company. Prior to joining the Company, Mr. Hoelscher served as Manager of Construction, Specialty Retail Division of Brown Group, Inc. Mr. Hoelscher has over 20 years experience in retail store development. LEONARD L. BERRY has served as a director of the Company since March 1994. Dr. Berry has served as a Professor of Marketing and the Director of the Center for Retailing Studies in the College of Business Administration at Texas A&M University since January 1982. Dr. Berry holds the J.C. Penney Chair of Retailing Studies at Texas A&M, a position awarded in January 1991. From July 1986 to July 1987, Dr. Berry served as the National President of the American Marketing Association. Dr. Berry also serves as a director of CompUSA and of Lowe's Companies, Inc. and as a public member of the Council of Better Business Bureaus. PETER A. DALLAS has served as a director of the Company since October 1991 and its predecessor since 1970. Mr. Dallas is a Banking Principal with NationsBank of Texas, N.A., a position held since January 1991. Mr. Dallas has served as an officer of NationsBank of Texas, N.A. and its predecessors, Boatmen's First National Bank of Amarillo and The First National Bank of Amarillo, since 1965. 36 38 GAINES L. GODFREY has served as a director of the Company since October 1991. Mr. Godfrey has been associated with Godfrey Ventures in the field of financial consulting, including evaluations, financings, underwritings, purchases and sales in a wide range of industries, since 1982 . From 1973 to 1982, Mr. Godfrey was Vice President, Finance for Mesa Petroleum Co. CRAIG R. LENTZSCH has served as a director of the Company since April 1994. Mr. Lentzsch is President and Chief Executive Officer of Greyhound Lines, Inc. a position held since November 1994. Mr. Lentzsch has served as a director of Greyhound since August 1994. From November 1994 to April 1995, Mr. Lentzsch also served as Chief Financial Officer of Greyhound. From August 1992 to November 1994, Mr. Lentzsch was employed by Motor Coach Industries International, Inc., where he served as Executive Vice President and Chief Financial Officer. Mr. Lentzsch is a member of the Board of Directors of the American Bus Association, the Intermodal Transportation Institute and Enginetech, Inc. STEPHEN S. MARMADUKE has served as a director of the Company since October 1991. From 1978 to September 1992, Mr. Marmaduke served as Vice President of Purchasing for Western. Mr. Marmaduke is the brother of the President and Chief Executive Officer of the Company, John H. Marmaduke, and a son of the late founder of Western, Sam Marmaduke. JEFFREY G. SHRADER has served as a director of the Company since October 1992. Mr. Shrader has served as a shareholder in the law firm of Sprouse, Mozola, Smith & Rowley, P.C. in Amarillo, Texas since January 1993. RON G. STEGALL has served as a director of the Company since May 1996. Mr. Stegall is the founder and has served as the Chief Executive Officer of Arlington Equity Partners, Inc. since January 1992. Mr. Stegall is also the founder of BizMart, Inc. and from October 1987 to December 1991 served as Chief Executive Officer of Bizmart. For more than 16 years prior to 1987, Mr. Stegall was employed by Tandy Corporation/Radio Shack Division serving as Senior Vice President from 1983 to 1987 and Vice President from 1979 to 1983. Mr. Stegall currently serves as Chairman of the Board of InterTAN, Inc. and as a director of O'Sullivan Industries, Inc. The Company has an Executive Committee, an Audit Committee and a Compensation Committee. The Audit Committee and the Compensation Committee consist solely of independent directors. The Executive Committee has the authority, between meetings of the Board of Directors, to take all actions with respect to the management of the Company's business that require action by the Board of Directors, except with respect to certain specified matters that by law must be approved by the entire Board of Directors. The Audit Committee is responsible for (i) reviewing the scope of, and the fees for, the annual audit, (ii) reviewing with the independent auditors the corporate accounting practices and policies and recommending to whom reports should be submitted within the Company, (iii) reviewing with the independent auditors their final report, (iv) reviewing with internal and independent auditors overall accounting and financial controls and (v) being available to the independent auditors during the year for consultation purposes. The Compensation Committee recommends the compensation of the officers of the Company and performs other similar functions and recommends grants of options under the Company's stock option plans for consideration by the Board of Directors. See "Management -- Stock Plans." Messrs. J. Marmaduke, Godfrey, Shrader and Stegall serve on the Executive Committee; Messrs. Godfrey, Dallas and Stegall serve on the Audit Committee; and Messrs. Berry, Lentzsch and Shrader serve on the Compensation Committee. 37 39 EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain information for fiscal 1997 regarding the compensation awarded to, earned by or paid to the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during fiscal 1997.
LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION(1) -------------------- NAME AND ----------------------- NUMBER OF SECURITIES PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS ------------------ ---------- ---------- -------------------- John H. Marmaduke............................. $156,991 $239,085 465,000(2) Chairman of the Board, President and Chief Executive Officer Phillip Hill.................................. 97,355 108,727 110,000 Senior Vice President and Chief Operating Officer Dennis McGill................................. 91,748 83,835 50,000 Vice President of Finance, Chief Financial Officer, Treasurer and Secretary Robert A. Berman.............................. 86,550 27,752 55,000 Vice President of Store Operations Michael Woods................................. 74,418 45,333 15,000 Vice President of Information Systems
- --------------- (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the compensation described in this table does not include medical, group life insurance or other benefits received by the Named Executive Officers that are available generally to all salaried employees of the Company, and certain perquisites and other personal benefits received by the Named Executive Officers that do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in the table. (2) Includes 400,000 shares subject to an option granted in fiscal 1993 with fixed annual increases in the exercise price, which option was amended in fiscal 1997 to fix the exercise price at $11.20 for the term of the option. 38 40 OPTION GRANTS, EXERCISES AND HOLDINGS Fiscal 1997 Option Grants. The following table sets forth certain information regarding options granted during fiscal 1997 to the Named Executive Officers.
INDIVIDUAL GRANTS --------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED EXERCISE OPTION TERM(4) OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ------------------------ GRANTED(#) FISCAL YEAR(1) SHARE(2) DATE(3) 5% 10% ---------- --------------- --------- ---------- ---------- ----------- John H. Marmaduke.... 24,825 2.8% $15.18(6) 08/28/02 $ 104,115 $ 230,067 40,175 4.6% 13.80 08/28/07 348,669 883,595 400,000(5) 45.9% 11.20(5) 01/31/07 4,833,598 14,234,072 Phillip Hill......... 25,000 2.9% 13.80 05/22/07 216,969 549,841 35,000 4.0% 13.80 08/28/07 303,756 769,778 50,000 5.7% 14.20(7) 01/31/10 766,039 2,255,846 Dennis McGill........ 10,000 1.1% 13.80 05/22/07 86,787 219,936 20,000 2.3% 13.80 08/28/07 173,575 439,873 20,000 2.3% 14.20(7) 01/31/10 306,416 902,338 Robert A. Berman..... 30,000 3.4% 13.80 05/22/07 260,362 659,809 25,000 2.9% 14.20(7) 01/31/12 383,020 1,127,923 Michael Woods........ 15,000 1.7% 13.80 08/28/07 130,181 329,905
- --------------- (1) The Company granted options to other associates to purchase an aggregate of 126,740 shares of Common Stock during fiscal 1997. (2) All options were granted at the fair market value of the Common Stock on the date of grant and a term of 10 years, unless otherwise noted. Fair market value is based upon an appraisal performed by an independent investment banking firm engaged by the Company. (3) Options may terminate before their expiration date if the optionee's status as an employee is terminated or upon the optionee's death. (4) In accordance with the rules of the Commission, shown are the gains or "option spreads" that would exist for the respective options granted. These gains are based on the assumed rates of annual compound stock price appreciation of 5% and 10% from the date the option was granted over the full option term. These assumed annual compound rates of stock price appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of future Common Stock prices. (5) Option granted in fiscal 1993 with fixed annual increases in the exercise price, which option was amended in fiscal 1997 to fix the exercise price at $11.20 for the term of the option. For a description of the deferred compensation expense recognized in connection with this repricing, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Nine Months Ended October 31, 1997 Compared to Nine Months Ended October 31, 1996." (6) Option granted with exercise price of $15.18 or 10% above fair market value of the Common Stock on the date of the grant. Term is five years. (7) Option granted with fixed annual increases in the exercise price and a term of 15 years. The option was amended in fiscal 1997 to fix the exercise price for the term of the option. 39 41 Fiscal 1997 Option Holdings. The following table sets forth certain information regarding options held at January 31, 1998. There were no options exercised during fiscal 1997 by the Named Executive Officers.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN THE OPTIONS AT FISCAL MONEY OPTIONS AT YEAR-END FISCAL YEAR-END ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- John H. Marmaduke................. 479,800 174,995 $1,495,130 $404,948 Phillip Hill...................... 48,420 173,980 335,728 168,432 Dennis McGill..................... 2,500 82,500 -- 31,500 Robert A. Berman.................. 0 55,000 -- 0 Michael Woods..................... 10,790 57,805 36,193 84,030
STOCK PLANS 1996 Incentive Stock Plan Scope. The Board of Directors and shareholders of the Company have approved the Company's Amended 1996 Incentive Stock Plan (the "1996 Plan"). The 1996 Plan authorizes the granting of stock options to purchase Common Stock, 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. The purpose of the 1996 Plan is to attract, retain and provide incentives to officers, other associates, directors and consultants of the Company and to thereby increase overall shareholder value. The 1996 Plan authorizes the award of 625,000 shares of Common Stock, representing % of outstanding shares of Common Stock after the Offering, to be used for stock options, stock appreciation rights or restricted or unrestricted stock. If an award made under the 1996 Plan expires, terminates or is forfeited, canceled or settled in cash without issuance of shares of Common Stock covered by the award, those shares will be available for future awards under the 1996 Plan. The 1996 Plan will terminate on May 18, 2006. As of January 31, 1998, options for 423,125 shares of Common Stock were outstanding under the 1996 Plan. Administration. The 1996 Plan is administered by the Board of Directors or, if directed by the Board of Directors, the Compensation Committee of the Board of Directors or another committee designated by the Board of Directors (in each event, the "Compensation Committee"). The Compensation Committee makes determinations with respect to the participation of employees, officers, directors and consultants in the 1996 Plan and, except as otherwise required by law or the 1996 Plan, the grant terms of awards, including vesting schedules, retirement and termination rights, payment alternatives such as cash, stock, contingent award or other means of payment consistent with the purposes of the 1996 Plan, and such other terms and conditions as the Board or the Compensation Committee deems appropriate. The Compensation Committee has the authority at any time to provide for the conditions and circumstances under which awards shall be forfeited. The Compensation Committee has the authority to accelerate the vesting of any award and the time at which any award becomes exercisable. Eligibility. Officers, other associates, directors and consultants of the Company may be selected by the Compensation Committee to receive awards under the 1996 Plan. In the discretion of the Compensation Committee, an eligible person may receive an award in the form of a stock option, stock appreciation right, restricted stock award, dividend equivalent right, stock award or other stock-based award, or any combination thereof, and more than one award may be granted to an eligible employee. Stock Options. The 1996 Plan authorizes the award of both non-qualified and incentive stock options ("ISO's"). Under the 1996 Plan and pursuant to awards made thereunder, Common Stock may be purchased at a fixed exercise price during a specified time. Unless otherwise provided in the award agreement, the exercise price of each share of Common Stock covered by a stock option shall not be less than the fair market value of the Common Stock on the date of the grant of such stock option, and 20% of the shares covered by the stock option shall become exercisable on the first anniversary of its grant and an additional 20% of such shares shall become exercisable on each of the second, third, fourth and fifth anniversaries of its grant. 40 42 Under the 1996 Plan, an ISO may be exercised at any time during the exercise period established by the Compensation Committee, except that (i) no ISO may be exercised prior to the expiration of six months from the date of grant; (ii) no ISO may be exercised more than three months after employment with the Company terminates by reason other than death or disability; and (iii) no ISO may be exercised more than one year after employment with the Company terminates by reason of death or disability. The aggregate fair market value (determined at the time of the award) of the Common Stock with respect to which ISO's are exercisable for the first time by any employee during any calendar year may not exceed $100,000. The term of each ISO is determined by the Compensation Committee, but in no event may such term exceed 10 years from the date of grant (or five years in the case of ISO's granted to shareholders owning 10% or more of the Company's outstanding shares of Common Stock). The exercise price of options is determined by the Compensation Committee, but the exercise price of ISO's cannot be less than the fair market value of the Common Stock on the date of the grant (or 110% of the fair market value of the Common Stock on the date of grant in the case of ISO's granted to shareholders owning 10% or more of the Company's outstanding shares of Common Stock). The exercise price of options may be paid in cash, in shares of Common Stock through a cashless exercise program with previously owned Common Stock or by such other methods as the Compensation Committee deems appropriate. Stock Appreciation Rights. The 1996 Plan authorizes the grant of stock appreciation rights ("SAR's"). The SARs may be granted either separately or in tandem with options. An SAR entitles the holder to receive an amount equal to the excess of the fair market value of a share of Common Stock at the time of exercise of the SAR over the option exercise price or other specified amount (or deemed option price in the event of an SAR that is not granted in tandem with an option), multiplied by the number of shares of Common Stock subject to the option or deemed option as to which the SAR is being exercised (subject to the terms and conditions of the option or deemed option). An SAR may be exercised at any time when the option or deemed option to which it related may be exercised and will terminate no later than the date on which the right to exercise the tandem option (or deemed option) terminates (or is deemed to terminate). Restricted Stock. Restricted stock awards are grants of Common Stock made to eligible persons subject to restrictions, terms and conditions as established by the Compensation Committee. An eligible person will become the holder of shares of restricted stock free of all restrictions if he or she complies with all restrictions, terms and conditions. Otherwise, the shares will be forfeited. The eligible persons will not have the right to vote the shares of restricted stock until all restrictions, terms and conditions are satisfied. Other Stock Based Awards. The Compensation Committee may allow a director, officer or other associate to elect to exchange annual retainers, fees or compensation for stock options. The Compensation Committee also may award rights to receive dividends or the equivalent. Additionally, the Compensation Committee may make an unrestricted transfer of ownership of Common Stock. Furthermore, the Compensation Committee may make other stock-based awards that are related to or serve a similar function as other awards. Adjustments. In the event of any changes in the outstanding shares of Common Stock by reason of any stock dividend, split, spinoff, recapitalization, merger, consolidation, combination, exchange of shares or other similar change, the aggregate number of shares with respect to which awards may be made under the 1996 Plan, and the terms and the number of shares of any outstanding option, restricted stock or other stock-based award, may be equitably adjusted by the Compensation Committee in its sole discretion. Change of Control. Upon a Change in Control, which is defined in the 1996 Plan to include certain third-party acquisitions of 30% or more of the then outstanding Company Common Stock or the combined voting power of the then outstanding Common Stock entitled to vote generally in the election of directors, changes in the composition of the Board of Directors, shareholder approval of certain significant corporate transactions such as a reorganization, merger, consolidation, sale of assets or the liquidation or dissolution of the Company, all outstanding awards vest and become immediately exercisable and cease to be subject to the risk of forfeiture. Termination and Amendment. The 1996 Plan may be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company 41 43 present or represented and entitled to vote at a duly held meeting of the Company's shareholders. The Board may at any time terminate the 1996 Plan or from time to time make such modifications or amendments of the 1996 Plan as it may deem advisable; provided, however, that the Board shall not make any material amendments to the 1996 Plan which require shareholder approval under applicable law, rule or regulation unless approved by the requisite vote of the Company's shareholders. No termination, modification or amendment of the 1996 Plan may adversely affect the rights conferred by an award without the consent of the recipient thereof. 1991 and 1994 Stock Option Plans Scope. The Board of Directors and shareholders of the Company have approved the Company's 1991 Stock Option Plan (the "1991 Plan") and 1994 Stock Option Plan (the "1994 Plan") (collectively, the "Plans"). The Plans are substantially identical and authorize the granting of ISO's and non-qualified stock options to purchase Common Stock. Options may be granted to officers, other associates and directors of the Company. Each of the Plans authorizes the issuance of 500,000 shares of Common Stock, each representing % of outstanding shares of Common Stock after the Offering, under stock option agreements. Shares of Common Stock issued under the Plans shall be authorized and unissued or treasury shares of Common Stock of the Company. The 1991 Plan will terminate on October 21, 2001, and the 1994 Plan will terminate on April 20, 2004. As of January 31, 1998, 478,400 of the shares authorized for issuance under the 1991 Plan were subject to options and 478,525 of the shares authorized for issuance under the 1994 Plan were subject to options. Administration. The Plans are administered by the Board of Directors or another committee designated by the Board of Directors of the Company (in each event, the "Compensation Committee"). Subject to the provisions of the Plans, the Compensation Committee has the authority to select eligible persons to receive awards, determine the time or times of receipt and determine the types of awards and the number of shares covered by the awards. The Compensation Committee is authorized to interpret the Plans, establish, amend and rescind any rules and regulations relating to the Plans, determine the terms and provisions of any agreements made pursuant to the Plans and make all other determinations that may be necessary or advisable for the administration of the Plans. Eligibility. Executive officers, directors and other key employees of the Company may be selected by the Compensation Committee to receive awards under the Plans. In the discretion of the Compensation Committee, an eligible person may receive an award in the form of ISO's or non-qualified stock options. More than one award may be made to eligible persons. Stock Options. The Plans authorize the award of non-qualified stock options. Under the Plans and pursuant to awards made thereunder, an option may be exercised at any time during the exercise period established by the Compensation Committee. Generally, the exercise period is ten years from the date of grant. The Compensation Committee determines the exercise price of options per share of Common Stock and whether the exercise price may be paid in cash or previously owned shares of Common Stock. Incentive Stock Options. The Plans authorize the award of ISO's. Under the Plans and pursuant to awards made thereunder, an ISO may be exercised at any time during the exercise period established by the Compensation Committee except that (i) no ISO may be exercised after employment with the Company terminates by reason other than retirement, death or disability; (ii) no ISO may be exercised more than one year after employment with the Company terminates by reason of death or disability; and (iii) no option may be exercised more than three months after retirement from the Company. The term of each option is determined by the Compensation Committee. Generally, the term will not exceed 10 years from the date of grant and may not exceed five years in the case of ISO's granted to shareholders owning 10% or more of the Company's outstanding shares of Common Stock. The aggregate fair market value (determined at the time of the award) of the Common Stock with respect to which ISO's are exercisable for the first time by an employee during any calendar year may not exceed $100,000. The exercise price of options as determined by the Compensation Committee shall be 100% of the fair market value of a share of Common Stock on the date 42 44 the ISO is granted, provided the ISO granted to any owner of 10% or more of the total combined voting power of the Company shall be 110% of the fair market value of the share of Common Stock on the date of grant. The exercise price of options may be paid in cash or in shares of previously owned Common Stock. Adjustments. In the event of any changes in the outstanding shares of Common Stock by reason of any stock dividend, split-up, recapitalization, merger, consolidation, combination, exchange of shares or other similar change, the aggregate number of shares with respect to which awards may be made under the Plans, and the terms and the number of shares of any outstanding option may be equitably adjusted by the Compensation Committee in its sole discretion. Change of Control. All options granted under the Plans are immediately exercisable upon a Change of Control, which is deemed to occur upon any merger, transfer of assets or transfer of voting shares of the Company resulting in members of the Marmaduke family owning, directly or indirectly, less than 50% of the voting shares of the Company. Termination and Amendment. The Compensation Committee may, without approval by the shareholders and without receiving further consideration from the participants, amend, condition or modify awards under the Plans except for amendments which under applicable law or regulation require such approval by the shareholders. 401(k) Savings Plan The Company presently sponsors a retirement plan called the Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust (the "401(k) Plan"). The total 401(k) Plan assets as of January 31, 1998 were valued at approximately $8.1 million. The trustee for the 401(k) Plan is Amarillo National Bank. Amarillo National Bank became the trustee for the 401(k) Plan on August 1, 1996 at which time associates were permitted to direct investments of their accounts among a selection of investments, including the Common Stock of the Company. Associates, including members of management, are eligible to make voluntary contributions of up to twelve percent (12%) of their annual compensation under the 401(k) Plan. The Company is permitted to make a discretionary contribution to the 401(k) Plan each fiscal year which will be calculated as a percentage (determined prior to the beginning of the plan year) of Elective Deferrals (as defined in the 401(k) Plan) made during the plan year by each participant eligible to receive a matching contribution. Contributions in excess of 6% of compensation shall not be included in this calculation. If the Company does not change the percentage rate that may be contributed for a plan year, the rate determined for the prior year shall remain in effect. The Company also is permitted to make discretionary profit sharing contributions to the 401(k) Plan each fiscal year which shall be credited to each eligible participant's account in the same proportion that the participant's salary and wage compensation bears to the total salary and wage compensation of all participants. The 401(k) Plan is intended to qualify as a profit sharing plan under Sections 401(a) and 401(k) of the Internal Revenue Code. Associate Stock Ownership Plan The Company maintains an Associate Stock Ownership Plan (the "ASOP") for associates completing one year of service (defined as 1,000 hours in a consecutive twelve-month period) under which contributions are made by the Company in amounts determined annually by the Board of Directors. The trustee for the ASOP is Amarillo National Bank. At January 31, 1998, approximately 2,845 associates were eligible to participate and were participating in the ASOP. Company contributions may be made in cash, in shares of Common Stock or other property. Allocation among participants of the Company's contributions to the ASOP is based upon the employee's compensation. Participants vest in their ASOP accounts at 20%, 40%, 60%, 80% and 100% after the completion of three, four, five, six and seven years of service, respectively, with the Company. Participants become fully vested upon retirement, death or disability. As soon as practicable after a participant's retirement, death, disability or termination of employment for any other reason, such participant's vested accrued benefit will be distributed to the participant or the 43 45 participant's beneficiary in shares of the Company's Common Stock or cash at the election of the participant. The ASOP permits participants to direct the voting of shares allocated to their account and permits current distribution to participants of cash dividends paid on Common Stock allocated to their accounts. During the last fiscal year, Company contributions to the ASOP for the accounts of the Named Executive Officers, and all executive officers as a group, the distribution or unconditional vesting of which are not subject to future events, was $4,398 and $5,300, respectively. Chief Executive Officer Stock Option In April 1993, the Board of Directors and shareholders approved a non-qualified stock option for 400,000 shares of Common Stock for John H. Marmaduke, Chief Executive Officer and President of the Company. The stock option grants Mr. Marmaduke the right to purchase 400,000 shares of Common Stock and terminates by its terms on January 31, 2007. The option is fully exercisable. The option was granted at the initial price of $7.84 per share of Common Stock and was to increase at a rate of 12% per annum. As amended in fiscal 1997, the exercise price per share of the option was fixed at $11.20 for the life of the option. Payment for shares received upon exercise of the option must be made in cash at the time of exercise. Corporate Officer Incentive Plan, Management Incentive Plan and Salary Incentive Plan Scope. The Board of Directors and shareholders of the Company have approved the Company's Corporate Officer Incentive Plan, the Management Incentive Plan and the Salary Incentive Plan (each an "Incentive Plan" and collectively the "Incentive Plans"). The Incentive Plans authorize the award of incentive cash payments to eligible employees if certain performance goals are met. Administration. The Incentive Plans are administered by the Chief Executive Officer and the Associate Resources Department of the Company, with final approval for all performance goals and award targets resting with the Compensation Committee or the Chief Executive Officer or, in the case of the Salary Incentive Plan, the Chief Executive Officer or the Corporate Compensation Team. After the size of any award has been determined based upon performance achievement, the Chief Executive Officer has the authority to reduce an award by no more than 30% based upon individual performance contributions. Eligibility. Award eligibility is determined by the Chief Executive Officer at the beginning of each performance period. Participants in the Incentive Plans are selected from corporate employees who are primarily responsible for the annual growth and profitability of the Company. A participant must be an employee of the Company on the day the Incentive Plan award is finalized and approved for payment in order to receive such award. Awards. The Incentive Plans provide for incentive cash payments based on incentive targets expressed as a percentage of a participant's base salary if certain performance goals are met. Each fiscal year is divided into two separate six month performance periods. Awards are made for each performance period. At the beginning of each performance period, each participant in the Incentive Plans is assigned an incentive target amount expressed as a percentage of base salary. The incentive target for a performance period can then be increased to not more than 125% of the targeted amount or decreased to not less than 50% of the targeted amount based upon performance achievement. At the beginning of each performance period, the Compensation Committee or, in the case of the Management Incentive Plan, the Chief Executive Officer, establishes in writing the performance goals that will determine the size of the Incentive Plan awards. As of October 31, 1997, the performance measures for all Incentive Plan participants are based upon sales and return on equity as defined in the Company's annual business plan. Return on equity is defined as the after-tax rate of return on beginning shareholders' equity for the performance period. Within 90 days after the end of each performance period, each participant's base salary rate will be multiplied by the earned Incentive Plan award percentage to determine the dollar value of the award for the performance period in question. The maximum award payable under the Corporate Officer Incentive Plan is the lesser of 250% of the participant's most recent annualized base salary or $1,000,000. 44 46 Adjustments and Amendments. The Board of Directors and the Compensation Committee retain the right to adjust, amend or suspend any current payments in the Corporate Officer Incentive Plan and the Management Incentive Plan for any given performance period if, in the good faith determination of the Board of Directors or the Compensation Committee, the payments of amounts thereunder would result in a material adverse change to or a material decline in the financial condition or prospects of the Company. Form and Payment of Awards. Award calculations under the Incentive Plans are finalized and paid within 90 days after the end of each performance period. A participant may elect to voluntarily defer a portion of an award. Additionally, participants under the Corporate Officer Incentive Plan and the Management Incentive Plan may elect to apply a portion of an award to purchase discounted Common Stock of the Company pursuant to the Management Stock Purchase Plan (see "Management Stock Purchase Plan"). Management Stock Purchase Plan Scope. The Board of Directors and shareholders of the Company have approved the Management Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan authorizes the issuance of up to 225,000 shares of Common Stock, representing % of outstanding shares of Common Stock after the Offering, pursuant to agreements providing for the purchase of Restricted Stock Units ("RSU's"). The cost of each RSU is equal to 75% of the fair market value of the Common Stock of the Company on the date the RSU is awarded. Shares of stock underlying any cancelled RSU's are added back to the shares of Common Stock available for issuance under the Purchase Plan. As of January 31, 1998, no RSU's had been awarded under the Purchase Plan. Administration. The Purchase Plan is administered by the Board of Directors or the Compensation Committee (in each event, the "Compensation Committee"). Eligibility. The Compensation Committee designates the management employees of the Company that are eligible to participate in the Purchase Plan. Participation. Each participant in the Purchase Plan may elect to purchase RSU's. Each RSU awarded to a participant is credited to a bookkeeping account established and maintained for that participant. Each participant may elect to receive an award of RSU's by completing a subscription agreement. A subscription agreement provides that the participant may elect to receive RSU's in lieu of a specified portion of any incentive bonus paid to such participant. During each performance period, a participant may elect to use the lesser of 50% of the actual bonus amount for such performance period or $25,000 to purchase RSU's. A participant is fully vested in each RSU three years after the RSU is awarded. Once vested, the Company will issue to the participant one share of Common Stock at the end of each deferral period specified in the subscription agreement pertaining to each RSU, or upon the participant's termination of employment or the termination of the Purchase Plan, if sooner. If a participant voluntarily terminates his employment with the Company for reasons other than death or permanent disability, the participant's nonvested RSU's shall be canceled and he shall receive a cash payment pursuant to the terms of the Purchase Plan. If a participant's employment is terminated by the Company, or if the participant's employment terminates as a result of death or permanent disability, the participant's nonvested RSU's shall be canceled and he shall receive RSU's pursuant to the terms of the Purchase Plan. Whenever dividends (other than dividends payable only in shares of stock) are paid with respect to Common Stock, each participant shall be paid an amount in cash equal to the number of his vested RSU's multiplied by the dividend value per share. In addition, each participant's account shall be credited with an amount equal to the number of such participant's nonvested RSU's multiplied by the dividend value per share. Amounts credited with respect to each nonvested RSU shall be paid, without interest, on the date the participant becomes vested in such RSU, or when the participant receives payment of his nonvested RSU's. Adjustments. In the event of a stock dividend, stock split or similar change in capital structure of the Company, the Compensation Committee shall make appropriate adjustments in the number and kinds of shares of Common Stock with respect to which RSU's will thereafter be granted, the number and kinds 45 47 of shares remaining subject to the outstanding RSU's, the number of RSU's credited to each participant's account, and the method of determining the cost of RSU's. In the event of any proposed merger, consolidation, dissolution or liquidation of the Company, all nonvested RSU's shall become fully vested on the effective date of such merger, consolidation, sale, dissolution or liquidation and the Compensation Committee in its sole discretion may, as to any outstanding RSU's, make such substitution or adjustment in the aggregate number of shares to reserve for issuance under the Purchase Plan and the number of shares subject to each RSU as it may determine on an equitable basis and as may be permitted by the terms of such transaction, or terminate such RSU's upon such terms and conditions as it shall provide. Amendment or Termination. The Company reserves the right to amend or terminate the Purchase Plan at any time, by action of its Board of Directors, provided that no such action shall adversely affect a participant's right under the Purchase Plan with respect to RSU's awarded and vested before the date of such action. DIRECTOR COMPENSATION Directors of the Company receive an annual cash retainer of $15,000 and a grant of shares of Common Stock valued at $5,000 for service as directors, and a fee of $750 for each director meeting and $500 for each committee meeting attended in person or by telephone. The Company reimburses directors for all expenses incurred in connection with their activities as directors. The Company has adopted a Stock Option Plan for Outside Directors (the "Directors Option Plan") for its non-employee directors and has reserved 100,000 shares of Common Stock for issuance thereunder. The Directors Option Plan provides that each non- employee director receives an initial option for 2,500 shares of Common Stock upon election as a director, and an annual grant of 2,500 shares thereafter. Each option is granted at the fair market value of the Common Stock of the Company at the time of the grant. All initial and annual stock options granted pursuant to the Directors Option Plan are nonqualified stock options and are generally exercisable for a period of 10 years from the date of grant or one year after the optionee ceases to be a director of the Company. As of January 31, 1998, options covering 35,000 shares have been granted under the Directors Option Plan. The Company also granted options covering 7,720 shares under a previous director compensation plan that was terminated in fiscal 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Berry, Lentzsch and Shrader presently serve as the members of the Compensation Committee. See "Certain Transactions." Mr. Shrader is a shareholder in the law firm of Sprouse, Mozola, Smith & Rowley, P.C. in Amarillo, Texas, which has provided legal services to the Company since 1993. 46 48 CERTAIN TRANSACTIONS Gaines Godfrey, a director of the Company, is a limited partner in certain limited partnerships that lease land and improvements to the Company under triple net leases. During fiscal years 1995, 1996 and 1997, the Company made aggregate lease payments of $479,392, $480,019 and $500,256 respectively, to such limited partnerships. Jeffrey G. Shrader, a director of the Company, is a shareholder in the law firm of Sprouse, Mozola, Smith & Rowley, P.C., Amarillo, Texas, which has provided legal services to the Company since 1993. In May 1994, the Company and the Estate of Sam Marmaduke (the "Estate"), entered into a Stock Redemption Agreement whereby the Estate has the opportunity on an annual basis to tender for purchase by the Company Common Stock owned by the Estate. John H. Marmaduke is named as the Independent Executor of the Estate. The Estate did not tender for purchase any of its shares of Common Stock in fiscal years 1994 through 1996. In fiscal 1997 the Estate tendered and the Company redeemed 107,195 shares of Common Stock for $1,479,291 paid in cash. The Estate has not tendered for purchase any shares of Common Stock during fiscal 1998, and the Estate has informed the Company that it does not intend to tender any shares of Common Stock to the Company prior to the consummation of this Offering. If this Offering is consummated, the Redemption Agreement will terminate. PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of January 31, 1998 and as adjusted to reflect the sale of shares in the Offering by (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock, (ii) each of the Company's directors, (iii) each executive officer named in the Summary Compensation Table set forth under the heading "Management," and (iv) all directors and executive officers of the Company as a group. The Company believes that each of such persons has the sole voting and dispositive power over the shares held by him except as otherwise indicated.
SHARES OWNED SHARES SHARES OWNED BEFORE THE OFFERING TO BE SOLD AFTER THE OFFERING ---------------------- ---------- ---------------------- NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2) ------------------- --------- ---------- --------- ---------- John H. Marmaduke(3)(4)........ 4,555,670 54.5% -- (4) % Estate of Sam Marmaduke(4)..... 1,351,785 16.2% % P.O. Box 33251 Amarillo, Texas 79120 Robert Schneider(5)............ 581,495 7.1% -- 581,495 % P.O. Box 32270 Amarillo, Texas 79120 Stephen S. Marmaduke(6)........ 1,432,495 17.1% -- 1,432,495 % Phillip Hill................... 65,920 * -- 65,920 * Dennis McGill.................. 9,340 * -- 9,340 * Robert A. Berman............... 500 * -- 500 * Mike Woods..................... 12,200 * -- 12,200 * Leonard L. Berry............... 12,180 * -- 12,180 * Peter A. Dallas................ 17,020 * -- 17,020 * Gaines L. Godfrey.............. 20,500 * -- 20,500 * Craig R. Lentzsch(7)........... 13,650 * -- 13,650 * Jeffrey G. Shrader(8).......... 26,205 * -- 26,205 * Ron G. Stegall(9).............. 7,850 * -- 7,850 * All directors and executive officers as a group (13 persons)(2).................. 6,173,530 73.8% -- %
47 49 - --------------- * Less than 1%. (1) Unless otherwise indicated, the address for each of the beneficial owners identified is c/o the Company, 3601 Plains Blvd., Suite #1, Amarillo, Texas 79102. (2) Based on 8,366,465 shares of Common Stock outstanding prior to the Offering and shares outstanding upon completion of the Offering. (3) Includes 1,351,785 shares held by the Estate of Sam Marmaduke, of which John H. Marmaduke is the Independent Executor, and 2,229,220 shares held by the John H. Marmaduke Family Limited Partnership, the managing general partner of which is John H. Marmaduke Management, Inc., of which John H. Marmaduke is president, 54,485 shares held by Martha A. Marmaduke, Mr. John H. Marmaduke's wife, 8,550 shares held by Margaret Hart Marmaduke, John H. Marmaduke's daughter, 10,000 shares held by Owen M. Marmaduke, Mr. Marmaduke's son, and 479,800 shares subject to stock options exercisable within 60 days, and excludes shares held in trusts for John H. Marmaduke's children of which NationsBank of Texas, N.A. is trustee. (4) John H. Marmaduke is the executor of the Estate of Sam Marmaduke and a son of the late Sam Marmaduke. John H. Marmaduke and Stephen S. Marmaduke are brothers. The Estate of Sam Marmaduke is to sell shares as a Selling Shareholder in this Offering. (5) Includes 30,000 shares held by trusts for the benefit of Mr. Schneider's children for which Mr. Schneider is trustee, and excludes 11,900 shares held by other trusts for the benefit of Mr. Schneider's children. (6) Includes 1,365,670 shares held by the Stephen S. Marmaduke Family Limited Partnership, the managing general partner of which is Stephen S. Marmaduke Management, Inc., of which Stephen S. Marmaduke is president, 60,130 shares held by Shelley R. Marmaduke, Stephen S. Marmaduke's wife, and 4,080 shares subject to options exercisable within 60 days. Excludes shares held directly by Stephen S. Marmaduke's adult children and shares held in trusts for Stephen S. Marmaduke's children, of which NationsBank of Texas, N.A. is trustee. Excludes any interest attributable to Stephen S. Marmaduke in the Estate of Sam Marmaduke, of which Stephen S. Marmaduke is a beneficiary. Stephen S. Marmaduke is the brother of John H. Marmaduke and a son of the late Sam Marmaduke. (7) Includes 3,500 shares held by the Lentzsch Special Trust 1, of which Craig R. Lentzsch is a co-trustee. (8) Includes 19,625 shares held in an individual retirement account for the benefit of Mr. Shrader and 3,050 shares held in a defined benefit plan for the account of Mr. Shrader. (9) Includes 7,000 shares held by the Stegall Family Limited Partnership. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 75,000,000 shares of Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share. As of January 31, 1998, there were approximately 226 record holders of Common Stock. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders. Cumulative voting in the election of directors is not permitted, and the holders of a majority of the number of outstanding shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Preferred Stock. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of 48 50 Common Stock are, and the shares offered by the Company in this Offering, will be, when issued and paid for, duly authorized, fully paid, validly issued and nonassessable. PREFERRED STOCK The Board of Directors of the Company is authorized (without any further action by the shareholders) to issue Preferred Stock in one or more series and to fix the voting rights and designations, preferences, limitations and relative rights and qualifications, limitations or restrictions and certain other rights and preferences of the Preferred Stock. Satisfaction of any dividend preferences of outstanding Preferred Stock would reduce the amount of funds available for the payment of dividends on Common Stock. Also, holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities, or the removal of incumbent management. See "Risk Factors -- Control of the Company; Effect of Certain Provisions in Articles of Incorporation and Bylaws." The Board of Directors of the Company, without shareholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the holders of Common Stock. On the date of this Prospectus, none of the 5,000,000 authorized shares of Preferred Stock will be outstanding and the Company has no present intention to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS Certain provisions of the Articles of Incorporation and Bylaws of the Company summarized in the following paragraphs may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt, including attempts that might result in a premium being paid over the market price for the shares held by shareholders prevailing at that time. See "Risk Factors -- Control of the Company; Effect of Certain Provisions in Articles of Incorporation and Bylaws." The following provisions may not be amended in the Company's Articles of Incorporation without the affirmative vote of the holders of a majority of the outstanding shares of Common Stock. Classified Board of Directors. The Articles of Incorporation of the Company provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. See "Management." Special Meetings of Shareholders; Prohibition of Action by Unanimous Consent. The Company's Articles of Incorporation prohibit the taking of shareholder action by written consent without a meeting and the Company's Bylaws provide that special meetings of shareholders of the Company be called only by the Chairman of the Board of Directors, a majority of the Board of Directors, the Company's President or holders of not less than 25% of the Company's outstanding stock entitled to vote at the proposed meeting. Amendment of Bylaws. The Bylaws may only be amended or repealed by the Board. EXCULPATORY CHARTER PROVISIONS; LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS The Articles of Incorporation of the Company provide that a director will not be liable to a corporation or its shareholders for monetary damages arising from acts or omissions in the director's capacity as a director, except for (i) a breach of the director's duty of loyalty to the corporation or its shareholders, (ii) an act or omission not in good faith that constitutes a breach of duty of the director to the corporation or an act or omission that involves intentional misconduct or a knowing violation of law, (iii) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (iv) an act or omission for which the liability of a director is expressly provided (or for which indemnification is expressly prohibited) by an applicable statute. In addition, the Company's Articles of Incorporation and Bylaws require it to indemnify its directors and officers against any and all liability and reasonable expense that may be incurred by them in connection with or resulting from (i) any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, 49 51 arbitrative or investigative, (ii) an appeal on such an action, suit or proceeding, or (iii) an inquiry or investigation that could lead to such an action, suit or proceeding, all to the fullest extent permitted by Texas law. The Company's Bylaws allow the Company to purchase and maintain liability, indemnification or similar insurance. Such insurance is currently in place. The Company has entered into indemnification agreements with each of its directors and executive officers providing indemnification to the fullest extent permitted by applicable law. TEXAS BUSINESS COMBINATION LAW The Company is subject to Part Thirteen of the Texas Business Corporation Act, which took effect September 1, 1997 (the "Business Combination Law"). In general, the Business Combination Law prevents an "affiliated shareholder" (defined generally as a person that is or was within the preceding three-year period the beneficial owner of 20% or more of the corporation's outstanding voting shares) or its affiliates or associates from entering into or engaging in a "business combination" (defined generally to include (i) mergers or share exchanges, (ii) dispositions of assets having an aggregate value equal to 10% or more of the market value of the assets or of the outstanding common stock or representing 10% or more of the earning power or net income of the corporation, (iii) certain issuances or transactions by the corporation that would increase the affiliated shareholder's proportionate ownership of shares of the corporation, (iv) certain liquidations or dissolutions, and (v) the receipt of tax, guarantee, loan or other financial benefits by an affiliated shareholder other than proportionately as a shareholder of the corporation) with an "issuing public corporation" (which would include the Company) during the three-year period immediately following the affiliated shareholder's acquisition of shares unless (a) before the date such person became an affiliated shareholder, the board of directors of the issuing public corporation approves the business combination or the acquisition of shares made by the affiliated shareholder on such date or (b) not less than six months after the date such person became an affiliated shareholder, the business combination is approved by the affirmative vote of holders of at least two-thirds of the issuing public corporation's outstanding voting shares not beneficially owned by the affiliated shareholder or its affiliates or associates. The Business Combination Law does not apply to a business combination with an affiliated shareholder that was the beneficial owner of 20% or more of the outstanding voting shares of the issuing public corporation on December 31, 1996, and continuously until the announcement date of the business combination; as a result, the restrictions of the Business Combination Act would not apply to Mr. John H. Marmaduke, who has been the beneficial owner of more than 20% of the outstanding Common Stock continuously since prior to December 31, 1996. TRADING MARKET AND TRANSFER AGENT No established trading market for the Common Stock existed prior to the Offering. An application has been made for the Common Stock to be listed on The Nasdaq National Market under the symbol "HAST." The transfer agent and registrar for the Common Stock is Chase Mellon Shareholder Services, and its address is 2323 Bryan Street, Suite 2370, Dallas, Texas 75201. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for the Common Stock, and no prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of substantial shares of Common Stock of the Company in the public market could adversely affect prevailing market prices and could impair the Company's future ability to raise capital through the sale of its equity securities. Upon completion of the Offering, the Company will have shares of Common Stock outstanding ( shares if the Underwriters exercise their over-allotment option in full). The shares of Common Stock sold in the Offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, which will be subject to the resale 50 52 limitations of Rule 144. All of the remaining outstanding shares, which were issued by the Company in reliance on exemptions from the registration requirements of the Securities Act, are "restricted securities" within the meaning of Rule 144. Those shares may not be sold publicly unless they are registered under the Securities Act, sold in compliance with Rule 144, or sold in a transaction exempt from registration. Following the expiration or release from the 180-day lock-up agreements with the representatives of the Underwriters, approximately additional shares of Common Stock will be eligible for sale in accordance with the requirements of Rule 144, subject to compliance with certain volume and other limitations. See "Underwriting." In addition, options covering 1,819,160 shares of Common Stock are outstanding. See "Management -- Option Grants, Exercises and Holdings." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year, including an "affiliate" as that term is defined under the Securities Act, is entitled to sell, within any three-month period commencing 90 days after the Offering in broker's transactions or to market makers, a number of "restricted" shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company ( shares immediately following this Offering) or (ii) the average weekly trading volume of the Company's outstanding Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission, provided that certain manner of sale requirements and requirements as to the availability of current public information about the Company are satisfied. A person who has not been an "affiliate" of the Company at any time within three months preceding a sale and who has beneficially owned shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the manner of sale, notice, availability of current public information and volume limitations described above. The Company believes that the earliest date on which any shares of its Common Stock currently outstanding will be eligible for sale under Rule 144 is , 1998. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 under the Securities Act may be relied upon for the resale of securities originally issued by the Company prior to the date of the Prospectus to its employees, directors, officers, consultants or advisers under written compensatory benefit plans or contracts relating to the compensation of such persons. Securities issued in reliance on Rule 701 are "restricted" shares and beginning 90 days after the date of this Prospectus may be sold by non-affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with the one-year holding period, in each case subject to the lock-up agreements discussed above. The Company intends to register all shares reserved for issuance under the 1996 Plan, the 1994 Plan, the 1991 Plan, the ASOP, the 401(k) Plan, the Incentive Plans, the Purchase Plan and the Directors Option Plan. At January 31, 1998, awards covering 2,108,900 shares of Common Stock have been issued and are outstanding under these plans. All shares purchased in the future under these plans will be available for resale in the public market without restriction, except that "affiliates" must comply with the applicable provisions of Rule 144. The Company is unable to estimate the number of shares that may be sold in the future by its shareholders since this will depend on the market price for the Common Stock, the personal circumstances of the shareholders, and other factors. Any sale of substantial amounts of shares of Common Stock in the open market may significantly reduce the market price of the Common Stock offered hereby. 51 53 UNDERWRITING Upon the terms and subject to the conditions stated in the Underwriting Agreement (the "Underwriting Agreement"), each Underwriter named below (collectively, the "Underwriters"), has severally agreed to purchase, and the Company and the Selling Shareholder have agreed to sell to such Underwriter, the number of shares of Common Stock set forth opposite the name of such Underwriter:
NUMBER UNDERWRITER OF SHARES ----------- --------- Smith Barney Inc............................................ A.G. Edwards & Sons, Inc.................................... ----- Total............................................. =====
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc. and A.G. Edwards & Sons, Inc. are acting as the representatives (the "Representatives"), propose to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial offering of the shares to the public, the public offering price and such concessions may be changed by the Representatives. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm any shares of Common Stock to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase, in whole or in part, up to additional shares of Common Stock at the price to public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares of Common Stock set forth opposite each Underwriter's name in the preceding table bears to the total number of shares of Common Stock listed in such table. The Company, the Selling Shareholder, and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. Each of the Company, its officers and directors, and certain other shareholders of the Company (including the Selling Shareholder) who will collectively own shares of Common Stock immediately after the Offering, has agreed not to (i) issue (in the case of the Company), sell, offer or agree to sell, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock of the Company (or any securities convertible into or exercisable or exchangeable for shares of Common Stock or such other capital stock) or publicly disclose the intention to make any such disposition or transfer or (ii) enter into any hedging, swap or other arrangements that transfers all or a portion of the 52 54 economic consequences associated with the ownership of any Common Stock or other capital stock of the Company for a period of 180 days after the date of this Prospectus without the prior written consent of Smith Barney Inc., except that the Company may issue shares of Common Stock upon the exercise of an option outstanding as of the date of this Prospectus. Prior to the Offering, there has not been any public market for the Common Stock of the Company. Consequently, the initial public offering price for the shares of Common Stock included in the Offering has been determined by negotiations among the Company, the Selling Shareholder, and the Representatives. Among the factors considered in determining such price were the history of and prospects for the Company's business and the industry in which it competes, an assessment of the Company's management and the present state of the Company's development, the past and present revenues and earnings of the Company, the prospects for growth of the Company's revenues and earnings, the current state of the economy in the United States, the current level of economic activity in the industry in which the Company competes and in related or comparable industries, and currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies which are comparable to the Company. An application to list the Common Stock for quotation on The Nasdaq National Market under the symbol "HAST" has been filed by the Company. At the request of the Company, the Underwriters have reserved up to shares for sale to officers, directors, employees and certain other persons associated with the Company at the initial public offering price. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same terms and conditions as the other shares offered hereby. In connection with the Offering and in compliance with applicable law, the Underwriters may overallot (i.e., sell more shares of Common Stock than the total amounts shown on the list of Underwriters and participations that appears above) and may effect transactions that stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those that might otherwise prevail in the open market. Such transactions may include placing bids for the Common Stock or effecting purchases of the Common Stock for the purpose of pegging, fixing or maintaining the prices of the Common Stock or for the purpose of reducing a syndicate short position created in connection with the Offering. A syndicate short position may be covered by exercise of the option described above rather than by open market purchases. In addition, the contractual arrangements among the Underwriters include a provision whereby, if Smith Barney Inc. purchases Common Stock in the open market for the account of the underwriting syndicate and the Common Stock purchased can be traced to a particular Underwriter or member of the selling group, the underwriting syndicate may require the Underwriter or selling group member in question to purchase the Common Stock in question at the cost price to the syndicate or may recover from (or decline to pay) the concession applicable to the Common Stock in question. The Underwriters are not required to engage in any of these activities and any such activities, if commenced, may be discontinued at any time. A.G. Edwards & Sons, Inc. has performed certain investment banking services on behalf of the Company during the past five years. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Locke Purnell Rain Harrell (A Professional Corporation), Dallas, Texas. Certain legal matters will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas. 53 55 EXPERTS The financial statements of Hastings Entertainment, Inc. as of January 31, 1997 and 1996, and for each of the years in the three-year period ended January 31, 1997, have been included herein and elsewhere in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus constitutes a part of the Registration Statement and does not contain all the information set forth in the Registration Statement, certain portions of which are omitted from this Prospectus as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the shares of Common Stock offered by this Prospectus, reference is made to the Registration Statement, including the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any agreement, contract or other document are not necessarily complete, but contain a summary of the material terms of such agreements, contracts or other documents, and in each instance reference is made to the copy of such agreement, contract or other document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference. The Registration Statement and accompanying exhibits and schedules may be inspected and copies may be obtained (at prescribed rates) at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the Registration Statement may also be inspected at the Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2551. In addition, the Common Stock will be listed on the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006-1500, where such material may also be inspected and copied. As a result of the Offering, the Company will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference facilities and regional offices referred to above. In addition, these reports, proxy statements and other information may also be obtained from the web site that the Commission maintains at http://www.sec.gov. The Company intends to furnish its shareholders annual reports containing consolidated financial statements certified by its independent auditors and quarterly reports for each of the first three quarters of each fiscal year containing unaudited financial information. 54 56 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Balance Sheets as of January 31, 1996 and 1997.............. F-3 Statements of Income for the years ended January 31, 1995, 1996 and 1997............................................. F-4 Statements of Shareholders' Equity for the years ended January 31, 1995, 1996 and 1997........................... F-5 Statements of Cash Flows for the years ended January 31, 1995, 1996 and 1997....................................... F-6 Notes to Financial Statements............................... F-7 Balance Sheets as of October 31, 1996 and 1997 (unaudited)............................................... F-18 Statements of Income for the nine months ended October 31, 1996 and 1997 (unaudited)................................. F-19 Statements of Shareholders' Equity for the nine months ended October 31, 1996 and 1997 (unaudited)..................... F-20 Statements of Cash Flows for the nine months ended October 31, 1996 and 1997 (unaudited)............................. F-21 Notes to Unaudited Financial Statements..................... F-22
F-1 57 WHEN THE TRANSACTION REFERRED TO IN NOTE 14 OF THE NOTES TO FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT. KPMG Peat Marwick LLP INDEPENDENT AUDITORS' REPORT The Board of Directors Hastings Entertainment, Inc.: We have audited the accompanying balance sheets of Hastings Entertainment, Inc. as of January 31, 1996 and 1997, and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hastings Entertainment, Inc. as of January 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 1997, in conformity with generally accepted accounting principles. Dallas, Texas March 21, 1997, except as to note 14, which is as of , 1998 F-2 58 HASTINGS ENTERTAINMENT, INC. BALANCE SHEETS JANUARY 31, 1996 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUES)
ASSETS FISCAL -------------------- 1995 1996 -------- -------- Current assets: Cash...................................................... $ 2,738 $ 4,972 Merchandise inventories (note 2).......................... 94,602 105,185 Other current assets...................................... 4,392 3,396 -------- -------- Total current assets.............................. 101,732 113,553 Property and equipment, net (note 3)........................ 63,684 67,165 Deferred income taxes (note 6).............................. 1,013 976 Other assets................................................ 798 27 -------- -------- $167,227 $181,721 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capitalized lease obligations (notes 4 and 5)........................................ $ 1,295 $ 301 Trade accounts payable.................................... 43,748 41,388 Accrued expenses and other liabilities (notes 5 and 12)... 11,438 11,120 Deferred income taxes (note 6)............................ 2,454 3,158 Income taxes payable...................................... 2,066 113 -------- -------- Total current liabilities......................... 61,001 56,080 Long-term debt and capitalized lease obligations, excluding current maturities (notes 4 and 5)........................ 37,621 51,572 Other long-term liability (note 12)......................... -- 1,500 Redemption value of common stock held by estate of Company's founder (note 9).......................................... 11,500 9,500 Shareholders' equity (notes 9 and 14): Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued................................ -- -- Common stock, $.01 par value; 75,000,000 shares authorized; 8,552,000 shares issued.................... 86 86 Additional paid-in capital................................ 1,482 1,585 Retained earnings......................................... 68,064 71,721 Treasury stock, stated at cost............................ (1,027) (823) Redemption value of common stock held by estate of Company's founder...................................... (11,500) (9,500) -------- -------- 57,105 63,069 Commitments and contingencies (notes 5, 9, 11, 12 and 13) -------- -------- $167,227 $181,721 ======== ========
See accompanying notes to financial statements. F-3 59 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF INCOME YEARS ENDED JANUARY 31, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEAR -------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Merchandise revenue..................................... $ 197,311 $ 232,463 $ 251,934 Video rental revenue.................................... 57,603 66,449 72,357 ---------- ---------- ---------- Total revenues................................ 254,914 298,912 324,291 Cost of revenues (note 8)............................... 159,233 189,159 204,612 ---------- ---------- ---------- Gross profit.................................. 95,681 109,753 119,679 ---------- ---------- ---------- Selling, general and administrative expenses............ 80,480 89,325 105,183 Development expenses (note 8)........................... 2,811 2,791 2,421 ---------- ---------- ---------- 83,291 92,116 107,604 ---------- ---------- ---------- Operating income.............................. 12,390 17,637 12,075 ---------- ---------- ---------- Other income (expenses): Interest expense...................................... (718) (2,588) (3,585) Gain (loss) on sale of mall stores (note 12).......... 4,080 -- (2,500) Other, net............................................ 148 221 126 ---------- ---------- ---------- 3,510 (2,367) (5,959) ---------- ---------- ---------- Income before income taxes.................... 15,900 15,270 6,116 Income taxes (note 6)................................... 6,090 5,875 2,320 ---------- ---------- ---------- Net income.................................... $ 9,810 $ 9,395 $ 3,796 ========== ========== ========== Net income per common share............................. $ 1.17 $ 1.11 $ .45 ========== ========== ========== Weighted average common shares outstanding.............. 8,378,245 8,429,165 8,452,190 ========== ========== ==========
See accompanying notes to financial statements. F-4 60 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
REDEMPTION VALUE OF COMMON STOCK COMMON STOCK ADDITIONAL TREASURY STOCK HELD BY ESTATE TOTAL ------------------ PAID-IN RETAINED ----------------- OF COMPANY'S SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT FOUNDER EQUITY --------- ------ ---------- --------- ------- ------- -------------- ------------- Balances at January 31, 1994... 8,552,000 $ 9 $1,334 $49,085 186,985 $(1,541) $(15,500) $33,387 Purchase of treasury stock..... -- -- -- -- 3,750 (39) -- (39) Sale of treasury stock including stock option exercises.................... -- -- 139 -- (65,335) 541 -- 680 Change in redemption value..... -- -- -- -- -- -- 2,000 2,000 Dividends ($.012 per share).... -- -- -- (105) -- -- -- (105) Net income..................... -- -- -- 9,810 -- -- -- 9,810 Change in common stock par value.................... -- 77 (77) -- -- -- -- -- --------- --- ------ ------- ------- ------- -------- ------- Balances at January 31, 1995... 8,552,000 86 1,396 58,790 125,400 (1,039) (13,500) 45,733 Purchase of treasury stock..... -- -- -- -- 15,535 (186) -- (186) Sale of treasury stock including stock option exercises.................... -- -- 86 -- (23,130) 198 -- 284 Change in redemption value..... -- -- -- -- -- -- 2,000 2,000 Dividends ($.014 per share).... -- -- -- (121) -- -- -- (121) Net income..................... -- -- -- 9,395 -- -- -- 9,395 --------- --- ------ ------- ------- ------- -------- ------- Balances at January 31, 1996... 8,552,000 86 1,482 68,064 117,805 (1,027) (11,500) 57,105 Sale of treasury stock including stock option exercises.................... -- -- 103 -- (23,440) 204 -- 307 Change in redemption value..... -- -- -- -- -- -- 2,000 2,000 Dividends ($.017 per share).... -- -- -- (139) -- -- -- (139) Net income..................... -- -- -- 3,796 -- -- -- 3,796 --------- --- ------ ------- ------- ------- -------- ------- Balances at January 31, 1997... 8,552,000 $86 $1,585 $71,721 94,365 $ (823) $ (9,500) $63,069 ========= === ====== ======= ======= ======= ======== =======
See accompanying notes to financial statements. F-5 61 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 1995, 1996 AND 1997 (DOLLARS IN THOUSANDS)
FOR THE FISCAL YEAR -------------------------------- 1994 1995 1996 -------- -------- -------- Cash flows from operating activities: Net income............................................... $ 9,810 $ 9,395 $ 3,796 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization......................... 19,397 23,661 24,939 (Gain) loss on sale of mall stores, net............... (4,080) -- 2,500 Loss on transfer of rental videos and disposal of assets.............................................. 2,163 7,514 8,028 Deferred income tax expense (benefit)................. (563) 1,149 741 Changes in operating assets and liabilities: Merchandise inventories............................. (17,284) (18,183) (6,521) Other current assets................................ (1,009) (353) 996 Trade accounts payable and accrued expenses......... 6,899 9,782 (3,678) Income taxes payable................................ (590) 726 (1,953) -------- -------- -------- Net cash provided by operations.................. 14,743 33,691 28,848 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment...................... (40,013) (48,358) (40,510) Proceeds from sales of stores............................ 8,689 -- -- (Increase) decrease in other assets...................... (260) (93) 771 -------- -------- -------- Net cash used in investing activities............ (31,584) (48,451) (39,739) -------- -------- -------- Cash flows from financing activities: Net borrowings (repayments) under revolving credit facility.............................................. (5,500) 4,450 (11,750) Advances under long-term debt and capital lease obligations........................................... 21,200 11,600 25,000 Principal payments under long-term debt and capital lease obligations........................................... (121) (174) (293) Payments of dividends.................................... (105) (121) (139) Purchase of treasury stock............................... (39) (186) -- Proceeds from sale of treasury stock..................... 680 284 307 -------- -------- -------- Net cash provided by financing activities........ 16,115 15,853 13,125 -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... (726) 1,093 2,234 Cash and cash equivalents at beginning of year............. 2,371 1,645 2,738 -------- -------- -------- Cash at end of year........................................ $ 1,645 $ 2,738 $ 4,972 ======== ======== ========
See accompanying notes to financial statements. F-6 62 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1996 AND 1997 (1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Hastings Entertainment, Inc. (the "Company") operates a chain of retail stores located in 15 states, primarily in the southwestern and Rocky Mountain portions of the United States, with revenues originating primarily from music, book and video sales and video rentals. In fiscal 1996, the Company changed its name from Hastings Books, Music & Video, Inc. to Hastings Entertainment, Inc. The Company's fiscal years ended January 31, 1995, 1995 and 1997 are referred to as fiscal 1994, 1995 and 1996, respectively. (b) Cash and Cash Equivalents The Company considers all cash and short-term investments with original maturities of three months or less (primarily money market mutual funds) to be cash equivalents. (c) Merchandise Inventories Merchandise inventories (music, books and videos) have been restated for all periods presented and are recorded at the lower of cost (using the first-in, first-out ("FIFO") method) or market. These inventories were previously recorded at the lower of cost (using the last-in, first-out ("LIFO") method) or market. Management believes that the FIFO method is preferable in the circumstances because it more appropriately matches the costs and revenues from merchandise inventories. (d) Store Preopening Costs Preopening costs represent the costs of hiring and training personnel and other costs incurred in connection with the opening of a new store. Preopening costs are expensed as incurred. (e) Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method. Furniture and fixtures are depreciated over their estimated useful lives of 3 to 12 years. Leasehold improvements are amortized over the shorter of the related lease term or their estimated useful lives. 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 shorter of the related lease term or estimated useful life. The depreciation and video markdown policies described below combine to provide an average cost allocation period of 8 to 12 months. The Company initially depreciates the video cost using the straight line method over an 18 month period. After an introductory rental period, the Company conducts weekly evaluations to identify, on a video by video basis, those videos that are not performing at a defined profitability level. Underperforming videos are either transferred to another store at their carrying value or written down to their estimated selling price and retained in that store's merchandise inventory for sale as previewed videos. On February 1, 1996, the Company began providing for an estimated residual value of $5 per video and began depreciation of rental videos in their first full month of service. In fiscal 1994 and 1995, a full month's depreciation was provided in the month the rental videos were received. These changes resulted in an increase in fiscal 1996 net earnings and earnings per common share of $829,000 and $.10, respectively. The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, on F-7 63 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) February 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed 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 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. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (f) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Financial Instruments All financial instruments held by the Company have been stated at values which approximate fair value as of January 31, 1996 and 1997 due to the instruments bearing interest at market rates. (h) Derivative Financial Instruments The Company's only derivative position is a nonleveraged off-balance-sheet interest rate swap. The interest rate swap is accounted for by recording the net interest received or paid as an adjustment to interest expense on a current basis. Gains or losses resulting from market movements are not recognized. (i) Stock Option Plans The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, 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. Since the Company grants substantially all stock options with an exercise price equal to or greater than the current market price of the stock on the grant date, compensation expense recorded is immaterial. On February 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Under SFAS 123, the Company 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. The Company has elected not to adopt the recognition provision of SFAS 123 and will continue to account for stock-based compensation under APB 25. (j) Advertising Costs Advertising costs for newspaper, television and other media are expensed as incurred. F-8 64 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (k) Net Income Per Share Net income per share is computed on the basis of the weighted average number of common shares outstanding during the period. The effect of stock options on the computation of net income per share was not material. (l) Use of Management Estimates The 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 assets and 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. (2) MERCHANDISE INVENTORIES Merchandise inventories consisted of the following (dollars in thousands):
1995 1996 ------- -------- Merchandise inventories at standard cost, which approximates FIFO: Music..................................................... $36,019 $ 39,538 Books..................................................... 35,317 40,785 Videos.................................................... 10,315 10,408 Other..................................................... 13,281 18,354 ------- -------- 94,932 109,085 Less allowance for inventory returns and shrinkage.......... 330 3,900 ------- -------- $94,602 $105,185 ======= ========
During fiscal 1995 and 1996, the Company purchased approximately 47% and 32%, respectively, of all products (defined herein as merchandise inventories and rental videos) from three independent suppliers. During fiscal 1994 and 1995, the Company purchased approximately 59% and 18%, respectively, of all products from Anderson Merchandisers, Inc. ("Anderson"), an affiliate of the Company. During fiscal 1996, the Company had nominal purchases from Anderson. Merchandise inventories that are not sold can normally be returned to the suppliers. In the 1996 fourth quarter, the Company recorded a loss of $3.5 million to establish a reserve for estimated costs related to merchandise returned or to be returned to suppliers for which credit is pending. The $3.5 million reserve is included in the allowance for inventory returns and shrinkage at January 31, 1997. Because the amount of credit to be received requires estimates, it is reasonably possible that the Company's estimate of the ultimate settlement with its suppliers may change in the near term. F-9 65 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY AND EQUIPMENT Property and equipment consist of the following (dollars in thousands):
1995 1996 ------- -------- Rental videos............................................... $51,759 $ 57,940 Furniture and equipment..................................... 42,258 49,257 Leasehold improvements...................................... 26,810 28,983 Property under capital lease................................ 1,948 1,948 ------- -------- 122,775 138,128 Less accumulated depreciation and amortization.............. (59,091) (70,963) ------- -------- $63,684 $ 67,165 ======= ========
(4) LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS Long-term debt and capitalized lease obligations consisted of the following (dollars in thousands):
1995 1996 ------- ------- Revolving credit facility................................... $25,650 $23,900 Term note................................................... 10,000 -- Series A senior notes....................................... -- 25,000 Capitalized lease obligations (note 5)...................... 1,779 1,714 Other....................................................... 1,487 1,259 ------- ------- 38,916 51,873 Less current maturities..................................... 1,295 301 ------- ------- $37,621 $51,572 ======= =======
During fiscal 1994, the Company entered into an unsecured credit agreement with a group of banks which provides for a $30 million revolving credit facility and a $10 million term note. During fiscal 1995, the unsecured credit agreement was amended to provide an additional $10 million seasonal credit facility. During fiscal 1996, the unsecured credit agreement was amended to permanently increase the revolving credit facility to $45 million. The revolving credit facility bears interest at variable rates based on the lender's base rate and LIBOR (7.4% and 7.2% at January 31, 1996 and 1997, respectively) and expires on April 30, 1999. The seasonal credit facility and the term note, which was repaid in June 1996, expired during fiscal 1996. The credit agreement includes provisions which, among other things, require the maintenance of specified financial ratios and net worth requirements. Further, the credit agreement imposes certain restrictions with respect to additional indebtedness, transactions with related parties, investments, and capital expenditures. The Company selectively uses off-balance-sheet derivative instruments to manage its interest rate risk. On June 16, 1995, the Company entered into an interest rate swap agreement with a notional amount of $15 million, which effectively converts a portion of the floating rate debt to a fixed rate of 7%. The swap terminates in June 1998. The counterparty to this contract is a high credit quality commercial bank. Consequently, credit risk, which is inherent in all swaps, has been minimized to a large extent. The fair value of the interest rate swap agreement is the estimated amount that the Company would pay or receive to terminate the agreement at January 31, 1997, taking into consideration current interest rates and assuming the creditworthiness of the counterparties. The fair value of the agreement at January 31, 1997 was immaterial. F-10 66 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During fiscal 1996, the Company entered into an unsecured credit agreement with a financial institution which provides for Series A senior notes with an aggregate principal amount of $25 million. The notes are due June 13, 2003, require quarterly interest payments through May 1999, and have an effective interest rate of 7.53%. Beginning in June 1999, the Company will be required to make annual principal payments of $5 million. The credit agreement includes provisions which, among other things, require the maintenance of specified financial ratios and net worth requirements. Further, the credit agreement imposes certain restrictions with respect to additional indebtedness, transactions with related parties, investments and capital expenditures. The capitalized lease obligations represent two leases on certain retail space with terms of fifteen years. The aggregate maturities of long-term debt and capitalized lease obligations for years subsequent to fiscal 1996 are as follows: 1997........................................................ $ 301 1998........................................................ 321 1999........................................................ 29,241 2000........................................................ 5,354 2001........................................................ 5,370 Thereafter.................................................. 11,286 ------- $51,873 =======
(5) LEASES The Company leases retail space under operating leases with terms ranging from three to fifteen 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 consists of the following (dollars in thousands):
1994 1995 1996 ------ ------- ------- Minimum rentals........................................ $8,149 $10,032 $10,941 Contingent rentals..................................... 1,840 1,655 1,643 ------ ------- ------- Rental expense............................... $9,989 $11,687 $12,584 ====== ======= =======
F-11 67 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments under noncancellable operating leases, excluding certain leases assumed by another party in February 1994 (see note 12), and the present value of future minimum capital lease payments as of January 31, 1997 are (dollars in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 1998........................................................ $ 233 $10,706 1999........................................................ 241 10,549 2000........................................................ 251 9,925 2001........................................................ 254 8,675 2002........................................................ 256 7,277 Thereafter.................................................. 1,497 14,342 ------ ------- Total minimum lease payments...................... 2,732 $61,474 ======= Less amount representing imputed interest................... 1,018 ------ Total obligations under capital leases............ 1,714 Less current principal maturities of capital lease obligations............................................... 73 ------ Obligations under capital leases, excluding current maturities.............................. $1,641 ======
During fiscal 1994, the Company relocated or committed to relocate from eight existing store leases for which the property will no longer be used by the Company. Six of the eight store leases still remain in effect. During fiscal 1996, the Company relocated from one existing store lease for which the property will no longer be used by the Company. Included in accrued expenses and other liabilities is $1.2 million for the net present value of future payments attributable to such leases, net of probable sublease income. Future minimum lease payments due on these operating leases are included in the table above. A director of the Company is a limited partner in various limited partnerships that lease land and improvements to the Company under operating lease agreements. During fiscal 1994, 1995 and 1996, the Company made lease payments of $443,998, $479,392 and $480,019, respectively, to these partnerships. (6) INCOME TAXES Income tax expense (benefit) consists of the following (dollars in thousands):
1994 1995 1996 ------ ------ ------ Current federal.......................................... $5,541 $3,967 $1,566 Current state and local.................................. 1,112 759 13 Deferred federal......................................... (345) 1,014 281 Deferred state and local................................. (218) 135 460 ------ ------ ------ $6,090 $5,875 $2,320 ====== ====== ======
The difference between expected income tax expense (computed by applying the statutory rate of 35% for fiscal 1994 and 1995 and 34% for fiscal 1996 to earnings before income taxes) and actual income tax expense is as follows (dollars in thousands):
1994 1995 1996 ------ ------ ------ Computed "expected" tax expense.......................... $5,565 $5,345 $2,079 State and local income taxes, net of federal income tax benefit................................................ 595 571 228 Other.................................................... (70) (41) 13 ------ ------ ------ $6,090 $5,875 $2,320 ====== ====== ======
F-12 68 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (dollars in thousands):
1995 1996 ------- ------- Deferred tax assets: Provision for merchandise return costs.................... $ -- $ 1,178 Provision for contingent lease costs...................... -- 922 Alternative minimum tax carryforward...................... -- 905 Provision for abandoned leases............................ 533 459 Provision for deferred rent............................... 292 426 Compensated absences...................................... 191 208 Other..................................................... 397 390 ------- ------- Total deferred tax assets......................... 1,413 4,488 Deferred tax liabilities: Inventories, principally due to the measurement of cost using LIFO for income tax purposes..................... 2,230 4,656 Freight costs............................................. 546 674 Property and equipment, principally due to different depreciation methods for financial reporting and income tax purposes........................................... 78 1,340 ------- ------- Total deferred tax liabilities.................... 2,854 6,670 ------- ------- Net deferred tax assets (liabilities)............. $(1,441) $(2,182) ======= =======
The Company did not record a valuation allowance for deferred tax assets at January 31, 1996 or 1997. In assessing the realizability of deferred tax assets, management considers the scheduled reversal of deferred tax assets and liabilities, future taxable income and tax planning strategies, and believes it is more likely than not the Company will realize the benefits of these deductible differences at January 31, 1997. At January 31, 1997, the Company has an alternative minimum tax carryforward for federal income tax purposes of $0.9 million which is available indefinitely to offset future regular federal taxable income. (7) PROFIT SHARING PLAN Employees who have attained age 21 and completed one year of service are eligible to participate in the Company's profit sharing plan, and may elect to contribute up to 12 percent of their salary, subject to federal limitations, to the plan. Employer contributions are determined at the discretion of the Company and are allocated solely to those employees who are participating in the plan. Amounts expensed related to the plan were $0.6 million, $0.4 million and $0.6 million during fiscal 1994, 1995 and 1996, respectively. (8) TRANSACTIONS WITH FORMER AFFILIATE The Company had a Branch Support Service Agreement ("Agreement") with Anderson which, among other things, provided that Anderson would supply to the Company products for retail sale or rental and would provide services for accounting, management information systems, advertising, printing, and other services reasonably necessary for the performance of the Company's operations. The Agreement was terminated on January 31, 1996. Prior to the termination of the Agreement, the Company began the development of various systems to assist in its efforts to become independent of Anderson. Development expenses included in the accompanying statements of income include costs to develop various information and other systems for buying, distribution, finance, inventory and store operations. F-13 69 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (9) SHAREHOLDERS' EQUITY During fiscal 1994, the Company changed the par value of its common shares from $.001 to $.01 and increased the number of authorized shares from 5,000,000 to 20,000,000. In addition, 5,000,000 shares of preferred stock were authorized. During fiscal 1996, the Company increased the number of authorized shares of its common stock from 20,000,000 to 75,000,000. The Board of Directors of the Company is authorized to establish and designate preferences, limitations and rights of the preferred stock. The Company has three stock option plans: the 1991 and 1994 Stock Option Plans and the 1996 Incentive Stock Plan. A total of 500,000 shares may be granted under each of the 1991 and 1994 Stock Option Plans, and 625,000 shares may be granted under the 1996 Incentive Stock Plan. The 1991 and 1994 Stock Option Plans and the 1996 Incentive Stock Plan authorize the award of both incentive stock options and nonqualified 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 fair market value of the Company's common stock on the date the option is granted. The exercise price per share of nonqualified stock options is determined by the Board of Directors, or a committee thereof. The term of each option is determined by the Board of Directors and generally will not exceed ten years from the date of grant. The exercise price of options issued to certain executive officers of the Company includes fixed annual increases. The 1996 Incentive Stock Plan also authorizes the granting of stock appreciation rights, restricted stock, dividend equivalent rights, stock awards, and other stock-based awards to officers, other associates, directors, and consultants of the Company. There have been no grants under this plan. The Company's nonemployee directors are also eligible for stock option awards. Grants to these directors have not been significant. The Company's Chief Executive Officer has an option to acquire 400,000 shares of common stock. The option was not exercisable until February 1, 1997, and may be exercised in full or in part from that date through January 31, 2007. These options may be exercised in fiscal 1997 at an exercise price of $13.82. The exercise price of the options increases 12% in each fiscal year through fiscal 2001 and remains fixed thereafter. In fiscal 1996, the Company adopted the management stock purchase plan that authorizes the issuance of up to 225,000 shares of common stock, pursuant to agreements providing for the purchase of Restricted Stock Units (RSU's). The cost of each RSU is equal to 75% of the fair market value of the common stock of the Company on the date the RSU is awarded. As of January 31, 1997, no RSU's have been awarded under the Plan. F-14 70 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of information with respect to all stock option plans is as follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- Outstanding at January 31, 1994.......................... 811,505 $ 9.61 Granted................................................ 193,565 10.33 Exercised.............................................. (335) 0.20 --------- ------ Outstanding at January 31, 1995.......................... 1,004,735 9.76 Granted................................................ 397,435 17.51 Exercised.............................................. (1,085) 0.20 Forfeited.............................................. (72,150) 7.18 --------- ------ Outstanding at January 31, 1996.......................... 1,328,935 12.22 Granted................................................ 214,720 13.86 Exercised.............................................. (6,350) 10.21 Forfeited.............................................. (23,500) 10.97 --------- ------ Outstanding at January 31, 1997.......................... 1,513,805 $12.48 ========= ====== Exercisable at January 31, 1997........................ 199,390 7.40 Reserved and available for grant at January 31, 1997... 417,645
At January 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $.20 to $24.48 and seven years, respectively. The Company applies APB 25 in accounting for its Plans. Since the Company grants substantially all stock options with an exercise price equal to or greater than the current market price of the stock on the grant date, compensation expense recorded is not significant. Had the Company determined compensation cost based on the minimum value at the date of grant for its stock options under SFAS 123, the Company's net income and net income per share would not have been materially different. The calculation of the effect on net income includes only options granted during fiscal 1995 and 1996. Therefore, the full impact of measuring compensation cost for stock options under SFAS 123 is not reflected in the calculation because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to February 1, 1995 is not considered. The per share weighted average exercise price and the per share weighted average minimum value of stock options at the date of grant, using the Black-Scholes option-pricing model for SFAS 123 disclosure purposes is as follows:
EXERCISE PRICE MINIMUM VALUE ---------------- -------------- 1995 1996 1995 1996 ------ ------ ----- ----- Options granted at market price................... $12.40 $14.20 $5.86 $6.96 Options granted at prices exceeding market........ 24.48 -- 0.27 -- Total options granted............................. 17.32 14.20 3.58 6.96
The following assumptions were used in the calculation:
1995 1996 ---- ---- Expected dividend yield..................................... -- -- Risk-free interest rate..................................... 6.43% 6.68% Expected life in years...................................... 10 10
The Company's Associate Stock Ownership Plan ("ASOP") permits full-time employees, as defined, who have attained age 21 and completed one year of service to participate in the ASOP. Employer F-15 71 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) contributions are determined at the discretion of the Company. The Board of Directors has determined that the level of contributions will be made based on attaining operational profit goals as set by the Board of Directors. The contribution is based on a percentage of participants' eligible compensation and provisions of $0.2 million, $0.3 million and $0.2 million were made in the accompanying financial statements for 1994, 1995 and 1996, respectively. Common shares allocated to the ASOP were 38,970, 60,405 and 77,495 at January 31, 1995, 1996 and 1997, respectively. The Company is a party to a stock redemption agreement with the estate of the Company's founder. Under the agreement, the estate may, at its option, require the Company to purchase shares of common stock at fair value in amounts equal to or less than specified annual obligations of $1.5 million for fiscal 1997 through 2001, and $1.0 million for fiscal 2002 and 2003. The redemption obligation is limited by Section 303 of the Internal Revenue Code of 1986, as amended, and could be reduced based upon the resolution of certain pending matters between the Internal Revenue Service and the estate of the Company's founder. As of January 31, 1997, the Company has not acquired any shares pursuant to this agreement. (10) SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest during fiscal 1994, 1995 and 1996, totaled $0.7 million, $2.5 million and $3.3 million, respectively. Cash payments for income taxes during fiscal 1994, 1995 and 1996 totaled $5.8 million, $4.0 million, $3.6 million, respectively. Noncash investing activities during fiscal 1994, 1995 and 1996 include the transfer of videos with a depreciated cost of $1.9 million, $4.4 million and $4.1 million, respectively, from property and equipment to merchandise inventory. (11) CONTINGENCIES The Company's employees are covered under a self-insured health plan. Claims in excess of $100,000 per employee are insured by an insurance company. Estimated claims incurred but not paid have been accrued in the accompanying financial statements. Health insurance expense during fiscal 1994, 1995 and 1996 were $0.7 million, $0.5 million and $1.0 million, respectively. The Company is partially self-insured for workers' compensation. Claims in excess of $100,000 per accident and $1.1 million in the aggregate annually are insured by an insurance company. Estimated claims incurred but not paid have been accrued in the accompanying financial statements. Workers' compensation expense during fiscal 1994, 1995 and 1996 was $0.3 million, $0.5 million and $0.6 million, respectively. (12) SALE OF MALL STORES During fiscal 1993, the Company sold the assets, primarily inventory and leasehold improvements, related to 26 mall stores to Camelot Music, Inc. ("Camelot"). Proceeds from the sales were $9.4 million and the Company recognized a gain of $3.8 million. During fiscal 1994, the Company sold the assets of another 16 mall stores to Camelot. Proceeds from the 1994 sales were $8.7 million and the Company recognized a gain of $4.1 million. In connection with the sales, the Company assigned the underlying leases on the stores to Camelot. Some of the leases have expired and the Company has been released from liability by the landlord on other leases. At January 31, 1997, the Company was contingently liable on 19 of the original 42 store leases. In August 1996, Camelot filed for protection from creditors under the federal bankruptcy code. The Company has been named in suits by lessors alleging that Camelot has defaulted on certain of its obligations under these leases. In 1996, the Company recorded a loss reserve of $2.5 million for the future lease obligations of these stores. At January 31, 1997, current accrued liabilities and other long-term liability include $0.9 million and $1.5 million, respectively, for these obligations. Because the ultimate liability is dependent, in part, on the F-16 72 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) rulings of the bankruptcy court and the Company's ability to sublease the stores, it is reasonably possible that the Company's estimate of the liability may change in the near term. (13) LEGAL PROCEEDINGS The Company is involved in various claims and legal actions arising from the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial statements. (14) SUBSEQUENT EVENTS The Company effected a five for one stock split on , 1998, the effects of which have been retroactively applied to the financial statements. In July 1997 and January 1998, the Company amended the option of the Chief Executive Officer to acquire 400,000 shares of common stock. The exercise price of these options has been reduced to $11.20 and the fixed annual increases in the exercise price have been eliminated. The Company also eliminated the fixed annual increases of the exercise prices of options issued to certain executive officers under the Company's stock plans. F-17 73 HASTINGS ENTERTAINMENT, INC. BALANCE SHEETS OCTOBER 31, 1996 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUES) UNAUDITED ASSETS
FISCAL -------------------- 1996 1997 -------- -------- Current Assets: Cash...................................................... $ 276 $ 3,146 Merchandise inventories................................... 110,988 126,994 Income Taxes Receivable................................... 939 349 Other current assets...................................... 2,613 2,377 -------- -------- Total current assets.............................. 114,816 132,866 Property and equipment, net................................. 67,912 80,983 Deferred income taxes....................................... 1,590 975 Other assets................................................ 864 30 -------- -------- $185,182 $214,854 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt and capitalized lease obligations............................................ $ 1,296 $ 302 Trade accounts payable.................................... 43,199 48,957 Accrued expenses and other liabilities.................... 13,853 18,012 Deferred income taxes..................................... 322 3,158 -------- -------- Total current liabilities......................... 58,670 70,429 Long term debt and capitalized lease obligations, excluding current maturities........................................ 56,112 68,344 Other long-term liability................................... 1,500 1,500 Redemption value of common stock held by estate of Company's founder................................................... 9,500 8,000 Shareholders' equity: Preferred Stock, $.01 par value; 5,000,000 shares authorized; none issued................................ -- -- Common Stock, $.01 par value; 75,000,000 shares authorized; 8,552,000 shares issued.................... 86 86 Additional paid-in capital................................ 1,576 1,656 Retained earnings......................................... 68,112 75,040 Treasury stock............................................ (874) (2,201) Redemption value of common stock held by estate of Company's founder...................................... (9,500) (8,000) -------- -------- Total shareholders' equity........................ 59,400 66,581 -------- -------- $185,182 $214,854 ======== ========
See accompanying notes to financial statements. F-18 74 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF INCOME NINE MONTHS ENDED OCTOBER 31, 1996 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED
FOR THE FISCAL NINE MONTHS -------------------------- 1996 1997 ----------- ----------- Merchandise revenue......................................... $170,940 $187,969 Video rental revenue........................................ 53,090 52,641 -------- -------- Total revenues.................................... 224,030 240,610 Cost of revenues............................................ 136,451 147,930 -------- -------- Gross Profit...................................... 87,579 92,680 Selling, general and administrative expenses................ 80,260 83,877 Development expenses........................................ 1,866 -- -------- -------- 82,126 83,877 -------- -------- Operating income.................................. 5,453 8,803 Other income (expenses): Interest expense.......................................... (2,677) (3,093) Loss on sale of mall stores............................... (2,500) -- -------- -------- (5,177) (3,093) -------- -------- Income before income taxes............................. 276 5,710 Income taxes................................................ 126 2,282 -------- -------- Net income........................................ $ 150 $ 3,428 ======== ======== Net income per common share................................. $ $ ======== ======== Weighted average common shares outstanding..................
See accompanying notes to financial statements. F-19 75 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED OCTOBER 31, 1996 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED
REDEMPTION VALUE OF COMMON STOCK COMMON STOCK ADDITIONAL TREASURY STOCK HELD BY ESTATE TOTAL ------------------ PAID-IN RETAINED ------------------ OF COMPANY'S SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT FOUNDER EQUITY --------- ------ ---------- -------- -------- ------- -------------- ------------- Balances at January 31, 1996..................... 8,552,000 $86 $1,482 $68,064 117,805 $(1,027) $(11,500) $57,105 Sale of treasury stock, including stock option exercises................ -- -- 94 -- (17,590) 153 -- 247 Dividends ($.012 per share)................... -- -- -- (102) -- -- (102) Net income................. -- -- -- 150 -- -- 150 Change in redemption value.................... -- -- -- -- -- 2,000 2,000 --------- --- ------ ------- -------- ------- -------- ------- Balances at October 31, 1996..................... 8,552,000 $86 $1,576 $68,112 100,215 $ (874) $ (9,500) $59,400 ========= === ====== ======= ======== ======= ======== ======= Balances at January 31, 1997..................... 8,552,000 $86 $1,585 $71,721 94,365 $ (823) $ (9,500) $63,069 Purchase of treasury stock.................... -- -- -- -- 13,160 (168) -- (168) Sale of treasury stock, including stock option exercises................ -- -- 71 -- (29,005) 290 -- 361 Dividends ($.013 per share)................... -- -- -- (109) -- -- (109) Net income................. -- -- -- 3,428 -- -- 3,428 Redemption of common stock held by estate........... -- -- -- -- 107,195 (1,500) 1,500 -- --------- --- ------ ------- -------- ------- -------- ------- Balances at October 31, 1997..................... 8,552,000 $86 $1,656 $75,040 185,715 $(2,201) $ (8,000) $66,581 ========= === ====== ======= ======== ======= ======== =======
See accompanying notes to financial statements. F-20 76 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS NINE MONTHS ENDED OCTOBER 31, 1996 AND 1997 (DOLLARS IN THOUSANDS) UNAUDITED
FOR THE FISCAL NINE MONTHS -------------------------------------- 1996 1997 ----------------- ----------------- Cash flows from operating activities: Net income.............................................. $ 150 $ 3,428 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization........................... 18,866 20,515 Loss on sale of mall stores............................. 2,500 -- Deferred tax benefit.................................... (2,709) -- Loss on transfer of rental videos and disposal of assets............................................... 5,701 4,653 Changes in operating assets and liabilities: Merchandise inventories.............................. (13,144) (17,367) Other current assets................................. 1,779 1,019 Trade accounts payable, accrued expenses and other liabilities........................................ 866 14,461 Income taxes payable................................. (3,005) (462) -------- -------- Net cash provided by operations................. 11,004 26,247 -------- -------- Cash flows from investing activities: Purchases of property and equipment..................... (32,037) (43,427) Increase in other assets................................ (66) (3) -------- -------- Net cash used in investing activities........... (32,103) (43,430) -------- -------- Cash flows from financing activities: Net borrowings (repayments) under revolving credit facility............................................. (6,300) 17,000 Advances under long term debt and capital lease obligations.......................................... 25,000 -- Principal payments under long term debt and capital lease obligations.................................... (208) (227) Payment of dividends.................................... (102) (109) Purchase of treasury stock.............................. -- (168) Proceeds from sale of treasury stock.................... 247 361 Redemption of common stock held by estate of Company's founder.............................................. -- (1,500) -------- -------- Net cash provided by financing activities....... 18,637 15,357 -------- -------- Net increase (decrease) in cash........................... (2,462) (1,826) Cash at beginning of period............................... 2,738 4,972 -------- -------- Cash at end of period..................................... $ 276 $ 3,146 ======== ========
See accompanying notes to financial statements. F-21 77 HASTINGS ENTERTAINMENT, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS OCTOBER 31, 1996 AND 1997 The accompanying unaudited financial statements of Hastings Entertainment, Inc. as of October 31, 1996 and 1997 and for the nine months ended October 31, 1996 and October 31, 1997 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and footnotes required by generally accounting principles for a complete presentation of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of the interim periods have been included. Operating results for any interim period are not necessarily indicative of the results that may be expected for the entire fiscal year. The Company's business is heavily dependent on fourth quarter revenues. Historically, the fourth quarter has accounted for a significantly disproportionate share of the Company's revenues and earnings. These statements should be read in conjunction with the financial statements and notes thereto as of January 31, 1997 and for the three years ended January 31, 1997. The Company effected a five for one stock split on , 1998, the effects of which have been retroactively applied to the financial statements. In July 1997 and January 1998, the Company amended the option of the Chief Executive Officer to acquire 400,000 shares of common stock. The exercise price of these options has been reduced to $11.20 and the fixed annual increases in the exercise price have been eliminated. The Company recorded a charge of $.6 million (net of income tax benefit of $.4 million) related to the July 1997 amendment. The Company also eliminated the fixed annual increases of the exercise prices of options issued to certain executive officers under the Company's stock plans. Cash payments for interest during the nine months ended October 31, 1996 and October 31, 1997 totaled $2.7 million and $3.1 million respectively. Cash payments for income tax during the nine months ended October 31, 1996 and October 31, 1997 totaled $3.2 million and $.2 million, respectively. Noncash investing activities during the nine months ended October 31, 1996 and October 31, 1997 include the transfer of videos with a depreciated cost of $3.2 million and $4.4 million, respectively, from property and equipment to merchandise inventory. F-22 78 SCRIPT OF CD-ROM TO BE ATTACHED TO INSIDE BACK COVER PAGE OF PROSPECTUS [TO BE PROVIDED SUPPLEMENTALLY.] 79 [CD-ROM SLEEVE] [STORE SCHEMATIC; INTERIOR/EXTERIOR PHOTOGRAPHS OF STORE; PHOTOGRAPHS OF PRODUCT/ARTISTS; AND/OR MAP OF STORE LOCATIONS] 80 ====================================================== NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... Risk Factors.......................... Use of Proceeds....................... Dividend Policy....................... Dilution.............................. Capitalization........................ Selected Financial Data............... Management's Discussion and Analysis of Financial Condition and Results of Operations....................... Business.............................. Management............................ Certain Transactions.................. Principal Shareholders and Selling Shareholder......................... Description of Capital Stock.......... Shares Eligible for Future Sale....... Underwriting.......................... Legal Matters......................... Experts............................... Available Information................. Index to Financial Statements.........
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== SHARES HASTINGS ENTERTAINMENT, INC. COMMON STOCK [Issuer's Logotype] ------------ PROSPECTUS , 1998 ------------ SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. ====================================================== 81 PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table indicates the expenses expected to be incurred in connection with the Offering described in this Registration Statement, all of which will be paid by the Company: SEC Registration Fee........................................ $ * NASD Filing Fee............................................. * Nasdaq National Market Listing Fee.......................... * Transfer Agent and Registrar Fees........................... * Blue Sky Fees (including counsel fees)...................... * Accountants' Services and Expenses.......................... * Legal Services.............................................. * Printing and Engraving Fees................................. * Miscellaneous............................................... * ------- TOTAL............................................. $ =======
- --------------- * To be supplied by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.02-1 of the Texas Business Corporation Act permits a corporation to indemnify certain persons, including officers and directors and former officers and directors, and to purchase insurance with respect to liability arising out of their capacity or status as officers and directors. Such law provides further that the indemnification permitted thereunder will not be deemed exclusive of any other rights to which officers and directors may be entitled under the corporation's articles of incorporation, bylaws, any agreement or otherwise. Article Thirteen of the Company's Articles of Incorporation provides as follows: The corporation shall indemnify any person who was, is or is threatened to be made a named defendant or respondent in a proceeding (as hereinafter defined) because the person (a) is or was a director or officer of the corporation or (b) while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, manager, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, limited liability company, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the fullest extent that a corporation may grant indemnification to a person serving in such capacity under the Texas Business Corporation Act, as the same exists or may hereafter be amended. Such right shall include the right to be paid by the corporation for all expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the corporation within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Texas Business Corporation Act, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors or any committee thereof, special legal counsel or shareholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the corporation (including its Board of Directors or any committee thereof, special legal counsel or shareholders) that such indemnification or advancement is not permissible, shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. II-1 82 The corporation may additionally indemnify any person not covered by the grant of mandatory indemnification contained above to the fullest extent permitted by law. Neither the amendment nor repeal of this Article, nor the adoption of any provision of these Third Restated Articles of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any proceeding that accrued or arose prior to such amendment, repeal or adoption of any inconsistent provision. As used herein, the term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. In addition, Article Nine of the Company's Bylaws provides for such indemnification of officers and directors within the limits set forth in the Articles of Incorporation and applicable provisions of Texas law. The Company has entered into indemnification agreements with each of its directors and executive officers providing indemnification to the fullest extent permitted by applicable law. Article Fourteen of the Company's Articles of Incorporation further includes a provision eliminating the monetary liability of a director to the Company or its shareholders for an act or omission in the director's capacity as a director to the fullest extent permitted by Texas law. See "Description of Capital Stock -- Exculpatory Charter Provisions; Liability and Indemnification of Officers and Directors." The Company intends to maintain liability insurance for the benefit of its directors and officers. II-2 83 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following table relates to all securities issued or sold by the Company within the past three years and not registered under the Securities Act. All such sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as transactions not involving a public offering and related state securities law. With respect to the Common Stock, the number of shares issued and the price per share information have been adjusted to reflect the five-for-one split of the Company's Common Stock effected immediately prior to the Offering.
NUMBER OF PRICE PER AGGREGATE PURCHASER/TRANSFEREE DATE OF TRANSACTION SHARES SHARE PRICE -------------------- ------------------- --------- --------- ----------- Jeffrey G. Shrader...................... June 27, 1995 2,175 $12.40 $ 26,970.00 ASOP(1)................................. October 12, 1995 15,455 12.40 191,642.00 Owen Marmaduke.......................... November 1, 1995 2,415 12.40 29,946.00 Samuel Marmaduke........................ November 1, 1995 2,015 12.40 24,986.00 Jeffrey G. Shrader(2)................... January 31, 1996 660 .20 132.00 Roxanne Conant-Spradlin(3).............. May 15, 1996 500 10.40 5,200.00 ASOP(1)................................. July 19, 1996 17,090 14.20 242,678.00 Kelly Wood(4)........................... October 21, 1996 7,740 14.20 109,908.00 Marilyn McCrary Wilson(4)............... November 27, 1996 1,335 14.20 18,957.00 Howard Miller(3)........................ December 16, 1996 350 7.00 2,450.00 Sherry Scoggins(4)...................... January 8, 1997 5 14.20 71.00 Theresa Rooney(4)....................... January 8, 1997 65 14.20 923.00 Jeffrey D. Sumpter(3)................... January 14, 1997 500 10.40 5,200.00 Walter McNeer........................... January 30, 1997 5,000 10.40 52,000.00 Marilyn Foos(3)......................... February 4, 1997 350 12.40 4,340.00 Richard Williamson(2)................... February 28, 1997 815 .20 163.00 William J. Morey(3)..................... February 28, 1997 200 10.40 2,080.00 Brenda D. Kuykendall(3)................. May 5, 1997 500 10.40 5,200.00 Darrell Kendall(3)...................... May 30, 1997 500 10.40 5,200.00 Darrell Kendall(3)...................... May 30, 1997 100 12.40 1,240.00 ASOP(1)................................. July 16, 1997 13,270 13.80 183,126.00 Vinny Losasso(3)........................ July 22, 1997 710 7.00 4,970.00 James Fritz(3).......................... August 8, 1997 710 7.00 4,970.00 James Fritz(3).......................... August 8, 1997 1,000 10.40 10,400.00 James Fritz(3).......................... August 8, 1997 225 12.40 2,790.00 Michael Terk............................ October 1, 1997 500 13.80 6,900.00 Leonard L. & Nancy Berry................ October 1, 1997 5,000 13.80 69,000.00 Matthew J. Berry........................ October 1, 1997 500 13.80 6,900.00 Jonathan E. Berry....................... October 1, 1997 500 13.80 6,900.00 Robert A. & Vickie Berman............... October 1, 1997 500 13.80 6,900.00 Stanley Marsh 3 Special Trust........... October 7, 1997 3,295 13.80 45,471.00 Stanley Marsh 3 Special Trust........... October 9, 1997 3,515 13.80 48,507.00 Gaines L. Godfrey(2).................... October 10, 1997 3,500 .20 700.00 Carroll Rogers.......................... October 31, 1997 125 13.80 1,725.00 Kent Andrews Life Est. Trust............ December 3, 1997 210 13.80 2,898.00 Howard Miller(3)........................ December 15, 1997 180 7.00 1,260
- --------------- (1) Transfer of stock to the Company's ASOP for annual funding. (2) Pursuant to options granted under the Directors Option Plan. (3) Pursuant to options granted under the Company's 1991 or 1994 Stock Option Plans or the Amended 1996 Incentive Stock Plan. (4) Purchases from the Company's ASOP or its 401(k) Plan as a result of forfeitures. II-3 84 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 1.1+ -- Form of Underwriting Agreement. 3.1+ -- Third Restated Articles of Incorporation of the Company. 3.2+ -- Amended and Restated Bylaws of the Company. 4.1++ -- Specimen of Certificate of Common Stock of the Company. 4.2+ -- Third Restated Articles of Incorporation of the Company (see 3.1 above). 4.3+ -- Amended and Restated Bylaws of the Company (see 3.2 above). 5.1++ -- Opinion of Locke Purnell Rain Harrell (A Professional Corporation). 10.1+ -- Form of Indemnification Agreement by and between the Company and its directors and executive officers. 10.2+ -- Note Purchase Agreement regarding $25,000,000 7.75% Senior Notes Due June 13, 2003. 10.3+ -- Credit Agreement among Hastings Books, Music & Video, Inc. and The Boatmen's National Bank of St. Louis dated as of December 12, 1994, as amended. 10.4+ -- Hastings Amended 1996 Incentive Stock Plan. 10.5++ -- Hastings 1994 Stock Option Plan. 10.6++ -- Hastings 1991 Stock Option Plan. 10.7+ -- Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust Agreement. 10.8+ -- Hastings Employee Stock Ownership Plant Trust Agreement. 10.9++ -- Chief Executive Officer Stock Option, as amended. 10.10+ -- Corporate Officer Incentive Plan. 10.11+ -- Management Stock Purchase Plan. 10.12+ -- Management Incentive Plan. 10.13+ -- Salary Incentive Plan 10.14+ -- Hastings Entertainment, Inc. Stock Option Plan for Outside Directors. 10.15+ -- Lease Agreement, dated August 3, 1994, between Omni Capital Corporation and the Company, for office space located at Sunset Center in Amarillo, Texas. 10.16+ -- Lease Agreement, dated August 3, 1994, between Omni Capital Corporation and the Company, for warehouse space located at Sunset Center in Amarillo, Texas. 10.17++ -- Stock Redemption Agreement dated May 3, 1994, as amended, between John H. Marmaduke, Independent Executor of the Estate of Sam Marmaduke, Deceased, and the Company. 10.18+ -- Lease Agreement dated May 28, 1992 between the City of Amarillo and the Company for space located at 1900 W. 7th Avenue in Amarillo, Texas. 10.19+ -- $1,600,000 Promissory Note and Security Agreement in favor of First Interstate Bank of Texas, NA. 11.1++ -- Computation of Per Share Gain (Loss). 21.1+ -- Subsidiaries of the Company. 23.1+ -- Consent of KPMG Peat Marwick LLP. 23.2++ -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in Exhibit 5.1). 24.1+ -- Powers of Attorney (included on signature pages). 27.1+ -- Financial Data Schedule.
- --------------- + Filed herewith. ++ To be filed by amendment. (b) Financial Statement Schedules. II-4 85 All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable or the information has been provided in the Financial Statements or the notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Company hereby undertakes to provide to the representative of the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by any director, officer or controlling person in connection with the securities being registered, the Company will, unless the in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 86 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Amarillo, State of Texas, on this 13th day of March, 1998. HASTINGS ENTERTAINMENT, INC. By: /s/ JOHN H. MARMADUKE ------------------------------------ Name: John H. Marmaduke Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis McGill and Jeffrey G. Shrader, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any registration statement related to the Offering contemplated by this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ JOHN H. MARMADUKE Chairman of the Board, President and March 13, 1998 - ----------------------------------------------------- Chief Executive Officer (principal John H. Marmaduke executive officer) /s/ DENNIS MCGILL Vice President of Finance, Chief March 13, 1998 - ----------------------------------------------------- Financial Officer, Treasurer and Dennis McGill Secretary (principal financial officer and principal accounting officer) /s/ PHILLIP HILL Senior Vice President, Chief March 13, 1998 - ----------------------------------------------------- Operating Officer and Director Phillip Hill /s/ LEONARD L. BERRY Director March 13, 1998 - ----------------------------------------------------- Leonard L. Berry /s/ PETER A. DALLAS Director March 13, 1998 - ----------------------------------------------------- Peter A. Dallas
II-6 87
SIGNATURES TITLE DATE ---------- ----- ---- /s/ GAINES L. GODFREY Director March 13, 1998 - ----------------------------------------------------- Gaines L. Godfrey /s/ CRAIG R. LENTZSCH Director March 13, 1998 - ----------------------------------------------------- Craig R. Lentzsch /s/ STEPHEN S. MARMADUKE Director March 13, 1998 - ----------------------------------------------------- Stephen S. Marmaduke /s/ JEFFREY G. SHRADER Director March 13, 1998 - ----------------------------------------------------- Jeffrey G. Shrader /s/ RON G. STEGALL Director March 13, 1998 - ----------------------------------------------------- Ron G. Stegall
II-7 88 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 1.1+ -- Form of Underwriting Agreement. 3.1+ -- Third Restated Articles of Incorporation of the Company. 3.2+ -- Amended and Restated Bylaws of the Company. 4.1++ -- Specimen of Certificate of Common Stock of the Company. 4.2+ -- Third Restated Articles of Incorporation of the Company (see 3.1 above). 4.3+ -- Amended and Restated Bylaws of the Company (see 3.2 above). 5.1++ -- Opinion of Locke Purnell Rain Harrell (A Professional Corporation). 10.1+ -- Form of Indemnification Agreement by and between the Company and its directors and executive officers. 10.2+ -- Note Purchase Agreement regarding $25,000,000 7.75% Senior Notes Due June 13, 2003. 10.3+ -- Credit Agreement among Hastings Books, Music & Video, Inc. and The Boatmen's National Bank of St. Louis dated as of December 12, 1994, as amended. 10.4+ -- Hastings Amended 1996 Incentive Stock Plan. 10.5++ -- Hastings 1994 Stock Option Plan. 10.6++ -- Hastings 1991 Stock Option Plan. 10.7+ -- Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust Agreement. 10.8+ -- Hastings Employee Stock Ownership Plan and Trust Agreement. 10.9++ -- Chief Executive Officer Stock Option, as amended. 10.10+ -- Corporate Officer Incentive Plan. 10.11+ -- Management Stock Purchase Plan. 10.12+ -- Management Incentive Plan. 10.13+ -- Salary Incentive Plan 10.14+ -- Hastings Entertainment, Inc. Stock Option Plan for Outside Directors. 10.15+ -- Lease Agreement, dated August 3, 1994, between Omni Capital Corporation and the Company, for office space located at Sunset Center in Amarillo, Texas. 10.16+ -- Lease Agreement, dated August 3, 1994, between Omni Capital Corporation and the Company, for warehouse space located at Sunset Center in Amarillo, Texas. 10.17++ -- Stock Redemption Agreement dated May 3, 1994, as amended, between John H. Marmaduke, Independent Executor of the Estate of Sam Marmaduke, Deceased, and the Company. 10.18+ -- Lease Agreement dated May 28, 1992 between the City of Amarillo and the Company for space located at 1900 W. 7th Avenue in Amarillo, Texas. 10.19+ -- $1,600,000 Promissory Note and Security Agreement in favor of First Interstate Bank of Texas, NA. 11.1++ -- Computation of Per Share Gain (Loss). 21.1+ -- Subsidiaries of the Company. 23.1+ -- Consent of KPMG Peat Marwick LLP. 23.2++ -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (included in Exhibit 5.1). 24.1+ -- Powers of Attorney (included on signature pages). 27.1+ -- Financial Data Schedule.
- --------------- + Filed herewith. ++ To be filed by amendment. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 [_____________] Shares HASTINGS ENTERTAINMENT, INC. Common Stock UNDERWRITING AGREEMENT [_____________], 1998 SMITH BARNEY INC. A.G. EDWARDS & SONS, INC. As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: Hastings Entertainment, Inc., a Texas corporation (the "Company"), proposes to issue and sell an aggregate of [____________] shares of its common stock, $0.01 par value per share, to the several Underwriters named in Schedule II hereto (the "Underwriters"), and the person named in Schedule I hereto (the "Selling Shareholder") proposes to sell to the several Underwriters an aggregate of [____________] shares of common stock of the Company. The Company and the Selling Shareholder are hereinafter sometimes referred to as the "Sellers". The Company's common stock, $0.01 par value, is hereinafter referred to as the "Common Stock" and the [____________] shares of Common Stock to be issued and sold to the Underwriters by the Company and the [____________] shares of Common Stock to be sold to the Underwriters by the Selling Shareholder are hereinafter referred to as the "Firm Shares". The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional [____________] shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The Company and the Selling Shareholder wish to confirm as follows their respective agreements with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-1 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Shares. The term 2 "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If an abbreviated registration statement is prepared and filed with the Commission in accordance with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the term "Registration Statement" as used in this Agreement includes the Abbreviated Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. 2. Agreements to Sell and Purchase. Subject to such adjustments as you may determine in order to avoid fractional shares, the Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Shareholder herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $[________] per Share (the "purchase price per share"), the number of Firm Shares which bears the same proportion to the aggregate number of Firm Shares to be issued and sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Shareholder. Subject to such adjustments as you may determine in order to avoid fractional shares, the Selling Shareholder agrees, subject to all the terms and conditions set forth herein, to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company and the Selling Shareholder herein contained and subject to all the terms and conditions set forth herein, each Underwriter, severally and not jointly, agrees to purchase from the Selling Shareholder at the purchase price per share that number of Firm Shares which bears the same proportion to the number of Firm Shares set forth opposite the name of such Selling Shareholder in Schedule I hereto as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto (or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Shareholder. 2 3 The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of [____________] Additional Shares from the Company. Additional Shares may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion that the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto ( or such number of Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Shareholder. Certificates in transferable form for the Shares which the Selling Shareholder agrees to sell pursuant to this Agreement have been placed in custody with [______________] (the "Custodian") for delivery under this Agreement pursuant to a Custody Agreement and Power of Attorney (the "Custody Agreement") executed by the Selling Shareholder appointing [______________] and [______________] as agents and attorneys-in-fact (the "Attorneys-in-Fact"). The Selling Shareholder agrees that (a) the Shares represented by the certificates held in custody pursuant to the Custody Agreement are subject to the interests of the Underwriters and the Company, (b) the arrangements made by the Selling Shareholder for such custody are, except as specifically provided in the Custody Agreement, irrevocable, and (c) the obligations of the Selling Shareholder hereunder and under the Custody Agreement shall not be terminated by any act of such Selling Shareholder or by operation of law, whether by the death or incapacity of the Selling Shareholder or the occurrence of any other event. If the Selling Shareholder shall die or be incapacitated or if any other event shall occur before the delivery of the Shares hereunder, certificates for the Shares of such Selling Shareholder shall be delivered to the Underwriters by the Attorneys-in-Fact in accordance with the terms and conditions of this Agreement and the Custody Agreement as if such death or incapacity or other event had not occurred, regardless of whether or not the Attorneys-in-Fact or any Underwriter shall have received notice of such death, incapacity or other event. Each Attorney-in-Fact is authorized, on behalf of the Selling Shareholder, to execute this Agreement and any other documents necessary or desirable in connection with the sale of the Shares to be sold hereunder by such Selling Shareholder, to make delivery of the certificates for such Shares, to receive the proceeds of the sale of such Shares, to give receipts for such proceeds, to pay therefrom any expenses to be borne by such Selling Shareholder in connection with the sale and public offering of such Shares, to distribute the balance thereof to such Selling Shareholder, and to take such other action as may be necessary or desirable in connection with the transactions contemplated by this Agreement. Each Attorney-in-Fact agrees to perform his duties under the Custody Agreement. 3. Terms of Public Offering. The Sellers have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon 3 4 after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00 A.M., New York City time, on [______________], 1998 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement among you, the Company and the Attorneys-in-Fact. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company and the Attorneys-in-Fact of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement among you, the Company and the Attorneys-in-Fact. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor in immediately available funds. 5. Agreements of the Company. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period 4 5 of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, three signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the 5 6 judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission, and (ii) from time to time such other information concerning the Company as you may request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 12 hereof or by notice given by you terminating this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company or the Selling Shareholder to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder substantially in accordance with the description set forth in the Prospectus. 6 7 (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) During the period of 180 days from the date of the Prospectus, the Company will not, without your prior written consent, issue, sell, offer or agree to sell, pledge, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock of the Company (or any securities convertible into or exercisable or exchangeable for shares of Common Stock or such other capital stock) or publicly disclose the intention to make any such disposition or transfer, other than the Company's sale of Shares hereunder and the Company's issuance of Common Stock upon the exercise of presently outstanding stock options. (n) The Company has obtained and delivered to you agreements executed and delivered by each of its officers and directors and such of its shareholders as have been heretofore designated by you and listed on Schedule III attached hereto to the effect that during the period of 180 days from the date of the Prospectus, such persons will not, without your prior written consent (i) issue, sell, offer or agree to sell, pledge, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock of the Company (or any securities convertible into or exercisable or exchangeable for shares of Common Stock or such other capital stock) or publicly disclose the intention to make any such disposition or transfer or (ii) enter into any hedging, swap or other arrangement that transfers all or a portion of the economic consequences associated with the beneficial ownership of any Common Stock or other capital stock of the Company. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will use its best efforts to have the Common Stock listed, subject to notice of issuance, on the Nasdaq National Market concurrently with the effectiveness of the registration statement. 6. Agreements of the Selling Shareholder. The Selling Shareholder agrees with the several Underwriters as follows: (a) Such Selling Shareholder will cooperate to the extent necessary to cause the registration statement or any post-effective amendment thereto to become effective at the earliest possible time. (b) Such Selling Shareholder will pay all Federal and other taxes, if any on the transfer or sale of the Shares being sold by the Selling Shareholder to the Underwriters. 7 8 (c) Such Selling Shareholder will do or perform all things required to be done or performed by the Selling Shareholder prior to the Closing Date or any Option Closing Date, as the case may be, to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. (d) Such Selling Shareholder has executed or will execute a "lock-up" letter as provided in Section 5(n) above and, except for the sale of Shares to the Underwriters pursuant to this Agreement, without your prior written consent, will not issue, sell, offer or agree to sell, pledge, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock of the Company (or any securities convertible into or exercisable or exchangeable for shares of Common Stock or such other capital stock) or publicly disclose the intention to make any such disposition or transfer. (e) Except as stated in this Agreement and in the Prepricing Prospectus and the Prospectus, such Selling Shareholder will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (f) Such Selling Shareholder will advise you promptly, and if requested by you, will confirm such advice in writing, within the period of time referred to in Section 5(f) hereof, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations or of any change in information relating to such Selling Shareholder or the Company or any new information relating to the Company or relating to any matter stated in the Prospectus or any amendment or supplement thereto which comes to the attention of such Selling Shareholder that suggests that any statement made in the Registration Statement or the Prospectus (as then amended or supplemented, if amended or supplemented) is or may be untrue in any material respect or that the Registration Statement or Prospectus (as then amended or supplemented, if amended or supplemented) omits or may omit to state a material fact or a fact necessary to be stated therein in order to make the statements therein not misleading in any material respect, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented, if amended or supplemented) in order to comply with the Act or any other law. 7. Representations and Warranties of the Company and the Selling Shareholder. The Company and the Selling Shareholder represent and warrant, jointly and severally, to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with 8 9 the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding shares of Common Stock of the Company, including the shares of Common Stock to be sold by the Selling Shareholder, have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the registration statement and the prospectus. (d) The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Texas with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company. (e) The Company does not own any capital stock or other ownership interests in any corporation, partnership, limited liability company, joint venture or other legal entity. (f) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company, or to which the Company or any of its respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the Act. (g) The Company is not in violation of its articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or of any decree of any court or governmental agency or body having jurisdiction over the Company, or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Company is a party or by which it or any of its respective properties may be bound. 9 10 (h) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby (i) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with the securities or Blue Sky laws of various jurisdictions, all of which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation or bylaws, or other organizational documents, of the Company or (ii) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company is a party or by which it or any of its respective properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of its respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of its property or assets is subject. (i) The accountants, KPMG Peat Marwick LLP, who have certified or shall certify the financial statements included in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants as required by the Act. (j) The financial statements, together with related schedules and notes, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the financial position, results of operations and changes in financial position of the Company on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (k) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (l) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), the Company has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, 10 11 of the Company, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, net worth or results of operations of the Company. (m) The Company has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement, and all the property described in the Prospectus as being held under lease by the Company is held by it under valid, subsisting and enforceable leases. (n) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) The Company has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the Company has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company. (p) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (q) To the Company's knowledge, neither the Company nor any employee or agent of the Company has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (r) The Company has filed all tax returns required to be filed, which returns are complete and correct, and the Company is not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. 11 12 (s) No holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement. (t) The Company owns or possesses all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by it or necessary for the conduct of its businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company with respect to the foregoing. (u) The Company is not now, and after sale of the Shares to be sold by it hereunder and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 8. Representations and Warranties of the Selling Shareholder. The Selling Shareholder represents and warrants to each Underwriter that: (a) Such Selling Shareholder now has, and on the Closing Date will have, valid and marketable title to the Shares to be sold by such Selling Shareholder, free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer. (b) Such Selling Shareholder now has, and on the Closing Date will have, full legal right, power and authorization, and any approval required by law, to sell, assign transfer and deliver such Shares in the manner provided in this Agreement, and upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire valid and marketable title to such Shares free and clear of any lien, claim, security interest, or other encumbrance. (c) This Agreement and the Custody Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and are the valid and binding agreements of such Selling Shareholder enforceable against such Selling Shareholder in accordance with their terms. (d) Neither the execution and delivery of this Agreement or the Custody Agreement by or on behalf of such Selling Shareholder nor the consummation of the transactions herein or therein contemplated by or on behalf of such Selling Shareholder requires any consent, approval, authorization or order of, or filing or registration with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) or conflicts or will conflict with or constitutes or will constitute a breach of, or default under, or violates or will violate, any agreement, indenture or other instrument to which such Selling Shareholder is a party or by which such Selling Shareholder is or may be bound or to which any of such Selling Shareholder's property or assets is subject, or any 12 13 statute, law, rule, regulation, ruling, judgment, injunction, order or decree applicable to such Selling Shareholder or to any property or assets of such Selling Shareholder. (e) The Registration Statement and the Prospectus, insofar as they relate to such Selling Shareholder, do not and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) Such Selling Shareholder does not have any knowledge or any reason to believe that the Registration Statement or the Prospectus (or any amendment or supplement thereto) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (g) The representations and warranties of such Selling Shareholder in the Custody Agreement are, and on the Closing Date will be, true and correct. (h) Such Selling Shareholder has not taken, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares, except for the lock-up arrangements described in the Prospectus. 9. Indemnification and Contribution. (a) The Company and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company or any Selling Shareholder may otherwise have. 13 14 (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or the Selling Shareholder, such Underwriter or such controlling person shall promptly notify the parties against whom indemnification is being sought (the "indemnifying parties"), and such indemnifying parties shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the indemnifying parties and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and any indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying parties shall not be liable for any settlement of any such action, suit or proceeding effected without their written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the indemnifying parties agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, the Selling Shareholder, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company and the Selling Shareholder to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, the Selling Shareholder, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense 14 15 thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, the Selling Shareholder, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which any Underwriter may otherwise have. (d) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholder on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholder bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company, the Selling Shareholder or the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company and the Selling Shareholder, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Shareholder on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholder on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company, the Selling Shareholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, 15 16 suit or proceeding. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule II hereto (or such numbers of Firm Shares increased as set forth in Section 12 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 9 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 9 and the representations and warranties of the Company and the Selling Shareholder set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or the Selling Shareholder or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9. 10. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with to your satisfaction. 16 17 (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, net worth, or results of operations of the Company not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any officer or director of the Company or the Selling Shareholder which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially adversely affect the market for the Shares. (c) You shall have received on the Closing Date, an opinion of Locke Purnell Rain Harrell (a Professional Corporation), counsel for the Company and the Selling Shareholder, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Texas with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (ii) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; (iii) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares to be issued and sold by the Company hereunder, have been duly authorized and validly issued, and are fully paid and nonassessable; (iv) The Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company; 17 18 (v) The form of certificates for the Shares conforms to the requirements of Texas law; (vi) The Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the best knowledge of such counsel after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (vii) The Company has corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to be sold by it to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company and is a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles; (viii) The Company is not in violation of its articles of incorporation or bylaws, or other organizational documents, or to the best knowledge of such counsel after reasonable inquiry, is in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus; (ix) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof, nor consummation by the Company of the transactions contemplated hereby conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation or bylaws, or other organizational documents, of the Company or any agreement, indenture, lease or other instrument to which the Company is a party or by which it or any of its respective properties is bound that is an exhibit to the Registration Statement, or is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, nor will any such action result in any violation of any existing law or regulation, or any violation of any ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Company or any of its respective properties; (x) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company (except as have been obtained under the Act and the Exchange Act or such as may be required under state securities or Blue 18 19 Sky laws governing the purchase and distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement; (xi) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; (xii) To the best knowledge of such counsel after reasonable inquiry, (A) other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Company, or to which the Company or any of its property is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) and (B) there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be; (xiii) To the best knowledge of such counsel after reasonable inquiry, the Company is not in violation of any law, ordinance, or administrative or governmental rule or regulation applicable to the Company or of any decree of any court or governmental agency or body having jurisdiction over the Company; (xiv) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; (xv) This Agreement and the Custody Agreement have each been duly executed and delivered by or on behalf of the Selling Shareholder and are valid and binding agreements of the Selling Shareholder enforceable against the Selling Shareholder in accordance with their terms; (xvi) To the knowledge of such counsel, the Selling Shareholder has full legal right, power and authorization, and any approval required by law, to sell, assign, transfer and deliver good and marketable title to the Shares which such Selling Shareholder has agreed to sell pursuant to this Agreement; (xvii) The execution and delivery of this Agreement and the Custody Agreement by the Selling Shareholder and the consummation of the transactions contemplated hereby and thereby will not conflict with, violate, result in a breach of or constitute a default under the terms or provisions of any agreement, indenture, mortgage or other instrument known to such counsel to which the Selling Shareholder is a party or by which it or any of its assets or property is bound, or any court order or decree or any law, 19 20 rule, or regulation applicable to the Selling Shareholder or to any of the property or assets of the Selling Shareholder; (xviii) Upon delivery of the Shares pursuant to this Agreement and payment therefor as contemplated herein the Underwriters will acquire good and marketable title to the Shares free and clear of any lien, claim, security interest, or other encumbrance, restriction on transfer or other defect in title; and (xix) The Company has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Company), to own its properties and to conduct its business as now being conducted, as described in the Prospectus; (xx) The Company does not own any capital stock or other ownership interests in any corporation, partnership, limited liability company, joint venture or other legal entity. (xxi) The Company owns all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by it or necessary for the conduct of its business, and such counsel is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company with respect to the foregoing; (xxii) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and such counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company; and (xxiii) Except as described in the Prospectus, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any Common Stock or other securities of the Company included in the registration statement or the right, as a result of the filing of the registration statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (xxiv) Although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such 20 21 counsel that has caused it to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Company as to laws of any jurisdiction other than the United States or the State of Texas, provided that (A) each such local counsel is acceptable to the Representatives, (B) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is in form and substance satisfactory to them and their counsel, and (C) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon. (d) You shall have received on the Closing Date an opinion of Vinson & Elkins L.L.P., counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the matters referred to in clauses (iv), (vi), (vii), (xi) and (xxiv) of the foregoing paragraph (c) and such other related matters as you may request. (e) You shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from KPMG Peat Marwick LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (f) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company; (iv) the Company shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the 21 22 representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 10(g) and in Section 10(h) hereof. (g) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (h) All the representations and warranties of the Selling Shareholder contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the Selling Shareholder to the effect set forth in this Section 10(i) and in Section 10(j) hereof. (i) The Selling Shareholder shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (j) The Shares shall have been listed or approved for listing upon notice of issuance on the Nasdaq National Market. (k) The Sellers shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company or any Attorney-in-Fact or the Selling Shareholder and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company or the Selling Shareholder, as the case may be, to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 10, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (i) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c) and (d) shall be revised to reflect the sale of Additional Shares. 11. Expenses. The Sellers (in proportion to the number of Shares being offered by each of them, including any Additional Shares which the Underwriters shall have elected to purchase) agree to pay the following costs and expenses and all other costs and expenses incident to the performance by them of their obligations hereunder: (a) the preparation, printing or reproduction, 22 23 and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (b) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (c) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (d) the printing (or reproduction) and delivery of this Agreement, the Blue Sky Memorandum and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (e) the registration of the Shares under the Exchange Act and the listing of the Shares on the Nasdaq National Market; (f) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the Blue Sky Memorandum and such registration and qualification); (g) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (h) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (i) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company and the Selling Shareholder. 12. Effective Date of Agreement. This Agreement shall become effective: (a) upon the execution and delivery hereof by the parties hereto; or (b) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company and the Selling Shareholder. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule II hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such 23 24 Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule II hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 12 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 13. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company or the Selling Shareholder, by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (a) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (b) a general moratorium on commercial banking activities in New York or Texas shall have been declared by either federal or state authorities, or (c) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 14. Information Furnished by the Underwriters. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first, third and [________] paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 7(b) and 9 hereof. 15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (a) if to the Company, at the office of the Company at 3601 Plains Boulevard, Suite #1, Amarillo, Texas 79102, Attention: John H. Marmaduke, President and Chief Executive Officer; or (b) if to the Selling Shareholder, at [___________________________], Attention: [___________________], or (c) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. 24 25 This Agreement has been and is made solely for the benefit of the several Underwriters, the Selling Shareholder, the Company, its directors and officers, and the other controlling persons referred to in Section 9 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 16. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 25 26 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Shareholder and the several Underwriters. Very truly yours, HASTINGS ENTERTAINMENT, INC. By: --------------------------------------- Chairman of the Board The Selling Shareholder named in Schedule I By: --------------------------------------- Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule II hereto. SMITH BARNEY INC. A.G. EDWARDS & SONS, INC. As Representatives of the Several Underwriters By: SMITH BARNEY INC. By: --------------------------------------- Managing Director 26 27 SCHEDULE I HASTINGS ENTERTAINMENT, INC.
SELLING STOCKHOLDERS NUMBER OF FIRM SHARES -------------------- --------------------- Estate of Sam Marmaduke . . . . . . . . . . . . . . ______________ Total . . . . . . . . . . . . . . . . . . . ______________
27 28 SCHEDULE II HASTINGS ENTERTAINMENT, INC.
NUMBER OF UNDERWRITER FIRM SHARES ----------- ----------- Smith Barney, Inc. . . . . . . . . . . . . . . . . . . . . . . A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . . . .
28 29 SCHEDULE III NAMES OF SHAREHOLDERS SUBJECT TO THE LOCK-UP PROVISION 29 EX-3.1 3 3RD RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 THIRD RESTATED ARTICLES OF INCORPORATION WITH AMENDMENT OF HASTINGS BOOKS, MUSIC & VIDEO, INC. ARTICLE ONE Hastings Books, Music & Video, Inc. (the "Corporation"), pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts these Third Restated Articles of Incorporation, which accurately copy the Articles of Incorporation of the Corporation and all amendments thereto that are in effect to date and as further amended by such Third Restated Articles of Incorporation as hereinafter set forth, and which contain no other change in any provision thereof. ARTICLE TWO The Restated Articles of Incorporation of the Corporation are amended by these Third Restated Articles of Incorporation as follows: (a) ARTICLE ONE of the Articles of Incorporation of the Corporation is amended to read in its entire as follows: ARTICLE ONE The name of the corporation is Hastings Entertainment, Inc. ARTICLE THREE The amendment made by the Third Restated Articles of Incorporation of the Corporation has been effected in conformity with the provisions of the Texas Business Corporation Act, and such Third Restated Articles of Incorporation and each such amendment made by the Third 2 Restated Articles of Incorporation were duly adopted by the shareholders of the Corporation on the 6th day of August, 1996. ARTICLE FOUR The number of shares of the Corporation outstanding at the time of such adoption was 1,686,939; the number of shares entitled to vote on the Third Restated Articles of Incorporation as so amended was 1,686,939; the number of shares voted for such Third Restated Articles of Incorporation was 1,531,413; and no shares voted against such Third Restated Articles of Incorporation. ARTICLE FIVE The Restated Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Third Restated Articles of Incorporation, which accurately copy the entire text thereof, as amended as set forth above: THIRD RESTATED ARTICLES OF INCORPORATION OF HASTINGS ENTERTAINMENT, INC. ARTICLE ONE The name of the corporation is Hastings Entertainment, Inc. ARTICLE TWO The period of its duration is perpetual. -2- 3 ARTICLE THREE The purpose for which the corporation is organized is to engage in the transaction of any or all lawful business for which corporations may be organized under the Texas Business Corporation Act. ARTICLE FOUR The aggregate number of shares of capital stock that the corporation shall have authority to issue is eighty million (80,000,000) shares, consisting of seventy-five million (75,000,000) shares of Common Stock par value one cent ($.01) per share, and five million (5,000,000) shams of Preferred Stock, par value one cent ($.01) per share. The following is a statement of the designations, preferences, limitations and relative rights in respect of the classes of stock of the corporation, and of the authority with respect thereto expressly vested in the Board of Directors of the corporation Preferred Stock. Shares of the Preferred Stock may be issued from time to time in one or more series; the shares of each series to have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations and relative rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the corporation. The Board of Directors of the corporation is hereby expressly authorized, subject to the limitations provided by law, to establish and designate series of the Preferred Stock, to fix the number of shares constituting each series, and to fix the designations, preferences, limitations and relative rights, including voting rights, of the shares of each series and the variations in the relative powers, -3- 4 rights, preferences and limitations as between series, and to increase and decrease the number of shares constituting each series. Common Stock. A. Dividends. Subject to the prior rights and preferences of the Preferred Stock and subject to the provisions and on the conditions set forth in any resolution of the Board of Directors of the corporation, dividends may be paid on the Common Stock in money, property or capital stock, as and when declared by the Board of Directors of the corporation out of any funds of the corporation legally available for the payment thereof. B. Voting. The shares of Common Stock shall be by voting stock at the rate of one vote for each share of Common Stock. C. Liquidation Rights. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and after distribution in full of the preferential amounts to be distributed to the holders of shares of any and all series of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive all the remaining assets of the corporation available for distribution to its shareholders, ratably in proportion to the number of shares of Common Stock held by them. ARTICLE FIVE The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand ($1,000.00) dollars consisting of money, labor done, or property actually received, which sum is not less than One Thousand ($1,000.00) Dollars. -4- 5 ARTICLE SIX No shareholder shall have, as a shareholder of the corporation, any preemptive right to acquire, purchase or subscribe for the purchase of any unissued or treasury shares of any class of stock of the corporation, whether now or hereafter authorized, or any bonds, debentures or other securities of the corporation convertible into or exchangeable for, or carrying or accompanied by any rights to acquire, purchase or subscribe for the purchase of, any such unissued or treasury shares. ARTICLE SEVEN Cumulative voting in the election of directors or otherwise is hereby expressly prohibited. ARTICLE EIGHT The directors of the corporation shall be divided into three classes, as nearly equal in number as reasonably possible, with the directors in each class to hold office until their successors are elected and qualified. At each annual meeting of shareholders of the corporation, the successors to the class of directors whose term shall then expire shall be elected to hold office for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no event will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to his earlier death, resignation or removal from office. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the corporation shall -5- 6 have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the resolution or resolutions adopted by the Board of Directors establishing the designations, preferences, limitations and relative rights with respect to such shares of Preferred Stock, and such directors so elected shall not be divided into classes pursuant to this Article Eight unless expressly provided by such terms. Any vacancy occurring in the Board of Directors may be filled by an election at an annual meeting or a special meeting of the shareholders called for that purpose or by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual meeting or at a special meeting of the shareholders called for that purpose or may be filled by the Board of Directors for a term of office to coincide with the remaining term of the applicable class; provided that the Board of Directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Notwithstanding the preceding provisions of this Article, whenever the holders of any one or more classes or series of Preferred Stock issued by the corporation are entitled to elect one or more directors by the provisions of the resolution or resolutions adopted by the Board of Directors establishing the designations, preferences, limitations and relative rights with respect to such shares, any vacancies in such directorships and any newly created directorships of such class or series to be filled by reason of an increase in the number of such directors may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office -6- 7 or by a sole remaining director so elected, or by vote of the holders of the outstanding shares of such class or series, and such directorships shall not in any case be filled by the vote of the remaining directors or the holders of the outstanding shares as a whole unless provided in such resolution or resolutions. ARTICLE NINE Special meetings of shareholders may be called by the Chairman of the Board of Directors, the President, the Board of Directors, or the holders of at least twenty-five percent (25%) of all the shares entitled to vote at the proposed special meeting. ARTICLE TEN No action required or permitted to be taken at a meeting of the shareholders of the corporation may be taken by written consent of the shareholders. ARTICLE ELEVEN The post office of its registered office is 3601 Plains, Amarillo, Texas 79102, and the name of its registered agent at such address is John H. Marmaduke. ARTICLE TWELVE The number of directors constituting the Board of Directors of the corporation at the time of the adoption of the Third Restated Articles of Incorporation is nine (9), and the names and addresses of the directors are as follows:
Name Address ---- ------- 1. John Marmaduke P.O. Box 35350 (3601 Plains), Amarillo, Texas 79120 (79102) 2. Walter McNeer P.O. Box 35350 (3601 Plains), Amarillo, Texas 79120 (79102) 3. Ron Stegall 600 Six Flags Drive, Suite 628, Arlington, Texas 76001
-7- 8 4. Steve Marmaduke 1605 Crockett, Amarillo, Texas 79102 5. Gaines Godfrey 662 La Viveza Court, Santa Fe, New Mexico 87501 6. Peter Dallas P.O. Box 1331, 8th & Taylor, Amarillo, Texas 79180 7. Leonard Berry 202 Lampwick Circle, College Station, Texas 77840 8. Jeffrey Shrader 801 S. Fillmore, Suite 600, P.O. Box 15008, Amarillo, Texas 79105-5008 9. Craig Lentzsch 15110 N. Dallas Parkway, Dallas, Texas 75266-0362
ARTICLE THIRTEEN The corporation shall indemnify any person who was, is or is threatened to be made a named defendant or responded in a proceeding (as hereinafter defined) because the person (a) is or was a director or officer of the corporation or (b) while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, manager, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, limited liability company, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the fullest extent that a corporation may grant indemnification to a person serving in such capacity under the Texas Business Corporation Act, as the same exists or may hereafter be amended. Such right shall include the right to be paid by the corporation for all expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the corporation within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid -8- 9 amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Texas Business Corporation Act, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors or any committee thereof, special legal counsel or shareholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the corporation (including its Board of Directors or any committee thereof, special legal counsel or shareholders) that such indemnification or advancement is not permissible, shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. The corporation may additionally indemnify any person not covered by the grant of mandatory indemnification contained above to the fullest extent permitted by law. Neither the amendment nor repeal of this Article, nor the adoption of any provision of these Third Restated Articles of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any proceeding that accrued or arose prior to such amendment, repeal or adoption of any inconsistent provision. As used herein, the term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. -9- 10 ARTICLE FOURTEEN A director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this Article Fourteen does not eliminate or limit the liability of a director to the extent the director is found liable for: (a) a breach of a director's duty of loyalty to the corporation or its shareholders; (b) an act or omission not in good faith that constitutes a breach of duty of the director to the corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (c) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (d) an act or omission for which the liability of a director is expressly provided by an applicable statute. Neither the amendment nor repeal of this Article, nor the adoption of any provision of these Third Restated Articles of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article. would accrue or arise, prior to such amendment, repeal or adoption of any inconsistent provision. If the Texas Business Corporation Act or the Texas Miscellaneous Corporation Laws Act or any successor act thereto is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Texas Business Corporation Act or the Texas Miscellaneous Corporation Laws Act, or any successor act thereto, as so amended from time to time. -10- 11 IN WITNESS WHEREOF, the undersigned authorized officer has hereunto set his hand on behalf of the Corporation as of this 29th day of August, 1996. HASTINGS ENTERTAINMENT, INC. By: /s/ DENNIS MCGILL ------------------------------------ Dennis McGill, Vice President, Secretary, Treasurer, and Chief Financial Officer -11- EX-3.2 4 AMENDED AND RESTATED BY-LAWS 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF HASTINGS BOOKS, MUSIC & VIDEO, INC. 2 TABLE OF CONTENTS AMENDED AND RESTATED BYLAWS OF HASTINGS BOOKS, MUSIC & VIDEO, INC. ---000---
Page ---- ARTICLE I - OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - MEETINGS OF THE SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.4 Notice of Annual or Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.5 Notice Requirements to Present Proposals and Nominate Directors . . . . . . . . . . . . . . . . . . 2 2.6 Business at Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.7 Quorum of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.8 Act of Shareholders' Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.9 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.10 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.11 Voting List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III - BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Number of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3 Resignation and Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.4 Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.5 Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE IV - MEETINGS OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.1 First Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.2 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.4 Business at Regular or Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.5 Quorum of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.6 Interested Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.7 Act of Directors' Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.8 Action by Written Consent Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE V - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE VI - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.1 Methods of Giving Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.2 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.3 Attendance as Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-i- 3 ARTICLE VII - MEETINGS BY USE OF CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE VIII - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.1 Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.2 Election and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.3 Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.4 Term, Removal and Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.5 Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.6 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.7 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.8 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.9 Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.10 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.11 Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8.12 Officer's Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IX - INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.1 Indemnification by the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.2 Expenses; Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.3 Additional Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.4 Amendment or Repeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.5 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE X - CERTIFICATES FOR SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.1 Certificates Representing Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.2 Restriction on Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.3 Voting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.4 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.5 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.6 Closing of Transfer Books and Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.7 Registered Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE XI - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.1 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.2 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.3 Negotiable Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.4 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.5 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.6 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE XII - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-ii- 4 AMENDED AND RESTATED BYLAWS OF HASTINGS BOOKS, MUSIC & VIDEO, INC. ---000--- ARTICLE I OFFICES 1.1 Registered Office. The registered office, until changed by action of the Board of Directors, shall be located at 421 East 34th Street in the City of Amarillo, County of Potter, State of Texas. 1.2 Other Offices. The corporation also may have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or as the business of the corporation may require. ARTICLE II MEETINGS OF THE SHAREHOLDERS 2.1 Place of Meetings. All meetings of shareholders for the election of directors or for any other proper purpose shall be held at such place within or without the State of Texas as the Board of Directors may from time to time designate, as stated in the notice of such meeting or a duly executed waiver of notice thereof. 2.2 Annual Meeting. An annual meeting of shareholders shall be held at such time and date as the Board of Directors may determine. At such meeting the shareholders entitled to vote thereat shall elect a Board of Directors and may transact such other business as may properly be brought before the meeting. 2.3 Special Meetings. Special meetings of shareholders maybe called by the Chairman of the Board of Directors, the President, the Board of Directors, or the holders of at least twenty-five percent (25%) of all the shares entitled to vote at the proposed special meeting. If not otherwise fixed in accordance with these Bylaws, the record date for determining shareholders entitled to call a special meeting is the date the first shareholder signs the notice of such meeting. 2.4 Notice of Annual or Special Meeting. Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than 10 nor more than 60 days before the date of the meeting, either personally or by -1- 5 mail, by or at the direction of the President, the Secretary or the officer or person calling the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the share transfer records of the corporation, with postage thereon prepaid. 2.5 Notice Requirements to Present Proposals and Nominate Directors. (a) At an annual meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the annual meeting (i) by or at the direction of a majority of the directors, or (ii) by any shareholder of the corporation who complies with the notice procedures set forth in this Section 2.5(a). For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal executive offices of the corporation not less than 50 days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than 60 days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, then notice by the shareholder, to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A shareholder's notice to the Secretary pursuant to this Section 2.5(a) shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the shareholder proposing such business and of each other shareholder known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the corporation's stock that are beneficially owned by the shareholder on the date of such shareholder notice and by each other shareholder known by such shareholder to be supporting such proposal on the date of such shareholder notice, and (iv) any financial interest of the shareholder in such proposal. The presiding officer of the annual meeting shall determine and declare at the annual meeting whether the shareholder proposal was made in accordance with the terms of this Section 2.5(a). If the presiding officer determines that a shareholder proposal was not made in accordance with the terms of this Section 2.5(a), he or she shall so declare at -2- 6 the annual meeting and any such proposal shall not be acted upon at the annual meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. (b) Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board, or by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5(b). Such nominations, other than those made by or at the direction of the Board or by any nominating committee or person appointed by the Board, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal executive offices of the corporation not less than 50 days prior to the scheduled annual meeting or special meeting called to elect a director or directors, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than 60 days' notice or prior public disclosure of the date of the scheduled meeting is given or made, then notice by the shareholder, to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled meeting was mailed or the day on which such public disclosure was made. A shareholder's notice to the Secretary pursuant to this Section 2.5(b) shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director, (A) the name, age, business address and residence address of the person, (B) the principal occupation or employment of the person, (C) the class and number of shares of capital stock of the corporation that are beneficially owned by the person and (D) any other information relating to the person that is required to be disclosed in connection with solicitations for proxies for the election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the corporation's books, of the shareholder and (B) the class and number of shares of the corporation's stock that are beneficially owned by the shareholder on the date of such shareholder notice. -3- 7 The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The presiding officer of the meeting shall determine and declare at the meeting whether the nomination was made in accordance with the - terms of this Section 2.5 b). If the presiding officer determines that a nomination was not made in accordance with the terms of this Section 2.5(b), he shall so declare at the meeting and any such defective nomination shall be disregarded. 2.6 Business at Special Meeting. The business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice thereof. 2.7 Quorum of Shareholders. Unless otherwise provided in the Restated Articles of Incorporation, with respect to any matter, the holders of a majority of the shares entitled to vote on that matter, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If, however, a quorum shall not be present or represented at any meeting of the shareholders, the holders of a majority of the shares represented in person or by proxy at the meeting shall have the power to adjourn the meeting until such time and to such place as they shall determine, without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, and the subsequent withdrawal of any shareholder or the refusal of any shareholder to vote shall not affect the presence of a quorum at the meeting. 2.8 Act of Shareholders' Meeting. With respect to any matter, other than the election of directors or a matter for which the affirmative vote of the holders of a specified portion of the shares entitled to vote is required by law or the Restated Articles of Incorporation or otherwise by these Bylaws, the affirmative vote of the holders of a majority of the shares entitled to vote on that matter and represented in person or by proxy at a meeting of shareholders at which a quorum is present shall be the act of shareholders. Unless otherwise provided in the Restated Articles of Incorporation, directors shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. 2.9 Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent otherwise provided by law, the Restated Articles of Incorporation or the resolution or resolutions, if any, establishing the designations, -4- 8 preferences, limitations and relative rights of such shares. At each election of directors every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has the right to vote. Unless permitted by the Restated Articles of Incorporation, no shareholder shall be entitled to cumulate his votes by giving one candidate as many votes as the number of such directors to be elected multiplied by the number of shares owned by such shareholder or by distributing such votes on the same principle among any number of such candidates. 2.10 Proxies. At any meeting of the shareholders, each shareholder having the right to vote shall be entitled to vote either in person or by proxy executed in writing by the shareholder or his duly authorized attorney-in- fact. A telegram, telex, cablegram or similar transmission by the shareholder or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder shall be treated as an execution in writing for purposes of this section. No proxy shall be valid after 11 months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. An irrevocable proxy, if noted conspicuously on the certificate representing the shares that are subject to the irrevocable proxy, shall be specifically enforceable against the holder of those shares or any successor or transferee of the holder. Unless noted conspicuously on the certificate representing the shares that are subject to the irrevocable proxy, an irrevocable proxy, even though otherwise enforceable, is ineffective against a transferee for value without actual knowledge of the existence of the irrevocable proxy at the time of the transfer or against any subsequent transferee (whether or not for value), but such an irrevocable proxy shall be specifically enforceable against any other person who is not a transferee for value from and after the time that the person acquires actual knowledge of the existence of the irrevocable proxy. 2.11 Voting List. The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least 10 days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and number of shares held by each shareholder, which list, for a period of 10 days prior to such meeting, shall be kept on file at the registered office or principal place of business of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list also shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders -5- 9 entitled to examine such list or transfer books or to vote at any such meeting of shareholders. ARTICLE III BOARD OF DIRECTORS 3.1 Powers. The powers of the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by law, the Restated Articles of Incorporation or these Bylaws directed or required to be exercised and done by the shareholders. 3.2 Number of Directors. The number of directors of the corporation constituting the Board of Directors shall be fixed from time to time by a resolution adopted by a majority of the full Board of Directors. The first Board of Directors constituted after the date of adoption of these Bylaws shall consist of nine (9) directors, subject to the provisions of this Article III and the Restated Articles of Incorporation. 3.3 Resignation and Removal. Any director may resign at any time upon giving written notice to the corporation. At any special meeting of shareholders called expressly for the purpose of removing a director or directors or at an annual meeting of shareholders, any director or the entire Board of Directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. 3.4 Compensation of Directors. As specifically prescribed from time to time by resolution of the Board of Directors, the directors of the corporation may be paid their expenses of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary in their capacity as directors. This provision shall not preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.5 Chairman of the Board. The Board of Directors, at its first meeting after each annual meeting of shareholders, may elect one of its members Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall have such other powers and duties as usually pertain to such position or as may be delegated by the Board of Directors. -6- 10 ARTICLE IV MEETINGS OF THE BOARD 4.1 First Meeting. The first meeting of each newly elected Board of Directors shall be held without notice immediately following the shareholders' annual meeting at which such directors were elected, at the same place as such shareholders, meeting or at such other time and place either within or without the State of Texas as shall be designated by the Secretary upon the written request of a majority of the directors then elected. 4.2 Regular Meetings. Regular meetings of the Board of Directors may be held with or without notice at such time and at such place either within or without the State of Texas as from time to time shall be prescribed by resolution of the Board of Directors. 4.3 Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors or the President, and shall be called by the Chairman of the Board of Directors, the President or the Secretary on the written request of three (3) directors. Written notice of special meetings of the Board of Directors shall be given to each director at least 24 hours prior to the time of the meeting. 4.4 Business at Regular or Special Meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 4.5 Quorum of Directors. A majority of the Board of Directors shall constitute a quorum for the transaction of business, unless a greater number is required by law or the Restated Articles of Incorporation. If a quorum shall not be participating at any meeting of the Board of Directors, the directors participating thereat nay adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be participating. 4.6 Interested Directors. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and -7- 11 the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (c) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes the contract or transaction. 4.7 Act of Directors' Meeting. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the act of a greater number is required by law or the Restated Articles of Incorporation. 4.8 Action by Written Consent Without a Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all members of the Board of Directors or committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at such meeting. ARTICLE V COMMITTEES The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members one or more committees, each of which sale be comprised of one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the Board of Directors, replace absent or disqualified members at any meeting of that committee, to the extent provided in such resolution or In the Restated Articles of Incorporation, shall have and any exercise all of the authority of the Board of Directors, subject to the limitations imposed by applicable law. Vacancies in the membership of the committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. All committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. The designation of a committee of the Board of Directors and the -8- 12 delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. To the extent applicable, the provisions of Article IV of these Bylaws governing the meetings of the Board of Directors shall likewise govern the meetings of any committee thereof. ARTICLE VI NOTICES 6.1 Methods of Giving Notice. Whenever any notice is required to be given to any shareholder or director under the provisions of any law, the Restated Articles of Incorporation or these Bylaws, it shall be given in writing and delivered personally or mailed to such shareholder or director at such address as appears on the records (or in the case of a shareholder, the stock transfer books) of the corporation, and such notice small be deemed to be delivered at the time when the same shall be deposited in the United States mail with sufficient postage thereon prepaid. Notice to directors also may be given by telegram, and notice given by such means shall be deemed given at the time it is delivered to the telegraph office. 6.2 Waiver of Notice. Whenever any notice is required to be given to any shareholder or director under the provisions of any law, the Restated Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 6.3 Attendance as Waiver. Attendance of a director at a meeting of the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE VII MEETINGS BY USE OF CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT Subject to the provisions hereof requiring or permitting notice of meeting, unless otherwise restricted by the Restated Articles of Incorporation or these Bylaws, shareholders, members of the Board of Directors or members of any committee designated by such Board of Directors may participate in and hold a meeting of such shareholders, Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each -9- 13 other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is called or convened. ARTICLE VIII OFFICERS 8.1 Executive Officers. The officers of the corporation shall consist of a President and a Secretary, and may also include one or more Vice Presidents, a Treasurer and such other officers as are provided for in this Article. Any Vice President of the corporation may, by the addition of a number or a word or words before or after the title "Vice President," be designated "Executive," "Senior," "First," "Second" or "Assistant" Vice President. Each officer of the corporation shall be elected by the Board of Directors as provided in Section 8.2 of this Article. Any two or more offices may be held by the same person. 8.2 Election and Qualification. The Board of Directors, at its first meeting after each annual meeting of shareholders, shall elect a President and a Secretary. The Board of Directors also may elect one or more Vice Presidents, a Treasurer, and such other officers, including assistant officers and agents, as may be deemed necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 8.3 Salaries. The salaries of all officers and agents of the corporation shall be fixed by or in the manner provided in a resolution of the Board of Directors. 8.4 Term, Removal and Vacancies. Each officer of the corporation shall hold office until his successor is chosen and qualified or until his death, resignation or removal. Subject to the contract rights of the corporation, any officer may resign at any time upon giving written notice to the corporation. Any officer or agent or member of a committee elected or appointed by the Board of Directors may be removed, by the Board of Directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent or member of a committee shall not of itself create contract rights. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors. 8.5 Chief Executive Officer. Unless the Board of Directors designates otherwise, the President shall be the Chief Executive officer of the corporation. The Chief Executive Officer shall preside at all meetings of the shareholders. The Chief Executive -10- 14 Officer shall have such other powers and duties as usually pertain to such office or as nay be delegated by the Board of Directors. 8.6 President. The President shall have such powers and duties as usually pertain to such office, except as the sane may be modified by the Board of Directors. Unless the Board of Directors shall otherwise delegate such duties, the President shall be ex-officio a member of all standing committees, shall have general powers of oversight, supervision and management of the business and affairs of the corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. He may execute bonds, mortgages, instruments, contracts, agreements and other documentation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the corporation may sign and execute such documents when so authorized by these Bylaws, the Board of Directors or the President. 8.7 Vice Presidents. Unless otherwise determined by the Board of Directors, one of the Vice Presidents shall, in the absence or disability of the President, perform the duties and exercise the powers of the President. The various Vice Presidents shall perform such other duties and have such other powers as the Board of Directors shall prescribe or as the President shall delegate. 8.8 Secretary. The Board of Directors and of the shareholders, record all the proceedings of the meetings of the Board of Directors and of the shareholders in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings as may be prescribed by the Board of Directors or the President. He shall keep in safe custody the seal of the corporation, if any, and, when authorized by the Board of Directors, affix the same to any instrument requiring it, and, when so affixed, it shall be attested by his signature or by the signature of an Assistant Secretary, or if there be none, the signature of the Treasurer acting as Assistant Secretary. 8.9 Assistant Secretaries. An Assistant Secretary, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the powers of the Secretary. An Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors may from time to tine prescribe. 8.10 Treasurer. The Treasurer shall have custody of the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the Funds of the corporation as may be ordered by -11- 15 the Board of Directors, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of his transactions as Treasurer and of the financial condition of the corporation. 8.11 Assistant Treasurers. An Assistant Treasurer, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer. An Assistant Treasurer shall perform, such other duties, and have such other powers as the Board of Directors may from time to time prescribe. 8.12 Officer's Bond. If required by the Board of Directors, any officer so required shall give the corporation a bond (which shall be renewed as the Board of Directors nay require) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of any and all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. ARTICLE IX INDEMNIFICATION 9.1 Indemnification by the Corporation. The corporation shall indemnify any person who was, is or is threatened to be made a named defendant or respondent in a proceeding (as hereinafter defined) because the person (a) is or was a director or officer of the corporation or (b) while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, manager, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, limited liability company, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the fullest extent that a corporation may grant indemnification to a person serving in such capacity under the Texas Business Corporation Act, as the same exists or may hereafter be amended. 9.2 Expenses; Procedure. Such right shall include the right to be paid by the corporation for all expense incurred in defending any such proceeding in advance of its final disposition to the maximum, extent permitted under the Texas Business Corporation Act, as the same exists or any hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the corporation within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of -12- 16 prosecuting such claim. It shall be a defense to any such action that such indemnification of advancement of costs of defense are not permitted under the Texas Business Corporation Act, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors or any committee thereof, special legal counsel or shareholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the corporation (including its Board of Directors or any committee thereof, special legal counsel or shareholders) that such indemnification or advancement is not permissible shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. 9.3 Additional Indemnification. The corporation may additionally indemnify any person not covered by the grant of mandatory indemnification contained above to the fullest extent permitted by law. 9.4 Amendment or Repeal. Neither the amendment nor repeal of this Article IX, nor the adoption of any provision of these Bylaws inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any proceeding that accrued or arose prior to such amendment, repeal or adoption of any inconsistent provision. 9.5 Definition. As used herein, the term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. ARTICLE X CERTIFICATES FOR SHARES 10.1 Certificates Representing Shares. The corporation shall deliver certificates in such form as may be determined by the Board of Directors representing shares to which shareholders are entitled. Such certificates shall be numbered and shall be entered in the books of the corporation as they are issued, and shall be signed by the President or Vice President and Secretary or Assistant Secretary of the corporation, and may be sealed with the seal of the corporation or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of its issuance. If the corporation is authorized to issue shares of more -13- 17 than one class, each certificate representing shares issued by the corporation shall conspicuously set forth such provisions as are required by applicable law. If the corporation has by its Restated Articles of Incorporation limited or denied the preemptive right of shareholders to acquire unissued or treasury shares of the corporation, each certificate representing shares issued by such corporation shall be conspicuously set forth such provisions as are required by applicable law. Each certificate representing shares shall state upon the face thereof that the corporation is organized under the laws of the State of Texas, the name of the person to whom issued, the number and class of shares and the designation of the series, if any, that such certificate represents and the par value of each share represented by such certificate or a statement that the shares are without par value. No certificate shall be issued for any share until the amount of the consideration therefor, fixed as provided by law, has been fully paid. 10.2 Restriction on Transfer of Shares. If any restriction on the transfer, or registration of the transfer, of shares shall be imposed or agreed to by the corporation, as permitted by law, the Restated Articles of Incorporation or these Bylaws, such restriction shalt be noted conspicuously on each certificate representing shares in accordance with applicable law. 10.3 Voting Agreements. A written counterpart of any voting agreement entered into among any number of shareholders of the corporation, or any number of shareholders of the corporation and the corporation itself, for the purpose of providing that shares of the corporation shall be voted in the manner prescribed in the agreement shall be deposited with the corporation at its principal place of business or registered office and shall be subject to the same right of examination by a shareholder of the corporation, in person or by agent or attorney, as are the books and records of the corporation. The existence of the agreement shall be noted conspicuously on the certificate representing the shares that are subject to the agreement. 10.4 Transfer of Shares. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 10.5 Lost, Stolen or Destroyed Certificates. The Board of Directors, the President or such other officer or officers of the corporation as the Board of Directors may from time to time designate may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate or certificates of stock to be lost, stolen or destroyed. When issuing such a new certificate or certificates, -14- 18 the Board of Directors, the President or such other officer or officers, in its or his discretion and as a condition precedent to the issuance thereof, may require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it or he shall require and/or to give the corporation a bond in such form, in such sum and with such surety or sureties as it or he may direct as indemnity against any claim that may be made against the corporation with respect to the certificate or certificates alleged to have been lost, stolen, or destroyed. 10.6 Closing of Transfer Books and Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive a distribution by the corporation (other than a distribution involving a purchase or redemption by the corporation of any of its own shares) (a "Distribution") or a share dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may provide that share transfer records shall be closed for a stated period but not to exceed, in any case, 60 days. If the share transfer records shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such records shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the share transfer records, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 60 days and, in case of a meeting of shareholders, not less than 10 days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer records are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive a distribution or a share dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such Distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders had been made as provided in this Section 10.6, such determination shall apply to adjournment thereof, except when the determination has been made through the closing of the share transfer records and the stated period of closing has expired. 10.7 Registered Shareholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. -15- 19 ARTICLE XI GENERAL PROVISIONS 11.1 Dividends. Dividends upon the outstanding shares of the corporation, except as provided by applicable law and the Restated Articles of Incorporation, may be declared by the Board of Directors at any annual, regular or special meeting. Dividends may be declared and paid in cash, in property, in shares of the corporation or in any combination thereof. The declaration and payment shall be at the discretion of the Board of Directors. 11.2 Reserves. There may be created from time to time by resolution of the Board of Directors, out of the earned surplus of the corporation, such reserve or reserves as the directors in their discretion think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the corporation, or for such other purpose as the directors shall think beneficial to the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 11.3 Negotiable Instruments. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer or officers or such other person or persons and in such manner as are permitted by these Bylaws or in such manner as the Board of Directors may from time to time prescribe by resolution. 11.4 Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. 11.5 Seal. The corporation may have a corporate seal and, if the Board of Directors adopts a corporate seal, the corporate seal shall have inscribed thereon the name of the corporation and may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 11.6 Books and Records. The corporation shall keep books and records of account and shall keep minutes of the proceedings of the shareholders, the Board of Directors and each committee of the Board of Directors. The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of the original issuance of shares issued by the corporation and a record of each transfer of those shares that have been presented to the corporation for registration of transfer. Such records shall contain the names and addresses of all past and current shareholders of the corporation and the number and class or series of shares issued by the corporation held by each of them. Any books, records, minutes and share transfer records may be in written form or in any other form capable of being converted into written form within a reasonable time. -16- 20 ARTICLE XII AMENDMENTS These Bylaws shall be adopted by the Board of Directors and approved by the shareholders of the corporation. The Board of Directors shall have the sole and exclusive power to amend or repeal these Bylaws or adopt new bylaws. -17- 21 CERTIFICATE OF SECRETARY The undersigned does hereby certify that (i) he is the duly elected and qualified Secretary of Hastings Books, Music & Video, Inc., a Texas corporation (the "Corporation"), and (ii) the foregoing is a true and correct copy of the Amended and Restated Bylaws of the Corporation reviewed and adopted by the Board of Directors of the Corporation on April 20, 1994 and by the shareholders of the Corporation on April 20, 1994. /s/ GREG SKELTON ------------------------------------- Greg Skelton, Secretary -18- EX-10.1 5 INDEMNIFICATION AGREEMENT 1 Exhibit 10.1 INDEMNIFICATION AGREEMENT This Agreement, dated as of _______________ ___, 199__, is by and between HASTINGS ENTERTAINMENT, INC., a Texas corporation (the "Company"), and _____________________________ ("Indemnitee"). W I T N E S S E T H : WHEREAS, the Company desires to have qualified persons serving as officers of the Company and qualified persons serving as directors on its Board of Directors who are willing to make decisions that in their judgment are in the Company's best interest without any undue threat of personal liability; WHEREAS, the Company's Amended and Restated Articles of Incorporation ("Articles of Incorporation") and the Company's Bylaws ("Bylaws") require indemnification of each director or officer of the Company in his capacity as a director or officer and, if serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by him in connection with or resulting from (a) any threatened, pending, or completed action, suit, or proceeding whether civil, criminal, administrative, arbitrative, or investigative (collectively, a "Proceeding"), (b) an appeal in such a Proceeding, or (c) any inquiry or investigation that could lead to such a Proceeding, to the fullest extent permitted by the Texas Business Corporation Act ("Act"), as the same exists or may be hereafter amended; WHEREAS, the Company desires to grant to Indemnitee the maximum indemnification for any Loss (hereinafter defined) permitted by the Articles of Incorporation and Bylaws; WHEREAS, developments with respect to the terms and availability of directors' and officers' liability insurance and with respect to the application, amendment, and enforcement of statutory, charter, and bylaw indemnification provisions generally have raised questions concerning the adequacy and reliability of the protection afforded to persons intended to be protected thereunder; and WHEREAS, in order to resolve such questions and thereby induce Indemnitee to serve or to continue serving, as an officer or a director of the Company, the Company has agreed to enter into this Agreement with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's consent to serve or continuing to serve in the position of director of the Company, the parties hereto agree as follows: 1. Indemnity of Indemnitee. The Company shall indemnify Indemnitee in his capacity as director, director nominee, and/or officer of the Company, as the case may be, and, if serving at the request of the Company as a director, director nominee, officer, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, trust partnership, joint venture, sole proprietorship, employee benefit plan, or other enterprise, in each 2 of those capacities, against any and all loss, liability and reasonable expense that may be incurred by Indemnitee in connection with or resulting from (a) any Proceeding, (b) an appeal in such a Proceeding, or (c) any inquiry or investigation that could lead to such a Proceeding, all to the fullest extent permitted by Article 2.02-1 of the Act. All indemnity obligations and/or liabilities of the Company hereunder shall be without limit and without regard to the cause or causes thereof or the negligence or gross negligence of any person or persons (expressly including Indemnitee), whether such negligence or gross negligence of Indemnitee be sole, joint or concurrent, active, or passive. Expenses shall include, without limitation, damages, judgments, fines, penalties, settlements and costs, attorneys' fees and disbursements and costs of attachments or similar bonds, investigations, any excise tax assessed with respect to any employee benefit plans and any expenses of establishing a right to indemnification under this Agreement. 2. Continuation of Indemnity. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director, director nominee or officer of the Company, shall be retroactive to the date Indemnitee first became a director, director nominee or officer covering all periods of service from time to time, and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending, or completed Proceeding, any appeal in a Proceeding, and any inquiry or investigation that could lead to a Proceeding, by reason of the fact that Indemnitee was serving, or had consented to serve, in any capacity referred to herein. 3. Notification and Defense of Claim. Promptly after receipt by Indemnitee of notice of any claim against Indemnitee or the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the assertion of any such claim or the commencement thereof; but the omission so to notify the Company will not relieve it from any liability under this Agreement unless such delay in notification actually prejudiced the Company (and then only to the extent the Company was actually prejudiced thereby) and in addition, the Company shall not be relieved from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company will be entitled to participate therein at its own expense. (b) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof with counsel satisfactory to Indemnitee, provided that, notwithstanding the Company's assumption of such defense, Indemnitee shall have the right to retain separate counsel and the Company shall pay all reasonable fees and expenses of such counsel and all other reasonable expenses of Indemnitee in connection with such Proceeding. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action. (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its -2- 3 written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor Indemnitee will unreasonably withhold their consent to any proposed settlement. 4. Advances of Expenses. Reasonable expenses (other than judgments, penalties, fines and settlements) incurred by Indemnitee that are subject to indemnification under this Agreement (and not paid, reimbursed or advanced by others) shall be paid or reimbursed by the Company in advance of the final disposition of the Proceeding within 30 days after the Company receives a written request by Indemnitee accompanied by substantiating documentation of such expenses, a written affirmation by Indemnitee of his good faith belief that he has met the standard of conduct necessary for indemnification under this Agreement, and a written undertaking by or on behalf of Indemnitee to repay the amount paid or reimbursed if it is ultimately determined that he has not met those standards or that such reasonable expenses do not constitute a Loss. The written undertaking described above shall be an unlimited general obligation of Indemnitee and shall not be secured. Such undertaking shall be without reference to the financial ability of Indemnitee to make repayment. 5. Right of Indemnitee to Indemnification Upon Application: Procedure Upon Application. Upon the written request of Indemnitee to be indemnified pursuant to this Agreement (other than pursuant to Section 4 hereof), the Company shall cause the Reviewing Party (hereinafter defined) to determine, within 45 days, whether or not the Indemnitee has met the relevant standards for indemnification required by this Agreement. The termination of a Proceeding by judgment, order, settlement, or conviction, or on a plea of nolo contendere or its equivalent, shall not of itself create a presumption that Indemnitee did not meet the requirements for indemnification required by this Agreement. If a determination of indemnification is to be made by Independent Legal Counsel (hereinafter defined), such Independent Legal Counsel shall render its written opinion to the Company and Indemnitee as to what extent Indemnitee will be permitted to be indemnified. The Company shall pay the reasonable fees of Independent Legal Counsel and indemnify and hold harmless such Indemnitee against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to the engagement of Independent Legal Counsel pursuant hereto and the written opinion of such Independent Legal Counsel. 6. Definitions. The terms defined in this Section 6 shall, for purposes of this Agreement have the indicated meanings: (a) "Loss" shall mean any and all judgments, penalties (including excise and similar taxes), fines, settlements, and reasonable expense (including attorneys' fees) actually incurred by Indemnitee, after realization of or giving effect to all insurance, bonding, indemnification and other payments or recoveries actually received by or for the benefit of Indemnitee, directly or indirectly. (b) "Reviewing Party" means, if a Change in Control (hereinafter defined) has not occurred (or if a Change in Control has occurred and such Change in Control has been approved by a majority of the Board of Directors of the Company who were -3- 4 directors of the Company immediately prior to such Change in Control), (i) a majority of a quorum of directors of the Company who at the time of voting upon a determination of indemnification are neither officers or employees of the Company or members of the immediate family of an officer or employee of the Company ("Interested Parties") nor parties to that particular Proceeding to which Indemnitee is seeking indemnification; or (ii) Independent Legal Counsel selected by a majority of a quorum of directors who at the time of selecting such Independent Legal Counsel are neither Interested Parties nor parties to that particular Proceeding to which Indemnitee is seeking indemnification, or if such a quorum cannot be obtained, by a majority vote of a committee of the Board of Directors of the Company designated to select such Independent Legal Counsel by a majority vote of all directors of the Company, consisting solely of two or more directors who at the time of such selection are neither Interested Parties nor parties in that particular Proceeding to which Indemnitee is seeking indemnification, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors of the Company. "Reviewing Party" means if a Change in Control has occurred, Independent Legal Counsel selected in the manner set forth in (ii) above. (c) "Change in Control" shall mean an event which shall be deemed to have occurred if: (i) a merger or consolidation of the Company with or into another corporation occurs in which the Company shall not be the surviving corporation (for purposes of this definition, the Company shall not be deemed the surviving corporation in any such transaction if, as the result thereof, it becomes a wholly-owned subsidiary of another corporation); (ii) a dissolution of the Company occurs; (iii) a transfer of all or substantially all of the assets or shares of stock of the Company in one transaction or a series of related transactions to one or more other persons or entities occurs; (iv) if any "person" or "group" as those terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than Excluded Persons, becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (v) during any period of two consecutive years commencing on or after January 1, 1998, individuals who at the beginning of the period constituted the Board cease for any reason to constitute at least a majority, unless the election of each director who was not a director at the beginning of the period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. The term "Excluded Persons" means John H. Marmaduke, Steven J. Marmaduke and any person, entity, or group under the control of any of them, or a trustee or other fiduciary holding securities under an employee benefit plan of the Company. (d) "Independent Legal Counsel" shall mean an attorney, selected in accordance with the provisions of Section 6(b) hereof, who shall not have otherwise performed services for Indemnitee, the Company, any person that controls the Company or any of the directors of the Company, within five years preceding the time of such selection (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the -4- 5 Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be any person who has been sanctioned or censured for ethical violations of applicable standards of professional conduct. 7. Enforceability. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proof that indemnification is not appropriate shall be on the Company. Neither the failure of the Company (including its Board of Directors or Independent Legal Counsel) to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors or Independent Legal Counsel) that Indemnitee has not met such an applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. 8. Partial Indemnity; Expenses. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, and penalties, but not for the total amount thereof, the Company shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Proceedings relating in whole or in part to an event subject to indemnification hereunder or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against expenses incurred for any Loss in connection with such Proceeding, issue or matter, as the case may be. 9. Repayment of Expenses. Indemnitee shall reimburse the Company for all reasonable expenses paid by the Company in defending any Proceeding against Indemnitee in the event and only to the extent that it shall be ultimately determined that Indemnitee is not entitled to be indemnified by the Company for such expenses under the provisions of this Agreement. 10. Consideration. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce Indemnitee to consent to serve, to serve, and/or to continue serving as a director or officer, and acknowledges that Indemnitee is relying upon this Agreement in consenting to serve and serving in such capacity. 11. Indemnification Hereunder Not Exclusive. The indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any other agreement, vote of shareholders, as a matter of law, or otherwise. 12. Subrogation. If a payment is made under this Agreement, the Company shall be subrogated to the extent of such payment to all of the right of recovery of such Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights. -5- 6 13. Severability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision thereof shall be held to be invalid or unenforceable for any reason such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereto. 14. Notice. Any notice, consent, or other communication to be given under this Agreement by any party to any other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service, or (d) delivered by telex or facsimile transmission to the address set forth beneath the signature of the parties below, or at such other address as may be designated by the parties from time to time in accordance with this Section. Notices delivered personally, by overnight express delivery service, or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). 15. Governing Law: Binding Effect; Amendment and Termination: Reimbursement. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Texas, without giving effect to Texas principles of conflicts of laws. (b) This Agreement shall be binding upon Indemnitee and upon the Company, its successors, and assigns, and shall inure to the benefit of Indemnitee, his heirs, executors, administrators, personal representation, and assigns and to the benefit of the Company, its successors, and assigns. (c) No amendment, modification, termination, or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. (d) If Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse Indemnitee for all of Indemnitee's reasonable fees and expenses in bringing and pursuing such action. -6- 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. THE COMPANY: HASTINGS ENTERTAINMENT, INC. By: --------------------------------- Printed Name: -------------------- Title: --------------------------- Address of the Company 3601 Plains Boulevard, Suite #1 Amarillo, Texas 76102 Facsimile Number: (806) 351-2424 INDEMNITEE: ------------------------------------------ Address of Indemnitee: ------------------------------------------ ------------------------------------------ Facsimile Number: ------------------------- -7- EX-10.2 6 NOTE PURCHASE AGREEMENT DATED 6/13/96 1 EXHIBIT 10.2 ================================================================================ HASTINGS BOOKS, MUSIC & VIDEO, INC. $25,000,000 7.75% Series A Senior Notes due June 13, 2003 ---------------- NOTE PURCHASE AGREEMENT ---------------- Dated June 13, 1996 ================================================================================ 2 HASTINGS BOOKS, MUSIC & VIDEO, INC. $25,000,000 7.75% SENIOR NOTES DUE JUNE 13, 2003 INDEX 1. Composite Conformed Copy of Note Purchase Agreement (with all Exhibits and Schedules attached) 2. 7.75% Senior Notes due June 13, 2003 3. Legal Opinion of Counsel to Hastings 3 TABLE OF CONTENTS
Section Page - ------- ---- 1. AUTHORIZATION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. SALE AND PURCHASE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.1. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.2. Performance; No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.3. Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.4. Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.5. Purchase Permitted By Applicable Law, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.6. Sale of Other Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.7. Payment of Special Counsel Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.8. Private Placement Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.9. Changes in Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.10. Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.11. Amendment of Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.1. Organization; Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.2. Authorization, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.3. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.4. Subsidiaries; Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.5. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.6. Compliance with Laws, Other Instruments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.7. Governmental Authorizations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.8. Litigation; Observance of Agreements, Statutes and Orders . . . . . . . . . . . . . . . . . . . . . 6 5.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.10. Title to Property; Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.11. Licenses, Permits, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
-i- 4 5.12. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.13. Private Offering by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.14. Use of Proceeds; Margin Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.15. Existing Indebtedness; Future Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.16. Foreign Assets Control Regulations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.17. Status under Certain Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.18. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6. REPRESENTATIONS OF THE PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.1. Purchase for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.2. Source of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7. INFORMATION AS TO COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.1. Financial and Business Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.2. Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.3. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8. PREPAYMENT OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.1. Required Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.2. Optional Prepayments with Make-Whole Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.3. Allocation of Partial Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.4. Maturity; Surrender, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.5. Purchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.6. Right to Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.7. Make-Whole Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 9. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.1. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.2. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.3. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9.4. Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.5. Corporate Existence, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.6. Parity with Other Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.7. Guaranteed Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9.8. Covenant to Secure Notes Equally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.9. Information Required by Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
-ii- 5 10. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.1. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.2. Merger, Consolidation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10.3. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10.4. Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 10.5. Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 10.6. Fixed Charges Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.7. Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.8. Priority Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.9. Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.10. Restricted Payments and Restricted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 12. REMEDIES ON DEFAULT, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 12.1. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 12.2. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 12.3. Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 12.4. No Waivers or Election of Remedies, Expenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 29 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 13.1. Registration of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 13.2. Transfer and Exchange of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 13.3. Replacement of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 14. PAYMENTS ON NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 14.1. Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 14.2. Home Office Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 15. EXPENSES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 15.1. Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 15.2. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 32
-iii- 6 17. AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 17.1. Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 17.2. Solicitation of Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 17.3. Binding Effect, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 17.4. Notes held by Company, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 18. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 19. REPRODUCTION OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 20. CONFIDENTIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 21. SUBSTITUTION OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 22. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 22.1. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 22.2. Payments Due on Non-Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 22.3. Accounting Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 22.4. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 22.5. Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 22.6. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 22.7. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-iv- 7 SCHEDULE A -- Information Relating to Purchasers SCHEDULE B -- Defined Terms SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 5.4 -- Affiliates of the Company and Directors and Senior Officers of the Company SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.8 -- Certain Litigation SCHEDULE 5.11 -- Patents, etc. SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Indebtedness EXHIBIT 1 -- Form of 7.75% Series A Senior Note due June 13, 2003 EXHIBIT 4.4(a) -- Form of Opinion of Counsel for the Company EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel to the Purchasers EXHIBIT 8.6(b) -- Form of Notice of Sale -v- 8 HASTINGS BOOKS, MUSIC & VIDEO, INC. 3601 Plains Blvd., Suite I Amarillo, Texas 79120-2104 7.75% Series A Senior Notes due June 13, 2003 June 13, 1996 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A: Ladies and Gentlemen: Hastings Books, Music & Video, Inc., a Texas corporation (the "COMPANY"), agrees with you as follows: 1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $25,000,000 aggregate principal amount of its 7.75% Series A Senior Notes due June 13, 2003 (the "NOTES," such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement or the Other Agreement (as hereafter defined)). The Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into a separate Note Purchase Agreement (the "OTHER AGREEMENT") identical with this Agreement with the other purchaser named in Schedule A (the "OTHER PURCHASER"), providing for the sale at such Closing to the Other Purchaser of Notes in the principal amount specified opposite its name in Schedule A. Your obligation hereunder and the obligations of the Other Purchaser under the Other Agreement are several and not joint obligations and you shall have no obligation under the Other Agreement and no liability to any Person for the performance or nonperformance by the Other Purchaser thereunder. 1 9 3. CLOSING. The sale and purchase of the Notes to be purchased by you and the Other Purchaser shall occur at the offices of Baker & Botts, L.L.P., Trammell Crow Center, 2001 Ross Avenue, Suite 800, Dallas, Texas 75201, at 10:00 am., Central time, at a closing (the "CLOSING") on June 13, 1996 or on such other Business Day thereafter on or prior to June 17, 1996 as may be agreed upon by the Company and you and the Other Purchaser. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 101409997409 at The Boatmen's National Bank of St. Louis, ABA number 081000032, Reference: Hastings Books, Music & Video, Inc., Attention: Michelle L. Bammer. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. 4.2. PERFORMANCE; NO DEFAULT. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by Section 10 hereof had such Section applied since such date. 2 10 4.3. COMPLIANCE CERTIFICATES. (a) Officer's Certificate. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled. (b) Secretary's Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes, this Agreement and the Other Agreement. 4.4. OPINIONS OF COUNSEL. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Sprouse, Mozola, Smith & Rowley, P.C., counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you) and (b) from Baker & Botts, L.L.P., your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as you may reasonably request. 4.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation G, T or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.6. SALE OF OTHER NOTES. Contemporaneously with the Closing the Company shall sell to the Other Purchaser and the Other Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A. 4.7. PAYMENT OF SPECIAL COUNSEL FEES. Without limiting the provisions of Section 15. 1, the Company shall have paid on or before the Closing the reasonable fees, charges and disbursements of your special counsel referred 3 11 to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least two Business Days prior to the Closing. 4.8. PRIVATE PLACEMENT NUMBER. A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.9. CHANGES IN CORPORATE STRUCTURE. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. 4.10. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 4.11. AMENDMENT OF CREDIT AGREEMENT. The Credit Agreement among the Company, The Boatmen's National Bank of St. Louis, individually, as the Issuing Bank and as the Agent, and the financial institutions parties thereto, dated December 12, 1994, as amended from time to time, shall have been amended to permit the transactions contemplated by this Agreement and the Other Agreement and to permit the effective implementation of Sections 9.8 and 10.3 and related provisions. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: 5.1. ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The 4 12 Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreement and the Notes and to perform the provisions hereof and thereof. 5.2. AUTHORIZATION, ETC. This Agreement and the Other Agreement and the Notes have been duty authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3. DISCLOSURE. The Company, through its agent, Chase Securities Inc. has delivered to you and the Other Purchaser a copy of a Confidential Offering Memorandum, dated April, 1996 (the "MEMORANDUM"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company. This Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since January 31, 1996, there has been no change in the financial condition, operations, business, properties or prospects of the Company except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. The financial projections contained in the Memorandum are reasonable based upon the assumptions contained therein and the best information available to the Company. 5 13 5.4. SUBSIDIARIES; AFFILIATES. The Company has no Subsidiaries. Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Affiliates and (ii) of the Company's directors and senior officers. 5.5. FINANCIAL STATEMENTS. The Company has delivered to you and the Other Purchaser copies of the financial statements of the Company listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the financial position of the Company as of the respective dates specified in such Schedule and the results of its operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company. 5.7. GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. 5.8. LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any property of the Company in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 6 14 (b) The Company is not in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 5.9. TAXES. The Company has filed all tax returns that are required to have been filed in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon it or its properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended May 31, 1991. 5.10. TITLE TO PROPERTY; LEASES. The Company has good and sufficient title to its properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. 5.11. LICENSES, PERMITS, ETC. Except as disclosed in Schedule 5.11, (a) the Company owns or possesses all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; (b) to the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and 7 15 (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company. 5.12. COMPLIANCE WITH ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "BENEFIT LIABILITIES" has the meaning specified in section 4001 of ERISA and the terms "CURRENT VALUE" and "present value" have the meaning specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected pos-retirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you. 8 16 5.13. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchaser and not more than 60 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 5.14. USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 CFR 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 2% of the value of the assets of the Company and the Company does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation G. 5.15. EXISTING INDEBTEDNESS; FUTURE LIENS. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company as of April 30, 1996, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company. The Company is not in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company and no event or condition exists with respect to any Indebtedness of the Company that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien that secures Indebtedness. 9 17 5.16. FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 5.17. STATUS UNDER CERTAIN STATUTES. The Company is not subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 5.18. ENVIRONMENTAL MATTERS. The Company owns no real property. The Company has no knowledge of any claim and has not received any notice of any claim, the Company has no knowledge that any proceeding has been instituted raising any claim against any of the real properties or other assets formerly owned, leased or operated by it, and no proceeding has been instituted raising any claim against the Company or any of its real properties or other assets now owned, leased or operated by it, alleging in any of the foregoing cases any damage to the environment or violation of any Environmental Laws, except such as could not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing, (a) the Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by it or to other assets or their use, except in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) the Company has not stored any Hazardous Materials on real properties now or formerly owned, leased or operated by it and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) the portions of the buildings situated on all real properties now, leased or operated by the Company are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. 10 18 6. REPRESENTATIONS OF THE PURCHASER. 6.1. PURCHASE FOR INVESTMENT. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. 6.2. SOURCE OF FUNDS. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) the Source constitutes assets of a general account maintained by an insurance company, and the use of such Source for the purchase of the Notes is permitted by the terms of Prohibited Transaction Class Exemption 95-60; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part 1(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names 11 19 of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN," "GOVERNMENTAL PLAN," "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 7. INFORMATION AS TO COMPANY. 7.1. FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements -- within 90 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that, in the event the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared 12 20 in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) Annual Statements -- within 120 days after the end of each fiscal year of the Company, duplicate copies of (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) by a written notice from such accountants stating whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default under Section 10 of this Agreement, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any such Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that, in the event the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b); 13 21 (c) SEC and Other Reports - in the event the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) Notice of Default or Event of Default -- promptly, and in any event within ten days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section II(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters -- promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; 14 22 (f) Notices from Governmental Authority -- promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and (g) Requested Information -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. 7.2. OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.2 through Section 10.10 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) Event of Default -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. 7.3. INSPECTION. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) No Default -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive 15 23 office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) Default -- if a Default or Event of Default then exists, at the expense of the Company, which shall be deemed to include the reasonable costs and expenses of counsel, accountants, financial advisors and other third party advisors of such holder incurred in connection with the exercise of the rights of such holder pursuant to this Section 7.3(b), to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. 8. PREPAYMENT OF THE NOTES. 8.1. REQUIRED PREPAYMENTS. On June 13, 1999 and on each June 13 thereafter to and including June 13, 2002 the Company will prepay $5,000,000 principal amount (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Make-Whole Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 or purchase of the Notes permitted by Section 8.5 or Section 8.6 the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment or purchase shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of such prepayment or purchase. 8.2. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than 20% of the aggregate principal amount of the Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than, 90 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be 16 24 accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. 8.3. ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.4. MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.5. PURCHASE OF NOTES. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquires directly or indirectly, any of the outstanding Notes except upon the payment, prepayment or purchase of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.6. RIGHT TO PUT. (a) Granting of Put. The Company hereby gives and grants to the holder of each Note the option, right and privilege (such option, right and privilege herein collectively referred to as the "RIGHT TO PUT") to require the Company, upon or after the occurrence of any Designated Event, to purchase from such holder all Notes held by such holder on the terms and conditions hereinafter set forth, and the Company agrees so to purchase from such holder, for an amount equal to the aggregate outstanding principal amount of such Notes and the accrued and unpaid interest thereon. 17 25 (b) Exercise of Put. Within 10 Business Days after any Responsible Officer of the Company has knowledge of the occurrence of any Designated Event, the Company shall give the holder of each Note written notice thereof describing such Designated Event, and the facts and circumstances surrounding the occurrence thereof, in reasonable detail. At any time prior to 60 days after any holder shall receive such notice, such holder may exercise its Right to Put by delivering to the Company, at the address provided by the Company pursuant to Section 18 (if so provided), an irrevocable notice of sale substantially in the form of Exhibit 8.6(b) hereto (a "NOTICE OF SALE"); provided, that the Company shall give the holder of each Note prompt written notice of such Notice of Sale, whereupon the holder of each Note shall have until the later of (x) the expiration of such sixty-day period or (y) 10 days after its receipt of such notice from the Company to exercise its Right to Put by delivering to the Company a Notice of Sale. If the holder of a Note shall deliver a Notice of Sale pursuant to any provision of the preceding sentence, the Company shall purchase the Notes then held by such holder on the date specified in such notice (which shall be not less than 20 days after delivery of such Notice of Sale), and such holder shall sell such Notes to the Company without recourse, representation or warranty (other than as to such holder's full right, title and interest to such Notes free of any adverse claim thereto), at a price, payable in immediately available funds by wire transfer to the account specified pursuant to Schedule A hereto or to such other account as may be specified in such notice, equal to the aggregate outstanding principal amount of the Notes of such holder and the accrued and unpaid interest thereon; provided, that if more than one holder shall give a Notice of Sale in compliance with the foregoing provisions of this Section 8.6(b), the Company shall purchase the Notes held by all such holders on the same day, which shall be the latest day specified in all such Notices of Sale but in no event more than 90 days after the date of the Company's sending of notice of the occurrence of the Designated Event giving rise thereto, and shall advise the holder of each Note of such date and the aggregate principal amount of Notes to be purchased by the Company. Each holder shall have the respective rights specified in this Section 8.6 with respect to each Designated Event that shall occur, regardless of any act or omission to act with respect to any previous Designated Event. 8.7. MAKE-WHOLE AMOUNT. The term "Make-Whole Amount" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "CALLED PRINCIPAL" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with 18 26 respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 500" on the Telerate Access Service (or such other display as may replace Page 500 on Telerate Access Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield in clause (i) or clause (ii) will be determined, (2) if necessary, by (x) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (y) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life and (b) by converting all such implied yields to a quarterly payment basis in accordance with accepted financial practice. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (12) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1. 19 27 "SETTLEMENT DATE" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. 9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 9.1. COMPLIANCE WITH LAW. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.2. INSURANCE. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. 9.3. MAINTENANCE OF PROPERTIES. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 20 28 9.4. PAYMENT OF TAXES AND CLAIMS. The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums, have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax, assessment or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes, assessments or claims in the aggregate could not reasonably be expected to have a Material Adverse Effect. 9.5. CORPORATE EXISTENCE, ETC. Subject to Section 10.2, the Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Sections 10.2 and 10.9, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in fall force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. 9.6. PARITY WITH OTHER SENIOR INDEBTEDNESS. The Company will, and will cause its Subsidiaries to, execute all such documents and take such other actions (including such documents and actions as the Required Holders may reasonably request) in order to assure that at all times the Notes shall rank pari passu in right of payment with all senior unsecured Indebtedness of the Company. 9.7. GUARANTEED OBLIGATIONS. The Company covenants that if, at any time, any of its Subsidiaries executes a Guaranty of any Indebtedness of the Company, the Company will simultaneously cause such Subsidiary or Subsidiaries, as the case may be, to execute and deliver to the holder of each Note a similar Guaranty in form and substance reasonably satisfactory to the Required Holders with respect to payment of the principal amount of the Notes, and any Make-Whole Amount and interest thereon, which bears the same ratio to the total unpaid principal amount of the Notes as the amount of such other Indebtedness which is subject to a Guaranty bears to the total unpaid principal amount of such other Indebtedness. 21 29 9.8. COVENANT TO SECURE NOTES EQUALLY. If the Company or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by Section 10.3 (unless prior written consent to the creation or assumption thereof shall halve been obtained pursuant to this Agreement), the Company will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Indebtedness so long as such Indebtedness shall be so secured pursuant to such agreements and instruments as shall be approved by the Required Holders, and the Company will cause to be delivered to the holder of each Note an opinion of independent counsel to the effect that such agreements and instruments are enforceable in accordance with their terms and that the Notes are equally and ratably secured with such other Indebtedness. 9.9. INFORMATION REQUIRED BY RULE 144A. The Company will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. For the purpose of this Section 9.9, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. 10. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 10.1. TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate, except (a) in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate, or (b) pursuant to the Stock Redemption Agreement. 10.2. MERGER, CONSOLIDATION, ETC. The Company will not, and will not permit any of its Subsidiaries to, consolidate with or merge with any other Person or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person (except that a Subsidiary of the Company may (x) consolidate with or merge with, or convey, transfer or lease substantially all of its assets in a single 22 30 transaction or series of transactions to, another Subsidiary of the Company or the Company and (y) convey, transfer or lease all of its assets in compliance with the provisions of Section 10.9), provided that the foregoing restriction shall not apply to the consolidation or merger of the Company with, or the conveyance, transfer or lease of substantially all of the assets of the Company in a single transaction or series of transactions to, any Person so long as: (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, such corporation shall have (i) executed and delivered to each holder of Notes its assumption, in a form reasonably satisfactory to the Required Holders, of the due and punctual performance and observance of each covenant and condition of this Agreement, the Other Agreement and the Notes and (ii) caused to be delivered to each holder of Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof, and (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement or the Notes. 10.3. LIENS. The Company will not, and will not permit any Subsidiary to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any property or asset (including, without limitation, any document or instrument in respect of goods or accounts receivable) of the Company or any Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom or assign or otherwise convey any right to receive income or profits, except: (a) Liens existing on the date of the Closing and securing the Indebtedness of the Company referred to in Schedule 5.15; (b) Liens incidental to the conduct of business or the ownership of properties of the Company and its Subsidiaries (including Liens in connection with worker's compensation, unemployment insurance and other like laws (other than ERISA Liens), warehousemen's and mechanic's liens and statutory landlord's liens) and Liens to secure the 23 31 performance of bids, tenders or trade contracts, or to secure statutory obligations, property taxes and assessments or governmental charges, surety or appeal bonds or other Liens of like general nature which are incurred in the ordinary course of business and not in connection with the borrowing of money and which do not in any event materially impair the value or use of the property encumbered thereby in the operation of the business of the Company and its Subsidiaries; provided in each case, that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (c) any Lien created to secure all or any part of the purchase price, or to secure Indebtedness incurred or assumed to pay all or any part of the purchase price or cost of construction, of tangible property (or any improvement thereon) acquired or constructed by the Company or a Subsidiary after the date of the Closing, provided that (i) any such Lien shall extend solely to the item or items of such property (or improvement thereon) so acquired or constructed, (ii) the principal amount of the Indebtedness secured by any such Lien shall at no time exceed an amount equal to the lesser of (A) the cost to the Company or such Subsidiary of the property (or improvement thereon) so acquired or constructed and (B) the Fair Market Value (as determined in good faith by the board of directors of the Company) of such property (or improvement thereon) at the time of such acquisition or construction, and (iii) any such Lien shall be created contemporaneously with, or within 90 days after, the acquisition or construction of such property; and (d) Liens, other than those described in the foregoing clauses securing Indebtedness of the Company or any Subsidiary, provided that the aggregate principal amount of all such secured Indebtedness plus the aggregate principal amount of all other Priority Debt shall not at any time exceed 10% of Adjusted Net Worth. 10.4. CURRENT RATIO. The Company will not, at any time, permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities to be less than 1 to 1. 10.5. ADJUSTED NET WORTH. The Company will not permit Adjusted Net Worth (i) on April 30, 1996 to be less than $50,000,000 plus the greater of zero or 50% of Consolidated Net Income for the period commencing on February 1, 1996 and ending on such day, or (ii) on the last day of any subsequent fiscal quarter of the Company, to be less than the minimum Adjusted Net Worth required by this 24 32 Section 10.5 at the end of the immediately preceding fiscal quarter plus the greater of zero or 50% of Consolidated Net Income for the fiscal quarter of the Company ending on such day. 10.6. FIXED CHARGES COVERAGE RATIO. The Company will not, at any time, permit the Fixed Charges Coverage Ratio to be less than 1.5 to 1. 10.7. LIMITATION ON INDEBTEDNESS. The Company will not, at any time, permit Consolidated Indebtedness to exceed 60% of Consolidated Total Capitalization. 10.8. PRIORITY DEBT. The Company will not at any time permit the aggregate outstanding principal amount of Priority Debt to exceed 10% of Adjusted Net Worth. 10.9. SALE OF ASSETS. Except as permitted under Section 10.2, the Company will not, and will not permit any of its Subsidiaries to, make any Asset Sale (a) other than for Fair Market Value or (b) (i) if the Fair Market Value of the assets that are the subject of such Asset Sale plus the Fair Market Value of the assets that are the subjects of all other Asset Sales during the then current fiscal year would exceed 10% of Consolidated Net Tangible Assets, or (ii) if the Fair Market Value of the assets that are the subject of such Asset Sale plus the Fair Market Value of the assets that are the subjects of all other Asset Sales since the date of the Closing would exceed 25% of Consolidated Net Tangible Assets. If the Net Proceeds Amount for any Asset Sale is applied to a Debt Prepayment Application or a Property Reinvestment Application within 180 days after such Asset Sale, then such Asset Sale, only for the purpose of determining compliance with the preceding sentence as of any date, shall be deemed not to be an Asset Sale. 10.10. RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. (a) LIMITATION. The Company will not, and will not permit any of its Subsidiaries to, declare, make or incur any liability to make any Restricted Payment or make or authorize any Restricted Investment unless immediately after giving effect to such action: (i) the sum of (x) the aggregate value of all Restricted Investments of the Company and its Subsidiaries (valued immediately after such action), plus (y) the aggregate amount of Restricted Payments of the Company and its Subsidiaries declared or made during the period commencing on February 1, 1996, and ending on the date such Restricted Payment or Restricted Investment is declared or made, inclusive, would not exceed the sum of 25 33 (A) $7,500,000, plus (B) 50% of Consolidated Net Income for such period (or minus 100% of Consolidated Net Income for such period if Consolidated Net Income for such period is a loss), plus (C) the aggregate amount of Net Proceeds of Common Stock for such period, and (ii) no Default or Event of Default would exist. (b) TIME OF PAYMENT. The Company will not, nor will it permit any of its Subsidiaries to, authorize a Restricted Payment that is not payable within 60 days of authorization. 11. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in Section 10 and such default is not remedied within 15 days after the occurrence of such default; or (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or 26 34 (f) (i) The Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $1,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $1,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared, due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $1,000,000, or (y) one or more Persons have the right to require the Company or any Subsidiary so to purchase or repay such Indebtedness; or (g) the Company or any Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 60 days; or (i) a final judgment or judgments for the payment of money aggregating in excess of $5,000,000 (exclusive of amounts which financially sound and reputable insurers have unconditionally acknowledged are covered by policies of insurance issued thereby) are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 45 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 45 days after the expiration of such stay; or 27 35 (j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $ 1,000,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides postemployment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 12. REMEDIES ON DEFAULT, ETC. 12.1. ACCELERATION. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 33 1/3% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. 28 36 Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. 12.2. OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. 12.3. RESCISSION. At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of not less than 66 2/3% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 12.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note 29 37 upon any holder thereof shall be exclusive of any other right power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 13.1. REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 13.2. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or an attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $ 1,000,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2. 30 38 13.3. REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is you or your nominee or another holder of a Note with a minimum net worth of at least $50,000,000, your or such other holder's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 14. PAYMENTS ON NOTES. 14.1. PLACE OF PAYMENT. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in New York, New York at the principal office of The Chase Manhattan Bank, N.A., in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. 14.2. HOME OFFICE PAYMENT. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at 31 39 your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. 15. EXPENSES, ETC. 15.1. TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2. SURVIVAL. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement 32 40 and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER. 17.1. REQUIREMENTS. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20, or (iv) amend the definition of "Designated Event" or the constituent definitions thereof. 17.2. SOLICITATION OF HOLDERS OF NOTES. (a) Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 33 41 17.3. BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 17.4. NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. 34 42 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or other reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to 35 43 effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. 21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. 22. MISCELLANEOUS. 22.1. SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement by or on behalf of either of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 22.2. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 36 44 22.3. ACCOUNTING MATTERS. Wherever reference is made in any provision of this Agreement to a consolidated balance sheet or other consolidated financial statement or financial computation with respect to the Company and its Subsidiaries, if at the time that any such provision is applicable the Company shall not have any Subsidiary, such terms shall mean a balance sheet or other financial statement or financial computation, as the case may be, with respect to the Company only. 22.4. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 22.5. CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 22.6. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 22.7. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding, to the extent permitted by the law of such State, choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * 37 45 If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ DENNIS MCGILL ------------------------------------- Name: Dennis McGill ----------------------------------- Title: Vice President ---------------------------------- The foregoing is hereby agreed to as of the date thereof. METROPOLITAN LIFE INSURANCE COMPANY By: /s/ JOHN R. ENDRES ------------------------------------- Name: John R. Endres ----------------------------------- Title: Assistant Vice-President ---------------------------------- -38- 46 SCHEDULE A INFORMATION RELATING TO PURCHASERS
Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- METROPOLITAN LIFE INSURANCE COMPANY $10,000,000 (1) All payments by wire transfer of immediately available funds to: The Chase Manhattan Bank, N.A. 33 East 23rd Street New York, New York 100010 ABA No. 021000021 Account No. 002-2-410591 with sufficient information to identify the source and application of such funds (including the PPN of the Notes) (2) All notices of payments and written confirmation of such wire transfer: Metropolitan Life Insurance Company One Madison Avenue New York, NY 10010 Attention: Treasurer Telecopy: 212/578-3910 with a copy to: Metropolitan Life Insurance Company One Lincoln Center, Suite 800 Oakbrook Terrace, IL 60181 Attention: Assistant Vice President Telecopy: 708/916-2575
1 Schedule A 47 SCHEDULE A (3) All other communications: Metropolitan Life Insurance Company One Madison Avenue New York, NY 10010 Attention: Treasurer Telecopy: 212/578-3910 with a copy to: Metropolitan Life Insurance Company One Lincoln Center, Suite 800 Oakbrook Terrace, IL 60181 Attention: Assistant Vice President Telecopy: 708/916-2575 Tax I.D. No. 13-5581829
2 Schedule A 48 SCHEDULE A
Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- METROPOLITAN INSURANCE AND ANNUITY COMPANY $15,000,000 (1) All payments by wire transfer of immediately available funds to: The Chase Manhattan Bank, N.A. 33 East 23rd Street New York, New York 10010 ABA No. 021000021 Account No. 002-1-072301 with sufficient information to identify the source and application of such funds (including the PPN of the Notes) (2) All notices of payments and written confirmation of such wire transfer: Metropolitan Insurance and Annuity Company One Madison Avenue New York, NY 10010 Attention: Treasurer Telecopy: 212/578-3910 with a copy to: Metropolitan Life Insurance Company One Lincoln Center, Suite 800 Oakbrook Terrace, IL 60181 Attention: Assistant Vice President Telecopy: 708/916-2575
3 Schedule A 49 SCHEDULE A (3) All other communications: Metropolitan Insurance and Annuity Company One Madison Avenue New York, NY 10010 Attention: Treasurer Telecopy: 212/578-3910 with a copy to: Metropolitan Life Insurance Company One Lincoln Center, Suite 800 Oakbrook Terrace, IL 60181 Attention: Assistant Vice President Telecopy: 708/916-2575 Tax I.D. No. 13-2876440
4 Schedule A 50 SCHEDULE B DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "ADJUSTED NET WORTH" means, at any time, Consolidated Net Worth plus the LIFO valuation reserve of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "AFFILIATE" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "AFFILIATE" is a reference to an Affiliate of the Company. "ASSET SALE" means any conveyance, transfer, lease or other disposition (including, without limitation, by means of a Sale-Leaseback Transaction or by way of merger or consolidation) (collectively, for purposes of this definition, a "transfer"), directly or indirectly, in one or a series of related transactions, of (a) any Capital Stock of any Subsidiary (including, without limitation, the issuance thereof by such Subsidiary to any Person other than the Company or a Wholly-Owned Subsidiary); (b) all or substantially all of the properties of any division or line of business of the Company or any Subsidiary; or (c) any other properties of the Company or any Subsidiary (other than (i) transfers of cash or cash equivalents, (ii) any sale in the ordinary course of business for not less than Fair Market Value, (iii) any transfer of properties that is made in compliance with the 1 Schedule B 51 SCHEDULE B provisions of Section 10.2 hereof or (iv) any transfer of properties of any Subsidiary to the Company or a Wholly-Owned Subsidiary. "BOARD OF DIRECTORS" means, at any time, the board of directors of the Company or any committee thereof which, in the instance, shall have the lawful power to exercise the power and authority of such board of directors. "BUSINESS DAY" means (a) for the purposes of Section 8.7 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York, or Amarillo, Texas are required or authorized to be closed. "CAPITAL LEASE" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "CAPITAL LEASE OBLIGATION" means, with respect to any Person and a Capital Lease, the amount of the obligation of such Person as the lessee under such Capital Lease which would, in accordance with GAAP, appear as a liability on a balance sheet of such Person. "CAPITAL STOCK" of any Person means any and all shares, interests, participations or other equivalents in the equity interest (however designated) in such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire an equity interest in such Person. "CLOSING" is defined in Section 3. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. 2 Schedule B 52 SCHEDULE B "COMPANY" means Hastings Books, Music & Video, Inc., a Texas corporation, until a corporation becomes a successor in a transaction permitted by Section 10.2, and thereafter shall mean any such successor corporation. "CONFIDENTIAL INFORMATION" is defined in Section 20. "CONSOLIDATED CURRENT ASSETS" means, at any time, (i) the total assets of the Company and its Subsidiaries which would be shown as current assets on a balance sheet of the Company and its Subsidiaries prepared in accordance with GAAP at such time (without regard to the net book value of prerecorded video tapes held for rental by the Company and its Subsidiaries) plus (ii) an amount equal to the net book value of prerecorded video tapes held for rental by the Company and its Subsidiaries. "CONSOLIDATED CURRENT LIABILITIES" means, at any time, the total liabilities of the Company and its Subsidiaries which would be shown as current liabilities on a balance sheet of the Company and its Subsidiaries prepared in accordance with GAAP at such time, but in any event including as current liabilities, without limitation, Current Maturities of Funded Indebtedness. "CONSOLIDATED EBIRT" means, for any fiscal period, the sum of (a) Consolidated Net Income for such period, plus (b) to the extent deducted in determining Consolidated Net Income, Fixed Charges and Taxes for such period. "CONSOLIDATED INDEBTEDNESS" means, as of any date of determination, the total of all Indebtedness of the Company and its Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP. "CONSOLIDATED NET INCOME" means, with reference to any period, the net income (or loss) of the Company and its Subsidiaries for such period (taken as a cumulative whole), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the 3 Schedule B 53 SCHEDULE B Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP, provided that there shall be excluded any net income or gain and any net loss during such period from any extraordinary items. "CONSOLIDATED NET TANGIBLE ASSETS" means, at any time, the net book value of the total assets of the Company and its Subsidiaries shown on the most recent consolidated balance sheet of the Company and its Subsidiaries delivered pursuant to Section 5.5, Section 7.1(a) or Section 7.1(b) (after eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries) other than assets (net of reserves applicable thereto) shown as intangible assets on such balance sheet. "CONSOLIDATED NET WORTH" means, at any time, (a) the total assets of the Company and its Subsidiaries which would be shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, after eliminating all amounts properly attributable to minority interests, if any, in the stock, and surplus of Subsidiaries, minus (b) the total liabilities of the Company and its Subsidiaries which would be shown as liabilities on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP. "CONSOLIDATED TOTAL CAPITALIZATION" means, at any time, the sum of Adjusted Net Worth and Consolidated Indebtedness. "CURRENT MATURITIES OF FUNDED INDEBTEDNESS" means, at any time and with respect to any item of Funded Indebtedness, the portion of such Funded Indebtedness outstanding at such time which by the terms of such Funded Indebtedness or the terms of any instrument or agreement relating thereto is due on demand or within one year from such time (whether by sinking fund, other required prepayment or final payment at maturity) and is not directly or indirectly renewable, 4 Schedule B 54 SCHEDULE B extendible or refundable at the option of the obligor under an agreement or firm commitment in effect at such time to a date one year or more from such time. "DEBT PREPAYMENT APPLICATION" means, with respect to any Asset Sale, the application by the Company or its Subsidiaries of cash in an amount equal to the Net Proceeds Amount with respect to such Asset Sale to pay the principal of Senior Funded Indebtedness for borrowed money of the Company ("QUALIFYING INDEBTEDNESS") (other than (a) mandatory prepayments or payments at maturity of such Indebtedness, (b) Indebtedness owing to any Subsidiary or any Affiliate and (c) Indebtedness in respect of any revolving credit or similar credit facility providing the Company with the right to obtain loans or other extensions of credit from time to time, except to the extent that in connection with such payment of such Indebtedness the availability of credit under such credit facility is permanently reduced by an amount not less than the amount of such proceeds applied to the payment of such Indebtedness), provided that in the course of making such application the Company shall prepay each outstanding Note in accordance with Section 8.2 (other than the requirement in the first sentence of such Section that partial prepayments be in an amount not less than 20% of the aggregate principal amount of the Notes then outstanding) in a principal amount which equals the Ratable Portion for such Note. As used in this definition, "RATABLE PORTION" for any Note means an amount equal to the product of (x) the Net Proceeds Amount being so applied to the payment of principal of Qualifying Indebtedness multiplied by (y) a fraction the numerator of which is the outstanding principal amount of such Note and the denominator of which is the aggregate outstanding principal amount of Qualifying Indebtedness. "DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "DEFAULT RATE" means that rate of interest that is the greater (determined on a daily basis) of (i) 9.75% per annum or (ii) 2% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. in New York, New York as its "base" or "prime" rate. "DESIGNATED EVENT" means (i) prior to the initial public offering of the Capital Stock of the Company (the "OFFERING"), the failure of the members of the Control Group (a) to own 5 Schedule B 55 SCHEDULE B more than 50% of the combined voting power of all then issued and outstanding Voting Stock of the Company, or (b) to possess the power to elect, appoint or cause the election or appointment of at least a majority of the members of the Board of Directors, or (ii) subsequent to the Offering, (x) the failure of the members of the Control Group to own at least 33 1/3% of the combined voting power of all then issued and outstanding Voting Stock of the Company or (y) following the election or removal of directors, a majority of the Board of Directors consists of individuals who were not members of the Board of Directors two years before such election or removal, unless the election of each director who was not a director at the beginning of such two-year period has been approved in advance by directors representing at least a majority of the directors then in office who were directors at the beginning of the two-year period. As used in this definition, "CONTROL GROUP" means: (a) (i) John H. Marmaduke, Walter McNeer, Phillip Hill, Dennis McGill, Tim Hoelscher, Mike Woods, Robert Volpe, Steve S. Marmaduke, Leonard L. Berry, Peter A. Dallas, Gaines L. Godfrey, Craig R. Lentzsch, Jeffrey G. Shrader and Ron Stegall, (ii) their respective parents, spouses, children and lineal descendants, and (iii) the estate, or any foundation or trust for the benefit, of any of the foregoing persons; (b) the John H. Marmaduke Family Limited Partnership and the Stephen S. Marmaduke Family Limited Partnership, provided that (i) at least 90% of the equity interests therein are owned, legally and beneficially, by the spouse, children and lineal descendants of Sam H. Marmaduke, or by the estate, or any foundation or trust for the benefit, of any of the foregoing persons; and 6 Schedule B 56 SCHEDULE B (ii) each general partner therein is, or (if a general partner is an entity) all of the equity interests in such general partner are owned, legally and beneficially, by,one or more of the Persons described in the foregoing clause (b)(i); (c) Hastings Books, Music & Video Associate Stock Ownership Plan; and (d) Hastings Books, Music & Video Employee Profit Sharing Plan & Trust. "DISTRIBUTION" means, in respect of the Company or any Subsidiary: (a) dividends or other distributions or payments in respect of its Capital Stock (except (i) in the case of the Company, dividends or other distributions of its common stock or warrants, rights or other options to purchase its common stock, and (ii) in the case of a Subsidiary, dividends or other distributions or payments in respect of its Capital Stock to the Company or a Wholly-Owned Subsidiary); and (b) the redemption or acquisition of its Capital Stock or of warrants, rights or other options to purchase its Capital Stock (except (i) in the case of the Company, when solely in exchange for shares of its common stock or warrants, rights or other options to purchase its common. stock, and (ii) in the case of a Subsidiary, redemptions or acquisitions from the Company or a Wholly-Owned Subsidiary). "ENVIRONMENTAL LAWS" means any and all Federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. 7 Schedule B 57 SCHEDULE B "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "EVENT OF DEFAULT" is defined in Section 11. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means, at any time and with respect to any property, the sale value of such property that would be realized in an arm's-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell). For purposes of calculating such sale value in the case of an Asset Sale, the amount shall be determined in good faith at the time of such Asset Sale by a Senior Financial Officer. "FIXED CHARGES" means, with respect to any period, the sum of (a) Interest Charges for such period and (b) Lease Rentals for such period. "FIXED CHARGES COVERAGE RATIO" means, at any time, the ratio of (a) Consolidated EBIRT for the four fiscal quarters ending on, or most recently ended prior to, such time to (b) Fixed Charges for such period. "FUNDED INDEBTEDNESS" means, with respect to any Person, all Indebtedness of such Person which by its terms or by the terms of any instrument or agreement relating thereto matures, or which is otherwise payable or unpaid, one year or more from, or is directly or indirectly renewable or extendible at the option of the obligor in respect thereof to a date one year or more (including, without limitation, an option of such obligor under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of one year or more) from, the date of the creation thereof. 8 Schedule B 58 SCHEDULE B "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "GOVERNMENTAL AUTHORITY" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "GUARANTY" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; 9 Schedule B 59 SCHEDULE B (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "HAZARDOUS MATERIAL" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "INDEBTEDNESS" with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); 10 Schedule B 60 SCHEDULE B (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "Institutional Investor" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 10% of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "INTEREST CHARGES" means, with respect to any period, the sum (without duplication) of the following (in each case, eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP): (a) all interest in respect of Indebtedness of the Company and its Subsidiaries (including imputed 11 Schedule B 61 SCHEDULE B interest on Capital Lease Obligations and net costs of interest rate Swaps) deducted in determining Consolidated Net Income for such period, together with all interest capitalized or deferred during such period and not deducted in determining Consolidated Net Income for such period, and (b) all debt discount and expense amortized or required to be amortized in the determination of Consolidated Net Income for such period. "INVESTMENT" means any investment, made in cash or by delivery of property, by the Company or any of its Subsidiaries (i) in any Person, whether by acquisition of Capital Stock, Indebtedness or other obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise, or (ii) in any property. "LEASE RENTALS" means, with respect to any period, the sum of the rental and other obligations required to be paid during such period by the Company or any Subsidiary as lessee or sublessee under all leases of real or personal property (other than Capital Leases), excluding any amount required to be paid by the lessee or sublessee (whether or not therein designated as rental or additional rental) on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges. "LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "MAKE-WHOLE AMOUNT" is defined in Section 8.7. "MATERIAL" means material in relation to the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken 12 Schedule B 62 SCHEDULE B as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. "MEMORANDUM" is defined in Section 5.3. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "NET PROCEEDS AMOUNT" means, with respect to any Asset Sale, an amount equal to the difference of (a) the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such Asset Sale) received by such Person in respect of such Asset Sale, minus (b) all ordinary and reasonable out-of-pocket costs and expenses actually incurred by such Person in connection with such Asset Sale. "NET PROCEEDS OF COMMON STOCK" means, with respect to any period, cash proceeds (net of all costs and out-of-pocket expenses in connection therewith, including, without limitation, placement, underwriting and brokerage fees and expenses), received by the Company and its Subsidiaries during such period, from the sale of all common stock of the Company, including in such net proceeds: (a) the net amount paid upon issuance and exercise during such period of any right to acquire any common stock, or paid during such period to convert a convertible debt Security to common stock (but excluding any amount paid to the Company upon issuance of such convertible debt Security); and 13 Schedule B 63 SCHEDULE B (b) any amount paid to the Company upon issuance of any convertible debt Security issued after January 31, 1996 and thereafter converted to common stock during such period. "NOTES" is defined in Section 1. "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "OTHER AGREEMENT" is defined in Section 2. "OTHER PURCHASER" is defined in Section 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PLAN" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "PREFERRED STOCK" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. 14 Schedule B 64 SCHEDULE B "PRIORITY DEBT" means, without duplication, (i) all Indebtedness secured by Liens with respect to any property of the Company or any of its Subsidiaries, other than Liens permitted by clauses (a), (b) and (c) of Section 10.3, and (ii) all secured and unsecured Indebtedness of Subsidiaries (except (a) Indebtedness held by the Company or a Wholly-Owned Subsidiary, (b) the Guaranty by a Subsidiary of the Indebtedness of another Subsidiary and (c) the Guaranty by a Subsidiary of the Notes pursuant to Section 9.7). "PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "PROPERTY REINVESTMENT APPLICATION" means, with respect to any Asset Sale, the application of an amount equal to the Net Proceeds Amount with respect to such Asset Sale to the acquisition by the Company or any Subsidiary of operating assets of the Company or any Subsidiary to be used in the principal business of such Person, provided such assets have a Fair Market Value at least equal to such Net Proceeds Amount. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "REQUIRED HOLDERS" means, at any time, the holders of at least 66 2/3% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement. "RESTRICTED INVESTMENTS" means all Investments except the following: (a) Investments in United States Governmental Securities, provided that such obligations mature within 365 days from the date of acquisition thereof; 15 Schedule B 65 SCHEDULE B (b) Investments in certificates of deposit or banker's acceptances issued by an Acceptable Bank, "provided that such obligations mature within 365 days from the date of acquisition thereof; (c) Investments in commercial paper given either of the two highest ratings by a credit rating agency of recognized national standing and maturing not more than 270 days from the date of creation thereof; (d) Investments in Repurchase Agreements; (e) Investments in demand deposits made in the ordinary course of business of the Company or any Subsidiary; and (f) Investments in deposits or Eurodollar deposits with any Acceptable Bank, provided that such deposits mature within 365 days from the date of acquisition thereof. As of any date of determination, each Restricted Investment shall be valued at the greater of (x) the amount at which such Restricted Investment is shown on the books of the Company or any of its Subsidiaries (or zero if such Restricted Investment is not shown on any such books); and (y) either (i) in the case of any Guaranty of the obligation of any Person, the amount which the Company or any of its Subsidiaries has paid on account of such obligation less any recoupment by the Company or such Subsidiary of any such payments, or 16 Schedule B 66 SCHEDULE B (ii) in the case of any other Restricted Investment, the excess of (x) the greater of (A) the amount originally entered on the books of the Company or any of its Subsidiaries with respect thereto and (B) the cost thereof to the Company or its Subsidiary over (y) any return of capital (after income taxes applicable thereto) upon such Restricted Investment through the sale or other liquidation thereof or part thereof or otherwise. As used in this definition of "Restricted Investments": "Acceptable Bank" means any bank or trust company (i) which is organized under the laws of the United States of America or any State thereof, (ii) which has capital, surplus and undivided profits aggregating at least $1,000,000,000, and (iii) whose long-term unsecured debt obligations shall have been given a rating of "A" or better by S&P, "AT" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing. "Acceptable Broker-Dealer" means any Person other than a natural person (i) which is registered as a broker or dealer pursuant to the Exchange Act and (ii) whose long-term unsecured debt obligations shall have been given a rating of "A" or better by S&P, "AT" or better by Moody's or an equivalent rating by any other credit rating agency of recognized national standing. "Moody's" means Moody's Investors Service, Inc. "Repurchase Agreement" means any written agreement (a) that provides for (i) the transfer of one or more United States Governmental Securities in an aggregate principal amount at least equal to the amount of the Transfer Price (defined below) to the Company or any of its Subsidiaries from an Acceptable Bank or an Acceptable Broker-Dealer against a transfer of funds (the "Transfer Price") by the Company or such Subsidiary to such Acceptable Bank or Acceptable Broker-Dealer, and (ii) a simultaneous agreement by the Company or such Subsidiary, in connection with such transfer of funds, to transfer to 17 Schedule B 67 SCHEDULE B such Acceptable Bank or Acceptable Broker-Dealer the same or substantially similar United States Governmental Securities for a price not less than the Transfer Price plus a reasonable return thereon at a date certain not later than 365 days after such transfer of funds, (b) in respect of which the Company or such Subsidiary shall have the right, whether by contract or pursuant to applicable law, to liquidate such agreement upon the occurrence of any default thereunder, and (c) in connection with which the Company or such Subsidiary, or an agent thereof, shall have taken all action required by applicable law or regulations to perfect a Lien in such United States Governmental Securities. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. "United States Governmental Security" means any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America. 18 Schedule B 68 SCHEDULE B "RESTRICTED PAYMENT" means (a) any Distribution in respect of the Company or any Subsidiary, including, without limitation, any Distribution resulting in the acquisition by the Company of Securities which would constitute treasury stock, and (b) any payment, repayment, redemption, retirement, repurchase or other acquisition, direct or indirect, by the Company or any Subsidiary of, on account of, or in respect of, the principal of any Subordinated Debt (or any installment thereof) prior to the regularly scheduled final maturity date of such Subordinated Debt (as in effect on the date such Subordinated Debt was originally incurred). For purposes of this Agreement, the amount of any Restricted Payment made in property shall be the greater of (x) the Fair Market Value of such property (as determined in good faith by the board of directors (or equivalent governing body) of the Person making such Restricted Payment) and (y) the net book value thereof on the books of such Person, in each case determined as of the date on which such Restricted Payment is made. "RIGHT TO PUT" is defined in Section 8.6(a). "SALE-LEASEBACK TRANSACTION" means, with respect to any Person, any direct or indirect arrangement pursuant to which properties are sold or transferred by such Person or a Subsidiary of such Person and are thereafter leased back from the purchaser or transferee thereof by such Person or one of its Subsidiaries. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SECURITY" has the meaning set forth in section 2(l) of the Securities Act. "SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer or treasurer of the Company. 19 Schedule B 69 SCHEDULE B "SENIOR FUNDED INDEBTEDNESS" means Funded Indebtedness of the Company other than Subordinated Debt. "STOCK REDEMPTION AGREEMENT" means that certain Stock Redemption Agreement, dated as of May 3, 1994, by and between John H. Marmaduke, Independent Executor of the Estate of Sam H. Marmaduke, Deceased, and the Company, as amended from time to time (if amended after the Closing to increase (i) the repurchase price per share or (ii) the number of shares subject to repurchase in any year, then only with the consent of the Required Holders). "SUBORDINATED DEBT" means any Indebtedness of the Company that is in any manner subordinated in right of payment or security to the Notes. "SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "SWAPS" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment 20 Schedule B 70 SCHEDULE B of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "TAXES" means, for any period, the sum of all U.S. Federal, state and foreign income taxes of the Company and its Subsidiaries, all as determined on a consolidated basis in accordance with GAAP. "VOTING STOCK" shall mean securities or other equity interests of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or persons performing similar functions in the case of business entities other than corporations). "WHOLLY-OWNED SUBSIDIARY" means, at any time, any Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Subsidiaries at such time. 21 Schedule B 71 Schedule 4.9 CHANGES IN CORPORATE STRUCTURE None Schedule 4.9 - Page 1 72 Schedule 5.4 SENIOR OFFICERS, DIRECTORS AND AFFILIATES Senior Officers The following table sets forth certain information about key personnel within the Company:
Name Position - ---- -------- John H. Marmaduke President and Chief Executive Officer Walter McNeer Executive Vice President and Chief Operating Officer - Stores Phillip Hill Senior Vice President and Chief Operating Officer - Systems and Support Dennis McGill Vice President of Finance, Chief Financial Officer, Treasurer and Secretary Tim Hoelscher Vice President of Real Estate/Construction Mike Woods Vice President of Information Systems Robert Volpe Vice President of Distribution
John H. Marmaduke, 48. Mr. Marmaduke has served as President and CEO of Hastings for the last 20 years, and Chairman of the Board since 1993. Mr. Marmaduke has been active in the entertainment industry with Hastings and its predecessor company for over 24 years. He served as President of Hastings' former parent company, Western Merchandisers, Inc. from 1982 through 1991. Upon Wal-Mart's purchase of Western Merchandisers, Inc. in 1991, Mr. Marmaduke continued as President through Wal-Mart's divestiture of the distribution company in 1994. Walter McNeer, 45. Mr. McNeer joined Hastings in 1974 and over his 22 years of service has served in various operating capacities. Since 1983, Mr. McNeer has served as Executive Vice President and Chief Operating Officer. Mr. McNeer was elected to the Board of Directors in 1993. Phillip Hill, 33. Mr. Hill joined Hastings in 1986 as District Manager and held positions of Director of Store Operations and Director of Information Services until 1992. Prior to joining Hastings, Mr. Hill served as the Director of Operations for Gateway Books, a retail book chain, in Knoxville, Tennessee. Mr. Hill has 17 years of retail industry experience. Dennis McGill, 47. Mr. McGill joined Hastings as Vice President of Finance, Chief Financial Officer, Treasurer and Secretary in 1995. From 1989 through 1994, Mr. McGill served as the President and Chief Executive Officer of the Bed Outlet, an 18 store, bedroom furniture retailer in California. Mr. McGill was the Senior Vice President-Finance and Chief Financial Officer for San Francisco-based Lewis Galoob Toys, Inc. a NYSE listed, international toy manufacturer from 1986 to 1989. Tim Hoelscher, 38. Mr. Hoetscher joined Hastings in 1988 as Director of Construction and accepted real estate responsibilities in August 1991. He was promoted to Vice President of Real Estate Construction in October 1992. Prior to joining Hastings, Mr. Hoelscher was employed by Brown Group, Inc. as Manager of Construction, Specialty Retail Division. Mr. Hoelscher has a total of 23 years experience in retail store development. Mike Woods, 34. Mr. Woods joined Hastings in 1989 as a programming specialist and was promoted to Vice President of Information Systems in October 1992. Prior to joining Hastings, Mr. Woods was employed as a systems consultant at Bryan Technologies, a process automation firm, in Albuquerque, New Mexico. Mr. Woods has 15 years experience in the information technology and systems industry. Robert Volpe, 44. Mr. Volpe joined Hastings as Vice President of Distribution in 1994. From 1994 to 1993, Mr. Volpe was Senior Director of Distribution and Operations with Pearle Vision, Inc. of Dallas, Texas. Schedule 5.4 - Page 1 73 Outside Board of Directors The following table is a listing of the Company's current outside Board of Directors:
Name Year Elected - ---- ------------ Leonard L Berry 1994 Peter A. Dallas 1971 Gaines L Godfrey 1991 Craig R. Lentszch 1994 Steve S. Marmaduke 1990 Jeffrey G. Shrader 1992 Ron Stegall 1996
Leonard L Berry, 53. Dr. Berry is a Professor of Marketing and the Director of the Center for Retailing Studies in the College of Business Administration at Texas A&M University. He holds the JC Penny Chair of Retailing Studies and is editor of the Arthur Andersen Retailing Issues Letter. In addition, Dr. Berry has served as the National President of the American Marketing Association. Peter A. Dallas, 61. Mr. Dallas has served as a Director of Hastings since 1971. Mr. Dallas has served in various capacities at Boatmen's First National Bank of Amarillo for 34 years. In addition, Mr. Dallas serves as a Director for Satana Company, a private investment company in Amarillo, Texas. Gaines L. Godfrey, 61. Mr. Godfrey has served as a Director of Hastings since 1991, and is the President of Santa Fe based Godfrey Ventures which he founded in 1982. Prior to that, Mr. Godfrey served as Chief Financial Officer of Mesa Petroleum in Amarillo, Texas. Craig R. Lentzch, 47. Mr. Lentzsch was elected a Director of Hastings in 1994. He is the President and Chief Executive Officer of Greyhound Lines, Inc. Mr. Lentzsch served as Executive Vice President and Chief Financial Officer of Motor Coach Industries, Inc. in Phoenix, Arizona. Prior to that, Mr. Lentzsch served as president and Chief Executive Officer of Continental Asset Services. Steve S. Marmaduke, 45. Mr. Marmaduke served as Vice President of Purchasing for Western Merchandisers from 1985 to 1992. Mr. Marmaduke was elected to the Hastings Board of Directors in 1990. Steve Marmaduke is the brother of John Marmaduke, President and CEO of Hastings and the son of the late founder of Western Merchandisers, Mr. Sam Marmaduke. Jeffrey G. Shrader, 45. Mr. Shrader has served as a Director of Hastings since 1992 and since 1993 has been a shareholder with the law firm of Sprouse, Mozola, Smith & Rowley, P.C. in Amarillo, Texas. For the five years prior thereto, Mr. Shrader was a partner with the law firm of Gibson, Oschner, & Adkins, L.L.P. in Amarillo, Texas. Ron Stegall, 48. Mr. Stegall is the founder and CEO of Arlington Equity Partners, Inc. He was also the founder, Chairman and CEO of BizMart Inc., one of the largest and fastest growing U.S. retail chains of office products superstores. Mr. Stegall had a 17 year career at Tandy Corporation where he rose to become Senior Vice President in charge of the Business Products Division. Mr. Stegall was elected to the Board of Directors in May, 1996. Affiliates The following is a list of the Affiliates: John H. Marmaduke Family Limited Partnership Steven S. Marmaduke Family Limited Partnership Estate of Sam Marmaduke Schedule 5.4 - Page 2 74 Schedule 5.5 Financial Statements All financial statements contained in the Memorandum. Unaudited Consolidated Balance Sheet and Income Statement for the period ended April 30, 1996. Schedule 5.5 - Page 1 75 Schedule 5.8 CERTAIN LITIGATION None Schedule 5.8 - Page 1 76 Schedule 5. 11 PATENTS, ETC None Schedule 5.11 - Page 1 77 Schedule 5.14 USE OF PROCEEDS The proceeds from the issuance of Hastings Books, Music & Video, Inc. 7.75 % Series.A Senior Notes are to be used to refinance existing senior indebtedness and to provide for general corporate purposes. Schedule 5.14 - Page 1 78 Schedule 5.15 Listing of Existing Indebtedness As of April 30, 1996
Balance/ Effective Creditor Amount Date Description -------- ------ ---- ----------- Boatmen's National Bank of St. Louis $29,850,000 12/12/94 Unsecured Operating Line of Credit Boatmen's National Bank of St. Louis $ 5,000,000 03/22196 Unsecured Term Note Boatmen's National Bank of St. Louis $ 2,500,000 04/17/96 Unsecured Term Note Boatmen's National Bank of St. Louis $ 2,500,000 05/02/96 Unsecured Term Note First Interstate Bank of Texas $ 1,434,000 05/23/95 Purchase of Corporate Aircraft Sable Realty, Inc., A Texas Corp. $ 827,217 06/08/92 Capital Lease on Retail Location Othello Holdings, Inc., a Texas Corp. $ 952,074 05/29/91 Capital Lease on Retail Location
Other Financial Relationships
Effective Relationship Amount Date Description ------------ ------ --------- ----------- Boatmen's National Bank of St. Louis $15,000,000 06/16/95 Unsecured Interest Rate Swap (notional amount) Softech Financial, an Illinois Corp. $0.00 05/29/91 Security Agreement on Software
Proceeds from the Notes will be applied first to pay accrued interest and outstanding principal amounts of the Unsecured Term Notes with the balance of the proceeds applied to the reduction of principal amounts outstanding of the Unsecured Operating Line of Credit. Schedule 5.15 - Page 1 79 EXHIBIT 1 [FORM OF NOTE] HASTINGS BOOKS, MUSIC & VIDEO, INC. 7.75% SERIES A SENIOR NOTE DUE JUNE 13, 2003 NO. [______] [DATE] $[_______] PPN 41834*AA4 FOR VALUE RECEIVED, the undersigned, Hastings Books, Music & Video, Inc.(herein called the "Company"), a corporation organized and existing under the laws of the State of Texas, hereby promises to pay to [__________________ ], or registered assigns, the principal sum of [_____________________] DOLLARS on June 13, 2003, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.75% per annum from the date hereof, payable quarterly in arrears, on the 13th day of March, June, September and December in each year, commencing with the 13th day of March, June, September or December next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable quarterly in arrears as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 9.75% or (ii) 2.0% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of The Chase Manhattan Bank, N.A. in New York, New York or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated June 13, 1996 (as from time to time amended, Exhibit 1 - Page 1 80 the "Note Purchase Agreements"; the capitalized terms used but not defined herein being used with the respective meanings specified in the Note Purchase Agreements), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to certain prepayments, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Note shall be construed in accordance with, and the rights of the registered holder hereof and the Company shall be governed by, the law of the State of New York excluding, to the extent permitted by the law of such State, choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: ------------------------------------- [Title] Exhibit 1 - Page 2 81 EXHIBIT 4.4(a) FORM OF OPINION OF COUNSEL FOR THE COMPANY Matters To Be Covered In Opinion of Counsel For The Company 1. The Company being duly incorporated, validly existing, in good standing and having requisite corporate power and authority to conduct its business and own its properties, to issue and sell the Notes, and to execute, deliver and perform its obligations under this Agreement, the Other Agreement and the Notes. 2. The Company being duly qualified and in good standing as a foreign corporation in appropriate jurisdictions. 3. Due authorization and execution of this Agreement, the Other Agreement and the Notes and such documents being legal, valid, binding and enforceable under Texas and federal law. 4. No conflicts with charter documents, laws or other agreements. 5. All consents required to issue and sell the Notes and to execute, deliver and perform this Agreement, the Other Agreement and the Notes having been obtained. 6. No litigation questioning validity of this Agreement, the Other Agreement or the Notes or in which, in the event of an adverse outcome, there is a reasonable likelihood of a Material Adverse Effect. Exhibit 4.4(a) - Page 1 82 7. The Notes not requiring registration under the Securities Act of 1933, as amended; no need to qualify an indenture under the Trust Indenture Act of 1939, as amended. 8. No violation of Regulations G, T or X of the Federal Reserve Board. 9. Company not an "investment company", or a company "controlled" by an "investment company", under the Investment Company Act of 1940, as amended. 10. Texas state courts and federal courts applying Texas conflict of laws principles giving effect to the choice of law provisions contained in this Agreement, the Other Agreement and the Notes. Exhibit 4.4(a) - Page 2 83 Exhibit 4.4(b) FORM OF OPINION OF SPECIAL COUNSEL TO THE PURCHASERS Matters To Be Covered In Opinion of Special Counsel To the Purchasers 1. The Company being duly incorporated, validly existing, in good standing and having requisite corporate power and authority to issue and sell the Notes and to execute, deliver and perform its obligations under this Agreement, the Other Agreement and the Notes. 2. Due authorization and execution of this Agreement, the Other Agreement and the Notes and such documents being legal, valid, binding and enforceable. 3. No conflicts with charter documents or bylaws. 4. The Notes not requiring registration under the Securities Act of 1933, as amended; no need to qualify an indenture under the Trust Indenture Act of 1939, as amended. 5. The opinion of counsel to the Company being satisfactory in form and scope and the purchasers of the Notes being justified in relying thereon. Exhibit 4.4(b) - Page 1 84 EXHIBIT 8.6(b) FORM OF NOTICE OF SALE Hastings Books, Music & Video, Inc. 3601 Plains Blvd., Suite I Amarillo, Texas 79120-2104 Attention: Chief Financial Officer Ladies and Gentlemen: Reference is made to those certain separate Note Purchase Agreements, each dated June 13, 1996 (the "Note Agreements", the capitalized terms herein being used herein as therein defined), between Hastings Books, Music & Video, Inc. (the "Company") and each of Metropolitan Life Insurance Company and Metropolitan Insurance and Annuity Company which provide, among other things, for the issuance and sale by the Company of its 7.75% Series A Senior Notes due June 13, 2003 in the aggregate principal amount of $25,000,000. In accordance with Section 8.6 of the Note Agreements, the undersigned hereby irrevocably exercises its Right to Put with respect to all Notes held by it. Please transfer in immediately available funds, on ________________________ [NOT LESS THAN 20 DAYS AFTER DELIVERY OF THIS NOTICE OF SALE], the outstanding principal amount of the Notes held by the undersigned and accrued and unpaid interest thereon with respect to the foregoing exercise of the undersigned's Right to Put. Exhibit 8.6(b) - Page 1 85 EXHIBIT 8.6(b) Date: [NAME OF HOLDER OF NOTES] By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Exhibit 8.6(b) - Page 2 86 HASTINGS BOOKS, MUSIC & VIDEO, INC. 7.75% SERIES A SENIOR NOTE DUE JUNE 13, 2003 No. AR-1 June 13, 1996 $10,000,000 PPN 41834*AA4 FOR VALUE RECEIVED, the undersigned, Hastings Books, Music & Video, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Texas, hereby promises to pay to METROPOLITAN LIFE INSURANCE COMPANY, or registered assigns, the principal sum of TEN MILLION AND No/100 DOLLARS on June 13, 2003, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.75% per annum from the date hereof, payable quarterly in arrears, on the 13th day of March, June, September and December in each year, commencing with the 13th day of September next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable quarterly in arrears as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 9.75% or (ii) 2.0% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of The Chase Manhattan Bank, N.A. in New York, New York or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated June 13, 1996 (as from time to time amended, the "Note Purchase Agreements"; the capitalized terms used but not defined herein being used with the respective meanings specified in the Note Purchase Agreements), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied 1 87 by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to certain prepayments, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Note shall be construed in accordance with, and the rights of the registered holder hereof and the Company shall be governed by, the law of the State of New York excluding, to the extent permitted by the law of such State, choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ DENNIS McGILL ------------------------------------- Name: Dennis McGill ----------------------------------- Title: Vice President ---------------------------------- 2 88 HASTINGS BOOKS, MUSIC & VIDEO, INC. 7.75% SERIES A SENIOR NOTE DUE JUNE 13, 2003 No. AR-2 June 13, 1996 $15,000,000 PPN 41834*AA4 FOR VALUE RECEIVED, the undersigned, Hastings Books, Music & Video, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Texas, hereby promises to pay to METROPOLITAN INSURANCE AND ANNUITY COMPANY, or registered assigns, the principal sum of FIFTEEN MILLION AND No/100 DOLLARS on June 13, 2003, with interest (computed on the basis of a 3 60-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.75% per annum from the date hereof, payable quarterly in arrears, on the 13th day of March, June, September and December in each year, commencing with the 13th day of September next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable quarterly in arrears as aforesaid (or at the option of the registered holder hereof, on demand), at a rate per annum. from time to time equal to the greater of (i) 9.75% or (ii) 2.0% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time to time in New York, New York as its "base" or prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of The Chase Manhattan Bank, N.A. in New York, New York or at such other shall have designated by written notice to the holder of this Note as place as the Company provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated June 13, 1996 (as from time to time amended, the "Note Purchase Agreements"; the capitalized terms used but not defined herein being used with the respective meanings specified in the Note Purchase Agreements), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied 1 89 by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to certain prepayments, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements. If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Note shall be construed in accordance with, and the rights of the registered holder hereof and the Company shall be governed by, the law of the State of New York excluding, to the extent permitted by the law of such State, choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ DENNIS McGILL ------------------------------------- Name: Dennis McGill ----------------------------------- Title: Vice President ---------------------------------- 2 90 [SPROUSE, MOZOLA, SMITH & ROWLEY, P.C. LETTERHEAD] June 13, 1996 Metropolitan Life Insurance Company One Madison Avenue New York, NY 10010 Metropolitan Insurance and Annuity Company One Madison Avenue New York, NY 10010 Ladies and Gentlemen: We have acted as counsel for Hastings Books, Music & Video, Inc., a Texas corporation (the "Company"), in connection with the Note Purchase Agreements, dated June 13, 1996, between the Company and each of you (the "Agreements"), pursuant to which the Company has issued to you today 7.75% Series A Senior Notes due June 13, 2003 of the Company in the aggregate principal amount of $25,000,000 (the "Notes"). All terms used herein that are defined in the Agreements have the respective meanings specified in the Agreements. This opinion letter is being delivered to you in satisfaction of the condition set forth in Section 4.4(a) of the Agreements and with the understanding that you are purchasing the Notes in reliance upon the opinions expressed herein. In this connection, we have examined such certificates of public officials, certificates of officers of the Company and copies certified to our satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as we have deemed relevant and necessary as a basis for our opinions set forth below. We have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein. With respect to the opinion expressed in paragraph 6 below, we have relied upon the representations made by you in Section 6.1 of the Agreements and upon the letter dated June 3, 1996 from Chase Securities Inc. regarding the limited nature of its offering of the Notes. With respect to the opinion expressed in paragraph 7 below, we have relied on the representation made by the Company in Section 5.14 of the Agreements. Moreover, we have assumed the due authorization, execution, and delivery of the respective Agreements by each of you. 91 PAGE 2 OF HARD COPY MISSING 92 Metropolitan Life Insurance Company Metropolitan Insurance and Annuity Company June 13, 1996 Page 3 - ----------------------------------- 6. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreements to register the Notes under the Securities Act of 1933, as amended, or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 7. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of Regulation G, T or X of the Board of Governors of the Federal Reserve System. 8. The Company is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act of 1940, as amended. 9. Texas state courts and federal courts applying Texas conflict of law principles would give effect to the choice of law provisions contained in the Agreements and the Notes. The foregoing opinion, with your concurrence, is predicated on and qualified in its entirety by the following: (a) The foregoing opinion is effective at and as of the date of this letter, and we disclaim any undertaking to advise you of changes which thereafter may be brought to our attention. (b) The foregoing opinion is based on and is limited to the laws of the State of Texas and the relevant laws of the United States of America, and we render no opinion with respect to the laws of any other jurisdiction. (c) Whenever our opinion is based on circumstances "to our knowledge after having made due inquiry," we have relied exclusively on certificates or statements of officers, after the discussion of the contents thereof with such officers of the Company or certificates of public officials as to the existence or non-existence of the circumstances upon which such opinion is predicated. We have no reason to believe, however, that any such certificate or statement is untrue or inaccurate in any material respect. (d) In rendering the opinions herein relating to the absence of any litigation, investigation, or administrative proceeding, we express no opinion with respect to the possible effect of administrative and legislative actions, proceedings and investigations as to which the Company is not a named party. 93 Metropolitan Life Insurance Company Metropolitan Insurance and Annuity Company June 13, 1996 Page 4 - ----------------------------------- The foregoing opinions may be relied upon by you, by each subsequent institutional holder of the Notes, and by your special counsel, Baker & Botts, L.L.P. Subject to the foregoing, this opinion is solely for the benefit of you, each subsequent institutional holder of the notes, and Baker & Botts, L.L.P., and may not be relied upon by any other Person without our prior written consent. Very truly yours, SPROUSE, MOZOLA, SMITH & ROWLEY, P.C. /s/ JERRY G. SHRADER Jerry G. Shrader JGS/sl EX-10.3 7 CREDIT AGREEMENT DATED 12/12/94 1 EXHIBIT 10.3 CREDIT AGREEMENT among HASTINGS BOOKS, MUSIC & VIDEO, INC. as Borrower and THE BOATMEN'S NATIONAL BANK OF ST. LOUIS Individually, as the Issuing Bank and as the Agent and FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO $30,000,000 Revolving Credit Facility $10,000,000 Term Loan Facility December 12, 1994 2 TABLE OF CONTENTS Article 1 DEFINITIONAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1 Certain Definitions of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2 General Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Article 2 THE CREDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.1 Commitments to Lend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.2 Method of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.3 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.4 Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 2.5 Continuations/Conversions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.6 Commitment and Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.7 Reduction and Termination of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.8 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 2.9 Principal Payments on Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 2.10 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.11 General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.12 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.13 Sharing of Payments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 2.14 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 2.15 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.16 Proceeds of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Article 3 CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.1 Initial Loans on the Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.2 All Loans, Conversions/Continuations and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 4 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 4.1 Entity Status, Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 4.2 Authorization; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4.4 Enforceable Obligations; Lien Establishment . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4.5 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4.6 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 4.7 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.8 No Default or Adverse Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.9 Material Agreements; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.10 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.11 Use of Proceeds; Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.12 No Financing of Regulated Corporate Takeovers . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.14 Principal Office; Names; Primary; Business . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.15 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3 SECTION 4.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4.17 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4.18 Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.19 Insider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.20 Certain Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.21 Insurance:Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 5 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.1 Financial Statements, Reports and Documents . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.2 Payment of Taxes and Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 5.3 Maintenance of Existence and Rights: Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 5.4 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 5.5 Other Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 5.6 Compliance with Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 5.7 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 5.8 Access; Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 5.9 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 5.10 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 5.12 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 5.13 Maintenance Of Corporate Identity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 5.14 Primary Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.15 Subordination of Affiliate Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.16 Landlord's Subordination Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE 6 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 6.1 Certain Financial Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 6.2 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 6.3 Limitation on Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 6.4 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 6.5 Limitation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 6.6 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 6.7 Limitation on Sale of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 6.8 Accounting Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 6.9 Internal Governance Documents; Name and Principal Place of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 6.10 Certain Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 6.11 Mergers, Acquisitions and Dissolutions . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 6.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 6.13 Sale of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-ii- 4 ARTICLE 7 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 7.2 Remedies Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 7.3 Certain Additional Remedies Regarding Letters of Credit . . . . . . . . . . . . . . . . . . 40 ARTICLE 8 THE AGENT AND BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 8.1 Appointment of the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 8.2 Exculpation; Agent's Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 8.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 8.4 Rights as a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 8.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 8.6 Bank's Credit Decision and Non-Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 8.7 Deferral of Distributions; Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 8.8 Nature of Article 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 8.9 Resignation and Removal by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE 9 CHANGED CIRCUMSTANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 9.1 Basis for Determining Interest Rate Inadequate or Unfair . . . . . . . . . . . . . . . . . 46 SECTION 9.2 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 9.3 Increased Cost and Reduced Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 9.4 Substitute Rate for Affected LIBOR Loans . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 9.5 Alternate Lending Office Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 10.2 No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 10.3 Payment of Costs and Expenses; Professionals and Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 10.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 10.5 Sharing of Set-Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.6 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.7 Successors and Assigns; Participations; Assignments . . . . . . . . . . . . . . . . . . . . 54 SECTION 10.8 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 10.9 Governing Law; Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 10.10 Counterparts; Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 10.11 Independence of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 10.12 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 10.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.14 Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.15 No Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.17 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 10.19 Payments Set Aside . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 10.20 Limitation of Liability; Commencement of Actions . . . . . . . . . . . . . . . . . . . . . 61
-iii- 5 SECTION 10.21 Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.22 This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
-iv- 6 CREDIT AGREEMENT This Credit Agreement is made and entered into as of the 12th day of December 1994 among (i) HASTINGS BOOKS, MUSIC & VIDEO, INC., a Texas corporation ("Borrower") (ii) each of the financial institutions that is a signatory hereto or becomes a party hereto as provided in Section 10.7 (individually, a "Bank" and collectively, the "Banks"), and (iii) THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, a national banking association ("Boatmen's"), individually as a Bank, as agent for the Banks acting in the manner and to the extent provided in Article 8 (in such capacity, the "Agent"), and as the issuer of the Letters of Credit hereinafter referred to (as such issuer, the "Issuing Bank"). W I T N E S S E T H: WHEREAS, Borrower has requested the Banks to provide it a revolving credit facility and a term loan facility, and the Issuing Bank to provide it a letter of credit facility within said revolving credit facility, for the purposes hereinafter provided; and WHEREAS, the Banks, severally, are willing to commit and to advance to the extent of their respective commitments, revolving credit and term loans to, and the Issuing Bank is willing to issue its letters of credit for the account of, Borrower upon the terms and subject to the conditions herein provided; NOW THEREFORE, for and in consideration of the premises and the promises herein, and for other good and valuable considerations, the receipt, adequacy and reasonable equivalency of which are hereby acknowledged by each party hereto, Borrower, each Bank, the Issuing Bank and the Agent agree as follows: Article 1 DEFINITIONAL PROVISIONS SECTION 1.1 Certain Definitions of Terms. For purposes of this Agreement, unless otherwise defined herein or the context otherwise requires, capitalized terms used in this Agreement shall have the respective meanings assigned to them in Annex B hereto. SECTION 1.2 General Definitional Provisions. (a) All terms defined in this Agreement shall have their defined meanings when used in each Loan Document and in each certificate, exhibit, schedule, annex or other instrument related thereto, unless in any case the context states or implies otherwise; and when required by the context, each term shall include the plural as well as the singular, and vice versa. Furthermore, in each Loan Document: (i) the word "or" is not exclusive, and the word 7 "including" (in its various forms) means "including without limitation"; and (ii) provisions in the masculine, feminine or neither genders should be construed to include any gender. (b) Definitions of each Person specifically defined herein or in each other Loan Document shall mean and include herein and therein, unless otherwise expressly provided to the contrary, the successors, assigns, heirs and legal representatives of each such Person. (c) Unless the context otherwise requires or unless otherwise expressly provided, references to this Agreement and each other Loan Document shall include all amendments, modifications, supplements, restatements, ratifications, renewals, increases, extensions, replacements, substitutions and rearrangements thereof or thereto, as applicable, and as in effect from time to time; provided, however, nothing contained in this sentence shall be construed to authorize any Person to execute or enter into any such amendments, modifications, supplements, restatements, ratifications, renewals, increases, extensions or rearrangements to a Loan Document to which it is a party, unless entered into and executed pursuant to the applicable provisions of the respective Loan Documents. (d) All accounting terms not specifically defined in a Loan Document shall be construed, and all accounting procedures, calculations and reporting required or provided for in any Loan Document shall be performed or prepared, as applicable, in accordance with GAAP consistently applied. (e) The term "Section" refers to Sections of this Agreement, and the terms "Annex", "Exhibit" and "Schedule" refer to Annexes, Exhibits and Schedules attached hereto, reference to which is hereby made for incorporation herein for all intents and purposes, unless in any case the context states or implies otherwise. The table of contents and headings in each Loan Document are inserted for convenience of reference only and shall be ignored when construing any such Loan Document. Loans hereunder are distinguished by "Class" and by "Type". The "Class" of a Loan (or of a Commitment to make such a Loan or of a Borrowing comprised of such Loans) refers to the determination whether such Loan is a Tenn Loan or a Revolving Loan, each of which constitutes a Class. The "Type" of a Loan refers to the determination whether such Loan is a Base Rate Loan or a LIBOR Loan. Loans may be identified by both Class and Type (e.g., a "Term Base Rate Loan" is a Loan which is both a Term Loan and a Base Rate Loan). -2- 8 Article 2 THE CREDITS SECTION 2.1 Commitments to Lend. (a) The Term Loans. From time to time during the Term Availability Period, each Bank severally agrees to make term loans (each, a "Term Loan") to Borrower, on and subject to the terms and conditions set forth in this Agreement, up to an aggregate principal amount of Term Loans not exceeding such Bank's Term Commitment. Any Term Loan that is repaid or prepaid may not be reborrowed. (b) Revolving Loans. From time to time during the Revolving Availability Period, each Bank severally agrees to make revolving loans (each, a "Revolving Loan") to Borrower, on and subject to the terms and conditions set forth in this Agreement, in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Revolving Commitment; provided, however, at no time shall the aggregate principal amount of all Revolving Loans outstanding plus the Letter of Credit Exposure exceed the aggregate Revolving Commitments of all Banks. Subject to the terms and conditions of this Agreement, Revolving Loans may be borrowed, repaid and reborrowed at any time during the Revolving Availability Period without premium or penalty. (c) Amount of Borrowings: Borrowings Ratable. Each Borrowing requested by Borrower as a Base Rate Loan shall be in a minimum principal amount of $100,000, or a multiple thereof, or if a lesser amount, the amount of the remaining unadvanced aggregate Term Commitments or Revolving Commitments, as applicable, of all Banks. Each Borrowing requested by Borrower as a LIBOR Loan shall be in a minimum principal amount of $500,000, or a multiple of $250,000 in excess thereof. All Borrowings hereunder shall be made from the Banks ratably in proportion to their respective Commitments of the relevant Class and Type. (d) Types. All Loans shall, at the option of Borrower, be either Base Rate Loans or LIBOR Loans and may be continued or converted pursuant to Section 2.5, provided that all Loans made pursuant to the same Borrowing shall be of the same Type; provided, however, no more than 10 LIBOR Loan Borrowings shall be outstanding at any time. SECTION 2.2 Method of Borrowing. (a) Borrower shall give the Agent notice (a "Notice of Borrowing"), in the form attached hereto as Exhibit A, not later than 12:00 noon (St. Louis time) on (i) with respect to Base Rate Loans, the Business Day of each Borrowing consisting of a Base Rate Loan and (ii) with respect to LIBOR Loans, the second LIBOR Business Day before each Borrowing consisting of a LIBOR Loan, specifying: -3- 9 (1) the date of such Borrowing, which shall be a Business Day in the case of a Borrowing consisting of a Base Rate Loan or a LIBOR Business Day in the case of a Borrowing consisting of a LIBOR Loan; (2) the Class and Type of the Loans comprising such Borrowing, provided that with respect to the initial Credit Event hereunder, all Loans shall be Base Rate Loans; (3) the aggregate amount of such Borrowing and of each Loan comprising such Borrowing; and (4) the deposit account of the Agent's Domestic Lending Office into which such Borrowing is requested to be deposited; and (5) in the case of a LIBOR Rate Borrowing, the duration of the Interest Period applicable thereto. Notwithstanding the foregoing, Borrower's right to designate any Loan as a LIBOR Loan shall be subject to the restrictions referred to in Section 2.5(c). (b) By 1:00 P.M. (St. Louis time) on the date of receipt of a Notice of Borrowing, the Agent shall notify each Bank of the contents thereof and of such Bank's ratable share of such Borrowing. Such Notice of Borrowing shall not be revocable by Borrower. (c) Not later than 2:00 P.M. (St. Louis time) on the date of each Borrowing, each Bank shall make available its ratable share of such Borrowing, in immediately available funds, to the Agent at the account number of the Agent set forth in Annex A. Unless the Agent determines that any applicable condition precedent has not been satisfied, the Agent will make the funds so received from each Bank available to Borrower in its deposit account designated in the applicable Notice of Borrowing. (d) Unless the Agent has received notice from a Bank, prior to any proposed Borrowing, that such Bank does not intend to fund its Loan requested to be made on such date, the Agent may assume that such Bank has funded its Loan and is depositing the proceeds thereof with the Agent on such date, and the Agent in its sole discretion may, but shall not be obligated to, disburse a corresponding amount to Borrower on such date. If Loan proceeds corresponding to that amount are not in fact deposited with the Agent by such Bank on or prior to the financing date of such Loan, such Bank agrees to pay, and in the event such Bank fails to immediately pay, Borrower agrees to repay, to the Agent forthwith on demand such corresponding amount, together with interest on the balance thereof from time to time outstanding for each day from the date such amount is disbursed to Borrower until the date such amount is paid or repaid to the Agent, (i) in the case of Borrower, at the interest rate applicable to such Borrowing, and (ii) in the case of such Bank, at the Federal Funds Rate. If such Bank shall pay to the Agent such corresponding -4- 10 amount, the amount so paid shall constitute such Bank's Loan as part of such Borrowing for the purposes of this Agreement. If both such Bank and Borrower shall repay such corresponding amount, the Agent shall promptly refund to Borrower such corresponding amount (together with any interest paid thereon by Borrower). This Section 2.2(d) does not relieve any Bank of its obligation to make its Loans on any funding date therefor. The obligations of each Bank hereunder are several, AND NEITHER ANY BANK NOR THE AGENT SHALL BE RESPONSIBLE FOR THE OBLIGATION OF ANY OTHER PERSON HEREUNDER (OR SUCH OTHER PERSON's DEFAULT IN THE PERFORMANCE THEREOF), nor will the failure by the Agent or any Bank to perform any of respective obligations hereunder relieve the Agent or any other Bank from the performance of its respective obligations hereunder. (e) All Borrowings made hereunder shall be disbursed by credit to the deposit account maintained by Borrower at the Agent's Domestic Lending Office that is designated in the applicable Notice of Borrowing. SECTION 2.3 Notes. (a) The Term Loans of each Bank shall be evidenced by a Term Note and the Revolving Loans of each Bank shall be evidenced by a Revolving Note. (b) Each reference in this Agreement to the "Note" of such Bank shall be deemed to, refer to and include any or all of the Notes referred to in the preceding clause (a), as the context may require. (c) Upon receipt of each Bank's Notes pursuant to this Section 2.3, the Agent shall promptly mail or deliver such Notes to such Bank. Each Bank shall record on its books, and prior to any transfer of its Notes shall endorse on the schedule forming a part thereof appropriate notations to evidence the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by Borrower with respect thereto; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of Borrower or any Bank hereunder or under any other Loan Document. Each Bank is hereby irrevocably authorized by Borrower so to endorse its Notes and to attach to and make a part of its Notes a continuation of any such schedule as and when required. SECTION 2.4 Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due and payable, at a rate per annum equal to the lesser of (i) the Base Rate as in effect for each such day and (ii) the Maximum Rate. Accrued, unpaid interest on the outstanding principal of the Base Rate Loans shall be due and payable on each Quarterly Date. Any principal of and, to the extent permitted by Law, accrued and unpaid interest on any Base Rate Loan which has become due and payable -5- 11 shall bear interest on the unpaid portion thereof, payable on demand, for each day from such due date and until paid, at the Default Rate. Not less than 5 Business Days prior to each Quarterly Date, Agent shall submit to Borrower a statement for accrued interest on Base Rate Loans due as of such Quarterly Date. (b) Each LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the lesser of (i) the sum of the Applicable Margin plus the applicable Adjusted London Interbank Offered Rate and (ii) the Maximum Rate. Accrued, unpaid interest on the outstanding principal of each LIBOR Loan shall be due and payable for each Interest Period on the last day thereof. Any principal of and, to the extent permitted by Law, interest on any LIBOR Loan which has become due and payable shall bear interest on the unpaid portion thereof, payable on demand, for each day from such due date and until paid, at the Default Rate. Not less than 5 LIBOR Business Days prior to the last day of each Interest Period, Agent shall submit to Borrower a statement for accrued interest on LIBOR Loans due as of the end of the Interest Period. (c) The Agent shall determine each interest rate applicable to the Loans hereunder and each fee hereunder. Interest for all Base Rate Loans and all fees shall be computed on the basis of a year of 365 or 366 days (as applicable), in each case for the actual number of days elapsed (including the first day but excluding the last day). Interest shall be computed for all LIBOR Loans on the basis of a year of 360 days, in each case for the actual number of days elapsed (including the first day but excluding the last day), except that, if use of a 360-day year would result in a rate in excess of the Maximum Rate, such computation will be made on the basis of a year consisting of 365 or 366 days, as appropriate. Each determination by the Agent of an interest rate or fee hereunder shall be conclusive and binding in the absence of manifest error. (d) Notwithstanding the foregoing, if at any time the applicable contractual rate of interest provided for herein (without reference to the Maximum Rate limitation) exceeds the Maximum Rate, then the rate of interest on any Loan or other Obligation shall be limited to the Maximum Rate during such time, and at all times thereafter (including periods during which any or all of such applicable contractual rates of interest have fallen below the Maximum Rate), the interest rate on any Loan or other Obligation shall be the Maximum Rate, or if there is no Maximum Rate in effect, the Agreed Maximum Rate, until the total amount of interest accrued on such Loan or other Obligation equals the amount of interest which would have accrued thereon if the applicable contractual rate of interest (without reference to the Maximum Rate limitation) had at all times been in effect; but in no event shall the aggregate interest payable or paid during the period beginning on the date the initial Loan is made until the Obligations are paid in full exceed an amount equal to interest at the Maximum Rate, so long as the Maximum Rate shall be applicable to this Agreement and the transactions contemplated hereby. If at maturity or final payment of any Note or other Obligations, as applicable, the total amount of interest paid or accrued on such Note or other Obligations under the foregoing provisions is less than the total amount of interest which would have been paid or accrued if the applicable -6- 12 contractual rate of interest provided for herein had at all times been in effect, then Borrower agrees, to the fullest extent permitted by Law, to pay an amount equal to the difference between (i) the lesser of (A) the amount of interest which would have been paid or accrued on such Note or other Obligations, as applicable, if the Maximum Rate had at all times been in effect and (B) the amount of interest which would have been paid or accrued on such Note or other Obligations, as applicable, if a rate per annum equal to the applicable contractual rate of interest provided for herein had at all times been in effect, and (ii) the amount of interest paid or accrued in accordance with the other provisions of such Note or other Obligations, as applicable. (e) The payment of interest (or any amount deemed to be interest) on any Note and on any other Obligation shall, in all respects regarding each Loan Document, be subject to the provisions of Section 10.8. SECTION 2.5 Continuations/Conversions, Etc. (a) Continuation/Conversion. (i) Borrower may elect from time to time to convert all or any portion of the outstanding Base Rate Loan to a LIBOR Loan by giving the Agent a completed and duly executed irrevocable notice of such election, in the form and substance of Exhibit D hereto (the "Continuation/Conversion Notice") not later than 12:00 noon (St. Louis time) on the second LIBOR Business Day before the proposed date of conversion, specifying the proposed date of conversion, the portion of the Base Rate Loan to be converted, and the duration of the Interest Period applicable thereto. (ii) Borrower may elect to continue (as of the last day of the applicable Interest Period) all or any part of any LIBOR Loan as the same Type of Loan by giving the Agent an irrevocable Continuation/Conversion Notice not later than 12:00 noon (St. Louis time) on the second LIBOR Business Day before the proposed date of continuation. The Continuation/Conversion Notice shall specify the proposed date of continuation, the portion of LIBOR Loan to be continued, and the duration of the Interest Period applicable thereto. (iii) Borrower may elect from time to time to convert all or any portion of a LIBOR Loan into a Base Rate Loan by giving the Agent an irrevocable Continuation/Conversion Notice not later than 12:00 noon (St. Louis time) one Business Day before the date of conversion. The Continuation/Conversion Notice shall specify the portion of the LIBOR Loan to be converted and the date of conversion. (iv) Upon receipt of a Continuation/Conversion Notice, the Agent shall promptly notify each Bank thereof. Any continuation pursuant to the preceding clause (i) or conversion pursuant to the preceding clause (ii), may only occur on the last day of -7- 13 the applicable Interest Period. Each Borrowing continued as, or converted to, a LIBOR Loan shall be in a minimum principal amount of $500,000, or a multiple of $250,000 in excess thereof, and each Borrowing continued as, or converted to, a Base Rate Loan shall be in a minimum principal amount of $100,000 or a multiple thereof. (b) No Notice. If no Continuation/Conversion Notice is given with respect to any LIBOR Loan prior to the time specified in Section 2.5(a)(i) or Section 2.5(a)(ii), or if a Continuation/Conversion Notice is timely or otherwise given, but it is incomplete and is not completed before the respective time required by this Agreement, Borrower shall be deemed to have converted such Loan into a Base Rate Loan on the last day of the applicable Interest Period. (c) Restrictions on Use of Options. Notwithstanding anything to, the contrary contained in this Section 2.5, no LIBOR Loan may be made or continued as such, and no Loan shall be made or converted to a LIBOR Loan, (i) when any Default or Event of Default has occurred and is continuing, (ii) when any provision of any Loan Document prohibits or would preclude any such continuation, election or conversion, or (iii) if after giving effect to any such proposed continuation, election or conversion, it would be necessary to prepay, in whole or part, a LIBOR Loan prior to the expiration of its then applicable Interest period in order for Borrower to pay, in full and in accordance with this Agreement, a mandatory, scheduled or voluntary payment or prepayment of principal hereunder, including the final maturity payment hereunder. During the period that a LIBOR Loan is prohibited or precluded hereunder from continuation, election or conversion, and unless otherwise expressly provided herein, each such LIBOR Loan shall be automatically converted to a Base Rate Loan on the last day of the applicable Interest Period, and each other Loan shall be continued as a Base Rate Loan. SECTION 2.6 Commitment and Other Fees. Subject to Section 10.8: (a) Borrower shall pay to the Agent, for the ratable account of the Banks, the following fees: (i) 1/8 of 1% per annum on each Unavailable Commitment during the Revolving Availability Period, (ii) 1/4 of 1% per annum on the total unused portion of the Revolving Commitments of all Banks (other than the then applicable, if any, Unavailable Commitment) during the Revolving Availability Period, and (iii) 1/4 of 1% per annum on the total unused portion of the Term Commitments of all Banks during the Term Availability Period. As to such fees attributable to the Revolving Commitments, such fees shall be payable quarterly in arrears on each Quarterly Date during the Revolving Availability Period and on the Revolving Commitment Termination Date. As to the Term Commitments, such fee shall be payable quarterly in arrears on each Quarterly Date during the Term Availability Period and on the Term Commitment Termination Date. (b) Borrower shall pay to the Issuing Bank and the Banks, by remittance to the Agent, the respective fees referred to in Section 2.14 as consideration for the issuance and maintenance -8- 14 of letters of Credit. Such fees shall be for the account of the Issuing Bank or for the ratable account of the Banks, as provided in Section 2.14. (c) On the Closing Date and on each anniversary date of the Closing Date prior to the termination all Commitments, Borrower shall pay the Agent, for its own account, an annual, non-refundable Agent's fee as set forth in a fee letter agreement of even date herewith, between Borrower and the Agent. SECTION 2.7 Reduction and Termination of Commitments. (a) After the Closing Date, Borrower may from time to time, upon at least 30 days' prior notice to the Agent prior to the beginning of a calendar quarter, receipt of which notice Agent shall promptly notify the Banks, temporarily reduce, for such calendar quarter, the unused portion of the Revolving Commitments of all Banks by an aggregate amount of up to $10,000,000, in minimum multiples of $1,000,000 (such reduced Commitment, the "Unavailable Commitment"). Each Unavailable Commitment shall automatically be restored at the end of the applicable calendar quarter, subject to Borrower's continuing rights to make temporarily reductions, or to terminate or permanently reduce unused portions of the Revolving Commitments, hereunder in accordance with the applicable provisions of this Section 2.7. For purposes of this Agreement, the face amount of each outstanding Letter of Credit shall constitute a used portion of the Revolving Commitments of the Banks. (b) After the Closing Date, Borrower may, upon at least 5 Business Days' prior notice to the Agent, receipt of which notice Agent shall promptly notify the Banks, terminate at any time, or permanently reduce from time to time by an aggregate amount of $1,000,000 or any integral multiple of $500,000 in excess thereof, the unused portion of the Revolving Commitments of all Banks. (c) During the Term Availability Period, Borrower may, upon at least 5 Business Days' prior notice to the Agent, receipt of which notice Agent shall promptly notify the Banks, terminate at any time, or permanently reduce from time to time by an aggregate amount of $1,000,000 or any integral multiple of $500,000 in excess thereof, the unused portion of the Term Commitments of all Banks. (d) Each termination or reduction of any Commitment pursuant to the provisions hereof shall apply proportionately to the respective Commitment of each Bank, and each such termination or permanent reduction, once terminated or so reduced, may not be reinstated. If any Commitment is terminated in its entirety, all accrued commitment fees with respect thereto shall be due and payable on the effective day of such termination. (e) To the extent not theretofore terminated or permanently reduced, as applicable, pursuant to other provisions of this Agreement, the Tenn Commitments of all Banks shall -9- 15 terminate on June 1, 1996 and the Revolving Commitments of all Banks shall terminate on January 31, 1997; provided, however, in the sole and absolute discretion of all of the Banks, such termination date for the Revolving Commitments of all Banks may be extended for up to an additional one-year period on each anniversary of this Agreement upon such terms and conditions as shall be prescribed by the all of the Banks. Any such election by all of the Banks shall be made, if at all, pursuant to a written instrument executed by all of the Banks, which instrument shall refer to this provision and set forth the extended term of the Revolving Commitments of all Banks and, if applicable, the terms and conditions for such extended term. SECTION 2.8 Mandatory Prepayments. (a) If at any time (whether as a result of a temporary or permanent reduction in Commitments pursuant to Section 2.7, (i) the aggregate principal amount of all Revolving Loans outstanding plus the Letter of Credit Exposure exceeds the aggregate amount of the Revolving Commitments of all Banks, Borrower shall immediately prepay the Revolving Loans in an amount at least equal to such excess, or (ii) the aggregate principal amount of all Term Loans outstanding exceeds the aggregate amount of the Term Commitment of all Banks, Borrower shall immediately prepay the Term Loans in an amount at least equal to such excess. All such mandatory Prepayments shall be accompanied by, and Borrower shall pay, interest thereon which has accrued until the date of payment thereof. (b) By 12:00 noon (St. Louis time) on the date that a mandatory prepayment is required under Section 2.8(a), Borrower shall select which outstanding Loans (indicating the Class and Type) are to be prepaid and shall notify the Agent thereof. Such notice shall not be revocable by Borrower. By 1:00 P.M. (St. Louis time) on the date of receipt of such notice, the Agent shall notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment. Each such prepayment shall be applied to prepay ratably the respective Loans so selected. (c) As provided in Section 2.2(d), Borrower shall immediately prepay the principal of, and accrued interest on, portions of Borrowings funded by the Agent as to which and to the extent a Bank has not funded its pro rata portion. SECTION 2.9 Principal Payments on Loans. (a) On each Quarterly Date commencing October 1, 1996 and continuing consecutively through January 31, 1999 (or until paid in full), there shall be due and payable a principal installment in respect of outstanding Term Loans in an aggregate principal amount equal to five percent (5%) of the unpaid principal balance of Term Loans as of the Term Commitment Termination Date, together with accrued interest on the principal amount paid; provided, however, the aggregate unpaid principal balance of the Term Loans, together with accrued, unpaid interest thereon shall (unless the maturity thereof is sooner accelerated or otherwise becomes due and -10- 16 payable in accordance with the terms hereof or any other Loan Document) be due and payable in full on January 31, 1999. Not less than 5 Business Days prior to the first Quarterly Date on which principal installment payments commence under this clause La), the Agent shall submit to Borrower a statement of the amount of such principal installments. (b) By 12:00 noon (St. Louis time) on the date that a payment is required in respect of Term Loans under this Section 2.9, Borrower shall select which outstanding Term Loans that are either (i) Base Rate Loans or (ii) LIBOR Loans whose last day of its Interest Period corresponds to the applicable Quarterly Date (and so indicating the Type) are to be paid and shall notify the Agent thereof. Such notice shall not be revocable by Borrower. By 1:00 P.M. (St. Louis time) on the date of receipt of such notice, the Agent shall notify each Bank of the contents thereof and of such Bank's ratable share of such payment. Each such payment shall be applied to pay ratably the Term Loans so selected, or if Borrower has not timely notified and identified the Agent (as herein provided) the Tenn Loans for application, such payment shall be applied, ratably, by the Agent as it determines in its sole discretion. (c) The aggregate unpaid principal balance of the Revolving Loans, together with accrued, unpaid interest thereon shall (unless the maturity thereof is sooner accelerated or otherwise becomes due and payable in accordance with the terms hereof or any other Loan Document) mature and be due and payable on Revolving Commitment Termination Date. SECTION 2.10 Optional Prepayments. (a) Borrower may, upon notice to the Agent given not later than 1:00 P.M. (St. Louis time) on (i) the Business Day of prepayment of any Base Rate Loan and (ii) the LIBOR Business Day prior to the date of prepayment of any LIBOR Loan, prepay (without premium or penalty, other than any funding losses as provided in Section 2.12) any Loan in whole at any time, or from time to time in part, in minimum principal amounts of $250,000 or any integral multiple of $250,000. Such notice shall specify the date and amount of prepayment and the Loan or Loans (indicating the corresponding Class or Type) applicable to such prepayment and shall not be revocable by Borrower. The payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest thereon and other fees and expenses due and owing to the date of prepayment. Any such prepayment of Tenn Loans shall be applied ratably, to the unpaid scheduled principal installments of such Loans in the inverse order of maturity thereof. (b) Upon receipt of a notice of prepayment pursuant to this Section 2.10, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share, if any, of such prepayment. SECTION 2.11 General Provisions as to Payments. Except as otherwise provided in Section 2.14(c), Borrower shall make each payment of principal of and interest on the Loans, -11- 17 of the Reimbursement Obligations and of fees or any other Obligations not later than 1:00 P.M. (St. Louis time) on the date when due (it being understood that interest shall accrue and be payable for such date on any amounts which are paid after 1:00 P.M. (St. Louis time)), in immediately available funds, without deduction, setoff or counterclaim to the Agent, the Issuing Bank or any Bank at the account of the Agent set forth in Annex A. By 2:00 P.M. (St. Louis time) on the date of receipt, the Agent will distribute to the Issuing Bank or each Bank (as applicable), in accordance with the terms of this Agreement, its ratable share of each such payment. Whenever any payment of principal of or interest on the LIBOR Loans shall be due on a day which is not a LIBOR Business Day, the date for payment thereof shall be extended to the next succeeding LIBOR Business Day unless such LIBOR Business Day falls in another calendar month, in which case the date for payment thereof shall be the immediately preceding LIBOR Business Day. Whenever any payment of any other Obligations shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for any payment of principal is extended as provided above or by operation of law or otherwise, interest thereon shall be payable for such extended time. Unless the Agent has received notice from Borrower prior to the date on which any payment is due to each Bank or the Agent hereunder that Borrower will not make such payment in full, the Agent may assume that Borrower has made such payment in full to the Agent on such date, and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent Borrower has not made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at a rate per annum equal to the Federal Funds Rate. In the event any payment received by the Agent and so paid to Banks is rescinded or must otherwise be returned by the Agent, each Bank shall, upon the request of the Agent, repay to the Agent the amount of such payment paid to such Bank, together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at a rate per annum equal to the Federal Funds Rate. SECTION 2.12 Funding Losses. If Borrower (i) makes any payment or prepayment of principal with respect to any LIBOR Loan, pursuant to Article 2 or otherwise, on any day other than the last day of the Interest Period applicable thereto, (ii) fails to borrow, pay or prepay any LIBOR Loans after notice has been given to any Bank in accordance with Section 2.2(b) or 2.10(b), (iii) defaults in making a Borrowing of, conversion into, or continuation of, LIBOR Loans after it has given a notice regarding same in accordance with the provisions of this Agreement, or (iv) converts or continues a LIBOR Loan, or converts a Base Rate Loan into a LIBOR Loan, in any event in this clause (iv) pursuant to Section 2.5 at any time other than at the end of (or in the case of a conversion to a Base Rate Loan, at the beginning of) the relevant Interest Period, then Borrower shall, subject to Section 10.8, pay to each Bank on demand an amount sufficient to compensate such Bank for any actual loss or expense incurred or sustained -12- 18 by it as a consequence of any thereof, which compensation shall include an amount equal to the greater of zero or [(B-C) x D x E]/360 wherein "B" is decimal equivalent of the London Interbank Offered Rate that is (or would be in the case of Borrower's failure to borrow after giving a Notice of Borrowing) payable by Borrower on such LIBOR Loan; "C" is the decimal equivalent of the Eurodollar rate that would apply to a hypothetical Eurodollar deposit in the Affected Principal Amount whose investment date were on the last Business Day on or before the first day of the Remaining Interest Period and whose Interest Period were approximately equal, as determined by the requesting Bank, to the Remaining Interest Period (it being agreed that in the event the Remaining Interest Period is not a 30, 60 or 90 day period, the requesting Bank shall determine the Eurodollar rate in its sole discretion); "D" is the number of days from the first day of the Remaining Interest Period to the last day of the Remaining Interest Period; "E" is the Affected Principal Amount. "Affected Principal Amount" shall mean, as applicable, (i) the principal amount of a LIBOR Loan that Borrower fails to take after having given a Notice of Borrowing therefor (unless such Notice of Borrowing has been withdrawn prior to becoming irrevocable) or (ii) the amount of any prepayment or repayment of a LIBOR Loan that occurs, or the entire principal amount of a LIBOR Loan that converts to another Type of Loan on a date which is not the last day of the Interest Period therefor. "Remaining Interest Period" shall mean, as applicable, (i) the entire Interest Period that would have been applicable to a LIBOR Loan that Borrower fails to take after having given a Notice of Borrowing therefor (unless such Notice of Borrowing has been withdrawn prior to becoming irrevocable) or (ii) if a prepayment or repayment on a LIBOR Loan occurs, or a LIBOR Loan converts to a Loan of another Type of Loan, whether or not required hereby, prior to the last day of the Interest Period therefor, the period from and including the date thereof to but excluding the last day of such Interest Period. If a Bank claims compensation under this Section 2.12, such Bank shall furnish a certificate to Borrower (with a copy to the Agent if it is not the Bank involved) that provides a detailed -13- 19 calculation of the amount to be paid to such Bank, which certificate shall be binding against Borrower, absent manifest error. SECTION 2.13 Sharing of Payments, etc. Each of the Agent and the Banks agrees that if it shall, whether through the exercise of rights under any Loan Document or rights of banker's lien, set-off, counterclaim or otherwise against Borrower or otherwise, obtain payment of a portion of the aggregate Obligations owed to it which, taking into account all distributions made by the Agent under this Agreement causes the Agent or such Bank to have received more than it would have received had such payment been received by the Agent and distributed pursuant to this Agreement, then (i) it shall notify the Agent and each of the other Banks, (ii) it shall be deemed to have simultaneously purchased and shall be obligated to purchase interests in the Obligations as necessary to cause the Agent and all Banks to share all payments as provided for herein, and (iii) such other adjustments shall be made from time to time as shall be equitable to ensure that the Agent and all Banks share all payments of Obligations as provided for herein; provided, however, nothing contained herein shall in any way affect the right of the Agent or any Bank to obtain payment (whether by exercise of rights of banker's lien, set-off, counterclaim or otherwise) of indebtedness other than the Obligations. Borrower expressly consents to the foregoing arrangements and agrees that any holder of any such interest or other participation in the Obligations, whether or not acquired pursuant to the foregoing arrangements, may to the fullest extent permitted by law exercise any and all rights of banker's lien, set-off or counterclaim as fully as if such holder were a holder of the Obligations in the amount of such interest or other participation. If all or any part of any funds transferred pursuant to this Section 2.13 is thereafter recovered from the seller under this Section 2.13 which received the same, the purchase provided for in this Section 2.13 shall be deemed to have been rescinded and the purchase price restored to the extent of such recovery, together with interest, if any, if interest is required pursuant to court order to be paid on account of the possession of such funds prior to such recovery. SECTION 2.14 Letters of Credit. (a) Subject to the terms and conditions hereof, the Revolving Commitments may be utilized, upon the request of Borrower, in addition to the Revolving Loans provided for in Section 2.1 hereof, by the issuance by the Issuing Bank of one or more Letters of Credit for the account of Borrower; provided, however, that no Letter of Credit may be issued if (i) after giving effect thereto (A) the Letter of Credit Exposure (including the amount of the requested Letter of Credit) would exceed the Letter of Credit Limit or (B) such Letter of Credit Exposure plus the aggregate outstanding principal balance of the Revolving Loans would exceed the Revolving Commitments of all Banks, and (ii) the expiration date thereof extends beyond the earlier of one year from issuance or 5 Business Days prior to the Revolving Commitment Termination Date. In addition to the applicable provisions of Article 3, all Letters of Credit shall be issued upon the request of Borrower on the terms and conditions set forth in this Section 2.14; and the provisions hereof that are applicable to the issuance of a Letter of Credit shall be correspondingly applicable to each renewal, extension or reissuance thereof, or amendment thereto. Upon the date of -14- 20 issuance by the Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Exposure, to the extent of such Bank's pro rata share of the Revolving Commitments of all Banks. Borrower hereby acknowledges and agrees to all such participations. (b) Borrower shall give the Agent and the Issuing Bank at least 5 Business Days' prior written notice specifying the date each Letter of Credit is to be issued and describing the proposed terms of such Letter of Credit, including without limitation, the date, face amount, beneficiary and expiry date thereof, the nature of the transactions proposed to be supported thereby and such other information as the Issuing Bank shall reasonably request, all in detail reasonably satisfactory to the Issuing Bank. Upon receipt of such notice, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's pro rata share of the amount of such proposed Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article 3, be subject to the conditions precedent that such Letter of Credit shall be in such form, contain such terms and support such transactions as shall be reasonably satisfactory to the Agent and the Issuing Bank, and that Borrower shall have executed and delivered a reimbursement agreement acceptable to the Issuing Bank, and such other instruments and agreements relating to such Letter of Credit as either the Agent or the Issuing Bank shall have reasonably requested. Each Letter of Credit shall, to the extent not inconsistent with the express terms hereof or the applicable Application, be such to the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (together with any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Bank (the "UCP")), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of Texas (other than conflict of law principles). (c) Borrower agrees to pay the following fees, by remittance to the Agent, in respect of Letters of Credit issued hereunder: (i) with respect to each Letter of Credit which is issued as a standby letter of credit, for the account of the Issuing Bank, a fee equal to $175.00; (ii) with respect to each Letter of Credit which is issued as a standby letter of credit, for the ratable account of the Banks, a fee equal to (x) the per annum rate of interest equal to the Applicable Margin in effect for Revolving Loans on the date of issuance multiplied by (y) the face amount of such Letter of Credit for the stated term of such Letter of Credit, adjusted for the actual days outstanding; (iii) with respect to each Letter of Credit which is issued as a commercial letter of credit, for the ratable account of the Banks, a fee in an amount equal to 1/4% multiplied by the face amount of each such Letter of Credit (subject to a minimum fee of $50.00 per each such Lender of Credit); and (iv) with respect to the negotiation of each Letter of Credit, for the account of the Issuing Bank, a fee equal to $50.00, each of the foregoing fees being non-refundable. The foregoing fees shall be due and payable as follows: (A) fees under clause -15- 21 (i) above shall be due and payable upon issuance of the Letter of Credit; (B) fees under clause GO above shall be due and payable quarterly in advance on each Quarterly Date with respect to the portion of the stated term of the Letter of Credit covered by the next succeeding calendar quarter; and (C) fees under clauses (iii) and (iv) shall be due and payable upon negotiation of the Letter of Credit. The foregoing fees are distinct from, and in addition to, interest on the Notes and Loans, if any, made in respect of the Letters of Credit, and fees and other amounts otherwise provided herein. (d) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the Issuing Bank shall promptly notify Borrower, the Agent and each Bank of Borrower's Reimbursement Obligations as a result of such demand and the date on which any payment is to be made to such beneficiary in respect of such demand. Borrower shall, by 1:00 P.M. (St. Louis time) on the date on which a drawing is to be made, reimburse the Issuing Bank for any amount paid or to be paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or further notice or other formalities of any kind, in an amount, in same day funds, and the unpaid balance of such amount from time to time remaining outstanding and unpaid after each such drawing shall accrue interest, until paid in full, at the Default Rate, which interest shall be due and payable on demand, or if demand is not sooner made, then on the Quarterly Date next following such drawing and, if applicable, on each Quarterly Date thereafter. (e) If, by 1:00 P.M. (St. Louis time) on the day on which a drawing is to be made or is made, Borrower fails to reimburse the Issuing Bank as provided in Section 2.14(d), for whatever reason, the Issuing Bank shall promptly notify the Agent, and the Agent shall promptly notify each Bank of the unreimbursed amount of such drawing and of such Bank's respective pro rata portion thereof. On the date of such notice (or if such notice is given after 1:00 P.M. (St. Louis time) on such date, on the next succeeding Business Day), each Bank agrees, without regard to the existence of a Default or Event of Default, to pay to the Issuing Bank, an amount equal to such Bank's pro rata portion of such unreimbursed amount, together with interest on such amount for each day from the date the Issuing Bank pays such draw to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate for such period. The Issuing Bank shall pay to each Bank such Bank's pro rata portion of all amounts received from Borrower for payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant to this Section 2.14(e). (f) Reimbursement Obligations of Borrower in respect of the Letters of Credit shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, without limitation, the following circumstances: -16- 22 (1) any lack of validity or enforceability of any Letter of Credit, or any agreement or instrument related thereto, or any other Loan Documents; (2) any amendment or waiver of, or any consent to departure from, the terms of any Letter of Credit or any other Loan Document, without the express prior written consent of the Issuing Bank and the Required Banks; (3) the existence of any claim, set-off, defense or other rights which Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), any Bank or any other Person, whether in connection with such Letter of Credit, this Agreement, any other Loan Document or any agreement or instrument related thereto, the transactions contemplated herein, or any unrelated transaction; (4) any statement, draft, certificate, demand or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (5) payment by the Issuing Bank under any Letter of Credit against presentation of a draft, demand, certificate or other document which appears on its face to comply but does not in fact comply with the terms of such Letter of Credit; (6) any material adverse change in the financial condition of Borrower; (7) any breach of any Loan Document by Borrower or any other Person; or (8) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. (g) IN ORDER TO INDUCE THE ISSUANCE OF LETTERS OF CREDIT BY THE ISSUING BANK, (1) BORROWER AGREES THAT THE ISSUING BANK SHALL NOT BE RESPONSIBLE OR LIABLE FOR, AND BORROWER'S OBLIGATIONS HEREUNDER AND UNDER EACH OTHER LOAN DOCUMENT WITH RESPECT TO THE LETTERS OF CREDIT SHALL NOT BE AFFECTED BY, ANY CIRCUMSTANCE, ACT OR OMISSION WHATSOEVER (WHETHER OR NOT KNOWN TO THE ISSUING BANK) OTHER THAN A CIRCUMSTANCE, ACT OR OMISSION CAUSED SOLELY BY AND RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE ISSUING BANK, AS DETERMINED BY A COURT OF COMPETENT JURISDICTION, AND (II) BORROWER ASSUMES ALL RISK OF THE ACTS OR OMISSIONS OF THE BENEFICIARY OR ANY TRANSFEREE OF ANY LETTER OF CREDIT WITH RESPECT TO THE USE OF SUCH LETTER OF CREDIT. NETHER THE ISSUING BANK NOR ANY OF ITS AFFILIATES, NOR ANY OF ITS OR THEIR OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS, -17- 23 DIRECTORS OR INSURERS, OR ANY OF ITS OR THEIR SUCCESSORS ASSIGNS, HEIRS AND LEGAL REPRESENTATIVES (COLLECTIVELY, THE "ISSUING BANK PARTIES") SHALL BE LIABLE OR RESPONSIBLE FOR: (1) VALIDITY, SUFFICIENCY OR GENUINENESS OF CERTIFICATES OR OTHER DOCUMENTS, OR OF ANY ENDORSEMENTS THEREON, EVEN IF SUCH CERTIFICATES OR OTHER DOCUMENTS SHOULD IN FACT PROVE TO BE IN ANY OR ALL RESPECTS INVALID, INSUFFICIENT, FRAUDULENT OR FORGED; (2) ERRORS, OMISSIONS, INTERRUPTIONS OR DELAYS IN TRANSMISSION OR DELIVERY OF ANY MESSAGES OR ADVICES BY MAIL, TELEX OR OTHERWISE, WHETHER OR NOT THEY BE IN CODE; (3) ERRORS IN TRANSLATION OR FOR ERRORS IN INTERPRETATION OF FOREIGN, TECHNICAL INDUSTRY-SPECIFIC TERMS; (4)THE USE THAT MAY BE MADE OF ANY LETTER OF CREDIT OR FOR ANY ACTS OR OMISSIONS OR THE BENEFICIARY AND ANY TRANSFEREE IN CONNECTION THEREWITH; (5) PAYMENT BY THE ISSUING BANK AGAINST PRESENTATION OF DOCUMENTS THAT DO NOT COMPLY WITH THE TERMS OF ANY CORRESPONDING LETTER OF CREDIT, INCLUDING FAILURE OF ANY DOCUMENTS TO BEAR ANY REFERENCE OR ADEQUATE REFERENCE TO SUCH LETTER OF CREDIT; (6)ANY CONSEQUENCE ARISING FROM CAUSES BEYOND THE CONTROL OF THE ISSUING BANK; AND(7)ANY OTHER CIRCUMSTANCES WHATSOEVER IN MAKING OR FAILING TO MAKE PAYMENT UNDER ANY LETTER OF CREDIT; EXCEPT ONLY THAT BORROWER SHALL HAVE A CLAIM AGAINST THE ISSUING BANK, AND THE ISSUING BANK SHALL BE LIABLE TO BORROWER, TO THE EXTENT, BUT ONLY TO THE EXTENT, OF ANY DIRECT, AS OPPOSED TO CONSEQUENTIAL, SPECIAL, INDIRECT OR PUNITIVE DAMAGES SUFFERED BY BORROWER WHICH BORROWER PROVES WERE CAUSED BY THE FAILURE OF THE ISSUING BANK TO DETERMINE WHETHER ANY DRAFT, CERTIFICATE OR OTHER DOCUMENT PRESENTED UNDER ANY LETTER OF CREDIT APPEARED ON ITS FACE TO COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT. IN FURTHERANCE OF THE FOREGOING, AND NOT IN LIMITATION THEREOF, THE ISSUING BANK MAY ACCEPT CERTIFICATES OR OTHER DOCUMENTS THAT APPEAR ON THEIR FACE TO BE IN ORDER, WITHOUT RESPONSIBILITY FOR FURTHER INVESTIGATION. NONE OF THE FOREGOING SHALL AFFECT, IMPAIR OR PREVENT THE VESTING OF ANY OF THE RIGHTS AND POWERS OF THE ISSUING BANK, THE AGENT OR ANY BANK HEREUNDER FOR ANY OF THE AGREEMENTS ENTERED INTO BY BORROWER WITH RESPECT TO ANY LETTER OF CREDIT, ALL OF WHICH RIGHTS SHALL BE CUMULATIVE. IN FURTHERANCE AND NOT IN LIMITATION OF THE FOREGOING PROVISIONS, BORROWER AGREES THAT ANY ACTION TAKEN BY THE ISSUING BANK (INCLUDING AS A RESULT OF ITS OWN NEGLIGENCE) WITHOUT GROSS NEGLIGENCE OR WILLFUL MISCONDUCT UNDER OR IN CONNECTION WITH ANY LETTER OF CREDIT, OR ANY RELATED DRAFTS, CERTIFICATES, DOCUMENTS OR INSTRUMENTS, SHALL BE BINDING, ABSOLUTELY, -18- 24 IRREVOCABLY AND UNCONDITIONALLY, ON BORROWER AND SHALL NOT PUT THE ISSUING BANK UNDER ANY RESULTING LIABILITY TO BORROWER, AND BORROWER MAKES LIKE AGREEMENT AS TO ANY INACTION OR OMISSION, UNLESS WITH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. BORROWER ACKNOWLEDGES AND AGREES THAT THE FOREGOING PROVISIONS OF THIS SUBSECTION 2.14(G) ARE INTENDED TO RELEASE THE ISSUING BANK FROM ANY OBLIGATION OR LIABILITY RESULTING FROM, OR ATTRIBUTABLE TO, ANY ISSUING BANK, UNDER, OR IN CONNECTION WITH, ANY LETTER OF CREDIT. SECTION 2.15 Pro Rata Treatment. Except as required under Section 2.6(b), Section 2.6(c), Section 2.12, Section 2.14(c), Section 2.14(d) and Article 9, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the fees, each termination or reduction of the Commitments, and each refinancing of any Borrowing with, conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type, shall be allocated ratably and pro rata among the Banks in accordance with their respective Commitments. Each Bank agrees that in computing such Bank's portion of any Borrowing to be made hereunder, the Agent may, in its discretion, round each Bank's portion of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.16 Proceeds of Loans. Subject to the terms of this Agreement, the proceeds of the Loans and the Letters of Credit shall be used for accounts receivable and inventory financing, new store opening costs, expansion costs of existing stores and other general corporate purposes of Borrower. Article 3 CONDITIONS SECTION 3.1 Initial Loans on the Closing Date. The obligations of the Banks to make any Loan, or of the Issuing Bank to issue any Letter of Credit, on the Closing Date are subject to the conditions precedent that on or before the Closing Date, the Agent shall have received, there shall have been performed and there shall exist, the documents, actions and other matters set forth in Annex C hereto, each in form, scope and substance, and (as applicable) dated as of a date, satisfactory to the Agent and its counsel. SECTION 3.2 All Loans, Conversions/Continuations and Letters of Credit. The obligations of the Banks to make each Loan or to continue any Loan as, or to convert any Loan into, a LIBOR Loan or a Base Rate Loan, or of the Issuing Bank to issue any LeTter of Credit, are subject to, in addition to the conditions referred to in Section 3.1, the satisfaction of the Agent as to the following conditions precedent: -19- 25 (a) Representations True and No Defaults. (i) To Borrower's knowledge, the representations and warranties contained and referred to in Article 4 (other than those representations and warranties limited by their terms to a specific date) shall be true, complete and accurate in all material respects on and as of the date of the Credit Event as though made on and as of such date; (ii) no event shall have occurred since the date of the most recent financial statements delivered pursuant to Section 5.1 (or in the case of a Credit Event prior to the delivery of such statements, September 30, 1994), that has caused a Material Adverse Effect; and (iii) no Event of Default or Default shall have occurred and be continuing. (b) No Material Adverse Change. As of the date of the Credit Event, no change or event that might cause a Material Adverse Effect shall have occurred. (c) Borrowing/Letter of Credit Documents. Other than a continuation or conversion pursuant to Section 2.5, the Agent shall have received (i) a certificate signed by an Authorized Officer dated as of such date to the effects set forth in Section 3.2(a), (ii) a Notice of Borrowing delivered in accordance with Section 2.2(a) or a notice requesting a Letter of Credit delivered in accordance with Section 2.14(b), as the case may be, and (iii) such other documents and certificates relating to the transactions herein contemplated as the Issuing Bank or Banks, as applicable (through the Agent), may reasonably require. (d) Continuation/Conversion Documents On the date of any continuation or conversion pursuant to Section 2.5, the Agent shall have received (i) a certificate executed by an Authorized Officer dated as of such date to the effects set forth in Section 3.2(a), (ii) a Continuation/Conversion Notice delivered in accordance with Section 2.5(b), and (iii) such other documents and certificates relating to the transactions herein contemplated as the Banks (through the Agent) may reasonably require. ARTICLE 4 REPRESENTATIONS AND WARRANTIES To induce each of the Agent, the Issuing Bank and the Banks to enter into and perform its agreements pursuant to this Agreement, including, without limitation, the making of the Revolving Loans and Term Loans and the issuance of Letters of Credit, Borrower (i) makes and reaffirms to each of the Agent, the Issuing Bank and the Banks each of the representations and warranties contained in each Loan Document, and (ii) without duplication, represents and warrants to each of the Agent, the Issuing Bank and the Banks that, at the time of execution hereof and the transactions contemplated hereby and as of each of the dates of each of the financial statements required to be delivered, from time to time, pursuant to Section 5.1: SECTION 4.1 Entity Status, Power and Authority. Borrower is a corporation duly organized and validly existing in good standing under the laws of the State of Texas and is duly -20- 26 qualified as a foreign corporation and in good standing in all states in which the failure to be so qualified could have a Material Adverse Effect, all of which jurisdictions are set forth in Schedule 4.1 hereto. Borrower has the corporate power and authority and all Legal Rights which are necessary (i) to own, lease, use and operate its Property and to transact its business as now being and as proposed to be conducted and (ii) to execute and deliver each Loan Document, perform and comply with all obligations and agreements thereunder and consummate the transactions contemplated thereby. SECTION 4.2 Authorization; Consents. The execution, delivery and performance by Borrower of each Loan Document, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary corporate and other action by, on behalf of, and with respect to, Borrower, and no consent, approval, authorization, declaration, filing, order or other action by, on behalf of, or with respect to, Borrower is required of, or from, any Governmental Authority or other Person in connection with any of such execution, delivery or performance, or the validity or enforceability of any Loan Document against Borrower or any Property covered thereby which has not been obtained and is final and in full force and effect. SECTION 4.3 No Conflicts. Neither the execution or delivery of any Loan Document, nor the consummation of any transaction contemplated therein, nor the performance of, or compliance with, any of the terms and provisions thereof, does or will (i) conflict with, or result in or constitute a breach, violation or default of, or require a consent under, (A) any provision of Law to which Borrower or any of its Property is subject or bound, (B) any judgment or Legal Right applicable to Borrower or any of its Property, (C) any lease, indenture, loan agreement, note, purchase or acquisition agreement, mortgage, deed of trust or other agreement or instrument to which Borrower is a party or by which it or any of its Property may be bound or subject, or (D) any provision of the charter or bylaws of Borrower, or (ii) result in the creation or imposition of any Lien or Negative Pledge upon Borrower or any of its Property, except for the benefit of the Agent, the Issuing Bank and the Banks. SECTION 4.4 Enforceable Obligations; Lien Establishment. Each Loan Document has been duly executed and delivered by Borrower and constitutes the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with its respective terms. SECTION 4.5 Title to Properties. Borrower has good and indefeasible title to, or valid leasehold interests in, as applicable, all of its Property, free and clear of all Liens (except Permitted Liens), Negative Pledges and any other adverse claims of any nature, except any of the foregoing which are for the benefit of the Agent, the Issuing Bank and the Banks. Except as set forth in Schedule 4.5, there are no financing statements, lien instruments, abstracts of judgment, levies, executions or other filings of record in any jurisdiction naming Borrower as "debtor", "mortgagor", "obligor" or the like, or covering any Property of Borrower, except (i) those evidencing Permitted Liens and (ii) those which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. -21- 27 SECTION 4.6 Financial Condition. (a) Financial Statements. Borrower has delivered to the Agent copies of the audited balance sheet of Borrower as of January 31, 1994, and the related statements of income, stockholders' equity and cash flows for the year ended on such date, with reports thereon by KPMG Peat Marwick, its independent public accountants, and unaudited copies of such financial statements of Borrower for the monthly period ended September 30, 1994. Such financial statements (together with related schedules and notes, the "Financial Statements") are true, complete and accurate in all material respects, fairly present the financial condition of Borrower as of the respective dates thereof and have been prepared in accordance with GAAP applied throughout the periods covered thereby, subject to normal year-end audit adjustments. As of the date hereof, Borrower has no (i) obligations, liabilities or other Indebtedness (including Guarantees) or (ii) Investments in any Person which are (separately or in the aggregate) not reflected in such Financial Statements; and there has been no material adverse change in the financial condition, management, control, operations, business or prospects of Borrower or its Property (as applicable) since the date of the Financial Statements. Without limiting the foregoing, the Banks recognize that the above described interim financial statements of Borrower do not include full footnote disclosures that are included in the year-end financial statements of Borrower. (b) Solvency. Upon giving effect to the issuance of each Note (and the incurrence of the Indebtedness thereunder), the execution, delivery and performance of each Loan Document by Borrower, and the consummation of the transactions contemplated thereby, the following are and will be true, complete and accurate in all material respects: (i) the fair saleable value of the assets of Borrower exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of Borrower, as they mature; (ii) the assets of Borrower do not constitute unreasonably small capital for Borrower to carry out its business as now conducted and as proposed by it to be conducted; (iii) Borrower does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by Borrower, and of amounts to be payable on or in respect of debt of Borrower); and (iv) Borrower does not intend, nor believe, that final judgments against it in actions for money damages will be rendered at a time when, or in an amount such that, it will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered). -22- 28 SECTION 4.7 Full Disclosure. There is no fact that Borrower has not disclosed to the Banks which might reasonably be expected to have a Material Adverse Effect. Neither the financial information referenced in Section 4.6(a) nor any certificate, report, exhibit, schedule, statement, disclosure letter or other information furnished to the Agent or any Bank by, or on behalf of, Borrower, whether heretofore or herewith, in connection with the negotiation, preparation, execution, delivery or consummation of this Agreement and the other Loan Documents, or included therein or delivered pursuant thereto, contains any untrue statement of a material fact or omits or omitted to state any material fact necessary to make and keep the statements contained herein or therein from being misleading. All information furnished after the date hereof by or on behalf of Borrower shall be true, complete and accurate in all material respects. SECTION 4.8 No Default or Adverse Condition. No event has occurred and is continuing which constitutes a Default or an Event of Default, and there exists no event, circumstance, condition or casualty (whether or not covered by insurance) which could have a Material Adverse Effect. SECTION 4.9 Material Agreements; Insurance. Borrower is not in default under, or in violation or breach of (nor has any event or circumstance occurred which, but for the passage of time or the giving of notice, or both, would constitute a default under, or a violation or breach of), (i) its charter, bylaws or other internal governance document, (ii) any Judgment affecting it or any of its Property, or (iii) any partnership agreement or any material indenture promissory note, contract, lease, purchase or acquisition agreement, loan agreement, mortgage, deed of trust, security agreement, license, permit, franchise or other material agreement or obligation to which it is a party or by which it or any of its Property is bound. Attached hereto as Schedule 4.9 is a complete and correct list of all of Borrower's material patents, trademarks, tradenames, copyrights and service marks and all applications, registrations and licenses relating thereto. Borrower is not a party to, or bound by, any futures contract, forward agreement or contract, interest rate swap contract, commodity price swap contract or other hedging agreement or material contract or agreement. Borrower maintains insurance in compliance with Section 5.10. SECTION 4.10 No Litigation. Except as set forth on Schedule 4.10 (and therein designating which of the following clauses (i) through (iv) is applicable thereto), as of the date hereof, there is no Litigation or Judgment pending, or to the knowledge of Borrower threatened, against, affecting or challenging (as applicable) (i) any Property of Borrower, including, without limitation, Borrower's sole legal and beneficial title therein and all Legal Rights with respect thereto, (ii) the validity or enforceability of any Loan Document, (iii) the ability of Borrower to enter into, execute, deliver and perform its obligations under each Loan Document to which it is a party as provided therein, and otherwise to consummate the actions and transactions contemplated thereby, (iv) Borrower which, if adversely determined, could reasonably be expected to result in a Judgment, individually or when aggregated with all other Judgments, (A) -23- 29 for the payment of money in excess of $1,000,000 (regardless of insurance coverage) or (B) for the forfeiture of any Legal Rights of Borrower (other than of a trivial or non-consequential nature), or (v) Borrower, or any of its Property or Legal Rights, which might otherwise have a Material Adverse Effect. SECTION 4.11 Use of Proceeds; Margin Stock. The proceeds of the Loans and each Letter of Credit will be used solely as provided in Section 2.16, and none of such proceeds will be used (i) for the purpose of purchasing or carrying any "margin stock" as defined in Regulations G, T, U or X, (ii) for the purpose of maintaining, reducing or retiring any Indebtedness which Was originally incurred to purchase or carry a "margin stock", or (iii) for any other purpose which might constitute this transaction a "purpose credit" within the meaning of Regulations G, T, U or X. Borrower is not engaged in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying "margin stock". Neither Borrower nor any Person acting on behalf of Borrower has taken or will take any action which might cause any of the Loan Documents to violate Regulations G, T, U or X, or any other regulations of the Board of Governors of the Federal Reserve System or to violate the Exchange or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. SECTION 4.12 No Financing of Regulated Corporate Takeovers. No proceeds of the, Loans will be used to acquire any security in any transaction which is subject to Sections 13 or 14 of the Exchange Act, including particularly Sections 13(d) and 14(d) thereof. SECTION 4.13 Taxes. Borrower has filed all returns, reports, statements and filings with respect to all Taxes, deductions and withholdings required to be filed by Borrower; all such returns, reports, statements and filings are true, complete and accurate in all material respects; and all Taxes, deductions and withholdings with respect to Borrower or any of its Property have been paid prior to the time that such Taxes, deductions or withholdings could give rise to a Lien thereon, except for those being diligently contested in good faith by appropriate proceedings and for which any reserves required under GAAP have been established by Borrower. Except as set forth on Schedule 4.13, to Borrower's knowledge, (i) no tax or similar Lien has been filed on, or is being enforced against, Borrower or any of its Property, and no United States Federal income tax returns of Borrower have ever been and are not now being, examined or audited, and (ii) there is no proposed-Tax assessment against Borrower or any of its Property, and there is no basis for any such assessment. SECTION 4.14 Principal Office; Names; Primary; Business. The actual and anticipated principal place of business of Borrower, or if it has more than one such place, its chief executive office, is shown in Schedule 4.14, and Borrower intends to maintain its principal records and books at such office. Schedule 4.14 also lists the address of each location at which Borrower operates or conducts its business or maintains or stores any of its equipment, inventory or other Property. Except as set forth on Schedule 4.14, Borrower (i) has not conducted within -24- 30 the last 5 years and is not now conducting and does not currently have any plans to hereafter conduct, and has not owned within the last 5 years and is not now owning and does not currently have any plans to hereafter own, any material business, operations or Property in any name other than "Hastings Books, Music & Video, Inc." or any other name which includes the word "Hastings", and (ii) has not, within the last 5 years, merged into, consolidated with, or acquired, and has no current plans to merge into, consolidate with or acquire, any Person. The primary business of Borrower is the retail sale of entertainment products, including music products, including tapes, compact discs, prerecorded video tapes, records and accessories, as well as the retail sale of books and the retail rental of prerecorded video tapes. SECTION 4.15 Subsidiaries. Borrower does not have any Subsidiaries and is not a general or limited partner in any Person, except as set forth in Schedule 4.15, which lists as to each Subsidiary or general or limited partnership interest: (i) name of entity; (ii) jurisdiction of incorporation or organization; (iii) foreign qualification; (iv) share/percentage/nature ownership; and (v) primary business. Except as set forth in Schedule 4.15, there are no outstanding warrants, options, rights, contracts or commitments of Borrower of any kind entitling any one or more Persons to purchase or otherwise acquire (A) in excess of an aggregate of 30,000 shares of capital stock of Borrower or (B) any securities convertible into or exchangeable for in excess of an aggregate of 30,000 shares of capital stock of Borrower. SECTION 4.16 ERISA. No Reportable Event, (as defined in Section 4043(b) of ERISA) to which the notice requirement has not been waived has occurred with respect to any Plan. Each Plan complies with all applicable provisions of ERISA, and Borrower has filed a reports required by ERISA and the Code to be filed with respect to each Plan. Borrower does not have knowledge of any event which could result in a liability of Borrower to the PBGC. Borrower has met all requirements with respect to funding the Plans imposed by ERISA or the Code. Since January 1, 1986, there have not been any, nor are there now existing any events or conditions that would permit, termination of any Plan under circumstances which would cause the Lien provided under Section 4068 of ERISA to attach to any Property of Borrower. The value of the Plans' liabilities as defined in Section 4001(a)(16) of ERISA on the date hereof does not exceed the value of such Plans' assets allocable to such benefits as of the date of this Agreement by more than $500,000.00 and shall not be permitted to do so hereafter. No existing Plan is a multiemployer plan (as defined in Section 3(37) of ERISA) and Borrower has not made a complete or partial withdrawal from any such multiemployer plan so as to incur withdrawal liability as defined in Section 4201 of ERISA. SECTION 4.17 Compliance with Law. Borrower has complied in all material respects with, and is in compliance in all material respects with, all Laws applicable to it and its Property, including Environmental Laws and the provisions of the Fair Labor Standards Act of 1938, 29 U.S.C. Section 200, et seq., as amended, including specifically, but without limitation, 29 U.S.C. Section 215(a). -25- 31 SECTION 4.18 Government Regulation. Borrower is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act (as any of the preceding acts have been amended), or any other Law which regulates either the incurring by Borrower of Indebtedness or the determination or setting of, or changes to, the rates or amounts charged by Borrower for the goods or products it sells or the services it performs, including Laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services. Borrower is not (i) an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and Borrower is not "controlled" by such a company, or (ii) a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended, and is not a "subsidiary company" or an "affiliate" of any such company. SECTION 4.19 Insider. Borrower is not, and no Person having "control" (as that term is defined in 12 U.S.C. Section 375(b)(5) or in regulations promulgated pursuant thereto) of Borrower is, an "executive officer", "director" or "principal shareholder" (as those terms are defined in 12 U.S.C. Section 375(b) or in regulations promulgated pursuant thereto) of any Bank, of a bank holding company of which any Bank is a Subsidiary, or of any Subsidiary of a bank holding company of which any Bank is a Subsidiary. SECTION 4.20 Certain Environmental Matters. Except as disclosed in Schedule 4.20, and after reasonable inquiry made by or on behalf of Borrower, (i) Borrower (A) is not aware of, and has not received notice or otherwise learned of, any Environmental Complaint or Environmental Liability which could individually or in the aggregate have a Material Adverse Effect, (B) has no threatened or actual liability (contingent, direct or otherwise) in connection with the release or threatened release, generation, handling, treatment, storage, disposal or transportation of any Hazardous Material, or other substance which could individually or in the aggregate have a Material Adverse Effect, (C) is not aware of, and has not received notice or otherwise learned of, any federal or state investigation evaluating whether any remedial action is needed to respond to a release or threatened release, and/or the generation, handling, treatment, storage, disposal or transportation of any Hazardous Material for which Borrower is or may be liable, which could individually or in the aggregate have a Material Adverse Effect, (D) is not in violation of any Judgment or Litigation based upon Environmental Laws, or subject to any such Judgment or Litigation, which could individually or in the aggregate have a Material Adverse Effect, (E) has, in full force and effect, all material permits, licenses, approvals and other authorizations necessary for the use and operation of its Property, including, the generation, handling, treatment, storage, disposal, transportation or release of any Hazardous Material, and (F) is in compliance with all Environmental Laws, except to the extent the failure to so comply could not reasonably be expected to have a Material Adverse Effect or to result in any Environmental Liability that could reasonably be expected to have a Material Adverse Effect; and (ii) all Properties of Borrower are free from any Hazardous Material and Environmental Liens which could individually or in the aggregate have a Material Adverse Effect. There have been -26- 32 no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or on behalf of, or which are in the possession or knowledge of, Borrower, or any of Borrower's predecessors, in relation to any Property now or previously owned or leased by Borrower, or any of Borrower's predecessors, which have not been (y) made available to any Bank or its agents, employees or contractors and (z) listed in Schedule 4.20. Borrower has not received a notice of any Environmental Liability, Environmental Lien or Environmental Complaint other than those which have been provided to the Agent and listed in Schedule 4.20. SECTION 4.21 Insurance:Certifications. The insurance certificates delivered pursuant to Section 3.1 are true, complete and accurate in all material respects, and the insurance coverage set forth therein complies in all regards with the requirements set forth in Section 5.10. In furtherance of the foregoing, but not in limitation thereof, and in furtherance of all other matters as to which certifications are required pursuant to Section 3.1, all matters certified to by each and every Person which were evidenced by certificates and certifications referred to in Section 3.1 were true, complete and accurate in all material respects, as so certified and received by the Agent, the Issuing Bank and each Bank, as of the Closing Date and were certified by officers of Borrower, each of whom was authorized to execute and deliver such certificate for and on behalf of Borrower. ARTICLE 5 AFFIRMATIVE COVENANTS Until payment in full of the Notes, the payment and performance of all other Obligations, and the expiration and termination of all Letters of Credit, and so long as the Banks have any obligation hereunder to make any Loans or the Issuing Bank has any obligation to issue any Letters of Credit, Borrower agrees that it will punctually and completely perform and observe each of the following covenants: SECTION 5.1 Financial Statements, Reports and Documents. Borrower shall deliver the following to the Agent, in form, substance and scope satisfactory to Agent and otherwise as provided herein: (a) Quarterly Statements. As soon as available, and in any event within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year so long as Borrower remains a privately held corporation or in any event within 50 days after the end of each Fiscal Quarter if Borrower becomes a public company subject to the reporting requirement of the Exchange Act, copies of the statements of income, stockholders' equity and cash flow of Borrower for such quarter and for the portion of the Fiscal Year ending with such quarter, and the related balance sheet as at the end of such period, in each case setting forth in comparative form the corresponding figures for the corresponding periods of the preceding Fiscal Year, all in -27- 33 reasonable detail and certified by the president, chief financial officer or controller as being true, complete and accurate in all material respects, as fairly presenting the financial condition and results of operations of Borrower for the periods therein covered, and as having been prepared in accordance with GAAP, subject to normal year-end audit adjustments; (b) Annual Statements. As soon as available, and in any event within 120 days after the end of each Fiscal Year so long as Borrower remains a privately held corporation or in any event within 95 days after the end of each Fiscal Year if Borrower becomes a public company subject to the reporting requirement of the Exchange Act, copies of the audited statements of income, stockholders' equity and cash flow of Borrower for such Fiscal Year, and the related balance sheet of Borrower as at the end of such Fiscal Year, in each case setting forth in comparative form the corresponding figures for the preceding Fiscal Year, all in reasonable detail and accompanied by (i) an unqualified opinion of KPMG Peat Marwick or other independent public accountants of recognized national standing selected by Borrower and reasonably satisfactory to the Banks, to the effect that such financial statements have been prepared in accordance with GAAP, and fairly present the financial condition and results of operations of Borrower, as at the end of, and for, such Fiscal Year, and (ii) a certificate executed by the president, chief financial officer or controller to the same effect as such opinion; (c) Audit, Management and Other Reports. Promptly upon receipt thereof, a copy of each written report submitted to Borrower by independent accountants in any annual, quarterly or special audit, review or examination; (d) Compliance Certificate. Concurrently with the delivery of the financial statements delivered pursuant to Sections 5.1(a) and (b), respectively, a certificate in the form of Exhibit E, executed by the president, chief financial officer or controller, (i) stating that a review of the activities of Borrower during such period has been made under such officer's supervision and that to the knowledge of such officer, Borrower has observed, performed and fulfilled each and every obligation and covenant contained in each Loan Document to which it is a party and is not in Default under any Loan Document to which it is a party, or, if any such Default has occurred, specifying the nature and status thereof, and (ii) setting forth in reasonable detail the computation and information necessary to determine whether Borrower is in compliance with Section 6.1 as of the end of the respective Fiscal Quarter or Year, as applicable; (e) Accountant's Certificate. Concurrently with the delivery of the financial statements delivered pursuant to Section 5.1(b), a certificate of the accountants who audited such financial statements and rendered the related opinion, stating that they have reviewed this Agreement and each other relevant Loan Document, and stating further whether, in making their audit, such accountants have become aware of any condition or event which would constitute a Default or Event of Default, and if any such condition or event then exists, specifying the nature and period of existence thereof; -28- 34 (f) Insurance Reports. Within 30 days after any significant change in insurance coverage by Borrower, a report describing such change; and, with the annual financial statements furnished to the Agent under Section 5.1(b), a report describing the insurance coverage of Borrower; (g) Litigation Reports. With the annual financial statements furnished to the Agent under Section 5.1(b), reports by counsel to Borrower describing all Litigation affecting Borrower or any of its Property; and if a significant change in Litigation occurs or additional Litigation is threatened or commenced during a Fiscal Quarter, with the quarterly financial statements furnished to the Agent under Section 5.1(a) for such Fiscal Quarter, reports by counsel to Borrower describing such changes in or additions to Litigation since the date of the Litigation report most recently furnished to the Agent; (h) Environmental Notices. Notice to the Agent, in writing, promptly upon Borrower's receipt of notice or otherwise learning (whichever first occurs) from any Person of any (i) Environmental Complaint or Environmental Lien or (ii) any other claim, demand, action, event, condition, report or investigation indicating any potential or actual liability (A) upon which any Environmental Liability or Environmental Lien could result against Borrower, any Bank or any Property of Borrower, or (B) arising in connection with (1) the non-compliance with, or violation of, the requirements of any Environmental Law, (2) the release or threatened release, generation, treatment, handling, storage, disposal or transportation of any Hazardous Material into the environment or which act, occurrence or event Borrower would have a duty to report to a Governmental Authority under an Environmental Law, or (3) the existence of any Environmental Lien on any Property of Borrower; and Borrower shall immediately deliver a copy of each such notice to the Agent; (i) Supplemented Schedules. As soon as possible, and in any event within 15 days after Borrower obtains knowledge thereof, Borrower shall provide the Agent with a supplement to any existing Schedule which would make such Schedule (and any subsequent supplement thereto), and the corresponding representation and warranty to which it applies, true, complete and accurate in all material respects; provided, however, any such supplement shall not be deemed to have amended any Schedule to this Agreement unless and until the Banks have approved such amendment; and (j) Other Information. Within such period reasonably prescribed by the Agent, such other information concerning the business, operations, Property or financial condition of Borrower as any Bank (through the Agent) shall reasonably request. SECTION 5.2 Payment of Taxes and Other Liabilities. Borrower will pay and discharge when due, but in no event, later than 60 days following the date when due, all trade payables, royalties, license fees, franchise fees, operating costs and expenses, and similar expenses and obligations related to its operations, except for Contested Claims; and, except for Contested -29- 35 Claims, Borrower will timely pay and discharge when due (i) all Taxes, deductions and withholdings, (ii) all other material lawful claims against it or any of its Property, and (iii) all of its other material Indebtedness, obligations and liabilities. SECTION 5.3 Maintenance of Existence and Rights: Conduct of Business. Borrower will preserve and maintain its existence and all of its Legal Rights necessary or desirable in the ordinary course of its business and conduct and the ownership, maintenance and operation of its Property, and conduct its business in an orderly and efficient manner consistent with good business Practices and industry standards and in accordance with all Laws, except where the failure to so preserve, maintain or conduct would only result in a trivial and inconsequential effect. In addition, Borrower will act prudently and in accordance with customary industry standards and with its contractual obligations, in managing and operating its Property, business and investments and will keep in good working order and condition, ordinary wear and tear excepted, all of its Property and Legal Rights which are necessary or desirable to the conduct of its business and the ownership and maintenance of its Property. SECTION 5.4 Notice of Default. As soon as possible, but in any event within 5 Business Days of becoming aware thereof, Borrower shall furnish to the Agent written notice of the existence of any condition or event which constitutes or would become a Default or an Event of Default, which notice shall specify the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. SECTION 5.5 Other Notices. As soon as possible, but in any event within 5 Business Days of becoming aware thereof, Borrower will promptly notify the Agent of (i) any material adverse change in the financial condition, operations, Property or business of Borrower, (ii) any default under, or any threatened or actual acceleration of the maturity of, any Indebtedness owing or secured by Borrower (or any of its Property), which individually or in the aggregate represents a monetary obligation of $1,000,000 or more, or one with respect to which a default thereunder might have a Material Adverse Effect, (iii) any default or event of default under one or more leases pertaining to one or more locations at which Borrower operates or conducts any of its business or stores any of its Property, if such event could individually or in the aggregate have a Material Adverse Effect, (iv) any significant adverse claim against or affecting Borrower or any of its Property, and (v) the commencement of, and/or any material determination in, any Litigation which could reasonably be expected to result in a Judgment in excess of $1,000,000 (without regard to insurance coverage). In respect to each of the foregoing notices, Borrower will promptly provide to the Agent all reasonably related information requested by the Agent, in reasonable detail satisfactory to the Agent. SECTION 5.6 Compliance with Loan Documents. Borrower will promptly and completely comply with and observe and perform all covenants and provisions of each Loan Document. In furtherance of the foregoing, but in no way limiting the generality thereof, the proceeds of each Loan will be used strictly in compliance with Section 2.16. -30- 36 SECTION 5.7 Compliance with Agreements. Borrower will promptly comply in all material respects with all material contracts, leases, agreements, indentures, mortgages or documents binding on it or affecting it or its Property, business or operations. SECTION 5.8 Access; Books and Records. Upon reasonable notice, during all business hours, and at any time that an Event of Default continues to exist, Borrower authorizes and will permit any representatives of the Agent, the Issuing Bank or any Bank (i) to have access to, and grant permission for such representatives to examine, copy or make excerpts from, any and all books, records and documents that relate to the business, operations or Property of Borrower, (ii) to inspect any and all Property of Borrower, and (iii) to discuss the business, operations and financial condition of Borrower with its officers and employees and its independent certified public accountants, legal counsel (except for attorney/client privileged information and work product) and other consultants, all of the foregoing at the expense of Borrower. Borrower will maintain complete and accurate books and records of its respective transactions in accordance with GAAP. SECTION 5.9 Compliance with Law. Borrower will comply in all material respects with all Laws applicable to it or any of its Property, business operations or transactions. SECTION 5.10 Insurance. Borrower will maintain insurance with reputable insurers of sound financial strength and creditworthiness with respect to its Property and as to its operations and business, all as required by each Loan Document and otherwise in such types, amounts, scope and coverage, and against such risks, casualties, contingencies and liabilities, as required or necessitated by Law, and additionally, as is customarily maintained by other Persons engaged in similar businesses and operations, the foregoing insurance coverage specifically including the following: (i) worker's compensation or similar insurance as may be required by applicable Law, (ii) public liability insurance against claims for personal injury, death or property damage suffered upon, in or about, any Property occupied by Borrower or occurring as a result of the ownership, maintenance or operation by Borrower of any equipment, vehicle or other Property or as the result of the use of products or equipment manufactured, constructed, sold or operated by Borrower or services rendered by it, and (iii) insurance against the loss or damage to the Property and businesses of Borrower now owned or hereafter acquired. In addition, Borrower (x) will deliver copies of the policies and endorsements for such insurance to the Agent promptly after issuance or renewal of each, and (y) will cause each policy of insurance to provide that such policy will not be canceled or modified in any material respect (as to term, coverage, scope, property or risks covered, or otherwise) without 10 days prior written notice to the Agent. SECTION 5.11 ERISA Compliance. Borrower will at all times: (a) make contributions to each Plan in a timely manner and in an amount sufficient to comply with the minimum funding standards requirements of ERISA and the Code; -31- 37 (b) immediately upon acquiring knowledge of any "reportable event" to which the notice requirement has not been waived or of any "prohibited transaction" (as such terms are defined in the Code or ERISA, as applicable) in connection with a Plan, furnish the Agent with a statement executed by an Authorized Officer setting forth the details thereof and the action which Borrower proposes to take with respect thereto and, when known, any action taken by the Internal Revenue Service with respect thereto; (c) notify the Agent immediately upon receipt by Borrower of any notice of an interest by the PBGC to terminate or appoint a trustee or of the institution of any proceeding or other action which may result in the termination of any Plan and furnish to the Agent copies of such notice; (d) furnish the Agent with copies of each annual report (together with all related schedules and attachments) for each Plan filed with the Internal Revenue Service not later than 30 days after such report has been filed; and (e) furnish the Agent with copies of any request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted to the Secretary of the Treasury, the Department of Labor or the Internal Revenue Service, as the case may be. SECTION 5.12 Further Assurances. Borrower will cure and cause to be cured promptly any defects or deficiencies in the execution, delivery, creation or issuance of the Loan Documents, or any of them, and any of the transactions contemplated thereby. In addition, Borrower will Promptly make, execute or endorse, and acknowledge and deliver or file, or cause each of the same to be done, all such vouchers, invoices, notices, certifications and additional agreements, documents, instruments, undertakings or other assurances, and take any and all such other action, as the Agent may, from time to time, reasonably request or deem reasonably necessary or proper under any of the Loan Documents and the obligations of Borrower thereunder. SECTION 5.13 Maintenance Of Corporate Identity. Borrower will maintain separate corporate records, books and accounts. Borrower will observe the formal legal, financial and accounting requirements necessary for the maintenance of Borrower as a separate legal entity, including the keeping of corporate records indicating that, to the extent required by Law or its charter documents, transactions are reviewed and authorized by its Board of Directors and stockholders. All monies and funds advanced and to be advanced to or on behalf of Borrower by its Affiliates (other than capital contributions and other equity infusions, in each case, that are of a "common stock" nature, by shareholders or Affiliates of Borrower into Borrower), pursuant to a loan or otherwise, will be evidenced by valid, binding and enforceable written obligations to repay such monies and funds, the repayment of which shall be subordinated to the full and final payment of the Obligations, on terms and conditions satisfactory to the Banks. -32- 38 SECTION 5.14 Primary Business. Borrower will continue the retail sale of entertainment products, including music products, including tapes, compact discs, prerecorded video tapes, records and accessories, as well as the retail sale of books and the retail rental of prerecorded video tapes, as its primary business. SECTION 5.15 Subordination of Affiliate Obligations. Borrower will cause all loans or advances of Borrower to any Affiliate of Borrower at any time arising or existing to be evidenced by promissory notes. All such promissory notes are set forth on Schedule 5.15; Borrower will obtain and deliver to the Agent the written agreement, in form, substance and scope satisfactory to the Agent, of the holder of each such promissory note evidencing the subordination of such holder's right to payment under each such note to the payment of the Obligations. Borrower will cause the face of each promissory note to be marked with a reference to such subordination agreement, and will take and cause to be taken all such further and additional actions as the Agent may reasonably request to effect and evidence such subordination. SECTION 5.16 Landlord's Subordination Agreements. Within one year after the Closing Date, Borrower will diligently use its best efforts to deliver to the Agent a landlord's subordination agreement, in form, scope and substance satisfactory to the Agent, with respect to each location at which it operates or conducts its business or maintains or stores any of its equipment, inventory or other Property. After the Closing Date, as a condition to entering into any lease of space or acquiring any Property at which it plans to operate or conduct its business or maintain or store any of its equipment, inventory or other Property, Borrower shall diligently use its best efforts to deliver to the Agent a landlord's subordination agreement, in form, scope and substance satisfactory to the Agent, with respect to such proposed leased or owned location. ARTICLE 6 NEGATIVE COVENANTS Until payment in full of the Notes, the payment and performance of all other Obligations, and the expiration and termination of all Letters of Credit, and so long as the Banks have any obligation hereunder to make any Loans or the Issuing Bank has any obligation to issue any Letters of Credit, Borrower agrees that it will punctually and completely perform and observe each of the following covenants: SECTION 6.1 Certain Financial Matters. Borrower will not permit: (a) the ratio of Current Assets to Current Liabilities to be less than 1.00 to 1.00 as of the end of any Fiscal Quarter; or -33- 39 (b) the ratio of EBITR to Fixed Charges to be less than 1.25 to 1.00 as of the end of any Fiscal Quarter for the four-quarter period ending as of the end of such Fiscal Quarter; or (c) the Tangible Net Worth as of the end of any Fiscal Quarter to be less than the sum $45,000,000 plus (ii) fifty percent (50%) of the cumulative amount of net income of Borrower from February 1, 1994 through the end of such Fiscal Quarter (without regard to, or reduction for, any net loss reported for any Fiscal Quarter); or (d) the ratio of total liabilities (determined in accordance with GAAP) of Borrower to Tangible Net Worth to be more than 2.00 to 1.00 as of the end of any Fiscal Quarter; or (e) the ratio of (i) Funded Debt as of the end of any Fiscal Quarter to (ii) EBITDA for the four-quarter period ending as of the end of such Fiscal Quarter, to be more than 2.00 to 1.00; or (f) the aggregate amount of capital expenditures of Borrower (excluding, however, the capitalized cost of video tapes purchased by Borrower for rental) to exceed (i) $20,000,000 for the Fiscal Year ending January 31, 1995, (ii) $28,000,000 for the Fiscal Year ending January 31, 1996, or (iii) $26,500,000 for any Fiscal Year commencing February 1, 1996 or thereafter. SECTION 6.2 Limitation on Indebtedness. Borrower will not incur, create, contract, assume, have outstanding, permit or suffer to exist, Guarantee or otherwise be or become, directly or indirectly, liable in respect of any Indebtedness, except the following (collectively, "Permitted Indebtedness"): (i) the Obligations; (ii) current liabilities for Taxes incurred in the ordinary course of business which are not yet due and payable; (iii) so long as the same is paid in accordance with its terms and neither paid in violation of, nor renewed, extended, refinanced or modified in a manner or upon terms that would violate, any provision of any Loan Document, Indebtedness listed in Schedule 6.2, together with all renewals, extensions, refinancings and modifications (but not increases) thereof, (iv) trade payables arising in the ordinary course of business that, except for Contested Claims, are paid within the earlier of (A) 60 days of the date when payment thereof is due and payable and (B) 180 days of the date the respective goods are delivered or services are rendered; -34- 40 (v) purchase-money Indebtedness for equipment purchases which does not exceed, in aggregate, $4,000,000 for any Fiscal Year; and (vi) Indebtedness of Borrower which, prior to the incurrence thereof, is subordinated to the payment of the Obligations pursuant to a subordination agreement in form, scope and substance satisfactory to the Required Banks and which, when added together with other such subordinated Indebtedness of Borrower, does not exceed an aggregate amount approved by the Required Banks. SECTION 6.3 Limitation on Property. Borrower will not (i) grant, create, enter into, incur permit or suffer to exist, upon or with regard to any of its respective Property now owned or hereafter acquired, (A) any Lien, except for Permitted Liens, or (B) any Negative Pledge, except for the benefit of the Agent, the Issuing Bank and Banks, or (ii) enter into any sale-and-lease-back transaction. Anything in the foregoing or elsewhere in the Loan Documents to the contrary notwithstanding, it is understood that no Liens, other than Permitted Liens, or Negative Pledges, except for the benefit of the Banks, are permitted on or with respect to any of the Property of Borrower. SECTION 6.4 Restricted Payments. Except in situations in which, immediately before and after giving effect to the proposed transaction, Borrower is in full compliance with the financial covenants set forth in Section 6.1 and there is no other Default, Borrower will not directly or indirectly (i) declare or make, or incur any liability to pay or make, any Dividends, or (ii) redeem, repurchase, retire or otherwise acquire for value any of its capital stock, warrants, stock equivalents or other evidence of equity of any class or nature. Further, Borrower will not directly or indirectly set apart any money or other Property for a defeasance, sinking or analogous fund for any Dividend or distribution thereon, or for any redemption, retirement or other acquisition thereof. SECTION 6.5 Limitation on Investments. Borrower will not make or have outstanding any Investments in any Person, except for (i) Temporary Cash Investments; and (ii) other Investments which do not exceed $1,000,000 in aggregate at any given time (including Investments listed in Schedule 6.5). SECTION 6.6 Affiliate Transactions. Borrower will not enter into any transaction with, or pay any management or other fees or compensation to, any Affiliate of Borrower other than transactions in the ordinary course of business which are on fair and reasonable terms no less favorable to Borrower than would be obtained in a comparable arm's-length transaction with a Person who is not an Affiliate of Borrower. In addition, Borrower will not enter into any transaction with, or pay any management or other fees or compensation to, any Person (a "Non-Affiliated Person") who is not an Affiliate of Borrower, wherein an Affiliate of Borrower is directly or indirectly involved in, related to, or associated with, such transaction other than transactions in the ordinary course of business which are on fair and reasonable terms no less -35- 41 favorable to Borrower and would be obtained in a comparable arm's-length transaction with a Non-Affiliated Person wherein an Affiliate of Borrower is not directly or indirectly involved, related or associated. SECTION 6.7 Limitation on Sale of Property. Borrower will not sell, assign, lease, sublease or discount or otherwise exchange or dispose of any of its Property other than (i) sales of inventory in the ordinary course of its business, (ii) sales or other dispositions of obsolete equipment that is no longer needed for its ordinary business or which is being replaced by equipment of at least comparable value and utility to the equipment replaced when such equipment was efficiently operational and functional, and (iii) sales of fixed assets during each Fiscal Year which have an aggregate book value not in excess of 10% of the book value of Borrower's total fixed assets as of the beginning of such Fiscal Year. SECTION 6.8 Accounting Method. Borrower may change its fiscal year or its method of inventory valuation from LIFO to any other method permitted under GAAP with prior notice thereof given to the Banks, provided that Borrower will not make any other material change in its method of accounting, without the prior written approval of the Banks, which approval will not be unreasonably withheld. SECTION 6.9 Internal Governance Documents; Name and Principal Place of Business. Borrower will not amend its certificate or articles of incorporation or bylaws in any respect which could have a Material Adverse Effect. Without notifying the Agent in writing at least 30 Business Days prior to the effective date of each of the following changes, Borrower will not (i) change its name, or operate any of its business, operations or Property or own or lease any Property under any name, different than as set forth in Schedule 4.14, (ii) change its identity or corporate structure, or (iii) change its principal place of business or chief executive office, as applicable, from such address and location set forth in Schedule 4.14. Further, Borrower will notify the Agent as soon as practical and in any event within 30 days after Borrower opens to the public for business any location at which it will conduct its business or store or maintain any of its inventory, equipment or other Property, other than locations set forth in Schedule 4.14. SECTION 6.10 Certain Environmental Matters. Except in compliance in all respects with Environmental Laws, and otherwise in no way posing an imminent and significant endangerment to public health or welfare or the environment, Borrower will not knowingly (i) cause or permit any Hazardous Material to be placed, held, transported, located, released or disposed of on, under, from, to, or at, any Property now or hereafter owned, leased or otherwise controlled directly or indirectly by Borrower (for purposes of this Section 6.10, the "Subject Property"), or (ii) permit the Subject Property ever to be used (whether by Borrower or any other Person) as a dump site or storage site (whether permanent or temporary) for any Hazardous Material. Without limitation of the Agent's, the Issuing Banks' and the Banks' Rights under the Loan Documents, the Agent and its representatives shall have the right, but not the obligation, to enter upon the Subject Property or take such other actions as the Agent or any Bank deems -36- 42 necessary or advisable to cleanup, remove, resolve or minimize the impact of, or otherwise deal with, any Hazardous Discharge or Environmental Complaint upon the Agent's or any Bank's receipt of any notice from any Governmental Authority or other Person, asserting the existence of any Hazardous Discharge or Environmental Complaint on or pertaining to the Subject Property which, if true, could result in Environmental Liability against Borrower, the Agent, the Issuing Bank, any Bank or otherwise which, in the sole opinion of any of them, could jeopardize any of their present or future Liens against or rights to the Subject Property. All costs and expenses incurred by the Agent, the Banks and their representatives in the exercise of any such Rights shall become part of the Obligations and be payable upon demand, together with interest on the unpaid portion thereof at the Default Rate. SECTION 6.11 Mergers, Acquisitions and Dissolutions. Except for acquisitions by Borrower which do not involve more than $1,000,000 per acquisition, Borrower will not, without the prior written consent of the Banks, which consent will not be unreasonably withheld, become a party to a merger, acquisition or consolidation, or purchase or otherwise acquire by merger, lease or purchase all or a substantial part of the assets or Property of any Person or any shares or other evidence of legal or beneficial ownership of any Person, or dissolve or liquidate. Borrower acknowledges that the consent of the Banks under the preceding provision may be conditioned upon the relevant acquired entity becoming an obligor or guarantor of the Obligations on terms satisfactory to the Banks. For the purposes of applying the foregoing $1,000,000 limitation, a series of integrally related acquisitions from the same Person or its Affiliates shall be treated as one acquisition. SECTION 6.12 Subsidiaries. Borrower will not create or permit to exist any Subsidiary of Borrower and will not become a general partner, venturer or similar capacity in any partnership, venture or similar Person, without the prior written consent of the Banks, which consent shall not be unreasonably withheld. Borrower acknowledges that the consent of the Banks under the preceding provision may be conditioned upon the Subsidiary or other relevant entity becoming an obligor or guarantor of the Obligations on terms satisfactory to the Banks. SECTION 6.13 Sale of Receivables. Unless in favor of the Agent, the Issuing Bank and the Banks or reasonably necessary in connection with collection efforts on delinquent receivables, Borrower will not sell or discount any of its accounts or notes receivable. ARTICLE 7 EVENTS OF DEFAULT SECTION 7.1 Events of Default. An "Event of Default" shall exist if any one or more of the following events shall occur and be continuing: -37- 43 (a) failure or refusal to pay, within 5 Business Days of the date when due, any principal of, or interest on, any Note, or any Reimbursement Obligations on any Letter of Credit, or any fee, expense or other Obligations required hereunder; or (b) any representation, warranty or certification made or deemed made by, or on behalf of, Borrower under, or in connection with, any of the Loan Documents, or in any certificate, notice, request, statement or other communication furnished or made to the Agent, the Issuing Bank or any Bank pursuant hereto or in connection herewith is untrue, misleading or inaccurate in any material respect as of the date on which such representation, warranty or certification was made (or deemed made) or furnished; or (c) (i) failure to perform, observe or comply with any covenant or agreement contained in Article 6 or the occurrence of an event or circumstance designated as a "default" or an "event of default" under any other Loan Document; or (ii) except as provided in Section 7.1(a) or Section 7.1(c)(i), failure to perform, observe or comply with any covenant or agreement contained in this Agreement or any other Loan Document, which failure continues for a period of 30 days after Borrower obtains knowledge of the occurrence thereof, provided, however, that if such failure is susceptible to cure but not within such 30-day period, a plan to cure such failure has been approved in writing by the Required Banks and Borrower has commenced actions according to such plan within the 30-day period and is prosecuting such plan diligently, then no Event of Default shall occur under this Section 7.1(c)(ii) until the later of 60 days after the Borrower obtains knowledge of such failure or such other date as agreed to by Borrower and the Required Banks in the plan approved by the Required Banks; provided further, however that no such grace period shall apply, and an Event of Default shall exist under this Section 7.1(c)(ii) upon such failure to perform, observe or comply, if such failure (A) is not susceptible to cure, as determined in the discretion of the Required Banks, or (B) may not be cured, as determined in the discretion of the Required Banks, within 60 days after Borrower obtains knowledge of such failure or within a reasonable time thereafter according to any plan provided to the Required Banks; or (d) either (i) default in the payment, within 3 Business Days of when due, of Indebtedness of Borrower, individually or in the aggregate, in excess of $1,000,000 or default in respect of any note, agreement, indenture, loan agreement, credit agreement, bond or other document evidencing or relating to any such Indebtedness, and such default continues for more than the period of grace, if any, specified therein or (ii) Indebtedness of Borrower, individually or in the aggregate, in excess of $1,000,000 becomes due or prepayable before its stated maturity by acceleration of the maturity thereof or otherwise; or (e) Borrower shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, trustee, custodian, intervenor or liquidator of Borrower or of all or a substantial part of its Property, (ii) commence or file a voluntary petition, proceeding or case in bankruptcy, or admit in writing that it is unable to pay its debts as they become due or generally not pay its debts as they become due, (iii) make a general assignment for the benefit of creditors, -38- 44 (iv) file a petition or answer seeking reorganization or an arrangement with creditors or take advantage of any Debtor Laws, (v) file an answer admitting the material allegations of or consenting to, or default in answering, a petition, proceeding or case filed against it in any bankruptcy, reorganization or insolvency proceeding or (vi) take corporate action for the purpose of effecting any of the foregoing; or (f) an involuntary petition, proceeding, case or complaint is filed against Borrower seeking bankruptcy, liquidation, dissolution, winding-up or reorganization of Borrower, or the composition or readjustments of its debts, or the appointment of a receiver, custodian, trustee, intervenor or liquidator of it or all or substantially all of its Property, and such petition, proceeding, case or complaint is not dismissed within 30 days of the filing thereof; or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition, proceeding, case or complaint seeking liquidation, reorganization, dissolution, winding-up or bankruptcy of Borrower or appointing a receiver, custodian, trustee, intervenor or liquidator of Borrower, or of all or substantially all of its Property, and such order, order for relief, judgment or decree continues unstayed for a period of 30 days; or (g) any Judgment or in the aggregate, Judgments for the payment of money in excess of the sum of $1,000,000 or that would otherwise have a Material Adverse Effect shall be rendered against Borrower or with respect to its Property, and such Judgment or Judgments shall not be satisfied, discharged or appealed (provided that during the pendency of such appeal prosecution of the Judgment or Judgments is stayed) within 30 days of the date it is rendered; or (h) both (i) and (ii) following shall occur: (i) either (A) proceedings have been instituted to terminate,or a notice of termination has been filed with respect to, any Plan by Borrower, any member of the "controlled group" (as defined in the Code) of Borrower, PBGC or any representative of any thereof, or any such Plan shall be terminated, in each case under Section 4041 or 4042 of ERISA, or (B) a "reportable event" (as defined in Title 4 of ERISA) has occurred with respect to any Plan and continues for a period of 60 days, and (ii) the sum of the estimated liability to PBGC under Section 4062 of ERISA and the currently payable obligations of Borrower to fund liabilities (in excess of amounts required to be paid to satisfy the minimum funding standard of Section 412 of the Internal Revenue Code) under the Plan or Plans subject to such event exceeds 10% of Borrower's net worth at such time; or (i) a Change in Control shall occur; or (j) except pursuant to the express terms of any Loan Document, any Loan Document shall, at any time after its execution and delivery and for any reason, cease to be in full force and effect or be declared to be null and void, or Borrower or any other Person shall deny that it has any or any further liability or obligations under any Loan Document to which it is a party. -39- 45 SECTION 7.2 Remedies Upon Event of Default. In the event an Event of Default occurs and is continuing, the Agent may, and upon written request of the Required Banks, shall, exercise any one or more of the following Rights, and any other Rights available at law or in equity or provided in any of the Loan Documents: (i) terminate all or any portion of the Commitments (including the commitment to issue Letters of Credit), and such Commitments shall thereupon terminate, and (ii) declare the principal of, and all earned and accrued interest on, the Notes then outstanding and all other accrued and unpaid Obligations to be immediately due and payable, whereupon the same shall be and become due and payable, each and all of the foregoing without presentment, demand, protest, notice of default, NOTICE OF INTENT TO ACCELERATE, NOTICE OF ACCELERATION or other notice of any kind, all of which are hereby waived by Borrower, provided however, upon the occurrence of any Event of Default specified in Section 7.1(e) or Section 7.(f), all of the Commitments shall thereupon automatically and immediately terminate and the principal of, and all earned and accrued interest on the Notes then outstanding and all other accrued and unpaid Obligations shall thereupon be and become automatically and immediately due and payable, each and all of the foregoing without presentment, demand, protest, NOTICE OF DEFAULT, NOTICE OF INTENT TO ACCELERATE, NOTICE OF ACCELERATION or other notice of any kind, all of which are hereby waived by Borrower. If any amount payable under any of the Loan Documents is not paid when due the outstanding and unpaid portion of such amount shall bear interest at the Default Rate. SECTION 7.3 Certain Additional Remedies Regarding Letters of Credit. Borrower hereby agrees, in addition to the provisions of Section 7.1 hereof, that upon the occurrence and during the continuance of any Event of Default or any Letter of Credit Event, it shall, if requested by the Agent remit (and, in the case of any Event of Default specified in Section 7.1(e) or Section 7.1(f), forthwith, without any presentment, demand, protest, notice of default or of occurrence of a Letter of Credit Event, NOTICE OF ANY INTENT TO ACCELERATE, NOTICE OF ACCELERATION or any other notice of any kind or the taking of any other action by the Agent, the Issuing Bank or the Banks (all of which are hereby waived by Borrower), it shall remit) to the Agent an amount in immediately available funds (which funds shall be held as collateral for the Obligations) equal to the then aggregate amount of the Letter of Credit Exposure. Borrower hereby grants to Agent a Security interest in, a general lien upon, and a right of set off with respect to, all amounts from time to time and at any time held by, or paid or remitted to, the Agent, the Issuing Bank or any Bank, which are held as cash collateral as further security for the payment of the Obligations. ARTICLE 8 THE AGENT AND BANKS SECTION 8.1 Appointment of the Agent. Each of the Banks and the Issuing Bank hereby appoints Boatmen's as Agent to act as herein specified, and acting in the manner and to -40- 46 the extent provided in this Article 8, Boatmen's accepts such appointment as the Agent. Each of the Banks and the Issuing Bank hereby irrevocably authorizes the Agent to receive payments of principal, interest and other amounts due hereunder as specified herein and otherwise to take such action on its behalf, to exercise such powers and to perform such duties under the Loan Documents as are specifically delegated to, or required of, the Agent by the terms of the Loan Documents, together with all other powers reasonably incidental thereto, which authorization permits the Agent to perform any of its duties under the Loan Documents by or through its agents, attorneys or employees. The Agent shall have no duties or responsibilities except those expressly set forth with respect to it in the Loan Documents. The relationship of the Agent to the Banks and the Issuing Bank is only that of one company acting solely as an administrative agent for others, and nothing in the Loan Documents, express or implied, is intended to, or shall be construed to, constitute the Agent a trustee or other fiduciary for the Issuing Bank, or any holder of any of the Notes, or of any participation therein, nor to impose on the Agent duties and obligations other than those expressly provided for in the Loan Documents. As to any matters not expressly provided for in the Loan Documents and any matters to which the Loan Documents place within the discretion of the Agent, the Agent shall not be required to exercise any discretion or take any action (and it may request instructions from the Banks and the Issuing Bank with respect to any such matter), in which case is shall be required to act or refrain from acting (and shall be fully protected and free from liability to all Banks and the Issuing Bank in so acting or refraining from acting) upon the instructions of the Required Banks (including itself), and such instructions shall be binding upon all Banks and the Issuing Bank, and all holders of, and participants in, the Notes and the Letters of Credit; provided however, (i) the Agent shall in all cases be fully justified in failing or refusing to act under any Loan Document unless it shall be indemnified to its satisfaction by the Banks and the Issuing Bank against any and all liability and expense (other than any such liability or expense proximately caused by the Agent's gross negligence or willful misconduct, as determined by a final judgment) which may be incurred by it by reason of taking or continuing to take any such action, and (ii) the Agent shall not in any event be required to take any action which (A) is contrary to any Loan Document or Law or (B) exposes it to a risk of personal liability that it considers unreasonable. SECTION 8.2 Exculpation; Agent's Reliance. AS AMONG THE BANKS, NEITHER THE AGENT NOR ANY OF ITS AFFILIATES, NOR ANY ITS OR THEIR DIRECTORS, OFFICERS, AGENTS, ATTORNEYS, INSURERS OR EMPLOYEES, NOR ANY OF ITS OR THEIR SUCCESSORS, HEIRS, LEGAL REPRESENTATIVES OR ASSIGNS (COLLECTIVELY, THE "AGENT INDEMNITEES"), SHALL EVER BE LIABLE FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY ANY OF THEM UNDER OR IN CONNECTION WITH ANY LOAN DOCUMENT, INCLUDING THEIR NEGLIGENCE OF ANY KIND, EXCEPT THAT EACH SHALL RESPECTIVELY BE LIABLE FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED BY A FINAL JUDGMENT. Without limiting the generality of the foregoing or any other provision of any Loan Document, the Agent: (i) may treat the payee of any Note as the holder thereof until the Agent receives and accepts an assignment and acceptance entered into by the Persons as provided -41- 47 in Section 10.7 and all other provisions of Section 10.7 are complied with to the reasonable satisfaction of the Agent; (ii) may consult with legal counsel (including counsel for Borrower), independent public accountants and other experts and advisors selected by it and shall be fully protected and free from liability to all Banks and the Issuing Bank for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, experts or advisors; (iii) makes no warranty or representation to any Bank or the Issuing Bank and shall not be responsible to any Bank or the Issuing Bank for any statements, recitals, information, warranties or representations made in or in connection with any Loan Document, or in any communication or writing made or delivered in connection therewith; (iv) shall not have any duty to ascertain, to inquire or to keep itself informed as to the financial condition of the Borrower or the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Person or to inspect the Property (including the books and records) of Borrower or its Subsidiaries or any other Person; (v) shall not be responsible to any Bank or the Issuing Bank for the financial condition of the Borrower or the due execution, legality, validity, enforceability, collectibility, genuineness, sufficiency or value of any Loan Document or instrument or document furnished in connection therewith, or the creation, perfection, continued creation or perfection, or priority, of any Lien purported to be created by any Loan Document, or any other instrument or document furnished pursuant hereto or thereto; and (vi) may rely, and shall be fully protected and free from liability to all Banks and the Issuing Bank in relying, (A) upon the representations and warranties of Borrower, the Banks and the Issuing Bank in exercising its powers hereunder, and (B) upon any notice, consent, certificate, statement, resolution, instrument or other writing (which maybe by telegram, cable, telecopy, facsimile, telex, mail or telephone) believed by it to be genuine and signed, sent, communicated or otherwise made by the proper Person or Persons. SECTION 8.3 Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default or Event of Default (other than the non-payment of principal of or interest on Loans or of commitment fees) unless the Agent has received written notice from a Bank, the Issuing Bank or Borrower specifying the occurrence of such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives a Notice of Default, it shall give prompt notice thereof to the Banks and the Issuing Bank (and shall give each Bank and the Issuing Bank prompt notice of each such non-payment). Subject to Section 8.1, the Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Banks; provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall in its sole and absolute discretion deem advisable in the best interest of the Banks and the Issuing Bank. SECTION 8.4 Rights as a Bank. Boatmen's (and any successor acting as the Agent), in its capacity as a Bank or the Issuing Bank (as applicable) hereunder shall have the same rights and powers hereunder as any Bank or Issuing Bank (as applicable) and may exercise the same as though it were not the Agent, and the term "Bank", "Banks", "Issuing Bank", -42- 48 "Required Banks", "holders of Notes" or similar terms shall, unless otherwise expressly indicated, include Boatmen's (and any successor acting as Agent) in its individual capacity. Boatmen's (and any successor acting as the Agent) and its Affiliates may accept deposits from, lend money to, act as trustee under indentures or as transfer agent in respect of capital stock of, and generally engage in any kind of banking, trust, investment, financial advisory or other business with, the Borrower or its Affiliates, and may accept fees and other consideration from the Borrower or its Affiliates for services in connection with any of the foregoing, any of the Loan Documents or otherwise, all as if it were not Agent hereunder and without having to account for the same to the Banks or the Issuing Bank. All fees and other amounts received by Agent for its capacity as Agent hereunder shall solely be for its benefit and no other party hereto. SECTION 8.5 Indemnification. EACH BANK AGREES TO INDEMNIFY, REIMBURSE AND HOLD HARMLESS EACH AGENT INDEMNITEE (TO THE EXTENT NOT INDEMNIFIED AND REIMBURSED, ON DEMAND, BY BORROWER), RATABLY ACCORDING TO ITS PERCENTAGE SHARE, FROM AND AGAINST ANY AND ALL LOSSES, LIABILITIES, OBLIGATIONS, CLAIMS, LOSSES, DAMAGES, PENALTIES, ACTIONS, SUITS, JUDGMENTS, DEMANDS, SETTLEMENTS, COSTS, DISBURSEMENTS OR EXPENSES (INCLUDING FEES AND EXPENSES OF ATTORNEYS, ACCOUNTANTS, EXPERTS AND ADVISORS) OF ANY KIND OR NATURE WHATSOEVER (IN THIS SECTION 8.5, THE FOREGOING IS COLLECTIVELY REFERRED TO AS THE "LIABILITIES AND COSTS"), WHICH TO ANY EXTENT (IN WHOLE OR PART) MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST, SUCH AGENT INDEMNITEE IN ANY WAY RELATING TO, OR ARISING OUT OF, THE LOAN DOCUMENTS AND THE TRANSACTION AND EVENTS (INCLUDING THE ENFORCEMENT THEREOF) AT ANY TIME ASSOCIATED THEREWITH OR CONTEMPLATED THEREIN (INCLUDING ANY VIOLATION OR NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS BY ANY PERSON OR ANY LIABILITIES OR DUTIES OF ANY PERSON WITH RESPECT TO HAZARDOUS MATERIALS FOUND IN OR RELEASED INTO THE ENVIRONMENT) OR AS A RESULT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY SUCH AGENT INDEMNITEE, INCLUDING ITS NEGLIGENCE OF ANY KIND, OTHER THAN AS PROVIDED IN THE FOLLOWING PROVISO, THE GROSS NEGLIGENCE OF AN AGENT INDEMNITEE; PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY PORTION, IF ANY, OF ANY LIABILITIES AND COSTS WHICH IS PROXIMATELY CAUSED BY THE AGENT'S OWN INDIVIDUAL GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EACH BANK AGREES, IN PROPORTION WITH ITS PERCENTAGE SHARE, TO REIMBURSE THE AGENT PROMPTLY UPON ITS DEMAND FOR ANY COSTS AND EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES AND OTHER CHARGES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF THEIR -43- 49 RIGHTS OR RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, OR ANY OF THEM, OR ANY OTHER DOCUMENTS CONTEMPLATED BY THE WAN DOCUMENTS, TO THE EXTENT THAT THE AGENT IS NOT REIMBURSED, ON DEMAND, FOR SUCH AMOUNTS BY BORROWER. Each Bank's obligations under this paragraph shall survive the termination of this Agreement and the discharge of Borrower's obligations hereunder. SECTION 8.6 Bank's Credit Decision and Non-Reliance. Each Bank and the Issuing Bank hereby acknowledges that it has, independently and without reliance upon the Agent or any other Person, and based upon such documents and information as it has deemed appropriate, made (i) its own independent investigation and analysis (including legal and credit investigation and analysis) of Borrower and its Affiliates, and its and their respective financial conditions, operations and affairs, and Properties, and the transactions provided for in, and contemplated by, each of the Loan Documents and (ii) its own independent decision to enter into and perform each Loan Document. Each Bank and the Issuing Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Person, and based on such investigation, analysis, documents and information as it shall deem appropriate at the time, continue to make its own independent legal, credit and other decisions in taking or omitting to take action under or in connection with the Loan Documents. Except for notices, reports and other documents and information expressly required to be furnished to the Banks and/or the Issuing Bank by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank or the Issuing Bank with any credit or other information concerning the affairs, financial condition, or business of Borrower or its Affiliates which may come into the possession of the Agent or any of its Affiliates. SECTION 8.7 Deferral of Distributions; Investments. Whenever the Agent in good faith determines that it is uncertain about how to distribute to the Banks or the Issuing Bank any funds which it has received, or whenever the Agent in good faith determines that there is any dispute among the Banks and/or the Issuing Bank about how such funds should be distributed, the Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If the Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, it may, or if the Agent is otherwise required to invest funds pending distribution to the Banks and/or the Issuing Bank, it shall, invest such funds pending distribution in any manner it deems appropriate, absent timely instructions from the Required Banks; all interest on any such investment (net of investment and related costs, if any, incurred in connection therewith) shall be distributed upon the distribution of such investment and in the same proportion and to the same Persons as such investment. All moneys received by the Agent for distribution to the Banks and/or the Issuing Bank (other than to the Person who is the Agent in its separate capacity as a Bank) shall be held by the Agent pending such distribution solely as the Agent for such Banks and/or the Issuing Bank, and the Agent shall have no equitable title to any portion thereof. ABSENT GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON ITS PART (BUT EXCLUDING ITS OWN NEGLIGENCE OF ANY OTHER KIND), AS DETERMINED BY A FINAL JUDGMENT, THE AGENT SHALL BE FULLY PROTECTED -44- 50 AND FREE FROM LIABILITY TO THE BANKS AND/OR THE ISSUING BANK, FOR ANY COSTS AND LIABILITIES RESULTING FROM OR RELATED TO THE DEFERRAL OF DISTRIBUTIONS AND/OR MAKING OF INVESTMENTS AS PROVIDED FOR IN THIS SECTION 8, INCLUDING THE FAILURE OF ANY SUCH INVESTMENT. SECTION 8.8 Nature of Article 8. The provisions of this Article 8 (other than the following Section 8.9) are intended solely for the benefit of the Agent, Banks and the Issuing Bank, and neither the Borrower nor any other Person shall be entitled to rely on any such provision or assert any such provision in a claim or defense against the Agent, any Bank or the Issuing Bank. The Agent, Banks and the Issuing Bank may waive or amend such provisions as they desire without any notice to or consent of the Borrower. Nothing contained in any Loan Document, and no action taken by any Bank, the Issuing Bank or the Agent pursuant hereto or in connection herewith or pursuant to or in connection with the Loan Documents, shall be deemed to constitute the Banks and the Issuing Bank, together or with or without the Agent, a partnership, association, joint venture or other entity. SECTION 8.9 Resignation and Removal by Agent. The Agent may resign at any time as the Agent under the Loan Documents by giving written notice thereof (which notice shall contain the date of such resignation) to the Banks, the Issuing Bank and Borrower and, upon the gross negligence or manifest incompetence of the Agent, the Agent may be removed as the Agent under the Loan Documents by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 calendar days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, as applicable, then the retiring Agent may, on behalf of Banks and the Issuing Bank appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof having a combined capital and surplus of at least $500,000,000. In any case where a successor Agent is being selected, the parties agree to attempt to select such successor from one of the Banks. If one of the Banks is selected as a successor Agent, such selection shall not be subject to approval by Borrower; however, if a Person other than one of the Banks is selected as a successor Agent, such selection shall be subject to the approval of Borrower, which approval shall not be unreasonably withheld. Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring or removed Agent and the retiring or removed Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under the Loan Documents. -45- 51 ARTICLE 9 CHANGED CIRCUMSTANCES SECTION 9.1 Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period, (i) the Agent shall have determined (which determination shall be conclusive and binding upon Borrower) that, by reason of circumstances affecting the interbank eurodollar market, or reporting or data gathering and/or dissemination networks, systems or companies related thereto or dealing therewith, adequate and reasonable means do not exist for ascertaining the London Interbank Offered Rate for such Interest Period, or (ii) the Agent shall have received written notice from the Required Banks that the London Interbank Offered Rate determined or to be determined for such Interest Rate Period will not adequately and fairly reflect the cost to such Banks (as conclusively certified by such Banks) of making or maintaining their LIBOR Loans during such Interest Period, then the Agent shall forthwith give notice thereof to Borrower and the Banks. Until the Agent notifies Borrower that such notice has been withdrawn by the Agent, no further LIBOR Loans by any Bank shall be made or continued as such, nor shall Borrower have the right to convert Loans to LIBOR Loans. SECTION 9.2 Illegality. Notwithstanding any other provision herein, if at any time a Bank determines (which determination shall be reasonably exercised and if so reasonably exercised, shall be conclusive and binding upon the parties, absent manifest error) that the making or maintaining LIBOR Loans hereunder has become unlawful pursuant to applicable Law, or any interpretation, application or administration thereof (whether or not having the force of law), then such Bank (an "Affected Bank") shall so promptly notify the Agent, the other Banks and Borrower. Upon giving such notice (i) the obligations of all Banks to make or continue, or to convert Base Rate Loans into, LIBOR Loans shall be suspended until the Affected Bank notifies the Agent, the other Banks and Borrower that it may again make and maintain LIBOR Loans, and (ii) Borrower shall, upon the request of any Bank, prepay any LIBOR Loan then outstanding (which prepayment, if requested by Borrower, shall be made with the proceeds or effect of a Base Rate Loan extended contemporaneously by such Bank), together with accrued interest thereon, and loss and expenses, if any, provided for in Section 2.12. SECTION 9.3 Increased Cost and Reduced Return. (a) If the adoption of, or any change in, any Law, or in the interpretation, application or administration thereof, or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any central bank or other Governmental Authority: (i) shall subject any Bank (or its Lending Office) to any tax, duty or other charge of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, any Application or any LIBOR Loan made by it, or its obligations in respect to -46- 52 any of the foregoing, or shall change the basis of taxation of payments to such Bank (or its Lending Office) in respect to any amounts due to it in respect to any of the foregoing (except for changes in the rate of tax on the overall net income of such Bank or its Lending Office imposed by any jurisdiction); or (ii) shall impose, modify or deem applicable any reserve, special deposit, compulsory loan or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against assets of, deposits with or other liabilities of or for the account of, advances, loans or other extensions of credit by, or other acquisition of funds by, any Bank (or its Lending Office), which is not otherwise included in the determination of the Adjusted London Interbank Offered Rate; or (iii) shall impose on any Bank (or its Lending Office) or on the London interbank market any other condition affecting this Agreement, any Note, any Letter of Credit, any Application or any LIBOR Loan, or its obligations in respect to any of the foregoing; and the result of any of the foregoing is to increase the cost to such Bank (or its Lending Office) of making, converting into, continuing or maintaining any LIBOR Loan or issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Lending Office) under this Agreement or under its Notes with respect thereto, then subject to SECTION 10.8, within 5 days after demand by such Bank (with a copy to the Agent), Borrower shall, without limiting the effect of any other applicable provision hereof (but without duplication) pay to such Bank such additional amount or amounts as will compensate such Bank for such increased costs or reduction of amount receivable, but only to extent of the actual amount of such increased costs or reduction of amount receivable. (b) If the adoption of, or any change in, any Law regarding capital adequacy or risk-based capital guidelines or requirements, or in the interpretation, application or administration thereof or compliance by any Bank (or its Lending Office, or its or any of their Affiliates) with any request or directive regarding capital adequacy or risk-based capital guidelines or requirements (whether or not having the force of law) of any central bank or other Governmental Authority, does or shall, in the reasonable determination of such Bank, have the effect of reducing the rate of return on such Bank's (or its Lending Office, or its or their Affiliates) capital or assets as a consequence of its obligations hereunder, or under or in respect of any Letter of Credit, to a level below that which such Bank (or its Lending Office, or its or their Affiliates) could have achieved but for such adoption, change or compliance (taking into consideration such Bank's (or its Lending Office, or its or their Affiliates) policies with respect to capital adequacy or risk-based capital guidelines or requirements), then from time to time, within 5 days after demand by such Bank (with a copy to the Agent), subject to Section 10.8, Borrower shall, without limiting the effect of the foregoing provisions of this Section 9.3 (but without -47- 53 duplication), pay to such Bank such additional amount or amounts as will compensate such Bank for the amount of such reduction, but only to the actual amount of such reduction. (c) Each Bank will promptly notify Borrower and the Agent of any event of which it has knowledge which will entitle such Bank to compensation pursuant to this Section 9.3. A certificate of any Bank claiming compensation under this Section 9.3 and setting forth the additional amount or amounts to be paid to it, as well as the manner in which such amount or amounts were calculated, hereunder shall be conclusive and binding on Borrower in the absence of manifest error. In determining such amount, such Bank may use, among others, any reasonable averaging and attribution methods. (d) If Borrower pays any Bank compensation under this Section 9.3 and thereafter such Bank receives a refund of amounts under this Section 9.3 with respect to which such compensation was paid by Borrower, such Bank shall refund to Borrower the amount of such compensation to the extent of such refund so received by such Bank. (e) The rights and benefits of the Banks under this Section 9.3 shall also apply to the Issuing Bank in its capacity as such. SECTION 9.4 Substitute Rate for Affected LIBOR Loans. (a) If the obligation of any Bank to make, convert or continue (as applicable) a LIBOR Loan shall be suspended pursuant to Section 9.1 or Section 9.2 (each such affected LIBOR Loan, an "Affected Loan"), then each such Affected Loan that otherwise would have been made, converted or continued (as applicable) by the Banks as a LIBOR Loan shall be made, converted or continued (as applicable) instead as a Base Rate Loan. (b) If the London Interbank Offered Rate is not published or reported for 30 consecutive days or 30 days have passed since Borrower's receipt of an Agent's notice as provided under in Section 9.1 or an Affected Bank's notice as provided in Section 9.2, as applicable, and the circumstance underlying such notice continues to exist, then within 15 days after the earlier to occur of any such event (such earliest to occur event, a "LIBOR Event"), and so long as such LIBOR Event shall be continuing, Borrower may notify the Agent and the Banks that it desires to discuss with them the availability of a reasonably comparable alternate rate option or additional interest rate option for the Loans that is mutually agreeable to Borrower, the Agent and the Banks; and, if Borrower, the Agent and the Banks so mutually agree within 30 days after such notice is given by Borrower, the parties shall as soon as reasonably practical thereafter enter into an amendment to this Agreement and any other affected Loan Documents in form, scope and substance, and upon terms and conditions, satisfactory to the Agent and the Banks. If, in any event, any Bank does not, in its sole discretion (with due respect for, among other matters, its independent requirements, considerations and circumstances), agree to any proposed alternate or additional interest rate option within such 30-day period, no such alternate -48- 54 or additional interest rate option shall be available with respect to the LIBOR Event initiating the discussions related to such proposed alternative or additional interest rate option. SECTION 9.5 Alternate Lending Office Designation. Each Bank agrees that it will endeavor to use reasonable efforts to designate an alternate Lending Office with respect to any LIBOR Loans affected by the matters or circumstances described in any of Sections 9.1, 9.2 and 9.3 to reduce the liability of Borrower or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Bank as determined by it in its sole discretion; provided, however, no Bank shall have any obligation to so designate an alternate Lending Office located in the United States of America. ARTICLE 10 MISCELLANEOUS SECTION 10.1 Notices. (a) All notices, requests and other communications to any party under any Loan Document shall be in writing or, in the case of a Notice of Borrowing, by telephone confirmed the same day in writing on or before 12:00 noon (St. Louis time) (including bank wire, telecopy, telex or similar writing) and shall be given to such party at its address, telecopy or telex number set forth in Annex A or such other address, telecopy or telex number as such party may hereafter specify for the purpose by notice to the Agent and Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified pursuant to this Section 10.1 and the appropriate answerback is received, (ii) if given by telecopy, when such telecopy is transmitted to the telecopy number specified pursuant to this Section 10.1, and the sender has received electronic confirmation thereof, (iii) if given by registered or certified mail, return receipt requested, 72 hours after such communication is deposited in the mails with postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified pursuant to this Section 10.1; provided that notices to the Agent under Article 2 or Article 9 shall not be effective until actually received by a representative of the Agent, as distinguished from received at its place of business only. (b) Any verbal communication or instrument in writing received by the Agent in connection with a Borrowing or a Loan, the issuance of a Letter of Credit or any other matter with respect to any Loan Document, which purports to be dispatched or signed by or on behalf of Borrower and confirmed, in the case of a verbal communication, by the Agent by telephone confirmation with an Authorized Officer, shall conclusively be deemed to have been dispatched or signed by or on behalf of Borrower pursuant to such Person's authority to bind Borrower and all other Persons for the liabilities and matters in connection therewith to the Agent, the Issuing Bank and each Bank; and the Agent, the Issuing Bank and each Bank may conclusively rely thereon and shall have no obligation, duty or responsibility to determine the validity or genuineness thereof or the authority of the Person or Persons executing or dispatching the same. -49- 55 SECTION 10.2 No Waivers. No failure or delay by the Agent, the Issuing Bank, any Bank or Borrower in exercising any Right under any Loan Document, and no course of dealing with respect to any such Rights, shall operate as a waiver thereof, nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps or actions to enforce any Rights, preclude or prejudice the concurrent or subsequent exercise thereof or the exercise of any other such Rights. The Rights provided in the Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by Law or in equity. SECTION 10.3 Payment of Costs and Expenses; Professionals and Consultants. (a) Borrower agrees to pay all reasonable costs and expenses incurred (whether before, after or during the Closing Date) by or on behalf of the Agent (including audit costs and expenses and all attorneys' and other professionals' and consultants' fees, costs and expenses of Agent incurred in connection with the preparation of, advice or counsel regarding, or enforcement of, any Loan Document) in connection with (i) the investigation, review, negotiation, preparation, execution, delivery, administration, syndication, participation, filing, recordation, refinancing, restructuring, renegotiation or enforcement of each of the Loan Documents, and any and all renewals, amendments, extensions, restatements, supplements, rearrangements, consents, waivers, assignments and modifications thereto or thereof, and the transactions contemplated thereby, (ii) the monitoring, evaluating, making, maintaining, servicing, enforcement and collection of the Revolving Loans and the Term Loans and the issuance, administration, maintaining, servicing, enforcement and payment of the Letters of Credit and the Reimbursement Obligations, (iii) the creation, preservation, maintenance, protection, perfection and enforcement of Rights under each Loan Document and Liens in Property (whether or not incurred in connection with the commencement of a proceeding, litigation, foreclosure or other proceeding), specifically including all costs and expenses incurred with respect to any bankruptcy, insolvency or reorganization proceeding, regardless of whether the Agent ultimately prevails in such bankruptcy, insolvency or reorganization proceeding, and (iv) all amounts expended, advanced or incurred by or on behalf of the Agent to satisfy any obligation of Borrower under any Loan Document which is not timely satisfied by Borrower, if the Agent, at its discretion, so chooses to incur any such expenses or costs. Without in any manner limiting the foregoing, Borrower shall also pay all costs associated with the Agent's annual audit of Borrower conducted in 1994 and each subsequent year thereafter, subject to a maximum of $5,000 per such audit. Notwithstanding the foregoing, Borrower's costs associated with the preparation of this Agreement and other Loan Documents for the execution on the Closing Date shall be limited to $25,000. (b) Should Borrower fail to perform or observe any covenant or agreement contained in any of the Loan Documents and such failure continues through the cure period provided for therein, if any, the Agent, the Issuing Bank or any Bank may then perform or attempt to perform such covenant or agreement on behalf of Borrower. Such Person will endeavor to give Borrower notice of such performance or attempted performance. Borrower shall, at the request of such Person, promptly pay any amount expended in such performance or attempted performance to -50- 56 such Person at the principal office of the Agent, together with interest on the portion thereof from time to time remaining unpaid at the Default Rate. Notwithstanding the foregoing, it is expressly understood and agreed that (i) neither the Agent nor the Issuing Bank, nor any Bank, assumes any liability or responsibility for the performance of any covenants or agreements of Borrower hereunder or under any of the other Loan Documents, or any other documents, or other control over the management and affairs of Borrower, and (ii) Borrower's failure to perform any covenant or agreement that is cured, in whole or part, by any of their action shall be and continue a Default unless and until (A) all of such Person's attendant costs and expenses have been reimbursed as herein provided and (B) Borrower has submitted, and the Agent has received and approved, with the consent of the Required Banks, such objective evidence that supports the determination that such Default will not reoccur. (c) Borrower acknowledges and agrees that all attorneys, accountants, auditors, and other professional Persons and consultants who are from time to time engaged or employed by the-Agent (including, without limitation, Fulbright & Jaworski L.L.P.) and whose fees and expenses are or may be paid or reimbursed, as applicable, by Borrower, pursuant to the terms of any Loan Document, are the professionals of the Agent and not of Borrower, and each of them (i) shall have the right to act exclusively in the interest of the Agent, and (ii) shall have no duty of disclosure, duty of loyalty, duty of care or any other duty of any type or nature whatsoever, or deemed to have any attorney-client or other similar professional relationship whatsoever, to Borrower. SECTION 10.4 Indemnification. SUBJECT TO SECTION 10.8, BORROWER SHALL INDEMNIFY, DEFEND, PROTECT AND HOLD HARMLESS EACH BANK, THE AGENT, THE ISSUING BANK, AND THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES, PARENT COMPANIES AND OTHER RELATED ENTITIES, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS AND OTHER PROFESSIONALS AND CONSULTANTS, INSURERS AND STOCKHOLDERS, AND EACH OF THEM (AND TOGETHER WITH EACH AND ALL OF THEIR RESPECTIVE SUCCESSORS, ASSIGNS, HEIRS AND LEGAL REPRESENTATIVES, THE "INDEMNIFIED PARTIES"), FROM AND AGAINST ALL LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, ACTIONS, SUITS AND OTHER LEGAL PROCEEDINGS, JUDGMENTS, PENALTIES, DAMAGES, COSTS, INTEREST, CHARGES, ATTORNEYS' AND OTHER PROFESSIONALS' AND CONSULTANTS' FEES AND OTHER EXPENSES AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER ("INDEMNIFIED COSTS"), WHICH MAY BE IMPOSED ON, INCURRED OR SUSTAINED BY, OR ASSERTED AGAINST, THE INDEMNIFIED PARTIES, OR ANY OF THEM, BY REASON OF, ARISING OUT OF, OR IN ANY MANNER RELATED TO (DIRECTLY OR INDIRECTLY, CONSEQUENTIALLY, OR OTHERWISE), ANY LOAN DOCUMENT (INCLUDING, WITHOUT LIMITATION, ANY LETTER OF CREDIT), THE TRANSACTIONS CONTEMPLATED THEREBY, OR THE ENFORCEMENT, PROTECTION OR ADMINISTRATION THEREOF OR WITH RESPECT THERETO (COLLECTIVELY, THE -51- 57 "SUBJECT TRANSACTIONS"), INCLUDING, WITHOUT LIMITATION, DAMAGES, COSTS AND EXPENSES INCURRED BY ANY OF THE INDEMNIFIED PARTIES IN INVESTIGATING, PREPARING FOR, DEFENDING AGAINST, OR PROVIDING EVIDENCE, PRODUCING DOCUMENTS, OR TAKING ANY OTHER ACTION IN RESPECT OF ANY COMMENCED OR THREATENED LITIGATION UNDER ANY FEDERAL OR STATE, OR ANY SUBDIVISION THEREOF, SECURITIES OR ENVIRONMENTAL LAW OR ANY OTHER LAW OF ANY JURISDICTION OR AT COMMON LAW. THIS FOREGOING IS INTENDED TO INDEMNIFY, DEFEND, PROTECT AND HOLD HARMLESS EACH OF THE INDEMNIFIED PARTIES AGAINST ALL RISKS, FORESEEABLE OR UNFORESEEABLE, INVOLVED IN TUE SUBJECT TRANSACTIONS, INCLUDING, WITHOUT LIMITATION, THE NEGLIGENCE OR ALLEGED NEGLIGENCE (WHETHER SOLE, COMPARATIVE, CONTRIBUTORY OR OTHERWISE) OF ANY OF TEE INDEMNIFIED PARTIES, ALL OF WHICH RISKS ARE HEREBY ASSUMED BY BORROWER; PROVIDED, HOWEVER, AN INDEMNIFIED PARTY SHALL NOT BE ENTITLED TO INDEMNIFICATION FOR INDEMNIFIED COSTS TO THE EXTENT SUCH INDEMNIFIED COSTS ARE DIRECTLY CAUSED BY A BREACH OF ITS MATERIAL OBLIGATIONS UNDER ANY LOAN DOCUMENT OR ITS OWN GROSS NEGLIGENCE OR WILFUL MISCONDUCT AS DETERMINED BY A COURT OF COMPETENT JURISDICTION. AN INDEMNIFIED PARTY WILL PROVIDE BORROWER WITH NOTICE OF A CLAIM FOR INDEMNIFICATION HEREUNDER AS SOON AS REASONABLY PRACTICAL, AND SUCH INDEMNIFIED PARTY WILL PROVIDE SUCH INFORMATION CONCERNING THE CLAIM AS BORROWER MAY REASONABLY REQUEST. BORROWER SHALL HAVE THE RIGHT TO APPROVE, WHICH APPROVAL WILL NOT BE UNREASONABLY WITHHELD OR DELAYED, ANY SETTLEMENT AGREEMENT TO BE ENTERED INTO BY AN INDEMNIFIED PARTY IN CONNECTION WITH ANY ACTION, SUIT, INVESTIGATION OR PROCEEDING UNDERLYING A CLAIM FOR INDEMNIFICATION HEREUNDER PROVIDED THAT (I) BORROWER IS NOT IN DEFAULT (AS DEFINED IN ANNEX B) AS OF THE TIME AT WHICH SUCH INDEMNIFIED PARTY PROPOSES TO ENTER INTO SUCH SETTLEMENT AGREEMENT, AND (II) BORROWER HAS NOT TAKEN A POSITION IN SUCH ACTION, SUIT, INVESTIGATION OR PROCEEDING WHICH, IN THE SOLE JUDGMENT OF SUCH INDEMNIFIED PARTY, IS ADVERSE TO OR IN CONFLICT WITH THE POSITION OF SUCH INDEMNIFIED PARTY. IF, UNDER THE PRECEDING SENTENCE, BORROWER DOES NOT APPROVE A SETTLEMENT AGREEMENT PROPOSED BY AN INDEMNIFIED PARTY, BORROWER'S INDEMNIFICATION OBLIGATIONS HEREUNDER SHALL CONTINUE IN ANY EVENT WITH RESPECT TO THE CLAIM AND INDEMNIFIED COSTS NOT INCLUDED IN THE SETTLEMENT PROPOSAL. TO THE EXTENT THAT THE FOREGOING INDEMNIFICATION MAY BE DEEMED UNENFORCEABLE, IN WHOLE OR IN PART, FOR ANY REASON WHATSOEVER, INCLUDING BECAUSE IT IS VIOLATIVE OF LAW OR PUBLIC POLICY AS DETERMINED BY A FINAL, NON-APPEALABLE JUDGMENT -52- 58 OR ORDER OF A COURT OF COMPETENT JURISDICTION, BORROWER AGREES TO CONTRIBUTE THE MAXIMUM PORTION THAT IT IS NOT PROHIBITED TO PAY UNDER APPLICABLE LAW, TO THE PAYMENT AND SATISFACTION OF THE SUBJECT TRANSACTIONS. SECTION 10.5 Sharing of Set-Offs. Borrower hereby grants to Agent, the Issuing Bank and each Bank the right of set-off, to secure repayment of the Obligations, upon any and all monies, securities or other Property of Borrower and the proceeds therefrom, now or hereafter held or received by or in transit to Agent, the Issuing Bank or any Bank or any of their respective agents, from or for the account of Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and also upon any and all deposits (general or special) and credits of Borrower, and any and all claims of Borrower against Agent, the Issuing Bank or any Bank at any time existing. In connection with any set off, counterclaim or similar action by any Bank, such Bank agrees that it shall comply with, and otherwise be bound by, the provisions of Section 2.13. Borrower, the Agent, the Issuing Bank and each Bank agree that any Person purchasing a participation from a Bank pursuant to Section 10.7(b) shall, to the fullest extent permitted by Law and if provided in the participation agreement between the Bank and the participant, have all of the obligations of a Bank pursuant to the terms of this Section 10.5. Without limiting any Bank's right of set-off or counterclaim or otherwise, the Agent shall have the right to charge any account of Borrower maintained with Agent for the amount of any payment due under any Loan Document, under the Notes or with respect to any of the Letters of Credit. SECTION 10.6 Amendments and Waivers. All modifications, consents, amendments, waivers and the like of any provision of any Loan Document, or consent to any departure by Borrower therefrom (collectively,. the foregoing are referred to in this Section 10.6 as a "modification"), shall be effective only if the same is in a writing in form, scope and substance, and subject to conditions and requirements, if any, acceptable to the Agent and the Required Banks, and if so acceptable, is signed by Borrower, the Agent and, at least, the Required Banks; provided that no such modification shall, unless consented to in writing by all the Banks, (i) modify the Commitment of any Bank or subject any Bank to any additional funding obligation, (ii) reduce the principal amount or the stated rate of interest on any Loan or reduce any fees hereunder (other than fees payable solely to the Agent or the Issuing Bank, as applicable), (iii) extends the date fixed for any principal reduction pursuant to Section 2.8 or Section 2.9, the payment of any interest on any Loan, the payment of any Reimbursement Obligation or the payment of any fees hereunder (other than fees payable solely to the Agent or the Issuing Bank, as applicable), the maturity date of any of the Obligations, the Revolving Commitment Termination Date or the Term Commitment Termination Date, (iv) release or impair the Lien in any Property in favor of the Banks, (v) release any guarantor of the Obligations, (vi) change the percentage of the Commitments or the aggregate unpaid principal amount of the Notes, or the number of Banks which shall be required for the Banks or any of them to take any action under this Section 10.6 or any other provision of the Loan Documents, or (vii) affects this Section 10.6 -53- 59 or Section 10.3 or Section 10.4 or modifies the definition of "Required Banks"; provided, further, that, (y) no modification or waiver which modifies the rights, duties or obligations of the Agent shall be effective without the prior written consent of the Agent, and (z) no modification or waiver which modifies the rights, duties, obligations or commitment of the Issuing Bank shall be effective without the prior written consent of the Issuing Bank. SECTION 10.7 Successors and Assigns; Participations; Assignments. (a) The Loan Documents shall be binding upon, and inure to the benefit of the parties thereto and their respective successors and assigns, except that (i) Borrower may not assign or transfer any of its rights or obligations under any Loan Document without the prior written consent of the Agent, the Issuing Bank and all the Banks, and (ii) unless otherwise permitted under this Section 10.7, no Bank may transfer, pledge, assign, sell participations in or otherwise convey or encumber its Commitments or Loans or interests in Letters of Credit. Borrower shall not directly or indirectly purchase or otherwise retire any Obligations owed to any Bank or the Issuing Bank nor will any Bank or the Issuing Bank accept any offer to do so, unless each Bank or the Issuing Bank (or both, as applicable) shall have received substantially the same offer with respect to the same pro rata share of the Obligations owed to it. If Borrower, directly or indirectly, at any time purchases some but less than all of the Obligations owed to the Agent, the Issuing Bank and the Banks, then notwithstanding any provision herein to the contrary such purchaser or purchasers shall not be entitled to any rights of the Agent, the Issuing Bank or the Banks under the Loan Documents (including voting rights or the right to participate in or determine any modification (as that term is defined in Section 10.6)), unless and.until Borrower has purchased all of the Obligations. (b) Neither this Agreement nor any other Loan Document, nor any benefits hereunder or thereunder, shall inure to or for the benefit of any Person that is not a signatory party hereto, other than any of such Persons that are expressly named or designated as indemnitees, releasees or exculpatees herein. All conditions to make Revolving Loans or Term Loans hereunder or to issue Letters of Credit hereunder, and all covenants, warranties, representations, and other terms and provisions of, and applicable to, Borrower in each Loan Document are imposed solely and exclusively for the benefit of the Agent, the Issuing Bank and each Bank, and their respective successors and assigns. No other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that no Revolving Loans or Tenn Loans will be made or Letters of Credit will be issued in the absence of strict compliance with any or all of such conditions; and no other Person shall, under any circumstances, be deemed to be a beneficiary of such conditions, covenants, warranties, representations and other terms and provisions. Any of such conditions, and the breach of, or noncompliance with, any such covenants, warranties, representations and other terms and provisions may be freely waived in whole or in part by the Agent, the Issuing Bank and the Banks (subject to applicable provisions hereof) at any time if in its or their (as applicable) sole discretion it or they (as applicable) deem it advisable to do so. No such conditions, covenants, warranties, representations -54- 60 or other terms or provisions are intended to release, or authorize or permit a breach by, Borrower of any of its obligations and requirements to any third Person, or any noncompliance therewith, or to evidence the contractual interference therewith by the Agent, the Issuing Bank and the Banks. (c) Subject to the provisions of this Section 10.7, any Bank may in the ordinary course of its business, with notice to but without any consent of Borrower with respect thereto, and in accordance with applicable Law, at any time sell to one or more Qualified Banks (each a "Participant") a participating interests in all or any part of any Loans, or in the Commitments, of such Bank. In the event of any such sale by a Bank to a Participant, (i) such Bank shall remain a "Bank" for all purposes under this Agreement, and the Participant shall not constitute a "Bank" hereunder, (ii) such Bank's obligations under this Agreement shall remain unchanged, (iii) such Bank shall remain solely responsible for the performance of its obligations under this Agreement, (iv) such Bank shall remain the holder of any such Note and the obligor to fund its respective Commitments for all purposes under this Agreement, and (v) Borrower, the Issuing Bank, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents. Participants shall have no rights under this Agreement or any of the Loan Documents, other than rights of set off (and attendant obligations) expressly set forth herein. No Bank shall sell any participating interest under which the Participant shall have, and no Participant shall have, any rights to vote on any modification (as such term is defined in Section 10.6) of this Agreement or any other Loan Document, and any agreement between any Bank and any Participant granting any Participant any voting rights shall be void ab inido. Except in the case of the sale of a participating interest to a Bank, the relevant participation agreement shall not permit the Participant to transfer, pledge, assign, sell participations in, or encumber its portion of, the Commitments, the Loans, or the Letters of Credit. (d) Subject to the provisions of this Section 10.7, any Bank may, in the ordinary course of its business, with prior notice to and subject to the consent of Borrower, which consent shall not be unreasonably withheld, and in accordance with applicable Law, assign to one or more Qualified Banks (each a "Purchaser") a proportional part (not less than $5,000,000 of each of the Bank's Commitments, unless such Bank is reducing its Commitments to zero) of its rights and obligations under the Loan Documents, and such Purchaser shall (i) assume all such rights and obligations, pursuant to an assignment and assumption agreement and other necessary and related documents, all in form, scope and substance satisfactory to the Agent, executed by such Purchaser, such transferor Bank, the Agent and the Issuing Bank, and (ii) pay to the Agent, for its account, a non-refundable processing fee in the amount of $2,000. Upon the effectiveness of such assignment and assumption agreement, such Purchaser shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with Commitments as set forth in the assignment agreement, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by Borrower, the Banks or the Agent -55- 61 shall be required. Upon the consummation of any transfer to a Purchaser pursuant to this Section 10.7(d), the transferor Bank, the Agent, the Issuing Bank and Borrower shall make appropriate arrangements, at Borrower's cost and expense, so that, if required, new Notes are issued to such Purchaser. Any sale pursuant to this Section 10.7(d) shall be of an equal pro rata portion of each of the transferor Bank's Commitments, Loans and interests in Letters of Credit. A Purchaser shall be subject to all the provisions of this Section 10.7 the same as if it were a Bank signatory hereto as of the Closing Date. (e) Borrower authorizes each Bank to disclose to any Participant or Purchaser (each a "Transferee") and any prospective Transferee any and all financial information in such Bank's possession concerning Borrower which has been delivered to such Bank by or on behalf of them pursuant to this Agreement or which has been delivered to such Bank by them in connection with such Bank's credit evaluation prior to entering into this Agreement. (f) No Transferee (including for this purpose a different Lending Office of a Bank) shall be entitled to receive any greater payment under this Agreement than the transferor Bank would have been entitled to receive with respect to the rights assigned, unless such assignment is made with the prior written consent of Borrower or by reason of the provisions referred to in Section 9.5 regarding the designation of a different Lending Office under certain circumstances. (g) Notwithstanding any other provisions of this Section 10.7, no transfer or assignment of the interests or obligations of any Bank hereunder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require Borrower to file a registration statement with the Securities and Exchange Commission or to qualify the Loans or the Letters of Credit under the "Blue Sky" laws of any state. (h) Each Bank initially party to this Agreement hereby represents, and each person that becomes a Bank pursuant to an assignment permitted by Section 10.7(d) will, upon its becoming party to this Agreement, represent that it is a Qualified Bank, and that it will make or acquire Loans only for its own account in the ordinary course of its business; provided, however, that subject to the preceding provisions of this Section 10.7, the disposition of any promissory notes or other evidences of or interests in Obligations held by it shall at all times be within its exclusive control. SECTION 10.8 Maximum Interest Rate. It is the intent of the parties hereto that each of the Agent, the Issuing Bank and the Banks (collectively, the "Financing Parties"), and Borrower in the execution, delivery and performance of all Loan Documents, the transactions provided for therein and contemplated thereby, and all matters incidental and related thereto and arising therefrom, shall comply and conform strictly with Applicable Law from time to time in effect, including without limitation, Usury Laws. In furtherance thereof, the Financing Parties and Borrower stipulate and agree that none of the terms and provisions contained in, or pertaining to, the Loan Documents shall ever be construed to create a contract to pay for the use or -56- 62 forbearance or detention of money with interest at a rate or in an amount in excess of the Maximum Rate or maximum amount of interest permitted or allowed to be contracted for, charged, received, taken or reserved under said Laws. For purposes of each Loan Document, (i) "interest" shall include the aggregate of all amounts which constitute or are deemed to constitute interest under the Laws of the State of Texas or, to the extent they may apply, the Laws of the United States of America, that are contracted for, chargeable, receivable (whether received or deemed to have been received), taken or reserved under each such document, and (ii) all computations of the maximum amount of interest permitted or allowed under Applicable Law will be made on the basis of the actual number of days elapsed over a 365 or 366 day year, whichever is applicable. Neither Borrower nor any other person shall ever be required to pay unearned interest on, or with respect to any of, the Loan Documents and shall never be required to pay interest on, or with respect to any of, the Loan Documents at a rate or in an amount in excess of the Maximum Rate or maximum amount of interest that may be lawfully contracted for, charged, received, taken or reserved under Applicable Law, and the provisions of this paragraph shall control over all other provisions of the Loan Documents. If the effective rate or amount of interest which would otherwise be payable under the Loan Documents would exceed the Maximum Rate or maximum amount of interest any Financing Party or any other holder of any Note or other Obligations is allowed by Applicable Law to charge, contract for, take, reserve or receive, or in the event any Financing Party or any holder of any Note or other Obligations shall charge, contract for, take, reserve or receive monies that are deemed to constitute interest which would, in the absence of this provision, increase the effective rate or amount of interest payable under the Loan Documents to a rate or amount in excess of that permitted or allowed to be charged, contracted for, taken, reserved or received under Applicable Law then in effect, then the principal amount of such Note or other Obligations or the amount of interest which would otherwise be payable thereunder shall be payable at, or reduced to, as applicable, the maximum amount allowed pursuant to the then applicable indicated (weekly) rate ceiling referred to hereinabove at the definition of the term Applicable Law, or if no such ceiling is then in effect, as authorized and allowed under said Laws as now or hereafter construed by the courts having jurisdiction, and all such monies so charged, contracted, for, received, taken or reserved that are deemed to constitute interest in excess of the Maximum Rate or maximum amount of interest permitted by. Applicable Law shall be immediately returned or credited to the account of Borrower upon such determination. SECTION 10.9 Governing Law; Submission to Jurisdiction. THIS AGREEMENT, EACH NOTE AND EACH OTHER LOAN DOCUMENT (INCLUDING ITS AND THEIR VALIDITY, ENFORCEABILITY AND INTERPRETATION) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO ANY CONFLICTS OF LAW PRINCIPLES) AND TO THE EXTENT CONTROLLING, THE FEDERAL LAWS OF THE USA; PROVIDED THAT (I) THE PROVISION OF CHAPTER 15 OF THE TEXAS CREDIT CODE (VERNON'S TEXAS CIVIL STATUTES, ARTICLE 5069-15.01 ET SEQ.) ARE EXPRESSLY DECLARED BY THE PARTIES NOT TO BE APPLICABLE TO ANY LOAN DOCUMENT OR THE -57- 63 TRANSACTIONS CONTEMPLATED, BY ANY OF THEM, AND (II) THE LAWS OF THE STATE OF TEXAS AND/OR THE UNITED STATES OF AMERICA SHALL NOT LIMIT THE AMOUNT OR RATE OF INTEREST WHICH THE HOLDER OF ANY NOTE MAY CONTRACT FOR CHARGE, RECEIVE, COLLECT, TAKE, RESERVE AND/OR APPLY IF OTHER APPLICABLE LAWS PERMIT AT ANY TIME A HIGHER AMOUNT OR RATE. THE PARTIES EXPRESSLY ACKNOWLEDGE THAT (y) THEY INTEND THAT THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT SHALL BE GOVERNED BY THE PROVISIONS (INCLUDING, WITHOUT LIMITATION, THE RIGHT OF THE PARTIES TO SELECT THE GOVERNING LAW) OF THE UNIFORM COMMERCIAL CODE AND NOT BY COMMON LAW AND (z) THE STATE OF TEXAS BEARS A REASONABLE RELATIONSHIP TO THIS TRANSACTION AND NO OTHER STATE HAS A MATERIALLY GREATER INTEREST IN THIS TRANSACTION THAN THE STATE OF TEXAS. BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS (SAN ANTONIO DIVISION) AND OF ANY TEXAS STATE COURT SITTING IN BEXAR COUNTY, TEXAS FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. SECTION 10.10 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, and by each of the parties hereto on separate counterparts, all of which taken together shall constitute one and the same instrument. This Agreement shall become effective when the Agent shall have received counterparts hereof signed by all of the parties hereto. SECTION 10.11 Independence of Covenants. Each covenant and agreement of Borrower under each Loan Document shall be given independent effect so that, if a particular action or condition is prohibited or required by any covenant, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or Event of Default if such action is taken or condition exists. SECTION 10.12 Survival. The obligations of Borrower under Sections 2.12, 9.3, 10.3, 10.4, 10.8, 10.18 and 10.20 shall survive the termination of this Agreement, the payment of all other Obligations, the termination of the Commitments and the return of the Letters of Credit to the Issuing Bank for a period of 5 years after the last of such events to occur. The representations and warranties set forth in this Agreement and each of the other Loan Documents shall survive the execution, delivery and performance of this Agreement and the other Loan Documents and shall continue until one year after the later of (i) the repayment of the Obligations and (ii) the date on which the Banks' obligations to make Loans and the Issuing Bank's obligation to issue Letters of Credit shall have fully and finally terminated; and any investigation at any time by or on behalf of the Agent, the Issuing Bank or any Bank shall not diminish any of their respective rights to rely thereon. -58- 64 SECTION 10.13 Severability. In case any one or more of the provisions or part of a provision contained in any Loan Document shall for any reason be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability shall be deemed not to affect any other jurisdiction or any other provision or part of a provision of any Loan Document, but such Loan Document shall be reformed and construed in such jurisdiction as if such provision or part of a provision held to be invalid or illegal or unenforceable had never been contained herein and such provision or part reformed so that it would be valid, legal and enforceable in such jurisdiction to the maximum extent possible. SECTION 10.14 Governmental Regulation. Anything contained in any Loan Document to the contrary notwithstanding, Borrower acknowledges and agrees that neither the Agent nor the Issuing Bank, nor any Bank, shall be obligated (i) to extend or fund any credit or other financial accommodation to, or for the benefit of, Borrower in an amount, or (ii) to perform any other agreement or obligation to, or for the benefit of, Borrower in any regard, in contradiction or violation of any limitation or prohibition provided by any applicable statute or regulation, or any interpretation, ruling, decision, opinion or other pronouncement in respect thereto (whether or not having the effect of law), which any of them believes is applicable. SECTION 10.15 No Control. None of the covenants, terms or other provisions of any Loan Document or any document executed in conjunction therewith or related thereto shall, or shall be deemed to, give the Agent, the Issuing Bank or any Bank rights or powers to exercise control over, or participate in the management of, the business, affairs, operations or management of Borrower or any of its Property, including any right or power to influence or affect any of its treatment, transportation, storage or disposal of toxic and/or hazardous waste, substances or constituents. The relationship between Borrower and the other parties hereto created by this Agreement and each of the other Loan Documents is only that of debtor-creditor (with or without security, as applicable), and the Rights of such other parties hereunder and thereunder are limited to the rights to receive payment of the Obligations and to exercise the Rights provided herein and therein and in any other document executed in conjunction herewith or therewith or related hereto or thereto. SECTION 10.16 Renewals, Extensions, Rearrangements, Termination, Etc. With respect to each and every (i) renewal, extension, increase and rearrangement, if any, of the Obligations, or any part thereof, and (ii) amendment, modification, supplement, restatement, waiver and consent, if any, of or to this Agreement or any other Loan Document, all provisions of this Agreement and the other Loan Documents shall apply with equal force and effect to each such event or circumstance, except to the extent, if any, expressly set forth in connection with each such event or circumstance; provided, however, the foregoing is not intended in any regard to convey, acknowledge or otherwise evidence on the part of the Agent, the Issuing Bank or any Bank, expressly or by implication, any present consent or agreement to any such event or circumstance occurring subsequent to the date hereof, it being acknowledged and agreed that the entry by the parties hereto to any such events or circumstances shall be evaluated as they occur -59- 65 and subject to the other provisions of the Loan Documents, as same may be applicable. Except as expressly provided therein, all Loan Documents shall remain in effect until full and complete payment of all Obligations, termination of all commitments and obligations of the Issuing Bank and/or the Banks to make or extend any credit or financial accommodation to, or for the benefit of, Borrower, and receipt by the Agent, the Issuing Bank and the Banks, or any of the foregoing Persons, if so requested, of such written assurances of Borrower and any other designated Person or Persons that no other claims, rights, defenses, liabilities or obligations exist in respect hereto or against any of them or any other Indemnified Party. SECTION 10.17 Conflicts. In the event of any inconsistency or conflict between the terms of this Agreement and the terms of any other Loan Document, the terms of this Agreement shall control. SECTION 10.18 Confidentiality. Each Bank, the Issuing Bank and the Agent agree to use reasonable precautions to keep confidential, in accordance with customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by Borrower pursuant to this Agreement which is identified by Borrower as being confidential at the time the same is delivered to the Banks, the Issuing Bank or the Agent, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any Bank, the Issuing Bank or the Agent, (iii) to bank examiners, auditors or accountants of any Bank, the Issuing Bank or the Agent, (iv) to any other Bank, the Issuing Bank or the Agent, (v) in connection with any litigation to which any Bank, the Issuing Bank or the Agent is a party, provided, further, that, unless specifically prohibited by applicable Law or court order, each Bank, the Issuing Bank and the Agent shall, at least 5 Business Days prior to disclosure thereof, notify Borrower of any request for disclosure of any such non-public information (A) by any governmental agency or representative thereof (other than any such request in connection with an examination of such Bank's financial condition by such governmental agency) or (B) pursuant to legal process, or (vi) to any Transferee (or prospective Transferee) so long as such Transferee (or prospective Transferee) agrees in writing to handle such information confidentially. SECTION 10.19 Payments Set Aside. To the extent that Borrower makes a payment or payments to the Agent, the Issuing Bank or any Bank, or any of them (or their Transferee), or the Agent, the Issuing Bank or any Bank, or any of them (or their Transferee) enforces any Lien or exercises its right of setoff, and such payment or payments or the proceeds of such enforcement or setoff, or any part thereof, are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other Person under any Debtor Laws or equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and shall continue in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. -60- 66 SECTION 10.20 Limitation of Liability; Commencement of Actions. To the extent not prohibited by applicable law, no claim may be made by or on behalf of Borrower or any other Person against the Agent, the Issuing Bank or any Bank or any other Indemnified Party for any punitive damages in respect of any claim for breach of contract arising out of or related to the transactions contemplated by any Loan Document, or any act, omission, or event occurring in connection therewith (whether any of such is a claim based on contract, tort, duty imposed by law or otherwise), and Borrower hereby waives, releases, and agrees not to sue, or commence or authorize the commencement of any Litigation, upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Further, any claim made by or on behalf of Borrower or any other Person against the Agent, the Issuing Bank or any Bank or any other Indemnified Party shall be barred unless it is asserted by the commencement of an action or proceeding in a court as prescribed in Section 10.9 by the filing of a complaint therein within two (2) years after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, discovered or, in the exercise of reasonable diligence, should have been discovered; and Borrower agrees that such period of time is a reasonable and sufficient time for it to investigate and act upon any such claim or cause of action. The provisions of this Section 10.20 shall survive any termination, howsoever occurring, of this Agreement and each Loan Document and the full and final payment of the Notes and the other Obligations. SECTION 10.21 Review. Borrower acknowledges and represents to the Agent, the Issuing Bank and each Bank that Borrower has reviewed this Agreement and each other Loan Document, has had the benefit of legal counsel of its own choice throughout its review and negotiation of this Agreement and each other Loan Document, has been afforded an opportunity to review and negotiate this Agreement and each other Loan Document with the advice of its legal counsel, and is fully informed and knowledgeable of the terms, provisions, rights and effects of this Agreement and each other Loan Document. In furtherance of the foregoing, but not in limitation thereof, Borrower acknowledges and agrees that each Loan Document should be and shall be construed as if jointly drafted by the parties hereto. SECTION 10.22 This Agreement. THIS WRITTEN LOAN AGREEMENT AND ALL OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER COVERED HEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. [Signatures on Next Page] -61- 67 IN, WITNESS WHEREOF, the parties hereto have caused this Agreement to be duty executed by their respective authorized signatories as of the day and year first above written. BORROWER: HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ GENE JONES ----------------------------------------- Gene Jones, Vice President,\ Secretary, Treasurer and Chief Financial Officer BANKS: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS Individually, as the Agent and the Issuing Bank By: /s/ DWIGHT D. ERDBRUEGGER ----------------------------------------- Dwight D. Erdbruegger, Vice President TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ MARK DENTON ----------------------------------------- Mark Denton, Senior Vice President FIRST INTERSTATE BANK OF TEXAS, N.A. By: /s/ KIMBERLY WHITE ----------------------------------------- Kimberly White, Banking Officer -62- 68 ANNEX A THE BOATMEN'S NATIONAL BANK OF ST. LOUIS 1. Domestic Lending Office: The Boatmen's National Bank of St. Louis 800 Market Street St. Louis, Missouri 63166 2. LIBOR Lending Office: The Boatmen's National Bank of St. Louis 800 Market Street St. Louis, Missouri 63166 3. Term Commitment: $ 3,750,000 4. Revolving Commitment: $11,250,000 5. Total Commitment: $15,000,000 6. Information for Notices: The Boatmen's National Bank of St. Louis 800 Market Street St. Louis, Missouri 63166 Attention: Dwight D. Erdbruegger Phone: (314) 466-7053 Fax: (314) 466-6499 7.Account Number: ------------------------------------- ------------------------------------- ------------------------------------- Annex A - Page 1 69 ANNEX A TEXAS COMMERCE BANK NATIONAL ASSOCIATION 1. Domestic Lending Office: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 2. LIBOR Lending Office: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 3. Term Commitment: $ 3,125,000 4. Revolving Commitment: $ 9,375,000 5. Total Commitment: $12,500,000 6. Information for Notices: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 Attention: Mark Denton Phone: (214) 922-2246 Fax: (214) 922-2044 Annex A - Page 2 70 ANNEX A FIRST INTERSTATE BANK OF TEXAS, N.A. 1. Domestic Lending Office: First Interstate Bank of Texas, N.A. 1000 Louisiana Houston, Texas 77002 2. LIBOR Lending Office: First Interstate Bank of Texas, N.A. 1000 Louisiana Houston, Texas 77002 3. Term Commitment: $ 3,125,000 4. Revolving Commitment: $ 9,375,000 5. Total Commitment: $12,500,000 6. Information for Notices: First Interstate Bank of Texas, N.A. 309 W. 7th Street, Suite 1100 Fort Worth, Texas 76102 Attention: Kimberly White Phone: (817) 885-1122 Fax: (817) 885-1110 Annex A - Page 3 71 ANNEX A Address for Borrower: Hastings Books, Music & Video, Inc. 421 East 34th Street Amarillo, Texas 79103 Attention: Gene Jones Vice President, Secretary, Treasurer and Chief Financial Officer Phone: (806) 379-0474 or (806) 376-6251 Fax: (806) 374-0093 Annex A - Page 4 72 ANNEX B CERTAIN DEFINITIONS As used herein, the following terms shall have the respective meanings assigned to them as follows: "Adjusted London Interbank Offered Rate" means, with respect to any Interest Period, a rate per annum equal to the quotient obtained (rounded to the nearest 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the LIBOR Reserve Percentage. The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the LIBOR Reserve Percentage. "Affiliate" means any Person who, directly or indirectly, controls, is controlled by or is under common control with the relevant Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means any Person with possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership (of record, as trustee or by proxy) of Voting Shares, through a management contract, or otherwise. Any Person owning or controlling directly or indirectly 25% or more of the Voting Shares, or other equity interests of another Person shall be deemed to be an Affiliate of such Person. "Affected Bank" has the meaning set forth in Section 9.2. "Agent" has the meaning set forth in the introductory paragraph of this Agreement and shall include, at all relevant times, each successor appointed in the manner provided for in Article 8. "Agent Indemnitees" has the meaning set forth in Section 8.2. "Agreed Maximum Rate" means a per annum rate of interest equal to 5% plus the Base Rate, which Agreed Maximum Rate shall apply only during a period while there is no Maximum Rate applicable to the transactions contemplated hereby. "Agreement", "hereof", "hereto", "herein", "hereunder" and words of similar import means this Agreement as a whole, and not any particular article or section. "Agreement" means this Credit Agreement, as the same may be amended, modified or supplemented from time to time. ANNEX B - Page 1 73 "Applicable Law" means, with respect to each of the Agent, the Issuing Bank and the Banks, the law in effect, from time to time, applicable to this loan transaction and each Loan Document which lawfully permits the contracting for, taking, reserving, receiving, charging and/or collection of the maximum lawful, non-usurious rate of interest by such Person on each Loan Document and the transactions evidenced thereby, and arising in connection therewith (including, but without limitation, the Notes), including laws of the State of Texas, to the extent controlling, the laws of the United States of America, and laws of any jurisdiction whose laws may be mandatorily applicable to such Person, notwithstanding other provisions of any Loan Document or laws of the United States of America applicable to such Person and the transaction contemplated hereby, which would permit such Person to contract for, take, reserve, receive, charge or collect a greater amount of interest then under such jurisdiction's law. To the extent that Applicable Law is determined by reference to Article 1.04, Title 79, Revised Civil Statutes of Texas, 1925, as amended, the interest ceiling applicable hereto and in connection herewith shall be the "indicated" (weekly) rate ceiling as defined in said Article 1.04; provided however, it is agreed that the terms hereof, including the rate, or index, formula or provision of law used to compute the rate in connection herewith, will be subject to the revisions as to current and future balances, from time to time, pursuant to Applicable Law. IT IS FURTHER AGREED THAT IN NO EVENT SHALL CHAPTER 15 OF SUBTITLE 3, TITLE 79, REVISED CIVIL STATUTES OF TEXAS, 1925, AS AMENDED, APPLY To ANY LOAN DOCUMENT OR THE TRANSACTIONS EVIDENCED THEREBY, OR ARISING IN CONNECTION THEREWITH. "Applicable Margin" means, with respect to any LIBOR Loan, the following per annum percentages determined by the Agent as follows: (a) The Applicable Margin shall be equal to the percentage set forth below based upon the ratio of Funded Debt to EBITDA as of the end of each Fiscal Quarter with respect to the four fiscal-quarter period ending on as of the end of such Fiscal Quarter:
======================================================================================================== LIBOR Spread - -------------------------------------------------------------------------------------------------------- Ratio of Funded Debt to EBITDA Revolving Loans Term Loans - -------------------------------------------------------------------------------------------------------- Less than or equal to 1.00 to 1.00 1.00 1.25 - -------------------------------------------------------------------------------------------------------- Greater than 1.00 to 1.00 1.25 1.50 but less than or equal to 1.50 to 1.00 - -------------------------------------------------------------------------------------------------------- Greater than 1.50 to 1.00 1.50 1.75 ========================================================================================================
ANNEX B - Page 2 74 (b) Each determination of the Applicable Margin determined pursuant to subsection (a) above shall be determined by the Agent within 10 days after the delivery to it of a certificate required by Section 5.1(e). Promptly upon each such determination, the Agent shall notify Borrower and each Bank of such determination. Each change in the Applicable Margin shall remain effective until the next such determination. "Application" means an application, in such form as the Issuing Bank may specify from time to time, requesting the Issuing Bank to open a Letter of Credit. "Authorized Officer" means the president, chief financial officer, controller, assistant controller or accounting manager of Borrower or any other officer of Borrower which the president or chief financial officer may from time to time designate in writing to the Agent as having authority to act with respect to the Loan Documents and the transactions contemplated thereby. "Bank" has the meaning set forth in the introductory paragraph of this Agreement. "Base Rate" means, as determined by the Agent on a daily basis, the higher of (i) the variable rate per annum established by Boatmen's from time to time as its corporate base rate for short-term commercial loans to corporate borrowers (which Borrower acknowledges is not necessarily the lowest rate offered by Boatmen's), and (ii) the overnight cost of funds of Boatmen's as determined solely by Boatmen's plus a margin of 1/2% per annum. Each change in the Base Rate shall become effective, without prior notice to Borrower, automatically as of the opening of business on the date of such change in the Base Rate. "Base Rate Loan" means a Loan to be made or continued as or converted into such a designated Loan pursuant to the applicable Notice of Borrowing or Continuation/Conversion Notice, as the case may be, which will bear interest at the Base Rate. "Boatmen's" has the meaning set forth in the introductory paragraph of this Agreement. "Borrowing" means a borrowing pursuant to a Notice of Borrowing or a continuation or a conversion pursuant to Section 2.5 consisting, in each case, of the same Type of Loan having in the case of LIBOR Loans, the same Interest Period and made previously or being made concurrently by all of the Banks. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in St. Louis, Missouri are authorized or required by law to close. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP. ANNEX B - Page 3 75 "Change in Control" means, other than as a result of the public offering of previously unissued common stock of Borrower, (i) John Marmaduke, the Estate of Sam Marmaduke and members of the immediate families of John Marmaduke and Sam Marmaduke (collectively, the "Marmaduke Family") shall cease to collectively be the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act) of at least 30% of the combined voting power of the then outstanding voting securities of Borrower normally entitled to vote in elections of directors; or (ii) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than the Marmaduke Family or any member thereof, is or becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 40% of the combined voting power of the then outstanding securities of Borrower normally entitled to vote in elections of directors; or (iii) during any period of 12 consecutive months, Continuing Directors cease for any reason (other than death or disability) to constitute a majority of the Board of Directors of Borrower then in office. "Class" has the meaning set forth on Section 1.2(f). "Closing Date" means December 12, 1994. "Code" means the Internal Revenue Code of 1986, as heretofore and hereafter amended, or any successor statute. "Commitment" means a Term Commitment or a Revolving Commitment, and "Commitments" means two or more of the foregoing, as the context may require. "Contested Claim" means any Tax, Indebtedness or other claim or liability, (i) the validity or amount of which is being diligently contested in good faith by appropriate proceedings being diligently prosecuted, (ii) for which adequate reserves, if required by GAAP, have been established and (iii) with respect to which any right to execute upon or sell any Property or assets of Borrower has not matured or has been and continues to be effectively enjoined, superseded or stayed. "Continuation/Conversion Notice" has the meaning set forth in Section 2.5(a). "Continuing Directors" means any member of the Board of Directors of Borrower on the date of this Agreement, any director elected since the date thereof in any annual meeting of the stockholders upon the recommendation of the Board of Directors of Borrower or any other member of the Board of Directors of Borrower who will be recommended or elected to succeed a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors of Borrower. "Credit Event" means the making or continuation of, or conversion into, any Loan or the issuance of any Letter of Credit, or any extension thereof or other amendment or modification thereto. ANNEX B - Page 4 76 "Current Assets" means, at any time, (i) the current assets of Borrower determined in accordance with GAAP (without regard to the book value of prerecorded video tapes held for rental by Borrower) plus (ii) an amount equal to the book value of prerecorded video tapes held for rental by Borrower. "Current Liabilities" means, at any time, (i) the current liabilities of Borrower determined in accordance with GAAP (without regard to the principal amount of outstanding Revolving Loans) plus (ii) the principal amount of outstanding Revolving Loans. "Debtor Laws" means all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization or similar Laws, or general equitable principles, from time to time in effect, affecting the Rights of creditors generally or providing for relief to debtors. "Default" means any of the events specified in Section 7.1, regardless of whether there shall have occurred any passage of time or giving of notice or both that would be necessary in order to constitute such event an Event of Default. "Default Rate" means, at the time in question, the lesser of (i) the Base Rate, as in effect for each day during such time, plus 3% and (ii) the Maximum Rate. "Dividends" means, in respect of any corporation, limited liability company or similar Person, cash distributions or any other distributions (whether in cash, Property or obligations) on, or in respect of, any class of capital stock of such entity, except for distribution made solely in shares of common stock. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" opposite its name on Annex A attached hereto and made a part hereof or such other office of such Bank as such Bank may from time to time specify to Borrower and the Agent. "EBITDA" means, for any period, the net income (plus or minus any extraordinary charges or credits) of Borrower for such period plus (i) interest expense of Borrower for such period with respect to the Loans and all other borrowed-money Indebtedness and the interest expense component under Capitalized Lease Obligations plus (ii) income tax expense of Borrower for such period plus (iii) the aggregate amount deducted in determining net income of Borrower for such period for depreciation and amortization of Property. "EBITR" means, for any period, the net income (plus or minus any extraordinary charges or credits) of Borrower for such period plus (i) interest expense of Borrower for such period with respect to the Loans and all other borrowed-money Indebtedness and the interest expense component under Capitalized Lease Obligations plus (ii) income tax expense of Borrower for such period plus (iii) rental expense of Borrower for such period. ANNEX B - Page 5 77 "Environmental Complaint" means any third party (including private parties, governmental agencies, and employees) action, lawsuit, claim, demand, event, condition, report, investigation or proceeding which seeks to impose liability for (i) noise; (ii) pollution or contamination of the air, surface water, groundwater, or land; (iii) generation, handling, treatment, storage, disposal, or transportation of Hazardous Materials; (iv) exposure to Hazardous Materials; or (v) non-compliance with any Environmental Law. "Environmental Law" shall mean any federal, state, or local law, statute, ordinance, or regulation pertaining to health, industrial hygiene, or the environmental conditions, including without limitation, (i) the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984, as now or hereafter amended (42 U.S.C. Section 6901 et seq.); (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, as now or hereafter amended (42 U.S.C. Section 9601 et seq.); (iii) the Clean Water Act, as now or hereafter amended (33 U.S.C. Section 1251 et seq.); (iv) the Toxic Substances Control Act, as now or hereafter amended (15 U.S.C. Section 2601 et seq.); (v) the Clean Air Act, as now or hereafter amended (42 U.S.C. Section 7401 et seq.), Texas Solid Waste Disposal Act (V.T.C.A. Health and Safety Code Section 361.001 et seq.) and the Texas Water Code (V.T.C.A. Water Code Sections 26.001-26.407); (vi) all regulations promulgated under any of the foregoing; (vii) any local, state or foreign law, statute, regulation or ordinance analogous to any of the foregoing; and (viii) any other federal, state, local, or foreign law (including any common law), statute, regulation, or ordinance, regulating, prohibiting, or otherwise restricting the placement, discharge, release, threatened release, generation, treatment, or disposal upon or into any environmental media of any substance, pollutant, or waste which is now or hereafter classified or considered to be hazardous or toxic to human health or the environment. "Environmental Liability" means any claim, demand, obligation, cause of action, order, violation, damage, injury, judgment, penalty or fine, cost of enforcement, cost of remedial action or any other cost or expense whatsoever, including reasonable attorneys' fees and disbursements, resulting from the violation or alleged violation of any Environmental Law, the storage, handling, transportation or release of Hazardous Materials, or the imposition of any Environmental Lien. "Environmental Lien" means a Lien in favor of a Governmental Authority or other Person (i) for any liability under an Environmental Law or (ii) for damages arising from or costs incurred by such Governmental Authority or other person in response to a release or threatened release of hazardous or toxic waste, substance or constituent into the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, together with all presently effective and future regulations issued pursuant thereto. "Event of Default" shall have the meaning set forth in Section 7.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. ANNEX B - Page 6 78 "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal fund transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Financing Parties" has the meaning set forth in Section 10.8. "Fiscal Quarter" and "Fiscal Year" refer to the fiscal quarter and fiscal year of Borrower. "Fixed Charges" means, for any period, without duplication, the sum of (i) rental expense of Borrower for such period plus (ii) interest expense of Borrower for such period on Loans and any other borrowed-money Indebtedness and the interest expense component under Capitalized Lease Obligations plus (iii) principal payments of Borrower scheduled for such period on the Loans and all other borrowed-money Indebtedness which has a maturity date at least 12 months from the date of initial borrowing (including the capital portion of payments under Capital Lease Obligations) plus (iv) income tax expense of Borrower for such period plus (v) cash dividends paid by the Borrower during such period to its stockholders plus (vi) cash payments by Borrower during such period to redeem outstanding shares of its capital stock. "Funded Debt" means, as of any time, the outstanding principal balance of (i) the Notes plus (ii) Reimbursement Obligations plus (iii) any other borrowed-money Indebtedness of Borrower. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "Governmental Authority" means, whether now or hereafter constituted and/or existing, (i) any government or nation, (ii) any state, province, commonwealth, territory, possession, county, parish, town, township, city or municipality, (iii) any other Person or entity that exercises executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, government, (iv) any political or other authority, district or subdivision of any of the Persons or entities referred to in the preceding clauses (i), (ii) and (iii), (v) any court, tribunal, panel, board, commission, department, agency, bureau, examiner or instrumentality of the Persons or entities referred to in the preceding clauses (i), (ii), (iii) and (iv), and (vi) any arbitrator, mediator or arbitration and/or mediation panel, board or the like, whether impaneled pursuant to Laws, by contract or otherwise. ANNEX B - Page 7 79 "Guarantee" means, directly or indirectly (without duplication): (i) guarantee or guaranty, as applicable, an endorsement, an assumption, or an undertaking, an understanding or a contingent agreement or other agreement (hereinafter in this definition, the foregoing shall be collectively referred to as "any agreement", or "any other agreement", as the context may require) to purchase or acquire, or to furnish funds or Property for the payment or maintenance of, or otherwise to be or become liable (contingently, irrevocably, absolutely or otherwise) under or with respect to, or to perform or cause to be performed, the Indebtedness (or any Property constituting security therefor), other obligations and liabilities, net worth, capital requirements, working capital, earnings, financial condition or position, or financial covenants of any Person, or the redemption or repurchase obligations of any Person's capital stock, warrants or stock or other equity, partnership or similar capital equivalents, or any class or nature; (ii) a guarantee of, or any other agreement for, the payment of dividends or other distributions upon the stock, equity, partnership or other interests of any Person; (iii) any agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of its obligations or Indebtedness, or to provide assurances thereof to any creditor or other obligee of a debtor; (iv) any agreement to assure a creditor or other obligee against any loss, including but without limitation, causing a bank or other Person to issue a letter of credit or other similar instrument for the benefit of another Person; or (v) any agreement commonly known as or referred to as a "comfort" or "keepwell" letter or agreement; provided however, in no event shall "Guarantee" include endorsements for collection or deposit made in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "Hazardous Discharge" means the happening of any event, status or circumstance involving the use, storage, spill, transportation, removal, disposal, discharge or cleanup of any Hazardous Material. "Hazardous Material" means (i) any hazardous substance defined in the Comprehensive Response, Compensation and Liability Act 42 U.S.C. Section 9601 et seq.; (ii) any substance the presence of which on any Property requires reporting or remediation under any Environmental Law; (iii) gasoline, diesel fuel, fuel oil, motor oil and any other petroleum hydrocarbons, including any additives or other byproducts associated therewith; and (iv) asbestos and asbestos-containing materials in any form. "Indebtedness" means, for any Person (without duplication), any liability, indebtedness or obligation, contingent or otherwise, of such Person: (i) for borrowed money (whether by loan or the issuance and sale of debt securities or instruments or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (ii) evidenced by bonds, notes, debentures or similar instruments; (iii) representing the deferred purchase or acquisition price of Property or services, including trade accounts payable; (iv) with respect to amounts or obligations Guaranteed or Indebtedness of another secured by a Lien on the Property of such Person, whether or not the respective indebtedness or obligations so secured have been assumed by such Person; (v) with respect to ANNEX B - Page 8 80 reimbursement of, or payment in respect to, letters of credit, bankers' acceptances, surety or other bonds or similar instruments issued or credit transactions; (vi) for any Guarantee of such Person; (vii) under, or in respect of, an interest rate swap, cap or collar agreement or similar arrangement providing for the transfer or mitigation of interest or currency risks generally or under specific contingencies; (viii) under leases serving as a source of financing or otherwise capitalized in accordance with GAAP; (ix) under sales or other title retention agreements; (x) under, or in respect of, any indemnity and similar obligations, howsoever arising, including, indemnities incurred or arising in connection with the purchase, sale or use of Property, the scope of which indemnity is unlimited, unqualified or unquantifiable, or exceeds the fair market value of the Property being purchased, sold or used, or pertains to Environmental Liability or to the negligence, actions, omissions or other activities of any Person; (xi) under, or in respect of, any partnership, joint venture or similar entity in which such Person is a general partner, joint venturer or similar participant; (xii) in respect of unfunded vested benefits under any Plan; (xiii) to redeem, repurchase, retire or otherwise acquire any shares of capital stock, warrants, stock equivalents or other evidences of equity of any class or nature of such person, or to set apart any money or other Property for a defeasance, shaking or analogous fund for any Dividend or distribution thereon, or for any redemption, repurchase, retirement or other acquisition thereof, or (xiv) which would under GAAP be shown on such Person's balance sheet as a liability. "Interest Period" means with respect to each Borrowing consisting of a LIBOR Loan, the period commencing on the date of such Borrowing and ending one, two or three months thereafter, as Borrower may elect in the applicable Notice of Borrowing or Continuation/Conversion Notice; provided that: (i) any Interest Period which would otherwise end on a day that is not a LIBOR Business Day shall be extended to the next succeeding LIBOR Business Day unless such LIBOR Business Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding LIBOR Business Day; (ii) any Interest Period which begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last LIBOR Business Day of a calendar month; and (iii) no Interest Period applicable to a Term Loan shall be elected that extends beyond the Tenn Commitment Termination Date, and no Interest Period applicable to a Revolving Loan shall be elected that extends beyond the Revolving Commitment Termination Date. "Investment" in any Person means any investment, whether by means of share purchase, loan, advance, extension of credit (other than to customers of such Person in the ordinary course of such Person's business), capital contribution or otherwise, in or to such Person, the guarantee ANNEX B - Page 9 81 of any Indebtedness of such Person or the subordination of any claim against such Person to other Indebtedness of such Person. "Issuing Bank" has the meaning set forth in the introductory paragraph hereof. "Issuing Bank Parties" has the meaning set forth in Section 2.14(g). "Judgment" means any judgment, order, levy, abstract, mandamus, decree, injunction, restraining order or other directive, demand or the like, of any Governmental Authority, howsoever issued by it (whether pursuant to its equity rights or powers, or otherwise). "Laws" means all applicable statutes, laws, ordinances, regulations, rules, directives, guidelines, interpretations, rulings, orders, requirements, determinations, judgments, writs, injunctions, decrees and other similar pronouncements or directives of any Governmental Authority, and "Law" means each of the foregoing. "LC Documents" means, collectively, (i) each Letter of Credit, (ii) any application, reimbursement agreement, pledge agreement, remarketing agreement, note, and other agreements, documents, certificates and instruments now or hereafter relating to such Letters of Credit, and (iii) the other documents, instruments, agreements and certificates executed or delivered in connection with the items in clauses (i) and (ii) preceding, as the same may be amended, modified, supplemented, renewed, extended, increased, restated, refinanced, refunded and/or replaced from time to time, with such changes to (i), (ii) and (iii) as the Agent and the Issuing Bank shall have approved. "Legal Rights" means, with respect to a Person, and to such Person's business, operations and Property, all licenses, permits, certificates franchises, authorizations, consents, approvals, patents and patent rights, trademarks and trademark rights, tradenames and tradename rights, copyrights, service marks, applications, registrations and other similar rights, privileges and authorities, used or useful and required of such Person and/or for such Person to own and/or operate its business and Property. "Lending Office" means, as to any Bank, its Domestic Lending Office or its LIBOR Lending Office, as the context may require. "Letter of Credit" means any letter of credit issued pursuant to Section 2.14. "Letter of Credit Event" means any proceeding brought by or against Borrower, or any event, occurrence or circumstance in respect to a Letter of Credit, wherein the payment of such Letter of Credit is disputed, or the basis for such payment is disputed, or assertions with respect to any of the foregoing are made, including, without limitations disputes between or involving the respective account party and/or beneficiary of such Letter of Credit, or the commencement of any injunctive action or relief by any Person in connection therewith. ANNEX B - Page 10 82 "Letter of Credit Exposure" means, at any time without duplication, the sum of (i) the aggregate undrawn amount of all unexpired Letters of Credit, plus (ii) the aggregate unpaid amount of all Reimbursement Obligations due and payable at such time in respect of previous drawings made under Letters of Credit or under any LC Documents. "Letter of Credit Limit" means $5,000,000. "LIBOR Business Day" means any Business Day on which commercial banks are open for international business in London. "LIBOR Lending Office" means, as to any Bank, its office, branch or Affiliate identified in Annex A as its LIBOR Lending Office or such other office, branch or Affiliate of such Bank as it may hereafter designate as its LIBOR Lending Office by notice to Borrower and the Agent. "LIBOR Loan" means a Loan to be made or continued as or converted into such a designated Loan pursuant to the applicable Notice of Borrowing or Continuation/ Conversion Notice, as the case may be, which will bear interest at the Adjusted London Interbank Offered Rate. "LIBOR Rate Borrowing" means a Borrowing consisting of a LIBOR Loan. "LIBOR Reserve Percentage" means, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York with deposits exceeding five billion dollars in respect of "Eurocurrency Liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Lien" means any lien, mortgage, tax lien, pledge, encumbrance, Environmental Lien, easement, restriction, right-of-way, charge or adverse claim affecting title or use of, or resulting in an encumbrance against, Property of a Person, or a security interest, conditional sale or title retention arrangement, or any other interest in Property designed to secure the repayment of a liability or the performance of an obligation or agreement, whether arising by agreement, under any Law or otherwise, including, without limitation, any lease in the nature thereof, any option, right of first refusal or other similar agreement to sell, and any filing of, or agreement to give, any financing statement under the UCC or equivalent statute in any jurisdiction or any other instrument that evidences the creation, perfection, continuation, notice and/or other aspect of a present or future Lien or asserted Lien. ANNEX B - Page 11 83 "Litigation" means any proceeding, judicial, arbitral, mediation or otherwise) claim, complaint, demand, lawsuit, hearing, inquiry and/or investigation conducted or threatened by or before any Governmental Authority. "Loan" means any advance by the Banks to Borrower pursuant to their Revolving Commitments and their Term Commitments. "Loan Documents" means this Agreement, each Note and any and all other agreements, documents, promissory notes, instruments, reports, opinions, requests, certificates, notices, filings and all other documents, instruments, agreements and writings, now or hereafter executed or delivered pursuant to, or in connection with, this Agreement, or the transactions provided for herein or contemplated hereby, or in or by any other Loan Document, each of the foregoing being in form, scope and substance satisfactory to the Banks. "London Interbank Offered Rate" means, with respect to any Interest Period, the rate per annum (rounded to the nearest 1/100 of 1%) shown on page 3750 of the Dow Jones & Company Telerate screen or any successor page as the composite offered rate for London interbank deposits with a period equal to such Interest Period two LIBOR Business Days before the first day of such Interest Period. In the event that the London Interbank Offered Rate is no longer published or reported as specified above, then the parties shall use the rate of interest published in the Wall Street Journal (Southwest Edition) in the "Money Rates" section as the "London Interbank Offered Rates (LIBOR)" for a period of time equal or comparable to the applicable Interest Period, as of two Business Days preceding the date of Borrowing, in which case Borrower agrees it will no longer have the option to choose 60 days as an Interest Period with respect thereto. "Material Adverse Effect" means any circumstance or event which, individually or in the aggregate with other circumstances or events, (i) could have any material adverse effect whatsoever upon the validity, performance, perfection or enforceability of any Loan Documents, or (ii) could be material and adverse to the financial condition, business, operations or prospects of Borrower, taken as a whole, or the Property of Borrower, taken as a whole, (iii) could impair the ability of Borrower to fulfill promptly and completely its obligations under any of the Loan Documents to which is a party, or (iv) could result in or cause a Default or an Event of Default. "Maximum Rate" means, with respect to each of the Agent, the Issuing Bank and the Banks and on any and with respect to each day, the maximum lawful non-usurious rate of interest (if any) which, under Applicable Law, it is permitted or authorized to contract for, charge, collect, receive, take or reserve from Borrower on its Notes or other Obligations owed or owing to it, as the case may be, from time to time in effect, including changes in such Maximum Rate attributable to changes under Applicable Law which permit a greater rate of interest to be contracted for, charged, collected, received, taken or reserved as of the effective dates of the respective changes. ANNEX B - Page 12 84 "Negative Pledge" means any term, provision, agreement, contract or undertaking that, directly or indirectly, (i) precludes or restricts, or purports to preclude or restrict, the imposition or voluntary creation of, a Lien on Property, or (ii) upon the imposition or voluntary creation of a Lien on Property, requires the owner, lessee or other interest holder therein or thereto to incur an obligation (payment, performance, creation of a Lien or otherwise) to a Person, or requires such owner, lessee or other interest holder to provide, or cause to be provided, any assurances or security to a Person, which assurances and security did not theretofore exist and/or was not theretofore required, whether such assurances or security consist of collateral, guaranties, modifications or supplements to then existing agreements, new agreements, or otherwise. "Note" means a Term Note or a Revolving Note, and "Notes" means the Term Notes or the Revolving Notes, or all of them, and as otherwise provided in Section 2.3(b). "Notice of Borrowing" has the meaning set forth in Section 2.2(a). "Notice of Default" has the meaning set forth in Section 8.3. "Obligations" means all obligations, indebtedness, fees, expenses, costs, indemnities and other indemnification obligations, and liabilities of Borrower to the Agent and the Banks, now existing or hereafter arising, whether direct or indirect, related or unrelated, fixed or contingent, liquidated or unliquidated, joint, several or joint or several, or otherwise, and all renewals, extensions, increases, refinancings, rearrangements or modifications thereof, or any part thereof, arising pursuant to, or in connection with, this Agreement or any other Loan Document (including, without limitation and without duplication, the Letters of Credit, the Letter of Credit Exposure and the Reimbursement Obligations), and all interest accruing thereon (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Borrower, would accrue on such Obligations), and attorneys, fees incurred in the enforcement or collection thereof. "PBGC" means the Pension Benefit Guaranty Corporation, and any successor to all or any of the Pension Benefit Guaranty Corporation's functions under ERISA. "Participant" has the meaning set forth in Section 10.6(b). "Permitted Indebtedness" has the meaning stated in Section 6.2. "Permitted Liens" means: (i) Liens imposed by mandatory provisions of Law such as carrier's, materialmen's, mechanics', warehousemen's, landlord's and other like Liens arising in the ordinary course of business, securing Indebtedness not yet due, (ii) Liens for Taxes, if the same are not yet due and payable or qualify as a Contested Claim, (iii) encumbrances consisting of minor zoning restrictions, easements or other restrictions on the use of real Property, provided that such items do not or will not impair or interfere with the use of such Property for the purposes intended or the value thereof, (iv) pledges or deposits in connection with or to secure ANNEX B - Page 13 85 worker's compensation, unemployment insurance, pensions or other employee benefits, or public or statutory obligations, (v) purchase money security interests securing Indebtedness permitted under Section 6.2(vi), and (vi) Liens that exist on Property owned by Borrower on the date of this Agreement and are listed in Schedule 4.5, together with all renewals, extensions, refinancing and modifications (but not increases) of the Indebtedness secured thereby. "Person" includes any individual, corporation, company, joint venture, general or limited partnership, trust, organization, association, limited liability partnership, limited liability company or other entity (whether or not incorporated), or Governmental Authority. "Plan" means any plan subject to Title IV of ERISA and maintained at any time since January 1, 1986 for employees of Borrower or of any member of a "controlled group of corporations" or "trade or business," as such terms are defined in Section 414(b) or (c) of the Code, of which Borrower is a member, or any plan subject to Title IV of ERISA to which Borrower is required to contribute, or has been required to contribute at any time since January 1, 1986, on behalf of its employees. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible (including, without limitation, Legal Rights). "Purchaser" has the meaning set forth in Section 103(c). "Qualified Bank" means any commercial bank located in the USA, which is organized under the laws of the USA or any state thereof, insures its deposits with the Federal Deposit Insurance Corporation (or any successor) and has capital, surplus and undivided profits aggregating at least $100,000,000 as of the date of such commercial bank's most recent financial report. "Quarterly Date" means each April 1, July 1, October 1 and January 1. "Regulation D", "Regulation G", "Regulation T", "Regulation U" and "Regulation X" mean Regulation D, G, T, U or X, as the case may be, of the Board of Governors of the Federal Reserve System, or any successor or other regulation hereafter promulgated by said Board to replace the prior Regulation D, G, T, U or X and having substantially the same function. "Reimbursement Obligations" means, at any date, the obligations of Borrower then outstanding, or which may thereafter arise, in respect of Letters of Credit then outstanding, under Section 2.14 to reimburse the Issuing Bank for the amount paid by the Issuing Bank in respect of a drawing under a Letter of Credit or any other amounts payable under any of the LC Documents. "Required Banks" means, as of the date of any determination, Banks that hold at least 66 2/3 % of the Commitments or, if the Commitments shall have been terminated, holding Notes ANNEX B - Page 14 86 and having issued (or purchased participations in) Letters of Credit evidencing 66 2/3 % of the sum of the aggregate unpaid principal amount of the Loans and unexpired Letters of Credit. "Revolving Availability Period" means the period from and including the Closing Date to but not including the Revolving Commitment Termination Date. "Revolving Commitment" means, as to any Bank and on each relevant date of determination, the obligation of such Bank to make Revolving Loans to Borrower in an aggregate principal amount at any one time outstanding not exceeding the amount set forth opposite such Bank's name in Annex A under the caption "Revolving Commitment", as the same may be reduced from time to time pursuant to this Agreement, including reductions attributable to each Unavailable Commitment for the applicable quarterly period. "Revolving Commitment Termination Date" means the earlier to occur of (i) January 31, 1997 and (ii) the date upon which the Revolving Commitments of all Banks have been terminated pursuant to the terms of this Agreement. "Revolving Loan" has the meaning set forth in Section 2.1(b). "Revolving Note" means a promissory note executed by Borrower, substantially in the form of Exhibit C hereto and otherwise in form and substance satisfactory to the Agent, payable to the order of each Bank and evidencing the obligation of Borrower to repay Revolving Loans made to it by such Bank. "Rights" means rights, remedies, powers and privileges. "Subsidiary" means, for any Person, any corporation or "other entity (including, without limitation, any partnership or joint venture) (i) of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other Persons having similar powers and/or performing similar functions of such corporation or other entity (irrespective of whether or not at any time securities or other ownership interests of any class or classes of such corporation or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person, or (ii) of which such Person is a general partner, joint venturer or similar capacity. "Tangible Net Worth" means, as of any date, the total shareholders' equity (including common stock and preferred stock [other than mandatorily redeemable stock] at stated value, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on a balance sheet of Borrower prepared as of such date in accordance with GAAP, Pius subordinated Indebtedness in form and substance satisfactory to the Agent, less the sum of the following: (i) intellectual property rights, (ii) goodwill and experimental expenses, (iii) unamortized debt discount and expense, (iv) costs in excess of fair value of the net assets ANNEX B - Page 15 87 acquired. If (x) Borrower becomes a public company and (y) is required by Regulation S-X, any Financial Reporting Releases, Staff Accounting Bulletins or other pronouncement or promulgation by the U.S. Securities and Exchange Commission (collectively, "SEC Requirements"), to present any portion of shareholders' equity separately in its publicly-filed financial statements differently from a presentation that would appear when presented in accordance with GAAP (SEC Requirements notwithstanding), due to Borrower's obligations with respect to redemption or repurchase of shares of its capital stock, then GAAP accounting conventions shall prevail for the purpose of determining Tangible Net Worth. "Taxes" means all taxes, assessments, fees, levies, imposts, duties, penalties or other charges of any nature whatsoever from time to time or at any time imposed by any Law or any Governmental Authority, whether on income, profits, Property, sales, use, excise, franchises, capital, ownership, operations or otherwise. "Temporary Cash Investment" means any Investment in (i) direct obligations of the USA or any agency thereof, or obligations fully guaranteed by the USA or any agency thereof (including indirect investments in such obligations through repurchase agreements with the Agent or any Qualified Bank), provided that such obligations mature within 6 months of the date of acquisition thereof, (ii) commercial paper rated at least A-1 by Standard & Poors or at least P-1 by Moody's Investor Service and maturing not more than 6 months from the date of acquisition thereof, (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, the Agent, (iv) commercial paper maturing not more than 30 days from the acquisition thereof issued by any Bank (or the parent of any Bank) and (v) Eurodollar investments made available through any Bank or brokerage company. "Term Availability Period" means the period from and including June 1, 1995 to but not including the Term Commitment Termination Date. "Term Commitment" means, as to any Bank and on each relevant date of determination, the obligation of such Bank to make Term Loans to Borrower in an aggregate principal amount at any one time outstanding not exceeding the amount set forth opposite such Bank's name in Annex A under the caption "Term Commitment", as the same may be reduced from time to time pursuant to this Agreement, including reductions attributable to each Unavailable Commitment for the applicable quarterly period. "Term Commitment Termination Date" means the earlier to occur of (i) June 1, 1996, and (ii) the date upon which the Term Commitments of all Banks have been terminated pursuant to the terms of this Agreement. "Term Loan" has the meaning set forth in Section 2.1(a). "Term Note" means a promissory note executed by Borrower, substantially in the form of Exhibit B hereto and otherwise in form and substance satisfactory to the Agent, payable to the ANNEX B - Page 16 88 order of each Bank and evidencing the obligation of Borrower to repay Tenn Loans made to it by such Bank. "Transferee" has the meaning set forth in Section 10.7(d). "Type" has the meaning set forth in Section 1.2(f). "UCC" means the Uniform Commercial Code of the State of Texas and of any other state to the extent Texas Law requires application of the same. "UCP" has the meaning set forth in Section 2.14(b). "USA" means the United States of America. "Unavailable Commitment" has the meaning set forth in Section 2.7(a). "Voting Shares" of any corporation means shares of any class or classes (however designated) having ordinary voting power for the election of at least a majority of the members of the Board of Directors (or other governing bodies) of such corporation. ANNEX B - Page 17 89 ANNEX C CONDITIONS PRECEDENT: INITIAL LOAN (AND/OR INITIAL LETTER OF CREDIT) (a) Agreement and Schedules. This Agreement duly executed by Borrower, and all Schedules, duly and fully completed, that are provided for in this Agreement. (b) Revolving Notes. A Revolving Note duly executed by Borrower in favor of each Bank in the respective amount of such Bank's Revolving Commitment. (c) Term Notes. A Term Note duly executed by Borrower in favor of each Bank in the respective amount of such Bank's Term Commitment. (d) Opinion of Counsel to Borrower. Opinion of legal counsel for Borrower in the form of Exhibit F. (e) Notice of Borrowing and Other Certificates. A Notice of Borrowing duly completed and executed by Borrower, and a Compliance Certificate in the form of Exhibit E duly completed and executed by Borrower. (f) Secretary Certificate. A Certificate signed by the secretary of Borrower, which secretary's office and signature shall be confirmed by another officer of Borrower dated and effective as of the Closing Date attaching thereto or containing therein, and certifying as to the following: (i) corporate resolutions, as in effect and neither revoked nor rescinded, duly adopted by the board of directors of Borrower authorizing the execution, delivery and performance of the Loan Documents and the transactions contemplated thereby; (ii) true, complete and accurate copies of the articles of incorporation and bylaws, as amended and in effect, of Borrower; and (iii) names, incumbency and specimen signatures of the officers of Borrower authorized to execute and deliver the Loan Documents. (g) Official Certificates. Certificates as to incorporation, existence and good standing for Borrower issued by the Secretary of State (and/or other appropriate official) of the state of incorporation of Borrower and certificates of foreign qualification and good standing (or other similar instruments) for Borrower, issued by the Secretary of State (and/or other appropriate official) of each of the states wherein Borrower is or should be qualified to do business as a foreign corporation, each of the foregoing certificates being dated within 30 days prior to the date of the Closing Date. (h) Articles of Incorporation and Bylaws. A copy of the Articles of Incorporation of Borrower and all amendments thereto, certified by the Secretary of State of the state of incorporation of Borrower as being true, complete and accurate, and being dated within 30 days prior to the Closing Date. ANNEX C - Page 1 90 (i) Litigation Report. A report of Borrower describing all pending or threatened Litigation by or against Borrower or any of its Property (including Litigation for which Borrower will be responsible after the Closing Date). There shall be no outstanding order or injunction of any Governmental Authority which would prohibit (i) the execution, delivery or performance, now or hereafter, of any Loan Document or (ii) any of the transactions contemplated by the Loan Documents. (j) Environmental Reports. Copies of all environmental surveys or reports relating to real Property owned or leased by Borrower which have heretofore been performed or prepared (each of which is described in Schedule 4.20 hereof). (k) Insurance Certificates. A certificate from each insurer or duly authorized insurer's Agent of Borrower setting forth a listing of all insurance coverage of Borrower and reflecting that the policies evidencing such coverage conforms to the requirements of this Agreement and each of the other Loan Documents, including, without limitation, modification endorsements as specified in Section 5.10. In addition, Borrower shall deliver a certificate executed by an Authorized Officer setting forth the insurance obtained by Borrower in accordance with the requirements of Section 5.10 and certifying that such insurance is in full force and effect and that all premiums then due and payable thereon have been paid. (l) Financial Statements. Copies of financial statements of Borrower for the most recent period required under Section 5.1. (m) UCC Reports. Copies of the results of Uniform Commercial Code searches showing all financing statements and other documents or instruments on file against Borrower in the appropriate central and local offices of the relevant jurisdictions, each such search to be through a search period ending as of a date no more than 10 days prior to the Closing Date. (n) Regulatory and Other Approvals. Evidence that all necessary approvals or consents of Governmental Authorities and all other Persons have been obtained. (o) Compliance with Laws. Evidence that Borrower has complied with all Laws necessary to consummate the transactions contemplated by this Agreement and each of the other Loan Documents. (p) Fees. Payment of (i) the facility fee payable to the Agent on the Closing Date, and (ii)fees of counsel to the Banks payable by Borrower in connection with the preparation, negotiation and closing of the transactions contemplated by this Agreement (Borrower's obligations under clause (ii) are limited to $25,000). (q) Additional Documentation. Such additional approvals, opinions, documents, instruments, reports, certifications and/or agreements as the Agent, the Banks or their counsel may reasonably request. ANNEX C - Page 2 91 Hastings books - music - video March 17, 1995 Re: Credit Agreement dated December 12, 1994, among Hastings Books, Music & Video, Inc. as borrower, The Boatmen's National Bank of St. Louis, individually and as the Agent and certain other financial institutions that are a party thereto (the "Credit Agreement") (terms used below that are defined in the Credit Agreement shall have the meanings set forth therein) The Boatmen's National Bank of St. Louis, as Agent 800 Market Street St. Louis, Missouri 63166 Gentlemen: This letter will serve to confirm our request that the definition of "Tenn Availability Period" as set forth in the Credit Agreement, be modified to provide that the Tenn Availability Period will commence as of March 17, 1995 instead of June 1, 1995. We understand, that this change will have the effect of commencing the quarterly fee payable under Section 2.6(a) of the Credit Agreement as of March 17, 1995. If the foregoing is acceptable, please indicate your agreement as the Agent by executing this letter where indicated below. Also, as required under Section 10.6 of the Credit Agreement, please have the Required Banks sign below to indicate their agreement with the foregoing. Any approval of the foregoing by the Agent and the Banks shall not constitute a consent to any other or similar requests made by the Borrower in the future. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ GENE P. JONES ---------------------------------------- Gene P. Jones Vice President, Secretary, Treasurer and Chief Financial Officer ANNEX C - Page 3 92 AGREED AS OF THE DATE OF THIS LETTER: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS individually and as the Agent By: /s/ DAVID E. WILSDORF ------------------------------- Name: David E. Wilsdorf ----------------------------- Title: Vice President ---------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ MARK J. DENTON ------------------------------- Name: Mark J. Denton ----------------------------- Title: Senior Vice President ---------------------------- FIRST INTERSTATE BANK OF TEXAS, N.A. By: /s/ KIMBERLY WHITE ------------------------------- Name: Kimberly White ----------------------------- Title: Banking Officer ---------------------------- ANNEX C - Page 4 93 AMENDMENT TO CREDIT AGREEMENT This Amendment to Credit Agreement (this "Amendment") is entered into as of November 8, 1995, among (a) HASTINGS BOOKS, MUSIC & VIDEO, INC., a Texas corporation ("Borrower") (b) THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, a national banking association ("Boatmen's Bank"), individually, as the issuing Bank and as the Agent, and (c) the other financial institutions that are now or hereafter parties to the Credit Agreement described below (each a "Bank") and collectively the "Banks"). Recitals A. Borrower, Boatmen's Bank individually, as the Bank and as the Agent, and the other Banks have heretofore entered into the Credit Agreement dated as of December 12, 1994, as amended by the Letter Agreement dated March 17, 1995 (as amended, modified, restated and supplemented from time to time, the "Credit Agreement"). B. Borrower has requested that the Banks agree to (i) temporarily increase their aggregate Revolving Commitments from $30,000,000 to $40,000,000 for the period commencing on the date of this Amendment and ending on April 30, 1996, whereupon such aggregate Revolving Commitments will automatically be reduced to $30,000.000; and (ii) extend the Revolving Availability Period to January 31, 1998. C. The Banks are willing to agree to such requested changes on the terms and conditions set forth in this Amendment. Agreements In consideration of the foregoing premises, the mutual agreements contained herein and other good and valuable consideration and reasonably equivalent value, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the respective meanings set forth in the Credit Agreement. 2. Amendments. The Credit Agreement is hereby amended as follows: (a) Temporary Increase in Revolving Commitments. To reflect the temporary increase in the aggregate Revolving Commitments of the Banks from $30,000,000 to $40,000,000 for the period commencing on the date of this Amendment and ending on April 30, 1996, Annex A attached to the Credit Agreement is hereby amended and replaced with the Annex A attached to this Amendment. All references in the Credit Agreement and other Loan Documents to the "Revolving Commitments" of the Banks shall hereafter refer to such revised amounts, as the same may be reduced from time to time pursuant to the terms of the Credit Agreement. 94 (b) Renewal Revolving Notes. To evidence Revolving Loans made to Borrower by each Bank up to the amount of such Bank's Revolving Commitment, as revised hereby, Borrower shall execute and deliver to each Bank a Renewal Revolving Note in the form attached hereto as Exhibit A, payable to the order of such Bank and in a stated principal amount equal to such Bank's Revolving Commitment, as revised hereby. On the date hereof, Borrower shall execute and deliver to each Bank such a Renewal Revolving Note as a renewal, modification and increase of the existing Revolving Note issued to such Bank pursuant to the Credit Agreement. All references in the Credit Agreement and the other Loan Documents to the "Revolving Notes" of the Banks shall hereafter refer to the Renewal Revolving Notes executed and delivered pursuant to this Amendment, as further amended, modified, restated, supplemented, renewed, extended, increased, refinanced and/or replaced from time to time. (d) Mandatory Prepayment. Section 2.8 of the Credit Agreement is hereby amended to add the following new subsection (d): "(d) As described on Annex A attached hereto, the aggregate Revolving Commitments of al Banks are automatically reduced to $30,000,000 at 12:00 noon (St. Louis time) on April 30, 1996. Upon the effectiveness of such automatic reduction, Borrower shall immediately prepay the Revolving Loans in an amount such that the aggregate principal amount of all Revolving Loans outstanding plus the Letter of Credit Exposure does not exceed the aggregate amount of the Revolving Commitments of all Banks as so reduced. Any such prepayment shall be accompanied by, and Borrower shall pay, interest thereon which has accrued until the date of payment thereof." (c) Extension of Revolving Availability Period. To reflect the extension of the Revolving Availability Period, the referenced to "January 31, 1997" in Section 2.7(e) of the Credit Agreement is hereby amended to refer to "January 31, 1998." (e) Revolving Commitment Termination Date. The definition of "Revolving Commitment Termination Date" as set forth in Annex B attached to the Credit Agreement is hereby amended to read in its entirety as follows: "Revolving Commitment Termination Date" means the earlier to occur of (i) January 31, 1998 and (ii) the date upon which the Revolving Commitments of all Banks have been terminated pursuant to the terms of this Agreement. 3. In order to induce the Agent and the Banks to enter into this Amendment, Borrower hereby represents and warrants to the Agent and the Banks that, as of the date of this Amendment, (a) the representations and warranties set forth in the Credit Agreement and each -2- 95 other Loan Document are true and correct as if made on and as o the date hereof (other than those representations and warranties expressly limited by their terms to a specific date), (b) no Default or Event of Default has occurred and in continuing, and (c) no event has occurred since the date of the most recent financial statements delivered pursuant to Section 5.1 of the Credit Agreement that has caused a Material Adverse Effect. 4. Borrower hereby acknowledges and agrees that no facts events, status or conditions presently exist which, either now or with the passage of time or the giving of notice or both, presently constitute or will constitute a basis for any claim or cause of action against any of the Banks, or any defense to the payment of any of the indebtedness evidenced or to be evidenced by any of the Loan Documents. 5. Each Loan Document is hereby amended and modified to the extent necessary to give full force and effect to the terms of this Amendment, and each such Loan Document shall hereafter be construed and interpreted after giving full force and effect to the terms of this Amendment. As amended, modified and supplemented pursuant to this Amendment, Borrower hereby ratifies, confirms and restates each Loan Document and agrees that each such Loan Document shall continue in full force and effect. Each of the Loan Documents now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as mended hereby, or as further evidence of or in connection with the Credit Agreement, as amended hereby, are hereby amended to the extent necessary so that any reference in any such documents, instruments or agreements to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby. 6. In the event that any one or more of the provisions contained in this Amendment shall be determined invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision or provisions in every other respect and the remaining provisions of this Amendment shall not be impaired in any way. 7. When required or implied by the context used, defined terms herein shall include the plural as well as the singular, and vice versa. 8. The Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas and applicable federal laws of the United States of America. 9. This Amendment shall be binding upon and inure to the benefit of all parties hereto and their respective successors and assigns; provided, however, that neither Borrower nor any of its successors or assigns may, without the prior written consent of all of the Banks, assign any rights, powers, duties or obligations hereunder. 10. This Amendment maybe executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. -3- 96 11. The Amendment constitutes a Loan Document. 12. Upon execution of this Agreement by the Banks, Borrower shall pay the Agent, for the ratable account of the Banks, a non-refundable amendment fee equal to $12,500. [signatures on next page] -4- 97 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the day and year first above written. BORROWER HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ JOHN H. MARMADUKE -------------------------------------- Name: John H. Marmaduke ------------------------------------ Title: Chairman & CEO ----------------------------------- AGENT/BANKS: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, Individually, as the Agent and the Issuing Bank By: /s/ DAVID E. WILSDORF -------------------------------------- Name: David E. Wilsdorf ------------------------------------ Title: Vice President ----------------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ MARK J. DENTON -------------------------------------- Name: Mark J. Denton ------------------------------------ Title: Senior Vice President ----------------------------------- TEXAS COMMERCE BANK OF TEXAS, N.A. By: /s/ KIMBERLY WHITE -------------------------------------- Name: Kimberly White ------------------------------------ Title: Assistant Vice President ----------------------------------- -5- 98 THIRD AMENDMENT TO CREDIT AGREEMENT This Third Amendment to Credit Agreement (this "AMENDMENT") is entered into as of April 30, 1996, among (a) HASTINGS BOOKS, MUSIC & VIDEO, INC., a Texas corporation ("BORROWER"), (b) THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, a national banking association ("BOATMEN'S BANK"), individually, as the Issuing Bank and as the Agent, and (c) the other financial institutions that are now or hereafter parties to the Credit Agreement described below (each a "BANK" and collectively the "BANKS"). RECITALS A. Borrower, Boatmen's Bank individually, as the Issuing Bank and as the Agent, and the other Banks have heretofore entered into the Credit Agreement dated as of December 12, 1994, as amended by the Letter Agreement dated March 17, 1995 and the Amendment to Credit Agreement dated November 8, 1995 (as amended, modified, restated and supplemented from time to time, the "CREDIT AGREEMENT"). B. Borrower has requested that the Banks agree to (i) extend the temporary increase in their aggregate Revolving Commitments from April 30, 1996 until June 30, 1996, whereupon such aggregate Revolving Commitments will automatically be reduced from $40,000,000 to $30,000,000; (ii) extend the Revolving Availability Period from January 31,1998 to April 30, 1999; (iii) fix the Applicable Margin at 3/4 or 1% per annum from the date hereof until the first Fiscal Quarter of the 1997 Fiscal Year and provide for the determination of the Applicable Margin thereafter; (iv) reduce the fee from 1/4 of 1% to .1875 of 1% per annum on the total unused and available portion of the Revolving Commitments and Term Commitments of all Banks; (v) add a definition of Adjusted EBITDA, and replace the Funded Debt to EBITDA ratio with a Funded Debt to Adjusted EBITDA ratio; (vi) revise the definition of Fixed Charges, and replace the ratio of EBITR to Fixed Charges with a ratio of Adjusted EBITDAR to Fixed Charges; (vii) revise the definition of Tangible Net Worth to include the LIPO reserve and deferred income taxes; (viii) delete the ratio of Current Assets to Current Liabilities; and (ix) permit Borrower to issue up to $30,000,000 of unsecured promissory notes on or before September 30,1996, whereupon Borrower shall immediately prepay the entire outstanding principal balance of the Term Loans. C. The Banks are willing to agree to such requested changes on the terms and conditions set forth in this Amendment. AGREEMENTS In consideration of the foregoing premises, the mutual agreements contained herein and other good and valuable consideration and reasonably equivalent value, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the respective meanings set forth in the Credit Agreement. 2. Amendments. The Credit Agreement is hereby amended as follows: 99 (a) Extension of Temporary Increase in Revolving Commitments. To reflect the extension from April 30, 1996 until June 30, 1996 of the temporary increase in the Revolving Commitments from $30,000,000 to $40,000,000, all references to "12:00 noon (St. Louis time) on April 30, 1996" in Annex A attached to the Credit Agreement are hereby amended and replaced with "12:00 noon (St. Louis time) on June 30, 1996." (b) Extension of Revolving Availability Period. To reflect the extension of the Revolving Availability Period, the reference to "January 21, 1998" in Section 2.7(e) of the Credit Agreement is hereby amended to refer to "April 30, 1999." In addition, to reflect the ability of Banks to elect to extend such termination date for the Revolving Commitments for either up to an additional one-year or two-year period, the reference to "an additional one-year period" in Section 2.7(e) of the Credit Agreement is hereby amended to refer to "an additional one-year or two-year period." (c) Revolving Commitment Termination Date. The definition of "Revolving Commitment Termination Date" set forth in Annex B attached to the Credit Agreement is hereby amended to read in its entirety as follows: "Revolving Commitment Termination Date" means the earlier to occur of (i) April 30, 1999 and (ii) the date upon which the Revolving Commitments of all Banks have been terminated pursuant to the terms of this Agreement. (d) Adjust the Applicable Margin. The definition of "Applicable Margin" set forth in Annex B with respect to Term Loans, including the table thereunder with respect to Term Loans, shall remain unchanged, and, subject to subsection (dd) below, the definition of Applicable Margin with respect to Revolving Loans is hereby amended to add the following subsections (aa), (bb), (cc) and (dd), following subsection (b) thereof: (aa) From April 30, 1996 until determined pursuant to subsection (bb) below, the Applicable Margin with respect to Revolving Loans shall be equal to 3/4 of 1%; (bb) Commencing upon receipt of the certificate required Section 5.1(e) of the Credit Agreement for the first Fiscal Quarter of the 1997 Fiscal Year, the Applicable Margin with respect to Revolving Loans shall be equal to the percentage set forth below based upon the ratio of Funded Debt to Adjusted EBITDA as of the end of each such Fiscal Quarter with respect to the four fiscal-quarter period ending as of the end of such Fiscal Quarter; 2 100
====================================================================================================== LIBOR Spread - ------------------------------------------------------------------------------------------------------ Ratio of Funded Debt to Adjusted EBITDA Revolving Loans - ------------------------------------------------------------------------------------------------------ Less than 1.50 to 1.00 .75 - ------------------------------------------------------------------------------------------------------ Greater than or equal to 1.50 to 1.00 but less than 1.75 to 1.00 .875 - ------------------------------------------------------------------------------------------------------ Greater than or equal to 1.75 to 1.00 but less than 2.00 to 1.00 1.00 - ------------------------------------------------------------------------------------------------------ Greater than or equal to 2.00 to 1.00 1.25 ======================================================================================================
(cc) Each determination of the Applicable Margin pursuant to subsection (bb) above shall be determined by the Agent within 10 days after the delivery to it of a certificate required by Section 5.1(e). Promptly upon each such determination, the Agent shall notify Borrower and each Bank of such determination. Each change in the Applicable Margin shall remain effective until the next such determination. (dd) Paragraphs (aa), (bb) and (cc) above shall become void and of no further force or effect if (i) the Note Offering is not closed and funded on or before September 30, 1996; or (ii) the rate of interest on the Indebtedness evidenced by the notes issued by Borrower pursuant to the Note Offering exceeds the sum of (A) the yield on the 10.75% United States Treasury Notes due May 2003, as per PX7 of Bloomberg, at the time the rate of interest on the Indebtedness evidenced by the notes issued by Borrower pursuant to the Note Offering is determined (ie, the time of the circle), plus (B) 1.35%; and the Applicable Margin with respect to Revolving Loans shall revert to the Applicable Margin in effect immediately prior to the Third Amendment of this Agreement, which Applicable Margin is set forth in (a) above. (e) Reduction of Certain Fees. To reflect the reduction of certain fees, both references to "1/4 of 1%" in Section 2.6(a) of the Credit Agreement are hereby amended to refer to ".1875 of 1%." (f) Definition of Adjusted EBITDA. Annex B attached to the Credit Agreement is hereby amended to add the following definition of "Adjusted EBITDA": "Adjusted EBITDA" means, for any period, the net income (plus or minus any extraordinary charges or credits) of Borrower for such period plus (i) interest expense of Borrower for such period with respect to the Loans and all other borrowed-money Indebtedness and the interest expense component under Capitalized Lease Obligations plus (ii) income tax expense of Borrower for such period plus (iii) other non-cash items plus (iv) the aggregate amount deducted in determining net income of Borrower for such period for depreciation (excluding depreciation relating to video tapes held for rental) and amortization of Property. 3 101 (g) Change of Funded Debt to EBITDA Ratio. To reflect a change of the Funded Debt to EBITDA ratio, the reference to "EBITDA" in Section 6.1(e) of the Credit Agreement is hereby amended to be "Adjusted EBITDA," and the reference to "2.00 to 1.00" in Section 6.1(e) of the Credit Agreement is hereby amended to be "2.50 to 1.00." (h) Definition of EBITR. The definition of "EBITR" set forth in Annex B attached to the Credit Agreement is hereby deleted in its entirety and replaced with the following definition: "Adjusted EBITDAR" means, for any period, the net income (plus or minus any extraordinary charges for credits) or Borrower for such period plus (i) interest expense of Borrower for such period with respect to the Loans and all other borrowed-money Indebtedness and the interest expense component under Capitalized Lease Obligations plus (ii) income tax expense of Borrower for such period plus (iii) other non-cash items plus (iv) the aggregate amount deducted in determining net income of Borrower for such period for depreciation (excluding depreciation relating to video tapes held for rental) and amortization of Property plus (v) rental expense of Borrower for such period. (i) Change of EBITR to Fixed Charges Ratio. Section 6.1(b) of the Credit Agreement is hereby amended to read in its entirety as follows: (b) The ratio of Adjusted EBITDAR to Fixed Charges to be less than 2.00 to 1.00 as of the end of any Fiscal Quarter for the four-quarter period ending as of the end of such Fiscal Quarter; or (j) Definition of Fixed Charges. The definition of "Fixed Charges" as set forth in Annex B attached to the Credit Agreement is hereby amended to read in its entirety as follows: "Fixed Charges" means, for any period, without duplication, the sum of (i) rental expense of Borrower for such period plus (ii) interest expense of Borrower for such period on Loans and any other borrowed-money Indebtedness and the interest expense component under the Capitalized Lease Obligations. (k) Definition of Tangible Net Worth. The definition of "Tangible Net Worth" set forth in Annex B attached to the Credit Agreement is hereby amended to read in its entirety as follows: "Tangible Net Worth" means, as of any date, the total shareholders' equity (including common stock and preferred stock [other than mandatorily redeemable stock] at stated value, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on a balance sheet of Borrower prepared as of such date in accordance with GAAP plus (i) subordinated Indebtedness in forma and substance satisfactory to the Agent, (ii) LIFO reserve and (iii) deferred income taxes, less the sum of the following: (i) intellectural property rights, (ii) goodwil and experimental expenses, (iii) unamortized debt 4 102 discount and expense, (iv) costs in excess of fair value of the net assets acquired. If (x) Borrower becomes a public company and (y) is required by Regulation S-X, any Financial Reporting Releases, Staff Accounting Bulletins or other prounouncement or promulgation by the U.S. Securities and Exchange Commission (collectively, "SEC REQUIREMENTS"), to present any portion of shareholders' equity separately in its publicly-filed financial statements differently from a presentation that would appear when presented in accordance with GAAP (SEC Requirements notwithstanding), due to Borrower's obligations with respect to redemption or repurchase of shares of its capital stock, then GAAP accounting conventions shall prevail for the purpose of determining Tangible Net Worth. (l) Delete Current Assets to Current Liabilties Ratio. Section 6.1(a) of the Credit Agreement is hereby deleted in its entirety. (m) Permit Note Offering. Section 6.2 of the Credit Agreement is hereby amended to add the following new subsection (vii): "(vii) Indebtedness of Borrower evidenced by promissory notes issued by Borrower pursuant to the Note Offering; provided that all of the following conditions are met: (i) such notes are issued only for cash, (ii) the Indebtedness evidenced by such notes is less than or equal to $30,000,000, (iii) the Indebtedness evidenced by such notes is unsecured and parri passu with the Obligations, (iv) Borrower prepays the Revolving Loans and Term Loans required under Sections 2.8(d) and (e); and (v) the Note Offering closes and is funded no later than September 30, 1996." (n) Mandatory Prepayment. Section 2.8 of the Credit Agreement is hereby amended to (i) revise Section 2.8(d) to read in its entirety as follows, and (ii) to add the following new subsection (e): (d) On the earlier to occur of (i) the closing and funding of the Note Offering, and (ii) 12:00 noon (St. Louis time) on June 30, 1996, the aggregate Revolving Commitments of all Banks shall automatically be reduced to $30,000,000. In addition, on the date of the closing and funding of the Note Offering, the aggregate Revolving Commitments of all Banks shall automatically be further reduced by the amount, if any, by which the Indebtedness of Borrower evidenced by the promissory notes issued by borrower pursuant to the Note Offering exceeds $25,000,000. Upon the effectiveness of any of the foregoing automatic reductions, Borrower shall immediately prepay the revolving Loans in an amount such that the aggregate principal amount of all Revolving Loans outstanding plus the Letter of Credit Exposure does not exceed the aggregate amount of the Revolving Commitments of all Banks as so reduced. Any such prepayment shall be accompanied by, and Borrower shall pay, interest thereon which has accrued until the date of payment thereof. (e) On the date of the closing and funding of the Note Offering, the Term Commitment shall automatically terminate and Borrower shall immediately 5 103 prepay the entire outstanding principal balance of the Term Loans. Any such prepayment shall be accompanied by, and Borrower shall pay, interest thereon which has accrued until the date of payment thereof. (o) Definition of Note Offering. Annex B attached to the Credit Agreement is hereby amended to add the following definition of "Note Offering": "Note Offering" means the offering of Senior Notes contemplated by Borrower to close no later than September 30, 1996, such notes to be in the principal amount of up to $30,000,000. (p) Revisions to Exhibit E. Exhibit E attached to the Credit Agreement is hereby amended and replaced with Exhibit E attached to this Agreement. 3. In order to induce the Agent and the Banks to enter into this Amendment, Borrower hereby represents and warrants to the Agent and the Banks that, as of the date of this Amendment, (a) the representations and warranties set forth in the Credit Agreement and each other Loan Document are true and correct as if made on and as of the date hereof (other than those representations and warranties expressly limited by their terms to a specific date), (b) no Default or Event of Default has occurred and is continuing, and (c) no event has occurred since the date of the most recent financial statements delivered pursuant to Section 5.1 of the Credit Agreement that has caused a Material Adverse Effect. 4. Borrower hereby acknowledges and agrees that no facts events, status or conditions presently exist which, either now or with the passage of time or the giving of notice or both, presently constitute or will constitute a basis for any claim or cause of action against any of the Banks, or any defense to the payment of any of the indebtedness evidenced or to be evidenced by any of the Loan Documents. 5. Each Loan Document is hereby amended and modified to the extent necessary to give full force and effect to the terms of this Amendment, and each such Loan Document shall hereafter be construed and interpreted after giving full force and effect to the terms of this Amendment. As amended, modified and supplemented pursuant to this Amendment, Borrower hereby ratifies, confirms and restates each Loan Document and agrees that each such Loan Document shall continue in full force and effect. Each of the Loan Documents now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the credit Agreement, as amended hereby, are hereby amended to the extent necessary so that any reference in any such documents, instruments or agreements to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby. 6. In the event that one or more of the provisions contained in this Amendment shall be determined invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision or provisions in every other respect and the remaining provisions of this Amendment shall not be impaired in any way. 7. When required or implied by the context used, defined terms used herein shall include the plural as well as the singular, and vice versa. 6 104 8. This Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas and applicable federal laws of the United States of America. 9. This Amendment shall be binding upon and inure to the benefit of all parties hereto and their respective successors and assigns; provided, however, that neither Borrower nor any of its successors or assigns may, without the prior written consent of all of the Banks, assign any rights, powers, duties or obligations hereunder. 10. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 11. This Amendment constitutes a Loan Document. [signatures on next page] 7 105 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the day and year first above written. BORROWER HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ DENNIS MCGILL ------------------------------------- Name: Dennis McGill ----------------------------------- Title: CFO-VP- Finance ---------------------------------- AGENT/BANKS: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, Individually, as Agent and the Issuing Bank By: /s/ DWIGHT D. ERDBRUEGGER ------------------------------------- Name: Dwight D. Erdbruegger ----------------------------------- Title: Vice President ---------------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ MARK DENTON ------------------------------------- Name: Mark Denton ----------------------------------- Title: Senior Vice President ---------------------------------- FIRST INTERSTATE BANK OF TEXAS, N.A. By: /s/ KIMBERLY K. WELCH ------------------------------------- Name: Kimberly K. Welch ----------------------------------- Title: Assistant Vice President ---------------------------------- 8 106 FOURTH AMENDMENT TO CREDIT AGREEMENT This Fourth Amendment to Credit Agreement (this "Amendment") is entered into as of June 12, 1996, among (a) HASTINGS BOOKS, MUSIC & VIDEO, INC., a Texas corporation ("Borrower"), (b) THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, a national banking association ("Boatmen's Bank"), individually and as the Issuing Bank and as the Agent, and (c) the other financial institutions that are now or hereafter parties to the Credit Agreement described below (each a "Bank" and collectively the "Banks"). Recitals A. Borrower, Boatmen's Bank individually, as the Issuing Bank and as the Agent, and the other Banks have heretofore entered into the Credit agreement dated as of December 12, 1994, as amended by the Letter Agreement dated March 17, 1995, the Amendment to Credit Agreement dated November 8, 1995, and the Third Amendment to Credit Agreement dated April 12, 1996 (as amended, modified, restated and supplemented from time to time, the "Credit Agreement"). B. Borrower has requested that the Banks agree to allow Borrower to grant a negative pledge in connection with the Note Offering. C. The Banks are willing to agree to such requested changes on the terms and conditions set forth in this Amendment. Agreements In consideration of the foregoing premises, the mutual agreements contained herein and other good and valuable consideration and reasonably equivalent value, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the respective meanings set forth in the Credit Agreement. 2. Amendment. Section 6.3 of the Credit Agreement is hereby amended to read as follows: Section 6.3 Limitation on Property. Borrower will not (I) grant, create, enter into, incur, permit or suffer to exist, upon or with regard to any of its respective Property now owned or hereafter acquired, (A) any Lien, except for Permitted Liens, or (B) any Negative Pledge, except for the benefit of the Agent, the Issuing Bank and Banks, or the purchasers of the promissory notes issued by Borrower pursuant to the Note Offering, or (ii) enter into any sale-and-lease back transaction. Anything in the foregoing or elsewhere in the Loan Documents to the contrary notwithstanding, it is understood that no Liens, other than Permitted Liens, or Negative Pledges, except for the benefit of the Banks or the purchasers of the promissory notes issued by Borrower pursuant to the Note Offering, are permitted on or with respect to any of the Property of Borrower. 107 3. In order to induce the Agent and the Banks to enter into this Amendment, Borrower hereby represents and warrants to the Agent and the Banks that, as of the date of this Amendment, (a) the representations and warranties set forth in the Credit Agreement and each other Loan Document are true and correct as if made on and as of the date hereof (other than those representations and warranties expressly limited by their terms to a specific date), (b) no Default or Event of Default has occurred and is continuing, and (c) no event has occurred since the date of the most recent financial statement delivered pursuant to Section 5.1 of the Credit Agreement that has caused a Material Adverse Effect. 4. Borrower hereby acknowledges and agrees that no facts, events, status or conditions presently exist which, either now or with the passage of time or the giving of notice or both, presently constitute or will constitute a basis for any claim or cause of action against any of the Banks, or any defense to the payment of any of the indebtedness evidenced or to be evidenced by any of the Loan Documents. 5. Each Loan Document is hereby amended and modified to the extent necessary to give full force and effect to the terms of this Amendment, and each such Loan Document shall hereafter be construed and interpreted after giving full force and effect to the terms of this Amendment. As amended, modified and supplemented pursuant to this Amendment, Borrower hereby ratifies, confirms and restates each Loan Document now or hereafter executed and delivered in full force and effect. Each of the Loan Documents now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, or as further evidence of or in connection with the Credit Agreement, as amended hereby, are hereby amended to the extent necessary so that any reference in any such documents, instruments or agreements to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby. 6. In the event that ny one or more of the provisions contained in this Amendment shall be determined invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision or provisions in even other respect and the remaining provisions of this Amendment shall not be impaired in any way. 7. When required or implied by the contest used, defined terms used herein shall include the plural as well as the singular, and vice versa. 8. This Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas and applicable federal laws of the United States of America. 9. This Amendment shall be binding upon and inure to the benefit of all parties hereto and their respective successors and assigns; provided, however, that neither Borrower nor any of its successors may, without the prior written consent of all of the Banks, assign any rights, powers, duties or obligations hereunder. -2- 108 10. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 11. This Amendment constitutes a Loan Document. BORROWER: HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ DENNIS MCGILL -------------------------------------- Dennis McGill Chief Financial Officer, and Vice President Finance AGENT/BANKS: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS Individually, as the Agent and the Issuing Bank By: /s/ DAVID WILSDORF -------------------------------------- Name: David Wilsdorf ------------------------------------ Title: Vice President ----------------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ KEVIN KELTY -------------------------------------- Name: Kevin Kelty ------------------------------------ Title: Senior Vice President ----------------------------------- FIRST INTERSTATE BANK OF TEXAS, N.A. By: /s/ KIMBERLY K. WELCH -------------------------------------- Name: Kimberly Welch ------------------------------------ Title: Assistant Vice President ----------------------------------- -3- 109 FIFTH AMENDMENT TO CREDIT AGREEMENT This Fifth Amendment to Credit Agreement (this "Amendment") is entered into as of September 5, 1995, among (a) HASTINGS BOOKS, MUSIC & VIDEO, INC., a Texas corporation ("Borrower"), (b) THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, a national banking association ("Boatmen's Bank"), individually, as the Issuing bank and as the Agent, and (c) the other financial institutions that are now or hereafter parties to the Credit Agreement described below (each a "Bank" and collectively the "Banks"). RECITALS A. Borrower, Boatmen's Bank individually, as the Issuing Bank and as the Agent, and the other Banks have heretofore entered into the Credit Agreement dated as of December 12, 1994, as amended by the Letter Agreement dated March 17, 1995, the Amendment to Credit Agreement dated November 8, 1995, the Third Amendment to Credit Agreement dated April 30, 1996 and the Fourth Amendment to Credit Agreement dated June 12, 1996 (as amended, modified, restated and supplemented from time to time, the "Credit Agreement"). B. Borrower has requested that the Banks agree to (i) permanently increase their aggregate Revolving Commitments from $30,000,000 to $45,000,000; and (ii) change the Funded Date to Adjusted EBITDA ration from "2.50 to 1.00" to "2.25 to 1.00." C. The Banks are willing to agree to such requested changes on the terms and conditions set forth in this Amendment. AGREEMENTS In consideration of the foregoing premises, the mutual agreements contained herein and other good and valuable consideration and reasonably equivalent value, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the respective meanings set forth in the Credit Agreement. 2. Amendments. The Credit Agreement is hereby amended as follows; (a) Extension of Permanent Increase in Revolving Commitments. To reflect the permanent increase in the Revolving Commitments form $30,000,000 to $45,000,000, Annex A attached to the Credit Agreement is hereby amended and replaced with Annex A attached to this Amendment. All references in the Credit Agreement and other Loan Documents to the "Revolving Commitments" of the Banks shall thereafter refer to such revised amounts. (b) Renewal Revolving Notes. To evidence Revolving Loans made to Borrower by each Bank up to the amount of such Bank's Revolving Commitment, as revised hereby, Borrower shall execute and deliver to each Bank a Renewal Revolving 110 Note in the form attached hereto as Exhibit A, payable to the order of such Bank and in a stated principal amount equal to such Bank's Revolving Commitment, as revised hereby. ON the date hereof, borrower shall execute and deliver to each Bank such a Renewal Revolving Note as a renewal, modification and increase of the existing Revolving Note issued to such Bank pursuant to the Credit Agreement. All references in the Credit Agreement and the other Loan Documents to the "Revolving Notes" of the Banks shall hereafter refer to the Renewal Revolving Notes executed and delivered pursuant to this Amendment, as further amended, modified, restated, supplemented, renewed, extended, increased, refinanced and/or replaced from time to time. (c) Change of Funded Debt to Adjusted EBITDA Ratio. To reflect a change of the Funded Debt to Adjusted EBITDA ratio, the reference to "2.50 to 1.00" in Section 6.1(c) of the Credit Agreement is hereby amended to be "2.25 to 1.00". 3. In order to induce the Agent and the Banks to enter into this Amendment, Borrower hereby represents and warrants to the Agent and the Banks that, as of the date of this Amendment, (a) the representations and warranties set forth in the Credit Agreement and each other Loan Document are true and correct as if made on and as of the date hereof (other than those representations and warranties expressly limited by their terms to a specific date), (b) no Default or Event of Default has occurred and is continuing, and (c) no event has occurred since the date of the most recent financial statements delivered pursuant to Section 5.1 of the Credit Agreement that has caused a Material Adverse Effect. 4. Borrower hereby acknowledges and agrees that no facts events, status or conditions presently exist which, either now or with the passage of time or the giving of notice or both, presently constitute or will constitute a basis for any claim or cause of action against any of the Banks, or any defense to the payment of any of the indebtedness evidenced or to be evidenced by any of the Loan Documents. 5. Each Loan Document is hereby amended and modified to the extent necessary to give full force and effect to the terms of this Amendment, and each such Loan Document shall hereafter be construed and interpreted after giving full force and effect to the terms of this Amendment. As amended, modified and supplemented pursuant to this Amendment, Borrower hereby ratifies, confirms and restates each Loan Document and agrees that each such Loan Document shall continue in full force and effect. Each of the Loan documents now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, or as further evidence of or in connection with the Credit Agreement, are hereby amended to the extent necessary so that any reference in any such documents, instruments or agreements to the Credit agreement shall be a reference to the Credit Agreement as amended hereby. 6. In the event that any one or more of the provisions contained in this amendment shall be determined invalid, illegal or unenforceable in any respect for any reason, the validity, -2- 111 legality and enforceability of any such provision or provisions in every other respect and the remaining provisions of the Amendment shall not be impaired in any way. 7. When required or implied by the context used, defined terms used herein shall include the plural as well as the singular, and vice versa. 8. This Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas and applicable federal laws of the United States of America. 9. This Amendment shall be binding upon and inure to the benefit of all parties hereto and their respective successors and assigns; provided, however, that neither Borrower nor any of its successors or assigns may, without the prior written consent of all of the banks, assign any rights, powers duties or obligations hereunder. 10. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 11. This Amendment constitutes a Loan Document. 12. Upon the execution of this Amendment, Borrower shall pay to the Agent, for the ratable benefit of Banks, a non-refundable placement fee in the amount of $12,000.00. [signatures on next page] -3- 112 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the day and year first above written. BORROWER HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ DENNIS MCGILL -------------------------------------- Name: Dennis McGill ------------------------------------ Title: CFO-VP Finance ----------------------------------- AGENT/BANKS: THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, Individually, as the Agent and the Issuing Bank By: /s/ DWIGHT D. ERDBRUEGGER -------------------------------------- Name: Dwight D. Erdbruegger ------------------------------------ Title: Vice President ----------------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ MARK DENTON -------------------------------------- Name: Mark Denton ------------------------------------ Title: Senior Vice President ----------------------------------- WELLS FARGO BANK (TEXAS), National Association By: /s/ KIMBERLY K. WELCH -------------------------------------- Name: Kimberly Welch ------------------------------------ Title: Assistant Vice President ----------------------------------- -4- 113 ANNEX A THE BOATMEN'S NATIONAL BANK OF ST. LOUIS 1. Domestic Lending Office: The Boatmen's National Bank of St. Louis 800 Market Street St. Louis, Missouri 63166 2. LIBOR Lending Office: The Boatmen's National Bank of St. Louis 800 Market Street St. Louis, Missouri 63166 3. Revolving Commitment: $16,876,000 4. Total Commitment: $16,875,000 5. Information for Notices: the Boatmen's National Bank of St. Louis 800 Market Street St. Louis, Missouri 63166 Attention: David Wilsdorf Phone: (314) 466-7681 Fax: (314) 466-6499 Annex A-1 114 ANNEX A TEXAS COMMERCE BANK NATIONAL ASSOCIATION 1. Domestic Lending Office: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 2. LIBOR Lending Office: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 3. Revolving Commitment: $14,062,500 4. Total Commitment: $14,062,500 5. Information for Notices: Texas Commerce Bank National Association 2200 Ross Avenue, 3rd Floor Dallas, Texas 75201 Attention: Mark Denton Phone: (214) 965-2246 Fax: (214) 965-2990 Annex A-2 115 ANNEX A FIRST INTERSTATE BANK OF TEXAS, N.A. 1. Domestic Lending Office: First Interstate Bank of Texas, N.A. 1000 Louisiana Houston, Texas 77002 2. LIBOR Lending Office: First Interstate Bank of Texas, N.A. 1000 Louisiana Houston, Texas 77002 3. Revolving Commitment: $14,062,500 4. Total Commitment: $14,062,500 5. Information for Notices: First Interstate Bank of Texas, N.A. 1000 Louisiana Houston, Texas 77002 Attention: Kimberly Welch Phone: (817) 885-1122 Fax: (817) 885-1110 Annex A-3 116 EXHIBIT A RENEWAL REVOLVING NOTE $_________________________ September 5, 1996 For value received, HASTINGS BOOKS, MUSIC & VIDEO, INC., a Texas corporation (the "Maker'), irrevocably and unconditionally promises to pay to the order of _________________________ (the "Bank"), at the principal office of THE BOATMEN'S NATIONAL BANK OF ST. LOUIS in St. Louis, Missouri, as Agent for the Banks, the principal sum of _________________________ AND NO/100 DOLLARS ($________________), or such lesser amount as shall equal the aggregate unpaid principal amount of Revolving Loans made by the Bank to the Maker pursuant to the terms of the Credit Agreement referred to below, in lawful money of the USA and in immediately available funds, on the dates and in the principal amounts provided for in the Credit Agreement, and to pay interest on the unpaid principal amount of such Revolving Loans at such office, in like money and funds for the period commencing on the date of each such Revolving Loan until it is paid in full, at the rates and on the dates provided for in the Credit Agreement. All capitalized terms used but not defined herein shall have the meanings set forth in the Credit Agreement referred to below. Principal of and interest on the unpaid principal balance of Revolving Loans under this Note from time to time outstanding shall be due and payable as set forth in the Credit Agreement. This Note is one of the "Revolving Notes" executed by the Maker and is referred to in, governed by, and entitled to the benefits of, the Credit Agreement dated as of December 12, 1994, among the Maker, THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, individually, a s the Agent and as the Issuing Bank, and the financial institutions that are now or hereafter parties thereto (including the Bank), as amended by the Letter Agreement dated March 17, 1995, the Amendment to Credit Agreement dated November 8, 1995, the Third Amendment to Credit Agreement dated April 30, 1996, the Fourth Amendment to Credit Agreement dated June 12, 1996 and the fifth Amendment to Credit Agreement dated September 5, 1996 (as amended, restated, supplemented, renewed, extended or otherwise modified from time to time, "Credit Agreement"), to which reference is made for all relevant intents and purposes, including for a statement of the rights and obligations of the Agent and the Banks and the duties and obligations of the Maker in relation thereto, including mandatory and voluntary prepayments hereof, interest rate and amount limitations and the acceleration of the maturity hereof. however, neither the foregoing reference to the Credit Agreement nor to any provision thereof or referred to therein, shall affect or impair the irrevocable, absolute and unconditional obligation of the Maker to pay principal of, and interest on this Note when due. Unless the maturity of this Note shall have sooner occurred, the outstanding principal balance of this Note and all accrued and unpaid interest thereon shall be finally and fully payable on revolving Commitment Termination Date. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Revolving Loan made by the bank to the Maker, and each payment made on account of the principal thereof, and accrued interest thereon, shall be recorded by the Bank on its books and prior to any transfer of this Note, endorsed by the Bank on a schedule attached hereto or any 117 continuation thereof. The Bank's failure to make or error in making any such recordations or endorsements shall not diminish, reduce or relieve the Maker's obligation to pay (i) all Revolving Loans made by the Bank to the maker and then outstanding and (ii) all accrued and earned interest on the amounts thereof from time to time outstanding and unpaid, pursuant to this Note. The Maker and all sureties, endorsers, guarantors and other Persons ever liable for the payment of any sums payable on this Note, jointly and severally, waive notice, demand, notice of presentment, presentment, presentment for payment, demand for payment, non-payment, notice of dishonor, dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, notice of intent to demand, protest, notice of protest, grace and all formalities and other notices of any and every kind, and filing of suit or diligence in collecting this Note or enforcing (in whole or part) any security or guaranty now or hereafter for the payment of this Note, and consent and agree to any partial or full substitution, exchange or release of any such security or guaranty or the partial or full release of any Person primarily or secondarily liable hereon, and consent and agree that it will not be necessary for any holder hereof, in order to enforce payment by it of this Note to first institute suit or exhaust its remedies against the Maker or any other Persons liable herefor, or to enforce it rights against any such security hereford or guarantor or any other Person with respect hereto, and consent to any or all extensions, increases or renewals or postponements, modifications or rearrangements of time or payment of this Note or any other indulgence with respect hereto, without notice thereof to, or consent thereto from, any of them. Except as provided by Section 10.7 of the Credit Agreement, this Note may not be assigned by the Bank to any Person. This Note (including its validity, enforceability and interpretation) shall be governed by, and construed in accordance with, the laws of the State of Texas (without regard to conflict of law principles) and, to the extent controlling, the federal laws of the USA. This Note is given in renewal, modification and increase of the Renewal Revolving Note dated November 8, 1995, executed by the Maker and payable to the Bank, in the stated principal amount of $___________________. THIS NOTE, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- EX-10.4 8 AMENDED 1996 INCENTIVE STOCK PLAN 1 EXHIBIT 10.4 AMENDED 1996 INCENTIVE STOCK PLAN I. Purpose This 1996 Incentive Stock Plan (the "Plan") is intended to attract, retain and provide incentives to Employees, officers, Directors and consultants of the Company, and to thereby increase overall shareholders' value. The Plan generally provides for the granting of stock, stock options, stock appreciation rights, restricted shares, other stock-based awards or any combination of the foregoing to the eligible participants. II. Definitions (a) "Award" includes, without limitation, stock options (including incentive stock options within the meaning of Section 422(b) of the Code), stock appreciation rights, stock awards, restricted share awards, dividend equivalent rights, or other awards that are valued in whole or in part by reference to, or are otherwise based on, the Common Stock ("other Common Stock-based Awards"), all on a stand alone, combination or tandem basis, as described in or granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms and conditions of each Award made under this Plan. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means: (i) An acquisition by any person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) who is not as of the effective date of the Plan the beneficial holder of at least 10% of the Company's then outstanding common stock, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (x) the then outstanding common stock (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding common stock entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition of Outstanding Company Common Stock by the Company, (2) any acquisition of Outstanding Company Common Stock by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (3) any acquisition of Outstanding Company Common Stock by any person pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this definition; or (ii) A change in the composition of the Board such that the individuals who, as of the effective date of the Plan, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") ceased for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a Director subsequent to such effective date, whose election, or nomination for election by the Company's 2 stockholders, was approved by a vote of at least a majority of those individuals who are Directors and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) The approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding common stock, and the combined voting power of the then outstanding common stock entitled to vote generally in the election of directors, as the case may be, of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no person (other then the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, 30% or more of, respectively, the outstanding shares of common stock of the corporation resulting form such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Corporate Transaction and (3) individuals who were members of the Incumbent Board will constitute at least a majority of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board from time to time to administer this Plan. (g) "Common Stock" means the $.01 par value Class A Common Stock of the Company. (h) "Company" means Hastings Books, Music & Video, Inc., a Texas corporation. 3 (i) "Director" means a member of the Board. (j) "Employee" means an employee of the Company or a Subsidiary. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means during such time as the Common Stock of the Company is not publicly traded, the price per share of Common Stock of the Company established by a fair market evaluation of the Common Stock of the Company performed by an independent third party at the direction of the Company as the value of the Common Stock of the Company held by the Company's profit sharing plan. A.G. Edwards & Sons, Inc., currently provides such an evaluation annually for the Company's profit sharing plan. In the event more than one evaluation is performed annually, the evaluation immediately prior to the date of grant shall be the evaluation used. In the event the Common Stock of the Company becomes publicly traded, Fair Market Value shall mean the average of the opening and closing price of the stock on the day immediately preceding the date of the grant. In the event the Common Stock of the Company is not publicly traded and no evaluation is performed for the Company's profit sharing plan, the Fair Market Value shall be as determined by a majority of the disinterested directors of the Company. (m) "Participant" means an Employee, officer, Director or consultant who has been granted an Award under the Plan. (n) "Plan Year" means a calendar year. (o) "Subsidiary" means any corporation or other entity, whether domestic or foreign, in which the Company has or obtains, directly or indirectly, a proprietary interest of more than 50% by reason of stock ownership or otherwise. III. Eligibility Any Employee, officer, Director or consultant of the Company or Subsidiary selected by the Committee is eligible to receive an Award pursuant to Section VI hereof. IV. Plan Administration (a) Except as otherwise determined by the Board, the Plan shall be administered by the Committee. The Board, or the Committee to the extent determined by the Board, shall periodically make determinations with respect to the participation of Employees, officers, Directors and consultants in the Plan and, except as otherwise required by law or this Plan, the grant terms of Awards, including vesting schedules, retirement and termination rights, payment alternatives such as cash, stock, contingent award or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Board or the Committee deems appropriate which shall be contained in an Award Agreement with respect to a Participant. (b) The Committee shall have authority to interpret and construe the provisions of the 4 Plan and any Award Agreement and make determinations pursuant to any Plan provision or Award Agreement which shall be final and binding on all persons. No member of the Committee shall be liable for any action or determination made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Company's Certificate of Incorporation, as it may be amended from time to time. (c) The Committee shall have the authority at any time to provide for the conditions and circumstances under which Awards shall be forfeited. The Committee shall have the authority to accelerate the vesting of any Award and the time at which any Award becomes exercisable. V. Capital Stock Subject to the Provisions of this Plan (a) The capital stock subject to the provisions of this Plan shall be shares of authorized but unissued Common Stock and shares of Common Stock held as treasury stock. Subject to adjustment in accordance with the provisions of Section X, and subject to Section V(c) below, the maximum number of shares of Common Stock that shall be available for grants of Awards under this Plan shall be 125,000. (b) The grant of a restricted share Award shall be deemed to be equal to the maximum number of shares which may be issued under the Award. Awards payable only in cash will not reduce the number of shares available for Awards granted under the Plan. (c) There shall be carried forward and be available for Awards under the Plan, in addition to shares available for grant under paragraph (a) of this Section V, all of the following: (i) any unused portion of the limit set forth in paragraph (a) of this Section V; (ii) shares represented by Awards which are cancelled, forfeited, surrendered, terminated, paid in cash or expire unexercised; and (iii) the excess amount of variable Awards which become fixed at less than their maximum limitations. VI. Awards Under This Plan As the Board or Committee may determine, the following types of Awards and other Common Stock-based Awards may be granted under this Plan on a stand alone, combination or tandem basis: (a) Stock Option. A right to buy a specified number of shares of Common Stock at a fixed exercise price during a specified time. Unless otherwise specifically provided in an Award Agreement, (i) the exercise price of each share of Common Stock covered by a stock option shall not be less than the Fair Market Value of the Common Stock on the date of the grant of such stock option and (ii) 20% of the shares covered by the stock option shall become exercisable on the first anniversary of its grant and an additional 20% of such shares shall become exercisable on each of the second, third, fourth and fifth anniversary of its grant. (b) Incentive Stock Option. An Award which may be granted only to Employees in the form of a stock option which shall comply with the requirements of Code Section 422 or any successor section as it may be amended from time to time. The exercise price of any 5 incentive stock option shall not be less than 100% if the Fair Market Value of the Common Stock on the date of grant of the incentive stock option Award. An Employee who owns stock representing 10% of the voting power or value of all classes of stock of the Company or a Subsidiary shall only be granted an incentive stock option (i) with an exercise price of at least 110% of the Fair Market Value of the Common Stock on the date of the grant of such option and (ii) that expires 5 years form the date of its grant. Subject to adjustment in accordance with the provisions of Section X, the aggregate number of shares which may be subject to incentive stock option Awards under this Plan shall not exceed the maximum number of shares provided in paragraph (a) of Section V above. To the extent that Code Section 422 requires certain provisions to be set forth in a written plan, said provisions are incorporated herein by this reference. (c) Stock Option in lieu of Compensation Election. A right given with respect to a year to a Director, officer or key Employee to elect to exchange annual retainers, fees or compensation for stock options. (d) Stock Appreciation Right. A right which may or may not be contained in the grant of a stock option or incentive stock option to receive the excess of the Fair Market Value of a share of Common Stock on the date the option is surrendered over the option exercise price or other specified amount contained in the Award Agreement. (e) Restricted Shares. A transfer of Common Stock to a Participant subject to forfeiture until such restrictions, terms and conditions as the Committee may determine are fulfilled. (f) Dividend Equivalent Right. A right to receive dividends or their equivalent in value in Common Stock, cash or in a combination of both with respect to any new or previously existing Award. (g) Stock Award. An unrestricted transfer of ownership of Common Stock. (h) Other Stock-Based Awards. Other Common Stock-based Awards which are related to or serve a similar function to those Awards set forth in this Section VI. VII. Award Agreements Each Award under the Plan shall be evidenced by an Award Agreement setting forth the terms and conditions of the Award and executed by the Company and Participant. VIII. Other Terms and Conditions (a) Assignability. Unless provided to the contrary in any Award, no Award shall be assignable or transferable except by will, by the laws of descent and distribution and during the lifetime of a Participant, the Award shall be exercisable only by such Participant. No Award 6 granted under the Plan shall be subject to execution, attachment or process. (b) Termination of Employment or Other Relationship. The Committee shall determine the disposition of the grant of each Award in the event of the retirement, disability, death or other termination of a Participant's employment or other relationship with the Company or a Subsidiary. (c) Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to shares covered by an Award until the date the Participant is the holder of record. No adjustment will be made for dividends or other rights for which the record date is prior to such date. (d) No Obligation to Exercise. The grant of an Award shall impose no obligation upon the Participant to exercise the Award. (e) Payments by Participants. The Committee may determine that Awards for which a payment is due from a Participant may be payable: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Company, by money transfers or direct account debits; (ii) pursuant to a broker-assisted "cashless exercise" program if established by the Company (iii) with previously owned Common Stock; (iv) by a combination of the methods described in (i) through (iii) above; or (v) by such other methods as the Committee may deem appropriate. (f) Withholding. Except as otherwise provided by the Committee, (i) the deduction of withholding and any other taxes required by law will be made from all amounts paid in cash and (ii) in the case of payments of Awards in shares of Common Stock, the Participant shall be required to pay the amount of any taxes required to be withheld prior to receipt of such stock, or alternatively, a number of shares the Fair Market Value of which equals the amount required to be withheld may be deducted from the payment. (g) Restrictions on Sale and Exercise. With respect to officers and directors for purposes of Section 16 of the Exchange Act, and if required to comply with rules promulgated thereunder, (i) no Award providing for exercise, a vesting period, a restriction period or the attainment of performance standards shall permit unrestricted ownership of Common Stock by the Participant for at least six months from the date of grant, and (ii) Common Stock acquired pursuant to this Plan (other than Common Stock acquired as a result of the granting of a "derivative security") may not be sold for at least six months after acquisition. (h) Change in Control. In the event of a Change in Control, all Awards shall vest, become immediately exercisable and/or cease to be subject to any risk of forfeiture, as the case may be. IX. Termination, Modification and Amendments (a) The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the 7 Company present or represented and entitled to vote at a duly held stockholders meeting. (b) The Board may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that the Board shall not make any material amendments to the Plan which require stockholder approval under applicable law, rule or regulation unless the same shall be approved by the requisite vote of the Company's stockholders. (c) No termination, modification or amendment of the Plan may adversely affect the rights conferred by an Award without the consent of the recipient thereof. X. Recapitalization The aggregate number of shares of Common Stock as to which Awards may be granted to Participants, the number of shares thereof covered by each outstanding Award, and the price per share thereof in each such Award, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Company, or other change in corporate or capital structure; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. The Committee may also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent it is deemed necessary or desirable to preserve the intended benefits of the Plan for the Company and the Participants in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction. XI. No Right to Employment No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or in the other relationship with, the Company or a Subsidiary. Further, the Company and each Subsidiary expressly reserve the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any Award Agreement issued hereunder. XII. Governing Law To the extent that federal laws do not otherwise control, the Plan shall be construed in accordance with and governed by the laws of the State of Texas. XIII. Savings Clause This Plan is intended to comply in all aspects with applicable laws and regulations, including, with respect to those Employees who are officers or director for purposes of Section 16 of the Exchange Act, Rule 16b-3 under the Exchange Act. In case any one more of the 8 provisions of this Plan shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws (including Rule 16b-3) so as to foster the intent of this Plan. XIV. Effective Date and Term The Plan shall become effective upon adoption by the Board, subject to approval of the Plan by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company entitled to vote thereon within one year following adoption of the Plan by the Board. All Awards granted prior to such approval by the stockholders shall be subject to such approval and shall not be exercisable and/or transferable prior thereto. In the event such approval is not obtained within such one-year period, the Plan and all Awards granted thereunder shall be null and void. The Plan shall terminate on the tenth anniversary of the date on which it becomes efficient. No Award shall be granted after the termination of the Plan. EX-10.7 9 ASSOCIATES' 401(K) PLAN & TRUST AGREEMENT 1 EXHIBIT 10.7 HASTINGS ENTERTAINMENT, INC. ASSOCIATES' 401(k) PLAN AND TRUST AGREEMENT 2 TABLE OF CONTENTS
PAGE ARTICLE I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.02 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.03 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE III ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.01 Eligibility for Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.02 Eligibility to Make Elective Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.03 Eligibility Upon Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.04 Omission of Eligible Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.05 Inclusion of Ineligible Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.06 Election Not to Participate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE IV CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.01 Elective Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.02 Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.03 Profit Sharing Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.04 Rollover Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.05 Transfer Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.06 Qualified Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.07 Qualified Non-elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.08 Actual Deferral Percentage Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.09 Limitations on Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.10 Annual Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE V ALLOCATION TO PARTICIPANTS' ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.01 Individual Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.02 Valuation of the Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.03 Priority of Allocations to Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.04 Net Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
i 3 ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.01 Vesting of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.02 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.03 Timing of Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.04 Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.05 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.06 Distribution for Minor Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6.07 Location of Participant, Former Participant or Beneficiary Unknown . . . . . . . . . . . . . . . . . 41 6.08 Limitations on Benefits and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE VII FORMER PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.01 Participation by Former Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.02 Reinstatement of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.03 Separate Account Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.04 Years of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE VIII WITHDRAWALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 8.01 In-service Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 8.02 Hardship Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE IX PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 9.01 Powers and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 9.02 Assignment and Designation of Administrative Authority / Compensation of Benefits Committee . . . . 47 9.03 Allocation and Delegation of Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 9.04 Powers, Duties and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 9.05 Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 9.06 Appointment of Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 9.07 Information from Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9.08 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9.09 Majority Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9.10 Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9.11 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9.12 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 9.13 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 9.14 Claims Review Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ii 4 ARTICLE X TRUST ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10.01 Establishment and Acceptance of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10.02 Scope of Trustee's Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10.03 Powers and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 10.04 Liability of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 10.05 Reliance Upon Acts of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 10.06 Records and Accounting of Trustee / Valuation of Plan Assets . . . . . . . . . . . . . . . . . . . . 56 10.07 Payment of Compensation and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 10.08 Resignation or Removal of Trustee / Withdrawal From Trust . . . . . . . . . . . . . . . . . . . . . 57 10.09 Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 10.10 Accounting Upon Resignation or Removal of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 57 10.11 Employment of Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 10.12 Employer Securities and Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE XI AMENDMENT, TERMINATION AND MERGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 11.01 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 11.02 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 11.03 Successor Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 11.04 Plan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.01 Participant's Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.02 Alienation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.03 Construction of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.04 Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 12.05 Prohibition Against Diversion of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.06 Employer's and Trustee's Protective Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.07 Receipt and Release for Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.08 Action by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.09 Named Fiduciaries and Allocation of Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . 62 12.10 Approval by the Internal Revenue Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 12.11 Uniformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE XIII PARTICIPATING EMPLOYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 13.01 Adoption by Other Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 13.02 Requirements of Participating Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
iii 5 13.03 Designation of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.04 Associate Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.05 Participating Employers Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.06 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.07 Discontinuance of Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 13.08 Plan Administrator's Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE XIV TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 14.01 Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 14.02 Minimum Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 14.03 Super Top-Heavy Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 14.04 Determination of Top Heaviness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 14.05 Determination of Super Top Heaviness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 14.06 Calculation of Top-Heavy Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 14.07 Cumulative Accounts and Cumulative Accrued Accounts . . . . . . . . . . . . . . . . . . . . . . . . 68 14.08 Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 14.09 Top Heavy Vesting Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 ARTICLE XV PLAN LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 15.01 Authorization for Plan Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 15.02 Loan Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 ARTICLE XVI ELIGIBLE ROLLOVER DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 16.01 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 16.02 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
iv 6 ARTICLE I INTRODUCTION THIS AGREEMENT, by and between Hastings Entertainment, Inc., a corporation organized and existing under the laws of the State of Texas (herein referred to as the "Plan Sponsor") and Trustees as shall be appointed from time to time by the Plan Sponsor (herein referred to as the "Trustee") for the benefit of all associates of the Plan Sponsor and its affiliated companies who are or may become eligible hereunder and who elect to participate in the Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust hereby established. W I T N E S S E T H: WHEREAS, the Plan Sponsor heretofore adopted the Western Merchandisers, Inc. Employees Profit Sharing Plan and Trust Agreement (the "Western Merchandisers Plan"), as amended and restated effective June 1, 1989, in recognition of the contribution made to its successful operation by its associates and for the exclusive benefit of its eligible associates; and WHEREAS, the Plan Sponsor is no longer an affiliate of Western Merchandisers, Inc., as defined by Section 414(b) of the Internal Revenue Code of 1986, as amended; and WHEREAS, under the terms of the Western Merchandisers Plan, a Participating Employer has the ability to modify and amend the Western Merchandisers Plan by electing not to remain as a Participating Employer; and WHEREAS, the Plan Sponsor previously established the Hastings Books, Music & Video, Inc. Employees Profit Sharing Plan and Trust Agreement for the exclusive benefit of its associates, effective as of June 1, 1993 (the "Prior Plan"); and WHEREAS, in accordance with the terms of the Prior Plan, the Plan Sponsor has from time to time amended the Prior Plan, including a change in the name of the Plan and the Plan Sponsor, and wishes to amend and restate the Prior Plan in accordance with the terms and conditions hereafter set forth. NOW, THEREFORE, effective October 1, 1996 (except as otherwise noted herein), the Plan Sponsor hereby amends and restates the Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust (herein referred to as the "Plan"), as set forth herein. Except as otherwise provided herein, and subject to the following sentence, the provisions of the amended and restated Plan as contained herein are applicable to Associates and Participants who terminate employment for any reason, including death, disability or retirement, on or after October 1, 1996, or who are reemployed by the Employer on or after October 1, 1996 and while they are still entitled to restatement of rights under the Plan. Except as otherwise provided herein, any Associate or Participant who died, retired, became disabled or terminated employment prior to October 1, 1996 shall receive any benefits to which he or she is entitled based upon the appropriate provisions of the Prior Plan as in effect prior to October 1, 1996. 1 7 ARTICLE II DEFINITIONS 2.01 Definitions. (1) Actual Deferral Percentage (also referred to as ADP). Shall mean, for a specified (group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of: (a) the amount of the Employer contributions actually paid over to the trust on behalf of such Participant for the Plan Year to (b) the Participant's Compensation for such Plan Year. Employer contributions on behalf of any Participant shall include: (c) any Elective Deferrals made pursuant to the Participant's deferral election (including Excess Elective Deferrals of Highly Compensated Employees), but excluding: (i) Excess Elective Deferrals of Non-Highly Compensated Employees that arise solely from Elective Deferrals made under the Plan or plans of this Employer and (ii) Elective Deferrals that are taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals); and (d) at the election of the Employer, Qualified Non-elective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an Associate who would be a Participant but for the failure to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made. (2) Adoption Agreement. The agreement by which an Affiliate or a Subsidiary adopts this Plan for its associates. (3) Affiliate. Any corporation, association, joint venture, proprietorship or partnership that for Federal income tax purposes is a member of a controlled group of corporations (within the meaning of Section 414 of the Code) of which the Plan Sponsor is a member. (4) Aggregate Account. The total interest of a Participant in the Trust Fund consisting of his Pre-Tax Savings Account, his Voluntary Nondeductible Contribution Account. his Profit Sharing Contribution Account, his Matching Contribution Account, his Qualified Non- 2 8 elective Contribution Account, his Qualified Matching Contribution Account, his Rollover Account and his Transfer Account as such accounts are established for a Participant. (5) Aggregate Limit. The sum of: (a) 125 percent of the greater of the ADP of the Non-Highly Compensated Employees for the Plan Year or the ACP of Non-Highly Compensated Employees under the Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the CODA and (b) the lesser of 200 percent or two plus the lesser of such ADP of ACP. "Lesser" is substituted for "greater" in "(a)," above, and "greater" is substituted for "lesser" after "two plus the" in "(b)" if it would result in a larger Aggregate Limit. (6) Associate. Associate shall mean any employee of the Employer maintaining the Plan or of any other employer required to be aggregated with such Employer under Sections 414(b) , (c), (m) or (o) of the Code. The term Associate shall also include any leased employee deemed to be an employee of any employer described in the previous paragraph as provided in Sections 414(n) or (o) of the Code. Notwithstanding the previous sentence, if such leased employees constitute not more than 20 percent of the Employer's nonhighly compensated work force within the meaning of Section 414(n)(5)(C)(ii) of the Code, the term "Associate" shall not include those leased employees covered by the plan described in Section 414(n)(5) of the Code. (7) Authorized Leave of Absence. Any absence authorized by the Employer under the Employer's standard personnel practices, provided that all persons under similar circumstances must be treated alike in the granting of such Authorized Leaves of Absence and provided further that the Participant returns at the end of the period of authorized absence. Absence due to mandatory military service in the armed forces of the United States (including enlistment in lieu of impending mandatory service) shall be considered as an Authorized Leave of Absence. (8) Average Contribution Percentage (also referred to as ACP). The average of the Contribution Percentages of the Participants in a group. (9) Beneficiary. A person or persons designated by a Participant or a Former Participant in accordance with the provisions of Section 6.05 to receive any death benefit which shall be payable under this Plan. (10) Break-in-Service. The 12-consecutive month period measured by Plan Years beginning with the Plan Year which includes the first anniversary of an Associate's Employment Commencement Date during which a Participant does not complete more than 500 Hours of Service with the Employer. For the purpose of the first computation period, service will 3 9 be counted from the Associate's Employment Commencement Date to the end of the initial Plan Year. An Associate shall not incur a Break-in-Service for the Plan Year in which he becomes a Participant, dies, retires, or becomes disabled. Further, solely for the purpose of determining whether a Participant has incurred a Break-in-Service, Hours of Service shall be recognized for Authorized Leaves of Absence and for maternity and paternity leaves of absence. A "maternity or paternity leave of absence" shall mean an absence from work for any period by reason of the Associate's pregnancy, birth of the Associate's child, placement of a child with the Associate in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if the credit is necessary to prevent the Associate from incurring a Break-in-Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a maternity or paternity leave of absence shall be those which would normally have been credited but for such absence, or, in any case in which the Plan Administrator is unable to determine such hours normally credited, eight Hours of Service per work day. The total Hours of Service required to be credited for a maternity or paternity leave of absence shall not exceed 501. (11) CODA. A qualified cash or deferred arrangement as described in Section 401(k) of the Code. (12) Code. The Internal Revenue Code of 1986, as amended, or any subsequent applicable Internal Revenue Code which becomes law of the United States of America. (13) Committee (also referred to as Benefits Committee). The person(s) appointed by the Plan Administrator to assist in the administration of the Plan. The Committee shall serve at the pleasure of the Plan Administrator. (14) Compensation. The Participant's salary and wages including overtime, bonuses and commissions paid by the Employer for a Plan Year. Amounts contributed by the Employer under the Plan and any non-taxable fringe benefits provided by the Employer shall not be considered as Compensation. Compensation for any Self-Employed Individual shall be equal to his Earned Income. Compensation shall include only that compensation which is actually paid to the Associate during the Plan Year. Notwithstanding the above, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Associate under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code. Notwithstanding the foregoing, for Plan Years beginning prior to January 1, 1994, the annual Compensation of a Participant in excess of $200,000 shall be disregarded under the 4 10 Plan. This dollar limitation shall be adjusted by the Secretary of the Treasury at the same time and in the same manner as provided under Section 415(d) of the Code. For Plan Years beginning on or after January 1, 1994, the annual Compensation of a Participant in excess of $150,000 shall be disregarded under the Plan. This dollar limitation shall be adjusted by the Secretary of the Treasury at the same time and in the same manner as provided under Section 401(a)(17)(B) of the Code. In applying the dollar limitation provided herein, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Section 414(q)(6) of the Code because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules, the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. (15) Contribution Percentage. The Contribution Percentage shall mean the ratio (expressed as a percentage) of the Participant's Contribution Percentage Amounts to a Participant's Compensation for the Plan Year. (16) Contribution Percentage Amounts. The sum of the Matching Contributions and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan, on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. The Employer may include Qualified Non-elective Contributions in the Contribution Percentage Amounts. The Employer may also use Elective Deferrals in the Contribution Percentage Amounts so long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. (17) Disability. A physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing any gainful occupation and which condition constitutes total disability under the federal Social Security Acts. (18) Early Retirement Age. The later of the date on which the Participant (i) attains age 55, or (ii) completes 5 Years of Service. (19) Earned Income. The net earnings of a Self-Employed Individual from self-employment in the trade or business with respect to which the Plan is established for which the personal 5 11 services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions by the Employer to a qualified Plan to the extent deductible under Section 404 of the Code. Net earnings shall be determined with regard to the deduction allowed to the Employer by Code Section 164(f). (20) Effective Date. The Effective Date of this amendment and restatement shall be October 1, 1996. Certain provisions herein may be effective on such other dates as are noted within such provisions. (21) Elective Deferral. Any Employer contribution made to the Plan at the election of the Participant, in lieu of cash compensation, including contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any CODA, any simplified employee pension cash or deferred arrangement as described in Section 402(h)(1)(B) of the Code, any eligible deferred compensation plan under Section 457 of the Code, any plan described under Section 501(c)(18) of the Code, and any Employer contributions made on behalf of a Participant for the purchase of an annuity contract under Section 403(b) pursuant to a salary reduction agreement. Elective Deferrals shall not include any deferrals properly distributed as excess annual additions. (22) Employer. Hastings Entertainment, Inc. or any Affiliate or Subsidiary which shall adopt this Plan, or any successor which shall assume the obligations of this Plan. (23) Employment Commencement Date. The date on which an Associate first performs an Hour of Service for the Employer. (24) Entry Date. The date on which an Associate becomes a Participant in accordance with Section 3.01. (25) ERISA. Public Law No. 93-406, the Employee Retirement Income Security Act of 1974, as amended from time to time. (26) Excess Aggregate Contributions. With respect to any Plan Year. the excess of (a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (b) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). 6 12 (27) Excess Contributions. With respect to any Plan Year, the excess of: (a) The aggregate amount of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). (28) Excess Elective Deferrals. Those Elective Deferrals that are includible in a Participant's gross income under Section 402(g) of the Code to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code section. Excess Elective Deferrals shall be treated as annual additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant's taxable year. (29) Fiduciaries. The Employer, the Plan Sponsor, the Plan Administrator, the Benefits Committee and the Trustee, but only with respect to the specific responsibilities of each for Plan and Trust administration, all as described in Article IX. (30) Former Participant. A Participant whose employment with the Employer has terminated but who has a vested account balance under the Plan which has not been paid in full. (31) Highly Compensated Employee. A Highly Compensated Employee ("HCE") includes any Associate who during the Plan Year performs service for the Employer and who (i) is a 5-percent owner, (ii) receives Compensation for the Plan Year in excess of the Code Section 414(q)(1)(B) amount for the Plan Year, (iii) receives Compensation for the Plan Year in excess of the Code Section 414(q)(1)(C) amount for the Plan Year and is a member of the top paid group of employees within the meaning of Code Section 414(q)(4), or (iv) is an officer and receives Compensation during the Plan Year that is greater than 50 percent of the dollar limitation in effect under Code Section 415(b)(1)(A) for the Plan Year. If no officer satisfies the Compensation requirement during the Plan Year, the highest paid officer for such Plan Year shall be treated as an HCE. For purposes of determining who is an HCE, "Compensation" means Compensation as defined in Section 4.10(a)(4) hereof, except that amounts excluded pursuant to Code Sections 125, 402(e)(3), 402(h)(1)(B) and 403(b) are included. If an Associate is a family member of either a 5-percent owner (whether active or former) or an HCE who is one of the 10 most highly compensated Associates ranked on the basis of Compensation paid by the Employer during such Plan Year, then the family member and the 5-percent owner or top-ten HCE shall be aggregated. In such case, the family member and 5-percent owner or top-ten HCE shall be treated as a single Associate receiving Compensation and Plan contributions or benefits equal to the sum of the Compensation and benefits of the family member and 5-percent owner or top-ten HCE. For purposes of this Section, family 7 13 member includes the spouse, lineal ascendants and descendants of the Associate or former Associate, and the spouses of such lineal ascendants and descendants. The determination of who is an HCE, including the determinations of the number and identity of Associates in the top paid group, the number of Associates treated as officers and the Compensation that is taken into account, shall be made in accordance with Code Section 414(q) and Section 1.414(q)- 1T of the temporary Income Treasury Regulations to the extent they are not inconsistent with the method established above. (32) Hour of Service. (a) Each hour for which an Associate is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Associate for the computation period or periods in which duties are performed; and (b) Each hour for which an Associate is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including Disability), layoff, jury duty, military duty or Authorized Leave of Absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Associate for the computation period in which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. (d) Hours of Service shall be determined on the basis of actual hours for which an Associate is paid or entitled to payment. (e) An Hour of Service respecting any member of an affiliated service group (as defined in Section 414(m) of the Code) of which the Employer is a member or respecting any incorporated or unincorporated trade or business which is under common control with the Employer (as defined in Section 414(c) of the Code) shall be credited as an Hour of Service with the Employer. (f) Hours of Service also will be credited for any individual considered an Associate for purposes of this Plan under Section 414(n) of the Code. 8 14 (33) Investment Manager. Any person, firm or corporation, who: (a) is a registered investment advisor under the Investment Act of 1940; (b) is a bank or an insurance company; (c) has the power to manage, acquire or dispose of Plan assets; and (d) acknowledges in writing his fiduciary responsibility to the Plan. (34) Matching Contribution Account. The portion of a Participant's Aggregate Account which is credited with Matching Contributions, as adjusted for earnings and losses attributable to such contributions. (35) Matching Contribution. An Employer contribution made to this or any other defined contribution plan on behalf of a Participant on account of a Participant's Elective Deferral, under a plan maintained by the Employer. (36) Non-Highly Compensated Employee. Any Participant who is not a Highly Compensated Employee. (37) Normal Retirement Age. The date on which the Participant attains age 65, or the fifth anniversary of participation in the Plan, if later. (38) Normal Retirement Date. The first day of the month coincident with or next following the date the Participant attains Normal Retirement Age. The Participant may, however, agree to service past Normal Retirement Age and his Normal Retirement Date is the date such Participant actually retires. (39) Owner-Employee. A sole proprietor who owns the entire interest in the Employer or a partner who owns more than 10% of either the capital interest or the profits interest in the Employer and who receives income for personal services from the Employer. (40) Participant. An Associate participating in the Plan in accordance with the provisions of Section 3.01 and whose vested interest under this Plan has not been fully distributed. (41) Plan. Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust, which is the Plan set forth herein, as amended from time to time. (42) Plan Administrator. Hastings Entertainment, Inc. (43) Plan Sponsor. Hastings Entertainment, Inc. (44) Plan Year. The Plan's accounting year of twelve (12) consecutive months commencing on February 1 and ending the following January 31. 9 15 (45) Predecessor Plan. The Western Merchandisers, Inc. Employees Profit Sharing Plan and Trust Agreement, as amended and restated effective June 1, 1989. (46) Pre-Tax Savings Account. The portion of a Participant's Aggregate Account which is credited with Elective Deferrals, as adjusted for earnings and losses attributable to such contributions. (47) Prior Plan. The Hastings Books, Music & Video, Inc. Employees Profit Sharing Plan and Trust, as established effective June 1, 1993. (48) Profit Sharing Contribution Account. The portion of a Participant's Aggregate Account which is credited with profit sharing contributions under Section 4.03, as adjusted for earnings and losses attributable to such contributions. (49) Qualified Matching Contributions. Matching Contributions which are subject to the distribution and nonforfeitability requirements under Section 401(k) of the Code when made. (50) Qualified Matching Contributions Account. The portion of a Participant's Aggregate Account which is credited with Qualified Matching Contributions, as adjusted for earnings and losses attributable to such contributions. (51) Qualified Non-elective Contributions. Contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions. (52) Qualified Non-elective Contributions Account. The portion of a Participant's Aggregate Account which is credited with Qualified Non-elective Contributions, as adjusted for earnings and losses attributable to such contributions. (53) Rollover Account. The portion of an Associate's Aggregate Account credited with rollover contributions under Section 4.04, as adjusted for earnings and losses attributable to such contributions. (54) Self-Employed Individual. An individual who has earned income for the taxable year from the trade or business for which the Plan is established, and, also, an individual who would have had earned income but for the fact that the trade or business had no net profits for the taxable year. A Self-Employed Individual shall be treated as an Associate. (55) Spouse. The spouse of an Associate who was legally married to the Associate under the laws of the jurisdiction in which the marriage was contracted at the time of the Associate's death or actual retirement date. 10 16 (56) Subsidiary. Any corporation, association, joint venture, proprietorship or partnership that is considered a subsidiary under Section 424(f) of the Code. (57) Transfer Account. The portion of a Participant's Aggregate Account credited with funds transferred from qualified plans pursuant to Section 4.05, as adjusted for earnings and losses attributable to such funds. (58) Trust Agreement. The agreement entered into between the Plan Sponsor and the Trustee establishing the Trust. (59) Trust Fund; Trust; or Fund. The Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust. (60) Trustee. The person, persons or entity appointed as Trustee by the Plan Sponsor and any duly appointed, qualified and acting successor trustee which assumes responsibility and liability for the Plan assets under such terms acceptable to the Trustee and upon execution of such document or documents acceptable to the Trustee evidencing acceptance of Plan assets and liabilities by such successor trustee. (61) Valuation Date. Each business day of the Plan Year on which the New York Stock Exchange is open for business, and also the last day of the Plan Year, if not such a business day. (62) Voluntary Nondeductible Contribution. Contributions made by a Participant on an after-tax basis under the Predecessor Plan. Such contributions are not permitted by the Plan. (63) Voluntary Nondeductible Contribution Account. The portion of a Participant's Aggregate Account derived from the Participant's Voluntary Nondeductible Contributions, as adjusted for earnings and losses attributable to such contributions. (64) Year of Service. The initial Year of Service is defined as a twelve (12) consecutive month period, measured from the Associate's Employment Commencement Date, during which the Associate completes at least 1,000 Hours of Service. Subsequent Years of Service will be measured by Plan Years beginning with the Plan Year which includes the first anniversary of the Associate's Employment Commencement Date. For purposes of vesting, each Plan Year, including the initial Plan Year of employment, during which the Associate completes 1,000 Hours of Service shall count as a Year of Service. Years of Service with any participating, or nonparticipating Affiliate or Subsidiary shall be treated as Years of Service with the Employer. An Associate who transfers from a participating Employer to another participating Affiliate or Subsidiary shall continue to be covered by this Plan without interruption and shall not be considered to have incurred a termination of service. The Employer shall have the right to credit prior service with other organizations that are not affiliates or subsidiaries as Years of Service under this Plan and such prior service credit shall be given in a nondiscriminatory manner. 11 17 For an Associate with at least one Hour of Service after October 1, 1996, all of such Associate's Years of Service with the Employer are counted to determine the nonforfeitable percentage in the Associate's Aggregate Account derived from Employer contributions. 2.02 Number and Gender. Whenever appropriate herein, words used in the singular shall be considered to include the plural and the plural to include the singular. The masculine gender, when appearing in this Plan, shall be deemed to include the feminine gender. 2.03 Headings. The headings of Articles and Sections herein are included solely for convenience and if there is any conflict between such headings and the text of the Plan, the text shall control. 12 18 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 Eligibility for Participation. Each Associate who is a Participant in the Plan on the Effective Date shall remain a Participant. Each Associate who is an employee of the Employer on the Effective Date but who is not a Participant in the Plan shall become a Participant as of the Effective Date. Each other Associate shall become a Participant in the Plan on the later of (i) his Employment Commencement Date, or (ii) the February 1, May 1, August 1, or November 1 immediately following the date on which he attains age twenty-one (21). Leased employees (as described in Section 414(n) of the Code), independent contractors, and nonresident aliens who receive no earned income from the Employer which constitutes income from sources within the United States shall not be eligible to participate in the Plan. 3.02 Eligibility to Make Elective Deferrals. In order to make Elective Deferrals hereunder, each Associate must make application to the Employer for participation in the Plan and agree to the terms hereof. The Associate shall supply all information, including designation of Beneficiary form, required by the Employer in such manner and at such time as determined by the Employer. Upon the acceptance of any benefits under this Plan, such Associate shall automatically be bound by the terms and conditions of this Plan and all amendments hereto. 3.03 Eligibility Upon Reemployment. If a terminated Associate who was a Participant is reemployed, such Associate shall become a Participant immediately upon reemployment. All other Associates who are reemployed must meet the requirements of Section 3.01. 3.04 Omission of Eligible Associate. If, in any year, any Associate who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution has been made by the Employer for the year, the Employer shall make a subsequent contribution with respect to the omitted associate in the amount which the Employer would have contributed with respect to him had he not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. Where an Associate has been erroneously omitted from the Plan and discovery of such omission is made during the Plan Year in which such Associate should have become a Participant in the Plan, such Associate shall be allowed to defer an amount which is equal to the amount the Associate would have been allowed to defer if the Associate had been allowed to enter the Plan upon his correct Entry Date, subject to the annual twelve (12) percent limit imposed by Section 4.01 of the Plan. Such deferral shall be made against Compensation not yet earned. 3.05 Inclusion of Ineligible Associate. If, in any year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution by the Employer has been made for the Plan Year, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person 13 19 regardless of whether or not a deduction is allowed with respect to such contribution. in such event, the amount contributed with respect to the ineligible person shall constitute a forfeiture in the Plan Year in which the discovery is made. 3.06 Election Not to Participate. An Associate may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be communicated to the Employer in writing, upon commencement of employment or initial eligibility under this Plan or any other plan of the Employer. 14 20 ARTICLE IV CONTRIBUTIONS 4.01 Elective Deferrals. For any Plan Year, each Participant may enter into a salary reduction agreement in which he elects to have allocated to his Pre-Tax Savings Account any whole percentage, not to exceed twelve (12) percent, of the Participant's Compensation. (a) All salary reduction agreements shall be made at the time, in the manner and subject to the conditions specified by the Plan Administrator which shall prescribe uniform and nondiscriminatory rules for such agreements. (b) No Participant shall be permitted to have Elective Deferrals made under this Plan, or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect at the beginning of such taxable year. A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by notifying the Plan Administrator on or before March 1 of the Excess Elective Deferrals to be assigned to the Plan. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise by taking into account only those Elective Deferrals made to this Plan and any other plans of this Employer. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any Participant to whose account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. Excess Elective Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Elective Deferrals is the sum of: (i) income or loss allocable to the Participant's Pre-Tax Savings Account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator is the Participant's account balance attributable to Elective Deferrals without regard to any income or loss occurring during such taxable year; and (ii) ten percent of the amount determined under (i) multiplied by the number of whole calendar months between the end of the Participant's taxable year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. (c) A Participant may change (increase, decrease, discontinue or resume) the rate of Elective Deferrals to his Pre-Tax Savings Account once each Plan quarter, to be effective on the first day of the following Plan quarter (February 1, May 1, August 1 or November 1), 15 21 provided the Plan Administrator receives the amended salary reduction agreement within a specified time prior to the effective date of the change. (d) Elective Deferrals shall be paid to the Trustee as soon as such amounts reasonably can be segregated from the general assets of the Employer, but in no event later than the 15th business day of the month following the month in which such amounts would otherwise have been payable to the Participant in cash. Elective Deferrals shall be made in cash. 4.02 Matching Contributions. For any Plan Year, the Employer may make Matching Contributions to the Plan on behalf of all eligible Participants who make Elective Deferrals to the Plan in such amount as its Board of Directors in its sole discretion may authorize. Such Matching Contribution will be calculated as a percentage of Elective Deferrals made during such Plan Year by each eligible Participant, except that the amount of an eligible Participant's Elective Deferrals which exceeds six percent (6%) of such Participant's Compensation for the Plan Year shall not be taken into account when calculating the Matching Contribution. The Employer shall determine in writing at or before the beginning of each Plan Year the percentage of Elective Deferrals which will be contributed as a Matching Contribution for such Plan Year; provided, however, that the Employer may determine that no Matching Contribution shall be made. If the Employer does not change the percentage rate of Elective Deferrals which will be contributed as a Matching Contribution for a Plan Year, then the amount which was determined for the prior Plan Year will remain in effect. Matching Contributions shall be made on behalf of those Participants who are credited with a Year of Service during the Plan Year and are employed on the last day of the Plan Year. A Participant whose employment is terminated before the end of a Plan Year, but after he has completed 1,000 Hours of Service for the Plan Year, shall not share in Matching Contributions for the Plan Year unless by the terminated Participants not sharing in Matching Contributions for the Plan Year, the Plan would fail to meet the coverage requirements of Code Section 410(b)(1) for the Plan Year, in which case members of the group of terminated Participants shall share in Matching Contributions for the Plan Year as follows: the minimum number required to meet the coverage tests under Code Section 410(b)(1) based on their number of Hours of Service credited during the Plan Year, ranked in descending order. If more than one individual receives credit for the lowest number of Hours of Service for which any individual must be covered in order to meet the coverage tests (pursuant to the sentence above), then all individuals receiving credit for exactly that number of Hours of Service shall share in the allocation of Matching Contributions. Notwithstanding the preceding sentences, a Participant who terminated employment with the Employer during the Plan Year because of death, Disability or retirement is entitled to a Matching Contribution regardless of the number of Hours of Service completed by the Participant in such Plan Year. Matching Contributions shall be made no later than the date prescribed by law for filing the Employer's Federal income tax return, including extensions, for the taxable year in which the Plan Year ends. Matching Contributions shall be made in cash or in other such property acceptable to the Trustee. 4.03 Profit Sharing Contributions. For any Plan Year, the Employer may make a profit sharing contribution on behalf of each Participant who is credited with a Year of Service during the Plan 16 22 Year and is employed on the last day of the Plan Year. A Participant whose employment is terminated before the end of a Plan Year, but after he has completed 1,000 Hours of Service for the Plan Year, shall not share in profit sharing contributions for the Plan Year unless by the terminated Participants not sharing in profit sharing contributions for the Plan Year, the Plan would fail to meet the coverage requirements of Code Section 410(b)(1) for the Plan Year, in which case members of the group of terminated Participants shall share in profit sharing contributions for the Plan Year as follows: the minimum number required to meet the coverage tests under Code Section 410(b)(1) based on their number of Hours of Service credited during the Plan Year, ranked in descending order. If more than one individual receives credit for the lowest number of hours of Service for which any individual must be covered in order to meet the coverage tests (pursuant to the sentence above), then all individuals receiving credit for exactly that number of Hours of Service shall share in the allocation of profit sharing contributions. Notwithstanding the preceding sentences, a Participant who terminated employment with the Employer during the Plan Year because of death, Disability or retirement is entitled to a profit sharing contribution regardless of the number of Hours of Service completed by the Participant in such Plan Year. The amount of the profit sharing contribution shall be determined by the Employer each Plan Year. (a) Profit sharing contributions shall be credited to the Participant's Profit Sharing Contribution Account in the same proportion that the Participant's Compensation bears to the total Compensation of all Participants. Compensation shall be measured from the date the Associate became a Participant in the Plan. (b) Profit sharing contributions shall be made no later than the date prescribed by law for filing the Employer's federal income tax return, including extensions, for the taxable year within which the Plan Year ends. Profit sharing contributions shall be made in cash or in other such property acceptable to the Trustee. 4.04 Rollover Contributions. The Trustee, at the written discretion of the Plan Administrator, may accept and hold for the account of a Participant "rollover amounts," as described in either Section 402(a)(5)(A) or 408(d)(3)(A)(ii) of the Code. The funds of assets rolled over shall be allocated to the Associate's Rollover Account. The Associate does not have to be a Participant in the Plan before the Trustee can allow assets to be rolled over to the Plan. (a) The Plan Administrator shall develop rollover procedures, and may require such information from an Associate desiring to make such a rollover as it deems necessary or desirable. (b) The rollover of assets must occur on or before the 60th day following the Associate's receipt of the distribution from the other qualified plan, individual retirement account or individual retirement annuity. (c) The amount transferred is subject to the maximum rollover provision of Section 402(c)(2) of the Code. 17 23 4.05 Transfer Contributions. The Trustee, at the written direction of the Plan Administrator, may accept and hold for the Transfer Account of a Participant amounts representing the Participant's vested interest transferred to the Trust by the trustee of another retirement plan qualified under Section 401(a) of the Code. The assets transferred shall be allocated to the Associate's Transfer Account. The Associate does not have to be a Participant in the Plan before the Trustee can allow assets to be transferred to the Plan. This Plan shall not accept any direct or indirect transfers (as that term is defined under Code Section 401(a)(11) and the regulations thereunder) from a defined benefit plan, money purchase plan (including a target benefit plan), stock bonus or profit sharing plan which would otherwise have provided for a life annuity form of payment to the Participant. 4.06 Qualified Matching Contributions. The Employer may make Qualified Matching Contributions to the Plan on behalf of all Participants who are Non-Highly Compensated Employees who make Elective Deferrals to the Plan. The Qualified Matching Contributions shall be allocated to all Participants eligible to receive a Qualified Matching Contribution in the same proportion that the Participant's Compensation bears to the total Compensation of all Participants who are Non-Highly Compensated Employees eligible to receive a Qualified Matching Contribution. Qualified Matching Contributions shall be made on behalf of those Non-Highly Compensated Participants who are credited with a Year of Service during the Plan Year and who are employed on the last day of the Plan Year. Notwithstanding the preceding sentence, Non-Highly Compensated Participants who terminated employment with the Employer during the Plan Year because of death, Disability or retirement are entitled to a Qualified Matching Contribution. Qualified Matching Contributions shall be made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. Qualified Matching Contributions shall be made in cash or in other such property acceptable to the Trustee. 4.07 Qualified Non-elective Contributions. The Employer may elect to make Qualified Non-elective Contributions under the Plan on behalf of all Participants who are Non-Highly Compensated Employees in a ratio which each Non-Highly Compensated Participant's Compensation for the Plan Year bears to the total Compensation of all Non- Highly Compensated Participants for such Plan Year. (a) Qualified Non-elective Contributions shall be made on behalf of those Non-Highly Compensated Participants who are credited with a Year of Service during the Plan Year and who are employed on the last day of the Plan Year. Notwithstanding the preceding sentence, Non-Highly Compensated Participants who terminated employment with the Employer during the Plan Year because of death, Disability or retirement are entitled to a Qualified Non-elective Contribution. (b) Qualified Non-elective Contributions shall be made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. Qualified Non-elective Contributions shall be made in cash or in other such property acceptable to the Trustee. 18 24 4.08 Actual Deferral Percentage Test. The Actual Deferral Percentage (ADP) for Participants who are Highly Compensated Employees for each Plan Year and the ADP for Participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (a) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ADP for Participants who are Highly Compensated Employees does not exceed the ADP for Participants who are Non-Highly Compensated Employees by more than two (2) percentage points. (c) The ADP for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Non-elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his accounts under two or more arrangements described in Section 401(k) of the Code, that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Non-elective Contributions or Qualified Matching, Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(k) of the Code. (d) In the event that this Plan satisfies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the ADP of Associates as if all such plans were a single plan. Plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. (e) For purposes of determining the ADP of a Participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Elective Deferrals (and Qualified Non-elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) and Compensation of such Participant shall include the Elective Deferrals (and, if applicable, Qualified Non-elective Contributions and Qualified Matching Contributions, or both) and Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate associates in determining the ADP both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. 19 25 (f) For purposes of determining the ADP test, Elective Deferrals, Qualified Non-elective Contributions and Qualified Matching Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. (g) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Non-elective Contributions or Qualified Matching Contributions, or both, used in such test. (h) The determination and treatment of the ADP amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (i) Notwithstanding any other provision of this Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such Associates. Excess Contributions of Participants who are subject to the family member aggregation rules shall be allocated among the family members in proportion to the Elective Deferrals (and amounts treated as Elective Deferrals) of each family member that is combined to determine the combined ADP. Excess Contributions (including the amounts recharacterized) shall be treated as annual additions under the Plan. Excess Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Contributions is the sum of: (i) income or loss allocable to the Participant's Pre-Tax Savings Account (and, if applicable, the Qualified Non-elective Contribution Account or the Qualified Matching Contributions Account or both) for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for the year and the denominator is the Participant's account balance attributable to Elective Deferrals (and Qualified Non-elective Contributions or Qualified Matching Contributions, or both, if any of such contributions are included in the ADP test) without regard to any income or loss occurring during such Plan Year; and (ii) ten percent of the amount determined under (i) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. 20 26 Excess Contributions shall be distributed from the Participant's Pre-Tax Savings Account and Qualified Matching Contribution Account (if applicable) in proportion to the Participant's Elective Deferrals and Qualified Matching Contributions (to the extent used in the ADP test) for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Non-elective Contributions Account only to the extent that such Excess Contributions exceed the balance in the Participant's Pre-Tax Savings Account and Qualified Matching Contribution Account. 4.09 Limitations on Matching Contributions. The ACP for Participants who are Highly Compensated Employees for each Plan Year and the ACP for Participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (a) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ACP for Participants who are Highly Compensated Employees does not exceed the ACP for Participants who are Non-Highly Compensated Employees by more than two (2) percentage points. (c) If one or more Highly Compensated Employees participate in both a CODA and a plan subject to the ACP test maintained by the Employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with such Highly Compensated Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amount is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if either the ADP or ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non- Highly Compensated Employees. (d) For purposes of this Section, the Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his accounts under two or more plans described in Section 401(a) of the Code, or arrangements described in Section 401(k) of the Code that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts were made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(m) of the Code. 21 27 (e) In the event that this Plan satisfies the requirements of Sections 401(m), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the Contribution Percentage of Associates as if all such plans were a single plan. Plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. (f) For purposes of determining the Contribution Percentage of a Participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such Participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate associates in determining the Contribution Percentage both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (g) For purposes of determining the Contribution Percentage test, Matching Contributions and Qualified Non- elective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (h) The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Non-elective Contributions or Qualified Matching Contributions, or both, used in such test. (i) The determination and treatment of the Contribution Percentage amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (j) Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. If such Excess Aggregate Contributions are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Aggregate Contributions attributable to each of such Associates. Excess Aggregate Contributions of Participants who are subject to the family member aggregation rules shall be allocated among the family members in proportion to the Matching Contributions (or amounts treated as Matching, Contributions) of each family member that is combined to determine the combined ACP. Excess Aggregate Contributions shall be treated as annual additions under the Plan. 22 28 Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Aggregate Contributions is the sum of: (i) income or loss allocable to the Participant's Matching Contribution Account, Qualified Matching Contribution Account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified Non-elective Contribution Account and Pre-Tax Savings Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the year and the denominator is the Participant's account balance(s) attributable to Contribution Percentage Amounts without regard to any income or loss occurring during such Plan Year; and (ii) ten percent of the amount determined under (i) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. (k) Forfeitures of Excess Aggregate Contributions shall be applied to reduce Employer contributions for the Plan Year in which the excess arose. To the extent the excess exceeds Employer contributions or the Employer has already contributed for such Plan Year, forfeitures shall be allocated, after all other forfeitures under the Plan, to the Matching Contribution Account of each Non-Highly Compensated Employee who made Elective Deferrals in the ratio which each such Participant's Compensation for the Plan Year bears to the total Compensation of all such Participants for such Plan Year. (l) Excess Aggregate Contributions shall be forfeited, if forfeitable, or distributed on a pro rata basis from the Participant's Matching Contribution Account and Qualified Matching Contribution Account (and, if applicable, the Participant's Qualified Non-elective Contribution Account or Pre-Tax Savings Account, or both). 4.10 Annual Additions. (a) Definitions. For purposes of this Section 4.10, the following deletions and rules of interpretation shall apply: (1) "Annual Additions" to a Participant's Aggregate Account under this Plan is the sum, credited to a Participant's Aggregate Account for any Limitation Year, of all Employer contributions, Associate contributions and forfeitures, and, after March 31, 1984, amounts added to an individual medical account, as defined in Section 415(l)(2) of the Code which is part of a defined benefit plan maintained by the Employer and amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to a separate account of a Key 23 29 Employee (as defined in Section 419A(d)(3) of the Code) under a welfare benefit plan (as defined in Section 419(e) of the Code) maintained by the Employer. (2) "Annual Benefit": (A) A benefit which is payable annually in the form of a straight life annuity under a defined benefit plan. Such benefit does not include any benefits attributable to either Associate contributions or rollover account contributions. If a defined benefit plan provides for a benefit which is not payable in the form of a straight life annuity, the benefit is adjusted in accordance with Section 4.10(a)(2)(E) below. (B) Where a defined benefit plan provides for mandatory Associate contributions (as defined in Code Section 411(c)(2)(C)), the annual benefit attributable to mandatory contributions is determined by using the factors described in Code Section 411(c)(2)(B) and the regulations thereunder, regardless of whether Code Section 411 applies to that plan. However, the mandatory Associate contributions and any voluntary Associate contributions are all considered a separate defined contribution plan maintained by the Employer. (C) If rollover account contributions are made to a defined benefit plan, the annual benefit attributable to these contributions is determined on the basis of reasonable actuarial assumptions. (D) When there is a transfer of assets or liabilities from one qualified plan to another, the annual benefit attributable to the assets transferred shall not be taken into account by the transferee plan in applying the limitations of Code Section 415. The annual benefit payable on account of the transfer for any individual that is attributable to the assets transferred will be equal to the annual benefit transferred on behalf of such individual multiplied by a fraction, the numerator of which is the total assets transferred and the denominator of which is the total liabilities transferred. (E) Where a defined benefit plan subject to the limitations of Code Section 415(b) provides a retirement benefit in any form other than a straight life annuity, a defined benefit plan benefit is adjusted to a straight life annuity beginning at the same age which is the actuarial equivalent of such benefit in accordance with rules determined by the Commissioner of Internal Revenue. However, the following values are not taken into account: (i) the value of a qualified joint and survivor annuity (as defined in Code Section 417(a)(3)(A) and the regulations thereunder) 24 30 provided by a defined benefit plan to the extent that such value exceeds the sum of (a) the value of a straight life annuity beginning on the same date, and (b) the value of any post-retirement death benefits which would be payable even if the annuity were not in the form of a joint and survivor annuity; (ii) the value of benefits that are not directly related to retirement benefits (such as pre-retirement disability and death benefits and post-retirement medical benefits); (iii) the value of benefits provided by a defined benefit plan which reflect post- retirement cost-of-living increases to the extent that such increases are in accordance with Code Section 415(d) and the regulations thereunder. (F) Where a defined benefit plan provides a retirement plan benefit beginning before the Social Security retirement age, a defined benefit plan benefit is adjusted to the actuarial equivalent of a benefit beginning at the Social Security retirement age in accordance with rules determined by the Commissioner. The reduction under this provision shall be made in such manner as the Commissioner may prescribe which is consistent with the reduction for old-age insurance benefits commencing before the Social Security retirement age under the Social Security Act. (G) Where a Participant has less than ten (10) years of participation in a defined benefit plan with the Employer at the time the Participant begins to receive retirement benefits under a defined benefit plan, the benefit limitations described in Code Section 415(b)(1) and (4) are to be reduced by multiplying the otherwise applicable limitation by a fraction: (i) the numerator of which is the number of Years of Service with the Employer as of, and including, the Current Limitation Year, and (ii) the denominator of which is ten (10). (H) If the retirement benefit under a defined benefit plan begins after the Social Security retirement age, the determination as to whether the Maximum Permissible Defined Benefit Amount limitation has been satisfied shall be made, in accordance with regulations prescribed by the Commissioner, by adjusting such benefit so that it is equivalent to such a benefit beginning at the Social Security retirement age. (I) The annual benefit to which a Participant is entitled at any time under all defined benefit plans maintained by the Employer shall not, during the Limitation Year, exceed the Maximum Permissible Defined Benefit Amount. 25 31 (3) "Employer" - Hastings Entertainment, Inc. and any Affiliate or Subsidiary who adopts the Plan. (4) "Compensation" with respect to the Limitation Year: (A) Includes amounts accrued to a Participant (regardless of whether he was such during the entire Limitation Year): (i) as wages, salaries, fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Employer including but not limited to commissions, compensation for services on the basis of a percentage of profits and bonuses; (ii) for purposes of (i) above, earned income from sources outside the United States (as defined in Code Section 911(b)), whether or not excludable from gross income under Code Section 911; (iii) amounts described in Code Sections 104(a)(3), 105(a) and 105(h), but only to the extent that these amounts are includible in the gross income of the Participant; (iv) amounts paid or reimbursed by the Employer for moving expenses incurred by the Participant, but only to the extent that these amounts are not deductible by the Participant under Code Section 217. (B) Does not include: (i) notwithstanding (a)(4)(A)(i) of this Section 4.10, there shall be excluded from Compensation amounts contributed to this Plan as Elective Deferrals; (ii) other contributions made by the Employer to a plan of deferred compensation to the extent that, before the application of the Code Section 415 limitations to that plan, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed. In addition, Employer contributions made on behalf of a participant to a simplified employee pension described in Code Section 408(k) are not considered as Compensation for the taxable year in which contributed to the extent such contributions are excludable by the Participant from gross income under Code Section 408(k)(6). Additionally, any distributions from a plan of deferred compensation are not considered as Compensation, regardless of 26 32 whether such amounts are includible in the gross income of the Participant when distributed. However, any amounts received by a Participant pursuant to an unfunded nonqualified plan shall be considered as Compensation in the year such amounts are includible in the gross income of the Participant; (iii) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an associate either becomes freely transferable or is no longer subject to a substantial risk of forfeiture (pursuant to Code Section 83 and regulations thereunder). (5) "Limitation Year" - the Plan Year. (6) "Maximum Permissible Defined Benefit Amount" - for a Limitation Year the maximum permissible defined benefit amount with respect to any Participant shall be the lesser of the amounts determined under paragraphs (A) and (B) below, subject to the rules of paragraphs (C), (D) and (E) below, where: (A) is $90,000, and (B) is 100 percent of the Participant's average Compensation for his high three consecutive Years of Service. (C) As of January 1 of each calendar year commencing with the calendar year 1988, the dollar limitation set forth in paragraph (A) above shall be adjusted automatically to equal the dollar limitation as determined by the Commissioner of Internal Revenue for that calendar year under Code Section 415(d)(1)(A). This adjusted dollar limitation applies for the Limitation Year ending with the calendar year. It is applicable to associates who are participants of the defined benefit plan and to associates who have retired or otherwise terminated their service under a defined benefit plan with a nonforfeitable right to accrued benefits, regardless of whether they have actually begun to receive such benefits. The annual benefit payable to a terminated Participant which is otherwise limited by the dollar limitation shall be increased to take into account the adjustment of the dollar limitation. (D) With regard to Participants who have separated from service with a nonforfeitable right to accrued benefits, the Compensation limitation described in paragraph (B) above applicable to Limitation Years commencing on or after January 1, 1976, shall be adjusted annually to take into account increases in the cost of living. For any Limitation Year beginning after the separation occurs, the adjustment of the Compensation limitation is made as specified in regulations and rules prescribed by the 27 33 Commissioner. In the case of a Participant who separated from service prior to January 1, 1976, the cost-of-living adjustment of the Compensation limitation under this paragraph for all Limitation Years prior to January 1, 1976, is to be determined as provided by the Commissioner. (E) Anything herein to the contrary notwithstanding, the Maximum Permissible Defined Benefit Amount for any Associate who was a participant of a defined benefit plan before January 1, 1983, shall in no case be less than the "current accrued benefit" of such Associate as of the close of the last Limitation Year beginning before January 1, 1983, as such term is defined in Section 235(g)(4) of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). (7) "Maximum Permissible Defined Contribution Amount" - for a Limitation Year the maximum permissible defined contribution amount with respect to any Participant shall be the lesser of: (A) $30,000, adjusted automatically as of January 1 of each calendar Year commencing with the calendar year 1988, to equal the dollar limitation as determined by the Commissioner of Internal Revenue for that calendar year under Code Section 415(d)(1)(A) (or, if greater, 1/4 of the dollar limitation in effect under Code Section 415(b)(1)(A)), or (B) 25 percent of the Participant's Compensation for the Limitation Year. (8) "Projected Annual Benefit" - the annual benefit to which a Participant would be entitled under a defined benefit plan on the assumption that he or she continues employment until the Normal Retirement Age (or current age, if that is later) thereunder, that his or her compensation continues at the same rate as in effect for the Limitation Year under consideration until such age, and that all other relevant factors used to determine benefits under the defined benefit plan remain constant as of the current Limitation Year for all future Limitation Years. (b) For purpose of applying the limitations of Code Sections 415(b), (c) and (e) applicable to a Participant for a particular Limitation Year, all qualified defined benefit plans (without regard to whether a plan has been terminated) ever maintained by the Employer will be treated as one defined benefit plan and all qualified defined contribution plans (without regard to whether a plan has been terminated) ever maintained by the Employer will be treated as part of this Plan. (1) Annual Addition Limits. The amount of the Annual Addition which may be credited under this Plan to any Participant's Aggregate Account as of any allocation date shall not exceed the Maximum Permissible Defined Contribution Amount (based upon his Compensation up to such allocation date) reduced by the sum of any credits of 28 34 Annual Additions made to the Participant's Aggregate Account under all defined contribution plans as of any preceding allocation date within the Limitation Year. If an allocation date of this Plan coincides with an allocation date of any other qualified defined contribution plan maintained by the Employer, the amount of the Annual Additions which may be credited under this Plan to any Participant's Aggregate Account as of such date shall be an amount equal to the product of the amount to be credited under this Plan without regard to this Section 4.10 multiplied by the lesser of one (1) or a fraction, the numerator of which is the amount described in this subsection (b)(1) of Section 4.10 during the Limitation Year and the denominator of which is the amount that would otherwise be credited on this allocation date under all defined contribution plans without regard to this Section 4.10. If contributions to this Plan on behalf of a Participant are to be reduced as a result of this Section 4.10, such reduction shall be effected by first reducing the amount of Participant profit sharing contributions. If, as a result of a reasonable error in estimating a Participant's Compensation or under the limited facts and circumstances which the Commissioner of Internal Revenue finds justify the availability of the rules set forth in Section 1.415-6(b)(6) of the Income Tax Regulations, allocation of Annual Additions under the terms of the Plan for a particular Participant would cause the limitations of Code Section 415 applicable to that Participant for the Limitation Year to be exceeded, the excess amount shall not be deemed to be Annual Additions in that Limitation Year if they are treated as follows: (A) The excess amount in the Participant's profit sharing contributions shall be used to reduce contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for that Participant if that Participant is covered by the Plan as of the end of the Limitation Year. However, if that Participant is not covered by the Plan as of the end of the Limitation Year, then the excess amounts must be held unallocated in a suspense account for the Limitation Year and allocated and reallocated in the next Limitation Year to all of the remaining Participants in the Plan. If a suspense account is in existence at any time during a particular Limitation Year, other than the first Limitation Year described in the preceding sentence, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts (subject to the limitations of Code Section 415) before any contributions which would constitute Annual Additions may be made to the Plan for that Limitation Year. Furthermore, the excess amounts must be used to reduce contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for all of the remaining Participants in the Plan. For purposes of this subdivision, except as provided in (b)(1), excess amounts may not be distributed to Participants or Former Participants. 29 35 (B) In the event of termination of the Plan, the suspense account described in (A) above shall revert to the Employer to the extent it may not then be allocated to any Participant's Aggregate Account. (C) Notwithstanding any other provisions in this Section 4.10, the Employer shall not contribute any amount that would cause an allocation to the suspense account as of the date the contribution is allocated. If the contribution is made prior to the date as of which it is to be allocated, then such contribution shall not exceed an amount that would cause an allocation to the suspense account if the date of contributions were an allocation date. (D) Alternatively, the Plan Administrator may elect to follow the procedure described below in lieu of the procedure described in subparagraphs (A), (B)and (C) above. A Participant's Elective Deferrals made under Section 4.01 may be distributed to the extent that the distribution would reduce the excess amounts in the Participant's Account. These excess amounts to be distributed shall be adjusted for income or loss, provided such method is used consistently for all Participants and for all such corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income or loss to Participants' accounts. (2) Overall Limit. For any Participant of this Plan who at any time participated in a defined benefit plan of the Employer, the rate of benefit accrual by such Participant in each defined benefit plan in which the Participant participates during the Limitation Year will be reduced to the extent necessary to prevent the sum of the following fractions, computed as of the close of the Limitation Year, from exceeding 1.0: Project Annual Benefit of the Participant under all defined benefit plans divided by The lesser of (1) the product of 1.25 multiplied by the dollar limitation in effect under Code Section 415(b)(1)(A) for such Limitation Year, or (2) the product of 1.4 multiplied by the amount which may be taken into account under Code Section 415(b)(1)(B) with respect to such Participant for such Limitation Year plus The sum of Annual Additions to such Participant's Aggregate Account under all defined contribution plans in such Limitation Year and for all prior Limitation Years 30 36 divided by The sum of the lesser of the following amounts determined for such Limitation Year and for each prior year of service with the Employer: (1) the product of 1.25 multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A) for such Limitation Year, or (2) the product of 1.4 multiplied by 25 percent of the Participant's Compensation for such Limitation Year. 31 37 ARTICLE V ALLOCATION TO PARTICIPANTS' ACCOUNTS 5.01 Individual Accounts. The Plan Administrator shall create and maintain adequate records to disclose the interest in the Trust of each Participant, Former Participant and Beneficiary. Such records shall be in the form of individual accounts and credits and charges shall be made to such accounts in the manner herein described. Each Participant and Former Participant may have a Pre-Tax Savings Account, a Voluntary Nondeductible Contribution Account, a Matching Contribution Account, a Profit Sharing Contribution Account, a Qualified Non-elective Contribution Account, a Qualified Matching Contribution Account, a Rollover Account and a Transfer Account. The maintenance of individual accounts is only for accounting purposes. 5.02 Valuation of the Trust Fund. The Trustee shall value the assets of the Trust Fund on each Valuation Date. In making such valuation, the Trustee shall take into account earnings or losses of the Trust Fund, net of reasonable expenses, and capital appreciation or depreciation in such assets whether or not realized. The method of valuation shall be determined by the Trustee and shall be followed with reasonable consistency from Valuation Date to Valuation Date. 5.03 Priority of Allocations to Accounts. As of each Valuation Date, the account balances of Participants and Former Participants shall be adjusted to reflect adjustments in the value of the Trust Fund, to reflect payments of benefits and to reflect transfers of benefits to or for the benefit of any Participant or Former Participant. The following procedures shall apply when adjusting the account balances of Participants and Former Participants: (a) First, charge to the proper Accounts all payments, distributions and forfeitures made since the last Valuation Date; and (b) Next, credit the total Elective Deferrals, principal and interest loan repayments, rollover contributions and transfer contributions made since the last Valuation Date to the proper Participant's Account; and (c) Next, allocate the net gain or loss (as defined below) in each investment fund to all Participants and Former Participants, according to the then credit balance in their Accounts in that investment fund after the adjustments made in (a) and (b) above; and (d) Finally, if the Valuation Date corresponds to the Plan Year end, credit to the Account of each Participant and Former Participant who is eligible to share in Matching, Profit Sharing, Qualified Non- elective, and Qualified Matching Contributions, any such contributions made for the Plan Year. 32 38 For those accounts which are unitized, dividend income shall be allocated in proportion to the units on which such dividend was earned, except that any distributions or withdrawals paid since the date the dividend was earned shall first be subtracted. The "net gain or loss" of an investment fund to be allocated as of any Valuation Date means the amount equal to the sum of all interest income, dividend income, realized gains or losses and unrealized gains or losses credited or accrued to that fund since the previous Valuation Date, less an amount equal to any Net Expense (as defined in Section 5.04) incurred for that fund since the previous Valuation Date. 5.04 Net Expense. Any investment expense attributable to a particular investment fund shall be charged to that fund. Any other expenses of the Plan shall be charged on a pro rata basis to all investment funds maintained under this Plan if not paid by the Employer. 5.05 Participant Direction of Investments. A Participant may elect to have one percent (1%), or any multiple thereof up to one hundred percent (100%), of such Participant's Aggregate Account invested in any investment fund established hereunder. Such election shall apply to the existing Aggregate Account balance and future contributions made by or on behalf of such Participant. To the extent a Participant fails to direct the investment of all or any portion of his Aggregate Account and future contributions, they shall be invested in the investment fund or funds selected by the Trustee. Upon a Participant's termination of employment or cessation of participation for any reason, such Participant (or Beneficiary, in the case of the Participant's death) shall continue to have the right to direct the investment of his Aggregate Account until such time as he receives a distribution hereunder. A Participant may change his designation of the manner for investment of his Aggregate Account to any other manner permitted under this Section, provided that (i) the change must be made on a form prescribed by the Committee, or, if a telephone voice response system is available, the change may be made by using the telephone voice response system, (ii) the change shall become effective no later than the business day next following (a) the date the change is received by the Trustee, in the case of a written change, or (b) the date the change is made using the telephone voice response system, and (iii) the change shall be applicable to the Participant's existing Aggregate Account and to contributions made after the application for change shall have become effective. In order to comply with applicable federal or state securities laws, the Committee may establish such rules with respect to the change of investment designation by Participants as it shall deem necessary or advisable to prevent possible violations of such laws. 33 39 ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.01 Vesting of Accounts. Participants shall vest in their Accounts in accordance with the following: (a) Participants who retire on or after attaining Normal Retirement Age or Early Retirement Age or who terminate employment because of Disability or death shall be 100 percent vested in their Aggregate Account as of the date of such event. A Participant's Accounts shall be distributed in accordance with the applicable sections of this Article VI. (b) Participants who terminate employment with the Employer before their Normal Retirement Date or for any other reason other than death, Disability, or attainment of Early Retirement Age shall have the vested portion of their Accounts as of the date of termination of employment determined in the following manner. They shall be: (1) 100 percent vested in their Pre-Tax Savings Account, their Voluntary Nondeductible Contribution Account, their Qualified Non-elective Contribution Account, their Qualified Matching Contribution Account, their Rollover Account and their Transfer Account; and (2) vested in a certain percentage of their Matching Contribution Account and their Profit Sharing Contribution Account, determined in accordance with the following schedule (for Participants credited with at least one Hour of Service on or after October 1, 1996):
Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 but less than 3 25% 3 but less than 4 50% 4 but less than 5 75% 5 or more years 100%
Participants who are not credited with an Hour of Service on or after October 1, 1996 will be subject to the vesting schedule of the Prior Plan. The vested portion of a Participant's Accounts as determined above shall be distributed in accordance with the applicable Sections of this Article VI. (c) The computation of a Participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Plan. In the event that the Plan is amended to change or modify any vesting schedule, a Participant with at least three (3) Years of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such 34 40 amendment. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) the date the Participant receives written notice of the amendment from the Employer or Plan Administrator. 6.02 Forfeitures. Any portion of the final balance in the Participant's Account upon the Participant's termination of employment for reasons other than death, Disability or retirement which is not vested will be forfeited. A forfeiture of the Participant's nonvested Account shall take place upon the earlier of the occurrence of five (5) consecutive one-year Breaks-in-Service or the distribution of his entire vested account balance upon his termination of employment. Forfeitures shall first be used to reinstate previously forfeited account balances of rehired Former Participants who are entitled to reinstatement pursuant to Section 7.02 of the Plan. Remaining forfeitures shall first be used to reduce the Employer's matching contributions for the Plan Year, and then, to the extent there are still remaining forfeitures, to reduce the Employer's profit sharing contributions for the Plan Year. If a Participant is not vested to any extent, he shall be deemed to have received a distribution of his entire account balance upon his termination of employment. 6.03 Timing of Distributions. (a) If the amount of the Participant's total distribution is $3,500 or less, the Account shall be immediately distributed in a single lump sum payment without the consent of the Participant, or in the case of the death of the Participant, his Beneficiary. If the amount of the Participant's total distribution exceeds $3,500, the Participant must consent before an immediate distribution may be made. The Participant's Aggregate Account is immediately distributable if any part of the benefit may be distributed to the Participant before the later of Normal Retirement Age or age 62. If the Participant, or his Beneficiary in the case of death, does not consent to immediate payment, the distribution will be deferred until the Valuation Date coinciding with or next following the day the Participant reaches age 65 (or, in the case of a Beneficiary receiving the distribution, the date the Participant would have reached age 65 had he lived). A Former Participant or Beneficiary who has not consented to an immediate distribution may consent to such distribution on any subsequent Valuation Date. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: 35 41 (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (b) Account balances shall be distributed to Former Participants or Beneficiaries no later than ninety (90) days following the Valuation Date coincident with or next following the Participant's date of termination of employment. (c) Payment of a Participant's or Former Participant's benefits, unless the Participant or Former Participant otherwise elects, will begin not later than the 60th day after the latest of the close of the Plan Year in which: (1) The date on which the Participant attains age 65; (2) Occurs the 10th anniversary of the year in which the Participant commenced Participation; or (3) The Participant terminates his service with the Employer. (d) All distributions required under this Section 6.03(d) shall be determined and made in accordance with the proposed Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed Regulations and will take precedence over any inconsistent provisions of this Plan. For Plan Years beginning after December 31, 1988, distributions to all Participants or Former Participants who attain age 70 1/2 on or after January 1, 1988 must commence no later than the first day of April following the calendar year in which the individual attains age 70 1/2. For those Participants or Former Participants who attain age 70 1/2 before January 1, 1988, and who are not five percent owners (as defined in Section 416(i) of the Code), distributions must commence no later than the later of the first day of April following the calendar year in which the individual attains age 70 1/2 or retires. Distributions which commenced prior to January 1, 1989 under the provisions of Code Section 401(a)(9) and the regulations thereunder as then in effect, shall continue unchanged. As of the first distribution calendar year, distributions, if not made in a form pursuant to Section 6.04, may only be made over one of the following periods (or a combination thereof): (1) The life of the Participant; (2) The life of the Participant and a designated beneficiary; 36 42 (3) A period certain not extending beyond the life expectancy of the Participant; or (4) A period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. (e) Notwithstanding any provision in this Plan to the contrary, if a Former Participant's benefits have commenced and the Former Participant dies before his entire interest has been distributed to him, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used prior to the Former Participant's death. (f) If a Participant dies before his distributions have commenced, such Participant's entire interest will be distributed within five years after his death. The preceding sentence shall not apply if: (1) any portion of a Participant's benefit is payable to (or for the benefit of) any individual designated (or if the applicable law permits, deemed designated) as a Beneficiary by the Participant and such portion will be distributed over a period not extending beyond the life expectancy of such Beneficiary and such distribution begins not later than one year after the date of the Participant's death (or such later date as is prescribed by regulations); or (2) if the designated Beneficiary is the Participant's surviving Spouse, then Section 6.03(e) of the Plan shall apply, except that the distribution need only begin on the date on which the Participant would have attained age 70 1/2 (rather than one year after the date of the Participant's death); provided, however, if the surviving Spouse then dies before payments are required to begin, then the entire interest must be distributed with five years of the surviving Spouse's death. (g) Pursuant to Section 401(a)(9)(D) of the Code, the Participant, Former Participant or his Spouse, in the case of a distribution pursuant to Sections 401(a)(9)(B)(iii) and (iv) of the Code, may elect to have his life expectancy and the life expectancy of his designated beneficiary recalculated each year in order to determine the minimum distribution requirements for each year. The election must be made no later than the time the first distribution is required under Section 401(a)(9) of the Code. The election by the Participant, Former Participant or his Spouse shall be irrevocable as of the date of the first required distribution under Section 401(a)(9) of the Code. Prior to such date the Participant, Former Participant or his Spouse may change the election. (h) Notwithstanding anything to the contrary, the surviving Spouse of the Participant can direct the commencement of benefits within a reasonable time after the death of the Participant. 37 43 6.04 Form of Payment. Benefits from the Participant's or Former Participant's vested Account shall be paid, to a Participant or Former Participant who does not die before the annuity starting date, in one of the optional forms explained below: (a) Lump sum payment; or (b) Equal installments over a fixed period of time in which the Former Participant will receive equal payments in monthly, quarterly, semi-annual or annual installments for any period of time not exceeding the life expectancy of the Former Participant, or the joint life expectancy of the Former Participant and his designated Beneficiary. 6.05 Designation of Beneficiary. Each Participant or Former Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his Beneficiary or Beneficiaries to whom his Plan benefits are paid if he dies before receipt of all such benefits. Each Beneficiary designation shall be in a form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participant's or Former Participant's lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all Beneficiary designations previously filed with the Plan Administrator. In the event a married Participant or Former Participant designates a Beneficiary other than his Spouse, his Spouse must consent to such designation in writing, witnessed by a notary public or the Plan Administrator. This consent must be on file with the Plan Administrator before the Beneficiary designation can be honored. A spousal consent filed with the Plan Administrator shall be applicable only with respect to the Spouse who has signed such form. If a married Participant or Former Participant fails to designate a Beneficiary in the manner provided above, or if the Beneficiary designated by a deceased Participant or Former Participant dies before him or before complete distribution of the Participant's or Former Participant's benefits, the Plan Administrator in its discretion, may direct the Trustee to distribute such Participant's or Former Participant's benefits (or the balance thereof) to: (a) The surviving Spouse of the Participant or Former Participant; (b) The Participant's lineal descendants, in equal parts, per stirpes; or (c) The estate of the last to die of such Participant or Former Participant and his Beneficiary or Beneficiaries. 6.06 Distribution for Minor Beneficiary. In the event a distribution is to be made to a minor Beneficiary, or to the custodian for such minor Beneficiary under the Uniform Gifts to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which such Beneficiary resides, such payment to the legal guardian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 38 44 6.07 Location of Participant, Former Participant or Beneficiary Unknown. In the event that all, or any portion, of the distribution payable to a Participant or Former Participant or his Beneficiary hereunder shall, at the expiration of five (5) years after it shall become payable, remains unpaid solely by reason of the inability of the Plan Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant, Former Participant or his Beneficiary, the amount so distributable shall be reallocated in the same manner as a forfeiture pursuant to this agreement. In the event a Participant, Former Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored. 6.08 Limitations on Benefits and Distributions. All rights and benefits, including, elections, provided to a Participant or Former Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order" as those terms are defined in Code Section 414(p). 39 45 ARTICLE VII FORMER PARTICIPANTS 7.01 Participation by Former Participant. An Associate who is a Former Participant and who is rehired by the Employer shall be eligible to participate in the Plan immediately upon his rehire. 7.02 Reinstatement of Account. If any Former Participant is reemployed before he receives a distribution of the vested portion of his Account, the Former Participant shall continue to participate in the Plan in the same manner as if such termination of employment had not occurred. If any Former Participant shall be reemployed by the Employer before five consecutive one-year Breaks-in- Service, and such Former Participant had received a distribution of his entire vested interest prior to his reemployment, that portion of his Account that was forfeited shall be reinstated to the amount on the date of distribution if the Associate repays to the Plan the full amount of the distribution attributable to employer contributions before the earlier of five years after the first date on which the Former Participant is subsequently reemployed by the Employer, or the date the Former Participant incurs five consecutive one-year Breaks-in-Service following the date of the distribution. If an Associate is deemed to receive a distribution pursuant to Section 6.02 of the Plan, and the Associate resumes employment covered under this Plan before the date the Former Participant incurs five consecutive one-year Breaks-in-Service, upon the reemployment of such Associate, the Employer-derived account balance of the Associate will be restored to the amount on the date of such deemed distribution. The full amount of his Matching Contribution Account and Profit Sharing Contribution Account which was forfeited shall be reinstated to his Matching Contribution Account and Profit Sharing Contribution Account, respectively, and thereafter, at any subsequent date, the vested balance in his Matching Contribution Account and Profit Sharing Contribution Account will be determined in accordance with the following formula: Vested Balance = [VP (AB + PW)] - PW where VP = Current Vested Percent AB = Current Account Balance (including restored forfeitures) PW = Prior Withdrawal or distribution 7.03 Separate Account Balances. If a Former Participant is reemployed after five consecutive one-year Breaks-in- Service, then separate Accounts will be maintained as follows: (a) One Account for nonforfeitable benefits attributable to pre-break service; and (b) One Account representing his status in the Plan attributable to post-break service. 40 46 7.04 Years of Service. If any Former Participant is reemployed after a one-year Break-in-Service has occurred, Years of Service shall include Years of Service prior to his one-year Break-in-Service subject to the following rules: (a) A Former Participant's pre-break and post-break service shall be used for computing Years of Service for vesting purposes only after the Former Participant has completed one Year of Service following his date of reemployment with the Employer. (b) The vested account balance attributable to post-break service of a Former Participant who did not have a nonforfeitable interest in any portion of his Account attributable to contributions made by the Employer shall not be increased as a result of pre-break service if his consecutive one-year Breaks-in- Service equal or exceed the greater of five or the aggregate number of his pre-break Years of Service. (c) A Former Participant who had a nonforfeitable right to a portion of his Account attributable to contributions made by the Employer shall have pre-break and post-break Years of Service taken into account in determining his vested account balance. (d) A Former Participant's vested account balance attributable to pre-break service shall not be increased as a result of post-break service after five consecutive one-year Breaks-in-Service. 41 47 ARTICLE VIII WITHDRAWALS 8.01 In-service Withdrawals. Elective Deferrals, Qualified Non-elective Contributions and Qualified Matching Contributions, and income allocable to each are not distributable to a Participant or his Beneficiary or Beneficiaries, in accordance with such Participant's, Beneficiary's or Beneficiaries' election, earlier than upon separation from service, death or Disability. Such amounts may also be distributed upon: (a) Termination of the Plan without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Section 4975(e) or Section 409 of the Code) or a simplified employee pension plan as defined in Code Section 408(k). (b) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or business of such corporation if such corporation continues to maintain this Plan after disposition, but only with respect to Associates who continue employment with the corporation acquiring such assets. (c) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) if such corporation continues to maintain this Plan, but only with respect to Associates who continue employment with such subsidiary. (d) The attainment of age 59 1/2. (e) The hardship of the Participant as described in Section 8.02. Such withdrawals shall be paid in a single lump sum and shall be subject to federal income tax withholding as prescribed by Section 3405 of the Code and the regulations thereunder. 8.02 Hardship Withdrawals. Upon the application of any Participant who is an Associate, the Plan Administrator, in accordance with a uniform nondiscriminatory policy, shall at any time permit such Participant to withdraw all or any portion of the amounts in the Participant's Pre-Tax Savings Account, if the withdrawal is in light of an immediate and heavy financial need of the Associate and is necessary to satisfy such financial need. However, any withdrawal under this Section 8.02 may not include earnings credited to a Participant's Pre-Tax Savings Account after December 31, 1988. The amount of the withdrawal shall not exceed the amount required to meet the financial need. (a) The determination of whether an Associate has an immediate and heavy financial need shall be based on all relevant facts and circumstances pursuant to Treasury Regulation Section 1.401(k)-l(d)(2). The Plan Administrator will require application for such hardship, 42 48 review such application and shall request any additional information necessary to verify existence of such hardship. The Plan Administrator shall make determination in a nondiscriminatory manner based upon objective criteria applied on a uniform and nondiscriminatory basis. (b) A distribution will be deemed to be made on account of an immediate and heavy financial need of the Associate if the distribution is on account of: (1) Expenses incurred or necessary for medical care, described in Section 213(d) of the Code, of the Associate, the Associate's Spouse or any dependents of the Associate (as defined in Section 152 of the Code); (2) The purchase (excluding mortgage payments) of a principal residence for the Associate; (3) Payment of tuition, related educational fees, and room and board expenses for the next twelve (12) months of post-secondary education for the Associate, the Associate's Spouse, children or dependents (as defined in Section 152 of the Code); (4) The need to prevent the eviction of the Associate from, or a foreclosure on the mortgage of, the Associate's principal residence; or (5) Any such extraordinary financial hardship as shall be identified by the Commissioner of Internal Revenue. (c) The determination as to whether the distribution is necessary to satisfy a financial need shall be based on all the relevant facts and circumstances including the Associate's representation that the need cannot be relieved: (1) Through reimbursement or compensation by insurance or otherwise; (2) By reasonable liquidation of the Associate's assets, to the extent such liquidation would not itself cause an immediate and heavy financial need; (3) By cessation of Elective Deferrals to the Plan; or (4) By other distributions or nontaxable (at the time of the loan) loans from plans maintained by the Employer or by any other employer, or by borrowing from commercial sources on reasonable commercial terms. (d) A distribution shall be deemed to satisfy an immediate and heavy financial need if: 43 49 (1) The Associate has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer; (2) All plans maintained by the Employer provide that the Associate's Elective Deferrals (and Associate Contributions) will be suspended for twelve (12) months after the receipt of the hardship distribution; (3) The distribution is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution); and (4) All plans maintained by the Employer provide that the Associate may not make Elective Deferrals for the Associate's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Section 402(g) of the Code for such taxable year less the amount of such Associate's Elective Deferrals for the taxable year of the hardship distribution. (e) A Participant making an application under this Section 8.02 shall have the burden of presenting to the Plan Administrator evidence of such need. If a Participant's application for a hardship withdrawal is approved, the Plan Administrator shall then instruct the Trustee to make such payment of the approved amount to the Participant. Hardship withdrawals shall be paid in a single lump sum. (f) Hardship withdrawals shall be subject to Federal income tax withholding as prescribed by Section 3405 of the Code and the regulations thereunder. 44 50 ARTICLE IX PLAN ADMINISTRATION 9.01 Powers and Responsibilities. (a) Hastings Entertainment, Inc., as Plan Administrator, shall be empowered to appoint and remove the Trustee and Benefits Committee from time to time as it deems necessary for the proper administration of the Plan and for the sole and exclusive benefit of the Participants, Former Participants and their Beneficiaries in accordance with the terms of this Plan, the Code and ERISA. (b) The Plan Administrator shall establish a funding policy and method, including, but not limited to determination of the short-term objectives for liquidity and long-term objectives for investment growth, or shall appoint a qualified person to do so. (c) The Plan Administrator may in its discretion appoint an Investment Manager to manage all or a designated portion of the assets of the Plan. In such event, the Trustee shall follow the written directive of the Investment Manager in investing the assets of the Plan managed by the Investment Manager. (d) The Plan Administrator shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate means. 9.02 Assignment and Designation of Administrative Authority / Compensation of Benefits Committee. The Plan Administrator shall appoint one or more individuals to the Benefits Committee. The Benefits Committee shall have authority to assist in the administration of the Plan and shall be empowered to carry out the duties of the Plan Administrator, except as described in 9.01(a) above. Any person, including, but not limited to, the shareholders, officers, and Associates of the Employer shall be eligible to serve on the Benefits Committee. A member of the Benefits Committee may resign by delivering his written resignation to the Employer or be removed by the Employer by written notice of removal, to take effect at a date specified therein. The Plan Administrator shall furnish the Trustee with proper written evidence of the names and individuals on the Benefits Committee and of any resignations and replacements thereof. The Plan Administrator, upon the resignation or removal of a member of the Benefits Committee shall, as soon as administratively possible after such vacancy is created, designate in writing a successor to this position. The Benefits Committee shall select a Chairman from among its members. A Secretary shall also be appointed by the Benefits Committee who may or may not be a member of the Benefits Committee. The Chairman shall preside at all meetings of the Benefits Committee unless, in his absence, a Vice Chairman selected by the Benefits Committee presides. The Secretary shall keep all minutes of 45 51 Benefits Committee proceedings and such records and documents as are necessary for the proper administration of the Plan. Benefits Committee members may receive reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred in the performance of duties with the Plan; except that no person so serving on the Benefits Committee who already receives full-time pay from the Employer or an association of Employers whose Associates are Participants in the Plan, shall receive compensation from the Plan, except for reimbursement of expenses properly and actually incurred. Any bond which may be required by applicable laws or regulations for the performance of duties by members of the Benefits Committee and all reasonable and necessary costs, expenses, and liabilities incurred by the Benefits Committee in the supervision and administration of the Plan which are not paid by the Employer shall be a charge against the Plan assets and shall be paid therefrom by the Trustee as directed in writing by the Benefits Committee. 9.03 Allocation and Delegation of Responsibilities. If more than one person is appointed to serve on the Benefits Committee, the responsibilities of each member may be specified by the Plan Administrator and accepted in writing by each member. In the event that no such delegation is made by the Plan Administrator, the Benefits Committee members may allocate the responsibilities among themselves, in which event the Benefits Committee shall notify the Plan Administrator and the Trustee in writing of such action and specify the responsibilities of each member of the Benefits Committee. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate member of the Benefits Committee until such time as the Plan Administrator or the Benefits Committee files with the Trustee a written revocation of such designation. 9.04 Powers, Duties and Responsibilities. The primary responsibility of the Plan Administrator is to administer the Plan for the exclusive benefit of the Participants, Former Participants and their Beneficiaries, subject to the specific terms of the Plan. The Plan Administrator shall have the discretionary authority to control and manage the operation and administration of the Plan, shall administer the Plan in accordance with the terms hereof, and shall have the power to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Plan Administrator shall be conclusive and binding upon all persons. The Plan Administrator may correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of this Plan; provided, however, that any interpretation or construction shall be done in a nondiscriminatory manner and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Section 401(a) of the Code and the Trust which is a part hereof exempt under Section 501(a) of the Code and shall comply with the terms of ERISA and all regulations issued pursuant thereto. The Plan Administrator shall have all powers necessary or appropriate to accomplish its duties under this Plan. The Plan Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to, the following: 46 52 (a) Determining all questions relating to the eligibility of Associates to participate or remain Participants hereunder; (b) Computing, certifying, and directing the Trustee with respect to the amount and the kind of benefits to which any Participant or Former Participant shall be entitled hereunder; (c) Authorizing and directing the Trustee with respect to all nondiscretionary or otherwise directed disbursements from the Trust; (d) Maintaining all necessary records for the administration of the Plan; (e) Interpreting the provisions of the Plan and making and publishing such rules for regulation of the Plan as are consistent with the terms hereof; (f) Determining the size and type of any annuity contract to be purchased from any insurer, and designating the insurer from which such contract shall be purchased; (g) Computing and certifying to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (h) Assisting any Participant or Former Participant regarding his rights, benefits, or elections available under the Plan; and (i) Preparing and implementing a procedure for notifying eligible Associates that they may elect to have a portion of the Employer's contribution deferred into the Plan through a salary reduction agreement. 9.05 Records and Reports. The Plan Administrator shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary, for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Former Participants, Beneficiaries and others as required by law. 9.06 Appointment of Advisors. The Plan Administrator or the Trustee with the consent of the Plan Administrator may appoint counsel, specialists, advisers, and other persons as the Plan Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan. 9.07 Information from Employer. To enable the Plan Administrator to perform its functions, the Employer shall supply full and timely information to the Plan Administrator on all matters relating to the compensation of all Participants, Hours of Service, Years of Service, occurrences of retirement, death, Disability, or termination of employment, and such other pertinent facts and data as the Plan Administrator may require; and the Plan Administrator shall advise the Trustee of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Plan 47 53 Administrator and Trustee may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information. 9.08 Payment of Expenses. All expenses of administration may be paid out of the Plan assets unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Plan Administrator, including, but not limited to, fees of accountants, counsel, and other specialists, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Plan assets. However, the Employer may reimburse the Trust for any administrative expenses incurred pursuant to the above. Any administration expense paid to the Trust as a reimbursement shall not be considered as an Employer contribution. 9.09 Majority Actions. Except where there has been an allocation and delegation of administrative authority pursuant to Section 9.03, if there shall be more than one member of the Benefits Committee, they shall act by a majority of their number, but may authorize one or more of them to sign all papers on their behalf. 9.10 Bonding. Every Fiduciary, except a bank or an insurance company, unless exempted by ERISA and regulations thereunder, shall be bonded in an amount not less than 10 percent of the amount of the fund such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of the bond shall be determined at the beginning of each Plan Year by the amount of funds handled by each such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be an approved corporate surety company (as such term is used in Section 412(a)(2) of ERISA), and the bond shall be in the form approved by the Secretary of Labor. Notwithstanding anything herein to the contrary, the cost of such bonds shall be an expense of the Plan and may, at the election of the Plan Administrator, be paid from the Plan assets or by the Employer. 9.11 Indemnification. The Employer shall indemnify the Plan Administrator and each member of the Benefits Committee from and against any and all liabilities, costs, or expenses incurred as a result of any act or omission to act in connection with the performance of fiduciary duties or responsibilities, if any, under this Plan and applicable laws and regulations, but not for liabilities and claims arising from such Fiduciary's willful misconduct or gross negligence. 9.12 Interpretation. This Plan has been executed for the exclusive benefit of the Participants, Former Participants and their Beneficiaries. So far as possible, this Plan shall be interpreted and administered in a manner consistent with this intent and with the intention of the Employer that this Plan shall at all times fully comply with the requirements of applicable laws and regulations. Neither the Employer nor the Plan Administrator shall exercise any power or right to do or perform any act which is in conflict with or violates such laws and regulations. Any power or right granted under this Plan or retained by the Employer shall be void to the extent that its exercise or retention shall violate laws and regulations. The Employer shall make any and all retroactive amendments to this Plan that are required under applicable laws and regulations in order to 48 54 establish and maintain the Plan in conformity as a qualified Plan pursuant to Section 401(a) of the Code and the Trust which is a part hereof exempt pursuant to Section 501(a) of the Code. 9.13 Claims Procedure. Claims for benefits under the Plan may be filed with the Plan Administrator on forms supplied by the Employer. Written notice of the disposition of a claim shall be furnished to the claimant within ninety (90) days after the application thereof is filed. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition the claimant shall be furnished with an explanation of the Plan's claims review procedure. 9.14 Claims Review Procedure. Any Associate, former Associate, or Beneficiary of either, who has been denied a benefit by a decision of the Plan Administrator pursuant to Section 9.13 shall be entitled to request a review of the claim by filing with the Plan Administrator (on a form which may be obtained from the Plan Administrator) a request for a hearing. Such request, together with a written statement of the reasons why the claimant believes his claim should be allowed, shall be filed with the Plan Administrator no later than sixty (60) days after receipt of the written notification provided for in Section 9.13. The Plan Administrator shall then conduct a hearing within the next sixty (60) days, at which time the claimant may be represented by an attorney or any other representative of his choosing and at which time the claimant shall have an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon five (5) business days written notice to the Plan Administrator) the claimant or his representative shall have an opportunity to review all documents in the possession of the Plan Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowances, of the claim shall be made by the Plan Administrator with sixty (60) days of receipt of the appeal unless there has been an extension of sixty (60) days and shall be communicated in writing to the claimant. Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 49 55 ARTICLE X TRUST ADMINISTRATION 10.01 Establishment and Acceptance of Trust. The Trustee, as of the date of signature hereon, accepts the Trust hereby established and consents to act as Trustee subject to the terms, provisions, conditions, and limitations of this Plan. 10.02 Scope of Trustee's Functions. In all matters relating to the detailed administration of the Plan the Trustee shall act only upon the authorization evidenced by certificate of the Plan Administrator and shall be fully protected in relying and acting thereon; provided, however, if at any time the Plan Administrator shall fail to give directions or instructions to the Trustee in regard to any detail affecting the administration of the Plan over which the Plan Administrator has jurisdiction, then and in that event the Trustee, although being under no obligation to do so, may act without such directions or instructions and may exercise its own discretion and judgment as seems appropriate and advisable under the circumstances in order to effectuate the purposes of the Plan. Where the Trustee does so act without direction or instruction from the Plan Administrator, it shall act solely in the interests of the Participants and their Beneficiaries and for the exclusive purpose of providing the benefits required and defraying reasonable expenses of administering the Plan. The Trustee shall not be required to act on instructions received from the Plan Administrator, other than instructions from a qualified Investment Manager, if in its sole discretion and opinion it believes that compliance with such instructions would result in an action which would be improper or imprudent. In the event the Trustee declines or refuses to follow such instructions given in writing by the Plan Administrator or its duly authorized representative, notice of such refusal shall be furnished to the Plan Administrator in writing within fifteen (15) days of receipt of the Plan Administrator's written instructions. If at any time the Plan Administrator fails or refuses to provide the Trustee with written instructions concerning any action which, in the sole discretion of the Trustee, is deemed necessary in order to properly administer the Plan under the provisions hereunder and in accordance with applicable laws and regulations, then and in that event, the Trustee shall notify the Plan Administrator in writing of the Trustee's intent to take such action on a date no earlier than thirty (30) days from the date notice is received by the Plan Administrator. The notice shall describe the action which will be performed by the Trustee on a certain date unless written notice is received from the Plan Administrator within thirty (30) days disapproving such action and instructing the Trustee concerning the course of action which the Trustee should follow. If the Plan Administrator fails or refuses to respond to the Trustee's notification of intended action, such failure or refusal to respond shall be deemed by the Trustee as implied consent on the part of the Plan Administrator and on behalf of the Employer to the action intended to be performed by 50 56 the Trustee and shall be deemed as authorizing the Trustee to so act at the expiration of the thirty (30) day period. 10.03 Powers and Duties. The Trustee is hereby authorized and empowered to establish and maintain for and on behalf of the Plan Participants such pooled investment accounts as the Plan Administrator may direct, and into which the Plan assets shall be invested. In establishing such pooled investment accounts, or in utilizing such other investments as the Plan Administrator may from time to time direct, the Trustee shall be authorized and empowered to perform the following functions with respect to the Plan: (a) To invest and reinvest the Plan assets in real, personal, or mixed property including but not limited to securities of domestic and foreign corporations and investment trusts (whether open-end or not), bonds, preferred stocks, common stocks, mortgages, mortgage participations, interests in any common trust fund or commingled employee benefit fund to the extent allowed under applicable laws and regulations and with complete discretion as to converting realty into personalty or personalty into realty. (b) To invest in land, whether improved or unimproved, and improve any such land in any manner determined by the Plan Administrator to be feasible and prudent. To lease real, personal, or mixed property on such terms as the Plan Administrator shall deem proper, including the power to make leases that may extend beyond any time in which Plan termination may be necessary by such Employer; and to foreclose, extend, renew, assign, release, or partially release and discharge mortgages or other liens. (c) To invest in bonds, stocks, secured notes, or similar securities permitted by applicable laws and regulations. (d) To borrow funds at the direction of the Plan Administrator, from any party permitted by applicable laws and regulations for the purpose of purchasing as investments any property as collateral to secure such loan. (e) To make investments of types other than specified herein, provided such investments are in accordance with applicable laws and regulations. (f) To make distribution to or for the benefit of a retiree, disabled Participant, inactive Participant, Former Participant or of their Beneficiaries. (g) To purchase an annuity contract on behalf of a Participant or Former Participant as directed by the Plan Administrator. (h) To acquire or retain property returning no income or slight income as may be deemed advisable by the Plan Administrator without liability therefor. (i) To sell, exchange, give options, partition, convey, or otherwise dispose of, with or without covenants of warranty of title, any property, which may from time to time be or 51 57 become a part of the Plan assets at public or private sale or otherwise, for cash or other consideration or on credit, and upon such terms and conditions and for such consideration as the Plan Administrator shall consider advisable, and to transfer the same free of all trusts. (j) To vote, in person or by proxy, any stocks or other properties having voting rights; to execute any options, rights or privileges pertaining to any property; to participate in any merger, reorganization or consolidation affecting any part of the Plan assets and in connection therewith to take any action which an individual could take with respect to property owned outright by such individual including the payment of expenses or assessments, the deposit of stock or property with a protective committee, the acceptance or retention of new securities or property and the payment of such amounts of money as may seem advisable in connection therewith; and to hold any item constituting a part of the Plan assets for any length of time in the name of a nominee or nominees without mention of the Trust or any instrument of ownership. (k) To execute and deliver oil, gas, and other mineral leases, containing such unitization, pooling, and recycling agreements and other provisions as the Plan Administrator may deem proper; to execute mineral and royalty conveyances; to purchase leases, royalties, and any type of mineral interest; and to execute and deliver drilling contracts or other contracts or options and other instruments which the Plan Administrator may consider necessary or desirable in connection with oil, gas, or other mineral interests. All such instruments may be executed and delivered for such consideration as the Plan Administrator, in its sole discretion, deems to be fair and reasonable. (l) To exercise all other powers presently granted to Trustees by the Texas Trust Code as amended and in force on the effective date of this Plan, as amended from time to time thereafter, and not in conflict with the provisions hereof. (m) To do any and all things necessary and proper, including the power to execute any other instruments which may be required to fully and completely accomplish any of the powers herein conferred. (n) As a condition precedent to acting as Trustee for and on behalf of the Employer, the Trustee may require that the Plan Administrator execute any appropriate and proper instruments authorizing investment of Plan assets by the Trustee in investments so directed by the Plan Administrator or authorizing any action by the Trustee so desired by the Plan Administrator. 10.04 Liability of Trustees. The Trustee shall not be responsible for any acts or omissions of the Plan Administrator. Any certificate or other instrument duly signed by the Plan Administrator purporting to evidence any instructions, direction, or order of the Plan Administrator shall be accepted by the Trustee as conclusive proof thereof. 52 58 10.05 Reliance Upon Acts of Trustee. No person dealing with the Trustee shall be required to verify the application by the Trustee of any money paid or other property delivered to the Trustee, and all persons dealing with the Trustee shall be entitled to rely upon the representations and decisions of the Trustee as to its authority and are released from any duty of inquiry with respect thereto. Any action of the Trustee hereunder shall be conclusively evidenced for all purposes of the Trust by the certification of the Trustee, and such certificate when received by an issuing company or by any other person, shall be conclusive evidence of the facts recited therein and shall fully protect all persons relying upon the truth thereof. A third person dealing with the Trustee shall not be required to make any inquiry whether the Plan Administrator has instructed the Trustee, or whether the Trustee is otherwise authorized to take or omit any action. 10.06 Records and Accounting of Trustee / Valuation of Plan Assets. The Trustee shall keep proper accounts of all investments, receipts, disbursements, and other transactions affected by it hereunder and all accounts, books, and records relating thereto shall be open for inspection at all reasonable times by the Plan Administrator, or any other representative designated by the Employer. Within ninety (90) days following the Valuation Date which coincides with the last day of the Plan Year, and at such other interim Valuation Dates as may be requested by the Plan Administrator, the Trustee shall furnish the Plan Administrator with a detailed statement of the Plan assets for the period beginning with the day following the previous Valuation Date for which a statement was required and ending with the Valuation Date for which the current statement is required. Reports prepared for the Employer by the Trustee as provided in the preceding paragraph shall reflect the fair market value of all assets to the Employer's account as of the Valuation Date for which the report is prepared. Each report shall reflect: (a) A detailed record of all cash receipts and disbursements for the period. (b) Value of all Plan assets on a cash basis held for the Employer. (c) Statement of earned income on a cash basis, other than capital gains or losses, during the preceding period. All such Plan assets which are listed by a recognized stock exchange or which otherwise have a readily ascertainable market value shall be valued by the Trustee as of the Valuation Date. Any assets held in the Employer's Trust account by the Trustee which do not have a readily ascertainable market value shall be valued by the Plan Administrator as of the Valuation Date and such value reported to the Trustee in writing. Upon the expiration of ninety (90) days from the date of filing such account, or upon the earlier specific approval thereof by the Plan Administrator, the Trustee, to the extent permitted by ERISA, shall be forever released and discharged from liability and accountability to anyone with respect to the propriety, of its accounts and transactions shown in such accounting, except with respect to such accounts or transactions as to which the Plan Administrator shall within such ninety (90) day period file written objection with the Trustee or with respect to any fraudulent act of the Trustee. Nothing 53 59 herein contained, however, shall preclude the Trustee from its right to have any of its accounts judicially settled by a court of competent jurisdiction. 10.07 Payment of Compensation and Expenses. The compensation of the Trustee, payable by the Employer or directly from the Plan assets, shall be determined by agreement wherein the Employer shall entitle the Trustee to receive a reasonable rate of compensation for services rendered in the performance of duties as Trustee. All reasonable expenses necessarily incurred by the Trustee in the performance of its duties shall also be agreed to and shall be paid by the Employer or upon approval of the Plan Administrator directly from Plan assets. The cost of any bond required of the Trustee in accordance with applicable laws and regulations, or as may be required by the Plan Administrator, shall be paid by the Employer or directly from Plan assets. 10.08 Resignation or Removal of Trustee / Withdrawal From Trust. The trustee may resign as Trustee hereunder for any reason, but such resignation shall become effective only at the expiration of thirty (30) days after written notice thereof has been forwarded by registered mail to the Employer and after an audit of the books and records of the Trustee has been made under the direction of the Plan Administrator and has been approved by the Plan Administrator. At the discretion of the Employer, the Trustee may be removed as Trustee hereunder, but such removal shall become effective only at the expiration of thirty (30) days after the Employer delivers written notice by registered mail to the Trustee and informs the Trustee of the name and address of the successor trustee to which assets are to be transferred. 10.09 Successor Trustee. If at any time the Trustee acting hereunder shall resign or be removed or cease to exist, a successor trustee or successor trustees shall be appointed forthwith by the Employer. Successor trustees may be a bank or other corporation with trust powers organized under the laws of the United States of America or of any State, an individual trustee, or a board of trustees. Any successor trustee appointed hereunder may qualify as such by executing, acknowledging, and delivering to the Plan Administrator an instrument accepting such appointment, whereupon such successor shall be and become vested with all the estate, rights, powers, discretions, duties, and obligations of the original Trustee as provided in this Plan. 10.10 Accounting Upon Resignation or Removal of Trustee. In the event of resignation or removal of the Trustee, the Trustee shall have the right to a full, final, and complete settlement of its account with the Trust either (1) by agreement of settlement between the Trustee and the Employer, or (2) if no such agreement can be reached, then by judicial settlement in an action instituted by the Trustee in a court of competent jurisdiction in the county where the Trustee's principal place of business is located. Upon the making of such settlement, the Trustee shall transfer to the successor trustee all Plan assets as they may then be constituted, and true copies of all its records relating to the Trust, and shall execute all documents necessary to transfer the Plan assets to the successor trustee, and the Trustee thereupon shall be discharged from further liability for all matters embraced within such settlement. 10.11 Employment of Agents. The Trustee shall be empowered to employ legal, accounting, clerical, and other assistance which may be required in carrying out the provisions of this Plan with such 54 60 expenses to be paid by the Employer; provided, however, that the Plan Administrator may direct the Trustee to pay such expenses from Plan assets. 10.12 Employer Securities and Real Property. The Trustee shall be empowered to acquire and hold "qualifying Employer securities" and "qualifying Employer real property," as those terms are defined in ERISA, provided, however, that the Trustee shall not be permitted to acquire any qualifying Employer securities or qualifying Employer real property if, immediately after the acquisition of such securities or property, the fair market value of all qualifying Employer securities and qualifying Employer real property held by the Trustee hereunder should amount to more than 100% of the fair market value of all the assets in the Trust Fund. 55 61 ARTICLE XI AMENDMENT, TERMINATION AND MERGERS 11.01 Amendment. The Employer shall have the right at any time to amend this Agreement. However, no such amendment shall authorize or permit any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants, Former Participants or their Beneficiaries or estates; no such amendment shall cause any reduction in the amount credited to the account of any Participant or Former Participant or cause or permit any portion of the Trust Fund to revert to or become property of the Employer; and no such amendment which affects the rights, duties or responsibilities of the Trustee and Plan Administrator may be made without the Trustee's and Plan Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the Trust provisions contained herein are a part of this Agreement and the amendment affects the duties of the Trustee hereunder. For the purposes of this Section, a Plan amendment which has the effect of eliminating or reducing an early retirement benefit or eliminating, an optional form of benefit (as provided in Treasury regulations) shall be treated as reducing the amount credited to the account of a Participant or Former Participant. 11.02 Termination. The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Plan Administrator written notice of such termination. A complete discontinuance of the Employer's contributions to the Plan shall be deemed to constitute a termination. Upon any termination (full or partial) or complete discontinuance of contributions, all amounts credited to the affected Participants' or Former Participants' Accounts shall become 100% vested and shall not thereafter be subject to forfeiture and all unallocated amounts shall be allocated to the accounts of all Participants and Former Participants in accordance with the provisions hereof. Upon such termination of the Plan, the Employer, by written notice to the Trustee and Plan Administrator, may direct either: (a) complete distribution of the assets in the Trust Fund to the Participants and Former Participants, in accordance with the modes of distribution provided for in Section 6.04 of the Plan, as soon as the Trustee deems it to be in the best interests of the Participants and Former Participants, but in no event later than two years after such termination; or, (b) continuation of the Trust created by this agreement and the distribution of benefits at such time and in such manner as though the Plan had not been terminated. Provided, however, that any distributions made pursuant to this Section shall be subject to the rights of consent afforded to the Participant pursuant to Section 6.03. 56 62 11.03 Successor Employer. In the event of the dissolution, merger, consolidation or reorganization of the Employer, provisions may be made by which the Plan will be continued by the successor; and, in that event, such successor shall be substituted for the Employer under the Plan. The substitution of the successor shall constitute an assumption of Plan liabilities by the successor and the successor shall have all the powers, duties, and responsibilities of the Employer under the Plan. 11.04 Plan Assets. In the event of any merger or consolidation of the Plan with, or transfer in whole or in part of the assets and liabilities of the Trust Fund to another trust fund held under, any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants or Former Participants of this Plan, the assets of the Trust Fund applicable to such Participants or Former Participants shall be transferred to the other trust fund only if: (a) Each Participant or Former Participant would (if either this Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer; (b) Actions of the Employer under this Plan, or of any new or successor employer of the affected Participants or Former Participants, shall authorize such transfer of assets; and, in the case of the new or successor employer of the affected Participants or Former Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' or Former Participants' inclusion in the new employer's plan; and (c) Such other plan and trust are qualified under Sections 401(a) and 501(a) of the Code. 57 63 ARTICLE XII MISCELLANEOUS 12.01 Participant's Rights. This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Associate. Nothing contained in this Plan shall be deemed to give any Participant or Associate the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Associate at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 12.02 Alienation. (a) Subject to the exceptions provided below, no benefit which shall be payable out of the Trust Fund to any person (including a Participant, Former Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagement, or torts of any such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. (b) This provision shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Plan Administrator under the provisions of the Retirement Equity Act of 1984. The Plan Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order," a former Spouse of a Participant or Former Participant shall be treated as the Spouse or surviving Spouse for all purposes under the Plan. 12.03 Construction of Agreement. This Plan and Trust shall be construed and enforced according to ERISA and the laws of the State of Texas, other than its laws respecting choice of law, to the extent not preempted by ERISA. 12.04 Legal Action. In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee or the Plan Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee or Plan Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 58 64 12.05 Prohibition Against Diversion of Funds. (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any Trust Fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive use of Participants, Former Participants or their Beneficiaries. (b) In the event the Employer shall make an excessive contribution under a mistake of fact pursuant to Section 403(c)(2)(A) of ERISA, the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the excess contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 12.06 Employer's and Trustee's Protective Clause. Neither the Employer nor the Trustee, nor their successors, shall be responsible for the validity of any contract issued hereunder or for the failure on the part of the insurer to make payments provided by any such contract, or for the action of any person which may delay payment or render a contract null and void or unenforceable in whole or in part. 12.07 Receipt and Release for Payments. Any payment to any Participant, Former Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant, Former Participant or Beneficiary in accordance with the provisions of this agreement, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, Former Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 12.08 Action by the Employer. Whenever the Employer under the terms of this agreement is permitted or required to do so or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 12.09 Named Fiduciaries and Allocation of Responsibility. The "Named Fiduciaries" of this Plan are (1) the Employer, (2) the Plan Administrator, (3) the Benefits Committee, (4) the Trustee and (5) any Investment Manager appointed hereunder. The Named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under this agreement. In general, the Employer shall have the sole responsibility for the administration of this agreement, which responsibility is specifically described in this agreement. The Benefits Committee shall have any responsibility for the administration of the Plan as is given to them by the Plan Administrator. The Trustee shall have the sole responsibility of management of the assets held under the Trust, except those assets, the management of which has been assigned to an Investment Manager, who shall be solely responsible for the management of the assets assigned to 59 65 it, all as specifically provided in this agreement. Each Named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of this agreement, authorizing or providing for such direction, information or action. Furthermore, each Named Fiduciary may rely upon any such direction, information or action of agreement to inquire into the propriety of any such direction, information or action. It is intended under this agreement that each Named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under this agreement. No Named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity. 12.10 Approval by the Internal Revenue Service. (a) Notwithstanding anything herein to the contrary, if, pursuant to an application filed by or in behalf of the Plan, the Commissioner of Internal Revenue or his delegate should determine that the Plan as amended and restated does not initially qualify as a tax-exempt plan and trust under Sections 401 and 501 of the Code, and such determination is not contested, or if contested, is finally upheld, then the Plan shall operate as if it had not been amended and restated. (b) Any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may within one (1) year following a final determination of the disallowance, whether by agreement with the Internal Revenue Service or by final decision of a court of competent jurisdiction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the excess contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned. 12.11 Uniformity. All provisions of the Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. 60 66 ARTICLE XIII PARTICIPATING EMPLOYERS 13.01 Adoption by Other Employers. Notwithstanding anything herein to the contrary, with the consent of the Plan Administrator and Trustee, any other corporation or entity (provided an Owner-Employee of such entity does not participate in the Plan for Plan Years beginning before January 1, 1984), whether an Affiliate or Subsidiary or not, may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. 13.02 Requirements of Participating Employers. (a) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Associate of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. (d) All rights and values forfeited by termination of employment shall inure only to the benefit of the Associate Participants of the Participating Employer by which the forfeiting Participant was employed, except that if the forfeiture is for an Associate whose Employer is a member of an affiliated or controlled group, then said considered forfeiture shall be allocated, based on Compensation to all Participant Accounts of Participating Employers who are members of the affiliated or controlled group. Should an Associate of one ("First") Employer be transferred to an associated ("Second") Employer (the Employer, an Affiliate or Subsidiary), such transfer shall not cause his account balance (generated while an Associate of the "First" Employer) in any manner, or by any amount to be forfeited. Such Associate's Participant account balance for all purposes of the Plan, including length of service, shall be considered as though he had always been employed by the "Second" Employer and as such had received contributions, forfeitures, earning or losses, and appreciation or depreciation in value of assets totaling amounts so transferred. (e) Any expenses of the Trust which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 61 67 13.03 Designation of Agent. Each Participating Employer shall be deemed to be part of this Plan; provided, however, that with respect to all of its relations with the Trustee and Plan Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Plan Administrator as its agent. Unless the content of the Plan clearly indicates the contrary, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 13.04 Associate Transfers. It is anticipated that an Associate may be transferred between Participating Employers, and the Associate involved shall carry with him accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Associate is transferred shall thereupon become obligated hereunder with respect to such Associate in the same manner as was the Participating Employer from whom the Associate was transferred. 13.05 Participating Employers Contribution. All contributions made by a Participating Employer, as provided for in this Plan, shall be paid to and held by the Trustee for the exclusive benefit of the Associates of such Participating Employer and the Beneficiaries of such Associates, subject to all the terms and conditions of this Plan. Any forfeiture by an Associate of a Participating Employer subject to allocation during each Plan Year shall be allocated only for the exclusive benefit of the Participants of such Participating Employer in accordance with the provisions of this Plan. On the basis of the information furnished by the Plan Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Associates of each Participating Employer. The Trustee may, but need not, register contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event an Associate transfers from one Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 13.06 Amendment. Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 13.07 Discontinuance of Participation. Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan. At any time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new Trustee as shall have been designated by such Participating Employer, in the event that it has established a separate pension plan for its Associates. If no successor is designated, the Trustee shall retain such assets for the Associates of said Participating Employer pursuant to the provisions of Article X hereof. In no such event shall any part of the corpus or income of the Trust as it relates to such Participating Employer be used for or diverted for purposes other than for the exclusive benefit of the Associates of such Participating Employer. 62 68 13.08 Plan Administrator's Authority. The Plan Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. 63 69 ARTICLE XIV TOP-HEAVY PROVISIONS 14.01 Generally. For any Plan Year in which the Plan is a Top-Heavy Plan, the requirements of Sections 14.02, 14.03 and 14.09 must be met in accordance with Section 416 of the Code and the regulations thereunder. 14.02 Minimum Contributions. Minimum Employer contributions for a Participant who is not a Key Employee shall be required under the Plan for the Plan Year as follows: (a) The amount of the minimum contributions shall be the lesser of the following percentages of Compensation: (1) three percent or, (2) the highest percentage at which such contributions are made under the Plan for the Plan Year on behalf of a Key Employee. (A) For purposes of this paragraph (2), all defined contribution plans required to be included in an Aggregation Group shall be treated as one plan. (B) This paragraph (2) shall not apply if the Plan is required to be included in an Aggregation Group and the Plan enables a defined benefit plan required to be included in the Aggregation Group to meet the requirements of Sections 401(a)(4) or 410 of the Code. (b) There shall be disregarded for purposes of this Section 14.02 any contributions or benefits under chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title 11 of the Social Security Act, or any other Federal or State law. (c) For purposes of this Section 14.02, the term "Participant" shall be deemed to refer to all Participants who have not separated from service at the end of the Plan Year including without limitation, individuals who declined to elect or make contributions to the Plan. (d) In determining whether a Non-Key Employee has received the required minimum contribution, such Non-Key Employee's Elective Deferrals shall not be taken into account. 14.03 Super Top-Heavy Plans. If, for any Plan Year in which the Plan is a Top-Heavy Plan it is also Super Top-Heavy Plan, then for purposes of the limitations on contributions and benefit under Section 415 of the Code, the dollar limitations in the defined benefit plan fraction and the defined contribution fraction shall be multiplied by 1.0 rather than 1.25. However, if the application of the provisions of this Section 14.03 would cause any individual to exceed the combined Section 64 70 415 limitations on contributions and benefits, then the application of the provisions of this Section 14.03 shall be suspended as to such individual until such time as he no longer exceeds the combined Section 415 limitations modified by this Section 14.03. During the period of such suspension, there shall be no Employer contributions or forfeitures allocated to such individual under this or any other defined contribution plan of the Employer and there shall be no accruals for such individual under an defined benefit plan of the Employer. 14.04 Determination of Top Heaviness. The determination of whether a plan is Top-Heavy shall be made as follows: (a) If the Plan is not required to be included in an Aggregation Group with other plans, it shall be Top- Heavy only if, when considered by itself, it is a Top-Heavy Plan and it is not included in a permissive Aggregation Group that is not a Top-Heavy Group. (b) If the Plan is required to be included in an Aggregation Group with other plans, it shall be Top-Heavy only if the Aggregation Group, including any permissively aggregated plans, is Top-Heavy. (c) If a plan is not a Top-Heavy Plan and is not required to be included in an Aggregation Group, then it shall not be Top-Heavy even if it is permissively aggregated in an Aggregation Group which is a Top- Heavy Group. 14.05 Determination of Super Top Heaviness. A plan shall be a Super Top-Heavy Plan if it would be a Top-Heavy Plan under the provisions of Section 14.06, but substituting "90 percent" for "60 percent" in the ratio test in Section 14.06. 14.06 Calculation of Top-Heavy Ratios. A plan shall be Top-Heavy and an Aggregation Group shall be a Top-Heavy Group with respect to any Plan Year as of the Determination Date, if the sum as of the Determination Date of the Cumulative Accrued Benefits and the Cumulative Accounts of Associates who are Key Employees for the Plan Year, exceeds 60 percent of a similar sum determined for all Associates, excluding former Key Employees. 14.07 Cumulative Accounts and Cumulative Accrued Accounts. The Cumulative Accounts and Cumulative Accrued Benefits for any Associate shall be determined as follows: (a) "Cumulative Account" shall mean the sum of the amount of an Associate's account under a defined contribution plan (for an unaggregated plan) or under all defined contribution plans included in an Aggregation Group (for aggregated plans) determined as of the most recent plan Valuation Date within a 12-month period ending on the Determination Date, increased by any contributions due after such Valuation Date and before the Determination Date. (b) "Cumulative Accrued Benefit" means the sum of the present value of an Associate's accrued benefits under a defined benefit plan (for an unaggregated plan) or under all defined benefit plans included in an Aggregation Group (for aggregated plans), determined under 65 71 the actuarial assumptions set forth in such plan or such plans, as of the most recent plan Valuation Date within a 12-month period ending on the Determination Date as if the Associate voluntarily terminated service as of such Valuation Date. (c) Accounts and benefits shall be calculated to include all amounts attributable to both Employer and Associate contributions but excluding amounts attributable to voluntary deductible Associate contributions. (d) Accounts and benefits shall be increased by the aggregate distributions during the five-year period ending on the Determination Date made with respect to an Associate under the plan or plans as the case may be or under a terminated plan which, if it had not been terminated, would have been required to be included in the Aggregation Group. (e) If any Associate has not performed services for the Employer maintaining the Plan at any time during the five-year period ending on the Determination Date, any accrued benefit for such Associate (and the account of such Associate) shall not be taken into account. (f) Rollovers and direct plan-to-plan transfers shall be handled as follows: (1) If the transfer is initiated by the Associate and made from a plan maintained by one employer to a plan maintained by another employer, the transferring plan continues to count the amount transferred under the rules for counting distributions. The receiving plan does not count the amount if accepted after December 31, 1983, but does count the amount if accepted prior to December 31, 1983. (2) If the transfer is not initiated by the Associate or is made between plans maintained by the Employers, the transferring plan shall no longer count the amount transferred and the receiving plan shall count the amount transferred. (3) For purposes of this subsection (f), all employers aggregated under the rules of Sections 414(b), (c) and (m) of the Code shall be considered a single employer. 14.08 Other Definitions. For purposes of this Article XIV, the following definitions shall apply, to be interpreted in accordance with the provisions of Section 416 of the Code and the regulations thereunder: (a) "Aggregation Group" means a plan or group of plans which includes all plans maintained by the Employers in which a Key Employee is a participant or which enables any plan in which a Key Employee is a participant to meet the requirements of Code Section 401(a)(4) or Code Section 410, as well as other plans selected by the Employer for permissive aggregation, inclusion of which would not prevent the group of plans from continuing to meet the requirements of such Code sections. 66 72 (b) "Compensation" shall have the meaning set forth in Section 4.10(a)(4), except that for purposes of this Article XIV, salary deferral contributions and other deferred compensation contributions made to the Plan by the Employer shall be included in compensation. (c) "Determination Date" means, with respect to any Plan Year: (1) the last day of the preceding Plan Year, or (2) in the case of the first Plan Year of any plan, the last day of such Plan Year. (d) "Associate" means, for purposes of this Article XIV, any person employed by an Employer and shall also include any Beneficiary of such person, provided that the requirement of Section 14.02 shall not apply to any person included in a unit of Associates covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between Associate representatives and one or more Employers if there is evidence that retirement benefits were the subject of good faith bargaining between such Associate representatives and such Employer or Employers. (e) "Employer" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer, or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)) with the Employer, or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer. (f) "Hour of Service" shall have the meaning set forth in Section 2.01(32). (g) "Key Employee" means as of any Determination Date, any Associate, former Associate, or Beneficiary of a former Associate who is, at any time during the Plan Year, or was, during any one of the four preceding Plan Years any one or more of the following: (1) An officer of an Employer having annual Compensation greater than 50% of the limitation in effect under Code Section 415(b)(1)(A) for any such Plan Year, unless 50 other such officers (or, if lesser, a number of such officers equal to the greater of three or ten percent of the Associates) have higher annual Compensation. (2) An owner (or considered an owner under Code Section 318) of one of the ten largest interest in the Employer if such individual's annual Compensation exceeds 100 percent of the dollar limitation in effect under, Code Section 415(c)(1)(A). For purposes of this paragraph (2), if two Associates have the same interest, the one with the greater Compensation shall be treated as owning the larger interest. 67 73 (3) Any person owning (or considered as owning within the meaning of Code Section 318) more than five percent of the outstanding stock of an Employer or stock possessing more than five percent of the total combined voting power of such stock. (4) A person who would be described in paragraph (3) above if "one percent" were substituted for "five percent" each place it appears in paragraph (3) above, and who has annual Compensation of more than $150,000. For purposes of determining ownership under this subsection 14.08(g), Code Section 318(a)(2)(C) shall be applied by substituting "five percent" for "50 percent" and the rules of subsections (b), (c) and (m) of Section 414 of the Code shall not apply. (h) "Year of Service" means a year which constitute a "Year of Service" under the rules of paragraphs (4), (5) and (6) of Code Section 411(a) to the extent not inconsistent with the provisions of this Article XIV. (i) "Non-Key Employee" means an Associate who is not a Key Employee. 14.09 Top Heavy Vesting Rule. (a) Top Heavy Vesting Schedule Overrides Plan Regular Vesting Schedule. For any Top Heavy Plan Year in which the Plan's Vesting Schedule contained in Section 6.01 is less rapid than the "Top Heavy Vesting Schedule" below, the Vested portion of any Participant's Aggregate Account (including amounts credited to such Account prior to the Plan becoming Top Heavy), and regardless whether a similar schedule applies to Participant's Aggregate Account in any other plan, shall be determined on the basis of the Participant's number of Years of Service according to the following schedule:
Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 but less than 3 25% 3 but less than 4 50% 4 but less than 5 75% 5 or more years 100%
(b) Discretion to Discontinue Top Heavy Schedule for Non-Top Heavy Plan Years. If in any Plan Year subsequent to a Top Heavy Plan Year, the Plan ceases to be a Top Heavy Plan, the Administrator may, in its sole and absolute discretion, elect to: (1) if the Top Heavy Vesting Schedule Above is more rapid than the Plan's current Vesting Schedule, to continue to apply the Top Heavy Vesting Schedule at Section 14.09(a) above, in determining a Participant's Aggregate Account, or (2) to revert to the Vesting Schedule in effect before this Plan became a Top Heavy Plan. Any such reversion shall be treated as a Plan amendment pursuant to the terms of Code section 411(a)(10), as set forth at Section 11.01 of the Plan. 68 74 (c) Non-application. The Top Heavy vesting rule does not apply to the Aggregate Account of any Participant who has not actually worked an Hour of Service after the Plan becomes a Top Heavy Plan. Additionally, any Participants who are not credited with an Hour of Service on or after October 1, 1996 will be subject to the Top Heavy Vesting Schedule of the Prior Plan. 69 75 ARTICLE XV PLAN LOANS 15.01 Authorization for Plan Loans. The Trustee is authorized to make loans from the Plan ("Plan Loans") to Participants, Former Participants, Beneficiaries, and Alternate Payees who are "Parties in Interest" to the Plan, as that term is defined by ERISA Section 3(14). For the purposes of this provision these individuals shall be referred to collectively as "Eligible Participants." Any outstanding loans existing on the Effective Date of this Restatement shall be governed by the terms of the Loan Agreement and the provisions of this Plan immediately before the Effective Date of this Restatement. Any renewal, extension, or other modification of an existing loan shall be governed by the terms of this restated Plan. 15.02 Loan Procedures. The Plan Administrator has established a loan policy which shall govern all loans granted or renewed pursuant to this Article XVI on or after the Effective Date of this Plan. A copy of the loan policy is attached hereto and hereby incorporated by reference and made a part hereof for all purposes. 70 76 ARTICLE XVI ELIGIBLE ROLLOVER DISTRIBUTIONS 16.01 General Rule. This Article applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Article XVI, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. 16.02 Definitions. For purposes of this Article XVI, the following definitions shall apply, to be interpreted in accordance with the provisions of Section 401(a)(31) of the Code and the regulations thereunder: (a) "Eligible Rollover Distribution" means any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: (1) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of ten years or more; (2) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) "Eligible Retirement Plan" means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (c) "Distributee" includes an Associate or former Associate. In addition, the Associate's or former Associate's surviving Spouse and the Associate's or former Associate's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as 71 77 defined in Section 414(p) of the Code, are Distributees with regard to the interest of the Spouse or former Spouse. (d) "Direct Rollover" means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 72 78 IN WITNESS WHEREOF, this Agreement has been executed this 5th day of September, 1996. SPONSOR: HASTINGS ENTERTAINMENT, INC. By: /s/ DENNIS McGILL ----------------------------------- Name: Dennis McGill --------------------------------- Title: Vice President & CEO -------------------------------- TRUSTEE: AMARILLO NATIONAL BANK By: /s/ SUSAN L. POWERS ----------------------------------- Name: Susan L. Powers --------------------------------- Title: Vice President & Trust Officer -------------------------------- 73 EX-10.8 10 ASSOCIATES' STOCK OWNERSHIP PLAN/TRUST AGREEMENT 1 Exhibit 10.8 HASTINGS BOOKS, MUSIC & VIDEO, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT 2 TABLE OF CONTENTS ARTICLE I INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE IV EMPLOYER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE V PARTICIPANT CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VI ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE VII TERMINATION OF SERVICE - PARTICIPANT VESTING . . . . . . . . . . . . . . . 26 ARTICLE VIII TIME, FORM AND METHOD OF PAYMENT OF BENEFITS . . . . . . . . . . . . . . . 32 ARTICLE IX EXEMPT LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE X REDEMPTION, PURCHASE PRIVILEGES AND OBLIGATIONS . . . . . . . . . . . . . . 47 ARTICLE XI EMPLOYER ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . . 50 ARTICLE XII COMMITTEES - ADMINISTRATION AND INVESTMENT PROVISIONS . . . . . . . . . . . 51 ARTICLE XIII PARTICIPANT ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . 55 ARTICLE XIV FIDUCIARY DUTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE XV INSURANCE CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 ARTICLE XVI DISCONTINUANCE, AMENDMENT, AND TERMINATION . . . . . . . . . . . . . . . . 62 ARTICLE XVII PARTICIPATION BY AFFILIATES OF EMPLOYER . . . . . . . . . . . . . . . . . . 64
- -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page i 3 ARTICLE XVIII TRUSTEE, POWERS AND DUTIES . . . . . . . . . . . . . . . . . . . . . . . . 65 ARTICLE XIX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 ARTICLE XX TOP HEAVY PLAN PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . 74 ARTICLE XXI ELIGIBLE ROLLOVER DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 80
- -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page ii 4 ARTICLE I INTRODUCTION THIS AGREEMENT, by and between Hastings Books, Music & Video, Inc., a corporation organized and existing under the laws of the State of Texas (herein referred to as the "Plan Sponsor") and Trustees as shall be appointed from time to time by the Plan Sponsor (herein referred to as the "Trustee") for the benefit of all employees of the Plan Sponsor and its affiliated companies who are or may become eligible hereunder and who participate in the Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan hereby established. W I T N E S S E T H: The purpose of this Plan is to enable participating Employees (hereinafter defined) to share in the growth and prosperity of the Company through equity ownership therein. The Plan is designed to invest primarily in Qualifying Employer Securities (hereinafter defined). The benefits provided by this Plan will be paid from a Trust Fund (hereinafter defined) established by the Company and will be in addition to the benefits Employees are entitled to receive under any other programs of the Employer (hereinafter defined) and under the Federal Social Security Act. This Plan and the separate related Trust (hereinafter defined) forming a part hereof are established and shall be maintained for the exclusive benefit of the eligible Employees of the Employer and their Beneficiaries (hereinafter defined). Except as hereinafter provided, no part of the Trust Fund shall ever revert to the Employer, except as hereinafter provided, or be used for or diverted to purposes other than the exclusive benefit of the Employees of the Employer and their Beneficiaries or the payment of administrative expenses of the Plan and Trust. The Plan is intended to be a qualified stock bonus plan, within the meaning of Section 401(a) of the Code and Treasury Regulation Section 1.401-1(b)(1)(iii) and an employee stock ownership plan, within the meaning of Section 4975(e) of the Code and Treasury Regulation Section 54.4975-11(a). - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 1 5 ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 Definitions. (1) Account. The separate account maintained for each Participant to reflect his allocable share of contributions made under this Plan and the income, losses, appreciation and depreciation of the Trust Fund attributable thereto. (2) Accrued Benefit. The balance in a Participant's Account as of any date derived from Employer contributions and the cash surrender value, or in the case of a deceased Participant, the face value of any Insurance Contracts on the life of the Participant held by the Trustee for the individual benefit of such Participant. (3) Act. Public Law No. 93-406, the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulations or rulings issued thereunder. (4) Active Participant. For each Plan Year, any Employee who satisfies the eligibility requirement of Article III and who completes at least one thousand (1,000) Hours of Service during such Plan Year. (5) Administration Committee. The person(s) appointed by the Plan Administrator to assist in the administration of the Plan. The Committee shall serve at the pleasure of the Plan Administrator. (6) Alternate Payee. The spouse, former spouse, child, or other dependent of a Participant who is recognized by a Domestic Relations Order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant. (7) Annual Addition. The sum of the following additions to a Participant's Account for the Limitation Year: (i) Employer contributions; (ii) Forfeitures; (iii) Employee contributions, excluding any rollover contributions (as defined in Sections 402(c), 403(a)(4), 403(b)(8) and 408(d)(3) of the Code) without regard to Participant contributions to a simplified employee pension which are excludable from gross income under Section 408(k)(6) of the Code; and - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 2 6 (iv) contributions made during the Limitation Year allocated to any individual medical benefit account (within the meaning of Section 415(l) of the Code) that is established for the Participant and that is part of a defined benefit plan (within the meaning of Section 414(j) of the Code). (8) Beneficiary. A person or persons designated by a Participant to receive any death benefit which shall be payable under this Plan. Each Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his Beneficiary or Beneficiaries to whom his Plan benefits are paid if he dies before receipt of all such benefits. Each Beneficiary designation shall be in a form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participant's lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all Beneficiary designations previously filed with the Plan Administrator. In the event a married Participant designates a Beneficiary other than his Spouse, his Spouse must consent to such designation in writing, witnessed by a notary public or the Plan Administrator. This consent must be on file with the Plan Administrator before the Beneficiary designation can be honored. Such spousal consent shall not be required if it is established to the satisfaction of the Administration Committee that such consent cannot be obtained because the spouse cannot be located or because of such other circumstances as the Secretary of the Treasury may prescribe by regulations. A spousal consent filed with the Plan Administrator shall be applicable only with respect to the Spouse who has signed such form. (9) Board of Directors. The Board of Directors of the Company, unless otherwise indicated or the context otherwise requires. (10) Break in Service. Any Plan Year during which an Employee or Participant does not complete more than five hundred (500) Hours of Service, determined as of the end of the Plan Year. (11) Collateral Suspense Account. An account established by or at the direction of the Administration Committee pursuant to Section 6.3 in which any Qualifying Employer Securities acquired with the proceeds of an Exempt Loan are accounted for until released from such Account and allocated among the Accounts of Participants. (12) Code. The Internal Revenue Code of 1986, as amended, and any regulations and rulings issued thereunder. (13) Committees. Collectively, the Administration Committee and the Investment Committee as from time to time constituted. (14) Company. Hastings Books, Music & Video, Inc. or any successor thereto which shall adopt this Plan. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 3 7 (15) Compensation. Includes amounts accrued to a Participant as wages, salaries, fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Employer as an Employee to the extent that such amounts are includible in gross income (including but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, concussions on insurance premiums, tips, bonuses, fringe benefits, reimbursement or other expenses under a nonaccountable plan (as described in Section 1.62-2(c) of the Income Tax Regulations)). The term "Compensation" shall also include, in the case of a Participant who is an employee within the meaning of Section 401(c) of the Code, the Participant's earned income (as described in Section 401(c)(2) of the Code) (determined without regard to any exclusions from gross income similar to those in Sections 931 and 933 of the Code) any foreign earned income as defined under Section 911(b) of the Code, regardless of whether such income is excludable from the gross income of the Employee under Section 911 of the Code; amounts described in Code Sections 104(a)(3), 105(a) and 105(h), but only to the extent that these amounts are includible in the gross income of the Participant; amounts paid or reimbursed by the Employer for moving expenses incurred by the Participant, but only to the extent that these amounts are not deductible by the Participant under Code Section 217; the value of a nonqualified stock option granted to the Participant by the Employer, but only to the extent that the value of the option is includible in the gross income of the Participant for the taxable year when granted; and the amount includible in the gross income of the Participant upon making an election described in Section 83(b) of the Code. The term "compensation" shall exclude the following: (i) other contributions made by the Employer to a plan of deferred compensation to the extent that, before the application of the Code Section 415 limitations to that plan, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed; (ii) Employer contributions made on behalf of a participant to a simplified employee pension plan described in Code Section 408(k) are not considered as Compensation for the taxable year in which contributed to the extent such contributions are excludable by the Participant from gross income under Code Section 408(k)(6); (iii) Any distributions from a plan of deferred compensation are not considered as Compensation, regardless of whether such amounts are includible in the gross income of the Participant when distributed. However, any amounts received by a Participant pursuant to an unfunded nonqualified plan shall be considered as Compensation in the year such amounts are includible in the gross income of the Participant; (iv) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an employee either becomes - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 4 8 freely transferable or is no longer subject to a substantial risk of forfeiture (pursuant to Code Section 83 and regulations thereunder); (v) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (vi) Other amounts that receive special tax benefits such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of a 403(b) annuity contract (whether or not the contributions are excludable from the gross income of the Participant). Compensation for any Limitation Year is the compensation actually paid or includible in gross income during such year. For the purposes of a contribution or an allocation under the Plan based on Compensation, Compensation shall only include amounts actually paid an Employee during the period he is a Participant for services performed as a Covered Employee. Compensation, for purposes of a contribution or allocation under the Plan, shall not include wages required to be recognized by the federal government for the personal use of a Company automobile or wages paid as an automobile allowance. Notwithstanding the above, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code. However, for purposes of Section 6.14, in the determination of Compensation in connection with the Limitation on Annual Additions under Code Section 415, this paragraph should be disregarded. Notwithstanding the foregoing, the annual Compensation of a Participant in excess of $200,000 shall be disregarded under the Plan. This dollar limitation shall be adjusted by the Secretary of the Treasury at the same time and in the same manner as provided under Section 415(d) of the Code. In applying the dollar limitation provided herein, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Section 414(q)(6) of the Code because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 5 9 the application of such rules, the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. (16) Covered Employee. Each Employee except Employees who are (1) leased employees within the meaning of Section 414(n) or Section 414(o) of the Code, (ii) nonresident aliens and who receive no earned income (within the meaning of Section 911(b) of the Code) from the Employer which constitutes income from sources within the United States (within the meaning of Section 861(a)(3) of the Code), or (iii) included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the Employer, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and the Employer; provided, however, that "Covered Employee" shall include any Employee who would otherwise be excluded under this Section 2.1(16)(iii) whose employee representatives have, through collective bargaining, negotiated participation in this Plan with the Employer or its representatives. (17) Diversification Election Period. The six-Plan Year period beginning with the later of: (i) The first Plan Year in which the Participant first became a Qualified Participant, or (ii) The first Plan Year beginning after December 31, 1986. For purposes of the preceding sentence, a Participant who first became a Qualified Participant in the Plan Year beginning in 1987 shall be treated as having become a Qualified Participant in the Plan Year beginning in 1988. (18) Domestic Relations Order. Any judgment, decree, or order (including one that approves a property settlement agreement) that related to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a Participant and is rendered under a state (within the meaning of Section 7701(a)(10) of the Code) domestic relations law (including a community property law). (19) Early Retirement Age. The first day of any Plan Year subsequent to the Participant's attaining age fifty-five (55) and completing ten (10) Years of Service, within the meaning of Section 7.6. (20) Effective Date. June 1, 1993. (21) Employee. Employee shall mean any person on the payroll of the Employer whose wages from the Employer are subject to withholding for purposes of - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 6 10 Federal income taxes and for purposes of the Federal Insurance Contributions Act. The term Employee shall also include any leased employee deemed to be an employee of any employer described in the previous paragraph as provided in Sections 414(n) or (o) of the Code. Notwithstanding the previous sentence, if such leased Employees constitute not more than 20 percent of the Employer's nonhighly compensated work force within the meaning of Section 414(n)(5)(C)(ii) of the Code, the term "Employee" shall not include those leased Employees covered by the plan described in Section 414(n)(5) of the Code. (22) Employer. The Company and any corporation or other entity that is a member of an affiliated group (as defined in Sections 414(b), (c) or (m) of the Code or any successor provision) including an entity which duly adopts the Plan with the approval of the Company as provided for in Article XVIII hereof. (23) Employer Security. Shares of stock and bonds or debentures (issued with interest coupons or in registered form) issued by the Company, any corporation in an unbroken chain of corporations in which the Company either directly or indirectly through subsidiary corporations owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation, and any corporation in an unbroken chain of corporations ending with the Company that owns, directly or indirectly through subsidiary corporations, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in such corporation. (24) Employment Commencement Date. The date on which an Employee first performs an Hour of Service for the Employer. (25) Exempt Loan. Any direct or indirect loan made to the Trust by a "Disqualified Person" (as defined in Section 4975(e)(2) of the Code) or a "Party in Interest" (as defined in Section 3(14) of the Act), or any loan to the Trust the repayment of which is guaranteed by a Disqualified Person or Party in Interest. The term "Exempt Loan" includes, but is not limited to, a direct lending of cash, a purchase-money transaction, and an assumption of Trust obligation. (26) Fiscal Year. The Employer's taxable year for Federal income tax purposes. (27) Forfeiture. The portion of a Participant's Account that is not part of the Participant's Vested Accrued Benefit and that the Participant permanently ceases to be entitled to when the Participant either (i) incurs five (5) consecutive Breaks in Service as the result of his termination of Service or (10 receives a distribution of his entire Vested Accrued Benefit (or, in the case of a Participant with no Vested Accrued Benefit, a deemed distribution of $0), as provided in Section 7.10. A Forfeiture shall be deemed to occur as of the last day of the Plan Year in which event or state of affairs giving rise to the Forfeiture occurs or arises. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 7 11 (28) Forfeiture Suspense Account. An account established pursuant to Section 6.8. (29) Former Participant. Any individual, other that a Re-Employed Employee, who has been a Participant hereunder, but who has incurred a Break in Service, and who has not yet received the entire benefit to which he is entitled under the Plan. (30) Hour of Service. (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period or periods in which duties are performed; and (b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including Disability), layoff, jury duty, Military duty or Leave of Absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period in which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. (d) Hours of Service shall be determined on the basis of actual hours for which an Employee is paid or entitled to payment. (e) An Hour of Service respecting any member of an affiliated service group (as defined in Section 414(m) of the Code) of which the Employer is a member, or respecting any incorporated or unincorporated trade or business which is under common control with the Employer (as defined in Section 414(c) of the Code) shall be credited as an Hour of Service with the Employer. (f) Hours of Service also will be credited for any individual considered an Employee for purposes of this Plan under Section 414(n) of the Code. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 8 12 Solely for purposes of determining whether an Employee or Participant has incurred a Break in Service under Section 7.6, an Employee or Participant shall be credited with eight (8) hours for each day (to a maximum of forty (40) hours per week) that the Employee or Participant is on any unpaid Leave of Absence. In no event shall hours credited under the preceding sentence be counted as Hours of Service for purposes of computing a Participant's Vested Accrued Benefit derived from Employer contributions or for purposes of determining whether a Participant is eligible to share in the allocation of Employer contributions and Forfeitures under Article VI. In addition, an Employee or Participant who incurs a Parental Absence shall be treated as an Employee or Participant on an unpaid Leave of Absence for purposes of the first sentence of this paragraph; provided, however, that Hours of Service credited to an Employee or Participant as a result of a Parental Absence shall be credited only in the year in which such Parental Absence commences unless such Employee or Participant would not have incurred a Break in Service during such year without being credited with Hours of Service for such Parental Absence, in which case such Hours of Service shall be credited for the year immediately following the year in which the Parental Absence commences. For purposes of the immediately preceding sentence, the term "year" shall mean the periods of computation used hereunder to determine an Employee's or Participant's Years of Service for purposes of eligibility and vesting. The Hours of Service to be credited in connection with such Parental Absence shall be the Hours of Service that otherwise would normally have been credited to an Employee or Participant but for such absence or, in any case in which the Administration Committee is unable to determine the number of Hours of Service that would otherwise normally have been credited to such Employee or Participant, eight (8) Hours of Service per day of absence, provided that the total number of hours so treated as Hours of Service for any period of Parental Absence shall not be exceed five hundred and one (501) Hours of Service. The Administration Committee shall resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee. (31) Insurance Contract. Any ordinary or term life insurance or annuity contract which may be issued hereunder by an insurance company. (32) Investment Committee. The Plan Investment Committee appointed to direct Plan investments pursuant to Section 12.1. (33) Leave of Absence. Any period of absence from the active employment of the Employer granted to the Employee in writing in accordance with a uniform policy, consistently applied, or compulsory military service, subject to the following conditions: (a) Absence from the active service of the Employer by reason of Leave of Absence granted by the Employer because of accident, illness, or for any other reason granted by the Employer on the basis of a uniform policy - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 9 13 applied without discrimination will not terminate an Employee's Service provided he returns to the active employment of the Employer at or prior to the expiration of his leave, or, if not specified therein, within the period of time which accords with the Employer's policy with respect to permitted absences. (b) Absence from the active service of the Employer because of engagement in military service will be considered a Leave of Absence granted by the Employer and will not terminate the Service of an Employee if he returns to the active employment of the Employer within 90 days from and after discharge or separation from such engagement or, if later, within the period of time during which he has re-employment rights under any applicable Federal law. (c) The Employer shall not be required to re-employ any Employee whose active service with the Employer was terminated by reason of military service unless such Employee has reemployment rights under any applicable Federal law. (d) If any such Employee who is Leave of Absence pursuant to paragraph (a) or (b) above does not return to the active employment of the Employer at or prior to the expiration of his Leave of Absence, his Service will be considered terminated as of the date on which his Leave of Absence began; provided, however, that, if such Employee is prevented from his timely return to the active employment of the Employer because of his permanent disability or his death, he shall be treated under the Plan as though he returned to active employment immediately preceding the date of his permanent disability or his death. (34) Limitation Year. A calendar year or any other twelve (12) consecutive month period adopted pursuant to a written resolution adopted by the Board of Directors for purposes of complying with Section 415 of the Code. (35) Normal Retirement Age. The date the Participant attains age 65. (36) Parental Absence. Any period of absence from the active Service of the Employer: (a) By reason of pregnancy of the Employee; (b) By reason of the birth of a child of the Employee; (c) By reason of placement of a child with the Employee in connection with the adoption of such child by the Employee; or - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 10 14 (d) For purposes of caring for such child for a period beginning immediately following such birth or placement. (37) Participant. An Employee or former Employee, other than a Former Participant, who has satisfied the requirements of Section 3.1 and who has not incurred a Break in Service following his termination of Service with the Employer. (38) Plan. The Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan as embodied herein and as amended from time to time. (39) Plan Year. The Fiscal Year of the Plan, ending on the 31st day of May. (40) Publicly Traded. With respect to a Qualifying Employer Security, such a security that is listed on a national securities exchange registered under Section 6 of the Securities Exchange Act of 1934 (the "Securities Exchange Act") or that is quoted on a system sponsored by a national securities association registered under Section 15A(b) of the Securities Exchange Act. (41) Qualified Contributions. Contributions of Employer Securities to a Participant's Employer Contribution Account under the Plan after December 31, 1986, and any dividends in the form of Employer Securities or in cash or other property that is used to acquire Employer Securities after such date that have been transferred to the Participant's Account. Unless the Employer separately accounted for each Participant's Qualified Contributions under the Plan, Qualified Contributions shall be traced to each Participant's Account by treating allocations made under the Plan after December 31, 1986, as consisting first of Qualified Contributions and, secondly, of contributions that are not Qualified Contributions. (42) Qualified Domestic Relations Order. A Domestic Relations Order that: (a) Creates or recognizes the existence of an Alternate Payee's right to, or assigns to an Alternate Payee the right to receive all or a portion of the benefits payable with respect to a Participant under the Plan; (b) Does not require the Plan to provide any type or form of benefit, or any option, not otherwise provided under the Plan; (c) Does not require the Plan to provide increased benefits (determined on the basis of actuarial value); (d) Does not require the payment of benefits to an Alternate Payee that are required to be paid to another Alternate Payee under another order previously determined to be a Qualified Domestic Relations Order; and (e) Clearly specifies: - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 11 15 (i) The name and last known mailing address (if any) of the Participant and the name and mailing address of each Alternate Payee covered by the order; (ii) The amount or percentage of the Participant's benefits to be paid by the Plan to each such Alternate Payee, or the manner in which such amount or percentage is to be determined; (iii) The number of payments or payment period to which such order applies; and (iv) Specifically specifies that it is applicable with respect to this Plan. In the case of any payment before a Participant has separated from Service, a Domestic Relations Order will not be treated as failing to be a Qualified Domestic Relations Order solely because such order requires the payment of benefits be made to an Alternate Payee: (f) On or after the date on which the Participant attains age fifty-five (55); (g) As if the Participant had retired on the date on which payment is to commence under such order (taking into account only the present value of benefits actually accrued as of such date); and (h) In any form in which such benefits may be paid under the Plan to the Participant. (43) Qualified Participant. A Participant who has completed at least ten (10) years of participation in the Plan and has attained fifty-five (55) years of age. In addition, such Participant's Account which is derived from Qualified Contributions must have a fair market value (as determined by the provisions of the Plan) in excess of five hundred dollars ($500). For purposes of determining whether the Participant's Account which is derived from Qualified Contributions exceeds five hundred dollars ($500), all contributions shall be counted that meet the requirements of a Qualified Contribution that are made on behalf of the Qualified Participant to any other plan maintained by an employer that is within the same controlled group of corporations (within the meaning of Code Section 414(b), (c), (in) or (o)) as the Company. (44) Qualifying Employer Security. Except as provided in Section 9.7, an Employer Security which is (1) stock or otherwise an equity security, or (ii) a bond, debenture, note or certificate or other evidence of indebtedness described in paragraphs (1), (2), and (3) of Section 503(e) of the Code. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 12 16 (45) Re-Employed Employee. For purposes of determining a Participant's Vested Accrued Benefit under Article VII, an Employee who has previously separated from Service or service with a Related Employer: (a) With any nonforfeitable interest in Employer contributions or employer contributions under a Related Plan; or (b) Without a nonforfeitable interest in Employer contributions or employer contributions under a Related Plan, but whose number of consecutive Breaks in Service does not equal or exceed his number of Years of Service (as defined in Section 7.6), and who resumes Service before his number of consecutive Breaks in Service equals or exceeds the greater of five (5) or his number of Years of Service as defined in Section 7.6. (46) Related Employer. Any business entity that is: (a) A member of a controlled group of corporations (as defined by Section 414(b) of the Code, with such Section being modified, for purposes of Section 6.14, in accordance with Section 415 (h) of the Code) which includes the Company; (b) A member of a group of trades or businesses (whether or not incorporated) that are under common control (as defined in Section 414(c) of the Code, with such Section being modified, for purposes of Section 6.14, in accordance with Section 415(h) of the Code) with the Company; (c) A member of an affiliated service group (as defined by Section 414(m) of the Code) which includes the Company; or (d) An entity required to be aggregated with the Company pursuant to Section 414(o) of the Code. (47) Related Plan. Any other defined contribution plan (as defined in Section 414(i) of the Code) maintained by the Company or any Related Employer. (48) Required Commencement Date. The April 1 of the calendar year following the calendar year in which the Participant attains age seventy and one-half (70 1/2). (49) Service. Any period of time the Employee is in the employ of the Employer, including any period the Employee is on Leave of Absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees. (50) Stock. Shares of any class of capital common stock, which are Qualifying Employer Securities issued by Hastings Books, Music & Video, Inc., a Texas corporation. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 13 17 (51) Trust. The trust established to hold, administer, and invest the contributions made under the Plan. (52) Trust Agreement. The agreement between the Employer and the Trustee or any successor Trustee establishing the Trust and specifying the duties of the Trustee. (53) Trustee. The persons or entities from time to time appointed as Trustee under the Trust Agreement. (54) Trust Fund. All property of every kind held or acquired by the Trustee under the Trust Agreement. (55) Valuation Date. May 31 of each year. (56) Vested Accrued Benefit. The percentage of a Participant's Accrued Benefit to which he becomes entitled upon termination of his participation in the Plan. (57) Year of Service. The initial Year of Service is defined as a twelve (12) consecutive month period, measured from the Employee's Employment Commencement Date, during which the Employee completes at least 1,000 Hours of Service. Subsequent Years of Service will be measured by Plan Years beginning with the Plan Year which includes the first anniversary of the Employee's Employment Commencement Date. For purposes of eligibility, if the Employee does not complete 1,000 Hours of Service in the twelve consecutive month period following the Employment Commencement Date, subsequent periods shall be measured on a Plan Year basis beginning with the Plan Year following the Employment Commencement Date. For purposes of vesting, each Plan Year, including the initial Plan Year of employment, during which the Employee completes 1,000 Hours of Service shall count as a Year of Service. Years of Service with any participating or nonparticipating Related Employer shall be treated as Years of Service with the Employer. An Employee who transfers from a participating Employer to another participating Related Employer shall continue to be covered by this Plan without interruption and shall not be to have incurred a termination of service. The Employer shall have the right to credit prior service with other organizations that are not Related Employers as Years of Service under this Plan and such prior service credit shall be given in a nondiscriminatory manner. All of an Employee's Years of Service with the Employer are counted to determine the nonforfeitable percentage in the Employee's Account derived from Employer contributions except Years of Service before age 18. 2.2 Prior Service. For purposes of Section 7.6, service by an Employee with any corporation that is acquired by the Employer or that was acquired by a predecessor of the Employer shall be deemed Service with the Employer, provided that the Employee becomes an employee of the Employer concurrently with such acquisition or that the - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 14 18 Employee became an employee of a predecessor of the Employer concurrently with such acquisition. 2.3 Word Usage. Words used in the masculine gender shall apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural shall be read as the singular and the singular as the plural. Whenever the words "Article" or "Section" are used in this Plan or a cross reference is made to an "Article" or "Section," the words "Article" or "Section" shall refer to an Article or Section of this Plan unless the context specifies otherwise. Compounds of the word "here," such as "herein" and "hereof" shall mean of this Plan, unless otherwise specified or required by the context. 2.4 Construction. It is the intention of the Employer that the Plan be qualified under the provisions of the Code and the Act and all its provisions shall be construed to that result. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 15 19 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Eligibility. A Covered Employee shall become a Participant in the Plan on the earlier of (a) the first day of the Plan Year coincident with or next following the date the Employee completes one Year of Service and attains age twenty-one (21) or (b) the first December 1 following the date the Employee completes one Year of Service and attains age twenty-one (21). 3.2 Break in Service - Participation. For purposes of participation in the Plan, the Plan shall not apply any Break in Service rule. 3.3 Participation Upon Re-Employment. A Participant whose employment terminates and who is subsequently re-employed as a Covered Employee before incurring five consecutive Breaks in Service shall re-enter the Plan as a Participant on the date of his re-employment. A Participant whose employment terminates and who is subsequently re-employed, but not as a Covered Employee, shall, if he subsequently becomes a Covered Employee before incurring five consecutive Breaks in Service, re-enter the Plan as a Participant on the date he first performs an Hour of Service as a Covered Employee subsequent to his re-employment. All other Covered Employees who are re-employed must meet the requirements of Section 3.1. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 16 20 ARTICLE IV EMPLOYER CONTRIBUTIONS 4.1 Employer Contributions. For each Plan Year that ends with or within the Employees taxable year, the Employer may contribute to the Trust a contribution of from zero percent (0%) to fifteen percent (15%) of the Compensation for the Plan Year of all Participants who are entitled to share in the allocation of contributions under Section 6.10, in cash or stock of the Employer, as its Board of Directors shall determine and authorize. The amount of the total Employer contribution for any Plan Year shall not exceed: (a) The aggregate limitation prescribed by Section 6.14 for all Participants entitled to share in the allocation of Employer contributions under Section 6.10, reduced by Forfeitures arising tinder Section 7.10, and (b) The sum of any amounts that have been erroneously forfeited or erroneously allocated with respect to Employees who were or would have been entitled to share in the allocation of Employer contributions, but for the failure to credit such Participants with Hours of Service which were, determined during the Plan Year to be creditable pursuant to Section 2.1(30), reduced by Forfeitures arising under Section 7.10 to the extent the contribution was not made in a preceding Plan Year. 4.2 Determination of Contribution. The Employer, from its records, shall determine the amount of any contributions to be made by it to the Trust under the terms of the Plan. 4.3 Time and Method Payment of Contribution. The Employer may pay its contribution for each Plan Year in one (1) or more installments. The Employer's contribution for any Plan Year shall be, due on the last day of its taxable year with or within which such Plan Year ends, and, unless paid before, shall be payable then or as soon thereafter as practicable, but not later than the time prescribed by law for filing the Employer's Federal income tax return (including extensions thereof) for such taxable year, without interest. If the contribution is on account of the Employer's preceding taxable year, the contribution shall be accompanied by the Employer's signed statement to the Trustee that payment is on account of such taxable year. Contributions my be paid in cash, Qualifying Employer Securities, or other property, as the Employer may determine. Qualifying Employer Securities and property shall be valued at their fair market value at the time of contribution. All contributions for each Plan Year shall be deemed to be paid as of the last day of such Plan Year. 4.4 Return of Employer Contributions. Notwithstanding any, provision herein to the contrary, upon the Employer's request, a contribution which was made upon a mistake of fact or conditioned upon deductibility of the contribution under Section 404 of the Code shall be returned to the Employer within one (1) year after payment of the contribution or disallowance of the deduction (to the extent disallowed), as the case may be. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 17 21 ARTICLE V PARTICIPANT CONTRIBUTIONS 5.1 Participant Contributions. A Participant may not make any contribution to the Trust established under this Plan. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 18 22 ARTICLE VI ALLOCATIONS 6.1 Participant's Accounts. The Administration Committee shall establish an Account which will reflect the Participant's share of contributions under the Plan and the income, losses, appreciation and depreciation of the Trust Fund attributable thereto. 6.2 Separate Accounts - Break in Service. If a Participant incurs five (5) consecutive Breaks in Service and subsequently re-enters the Plan as a Re-Employed Employee prior to the time that he has received a distribution hereunder equal to one hundred percent (100%) of his Vested Accrued Benefit, determined as of the last day of the Plan Year in which he incurred the last of such five (5) consecutive Breaks in Service, the Administration Committee shall maintain, or cause to be maintained, a separate Account for the Participant's pre-Breaks in Service Accrued Benefit derived from contributions and Forfeitures, and a separate Account for his post-Breaks in Service Accrued Benefit derived from contributions and forfeitures, unless the Participant's entire Accrued Benefit under the Plan is one hundred percent (100%) nonforfeitable at the time his income the last of such five, (5) consecutive Breaks in Service. 6.3 Collateral Suspense Accounts. The Administration Committee shall establish a Collateral Suspense Account for each Exempt Loan made pursuant to Article IX and shall allocate thereto any Qualifying Employer Securities acquired with the proceeds of such Exempt Loan; provided, however, that the Administration Committee need not establish a separate Collateral Suspense Account for an Exempt Loan that is made for purposes of repaying a prior Exempt Loan. Any Qualifying Employer Securities allocated to a Collateral Suspense Account shall be treated as if they were given as collateral for the Exempt Loan as provided in Section 9.3 without regard to whether they are actually given as collateral for such loan, and shall be released from the Collateral Suspense Account in accordance with the provisions of Section 9.6 for allocation to the Accounts of Participants and Beneficiaries in accordance with Section 6.8. 6.4 Valuation of Accounts. As of each Valuation Date, prior to allocating contributions, if any, for the Plan Year, the Administration Committee shall: (a) First. charge to the proper Participants' Accounts all payments or distributions made from Participants' Accounts since the last preceding Valuation Date that have not been charged previously, as provided in Section 6.5; (b) Next. adjust the net credit balance in Participants' Accounts upward or downward, pro rata, according to the then net credit balances of any single Participant to those of all Participants, so that the totals of the net credit balances will equal the then net worth of the Trust Fund less an amount equal to the sum of (1) the Collateral Suspense Account, (2) the Forfeiture Suspense Account, and (3) contributions, if - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 19 23 any, paid to the Trustee for the period elapsed since the last preceding Valuation Date. The Collateral Suspense Accounts, if any, shall not be adjusted to reflect any Trust earnings or losses. The Forfeiture Suspense Account, however, shall be adjusted to reflect Trust earnings or losses. For purposes of Valuation of Accounts under this Section 6.4, all Insurance Contracts held by the Trustee for the benefit of an individual Participant shall be treated as having no value. 6.5 Charging of Payments and Distributions. As of each Valuation Date, all payments and distributions made under the Plan, since the last preceding Valuation Date to or for the benefit of a Participant or his Beneficiary will be charged to the proper account of such Participant. 6.6 Allocation of Contributions and Qualifying Employer Securities Released From Collateral Suspense Accounts - General. As of each Valuation Date, for the Plan Year ending of such Valuation Date, the Administration Committee shall. (a) First, determine the aggregate limitation prescribed by Section 6.14 for all Participants described in Section 6.10. To the aggregate limitation add any amounts described in Section 4.1(b). (b) Next, allocate (i) contributions, if any, not used to repay Exempt Loans, and (ii) any Qualifying Employer Securities released from Collateral Suspense Accounts that are not given as collateral for a new Exempt Loan (the proceeds of which are used to repay a prior Exempt Loan to the Accounts of all Employees entitled to share in the amount described in Section 4.1(b) in the proportion that the amount required for all entitled Employees until the amount described in Section 4.1(b) is fully allocated. Former Employees and Beneficiaries shall be treated as Employees for purposes of this paragraph. (c) Finally, allocate (i) any Qualifying Employer Securities released from Collateral Suspense Accounts that are not given as collateral for a new Exempt Loan, the proceeds of which are used to repay a prior Exempt Loan, and (ii) contributions, if any, not used to repay Exempt Loans, in accordance with Section 6.7 to the Accounts of each Participant entitled to an allocation under Section 6.10. The allocation of contributions for any such Participant shall not exceed the amount determined pursuant to Section 6.14. If, after the first such allocation, any Employer contributions remain, the remainder shall be allocated and re-allocated in the same manner prescribed in this paragraph until exhausted. 6.7 Method of Allocating and Crediting Contributions and Qualifying Employer Securities Released From Collateral Suspense Accounts. Subject to the conditions and limitations of Section 6.14, as of each Valuation Date the Employer's contributions, if any, for the - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 20 24 Plan Year ending on that date that are not used to repay Exempt Loans, if any, which arose under the Plan that year, and Qualifying Employer Securities, if any, released from Collateral Suspense Accounts for that year that are not given as collateral for an Exempt Loan, the proceeds of which are used to repay a prior Exempt Loan, shall be allocated among and credited to the Accounts of Participants entitled to share in the Employer's contribution, for that Plan Year (as provided in Section 6.10) in the proportion that each such Participant's Compensation for the Plan Year ending on the Valuation Date bears to the Compensation of all such Participants for such Plan Year. 6.8 Forfeitures. Forfeitures that have arisen under Section 7.10 shall be used first to reduce Employer contributions to this Plan. To the extent possible, Forfeitures shall be used to reduce the Employer contributions for the Plan Year in which such Forfeitures occur. However, if Forfeitures arising during a particular Plan Year exceed the retired Employer contributor for that year, the amount of the Forfeitures in excess of the Employer contributions required for such year shall be credited to and held unallocated in a Suspense Account until the next succeeding Plan Year when such Forfeitures shall be deemed Forfeitures arising under Section 7.10. The Administration Committee shall continue to hold the undistributed, non-vested portion of a terminated Participant's Accrued Benefit in his Account solely for his benefit until a Forfeiture occurs at the time specified in Article VII. 6.9 Employer Contributions Considered Made on Last Day of Plan Year. For purposes of this Article VI, the Employer contributions, if any, under the Plan for any Plan Year will be considered to have been made on the last day of that year, regardless of when paid to the Trustee. 6.10 Participants to Whom Employer Contributions Will Be Allocated. The Employer contributions, if any, for any Plan Year that are not used to repay Exempt Loans and any Qualifying Employer Securities released from Collateral Suspense Accounts for such year that are not given as collateral for an Exempt Loan, the proceeds of which are, used to repay a prior Exempt Loan, will be allocated among and credited to the Accounts of: (a) All Active Participants who performed at least one thousand (1,000) Hours of Service during the Plan Year; and (b) Participants on Leave of Absence on the Valuation Date who received Compensation from the Employer during the Plan Year, regardless if such Participants performed at least one thousand (1,000) Hours of Service during the Plan Year; and (c) Participants who died, retired, or became permanently disabled during the Plan Year who received Compensation from the Employer during that year, regardless if such Participants performed at least one thousand (1,000) Hours of Service during the Plan Year. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 21 25 6.11 Valuation. Within a reasonable time after the close of each Plan Year, the Trustee shall prepare or cause to be prepared a statement of the condition of the Trust Fund, setting forth all investments, receipts, and disbursements, and other transactions effected by it during such Plan Year, and showing all the assets of the Trust Fund and the cost and fair market value thereof. If the Trustee does not constitute an independent appraiser within the meaning of Section 410(a)(28)(C) of the Code, then, to the extent an independent appraiser is required by such Code section, the Trustee shall retain an independent appraiser to make such valuation. This Trustees statement shall be delivered to the Administration Committee. The Administration Committee shall then cause to be prepared, and shall deliver to each Participant or Former Participant an annual report disclosing the status of his Account in the Trust. The Trustee's (or independent appraiser's) determination of the fair market value of the assets of the Trust Fund and the Administration Committee's charges or credits to accounts shall be final and conclusive on all persons ever interested hereunder, subject to Section 13.11 hereof. 6.12 Special Valuation. While it is contemplated that the Trust will be valued by the Trustee and allocations made only on the Valuation Date, should it be necessary to make distributions under the provisions hereof, and the Administration Committee, in good faith determines that, because of (a) an extraordinary change of economic conditions, (b) the occurrence of some casualty radically affecting the value of the Trust Fund or a substantial part thereof, or (c) an abnormal fluctuation in the, value of the Trust Fund has occurred since the end of the Preceding Plan Year, the Administration Committee may, in its sole discretion, to prevent the payee from receiving a substantially greater or lesser amount than what he would be entitled to, based on current values, cause a revaluation of the Trust Fund to be made and a reallocation of the interests therein as of the date the payee's right of distribution becomes fixed. The Administration Committee's determination to make such special valuation and the valuation of the Trust Fund as determined by the Trustee shall be conclusive and binding on all persons ever interested hereunder, subject to Section 13.11 hereof. 6.13 Equitable Allocations. If the Administration Committee in good faith determines that certain expenses of administration paid by the Trustee during the Plan Year under consideration, are not general, ordinary, and usual and should not be equitably be borne by all Participants, but should be borne only by one or more Participants, for whom or because of whom such specific expenses were incurred, the net earnings and adjustments in value of the accounts shall be increased by the amounts of such expenses, and the Administration Committee shall make suitable adjustments by debiting the particular account or accounts of such one or more Participants, Former Participants, or Beneficiaries, provided, however, that any such adjustment must be nondiscriminatory and consistent with the provisions of Section 401(a) of the Code. 6.14 Limitation on Annual Additions. (a) General. Notwithstanding any other provision of the Plan, the Annual Addition to a Participant's Account for any Limitation Year may not exceed an amount equal to the lesser of: - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 22 26 (i) Thirty thousand dollars ($30,000) or, if greater, one-fourth (1/4) of the dollar limitation in effect under Section 415(b)(1)(A) of the Code, adjusted for the Limitation Year (if and to the extent that such adjustment may be allowed by regulations prescribed by the Secretary of the Treasury) to take into account any cost-of-living increase adjustment provided for that year under Section 415(d) of the Code (the "dollar limitation"); or (ii) Twenty-five percent (25%) of the Compensation of the Participant for the Limitation Year. For purposes of the preceding sentence, if the Trustee enters into an Exempt Loan pursuant to Article IX hereof and no more than one third (1/3) of the Employer contributions made to the Plan for the Plan Year are allocated to the Accounts of highly compensated employees (within the meaning of Section 414(q) of the Code), the Employer contributions that are used to pay the interest on the Exempt Loan for the Plan Year, will not be included in determining whether the Plan satisfies the limitations of this Section 6.14. (b) Additional Limitation - Related Plan. If a Participant also participates in a Related Plan, the limitation specified in subparagraph (a) of this Section 6.14 shall be reduced by the Annual Addition made under any Related Plan on behalf of the Participant for the Limitation Year. (c) Additional Limitation - Defined Benefit Plan. If a Participant also participates in one or more qualified defined benefit plans (as defined in Section 414(j) of the Code) maintained by the Employer or a Related Employer, the maximum amount otherwise allocable to his Accounts under subparagraphs (a) and (b) of this Section 6.14 shall be reduced to the extent necessary to ensure that the sum of the "Defined Benefit Fraction" for the Limitation plus the "Defined Contribution Fraction" for the Limitation Year does not exceed 1.0. The "Defined Benefit Fraction" for a Limitation Year shall be a fraction (i) the numerator of which shall be the projected annual benefit of the Participant under such defined benefit plan or plans (determined as of the close of the year) and (ii) the denominator of which shall be an amount equal to the lesser of (A) the product of 1.25 multiplied by the dollar limitation in effect for such year under Section 415(b)(1)(A) of the Code or (B) the product of 1.4 multiplied by the amount which may be taken into account for such year under Section 415(b)(1)(B) of the Code with respect to such Participant. The "Defined Contribution Fraction" for a Limitation Year shall be a fraction (i) the numerator of which shall be the sum of the annual additions (as defined in Section 415(c)(2) of the Code) to the Participant's accounts under all defined contribution plans maintained by the Employer or Related Employer as of the close of the Limitation Year, and (ii) the denominator of which shall be the sum of the lesser of the following amounts determined for each such plan for the - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 23 27 Limitation Year and for each prior year of service with the Employer: (A) the product of 1.25 multiplied by the dollar limitation in effect for such year under Section 415(c)(1)(A) of the Code (determined without regard to Section 415(c)(6) of the Code) or (B) the product of 1.4 multiplied by the amount which may be taken into account under Section 415(c)(1)(B) of the Code with respect to such individual under the defined contribution plans for the Limitation Year. Notwithstanding the foregoing, the provisions of this subsection (c) shall only apply if such defined benefit plan or plans do not provide for a reduction of benefits to ensure that the sum of the Defined Benefit Fraction for such Limitation Year and the Defined Contribution Fraction for such Limitation Year does not exceed 1.0. (d) Adjusting Annual Additions. In the event it is necessary to limit the Annual Additions to the Accounts of a Participant under this Plan, adjustments shall first be made to the Annual Additions under any other defined contribution plan of the Employer, if permitted by such plan, and if further adjustments are required, the Administration Committee shall allocate Employer contributions in excess of the permitted Annual Addition to a suspense account. Amounts in this suspense account shall be allocated in the succeeding Plan Year as part of the Employer contribution, if any, for such Plan Year. Amounts held in such suspense account shall be allocable before the Employer contribution, if any, for such Plan Year. In the event of termination of the Plan, amounts credited to such suspense account shall, to the extent permitted by this Section, be allocated among the Accounts of Participants in the ratio that each such Participant's Compensation for the Plan Year in which the termination occurs bears to the Compensation of all such Participants for that Plan Year. Further reductions or adjustments to the method described above for adjusting - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 24 28 the Annual Additions of Participants may be made pursuant to the directions of the Administration Committee and may be made pursuant to priorities established under related defined contribution plans. 6.15 Allocation Does Not Create Rights. No Participant shall acquire any night to or interest in any specific asset of the Trust as a result of the allocations provided for in the Plan. 6.16 Dividend Pass-Through. With respect to any cash dividend paid on Qualifying Employer Securities held by the Trust, whether held in Participant's Accounts or a Collateral Suspense Account, the Company shall have the obligation, to: (a) Pay such dividend directly to the Participants or their Beneficiaries; (b) Pay such dividend to the Trust and direct the Trustee to distribute the dividend to the Participants or their Beneficiaries within ninety (90) days after the close of the Plan Year in which paid; (c) Direct the Trustee to use said dividend to make payments on an Exempt Loan, the proceeds of which were used to acquire the Qualifying Employer Securities; or (d) Allocate such dividend to all Participants' Accounts as income from the Trust Fund. In the case of a payment of dividends to Participants and Beneficiaries under (a) or (b) above, the payments shall be allocated as follows. With respect to dividends paid on Qualifying Employer Securities held in Participants' or Beneficiaries' Accounts, such dividends shall be allocated in the ratio that the number of shares of Qualifying Employer Securities credited to each Participant's or Beneficiary's Accounts bears to the total number of such shares credited to all such Accounts. With respect to dividends paid on Qualifying Employer Securities held in a Collateral Suspense Account, such dividends shall be allocated in the ratio that each Participant's or Beneficiary's total Account balance bears to the total of all such Account balances. In the case of a payment of dividends under (c) above, Qualifying Employer Securities with a fair market value of not less than the amount of such dividends shall be released from the Collateral Suspense Account and allocated to Participants' Accounts pursuant to Section 6.7 for the Plan Year in which the dividend is paid. The Company shall be allowed a Federal income tax deduction for any dividend paid pursuant to the terms of this Section 6.16. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 25 29 ARTICLE VII TERMINATION OF SERVICE - PARTICIPANT VESTING 7.1 Normal Retirement. A Participant may retire from the Service of the Company on the date he attains Normal Retirement Age. Upon termination of a Participant's employment for any reason after attaining Normal Retirement Age, the Administration Committee shall direct the Trustee to make payment of the full value of the Participant's Accrued Benefit to him at such times and in such manner as provided in Article VIII hereof. The value of the Participant's Accrued Benefit shall be determined as of the Valuation Date which is on or, if not on, which immediately precedes the date the Participant's employment terminates, adjusted, if applicable, to reflect any allocations and adjustments to his Accounts to which he is entitled under Article VI hereof made as of the Valuation Date following as termination of Service with the Company. The Participant's Accrued Benefit shall be adjusted annually to reflect any earnings and losses allocated to his Accounts pursuant to Section 8.9. A Participant who remains in the employ of the Company after attaining Normal Retirement Age shall continue to participate herein until the date of his actual retirement. 7.2 Early Retirement. A Participant may apply for an early retirement benefit in accordance with Section 13.12 hereof, and retire as of the first day of any Plan Year subsequent to the date the Participant attains Early Retirement Age. Upon termination of a Participant's employment under this Section 7.2, the Administration Committee shall direct the Trustee to make payment of the full value of the Participant's Accrued Benefit to him at such times and in such manner as provided in Article VIII hereof. The value of the Participant's Accrued Benefit shall be determined as of the Valuation Date coinciding with or immediately preceding the date the Participant's employment terminates under this Section 7.2, adjusted, if applicable, to reflect any allocations and adjustments to his Accounts to which he is entitled under Article VI made on the Valuation Date following his termination of Service with the Company. The Participant's Accrued Benefit shall be adjusted annually to reflect any earnings and losses allocated to such his Account pursuant to Section 8.9. Any Participant who terminates employment after having satisfied the Years of Service requirement of this section and who is entitled to receive any Vested Accrued Benefit hereunder may, upon satisfying the minimum age requirement of this section, apply for an early retirement benefit in accordance with Section 13.12 hereof, and shall be entitled to receive an early retirement benefit at the time and in the manner specified in Article VIII. 7.3 Disability. A Participant who becomes permanently disabled shall have the full value of his Accrued Benefit paid to him at such times and in such manner as provided in Article VIII hereof. The value of a disabled Participant's Accrued Benefit shall be determined as of the Valuation Date coinciding with or immediately preceding the date of the Participant's termination of employment due to disability, adjusted, if applicable, to reflect any allocations and adjustments to his Accounts to which he is entitled under - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 26 30 Article VI made on the Valuation Date following his termination of Service with the Company by reason of his permanent disability. The Participant's Accrued Benefit shall be adjusted annually to reflect any earnings and losses allocated to his Account pursuant to Section 8.9. A Participant is permanently disabled for purposes of the Plan when the Participant has a physical or mental condition resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing any gainful occupation and which condition constitutes total disability under the federal Social Security Acts. 7.4 Death. Upon the death of a Participant, his Beneficiary shall be entitled to receive the full value of the deceased Participant's Accrued Benefit determined as of the Valuation Date coinciding with or immediately preceding the date of such Participant's death, adjusted, if applicable, to reflect any allocations or adjustments to his Accounts to which he is entitled under Article VI made on the Valuation Date following the date of the Participant's death. The deceased Participant's Accrued Benefit shall be adjusted annually to reflect any earnings and losses allocated to his Account pursuant to Section 8.9. The value of a deceased Participant's Accrued Benefit shall be paid to his Beneficiary at such times and in such manner as provided in Article VIII hereof. 7.5 Termination of Service Prior to Normal Retirement Age. If a Participant's employment terminates prior to Normal Retirement Age for any reason other than early retirement, death, or permanent disability, then for each Year of Service (as determined under Section 7.6 hereof) he shall receive a percentage of his Accrued Benefit in his Account, (the balance being a Forfeiture pursuant to Section 7.10) equal to the following:
Years of Service Percentage of Accrued With the Company Benefit Payable ---------------- --------------- Less than 3 years None 3 years but less than 4 20% 4 years but less than 5 40% 5 years but less than 6 60% 6 years but less than 7 80% 7 years or more 100%
The value of the Participant's Vested Accrued Benefit in his Account shall be determined as of the Valuation Date coinciding with or next following the date of the Participant's termination of employment. The Participant's Vested Accrued Benefit shall be adjusted annually to reflect any earnings and losses allocated to his Account pursuant to Section 8.9. Payments shall be made at such times and in such manner as provided in Article VIII hereof. Forfeitures shall be used to reduce Employer contributions in accordance with Section 6.8. 7.6 Years of Service - Vesting. For purposes of vesting under Section 7.5, Years of Service shall mean any Plan Year during which the Participant completes not less than One - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 27 31 Thousand (1,000) Hours of Service with the Employer or a Related Employer. In the case of an Employee who separates from Service and who resumes employment with the Employer, but not as a Re-Employed Employee, Years of Service, as defined in this Section, prior to his resumption of employment shall be disregarded. In addition, if a Participant has incurred five (5) consecutive Breaks in Service, Service after such Breaks in Service shall not increase the Participant's nonforfeitable percentage in his Accrued Benefit in his Account that accrued prior to such five (5) consecutive Breaks in Service. 7.7 Vesting After a Distribution Without a Break in Service. If a distribution is made to a Participant at a time when the Participant has a Vested Accrued Benefit of less than one hundred percent (100%) in his Account, and such Participant incurs no Break in Service prior to the time that the distribution is made, a separate Account shall be established to reflect the Participant's Accrued Benefit in such Account as of the time of the distribution. At any given time, the value of the Participant's Vested Accrued Benefit attributable to such separate Account shall be equal to an amount computed as follows: (a) First, add the account balance of such account and the amount of the distribution made at a time when the Participant was less than one hundred percent (100%) vested in his Account; (b) Second, multiply the amount obtained in (a) by the Participant's vested percentage in such account, determined in accordance with Section 7.5 hereof, and (c) Finally, subtract the amount of the distribution added to the account balance under subsection (a) above from the amount obtained in (b). 7.8 Included Years of Service - Vesting. For purposes of determining "Years of Service" under Section 7.5, the Plan shall take into account all Years of Service an Employee completes with the Employer except: (a) In the case of an Employee who separates from Service and who resumes employment, but not as a Re-Employed Employee, Years of Service prior to his resumption of employment: and (b) Any Year of Service after the Participant first incurs five (5) consecutive Breaks in Service as the result of a termination of employment; provided, however, this exclusion shall apply solely in determining a Participant's Vested Accrued Benefit in his Account prior to said five (5) consecutive Breaks in Service. 7.9 Forfeiture - Qualifying Employer Securities. If a portion of a Participant's Account is forfeited, Qualifying Employer Securities allocated to such account after being released from a Collateral Suspense Account in accordance with the provisions of Section 6.6 shall be forfeited only after all other assets allocated to such account are forfeited. If more than one class of such Qualifying Employer Securities have been allocated to the Participant's Account and such securities are forfeited, the Participant shall forfeit the same proportion of each such class. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 28 32 7.10 Forfeiture Occurs and Restoration of Non-Vested Accrued Benefit. (a) Forfeiture Occurs. Except as provided in Section 7.11, a Participant shall permanently cease to be entitled to that part of his Account that is not part of his Vested Accrued Benefit when the Participant either: (i) Incurs five (5) consecutive Breaks in Service as the result of the termination of his Service; or (ii) Receives a distribution of his entire Vested Accrued Benefit in such Account, including the portion thereof derived from Employer contributions as the result of his termination of Service (provided such distribution, if any, is made not later than the close of the second Plan Year following the Participant's termination of Service). A Participant who has an Accrued Benefit but does not have a Vested Accrued Benefit shall be deemed to be a Participant who has received a distribution of his entire Vested Accrued Benefit on the last day of the Plan Year in which he terminates Service. A Participant's Forfeiture shall be deemed to occur on the last day of the Plan Year in which the event or state of affairs giving rise to the Forfeiture occurs or arises. The Administration Committee shall determine a Participant's Accrued Benefit Forfeiture, if any, solely by reference to the vesting schedule of Section 7.5. (b) Restoration of Non-Vested Accrued Benefit. If an individual who was formerly a Participant has incurred a Forfeiture of his non-Vested Accrued Benefit in accordance with the provisions of Section 7.10(a) by reason of a distribution described in clause (6) of the first sentence of such Section and returns to the Service of the Employer prior to incurring five (5) consecutive Breaks in Service, such individual's forfeited non-Vested Accrued Benefit shall be restored and credited to an Account hereinafter called the "Restoration Account," if the individual repays to the Plan the full amount of the distribution prior to the earlier of (1) the last day of the Plan Year in which the individual incurs five (5) Service, or (ii) the lapse of five (5) years following the individual's consecutive Breaks in re-employment by the Employer or a Related Employer (provided that the individual must be an Employee or an employee of a Related Employer at the tune of repayment). In the case of an individual who was formerly a Participant, who terminated Service with an Accrued Benefit but without a Vested Accrued Benefit, and whose non-Vested Accrued Benefit became a forfeiture due to a deemed distribution under Section 7. 10(a), such individual shall be deemed to repay his deemed distribution on the Valuation Date that coincides with or immediately follows his re-employment by the Employer or a Related Employer, provided that such individual is an Employee or an employee of a Related Employer on such Valuation Date, and, provided further, that he returns to the Service of the Employer prior to incurring five (5) consecutive Breaks in Service. As of the Valuation Date that coincides with or immediately follows such - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 29 33 repayment or deemed repayment, and prior to the allocation of (1) the Trust Fund pursuant to Section 6.4(b), (ii) Forfeitures pursuant to Section 6.8, or (iii) Employer contributions, if any, pursuant to Sections 6.6 and 6.7, there shall be allocated to the Participants Restoration Accounts an amount (the "Restoration Amount") of the Trust Fund equal to the amount of his previously forfeited non-Vested Accrued Benefit. The Restoration Amount shall be credited first against forfeitures arising. for the Plan Year, and if such Forfeitures are not sufficient to satisfy the Restoration Amount in full, the Restoration Amount shall be further credited against Trust Fund income and gain for the Plan Year, and if the Restoration Amount thereafter still remains unsatisfied in full, the remainder of such amount shall be satisfied out of Employer contributions, if any, for the Plan Year, which contributions shall be supplemented for the Plan Year by an amount equal to such remainder. The Restoration Amount shall not be deemed an Annual Addition or portion thereof for any Limitation Year. The Administration Committee shall give timely notification to any rehired Employee, if such Employee is eligible to make a repayment, of his night to make such repayment prior to the earlier of five (5) consecutive Breaks in Service after such distribution has occurred or five (5) years following his reemployment, and such notice shall also include an explanation of the consequences of not making such repayment. 7.11 Termination, Partial Termination, or Complete Discontinuance of Employer Contributions. Notwithstanding any other provision in this Plan, in the event of a termination or partial termination of the Plan or a complete discontinuance of Employer contributions under the Plan, all affected Participants shall have a fully vested interest in their Accrued Benefit determined as of the date of such event. The value of the Accrued Benefit shall be determined on the date the Accrued Benefit becomes fully vested, as if such date was the Valuation Date for the Plan Year in which the termination, partial termination, or complete discontinuance of Employer contributions occurs. 7.12 Amendment to Vesting Schedule. Although the Company reserves the fight to amend the vesting schedule set forth in Section 7.6 at any time, the Company shall not amend the vesting schedule (and no amendment shall be effective) if the amendment would reduce the nonforfeitable percentage of any Participant's Accrued Benefit derived from Employer contributions (determined as of the later of the date the Company adopts the amendment, or the date the amendment becomes effective) to a percentage less that the nonforfeitable percentage computed under the Plan without regard to the amendment. In the event the vesting schedule of this Plan is amended, any Participant who has completed at least three (3) Years of Service, as defined in Section 7.6, may elect to have his Vested Accrued Benefit computed under the Plan without regard to such amendment by notifying the Administration Committee in writing during the election period hereinafter described. The election period shall begin on the date such amendment is adopted and shall end no earlier than the latest of the following dates: - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 30 34 (a) The date which is sixty (60) days after the day such amendment is adopted; (b) The date which is sixty (60) days after such amendment becomes effective; or (c) The date which is sixty (60) days after the day the Participant is given written notice of such amendment by the Administration Committee. Any election made pursuant to this Section 7.12 shall be irrevocable. The Administration Committee, as soon as practicable, shall forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment, and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 31 35 ARTICLE VIII TIME, FORM AND METHOD OF PAYMENT OF BENEFITS 8.1 Time of Payment. (a) Normal Retirement. Unless the Participant elects otherwise, pursuant to Section 8.2, in the event of normal retirement, within the meaning of Section 7.1, payment of the Participant's Accrued Benefit shall commence as soon as administratively feasible, but in no event later than one (1) year after the close of the Plan Year in which the Participant separates from Service by reason of the attainment of Normal Retirement Age. A Participant who remains in the employee of the Company past Normal Retirement Age shall not be required to receive a distribution hereunder until after his actual retirement date, except that, in any case, payment of the Participant's Accrued Benefit shall commence not later than the Required Commencement Date. (b) Early Retirement. Unless the Participant elects to delay the commencement of the distribution of his Accrued Benefit pursuant to Section 8.2, or, alternatively, to accelerate the commencement of such distribution pursuant to this Section 8.1(b), in the event of early retirement, within the meaning of Section 7.2, payment of a Participant's Accrued Benefit shall commence as soon as administratively feasible, but in no event later than one (1) year after the close of the Plan Year in which the Participant attains Normal Retirement Age. Notwithstanding the foregoing, a Participant who separates from Service by reason of Early Retirement may elect to commence the distribution of his Accrued Benefit as soon as administratively feasible after his separation from Service, but in no event later than one (1) year after the close of the Plan Year in which such separation occurs. (c) Death. Unless the Participant elects otherwise, pursuant to Section 8.2, in the event of the Participant's death, payment of the Participant's Accrued Benefit shall commence as soon as administratively feasible, but in no event later than one (1) year after the close of the Plan Year in which the Administration Committee receives proof of the Participant's death. (d) Disability. Unless the Participant elects to delay the commencement of the distribution of his Accrued Benefit pursuant to Section 8.2, or, alternatively, to accelerate the commencement of such distribution pursuant to this Section 8.1(d), in the event of permanent disability, payment of the Participant's Accrued Benefit shall commence as soon as administratively feasible, but in no event later than one (1) year after the close of the Plan Year in which the Participant attains. Normal Retirement Age. Notwithstanding the foregoing, a Participant who separates from Service due to permanent disability may elect to commence the distribution of his Accrued Benefit as soon as administratively feasible after such separation, but in no event later than one (1) year after the close of the Plan Year - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 32 36 in which the Administration Committee determines that permanent disability exists. (e) Other Termination of Service. Unless the Participant elects to delay the commencement of the distribution of his Accrued Benefit pursuant to Section 8.2, or, alternatively, to accelerate the commencement of such distribution pursuant to this Section 8.1(e), in the event of the Participant's termination of employment for any reason other than normal retirement, early retirement, permanent disability, or death, payment of a Participant's Vested Accrued Benefit shall commence no later than one (1) year after the close of the Plan Year in which the Participant attains Normal Retirement Age. Notwithstanding the foregoing, a Participant who terminates employment pursuant to this Section 8.1(e) may elect to commence the distribution of Vested Accrued Benefit before the date he attains Normal Retirement Age, in which case such distribution will continence by the end of the Plan Year which is the fifth (5th) Plan Year following the Plan Year in which the Participant terminates employment. However, if the Participant dies or becomes permanently disabled after terminating employment but prior to commencement of his benefits, the Administration Committee, upon confirmation of the death or disability, shall direct the Trustee to make payment of the Participant's Vested Accrued Benefit to him (or to his Beneficiary if the Participant is deceased) in accord with the provisions of Section 8.1(c), in cases of death, Section 8.1(d), in cases of permanent disability. (f) Distribution of Certain Qualifying Employer Securities. Notwithstanding any provision contained herein to the contrary, if any portion of a Participant's Accrued Benefit consists of Qualifying Employer Securities acquired with the proceeds of an Exempt Loan that has not been fully repaid, the Administration Committee may elect to defer the distribution of such Qualifying Employer Securities until the last day of the Plan Year following the Plan Year in which the loan is repaid. The Administration Committee shall apply the provisions of this Section 8.1(f) in a nondiscriminatory and uniform manner. 8.2 Limitation on Time of Payment. (a) General Rule. Notwithstanding any provision contained herein to the contrary, unless the Participant elects otherwise, the Trustee shall concurrence, payment of the Participant's Vested Accrued Benefit not later than sixty (60) days after the close of the Plan Year in which the latest of the following events occurs: (i) The date the Participant attains Normal Retirement Age; (ii) The date the Participant terminates Service (employment) with the Employer; or (iii) The date the Participant completes ten (10) years of participation in the Plan. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 33 37 A Participant may, at the time and in the manner proscribed by the Administration Committee, elect to defer the payment of his Vested Accrued Benefit beyond the dates specified above by submitting a written statement to the Administration Committee describing his benefit and the date on which the payment of such benefit shall be made. Notwithstanding the preceding sentence, a Participant may not elect to defer the payment of his Vested Accrued Benefit if the exercise of such election will cause the present value of the retirement benefits payable solely to the Participant not to be greater than fifty percent (50%) of the present value of the total retirement benefits payable to the Participant and his Beneficiaries. The Administration Committee shall determine the "present value" as of the date the Trustee is to make payment of the Participant's Vested Accrued Benefit. The Administration Committee shall charge the electing Participant's Account for any expense incurred in making the determination of "present value." If the Administration Committee determines not to permit the Participant's election, it shall direct to the Trustee in writing to make distribution of the Participant's Vested Accrued Benefit to him in accordance with Section 8.3. The Administration Committee shall apply the provisions of this Section 8.2 in a nondiscriminatory and uniform manner Notwithstanding the foregoing, the Vested Accrued Benefit of each Participant (i) shall be distributed to such Participant not later than the Required Commencement Date or (ii) shall be distributed, commencing not later than the Required Commencement Date, in accordance with regulations, over the life of such Participant or over the lives of such Participant and his Beneficiary (or over a period not extending beyond the life expectancy of such Participant or the life expectancy of such Participant and his Beneficiary). (b) Death After Payments Have Begun. If distributions under the Plan have commenced with respect to a Participant and the Participant dies before his entire Vested Accrued Benefit has been distributed to him, the remaining portion of such benefit shall be distributed at least as rapidly as such benefit would have been distributed to him, commencing not later than the Required Commencement Date, under the method of distribution in effect at the Participant's death. (c) Death Prior to Payment of Benefits. If the Participant dies before the distribution of his Vested Accrued Benefit has commenced in accordance with Section 8.2, or if distribution of the Participant's Vested Accrued Benefit has commenced but the Participant dies prior to his Required Commencement Date, the remainder of the Participant's benefit shall be distributed within five (5) years after his death. However, if any portion of the Participant's Vested Accrued Benefit is payable to or for the benefit of a Beneficiary and such portion of the Participant's undistributed benefit will be distributed in accordance with regulations over the life of such Beneficiary or over a period not extending beyond the life expectancy of such Beneficiary and such distributions commence not later than one (1) year after the date of the Participant's death (or such later date as the Secretary of Treasury may by regulation prescribe), the deceased Participant's benefit shall be - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 34 38 distributed in accordance with such method of payment. Notwithstanding any of the foregoing, if the Beneficiary is the surviving spouse of the Participant, the deceased Participant's benefit shall be distributed to such surviving spouse on or before the date on which the Participant would have attained age seventy and one-half (70 1/2); provided, further, that if the surviving spouse dies before the distributions to such spouse commence, the distribution of the deceased Participant's benefit shall begin on or before a date determined as if the surviving spouse were the Participant. For purposes of this Section 8.2(c), the life expectancy of the Participant and his spouse may be redetermined but not more frequently than annually. In addition, pursuant to regulations prescribed by the Secretary of the Treasury, any amount paid to a child of the Participant shall be treated as if it had been paid to the surviving spouse of the Participant if such amount will become payable to the surviving spouse upon such child's attainment of majority (or other designated event permitted under regulations prescribed by the Secretary of the Treasury). For the purposes of this paragraph, the term "Beneficiary" shall only include individuals. Notwithstanding the foregoing provisions of this paragraph, nothing in this paragraph shall permit any Participant to elect any form of distribution not otherwise expressly permitted under this Plan; but rather, the Administration Committee may at any time modify any form of distribution elected by a Participant or Beneficiary to ensure compliance with this paragraph. (d) Section 401(a)(9) Compliance. Notwithstanding any other provision herein to the contrary, distributions hereunder will be made in accordance with the Treasury Regulations under section 401(a)(9) of the Code, including Treasury Regulations Section 1.401(a)(9)-2, and any Internal Revenue Service rulings, announcements or notices promulgated under section 401(a)(9) of the Code, including any grandfather or transitional rules thereunder. Furthermore, any provisions contained herein which reflect section 401(a)(9) of the Code shall override any distribution options in the Plan inconsistent with section 401(a)(9) of the Code. 8.3 Special Limitation on Involuntary Payment of Benefits. (a) Vested Accrued Benefit Not in Excess of $3,500. Notwithstanding the foregoing provisions of this Article VIII, if a Participant terminates Service for any reason and the value of the Participant's Vested Accrued Benefit, determined as of the Valuation Date immediately preceding a proposed distribution date following such termination of Service, does not exceed $3,500, the Administration Committee shall direct the Trustee to distribute the value of the Participant's Vested Accrued Benefit (including a deemed distribution of $0) to the Participant in a lump sum. (b) Vested Accrued Benefit in Excess of $3,500. If the value of a Participant's Vested Accrued Benefit exceeds $3,500, the Participant may file with the Administration Committee a written request for the payment of the entire amount of his Vested Accrued Benefit in any of the forms specified in Section 8.4 and the - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 35 39 Committee shall direct the Trustee so to pay such amount to the Participant in accordance with the provisions of Sections 8.1, 8.2, and 8.6. (c) Limitation on Involuntary Payment of Benefits. If (i) a Participant terminates Service for any reason other than death prior to the date the Participant attains Normal Retirement Age, (ii) the Participant does not consent to the commencement of payment of his Vested Accrued Benefit prior to the later of such date, and (iii) the value of the Participant's Vested Accrued Benefit as of the Valuation Date immediately preceding a proposed distribution date after such termination of Service exceeds $3,500, the Administration Committee shall direct the Trustee to retain the value of the Participant's Vested Accrued Benefit in the Trust Fund until the earlier of the date that the Participant requests the Administration Committee to commence the distribution of such benefit in accordance with Section 8.1(e) or the date the Participant attains Normal Retirement Age, when the value of such Vested Accrued Benefit shall be distributed in accordance with one of the options under Section 8.4, as selected by the Participant. Until distribution, the Participant's account shall be administered in accordance with this Section 8.3. The restrictions on the time of distribution of a Participant's Vested Accrued Benefit set forth above in this paragraph shall not apply after a Participant's death. Notwithstanding the foregoing provisions of this Section 8.3, a Participant who has terminated Service as provided above in this Section 8.3 and satisfied the Service requirements for early retirement specified in Section 7.2, shall, upon attaining the age specified in such Section 7.2, become eligible for a distribution of his Vested Accrued Benefit as if the Participant were eligible for early retirement, within the meaning of Section 7.2. 8.4 Form of Payment. A Participant, Former Participant, or the Beneficiary of a deceased Participant or Former Participant may elect to have his Vested Accrued Benefit distributed entirely in cash or in shares of Stock, provided, however, that if Stock is elected, the Administration Committee shall direct the Trustee to pay the value of any fractional shares of Stock in cash. Any whole shares of Stock distributed pursuant to this Section 8.4 may be subject to a right of first refusal in accordance with Section 10.1 hereof, and may be eligible for put option rights in accordance with Section 10.2 hereof. However, if the Company's charter or bylaws restrict the ownership of substantially all outstanding stock to Employees or to the Trust, any distribution hereunder may be made entirely in cash without granting the right to demand a distribution of Stock. A Participant, Former Participant, or Beneficiary shall make an election under this Section 8.4 by filing an election form with the Administration Committee on or before the date that is sixty (60) days prior to the date that the distribution of his Vested Accrued Benefit hereunder is to commence. If a Participant, Former Participant, or Beneficiary does not make an election as to the form of distribution of his Vested Accrued Benefit, the Administration Committee shall direct the Trustee to distribute the Participant's Vested Accrued Benefit in cash as provided in Section 8.6. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 36 40 8.5 Securities Law Restrictions. If at the time shares of Stock are to be distributed to a Participant (or, in the event of his death, his Beneficiary), to the extent deemed necessary or desirable by the Administration Committee, the Administration Committee may, as a condition precedent to the distribution of such shares, require from the Participant (or his Beneficiary) such written representations, if any, concerning his (or their) intentions with regard to the retention or disposition of the Stock being distributed or such written covenants and agreements, if any, as to the manner of any such disposition of such shares as, in the opinion of the Administration Committee, may be necessary to ensure that any such disposition by such Participant (or his Beneficiary) will not result in a violation of the Securities Act of 1933, as amended, or any similar or superseding statute or statutes, or any other applicable statute, statutes, or regulations then in effect. The Trustee may stamp or imprint on the stock certificates issued to a Participant (or his Beneficiary) pursuant to a distribution from the Trust a legend referring to (1) the provisions of the immediately preceding sentence and to any representations, covenants, or agreements made by the Participant (or his Beneficiary) with respect thereto, and (2) the right of first refusal provisions and restrictions of Section 10.1. 8.6 Method of Payment. After all required accounting adjustments, the Trustee, in accordance with the direction of the Administration Committee, shall make payment of the Participant's Vested Accrued Benefit, at the election of the Participant, under one (1) or more of the following methods: (a) By payment in a lump sum cash payment. (b) In whole shares of Stock and any fractional shares of Stock in cash. (c) By transfer to another plan qualified under section 401(a) of the Code. (d) By transfer to: (i) an individual retirement account described section 408(a) of the Code, or (ii) an individual retirement annuity described in section 408(b) of the Code. (e) By payment in substantially equal periodic payments (not less frequently than annually) over a period not longer than the greater of five (5) years or, in the case of a Participant with an Accrued Benefit in excess of Five Hundred Thousand Dollars ($500,000), five (5) years plus one (1) additional year (but no more than five (5) additional years) for each One Hundred Thousand Dollars ($ 100,000) or fraction thereof by which such benefit exceeds Five Hundred Thousand Dollars ($500,000). (f) By direct transfer to a plan qualified under Section 401(a) of the Code which accepts direct transfer contributions, an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code (other than an endowment contract) or an annuity plan - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 37 41 described in section 403(a) of the Code; provided, that the distribution form elected pursuant to this Section 8.6(f) qualified for transfer pursuant to section 401(a)(31) of the Code. The Administration Committee shall provide each Participant entitled to a distribution of his Vested Accrued Benefit with a written explanation of his distribution options under the Plan and shall prescribe the procedures a Participant must follow to request a direct transfer pursuant to this Section 8.6(f). If a Participant does not make an election hereunder, his Vested Accrued Benefit shall automatically be paid in the form specified in Section 8.6(e) above. Notwithstanding the foregoing provisions of this Section 8.6, the phrase "payment in a lump sum" as used herein shall not include the distribution of an Insurance Contract providing for (i) a life annuity to a Participant, (ii) a joint and survivor annuity to a Participant and his Beneficiary, or (iii) any other form of payment having the effect of (i) or (ii) above. 8.7 Benefit Payment Elections. A Participant who is entitled to receive a benefit under Article VII hereof may elect to receive any benefit to which he is entitled in one (1) or any combination of the seven (7) forms of payment of retirement benefits specified in Section 8.6 hereof. Upon a Participant's request, the Administration Committee shall furnish the Participant an appropriate form for the making of the election. The Participant shall make an election under this Section 8.7 by filing the election form with the Administration Committee on or before the last day of the Plan Year following which the Trustee would otherwise commence payment of a Participant's Accrued Benefit in accordance with the provisions of Section 8.1 hereof. The Participant shall not be permitted to make any election for an optional form of retirement benefits payable solely to the Participant will not be greater than fifty percent (50%) of the present value of the total retirement benefits payable to the Participant and his Beneficiaries. The Administration Committee shall determine "present value" as of the date the Trustee is to commence payment of the Participant's Vested Accrued Benefit. The Administration Committee shall charge the electing Participant's Account for any expense incurred in making the "present value" determination. The Administration Committee shall apply the provisions of this Section 8.7 in a nondiscriminatory and uniform mariner. 8.8 Special Limitations on Form of Benefits Distribution. Notwithstanding any provision of this Plan to the contrary, (a) a Participant may not elect that his Vested Accrued Benefit be paid in the form of a life annuity and (b) except as provided in the immediately following sentence, upon a Participant's death prior to the payment in full of such Participant's Vested Accrued Benefit, the Participant's Vested Accrued Benefit, including all amounts payable under Insurance Contracts purchased pursuant to Section 15.2, or portion thereof not paid as of the Participant's death, shall be paid in full to the Participant's surviving spouse. Payment of a deceased Participant's Vested Accrued Benefit shall not be paid in accordance with the immediately preceding sentence, but shall be paid in accordance with the Participant's election under the Plan if there is no spouse surviving the Participant or if the surviving spouse consents in the manner required in the immediately following sentence to payment of the Participant's Vested Accrued - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 38 42 Benefit to a designated Beneficiary other than the Participant's spouse. A Participant's spouse may consent in writing to the naming of a designated Beneficiary other than the spouse to receive the Participant's Vested Accrued Benefit, or portion thereof not distributed on the date of the Participant's death, such consent to acknowledge the effect of the election and be witnessed by a member of the Administration Committee or a notary public. Such election may not be changed without spousal consent, unless the consent expressly permits designations by the Participant without any requirement of further spousal consent. Consent of the Participant's spouse shall not be required if the spouse cannot be located or under such other circumstances as the Secretary of Treasury may by regulations prescribe. Any consent by a spouse (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. 8.9 Deferral of Payments. If a Participant's Account is retained in the Trust after the date on which his participation ends and he has become a Former Participant, the Account may continue to be treated as a part of the Trust Fund. The Account will be credited (or debited) with its share of the net income (or loss) attributable to the investments of the Trust Fund but shall not be credited with any further Employer contributions. Notwithstanding the foregoing, the Administration Committee in its sole discretion may direct that the Former Participant's Account be segregated and placed in a separate account. Once the Participant's Account is so segregated, it will no longer share in income, increases, or decreases, if any, of the Trust, nor will they be credited with any further Employer contributions. A segregated account alone shall be credited with any income it earns, and it alone shall bear any expense or loss it incurs. Upon the eventual distribution of such segregated Account, the Participant shall continue to have all the rights described in Section 8.6. 8.10 Limitation on Distributions. Except as otherwise provided in this Article VIII or Section 12.13, a Participant, Former Participant, or Beneficiary is not entitled to any payment, withdrawal, or distribution under the Plan. 8.11 Payment in the Event of Legal Disability. Payments to any Participant, Former Participant, or Beneficiary shall be made to the recipient entitled thereto in person or upon his personal receipt, in form satisfactory to the Administration Committee, except when the recipient entitled thereto shall be under a legal disability or, in the sole judgment of the Administration Committee, shall otherwise be unable to apply such payment in furtherance of his own interest and advantage. The Administration Committee may, in such event, in its sole discretion, direct all or any portion of such payments to be made in any one or more of the following ways: (a) To such person directly; (b) To the guardian of his person or his estate; (c) To a relative or friend of such person, to be expended for his benefit; or - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 39 43 (d) To a custodian for such person under any Uniform Gifts to Minors Act. The decision of the Administration Committee, in each case, will be final, binding, and conclusive upon all persons ever interested hereunder. The Administration Committee shall not be obliged to see to the proper application or expenditure of any payment so made. Any payment made pursuant to the power herein conferred upon the Administration Committee shall operate as a complete discharge of all obligations of the Trustee and the Administration Committee, to the extent of the distributions so made. 8.12 Accounts Charged. The Administration Committee shall charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made. 8.13 Payment Only From Trust Fund. All benefits of the Plan shall be payable solely from the Trust Fund and neither the Employer, Administration Committee, nor Trustee shall have any liability or responsibility therefor except as expressly provided herein. 8.14 Unclaimed Account Procedure. Neither the Trustee nor the Administration Committee shall be obliged to search for, or ascertain the whereabouts of, any Participant or Beneficiary. The Administration Committee, by certified or registered mail addressed to his last known address of record with the Administration Committee or the Employer, shall notify any Participant or Beneficiary that he is entitled to a distribution under this Plan, and the notice shall quote the provisions of this Section. If the Participant fails to claim his benefits or make his whereabouts known in writing to the Administration Committee within seven (7) calendar years after the date of Notification, the benefits under the Plan of the Participant or Beneficiary will be disposed of as follows: (a) If the whereabouts of the Participant is unknown but the whereabouts of the Participant's Beneficiary then is known to the Administration Committee, distribution will be made to the Beneficiary. (b) If the whereabouts of the Participant and his Beneficiary then is unknown to the Administration Committee, but the whereabouts of one or more relatives by adoption, blood, or marriage of the Participant is known to the Administration Committee, the Administration Committee shall direct the Trustee to distribute the Participant's benefits to any one or more of such relatives and in such proportions as the Administration Committee determines. (c) If the Administration Committee does not know the whereabouts of any of the above persons the Administration Committee shall then notify the Social Security Administration of the Participant's (or Beneficiary's) failure to claim the distribution to which he is entitled. The Administration Committee shall request the Social Security Administration to notify the Participant (or Beneficiary) in accord with the procedures it has established for this purpose. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 40 44 While payment is pending, the Administration Committee may direct the Trustee to hold the Participant's benefits in a segregated Account. The segregated Account shall be entitled to all income it earns and shall bear all expense or loss it incurs. Any payment made pursuant to the power herein conferred upon the Administration Committee shall operate as a complete discharge of all obligations of the Trustee and the Administration Committee, to the extent of the distributions so made. If, after the procedures in this Section 8.14 have been exhausted, neither the Participant nor his Beneficiary has made his whereabouts known, said Participant's Vested Accrued Benefit shall be forfeited to the Employer. Notwithstanding such a forfeiture, however, the Participant or his Beneficiary may reclaim the Participant's Vested Accrued Benefit at any time by giving written notice to the Employer. 8.15 Qualified Domestic Relations Orders. During any period in which the issue of whether a Domestic Relations Order is a Qualified Domestic Relations Order is being determined (by the Administration Committee, by a court of competent jurisdiction, or otherwise), the Administration Committee shall direct the Trustee to segregate in a separate account or in an escrow account the amount that would have been payable to the Alternate Payee during such period if the Domestic Relations Order is determined to be a Qualified Domestic Relations Order. If within eighteen (18) months the Domestic Relations Order (or modification thereof) is determined to be a Qualified Domestic Relations Order, the Administration Committee shall direct the Trustee to pay the segregated account (and any earnings or interest thereon) or the balance held in the escrow account, as applicable, to the person or persons entitled thereto. If within eighteen (18) months it is determined that the order is not a Qualified Domestic Relations Order or the issue as to whether such Domestic Relations Order is a Qualified Domestic Relations Order is not resolved, the Administration Committee shall direct the Trustee to pay the segregated account (and any earnings or interest thereon) or the balance of the escrow account, as applicable, to the person or persons who would have been entitled to such amounts if there had been no Domestic Relations Order. Any determination that a Domestic Relations Order is a Qualified Domestic Relations Order which is made after the close of the eighteen (18) month period shall be applied prospectively only. The Administration Committee shall establish reasonable procedures for determining whether a Domestic Relations Order is a Qualified Domestic Relations Order and to administer distributions under Qualified Domestic Relations Orders. When the Plan receives a Domestic Relations Order the Administration Committee shall promptly notify the appropriate Participant and any other Alternate Payee of the receipt of such order and the Administration Committee's procedures for determining whether such order is a Qualified Domestic Relations Order. The Administration Committee shall determine whether a Domestic Relations Order is a Qualified Domestic Relations Order within a reasonable period after receipt of such order, and shall within a reasonable time after such determination notify the Participant and each Alternate Payee of such determination. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 41 45 8.16 Alternate Forms of Benefit. Notwithstanding anything to the contrary herein, any Plan provision which restricts or would deny a Participant through the withholding of consent or the exercise of discretion by some person or persons other than the Participant (and where relevant, other than the Participant's spouse) of an "alternate form of benefit" is hereby amended by the deletion of the consent or discretion requirement. An "alternate form of benefit" encompasses the different forms of benefit payment available under the Plan which provides that: (a) a Participant's benefits under the Plan may be paid in more than one form, or (b) payment of a particular form of benefit may commence, at some time earlier than the normal date for the commencement of such benefit. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 42 46 ARTICLE IX EXEMPT LOANS 9.1 Investment Committee Direction. Subject to the limitations of Section 9.2, the Investment Committee may direct the Trustee to make Exempt Loans, the proceeds of which are to be used for acquiring Qualifying Employer Securities or repaying a prior Exempt Loan. 9.2 Limitations. (a) Primary Benefit Requirement. An Exempt Loan must be made primarily for the benefit of Participants and Beneficiaries. (b) Net Effect of Exempt Loan. At the time that an Exempt Loan is made, the interest rate charged therefor and the price of the Qualifying Employer Securities to be acquired with the proceeds thereof must not be such that the assets of the Trust Fund might be drained off. (c) Arm's Length Standard. The terms of an Exempt Loan must, at the time such loan is made, be at least as favorable to the Trust as the terms of a comparable loan resulting from arm's length negotiations between independent parties. (d) Use of Loan Proceeds. The proceeds of an Exempt Loan must be used within a reasonable time after their receipt by the Trustee only for any or all of the following purposes: (i) To acquire Qualifying Employer Securities; (ii) To repay such loan; or (iii) To repay a prior Exempt Loan. (e) Puts, Calls, etc. Except as provided in Sections 10.1 and 10.2 hereof, no Qualifying Employer Security acquired with the proceeds of an Exempt Loan may be subject to a put, call, other option, or buy-sell or similar arrangement while held by the Trustee and when distributed from the Trust. (f) Interest Rate. The interest rate charged under an Exempt Loan must not be in excess of a reasonable rate of interest. (g) Term. An Exempt Loan must be for a specific term, and may not be payable at the demand of any person, except in the case of default. 9.3 Liability and Collateral. All Exempt Loans shall be without recourse against the Trust. Furthermore, the only Trust assets that may be given as collateral for an Exempt Loan - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 43 47 are Qualifying Employer Securities acquired with the proceeds of the Exempt Loan and Qualifying Employer Securities that were given as collateral for a prior Exempt Loan that is to be repaid out of the proceeds of a current Exempt Loan. Any Qualifying Employer Securities given as collateral for an Exempt Loan shall be allocated to a Collateral Suspense Account created pursuant to Section 6.3, No person entitled to payment under an Exempt Loan shall have any right to Trust assets other than the following: (a) Collateral given for the Exempt Loan; (b) Employer contributions (other than contributions of Qualifying Employer Securities) that are made hereunder for purposes of being applied by the Trustee to satisfy its obligations under the Exempt Loan; and (c) Earnings attributable to Qualifying Employer Securities given as collateral for the Exempt Loan and earnings attributable to the investment of Employer contributions described in paragraph (b) of this Section 9.3. 9.4 Repayment of Exempt Loan. Principal and interest payable under an Exempt Loan shall be satisfied out of. (a) Employer contributions (other than contributions of the Trustee to satisfy its obligations under the Exempt Loan); (b) Earnings attributable to the investment of such contributions; and (c) Earnings attributable to Qualifying Employer Securities purchased with the proceeds of the Exempt Loan; provided, however, that the payments made under an Exempt Loan by the Trustee during any Plan Year shall not exceed an amount equal to the sum of such contributions and earnings received during the Plan Year and prior Plan Years minus payments that may be used by the Trustee to make payments under an Exempt Loan and shall be accounted for separately in the books and records of the Trust until the Exempt Loan is repaid in full. Notwithstanding any provision to the contrary, all Employer contributions (except contributions of Qualifying Employer Securities) made hereunder during the term of an Exempt Loan shall be deemed to be made for purposes of being used by the Trustee to satisfy its obligations under the Exempt Loan. Furthermore, all payments made by the Trustee under an Exempt Loan shall be first charged against Employer contributions available for making such payments. Earnings that may be used under this Section 9.4 to make payments under an Exempt Loan shall be deemed to have been used for that purpose only to the extent that payments made under the Exempt Loan during any Plan - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 44 48 Year are in excess of the total Employer contributions available to the Trustee for making payments under the Exempt Loan. 9.5 Default. In the event of default upon an Exempt Loan, the value of Trust assets transferred in satisfaction of such loan shall not exceed the amount of default. In addition, if the payee under an Exempt Loan is a Disqualified Person or Party in Interest, Trust assets will be transferred in satisfaction of the loan upon default only upon and to the extent of the failure of the Trustee to meet the payment schedule under the loan. 9.6 Release of Collateral. A portion of any Qualifying Employer Securities purchased with the proceeds of an Exempt Loan and given as security therefore shall be released from the Collateral Suspense Account established with respect to such loan each Plan Year during which the payment of amounts due under the loan is made. For each Plan Year during the term of the Exempt Loan, the number of Qualifying Employer Securities to be released from the Collateral Suspense Account relating to such loan shall equal the number of Qualifying Employer Securities allocated to such account immediately before the release for the current Plan Year multiplied by a fraction, the numerator of which is the amount of principal and interest paid under the Exempt Loan for the current Plan Year and the denominator of which is the sum of the numerator plus the principal and interest to be paid under the Exempt Loan for all future years. For purposes of computing the denominator of the above fraction, the number of future years under the Exempt Loan shall be determined without taking into account any possible extension or renewal periods. If the interest rate under the Exempt Loan is variable, the interest to be paid in future years shall be computed by using the interest rate applicable as of the end of the current Plan Year. Notwithstanding the preceding provisions of this Section 9.6, the Administration Committee, in its sole and absolute discretion, may determine the number of Qualifying Employer Securities to be released from the Collateral Suspense Account for any Plan Year by reference to principal payments only; provided, however, that if this method of determination is used, the following requirements must be satisfied: (a) The Exempt Loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level payments of such amounts for ten (10) years. (b) The interest included in any payment under the Exempt Loan is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables. This alternative method of determining the number of Qualifying Employer Securities to be released from the Collateral Suspense Account for any Plan Year may not be used if, by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of a new Exempt Loan (the proceeds of which are to be used to repay the Exempt Loan) exceeds ten (10) years. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 45 49 If more than one class of Quaff*g Employer Securities is given as collateral for the Exempt Loan, the number of Qualifying Employer Securities of each class to be released from the Collateral Suspense Account for any Plan Year shall be determined by applying the same fraction to each class. 9.7 Leveraged Employee Stock Ownership Plan. If an Exempt Loan is made by the Trustee pursuant to Section 9. 1, concurrently therewith the Plan shall become a "Leveraged Employee Stock Ownership Plan" (as defined in section 4975(e)(7) of the Code). Notwithstanding any provision contained herein to the contrary, upon the making of an Exempt Loan by the Trustee, the term "Qualifying Employer Security" shall mean: (a) Common stock issued by the Employer (or by a corporation which is a member of the same controlled group as defined in section 1563(a) of the Code determined without regard to section 1563(a)(4) and section 1563(e)(3)(C) of the Code) which is readily tradeable on an established stock market, or (b) If there is no common stock which meets the requirements of subparagraph (a), common stock issued by the Employer (or by a corporation which is a member of the same controlled group as defined in section 1563(a) of the Code determined without regard to section 1563(a)(4) and section 1563(e)(3)(C) of the Code) having a combination of voting power and dividend rights equal to or in excess of: (i) that class of common stock of the Employer (or of any other such corporation) having the greatest voting power; and (ii) that class of stock of the Employer (or of any other such corporation) having the greatest dividend rights; or (c) Noncallable preferred stock issued by the Employer (or by a corporation which is a member of the same controlled group as defined in section 1563(a) of the Code determined without regard to section 1563(a)(4) and section 1563(e)(3)(C) of the Code) if. (i) such stock is convertible at any time into common stock which is readily tradeable on an established securities market; and (ii) such conversion is set at a conversion price which (as of the date of the acquisition by the Plan) is reasonable. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 46 50 ARTICLE X REDEMPTION, PURCHASE PRIVILEGES AND OBLIGATIONS 10.1 Right of First Refusal. The Employer may retain a night of first refusal to purchase Qualifying Employer Securities acquired by the Trustee and distributed to Participants and Beneficiaries. The Employer may transfer such a right to the Trustee; provided, however, that any such transferred right must otherwise satisfy the requirements of this Section 10.1. Qualifying Employer Securities subject to the night of first refusal provided for in this Section 10. I must not be Publicly Traded at the time the right of first refusal may be exercised. The purchase price and other terms under the right of first refusal shall not be less favorable to the seller than the greater of the value of the Qualifying Employer Securities, determined in accordance with Section 10.3 hereof, or the purchase price and other terms offered by a buyer other than the Employer or the Trustee making a good faith offer to purchase the Qualifying Employer Securities from the seller. The right of first refusal shall expire no later than fourteen (14) days after the seller gives written notice to the holder of the night that an offer by a third party to purchase the Qualifying Employer Securities has been received. A legend may be placed on all Qualifying Employer Securities subject to the night of first refusal, which references such right. 10.2 Put Option. Qualifying Employer Securities distributed to a Participant (or his Beneficiary) shall be subject to a put option if they are not Publicly Traded when distributed or if they are subject to a trading limitation when distributed. For purposes of this Section 10.2, a trading limitation is a restriction under any Federal or state securities law, any regulation thereunder, or an agreement not prohibited by this Article X, affecting the Qualifying Employer Securities which makes such securities not as freely tradeable as securities not subject to such restriction. The put option shall be exercisable only by a Participant, his donees, or a person (including an estate or its distributees) to whom the Qualifying Employer Securities pass by reason of his death. The put option shall permit a Participant or other person described in the immediately preceding sentence to put the Qualifying Employer Securities subject thereto to the Employer. Under no circumstances may the put option bind the Plan or the Trustee; provided, however, that the put option may grant the Trustee an option to assume the rights and obligations of the Employer at the time the put option is exercised. If Federal or state law would be violated by the Employer's honoring of the put option, the put option shall permit the Qualifying Employer Securities to be put, in a manner consistent with such law, to a third party (other than the Trustee) that has substantial net worth at the time the put option is made available and whose net worth. is expected to remain substantial. The following requirements shall apply to a put option created pursuant to this Section 10.2: (a) Duration of Put Option. A put option shall be exercisable at least during a sixty (60) day period commencing on the date the Qualifying Employer Securities subject to such option are distributed under the Plan, and, if the put option is not - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 47 51 exercised within such sixty (60) day period, for an additional period of at least sixty (60) days in the following Plan Year (as provided in applicable Treasury Regulations). In the case of Qualifying Employer Securities that are Publicly Traded without any trading limitation when distributed, but which cease to be so traded within the period described above, the Employer must notify each shareholder holding such Qualifying Employer Securities in writing on or before the tenth (10th) day after the date such Qualifying Employer Securities cease to be so traded that for the remainder of the above-described period, the Qualifying Employer Securities are subject to a put option. The number of days between such tenth (10th) day and the date on which such notice is actually given, if later than the tenth (10th) day, shall be added to the duration of the put option. Any notice given under this paragraph (a) must inform distributees of the terms of the put options that they are to hold. (b) Time Excluded from Duration of Put Option. The period during which a put option granted pursuant to this Section 10.2 is exercisable does not include any time that a distributes is unable to exercise it because the party bound by the put option is prohibited from honoring it by applicable Federal or state law. (c) Manner of Exercise. A put option granted under this Section 10.2 shall be exercised by the holder thereof by notifying the Employer in writing that the put option is being exercised. (d) Price. The price at which a put option is exercisable is the value of the Qualifying Employer Securities with respect to which the option is being exercised, determined in accordance with the provisions of Section 10.3. (e) Payment Terms. Payment required under a put option granted pursuant to this Section 10.2 shall begin thirty (30) days after the exercise of the put option, and shall be made in a maximum of five (5) equal annual installment payments. The Employer shall provide adequate security and pay reasonable interest on the unpaid amounts due under the put option. For put options purchased as a part of an installment distribution, payment must be made not later than thirty (30) days after the exercise of the put option. 10.3 Valuation. For purposes of this Article X, valuations of Qualifying Employer Securities must be made in good faith and must be based on all relevant factors that should be considered in determining their value. In the case of a transaction between the Plan and a Disqualified Person or a Party in Interest, the value of Qualifying Employer Securities must be determined as of the date of the transaction. For all other purposes under this Article X, the value of Qualifying Employer Securities must be determined as of the most recent Valuation Date or special valuation date. In addition to and consistent with the requirements of the preceding paragraph, the methodologies for determining valuations of Qualifying Employer Securities shall be as follows: - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 48 52 (a) Securities Traded on a Recognized Exchange. If the relevant Qualified Employer Securities are readily tradeable on an established securities market, the value shall be deemed to be the mean trading price of such securities on such established securities markets over a reasonable period of time. (b) Securities Not Traded on a Recognized Exchange. If the relevant Qualified Employer Securities are not readily tradeable on an established securities market, all valuations with respect to the activities of the Plan shall be determined by an independent appraiser (who is defined as any appraiser meeting requirements similar to the requirements of the regulations prescribed under Code section 170(a)(1)). 10.4 Stock Transfer Documents. In the event the Put Option provided for in Section 10.2 is exercised or a purchase of shares is made by the Trustee or the Employer as provided for in Section 10.1, at such time as requested by the Trustee or the Employer, the distributee shall execute such stock powers or other documents required by the Trustee or the Employer to transfer and convert, ownership of the shares purchased to the Trustee and/or the Employer. 10.5 Preservation of Purchase Rights. The Put Option and the fight of first refusal get forth above shall continue and apply to any distribution made from the Plan prior to or after a date on which the Plan no longer maintains the status of an employee stock ownership plan, as that term is defined in section 4975(e)(7) of the Code. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 49 53 ARTICLE XI EMPLOYER ADMINISTRATIVE PROVISIONS 11.1 Information. The Employer shall, upon request or as may be specifically required hereunder, furnish or cause to be furnished, all of the information or documentation which is necessary or required by the Committees and Trustee to perform their respective duties and functions under the Plan. The Employer's records as to the current information the Employer furnishes to the Committees and Trustee shall be conclusive as to all persons. 11.2 No Liability. Subject to Article XIV, the Employer assumes no obligation or responsibility to any of the Employees, Participants, or Beneficiaries for any act of, or failure to act, on the part of the Committees of the Trustee. 11.3 Employer Action. Any action required of the Employer shall be by resolution of its Board of Directors or by a person authorized to act by Board resolution. 11.4 Indemnify. The Employer shall indemnify and save harmless the Board of Directors, individual Trustee(s), and the members of the Committees, and each of them, from and against any and all loss resulting from liability to which the Board of Directors, individual Trustee(s), and the Committees, or the members of the Board of Directors and Committees, may be subjected by reason of any act or conduct (except willful or reckless misconduct) in their official capacities in the administration of this Plan or Trust or both, including all expenses reasonably incurred in their defense, in case the Employer falls to provide such defense. The indemnification provisions of this Section 11.4 shall not relieve the Board of Directors, individual Trustee(s), or any members of the Committees from any liability he may have under the Act for breach of a fiduciary duty. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 50 54 ARTICLE XII COMMITTEES - ADMINISTRATION AND INVESTMENT PROVISIONS 12.1 Appointment of Committees. The Board of Directors shall appoint an Administration Committee to administer the Plan, and an Investment Committee to direct Plan investments, the members of which may or may not be Participants in the Plan. The members of both Committees may be identical, such members shall constitute a single Committee possessing the rights and powers of each. 12.2 Term. Each member of each Committee shall serve until his successor is appointed. Any member of either Committee may be removed by the Board of Directors, with or without cause, which shall have the power to fill any vacancy which may occur. A Committee member may resign upon written notice to the Employer. 12.3 Compensation. The members of the Committees shall serve without compensation for services as such, but the Employer shall pay all expenses of both Committees, including the expenses for any bond required under section 412 of the Act. To the extent such expenses are not paid by the Employer, they shall be paid by the Trustee from the Trust Fund. 12.4 Powers of Administration Committee. Subject to Article XIV, the Committee shall have the following powers and duties: (a) To direct the administration of the Plan in accordance with the provisions herein set forth; (b) To adopt rules of procedure and regulations necessary for the administration of the Plan provided the rules are not inconsistent with the terms of the Plan; (c) To determine all questions with regard to rights of Employees, Participants, and Beneficiaries under the Plan, including but not limited to rights of eligibility of an Employee to participate in the Plan, the value of a Participants Accrued Benefit, and the vested Accrued Benefit of each Participant; (d) To enforce the terms of the Plan and the rules and regulations it adopts; (e) To direct the Trustee as respects the crediting and distribution of the Trust and all other matters within its discretion as provided in the Trust Agreement; (f) To review and render decisions respecting a claim for, or denial of a claim for, a benefit under the Plan; (g) To furnish the Employer with information which the Employer may require for tax or other purposes; - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 51 55 (h) To engage the service of counsel (who may, if appropriate, be counsel for the Employer) and agents whom it may deem advisable to assist it with the performance of its duties; (i) To prescribe procedures to be followed by distributees in obtaining benefits; (j) To receive from the Employer and from Employees such information as shall be necessary for the proper administration of the Plan; (k) To receive and review reports of the financial condition and of the receipts and disbursements of the Trust Fund from the Trustee; (l) To maintain, or cause to be maintained, separate Accounts in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan; (m) To select a secretary, who need not be a member of the Administration Committee; and (n) To interpret and construe the Plan. The Administration Committee shall have no power to add to, subtract from, or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. Nonetheless, the Administration Committee shall have absolute discretion in the exercise of its powers under this Section 12.4. All exercises of power by the Administration Committee hereunder shall be final, conclusive and binding, unless found by a court of competent to be arbitrary and capricious. 12.5 Powers of Investment Committee. The Investment Committee shall have the following powers and duties: (a) To direct the Trustee in the investment, reinvestment, and disposition of the Trust Fund, including the investment of the Trust Fund in Qualifying Employer Securities without regard to the limitations of sections 407(a)(2), (3), or (4) of the Act, as provided in the Trust Agreement; (b) To direct the Trustee to make Exempt Loans, the proceeds of which are to be used for the purposes enumerated in Section 9.2(b); (c) To furnish the Employer with information which the Employer may require for tax or other purposes, (d) To engage the service of counsel (who may, if appropriate, be counsel for the Employer) and agents whom it may deem advisable to assist it with the performance of its duties; - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 52 56 (e) To receive and review reports of the financial condition and of the receipts and disbursements of the Trust Fund from the Trustee; (f) To select the issuing company or companies from which Insurance Contracts shall be purchased as provided herein, and to determine the form, type, and kind of such contract; (g) To engage the services of an Investment Manager or Managers (as defined in section 3(38) of the Act), each of whom shall have full power and authority to manage, acquire or dispose (or direct the Trustee with respect to acquisition' or disposition) of any Plan assets under its control; (h) To select a secretary, who need not be a member of the Investment Committee; and (i) To interpret and construe the Plan with respect to the investment, reinvestment, and disposition of Plan assets. 12.6 Manner of Action. The decision of a majority of the members of each Committee appointed and qualified shall control. In case of a vacancy in the membership of the Committees, the remaining members of the respective Committee may exercise any and all of the powers, authorities, duties, and discretions conferred upon such Committee pending the filling of the vacancy. The Committees may, but need not, call or hold formal meetings. Any decisions made or action taken pursuant to written approval of a majority of the then members shall be sufficient. Each Committee shall maintain adequate records of its decisions. 12.7 Authorized Representative. Each Committee may authorize any one of its members, or its secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters, or other documents. Each Committee must evidence this authority by an instrument signed by all its respective members and filed with the Trustee. 12.8 Nondiscrimination. The Administration Committee shall administer the Plan in a uniform, nondiscriminatory manner for the exclusive benefit of the Participants and their Beneficiaries. 12.9 Interested Member. No member of the Administration Committee may decide or determine any matter concerning the distribution, nature, or method of settlement of his own benefits under the Plan unless there is only one person acting alone in the capacity as the Administration Committee. 12.10 Funding Policy. The Investment Committee shall review, not less often than annually, all pertinent Employer information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan's objectives. The Investment Committee shall communicate annually to the Trustee and - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 53 57 to any Plan Investment Manager (herein so-called), if any, the Plan's short-term and long-term financial needs so investment policy can be coordinated with Plan financial requirements. 12.11 Individual Statement. As soon as practicable after the Valuation Date of each Plan Year but within the time prescribed by the Act and regulations under the Act, the Administration Committee will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his Accrued Benefit in the Trust as of that date and such other information the Act requires be furnished the Participant or Beneficiary. No Participant except a member of the Administration or Investment Committee, shall have the night to inspect the records reflect the Account of any other Participant. 12.12 Books and Records. The Administration Committee shall maintain, or cause to be maintained, records which will adequately disclose at all times the state of the Trust Fund and of each separate interest therein. The books, forms, and methods of accounting shall be the responsibility of the Administration Committee. 12.13 Diversification Requirements. Subject to paragraph (d) of this Section 12.13, to the extent required by section 401(a)(28)(B) of the Code, and notwithstanding the provisions of Section 12.5, each Qualified Participant may elect, within ninety (90) days after the end of each Plan Year that is within the Diversification Election Period, to receive a distribution from the Plan of up to (1) twenty-five percent (25%) of Qualified Contributions that have ever been allocated to the Qualified Participant's Account, less (11) the number of shares of Employer Securities previously distributed, transferred or diversified pursuant to a diversification election. However, in the last year of the Diversification Election Period, the preceding sentence shall be applied by substituting "fifty percent (50%)" for "twenty-five percent (25%)." (a) Delivery of Diversification Distribution. A Qualified Participant shall receive a distribution elected pursuant to this Section 12.13 within ninety (90) days after the last day of the period during which an election can be made. (b) Delivery of Employer Securities. The number of shares of Employer Securities that are delivered to a Participant who makes an election hereunder shall be the whole number of shares elected to be received hereunder with any fractional amount paid in cash, based upon fair market value of the shares. Such shares of Employer Securities delivered to the Participant must consist of Employer Securities that, immediately prior to distribution hereunder, are subject to the put option requirements of Section 10.2. (c) No Effect on Other Distributions. Any distribution that is made pursuant to this Section 12.13 shall not be taken into consideration in determining whether or not subsequent distribution is a lump sum distribution, as defined in Section 402(d)(4)(A) of the Code. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 54 58 ARTICLE XIII PARTICIPANT ADMINISTRATIVE PROVISIONS 13.1 Beneficiary Designation. Each Participant may from time to time designate, in writing, a Beneficiary to whom the Trustee shall pay his Accrued Benefit in the Trust Fund in the event of his death. The Administration Committee shall prescribe the form for the written designation of Beneficiary and, upon the Participant's filing the form with the Administration Committee, it shall revoke all designations filed prior to that date by the same Participant. As a condition to any married Participant designating a Beneficiary other than his spouse, to the extent required by applicable law, the Administration Committee shall require the spouse's consent, as described in Sections 2.1(8) and 8.8. 13.2 No Beneficiary Designation. If a Participant fails to name a Beneficiary in accord with Section 13.1, or if the Beneficiary named by a Participant predeceases him or dies before complete distribution of the Participant's Accrued Benefit in lump sum to the legal representative or representatives of the estate of the last to die of the Participant and his Beneficiary. The Administration Committee, in its sole discretion, shall direct the Trustee as to whom the Trustee shall make payment under this Section. 13.3 Voting of Qualifying Employer Securities. Each Participant, Former Participant, or Beneficiary of a deceased Participant or Former Participant shall be the "named fiduciary," as such term is defined in Section 402(a)(2) of the Act, with respect to the Qualifying Employer Securities allocated to his Account and shall be entitled to direct the Trustee concerning the manner in which such Qualifying Employer Securities are to be voted. Not less than. fifteen (15) days nor more than fifty (50) days prior to holding of each annual or special meeting of the shareholders of the Company, the Trustee shall furnish to each Participant, Former Participant, and Beneficiary of a deceased Participant or Former Participant a ballot form or proxy covering those issues to be voted on, on which may be set forth the Participants, Former Participants, or Beneficiary's instruction as to the manner of voting those Qualifying Employer Securities with respect to which he is entitled to direct the Trustee under this Section 13.3. Upon receipt of such instructions, the Trustee shall vote (or exercise dissenters rights where applicable) such Qualifying Employer Securities in accordance with the instructions received. The Trustee shall be the "named fiduciary" with respect to any nonvoted or unallocated Qualifying Employer Securities and shall vote such Qualifying Employer Securities in its sole and absolute discretion. 13.4 Personal Data to Administration Committee. Each Participant and Beneficiary must furnish to the Administration Committee evidence, data, or information as the Administration Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will promptly furnish full, true, and complete evidence, data, and information when requested by the Administration Committee, provided the Administration Committee shall advise each Participant of the effect of his failure to comply with its request. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 55 59 13.5 Address for Notification. Each Participant and each Beneficiary of a deceased Participant shall file with the Administration Committee, in writing, his post office address, and each subsequent change of such post office address. Any payment or distribution hereunder, and any communication addressed to a Participant or his Beneficiary, at the last address filed with the Administration Committee, or if no such address has been filed, then the last address indicated on the records of the Employer shall be deemed to have been delivered to the Participant or his Beneficiary on the date that such distribution or communication is deposited in the United States fl, postage prepaid. 13.6 Place of Payment and Proof of Continued Eligibility. Any check representing payment hereunder and any communication addressed to an Employee, a former Employee, a retired Employee, or Beneficiary at his last address filed with the Administration Committee, or if no such address has been filed, then at his last address as indicated on the records of the Employer, shall be deemed to have been delivered to such person on the date on which such check or communication is deposited in the United States mail. If the Administration Committee, for any reason, is in doubt as to whether pension payments are being received by the person entitled thereto, it shaH, by registered mail addressed to the person concerned, notify such person that all unmailed and future retirement income payments shall be henceforth withheld until he provides the Administration Committee with evidence of his continued life and his proper mailing address. 13.7 Assignment or Alienation. No benefit payable under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, except to the extent provided under a Qualified Domestic Relations Order, prior to actually being received by the person entitled to the benefit under the terms of the Plan. The Trust Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any person entitled to benefits hereunder, except to the extent that under a Qualified Domestic Relations Order the Trustee is required to pay over a Participant's Accrued Benefit hereunder to an Alternate Payee. In the event an Employer or the Trustee receives written notice of an adverse claim to a benefit distributable or being paid to a Participant, Former Participant or Beneficiary, the Trustee may suspend payment(s) of such benefit until such matter is resolved to the satisfaction of the Trustee. 13.8 Litigation Against the Trust. If any legal action filed against the Trustee, Board of Directors, or the Committee, or against any member or members of the Committee or Board of Directors, by or on behalf of any Participant or Beneficiary, results adversely to the Participant or to the Beneficiary, the Trustee shall reimburse itself, the Board of Directors, Committee, and any member or members of the Committee or Board of Directors, all costs and fees expended by it or them by surcharging all costs and fees against the sums payable under the Plan to the Participant or to the Beneficiary, but only to the extent a court of competent jurisdiction specifically authorizes and direct any such surcharges and only to the extent permitted under section 40 I(a)(I 3) of the Code. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 56 60 13.9 Information Available. Any Participant in the Plan or any Beneficiary may examine copies of the Plan description, latest annual report, any bargaining agreement, this Plan and Trust, contract, or any other instrument under which the Plan was established or is operated. The Administration Committee will maintain all of the items listed in this Section in his office, or in such other place or places as he may designate from time to time in order to comply with the regulations issued under the Act, for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary the Administration Committee shall furnish him with a copy of any item listed in this Section. The Administration Committee may make a reasonable charge to the requesting person for the copy so furnished. 13.10 Beneficiary's Right to Information. A Beneficiary's night to (and the Committees', or a Trustee's duty to provide to the Beneficiary) information or data concerning the Plan shall not arise until he first becomes entitled to receive a benefit under the Plan. 13.11 Claims Procedure. Prior to or upon becoming entitled to receive a benefit hereunder, a Participant or Beneficiary shall file a claim for such benefit with the Administration Committee at the time and in the manner prescribed thereby. Notwithstanding the immediately preceding sentence, the Administration Committee may direct the Trustee to commence payment of a Participant's or Beneficiary's benefits hereunder without requiring the filing of a claim therefore if the Administration Committee has knowledge of such Participant's or Beneficiary's whereabouts. 13.12 Early Retirement Benefits. A Participant who is eligible to apply for an early retirement benefit under Section 7.2 hereof and elects to do so shall file an application therefore with the Administration Committee at the time and in the manner prescribed thereby. 13.13 Appeal Procedure for Denial of Benefits. The Administration Committee shall provide adequate notice in writing to any Participant or to any Beneficiary ("Claimant") whose claim for benefits under the Plan the Administration Committee has denied. Such notice must be sent within ninety (90) days of the date the claim is received by the Administration Committee unless special circumstances require an extension of time for processing the claim. Such extension shall not exceed ninety (90) days and no extension shall be allowed unless, within the initial ninety (90) day period, the Claimant is sent an extension notice indicating the special circumstances requiring the extension and specifying a date by which the Administration Committee expects to render its final decision. The Administration Committee's notice of denial to the Claimant shall set forth: (a) The specific reason or reasons for the denial; (b) Specific reference to pertinent Plan provisions on which the Administration Committee based its denial; - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 57 61 (c) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; (d) A statement that the Claimant may: (i) Request a review upon written application to the Committee; (ii) Review pertinent Plan documents; and (iii) Submit issues and comments in writing; and (e) A statement that any appeal the Claimant washes to make of the adverse determination must be in writing to the Administration Committee within sixty (60) days after receipt of the Administration Committee's notice of denial of benefits. The Administration Committee's notice must further advise the Claimant that his failure to appeal the action to the Administration Committee in writing within the sixty (60) day period will render the Administration Committee's determination final, binding, and conclusive. If the Claimant should appeal to the Administrative Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. The Administration Committee shall re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is Justified under the circumstances. The Administration Committee shall advise the Claimant in writing of its decision, and the specific Plan provisions on which the decision is based. The notice of the decision shall be given with sixty (60) days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the sixty (60) day period infeasible, but in no event shall the Administration Committee render a decision regarding the denial of a claim for benefits later than one hundred and twenty (120) days after its receipt of a request for review. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the Claimant prior to the date the extension period commences. The Administration Committee's notice of denial of benefits shall identify the name of each member of the Administration Committee and the name and address of the Administration Committee member to whom the Claimant may forward his appeal. 13.14 No Rights Implied. Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, shall give any Employee, Participant, or any Beneficiary any right to continue employment, any legal or equitable right against the Employer or any officer, director, or Employee of the Employer, or against the Trustee, or its agents or employees, except as expressly provided by the Plan, the Trust or the Act. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 58 62 ARTICLE XIV FIDUCIARY DUTIES 14.1 Fiduciaries. The "Fiduciaries" of the Plan shall consist of the following: (a) The Employer; (b) The Administration Committee; (c) The Investment Committee; (d) The Trustee; and (e) Such other person or persons that are designated to carry out fiduciary responsibilities under the Plan in accordance with Section 14.3(c). Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan. A Fiduciary may employ one or more persons to render advice with regard to any responsibility such Fiduciary has under the Plan. 14.2 Allocation of Responsibilities. The powers and responsibilities of the Fiduciaries are hereby allocated as indicated below: (a) Employer. The Employer shall be responsible for all functions assigned or reserved to it under the Plan and Trust Agreement. Any authority assigned or reserved to the Employer under the Plan and Trust Agreement shall be exercised by resolution of the Employer's Board of Directors. (b) Administration Committee. The Administration Committee shall have the responsibility and authority to control the operation and administration of the Plan in accordance with the terms of the Plan and Trust Agreement, except with respect to duties and responsibilities specifically allocated to other fiduciaries. The Administration Committee shall have the authority to issue written directions to the Trustee to the extent provided in the Trust Agreement. The Trustee shall follow the Administration Committee's directions unless it is clear that the actions to be taken under those directions would be violations of applicable fiduciary standards or would be contrary to the terms of the Plan or Trust Agreement. (c) Investment Committee. The Investment Committee shall have the responsibility and authority to control the investment of the Trust Fund in accordance with the terms of the Plan and Trust Agreement, except with respect to duties and responsibilities specifically allocated to other fiduciaries. The Investment Committee shall have the authority to issue written directions to the Trustee to the extent provided in the Trust Agreement. The Trustee shall follow the Investment - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 59 63 Committee's directions, unless it is clear that the actions to be taken under those directions would be violations of applicable fiduciary standards or would be contrary to the terms of the Plan or Trust Agreement. (d) Trustee. The Trustee shall have the duties and responsibilities set out in the Trust Agreement, subject, however, to direction by the Committees as set out in the Trust Agreement. (e) Allocations. Powers and responsibilities may be allocated to other fiduciaries in accordance with Section 14.3, or as otherwise provided herein or in the Trust Agreement. This Article is intended to allocate to each Fiduciary the individual responsibility for the prudent execution of the functions assigned to it, and none of such responsibilities or any other responsibility shall be shared by two or more of such Fiduciaries unless such sharing shall be provided by a specified provision of the Plan or Trust Agreement. 14.3 Procedures for Delegation and Allocation of Responsibilities. Fiduciary responsibilities may be allocated as follows: (a) Each Committee may specifically allocate responsibilities to a specified member or members of the Committee. (b) Each Committee may designate a person or persons other than a Fiduciary to carry out fiduciary responsibilities under the Plan (this authority shall not cause any person or persons employed to perform ministerial acts and services for the Plan to be deemed fiduciaries of the Plan). (c) The Investment Committee may appoint an Investment Manager or managers to manage (including the power to acquire and dispose of) the assets of the Plan (or a portion thereof). (d) If at any time there be more than one Trustee serving under the Trust Agreement, such Trustees may allocate specific responsibilities, obligations, or duties among themselves in such manner as they shall agree. Any allocation of responsibilities pursuant to this Section 14.3 shall be made by filing a written notice thereof with the Administration Committee specifically designating the person or persons to whom such responsibilities or duties are allocated and specifically setting out the particular duties and responsibilities with respect to which the allocation or designation is made. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 60 64 ARTICLE XV INSURANCE CONTRACTS 15.1 General Insurance Investment. Upon the written direction of the Investment Committee, the Trustee shall apply for and pay premiums on Insurance Contracts for the benefit of the Trust Fund as a whole, and such contracts may be on the lives of any persons in whom there is an insurable interest, including Participants. Insurance Contracts held for the benefit of the Trust Fund as a whole shall be treated as investments of the Trust Fund and the cash value thereof shall be used in valuing the Trust Fund. All premiums paid thereon by the Trustee shall be charged against the Trust Fund as a whole and not to any specific Accounts. All dividends, death benefits, and other payments received by the Trustee by reason of such Insurance Contracts shall be credited to the Trust Fund the same as proceeds derived from the sale of an asset held thereunder. The Investment Committee may, in its sole discretion, authorize the Trustee to use any amount of dividends to pay premiums; or borrow against the cash surrender value of an Insurance Contract on the Participant's life in order to pay the premiums. 15.2 Insurance Company Not a Party to Agreement. No insurance company is a party to this Plan nor shall any insurance company be responsible for its validity. 15.3 Insurance Company Not Responsible for Trustee's Action. No insurance company is required to examine the terms of this Plan nor be responsible for any action taken by the Trustee. 15.4 Insurance Company Reliance on Trustee's Signature. For the purpose of making application to any insurance company and in the exercise of any right or option contained in any policy or annuity, the insurance company may rely upon the signature of the Trustee and shall be saved harmless and completely discharged in acting at the direction and authorization of the Trustee. 15.5 Acquittance. An insurance company shall be discharged from all liability for any amount paid to the Trustee or paid in accordance with the direction of the Trustee, and it shall not be obligated to see to the distribution or further application of any monies it so pays. 15.6 Duties of Insurance Company. Each insurance company shall keep such records; make such identification of contracts, funds and accounts within funds; and supply such information as may be necessary for the proper administration of the Plan under which it is carrying Insurance Contracts. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 61 65 ARTICLE XVI DISCONTINUANCE, AMENDMENT, AND TERMINATION 16.1 Discontinuance. The Employer shall have the night, at any time, to suspend or discontinue its contributions under the Plan. 16.2 Amendment. The Employer shall have the right at any tune and from time to time to amend the Plan in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) the Plan and Trust under the provisions of Code section 401(a) and to amend the Plan in any other manner provided no amendment shall: (a) Except as provided for in Sections 4.4 and 16.9, authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries; (b) Cause or permit any portion of the Trust fund to revert to or become the property of the Employer; (c) Increase duties or responsibilities of the Trustee or the Committees without the written consent of the affected Trustee or the affected member of the Administration or Investment Committee. The Employer shall make all amendments in writing. Each amendment shall state the date to which it is either retroactively or prospectively effective. 16.3 Termination. The Company shall have the right to terminate the Plan at any time. The Plan shall terminate upon the first to occur of the following: (a) The date terminated by action of the Board of Directors; (b) The date the Company shall be judicially declared bankrupt or insolvent; or (c) The dissolution, merger, consolidation, or reorganization of the Company or the sale by the Employer of all or substantially all of its assets, unless the successor or purchaser makes provision to continue the Plan, in which event the successor or purchaser shall be substituted as the Employer under this Plan. 16.4 Vesting on Termination or Suspension. Notwithstanding any other provision of this Plan to the contrary, upon the date of full or partial termination of the Plan, or, upon complete discontinuance of contributions to the Plan, an affected Participant's right to his Accrued Benefit, shall be one hundred percent (100%) nonforfeitable. The Administration Committee shall interpret and administer this Section 16.4 in accord with the intent and scope of the Regulations issued under section 41 I (d)(3) of the Code. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 62 66 16.5 Procedures on Termination. In the event of termination of the Plan or permanent discontinuance of Employer contributions, the Company shall, in its sole discretion, authorize any one of the following procedures: (a) Continue Plan. To continue the Plan in operation in all respects until the Trustee has distributed all benefits under the Plan, except that no further persons shall become Participants, no further Employer contributions shall be made, all Accounts shall be fully vested, and no further payments shall be made except in distribution of the Trust Fund and payment of administration expenses; or (b) Liquidate Plan. Subject to the restrictions of Section 8.14, to wind up and liquidate the Plan and Trust and distribute the assets thereof after deduction of all expenses to the Participants, Former Participants, and Beneficiaries in accordance with their respective Accounts as then constituted. If the Company makes no election before termination, then this subsection (b) will, govern distribution of the Trust Fund. 16.6 Merger. The Trustee shall not consent to, or be a party to, any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation, or transfer, the surviving Plan provides each Participant a benefit equal to or greater than the benefit immediately before the merger, consolidation, or transfer. In addition, the Trustee shall not accept a transfer of assets to this Plan from another plan if such assets are attributable, directly or indirectly, to a transfer or distribution from a defined benefit plan (within the meaning of section 4140) of the Code) or a defined contribution plan (within the meaning of section 414(i) of the Code) subject to the minimum funding standards of section 412 of the Code. 16.7 Notice in Change of Terms. The Administration Committee, within the time prescribed by the Act and applicable regulations shall furnish all Participants and Beneficiaries a summary descriptive of any material amendment to the Plan or notice of discontinuance of the Plan and all other information required by the Act to be furnished without charge. 16.8 Approval By Internal Revenue Service. Notwithstanding anything herein to the contrary, contributions to this Plan are conditioned upon the initial qualification of the Plan under Code section 401. If the Plan receives an adverse determination with respect to its initial qualification, then the Plan may return such contributions to the Employer within one (1) year after such determination, provided the application for the determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted, or such later date as the Secretary of the Treasury may prescribe. 16.9 Reversion of Forfeiture Suspense Amount. Notwithstanding any provision contained herein to the contrary, the Employer reserves the right to recover upon the termination of the Plan and Trust Fund any amounts held in a Forfeiture Suspense Account in the year of termination. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 63 67 ARTICLE XVII PARTICIPATION BY AFFILIATES OF EMPLOYER 17.1 Adoption by Affiliates. Any corporation or other business entity which is a member of a controlled group (as defined in sections 414(b), (c), (in) or (o) of the Code or any successor provision) which includes the Company may, with the consent of the Company, adopt the Plan for its employees. Such adoption shall be made by resolution of such corporation's Board of Directors and an instrument executed by its officers pursuant thereto. The provisions of the Plan shall apply to each Employer severally except as (a) provided in the instrument adopting the Plan and Trust and (b) otherwise specifically provided herein. 17.2 Amendment. If the Plan is amended by the Company after it has been adopted by one (1) or more affiliates pursuant to Section 17. 1, unless otherwise expressly provided, the Plan shall be treated as so amended by such affiliates without the necessity of any action on their parts. 17.3 Termination. If the Plan is terminated by the Company, it shall be deemed terminated by each affiliate that has adopted such instruments pursuant to Section 17. 1. Furthermore, any affiliate that has adopted the Plan pursuant to Section 17.1 may discontinue its participation herein at any time; provided, however, that such action shall not be treated as a termination of the Plan by the Company or any other affiliate who has adopted the Plan. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 64 68 ARTICLE XVIII TRUSTEE, POWERS AND DUTIES 18.1 Establishment and Acceptance of Trust. The Trustee as of its date of signature hereon, accepts the Trust hereby established and consents to act as Trustee subject to the terms, provisions, conditions, and limitations of this Plan. 18.2 Scope of Trustee's Functions. In all matters relating to the detailed administration of the Plan the Trustee shall act only upon the authorization evidenced by certificate of the Administration Committee and shall be fully protected in relying and acting thereon; provided, however, if at any time the Administration Committee shall fail to give directions or instructions to the Trustee in regard to any detail affecting the administration of the Plan over which the Administration Committee has jurisdiction, then and in that event the Trustee, although being under no obligation to do so, may act without such directions or instructions and may exercise its own discretion and judgment as seems appropriate and advisable under the circumstances in order to effectuate the purposes of the Plan. Where the Trustee does so act without direction or instruction from the Administration Committee, it shall act solely in the interests of the Participants and their Beneficiaries and for the exclusive purpose of providing the benefits required and defraying reasonable expenses of administering the Plan. The Trustee shall not be required to act on instructions received from the Administration Committee, other than instructions from a qualified Investment Manager, if in its sole discretion and opinion it believes that compliance with such instructions would result in an action which would be improper or imprudent. In the event the Trustee declines or refuses to follow such instructions given in writing by the Administration Committee or its duly authorized representative, notice of such refusal shall be furnished to the Administration Committee in writing within fifteen (15) days of receipt of the Administration Committee's written instructions. If at any time the Administration Committee fails or refuses to provide the Trustee with written instructions concerning any action which, in the sole discretion of the Trustee, is deemed necessary in order to properly administer the Plan under the provisions hereunder and in accordance with applicable laws and regulations, then and in that event, the Trustee shall notify the Administration Committee in writing of the Trustee's intent to take such action on a date no earlier than thirty (30) days from the date notice is received by the Administration Committee. The notice shall describe the action which will be performed by the Trustee on a certain date unless written notice is received from the Administration Committee within thirty (30) days disapproving such action and instructing the Trustee concerning the course of action which the Trustee should follow. If the Administration Committee fails or refuses to respond to the Trustees notification of intended action, such failure or refusal to respond shall be deemed by the Trustee as implied consent on the part of the Administration Committee and on behalf of the - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 65 69 Employer to the action intended to be performed by the Trustee and shall be deemed as authorizing the Trustee to so act at the expiration of the thirty (30) day period. 18.3 Powers and Duties. The Trustee is hereby authorized and empowered to establish and maintain for and on behalf of the Plan Participants such pooled investment accounts as the Administration Committee may direct, and into which the Plan assets shall be invested. In establishing such pooled investment accounts, or in utilize investments as the Administration Committee may from time to time direct, the Trustee shall be authorized and empowered to perform the following functions with respect to the Plan: (a) To invest and reinvest the Plan assets in real, personal, or mixed property including but not limited to securities of domestic and foreign corporations and investment trusts (whether open-end or not), bonds, preferred stocks, common stocks, mortgages, mortgage participations, interests in any common trust fund or commingled employee benefit fund to the extent allowed under applicable laws and regulations and with complete discretion as to converting realty into personalty or personalty into realty. (b) To invest in land, whether improved or unimproved, and improve any such land in any manner determined by the Administration Committee to be feasible and prudent. To lease real, personal, or mixed property on such terms as the Administration Committee shall deem proper, including the power to make leases that may extend beyond any time in which Plan termination may be necessary by such Employer; and to foreclose, extend, renew, assign, release, or partially release and discharge mortgages or other liens. (c) To invest in bonds, stocks, secured notes, or similar securities permitted by applicable laws and regulations. (d) To borrow funds at the direction of the Administration Committee or Investment Committee, from any party permitted by applicable laws and regulations for the purpose of purchasing as investments any property as collateral to secure such loan; provided, however, the following terms and conditions shall apply to any Exempt Loan: (1) The Trustee shall use the proceeds of the loan within a reasonable time after receipt only for any or all of the following purposes: (i) to acquire Qualifying Employer Securities, (ii) to repay such loan, or (iii) to repay a prior Exempt Loan. Except as provided under Article X, no Qualifying Employer Security may be subject to a put, call or other option, or buy-sell or similar arrangement while held by and when distributed from this Plan, whether or not this Plan is then an employee stock ownership plan. (2) The interest rate of the loan shall not be more than a reasonable rate of interest. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 66 70 (3) Any collateral the Trustee pledges to the creditor showy consist only of the assets purchased by the borrowed funds and those assets the Trust used as collateral on the prior Exempt Loan repaid with the proceeds of the current Exempt Loan. (4) The creditor shall have no recourse against the Trust under the loan except with respect to such collateral given for the loan, contributions (other than contributions of Qualifying Employer Securities) that the Employer makes to the Trust to meet its obligations under the loan, and earnings attributable to such collateral and the investment of such contributions. The payment made with respect to an Exempt Loan by the Plan during a Plan Year must not exceed an amount equal to the sum of such contributions and earnings received during or prior to the year less such Payments in prior years. The Investment Committee and the Trustee must account separately for such contributions and earnings in the books of account of the Plan until the Trust repays the loan. (5) In the event of default upon the loan, the value of Plan assets transferred in satisfaction of the loan must not exceed the amount of the default, and if the lender is a Disqualified Person, the loan must provide for transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the loan. (6) The Trustee must add and maintain all assets acquired with the proceeds of an Exempt Loan in a Collateral Suspense Account. In withdrawing assets from the Collateral Suspense Account, the Trustee shall apply the provisions of Regulation Sections 54.4975-7(b)(8) and (15) as if all securities in the Collateral Suspense Account were encumbered. Upon the payment of any portion of the loan, the Trustee shall effect the release of assets in the Collateral Suspense Account from encumbrances in accordance with the provisions of Section 9.6. (7) The loan must be for a specific term and may not be payable at the demand of any person except in the case of default. (8) Notwithstanding the fact that this Plan ceases to be an employee stock ownership plan, Qualifying Employer Securities acquired with the proceeds of an Exempt Loan shall continue after the Trustee repays the loan to be subject to the provisions of Treasury Regulation sections 54.4975-7(b)(4), (10), (11) and (12) relating to put, call or other options and to buy-sell or similar arrangements, except to the extent these regulations are inconsistent with Code section 409(h). (e) To make investments of types other than specified herein, provided such investments are in accordance with applicable laws and regulations. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 67 71 (f) To make distribution to or for the benefit of a retiree, disabled Participant, inactive Participant, Former Participant or of their Beneficiaries. (g) To purchase an annuity contract on behalf of a Participant or Former Participant as directed by the Administration Committee. (h) To acquire or retain property returning no income or slight income as may be deemed advisable by the Administration Committee without liability therefor. (i) To sell, exchange, give options, partition, convey, or otherwise dispose of@ with or without covenants of warranty of title, any property, which may from time to time be or become a part of the Plan assets at public or private sale or otherwise, for cash or other consideration or on credit, and upon such terms and conditions and for such consideration as the Administration Committee shall consider advisable, and to transfer the same free of all trusts. (j) To vote, in person or by proxy, any stocks or other properties having voting rights, to execute any options, rights or privileges pertaining to any property; to participate in any merger, reorganization or consolidation affecting any part of the Plan assets and in connection therewith to take any action which an individual could take with respect to property owned outright by such individual including the payment of expenses or assessments, the deposit of stock or property with a protective committee, the acceptance or retention of new securities or property and the payment of such amounts of money as may seem advisable in connection therewith; and to hold any item constituting a part of the Plan assets for any length of time in the name of a nominee or nominees without mention of the Trust or any instrument of ownership. (k) To execute and deliver oil, gas, and other mineral leases, containing such unitization, pooling, and recycling agreements and other provisions as the Administration Committee may deem proper; to execute mineral and royalty conveyances; to purchase leases, royalties, and any type of mineral interest; and to execute and deliver drilling contracts or other contracts or options and other instruments which the Administration Committee may consider necessary or desirable in connection with oil, gas, or other mining interests. All such instruments may be executed and delivered for such consideration as the Administration Committee, in its sole discretion, deems to be fair and reasonable. (l) To exercise all other powers presently granted to Trustees by the Texas Trust Code as amended and in force on the effective date of this Plan, as amended from time to time thereafter, and not in conflict with the provisions hereof (m) To do any and all things necessary and proper, including the power to execute any other instruments which may be required to fully and completely accomplish any of the powers herein conferred. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 68 72 (n) As a condition precedent to acting as Trustee for and on behalf of the Employer, the Trustee may require that the Administration Committee execute any appropriate and proper instruments authorizing investment of Plan assets by the Trustee in investments so directed by the Administration Committee or authorizing any action by the Trustee so desired by the Administration Committee. 18.4 Liability of Trustees. The Trustee shall not be responsible for any acts or omissions of the Administration Committee. Any certificate or other instrument duly signed by the Administration Committee purporting to evidence any instructions, direction, or order of the Administration Committee shall be accepted by the Trustee as conclusive proof thereof. 18.5 Reliance Upon Acts of Trustee. No person dealing with the Trustee shall be required to verify the application by the Trustee of any money paid or other property delivered to the Trustee, and all persons dealing with the Trustee shall be entitled to rely upon the representations and decisions of the Trustee as to its authority and are released from any duty of inquiry with respect thereto. Any action of the Trustee hereunder shall be conclusively evidenced for all purposes of the Trust by the certification of the Trustee, and such certificate when received by an issuing company or by any other person, shall be conclusive evidence of the facts recited therein and shall fully protect all persons relying upon the truth thereof. A third person dealing with the Trustee shall not be required to make any inquiry whether the Administration Committee has instructed the Trustee, or whether the Trustee is otherwise authorized to take or omit any action. 18.6 Records and Accounting of Trustee / Valuation of Plan Assets. The Trustee shall keep proper accounts of all investments, receipts, disbursements, and other transactions affected by it hereunder and all accounts, books, and records relating thereto shall be open for inspection at all reasonable times by the Administration Committee, or any other representative designated by the Employer. Within ninety (90) days following the Valuation Date, and at such other interim Valuation Dates as may be requested by the Administration Committee, the Trustee shall furnish the Administration Committee with a detailed statement of the Plan assets for the twelve (12) month period beginning with the previous Valuation Date of the Plan and ending with the last day of the Plan Year. Annual reports prepared for the Employer by the Trustee as provided in the preceding paragraph shall reflect the fair market value of all assets to the Employer's account as of the Valuation Date of the Plan. Each annual report shall reflect: (a) A detailed record of all cash receipts and disbursements for the Plan Year. (b) Value of all Plan assets on a cash basis held for the Employer. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 69 73 (c) Statement of earned income on a cash basis, other than capital gains or losses, during the preceding twelve-month period. All such Plan assets which are listed by a recognized stock exchange or which otherwise have a readily ascertainable market value shall be valued by the Trustee as of the Valuation Date. Any assets held mi the Employer's Trust account by the Trustee which do not have a readily ascertainable market value shall be valued by the Administration Committee as of the Valuation Date and such value reported to the Trustee in writing. Upon the expiration of ninety (90) days from the date of filing such annual or other account, or upon the earlier specific approval thereof by the Administration Committee, the Trustee, to the extent permitted by ERISA, shall be forever released and discharged from liability and accountability to anyone, with respect to the propriety of its accounts and transactions shown in such accounting, except with respect to such accounts or transactions as to which the Administration Committee shall within such ninety (90) day period file Written objection with the Trustee or with respect to any fraudulent act of the Trustee. Nothing herein contained, however, shall preclude the Trustee from its right to have any of its accounts judicially settled by a court of competent jurisdiction. 18.7 Payment of Compensation and Expenses. The compensation of the Trustee, payable by the Employer or directly from the Plan assets, shall be determined by agreement wherein the Employer shall entitle the Trustee to receive a reasonable rate of compensation for services rendered in the performance of duties as Trustee. All reasonable expenses necessarily incurred by the Trustee in the performance of its duties shall also be agreed to and shall be paid by the Employer or upon approval of the Administration Committee directly from Plan assets. The cost of any bond required of the Trustee in accordance with applicable laws and regulations, or as may be required by the Administration Committee, shall be paid by the Employer or directly from Plan assets. 18.8 Resignation or Removal of Trustee Withdrawal From Trust. The trustee may resign as Trustee hereunder for any reason, but such resignation shall become effective only at the expiration of thirty (30) days after written notice thereof has been forwarded by registered mail to the Employer and after an audit of the books and records of the Trustee has been made under the direction of the Administration Committee and has been approved by the Administration Committee. At the discretion of the Employer, the Trustee may be removed as Trustee hereunder, but such removal shall become effective only at the expiration of thirty (30) days after the Employer delivers written notice by registered mail to the Trustee and informs the Trustee of the name and address of the successor trustee to which assets are to be transferred. 18.9 Successor Trustee. If at any time the Trustee acting hereunder shall resign or be removed, or cease to exist, a successor trustee or successor trustees shall be appointed forthwith by the Employer. Successor trustees may be a bank or other corporation with trust powers organized under the laws of the United States of America or of any State, an individual trustee, or a board of trustees. Any successor trustee appointed hereunder - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 70 74 may qualify as such by executing, acknowledging, and delivering to the Administration Committee an instrument accepting such appointment, whereupon such successor shall be and become vested with all the estate, rights, powers, discretions, duties, and obligations of the original Trustee as provided in this Plan. 18.10 Accounting Upon Resignation or Removal of Trustee. In the event of resignation or removal of the Trustee, the Trustee shall have the night to a full, final, and complete settlement of its account with the Trust either (1) by agreement of settlement between the Trustee and the Employer, or (2) if no such agreement can be reached, then by judicial settlement in an action instituted by the Trustee in a court of competent jurisdiction i the county where the Trustee's principal place of business is located. Upon the making of such settlement, the Trustee shall transfer to the successor trustee all Plan assets as they may then be constituted, and true copies of all its records relating to the Trust, and shall execute all documents necessary to transfer the Plan assets to the successor trustee, and the Trustee thereupon shall be discharged from further liability for all matters embraced within such settlement. 18.11 Employment of Agents. The Trustee shall be empowered to employ legal, accounting, clerical, and other assistance which may be required in carrying out the provisions of this Plan with such expenses to be paid by the Employer; provided, however, that the Administration Committee may direct the Trustee to pay such expenses from Plan assets. 18.12 Employer Securities and Real Property. The Trustee shall be empowered to acquire and hold Qualifying Employer Securities and "Qualifying Employer Real Property," as those terms are defined in the Act, provided, however, that the Trustee shall not be permitted to acquire any Qualifying Employer Securities or Qualifying Employer Real Property if, immediately after the acquisition of such securities or property, the fair market value of all qualifying Employer securities and qualifying Employer real property held by the Trustee hereunder should amount to more than 100% of the fair market value of all the assets in the Trust Fund. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 71 75 ARTICLE XIX MISCELLANEOUS 19.1 Execution of Receipts and Releases. Any payment to any Participant, or to his legal representative or Beneficiary, in accordance with the provision of the Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Plan and Trust. The Administration Committee may require such Participant, legal representative, or Beneficiary, as a condition precedent to such payment, to execute a receipt and release therefore in such form as it shall determine. 19.2 No Guarantee of Interest. Neither the Trustee, the Administration Committee, the Investment Committee, nor the Employer guarantee the Trust Fund from loss or depreciation. The Employer does not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Administration Committee and the Trustee to make any payment from the Trust Fund is limited to the then available assets of the Trust. 19.3 Payment of Expenses. All expenses incident to the administration, termination, protection of the Plan and Trust, including but not limited to legal, accounting, and Trustee fees, shall be paid by the Employer, and until paid shall constitute a first and prior claim and lien against the Trust Fund. 19.4 Employer Records. Records of the Employer as to an Employee's or Participant's period of employment, termination of employment and the reason therefore, leaves of absence, reemployment, and Compensation will be conclusive on all persons, unless determined to be incorrect. 19.5 Interpretation and Adjustments. To the extent permitted by law, an interpretation of the Plan and a decision on any matter within the Fiduciary's discretion made in good faith is binding on all persons. A misstatement or mistake of fact shall be corrected when it becomes known and the person responsible shall make such adjustment on account thereof as he considers equitable and practicable. 19.6 Uniform Rules. In the administration of the Plan, uniform rules will be applied to all Participants similarly situated. 19.7 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document, or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 19.8 Severability. In the event any provision of the Plan shall be held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 72 76 19.9 Notice. Any notice to be given herein by the Trustee, the Employer, or the Committees, shall be deemed delivered, when (a) personally delivered, or (b) placed in the United States mails, in an envelope addressed to the last known address of the person to whom the notice is given. 19.10 Waiver of Notice. Any person entitled to notice under the Plan may waive the notice. 19.11 Successors. The Plan shall be binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns, and upon the Trustee, the Committees, and their successors. 19.12 Headings. The titles and headings of Articles and Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof. 19.13 Governing Law. All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of the State of Texas except to the extent Texas law is preempted by Federal statute. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 73 77 ARTICLE XX TOP HEAVY PLAN PROVISIONS 20.1 Generally. For any Plan Year in which the Plan is a Top-Heavy Plan, the requirements of Sections 20.2, 20.3 and 20.4 must be met in accordance with section 416 of the Code and the regulations thereunder. 20.2 Minimum Contributions. Minimum Employer contributions for a Participant who is not a Key Employee shall be required under the Plan for the Plan Year as follows: (a) The amount of the minimum contributions shall be the lesser of the following percentages of Compensation: (1) three percent or, (2) the highest percentage at which such contributions are made under the Plan for the Plan Year on behalf of a Key Employee. (A) For purposes of this paragraph (2), all defined contribution plans required to be included in an Aggregation Group shall be treated as one plan. (B) This paragraph (2) shall not apply if the Plan is required to be included in an Aggregation Group and the Plan enables a defined benefit plan required to be included in the Aggregation Group to meet the requirements of sections 401(a)(4) or 410 of the Code. (C) For purposes of this paragraph (2), the calculation of the percentage at which contributions are made for a Key Employee shall be based only on his pay not in excess of $200,000, such amount to be adjusted annually for increases in the cost of living in accordance with section 416(d) of the Code. (b) There shall be disregarded for purposes of this Section 20.2 any contributions or benefits under chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other Federal or state law. (c) For purposes of this Section 20.2, the term "Participant" shall be deemed to refer to all Participants who have not separated from service at the end of the Plan Year. 20.3 Super Top-Heavy Plans. If, for any Plan Year in which the Plan is a Top-Heavy Plan it is also a Super Top-Heavy Plan, then for purposes of the limitations on contributions - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 74 78 and benefits under section 415 of the Code, the dollar limitations in the defined benefit plan fraction and the defined contribution fraction shall be multiplied by 1.0 rather than 1.25. However, if the application of the provisions of this Section 20.3 would cause any individual to exceed the combined section 415 limitations on contributions and benefits, then the application of the provisions of this Section 20.3 shall be suspended as to such individual until such time as he no longer exceeds the combined section 415 limitations modified by this Section 20.3. During the period of such suspension, there shall be no Employer contributions or forfeitures allocated to such individual under this or any other defined contribution plan of the Employer and there shall be no accruals for such individual under any defined benefit plan of the Employer. 20.4 Termination of Service Prior to Normal Retirement Age. If during any Plan Year a Participant has performed at least one Hour of Service for the Employer and the Plan is a Top Heavy Plan, such Participant shall have a non-forfeitable interest in his Accrued Benefit attributable to his Account, should his Service with the Employer terminate prior to Normal Retirement Age for any reason other than early retirement, death or permanent disability, in accordance with the following schedule:
Years of Credited Percent Service for Vesting Purposes Vested ---------------------------- ------ Less than 2 years 0% 2 years but less than 3 years 20% 3 years but less than 4 years 40% 4 years but less than 5 years 60% 5 years but less than 6 years 80% 6 years or more 100%
Notwithstanding any of the foregoing, if during any prior Plan Year the Plan was a Top Heavy Plan and in any subsequent Plan Year the Plan ceases to be a Top Heavy Plan, the rights of a Participant who had performed at least one Hour of Service during the period the Plan was a Top Heavy Plan in and to his Accrued Benefit attributable to his Account shall not be less than his vested rights during the period that the Plan was a Top Heavy Plan. Provided, further, any Participant who has three (3) or more Years of Service at the beginning of a Plan Year in which the Plan ceases to be a Top Heavy Plan shall have the right to elect, within a reasonable time of the beginning of the Plan Year in which the Plan ceases to be a Top Heavy Plan, to have his nonforfeitable percentage under this Plan computed in accordance with the schedule applicable to Plan Years in which the Plan is a Top Heavy Plan. Any election made under this Section 20.4 shall be made in the manner specified hereunder as if such change in vesting schedule had been made by way of an amendment. 20.5 Determination of Top Heaviness. The determination of whether a plan is Top-Heavy shall be made as follows: - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 75 79 (a) If the Plan is not required to be included in an Aggregation Group with other plans, it shall be Top-Heavy only, if when considered by itself it is a Top-Heavy Plan and it is not included in a permissive Aggregation Group that is not a Top-Heavy Group. (b) If the Plan is required to be included in an Aggregation Group with other plans, it shall be Top-Heavy only if the Aggregation Group, including any permissively aggregated plans, is Top-Heavy. (c) If a plan is not a Top-Heavy Plan and is not required to be included in an Aggregation Group, then it shall not be Top-Heavy even if it is permissively aggregated in an Aggregation Group which is a Top-Heavy Group. 20.6 Determination of Super Top Heaviness. A plan shall be a Super Top-Heavy Plan if It would be a Top-Heavy Plan under the provisions of Section 20.7, but substituting "90 percent" for "60 percent" in the ratio test in Section 20.7. 20.7 Calculation of Top-Heavy Ratios. A plan shall be Top-Heavy and an Aggregation Group shall be a Top-Heavy Group with respect to any Plan Year as of the Determination Date, if the sum as of the Determination Date of the Cumulative Accrued Benefits and the Cumulative Accounts of Employees who are Key Employees for the Plan Year, exceeds 60 percent of a similar sum determined for all Employees, excluding former Key Employees. 20.8 Cumulative Accounts and Cumulative Accrued Benefits. The Cumulative Accounts and Cumulative Accrued Benefits for any Employee shall be determined as follows: (a) "Cumulative Account" shall mean the sum of the amount of an Employee's account under a defined contribution plan (for an unaggregated plan) or under all defined contribution plans included in an Aggregation Group (for aggregated plans) determined as of the most recent plan Valuation Date within a 12-month period ending on the Determination Date, increased by any contributions due after such Valuation Date and before the Determination Date. (b) "Cumulative Accrued Benefit" means the sum of the present value of an Employee's accrued benefits under a defined benefit plan (for an unaggregated plan) or under all defined benefit plans included in an Aggregation Group (for aggregated plans), determined under the actuarial assumptions set forth in such plan or such plans, as of the most recent plan Valuation Date within a 12-month period ending on the Determination Date as if the Employee voluntarily terminated service as of such Valuation Date. (c) Accounts and benefits shall be calculated to include all amounts attributable to both Employer and Employee contributions but excluding amounts attributable to voluntary deductible Employee contributions. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 76 80 (d) Accounts and benefits shall be increased by the aggregate distributions during the five-year period ending on the Determination Date made with respect to an Employee under the plan or plans as the case may be or under a terminated plan which, if it had not been terminated, would have been required to be included in the Aggregation Group. (e) If any Employee has not performed services for the Employer maintaining the Plan at any time during the five-year period ending on the Determination Date, any accrued benefit for such Employee (and the account of such Employee) shall not be taken into account. (f) Rollovers and direct plan-to-plan transfers shall be handled as follows: (1) If the transfer is initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer, the transferring plan continues to count the amount transferred under the rules for counting distributions. The receiving plan does not count the amount if accepted after December 31, 1983, but does count the amount if accepted prior to December 31, 1983. (2) If the transfer is not initiated by the Employee or is made between plans maintained by the Employers, the transferring plan shall no longer count the amount transferred and the receiving plan shall count the amount transferred. (3) For purposes of this subsection (f), all employers aggregated under the rules of sections 414(b), (c) and (in) of the Code shall be considered a single employer. 20.9 Other Definitions. For purposes of this Article XX, the following definitions shall apply, to be interpreted in accordance with the provisions of section 416 of the Code and the regulations thereunder: (a) "Aggregation Group" means a plan or group of plans which includes all plans maintained by the Employers in which a Key Employee is a participant or which enables any plan in which a Key Employee is a participant to meet the requirements of Code section 40 1 (a)(4) or Code section 410, as well as other plans selected by the Employer for permissive aggregation, inclusion of which would not prevent the group of plans from continuing to meet the requirements of such Code sections. (b) "Compensation" shall have the meaning set forth in Section 2.1(15). (c) "Determination Date" means, with respect to any Plan Year: (1) the last day of the preceding Plan Year, or - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 77 81 (2) in the case of the first Plan Year of any plan, the last day of such Plan Year. (d) "Employee" means, for purposes of this Article XX, any person employed by an Employer and shall also include any Beneficiary of such person, provided that the requirement of Section 20.2 shall not apply to any person included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between Employee representatives and one or more Employers if there is evidence that retirement benefits were the subject of good faith bargaining between such Employee representatives and such Employer or Employers. (e) "Employer" means any corporation which is a member of a controlled group of corporations (as defined in Code section 414(b)) which includes the Employer, or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c)) with the Employer, or a member of an affiliated service group (as defined in Code section 414(m)) which includes the Employer. (f) "Hour of Service" shall have the meaning set forth in Section 2.1(30). (g) "Key Employee" means as of any Determination Date, any Employee, former Employee, or Beneficiary of a former Employee who is, at any time during the Plan Year, or was, during any one of the four preceding Plan Years any one or more of the following: (1) An officer of an Employer having annual Compensation greater than 50% of the limitation in effect under Code section 415(b)(1)(A) for any such Plan Year, unless 50 other such officers (or, if lesser, a number of such officers equal to the greater of three or ten percent of the Employees) have higher annual Compensation. (2) An owner (or considered an owner under Code section 318) of one of the ten largest interest in the Employer if such individual's annual Compensation exceeds 100 percent of the dollar [initiation in effect under Code section 415(c)(1)(A). For purposes of this paragraph (2), if two Employees have the same interest, the one with the greater Compensation shall be treated as owning the larger interest. (3) Any person owning (or considered as owning within the meaning of Code section 318) more than five percent of the outstanding stock of an Employer or stock possessing more than five percent of the total combined voting power of such stock. (4) A person who would be described in paragraph (3) above if "one percent" were substituted for "five percent" each place it appears in paragraph (3) - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 78 82 above, and who has annual Compensation of more than $150,000. For purposes of determining ownership under this subsection 20.9(g), Code section 318(a)(2)(C) shall be applied by substituting "five percent" for "50 percent" and the rules of subsections (b), (c) and (m) of section 414 of the Code shall not apply. (h) "Year of Service" means a year which constitutes a "Year of Service" under the rules of paragraphs (4), (5) and (6) of Code section 41 1 (a) to the extent not inconsistent with the provisions of this Article XX. (i) "Non-Key Employee" means an Employee who is not a Key Employee. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 79 83 ARTICLE XXI ELIGIBLE ROLLOVER DISTRIBUTIONS 21.1 General Rule. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Article XXI, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. 21.2 Definitions. For purposes of this Article XXI, the following definitions shall apply, to be interpreted in accordance with the provisions of Section 401(a)(3 1) of the Code and the regulations thereunder: (a) "Eligible Rollover Distribution" means any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: (1) any distribution that is one of a series of substantially equal periodic payments .(not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of ten years or more; (2) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) "Eligible Retirement Plan" means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in die case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (c) "Distributee" includes an Employee or former Employee. In addition, the Employees or former Employee's surviving Spouse and the Employee's or former Employees Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the Spouse or former Spouse. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 80 84 (d) "Direct Rollover" means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. IN WITNESS WHEREOF, this Agreement has been executed this 31st day of May, 1994. Signed, sealed, and delivered in the presence of: SPONSOR: HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ Walter McNeer ----------------------------------- Its: Executive Vice President ---------------------------------- ATTEST: /s/ Steve P. Jones - -------------------------------------- Secretary TRUSTEE: /s/ Susan L. Powers - -------------------------------------- Vice President & Trust Officer Amarillo National Bank - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 81 85 AMENDMENT ONE TO THE HASTINGS BOOKS, MUSIC & VIDEO, INC. EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, HASTINGS BOOKS, MUSIC & VIDEO, INC. (the "Employer") heretofore adopted the HASTINGS BOOKS, MUSIC & VIDEO, INC. EMPLOYEE STOCK OWNERSHIP PLAN (the "Plan"); and WHEREAS, pursuant to Section 16.2 thereof the Employer reserved the right at any time to amend said Plan and desires to amend said Plan; NOW THEREFORE, the Plan, effective as of June 1, 1993, is hereby retroactively amended to June 1, 1993 as follows: 1. Section 2.1(15), Compensation, is hereby amended by adding the following paragraph at the end of the Section as follows: "For purposes of Section 6.7, Method of Allocating and Crediting Contributions and Qualifying Employer Securities Released From Collateral Suspense Accounts, Compensation does not include commissions or bonuses paid to Employees." 2. Section 6.10, Participants to Whom Employer Contributions Will Be Allocated, is hereby amended by adding the following paragraph at the end of the Section as follows: "A Participant whose employment is terminated before the end of a Plan Year, but after he has completed 1,000 Hours of Service for the Plan Year, shall not share in Employer contributions for the Plan Year unless by the terminated Participants not sharing in Employer contributions for the Plan Year, the Plan would fail to meet the coverage requirements of Code Section 410(b)(1) for the Plan Year, in which case members of the group of terminated Participants shall share in Employer contributions for the Plan Year as follows: the minimum number required to meet the coverage tests under Code Section 410(b)(1) based on their number of Hours of Service credited during the Plan Year, ranked in descending order. If more than one individual receives credit for the lowest number of Hours of Service for which any individual must be covered in order to meet the coverage tests (pursuant to the sentence above), then all individuals receiving credit for exactly that number of Hours of Service shall share in the allocation of Employer contributions. IN WITNESS WHEREOF, this instrument of amendment has been executed on this the 31st day of May, 1994, effective retroactively as provided herein, by the Employer and the Trustees. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 82 86 ATTEST: HASTINGS BOOKS, MUSIC & VIDEO, INC. EMPLOYER /s/ Gene P. Jones By: /s/ Walter McNeer - -------------------------- ---------------------------------------- TRUSTEES: /s/ Susan L. Powers ------------------------------------------- Vice President & Trust officer Amarillo National Bank - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 83 87 AMENDMENT TWO WHEREAS, Hastings Books, Music & Video, Inc. ("Employer") heretofore adopted the Hastings Books, Music & Video, Inc. Employees Stock Ownership Plan (the "Plan"); and WHEREAS, pursuant to Section 16.2 thereof the Employer reserved the right at any time to amend said Plan and desires to amend said Plan; NOW THEREFORE, the Plan, effective as of June 1, 1994, is hereby retroactively amended to June 1, 1994, as follows: 1. The name of the Plan shall be changed from the "Hastings Books, Music & Video, Inc. Employees Stock Ownership Plan" to the "Hastings Books, Music & Video, Inc. Associates Stock Ownership Plan." 2. Section 2.1 (15) is hereby amended by adding the following paragraph at the end of the Section as follows: Notwithstanding any of the foregoing, for purposes of Section 6.7, Method of Allocating and Crediting Contributions and Qualifying Employer Securities Released From Collateral Suspense Accounts, Compensation includes only base pay and excludes commissions, bonuses, moving expenses, health club dues, and executive medical reimbursement, and other similar perquisites, however, does include in base pay amounts that have been deferred in connection with the Employer's 401(k) plan and pursuant to a cafeteria plan for medial insurance premiums or other benefit programs. For the purposes of determining Compensation, as defined herein, amounts accrued to a Participant shall be equivalent to qualifying amounts paid to a Participant hereunder. 2. Section 2.1 (55), Valuation Date, is hereby revised to the following language: "January 31 of each year." 3. Section 7.10 (39) Plan Year is hereby revised to the following language: "The Fiscal Year of the Plan, ending on the 31st day of January." - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 84 88 IN WITNESS WHEREOF, this instrument of amendment has been executed on this the 31st day of May, 1994, effective retroactively as provided herein, by the Employer and the Trustees. ATTEST: HASTINGS BOOKS, MUSIC & VIDEO, INC. EMPLOYER /s/ Gene P. Jones By: /s/ Walter McNeer - ----------------------------- ------------------------------- TRUSTEES: /s/ Susan L. Powers ---------------------------------- Vice President & Trust officer Amarillo National Bank - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 85 89 THIRD AMENDMENT TO THE HASTINGS BOOKS, MUSIC & VIDEO, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT This Third Amendment to the Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan and Trust Agreement (the "ESOP") is hereby made and entered into this 22nd day of May , 1996, by Hastings Books, Music & Video, Inc. (the "Employer"). WITNESSETH: WHEREAS, the Plan was originally established effective June 1, 1993; WHEREAS, Section 16.2 of the Plan permits the Employer to amend the Plan at anytime; and WHEREAS, it is necessary to amend the Plan in order to receive a favorable determination letter from the Internal Revenue Service; NOW THEREFORE, the Plan is hereby amended by replacing Section 2.1(15) in its entirety with the following: "(15) Compensation. Includes amounts accrued to a Participant as wages, salaries, fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Employer as an Employee to the extent that such amounts are includible in gross income (including but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursement or other expenses under a nonaccountable plan (as described in Section 1.62-2(c) of the Income Tax Regulations)). The term "Compensation" shall also include, in the case of a Participant who is an employee within the meaning of Section 401(c) of the Code, the Participants earned income (as described in Section 401(c)(2) of the Code) (determined without regard to any exclusions from gross income similar to those in Sections 931 and 933 of the Code); any foreign earned income as defined under Section 911(b) of the Code, regardless of whether such income is excludable from the gross income of the Employee under Section 911 of the Code; amounts described in Code Sections 104(a)(3), 105(a) and 105(h), but only to the extent that these amounts are includible in the gross income of the Participant; amounts paid or reimbursed by the Employer for moving expenses incurred by the Participant, but only to the extent that these amounts are not deductible by the Participant under Code Section 217; the value of a nonqualified stock option granted to the Participant by the Employer, but only to the extent that the value of the option is includible in the gross income of the Participant for the taxable year when granted; and the amount includible in the gross income of the Participant upon - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 86 90 making an election described in Section 83(b) of the Code. The term "compensation" shall exclude the following: (i) other contributions made by the Employer to a plan of deferred compensation to the extent that, before the application of the Code Section 415 limitations to that plan, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed; (ii) Employer contributions made on behalf of a participant to a simplified employee pension plan described in Code Section 408(k) are not considered as Compensation for the taxable year in which contributed to the extent such contributions are excludable by the Participant from gross income under Code Section 408(k)(6); (iii) Any distributions from a plan of deferred compensation are not considered as Compensation, regardless of whether such amounts are includible in the gross income of the Participant when distributed. However, any amounts receive d by a Participant pursuant to an unfunded nonqualified plan shall be considered as Compensation in the year such amounts are includible in the gross income of the Participant; (iv) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture (pursuant to Code Section 83 and regulations thereunder); (v) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (vi) Other amounts that receive special tax benefits such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of a 403(b) annuity contract (whether or not the contributions are excludable from the gross income of the Participant). Compensation for any Limitation Year is the compensation actually paid or includible in gross income during such year. For the purposes of a contribution or an allocation under the Plan based on Compensation, Compensation shall only include amounts actually paid an Employee during the period he is a Participant for services performed as a Covered Employee. Compensation, for purposes of a contribution or allocation under the Plan, shall not include wages required to be recognized by the federal government for the personal use of a Company automobile or wages paid as an automobile allowance. - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 87 91 Notwithstanding the above, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code. However, for purposes of Section 6.14, in the determination of Compensation in connection with the limitation on Annual Additions under Code Section 415, this paragraph should be disregarded. Notwithstanding the foregoing, the annual Compensation of a Participant in excess of $200,000 shall be disregarded under the Plan. This dollar limitation shall be adjusted by the Secretary of the Treasury at the same time and in the same manner as provided under Section 415(d) of the Code. In applying the dollar limitation provided herein, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Section 414(q)(6) of the Code because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participants spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. It as a result of the application of such rules, the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall means the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to OBRA '93 annual - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 88 92 compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. For purposes of Section 6.7, Method of Allocating and Crediting Contributions and Qualifying Employer Securities Released From Collateral Suspense Accounts, Compensation does not include commissions or bonuses paid to Employees. Notwithstanding any of the foregoing, for purposes of Section 6.7, Method of Allocating and Crediting Contributions and Qualifying Employer Securities Released From Collateral Suspense Accounts, Compensation includes only base pay and excludes commissions, bonuses, moving expense, health club dues, and executive medical reimbursement, and other similar perquisites, however, does include in base pay amounts that have been deferred in connection with the Employer's 401(k) Plan and pursuant to a cafeteria plan for medical insurance premiums or other benefit programs. For the purposes of determining Compensation, as defined herein, amounts accrued to a Participant shall be equivalent to qualifying amounts paid to a Participant hereunder. "Section 4.4 shall be amended by replacing the Section in its entirety as follows: "4.4 Return of Employer Contributions. In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. All contributions made pursuant to this Article IV are conditioned on deductibility of such contributions under Code Section 404 for any year is disallowed, the contribution shall be returned to the Employer within one year after disallowance of the deduction. If a contribution is made by an Employer by a mistake of fact, the contribution may be returned to the Employer within one year after the payment of the contribution. Notwithstanding the above, earnings attributable to amounts described in paragraphs two and three of this Section 4.4 shall not be returned to the Employer; losses attributable to such amounts shall reduce the amount returned." Section 20.2(a)(2)(C) shall be amended by adding the following after the last paragraph: - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 89 93 "In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than. 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall means the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000." IN WITNESS WHEREOF, Hastings Books, Music & Video, Inc. has executed this Third Amendment. ATTEST: Hastings Books, Music & Video, Inc. /s/ C.W. Millikin /s/ Jeffery D. Sumpter - ------------------------------------- ---------------------------------- Corporate Controller, Asst. Secretary, Asst. Treasurer Asst. Secretary, Asst. Treasurer & Corporate Tax Manager - -------------------------------------------------------------------------------- Hastings Books, Music & Video, Inc. Employee Stock Ownership Plan Page 90 EX-10.10 11 CORPORATE OFFICER INCENTIVE PLAN 1 EXHIBIT 10.10 CORPORATE OFFICER INCENTIVE PLAN HASTINGS BOOKS, MUSIC & VIDEO, INC. BACKGROUND AND OBJECTIVES The overall compensation strategy of Hastings Books, Music & Video, Inc. (Hastings) is to provide key management with competitive total direct pay opportunity. The two cash components of the Hastings compensation program are base salary and management incentive opportunity. Periodic base salary adjustments will be used to reward an employee's sustained job performance over time, while also recognizing external salary market movement and increases in job responsibility. The Corporate Officer Incentive Plan (the COIP) for Hastings will provide incentive cash pay at risk, with potential COIP rewards tied to performance achievement. When COIP performance goals are met, COIP awards plus base salary will approximate competitive total cash pay opportunity for all plan participants. The following document defines COIP eligibility, the size of potential award opportunities, performance measurement, form and timing of award payments, administrative guidelines and definitions for ongoing COIP management. 1 2 ELIGIBILITY Award eligibility will be determined by the CEO at the beginning of each performance/award period. Generally, COIP participants will be selected from key executives e.g., corporate officers, who primarily are responsible for the annual growth and profitability of the Company. The number of eligible COIP participants is expected to vary from year to year, as Hastings expands and as the Company's compensation strategy and programs are refined. The CEO will determine whether a person employed by Hastings less than six months prior to the end of the applicable performance measurement period will be eligible for an award for that period. INCENTIVE TARGETS At the beginning of each performance period, each participant in the COIP will be assigned an INCENTIVE TARGET EXPRESSED AS A PERCENT OF BASE SALARY. This incentive target for the initial performance period can increase to 125% of the targeted amount (or decrease to 50% of the targeted amount) based on performance achievement. COIP incentive targets and minimum/maximum limits may be re-defined from time to time, as modifications are made in Hastings' management compensation strategy. Within 90 days after the end of each performance period, each participant's base salary rate will be multiplied by the actual COIP award percentage earned to determine the dollar value of the award for the prior performance period. For COIP calculations "base salary rate" shall mean the base salary rate in effect at the end of the performance period in which the award is earned. The maximum award payable under the COIP shall be the lesser of 250% of the participant's most recent annualized base salary rate or $1,000,000, to comply with IRC 162(m). 2 3 COIP AWARD POOL The COIP award pool shall be established at the beginning of each performance measurement period. The size of the COIP pool will equal 100% of all targeted COIP awards for all COIP participants. PERFORMANCE MEASURES At the beginning of each performance period, the Compensation Committee shall establish in writing the performance goals that shall determine the size of the COIP award. For the initial performance period, the primary performance measures for all COIP participants will be sales and return on equity (ROE), as defined in the Hastings annual business plan. ROE is defined as the after-tax rate of return on beginning shareholders' equity. Performance goals for COIP awards may be equal to or exceed the goals in the Hastings business plan, as determined by the Company's Compensation Committee. At the end of the performance period, the Compensation Committee shall certify in writing the extent to which the performance goals were satisfied. In addition to the COIP targets, senior management and the Hastings Compensation Committee jointly will establish minimum acceptable and outstanding COIP goals as follows: o MINIMUM ACCEPTABLE- Hastings performance at 50% of the target level, below which only the minimum incentive will be paid; 3 4 o TARGET - Hastings performance at 100% of target, where the COIP adjustment factor is 1X, with "X" equal to the target incentive pool; and o OUTSTANDING - Hastings performance at or above 150% of target, where the COIP adjustment factor is 1.25X, with "X" equal to the target incentive pool. Semi-annually, the Company will review actual results measured against overall Hastings goals to establish the size of the COIP pool earned. Simultaneously, senior management will recommend to the Compensation Committee appropriate COIP goals for the next performance period. Exhibit 1 presents a sample performance matrix that would be used to modify the initial COIP award pool for performance goal achievement. If, during a performance period, Hastings' Compensation Committee determines that an accounting reserve needs to be set aside to fund a future financial contingency for Hastings, the Board shall establish such a reserve and determine if adjustment(s) in the COIP target(s) for the affected performance period(s) are warranted. Similarly, the Compensation Committee has the authority to modify the COIP targets at the end of a performance period to adjust for extraordinary circumstances, including mergers, acquisitions, recapitalizations, or any other substantial changes in the Hastings business plan(s). 4 5 The Board of Directors and the Compensation Committee also retain the right and authority to adjust, amend, or suspend any current payments in the COIP for any given performance period, if, in the good faith determination of the Board of Directors or Compensation Committee, the payments of such COIP amounts would result in a material adverse change to, or a material decline in, the financial condition or prospects of Hastings. CEO DISCRETIONARY ADJUSTMENTS After the size of each COIP award has been determined based on COIP performance achievement, the CEO shall have the authority to make limited adjustments in COIP awards based on individual performance contributions. Such CEO discretionary adjustments, if any, shall be limited to -30%, and shall be restricted to downward adjustments only to comply with IRC 162(m). Exhibit 2 presents a sample COIP award calculation. FORM AND TIMING OF AWARDS COIP award calculations will be finalized within 90 days after the end of each performance period. COIP awards will be paid in cash in two distributions annually (initially in April for August through January performance and in October for February through July performance), unless a participant makes an election to voluntary defer a portion of his/her award. o Voluntary deferrals must be submitted to the CEO in writing at the beginning of the fiscal year to avoid constructive receipt, i.e., tax liability before the award is actually paid to the executive. 5 6 o Cash deferral elections shall be limited to one half or all of the award and should be limited to a maximum of three payments to avoid administrative complexity. o Participants also may elect to apply the lesser of $50,000 or 50% of the earned COIP award to purchase discounted Hastings common stock through the 1996 Management Stock Purchase Plan. To ensure deferral of taxes on the purchase (and discount) amount, the purchase would be made in restricted stock units, which would be converted to shares of Hastings stock after an additional three years of employment, as described below: ~ The purchase price of each restricted stock unit would be 75% of the fair market value of one share of common stock on the date the COIP cash award is payable. ~ Each restricted stock unit will fully vest and will be exchanged for one share of Hastings common stock if employment is not terminated before the end of a three-year restriction period. ~ The restriction period would begin on the date the performance units are purchased. ~ If employment is terminated during the three-year restriction period (other than "for cause"), the conversion value of the restricted stock units would be the lessor of the initial unit purchase price or the fair market value of the stock at the date of termination. If employment is terminated "for cause" during the restriction period, all restricted stock units would be forfeited. 6 7 ~ The employee would owe taxes on the (fully appreciated) value of the shares when the units are converted to Hastings stock. ADMINISTRATIVE GUIDELINES AND DEFINITIONS The COIP shall be administered by the CEO and the Associate Resources Department, with final approval for all performance goals and award targets resting with the Compensation Committee ("the Committee") of the Company's Board of Directors. All decisions made by the Committee shall be final and binding. o Employee Termination - A participant must be an employee of the Company on the day the COIP award is finalized and approved for payment by the Hastings Compensation Committee. o New Hires - Newly hired participants shall earn COIP awards on a pro-rata basis, based on their date of employment. The CEO will determine whether a person employed by Hastings less than six months prior to the end of the applicable performance measurement period will be eligible for an award for that period. o Base Salary - Base salary for COIP award calculations shall be the ending rate of pay for the performance period in which the award is earned. 7 8 o Support Documentation - The CEO and Associate Resources Department of the Company shall be responsible for maintaining all necessary support documentation regarding performance and bonus calculations under the COIP. 8 9 EXHIBIT 1 HASTINGS BOOKS, MUSIC & VIDEO, INC. CORPORATE OFFICER INCENTIVE PLAN INCENTIVE TARGET ADJUSTMENT VS. PERFORMANCE:
1996 ROE VERSUS PLAN 1996 SALES VS. <60% 60% 70% 80% 90% 100% 110% 120% 130% 140% >150% PLAN >150% 100% 105% 110% 115% 120% 125% 125% 125% 125% 125% 125% 140% 95% 100% 105% 110% 115% 120% 120% 120% 120% 120% 125% 130% 90% 95% 100% 105% 110% 115% 115% 115% 115% 120% 125% 120% 85% 90% 95% 100% 105% 110% 110% 110% 115% 120% 125% 110% 80% 85% 90% 95% 100% 105% 105% 110% 115% 120% 125% 100% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 90% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 80% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 70% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 60% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% <60% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
9 10 EXHIBIT 2 HASTINGS BOOKS, MUSIC & VIDEO, INC. CORPORATE OFFICER INCENTIVE PLAN SAMPLE AWARD CALCULATION ASSUMPTIONS: Management current salary is $50,000. Annual COIP award target is 30% of salary or $15,000. Semi-annual COIP award target is 15% of salary or $7,500. Actual sales are 90% of Plan and ROE is 100% of Plan (95% of Targeted COIP component earned based on matrix). CEO Discretion: Assume individual performance is satisfactory and CEO deducts nothing from earned award.
CALCULATIONS FOR: SEMI-ANNUAL ANNUAL AWARD Current Salary: $50,000 $50,000 Semi-annual Target: x.15 x.30 $7,500 $15,000 Performance Adjustment re:Matrix: x.95 x.95 Semi-annual COIP award earned: $7,125 $14,250
10 11 EXHIBIT 0 HASTINGS BOOKS, MUSIC & VIDEO, INC. CORPORATE OFFICER INCENTIVE PLAN INCENTIVE TARGETS AS A % OF SALARY
SEMI-ANNUAL OPPORTUNITY ANNUAL OPPORTUNITY ----------------------- ------------------ POSITION MINIMUM TARGET MAXIMUM MINIMUM TARGET MAXIMUM (.50X) (1.0X) (1.25X) (.50X) (1.0X) (1.25X) CEO 38% 75% 94% 75% 150% 188% EVP/COO 30% 60% 75% 60% 120% 150% SVP/COO 28% 55% 69% 55% 110% 137% VP FINANCE 22% 45% 56% 44% 90% 111% VP IS 15% 30% 38% 30% 60% 75% VP DISTRIBUTION 13% 25% 32% 25% 50% 63% VP RE 10% 20% 25% 20% 40% 50% DIRECTOR A 8% 15% 19% 15% 30% 38% DIRECTOR B 7% 13% 16% 13% 25% 32% DIRECTOR C 5% 10% 13% 10% 20% 25% MANAGER A 4% 8% 10% 8% 15% 19% MANAGER B 3% 5% 7% 5% 10% 13%
11 EX-10.11 12 MANAGEMENT STOCK PURCHASE PLAN 1 EXHIBIT 10.11 MANAGEMENT STOCK PURCHASE PLAN I. PURPOSE The purpose of the Hastings Books, Music & Video, Inc. Management Stock Purchase Plan (the "Plan") is to provide equity incentive compensation to selected management employees of Hastings Books, Music & Video, Inc. ("Hastings"). Participants in the Plan may elect to receive restricted stock units ("RSUs") in lieu of a portion of their incentive bonus under the Corporate Officer Incentive Plan ("COIP") and Management Incentive Plan ("MIP"). Each RSU represents the right to receive one share of the Company's Common Stock (the "Stock") upon the terms and conditions stated herein. RSUs are granted at a discount of 25% from the fair market value of the Stock on the date of grant. So long as the participant remains employed by the Company for at least three years after the date of grant, his or her RSUs will be settled in shares of Stock after a period of deferral selected by the participant, or upon termination of employment, if earlier. II. ADMINISTRATION The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). Each member of the Committee shall be a "disinterested person" within the meaning of Rule 16b-3(c)(2)(i) promulgated under the Securities Exchange Act of 1934, as amended (the "Act"). The Committee shall have complete discretion and authority with respect to the Plan and its application, except as expressly limited herein. Determinations by the Committee shall be final and binding on all par-ties with respect to all matters relating to the Plan. Capitalized terms not otherwise defined herein shall have the meaning set forth in the COIP. III. ELIGIBILITY Management employees of the Company as designated by the Committee shall be eligible to participate in the Plan. IV. PARTICIPATION A. Restricted Stock Units. Participation in the Plan shall be used on the award of RSUs. Each RSU awarded to a participant shall be credited to a bookkeeping account established and maintained for that participant. B. Cost of RSUs: Fair Market Value of Stock. The "Cost" of each RSU shall be equal to 75% of the fair market value of the Stock on the date the RSU is awarded. For all purposes of the Plan, the "fair market value of the Stock" on any given date shall mean the average of the high and low sales price of the Company Stock on such date or if not publicly traded prior to such date, the most recent independent third-party evaluation of the stock prepared 2 for the Company's ASOP. C. Election to Participate. Each participant may elect to receive an award of RSUs under the Plan during the subsequent Performance Period by completing a Bonus Deferral and RSU Subscription Agreement ("Subscription Agreement"). The Subscription Agreement shall provide that the participant elects to receive RSUs in lieu of a specified portion of any incentive bonus for a Performance Period. Such portion may be expressed as the lesser of a specified percentage up to 50% of the participant's actual bonus amount for such Performance Period or a specified dollar amount up to 50% of the participant's bonus. In no event may a participant receive RSUs greater than the lesser of $25,000 or 50% of the actual bonus amount for such Performance Period. Any dollar amount specified must be at least $1,000; and any percentage specified must be at least 10% and not more than 50%. Amounts specified are entirely contingent on the amount of bonus actually awarded. Each Subscription Agreement shall specify a deferral period for the RSUs to which it pertains. The deferral period shall be expressed as a number of whole years, not less than three (3), beginning on the award date. Subscription Agreements must be received by the Company no later than thirty (30) days prior to the beginning of the Performance Period for which such bonus amount will be determined. A participant who is not subject to the short-swing profits rule of Section 16 of the Act may revise his or her Subscription Agreement with respect to the amount of elected RSUs no later than thirty (30) days after the beginning of the Performance Period for which such bonus amount has been awarded. D. Award of RSUs. Twice each year, on the date that incentive bonuses are paid or would otherwise be paid, the Company shall award RSUs to each participant as follows: Each participant's account shall be credited with a whole number of RSUs determined by dividing the amount (expressed in dollars) that is determined under his or her Subscription Agreement by the Cost of each RSU awarded on such date. No fractional RSU will be credited and the amount equivalent in value to the fractional RSU will be paid out to the participant currently in cash. V. VESTING AND SETTLEMENT OF RSUS A. Vesting. A participant shall be fully vested in each RSU three years after the date such RSU was awarded. B. Settlement After Vesting. With respect to each vested RSU, the Company shall issue to the participant one share of Stock at the end of the deferral period specified in the participant's subscription agreement pertaining to such RSU, or upon the participant's termination of employment or the termination of the Plan, if sooner. C. Settlement Prior to Vesting. 1. Voluntary Termination. If a participant voluntarily terminates his/her employment with the Company for reasons other than death or permanent disability, the participant's nonvested RSUs shall be canceled and he or she shall receive a cash payment equal to the lesser of (a) the Cost of such RSUs or (b) an amount equal to the number of such RSUs -2- 3 multiplied by the fair market value of the Stock on the date of the participant's termination of employment. 2. Involuntary Termination. If a participant's employment is terminated by the Company, or if the participant's employment terminates as a result of death or permanent disability, the participant's nonvested RSUs shall be canceled and he or she shall receive payment as follows: The number of nonvested RSUs awarded on each award date shall be multiplied by a fraction that is equal to the number of full years that the participant was employed by the Company after each such award date divided by three and the participant shall receive the resulting number of such RSUs in shares of Stock. With respect to the participant's remaining nonvested RSUs, the participant shall receive cash in an amount equal to the lesser of (a) the Cost of such RSUs or (b) an amount equal to the number of such RSUs multiplied by the fair market value of the Stock on the date of the participant's termination of employment. 3. Committee's Discretion. The Committee shall have complete discretion to determine the circumstances of a participant's termination of employment, including whether the same results from voluntary termination, permanent disability or termination by the Company, and the Committee's determination shall be final and binding on all parties and not subject to review or challenge by any participant or other person. VI. DIVIDEND EQUIVALENT AMOUNTS Whenever dividends (other than dividends payable only in shares of Stock) are paid with respect to Stock, each participant shall be paid an amount in cash equal to the number of his or her vested RSUs multiplied by the dividend value per share. In addition, each participant's account shall be credited with an amount equal to the number of such participant's nonvested RSUs multiplied by the dividend value per share. Amounts credited with respect to each nonvested RSU shall be paid, without interest, on the date the participant becomes vested in such RSU, or when the participant receives payment of his or her nonvested RSUs pursuant to Subsection V.(C). VII. DESIGNATION OF BENEFICIARY A participant may designate one or more beneficiaries to receive payments or shares of Stock in the event of his/her death. A designation of beneficiary shall apply to a specified percentage of a participant's entire interest in the Plan. Such designation, or any change therein, must be in writing and shall be effective upon receipt by the Company. If there is no effective designation of beneficiary, or if no beneficiary survives the participant, the participant's estate shall be deemed to be the beneficiary. VIII. SHARES ISSUABLE; MAXIMUM NUMBER OF RSUS; ADJUSTMENTS A. Shares Issuable. The aggregate maximum number of shares of Stock reserved and available for issuance under the Plan shall be 45,000. For purposes of this limitation, the shares of Stock underlying any RSUs that are canceled shall be added back to the shares of Stock -3- 4 available for issuance under the Plan. Shares subject to the Plan are authorized but unissued shares or shares that were once issued and subsequently re-acquired by the Company. B. Adjustments. In the event of a stock dividend, stock split or similar change in capitalization affecting the Stock, the Committee shall make appropriate adjustments in (i) the number and kind of shares of Stock or securities with respect to which RSUs shall thereafter be granted; (ii) the number and kind of shares remaining subject to outstanding RSUs; (iii) the number of RSUs credited to each participant's account; and (iv) the method of determining the cost of RSUs. In the event of any proposed merger, consolidation, sale, dissolution or liquidation of the Company, all non-vested RSUs shall become fully vested upon the effective date of such merger, consolidation, sale, dissolution or liquidation and the Committee in its sole discretion may, as to any outstanding RSUs, make such substitution or adjustment in the aggregate number of shares reserved for issuance under the Plan and the number of shares subject to such RSUs as it may determine on an equitable basis and as may be permitted by the terms of such transaction, or terminate such RSUs upon such terms and conditions as it shall provide. In the case of the termination of any vested RSU, the Committee shall provide payment or other consideration which the Committee deems equitable in the circumstances. IX. AMENDMENT OR TERMINATION OF PLAN The Company reserves the right to amend or terminate the Plan at any time, by action of its Board of Directors, provided that no such action shall adversely affect a participant's rights under the Plan with respect to RSUs awarded and vested before the date of such action, and provided further, that the Plan amendments shall be subject to approval by the Company's shareholders to the extent required by the Act to ensure that awards are exempt under Rule 16b-3 promulgated under the Act. X. MISCELLANEOUS PROVISIONS A. No Distribution, Compliance with Legal Requirements. The Committee may require each person acquiring shares of Stock under the Plan to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No shares of Stock shall be issued until all applicable securities law and other legal and stock exchange requirements have been satisfied. The Committee may require the placing of such stop-orders and restrictive legends on certificates for Stock as it deems appropriate. B. Withholding. Participation in the Plan is subject to any required tax withholding on wages or other income of the participant in connection with the Plan. Each participant agrees, by entering the Plan, that the Company shall have the right to deduct any such taxes, in its sole discretion, from any amount payable to the participant under the Plan or from any payment of any kind otherwise due to the participant. Participants who wish to avoid the withholding of shares of Stock otherwise issuable to them under the Plan should arrange with the Company to pay the amount of taxes required to be withheld in advance of the settlement date. C. Notices, Delivery of Stock Certificates. Any notice required or permitted to be -4- 5 given by the Company or the Committee pursuant to the Plan shall be deemed given when personally delivered or deposited in the United States mail, registered or certified, postage prepaid, addressed to the participant at the last address shown for the participant on the records of the Company. Delivery of stock certificates to persons entitled to receive them under the Plan shall be deemed effective for all purposes when the Company or a share transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to such person at his/her last known address on file with the Company. D. Nontransferability of Rights. During a participant's lifetime, any payment or issuance of shares under the Plan shall be made only to him/her. No RSU or other interest under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt by a participant or any beneficiary under the Plan to do so shall be void. No interest under the Plan shall in any manner by liable for or subject to the debts, contracts, liabilities, engagements or torts of a participant or beneficiary entitled thereto. E. Company's Obligations to be Unfunded and Unsecured. The Plan shall at all times be entirely unfunded, and no provision shall at any time be made with respect to segregating assets of the Company (including Stock) for payment of any amounts or issuance of any shares of Stock hereunder. No participant or other person shall have any interest in any particular assets of the Company (including Stock) by reason of the right to receive payment under the Plan, and any Participant or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. F. Governing Law. The terms of the Plan shall be governed construed, administered and regulated in accordance with the laws of the State of Texas. In the event any provision of this Plan shall be determined to be illegal or invalid for any reason, the other provisions shall continue in full force and effect as if such illegal or invalid provision had never been included herein. G. Effective Date of Plan. The Plan shall become effective as of the date of its approval by the holders of a majority of the shares of the Company's Common Stock, present or represented and entitled to vote at a meeting of the shareholders. -5- EX-10.12 13 MANAGEMENT INCENTIVE PLAN 1 EXHIBIT 10.12 MANAGEMENT INCENTIVE PLAN HASTINGS BOOKS, MUSIC & VIDEO, INC. BACKGROUND AND OBJECTIVES The overall compensation strategy of Hastings Books, Music & Video, Inc. (Hastings) is to provide key management with competitive total direct pay opportunity. The two cash components of the Hastings compensation program are base salary and management incentive opportunity. Periodic base salary adjustments will be used to reward an employee's sustained job performance over time, while also recognizing external salary market movement and increases in job responsibility. The Management Incentive Plan (the MIP) for Hastings will provide incentive cash pay at risk, with potential MIP rewards tied to performance achievement. When MIP performance goals are met, MIP awards plus base salary will approximate competitive total cash pay opportunity for all plan participants. The following document defines MIP eligibility, the size of potential award opportunities, performance measurement, form and timing of award payments, administrative guidelines and definitions for ongoing MIP management. 1 2 ELIGIBILITY Award eligibility will be determined by the CEO at the beginning of each performance/award period. Generally, MIP participants will be the key managers. e.g., Directors, Managers and associates, who primarily are responsible for the annual growth and profitability of the Company. The number of eligible MIP participants is expected to vary from year to year, as Hastings expands and as the Company's compensation strategy and programs are refined. The CEO will determine whether a person employed by Hastings less than six months prior to the end of the applicable performance measurement period will be eligible for an award for that period. INCENTIVE TARGETS At the beginning of each performance period, each participant in the MIP will be assigned an INCENTIVE TARGET EXPRESSED AS A PERCENT OF BASE SALARY. This incentive target for the initial performance period can increase to 125% of the targeted amount (or decrease to 50% of the targeted amount) based on performance achievement. MIP incentive targets and minimum/maximum limits may be re-defined from time to time, as modifications are made in Hastings' management compensation strategy. Within 90 days after the end of each performance period, each participant's base salary rate will be multiplied by the actual MIP award percentage earned to determine the dollar value of the award for the prior performance period. For MIP calculations "base salary rate" shall mean the base salary rate in effect at the end of the performance period in which the award is earned. 2 3 MIP AWARD POOL The MIP award pool shall be established at the beginning of each performance measurement period. The size of the MIP pool will equal 100% of all targeted MIP awards for all MIP participants. PERFORMANCE MEASURES At the beginning of each performance period, the Compensation Committee or CEO shall establish in writing the performance goals that shall determine the size of the MIP award. For the initial performance period, the primary performance measures for all MIP participants will be sales and return on equity (ROE), as defined in the Hastings annual business plan. ROE is defined as the after-tax rate of return on beginning shareholders' equity. Performance goals for MIP awards may be equal to or exceed the goals in the Hastings business plan, as determined by the Company's Compensation Committee or CEO. At the end of the performance period, the Compensation Committee or CEO shall certify in writing the extent to which the performance goals were satisfied. In addition to the MIP targets, senior management, the Hastings Compensation Committee and CEO jointly will establish minimum acceptable and outstanding MIP goals as follows: o MINIMUM ACCEPTABLE- Hastings performance at 50% of the target level, below which only the minimum incentive will be paid; o TARGET - Hastings performance at 100% of target, where the MIP adjustment factor is 1X, with "X" equal to the target incentive pool; and 3 4 o OUTSTANDING - Hastings performance at or above 150% of target, where the MIP adjustment factor is 1.25X, with "X" equal to the target incentive pool. Semi-annually, the Company will review actual results measured against overall Hastings goals to establish the size of the MIP pool earned. Simultaneously, senior management will recommend to the Compensation Committee and CEO appropriate MIP goals for the next performance period. Exhibit 1 presents a sample performance matrix that would be used to modify the initial MIP award pool for performance goal achievement. If, during a performance period, Hastings' Compensation Committee or CEO determines that an accounting reserve needs to be set aside to fund a future financial contingency for Hastings, the Board shall establish such a reserve and determine if adjustment(s) in the MIP target(s) for the affected performance period(s) are warranted. Similarly, the Compensation Committee or CEO has the authority to modify the MIP targets at the end of a performance period to adjust for extraordinary circumstances, including mergers, acquisitions, recapitalizations, or any other substantial changes in the Hastings business plan(s). The Board of Directors and the Compensation Committee also retain the right and authority to adjust, amend, or suspend any current payments in the MIP for any given performance period, if, in the good faith determination of the Board of Directors or Compensation Committee, the payments of such MIP amounts would result in a material adverse change to, or a material decline in, the financial condition or prospects of Hastings. 4 5 CEO DISCRETIONARY ADJUSTMENTS After the size of each MIP award has been determined based on MIP performance achievement, the CEO shall have the authority to make limited adjustments in MIP awards based on individual performance contributions. Such CEO discretionary adjustments, if any, shall be limited to -30%, and shall be restricted to downward adjustments only. Exhibit 2 presents a sample MIP award calculation. FORM AND TIMING OF AWARDS MIP award calculations will be finalized within 90 days after the end of each performance period. MIP awards will be paid in cash in two distributions annually (initially in April for August through January performance and in October for February through July performance), unless a participant makes an election to voluntary defer a portion of his/her award. o Voluntary deferrals must be submitted to the CEO in writing at the beginning of the fiscal year to avoid constructive receipt, i.e., tax liability before the award is actually paid to the executive. o Cash deferral elections shall be limited to one half or all of the award and should be limited to a maximum of three payments to avoid administrative complexity. o Participants also may elect to apply the lesser of $50,000 or 50% of the earned MIP award to purchase discounted Hastings common stock through the 1996 Management Stock Purchase Plan. 5 6 To ensure deferral of taxes on the purchase (and discount) amount, the purchase would be made in restricted stock units, which would be converted to shares of Hastings stock after an additional three years of employment, as described below: ~ The purchase price of each restricted stock unit would be 75% of the fair market value of one share of common stock on the date the MIP cash award is payable. ~ Each restricted stock unit will fully vest and will be exchanged for one share of Hastings common stock if employment is not terminated before the end of a three-year restriction period. ~ The restriction period would begin on the date the performance units are purchased. ~ If employment is terminated during the three-year restriction period (other than "for cause"), the conversion value of the restricted stock units would be the lessor of the initial unit purchase price or the fair market value of the stock at the date of termination. If employment is terminated "for cause" during the restriction period, all restricted stock units would be forfeited. ~ The employee would owe taxes on the (fully appreciated) value of the shares when the units are converted to Hastings stock. 6 7 ADMINISTRATIVE GUIDELINES AND DEFINITIONS The MIP shall be administered by the CEO and the Associate Resources Department, with final approval for all performance goals and award targets resting with the Compensation Committee ("the Committee") of the Company's Board of Directors or CEO. All decisions made by the Committee or CEO shall be final and binding. o Employee Termination - A participant must be an employee of the Company on the day the MIP award is finalized and approved for payment by the Hastings Compensation Committee. o New Hires - Newly hired participants shall earn MIP awards on a pro-rata basis, based on their date of employment. The CEO will determine whether a person employed by Hastings less than six months prior to the end of the applicable performance measurement period will be eligible for an award for that period. o Base Salary - Base salary for MIP award calculations shall be the ending rate of pay for the performance period in which the award is earned. o Support Documentation - The CEO and Associate Resources Department of the Company shall be responsible for maintaining all necessary support documentation regarding performance and bonus calculations under the MIP. 7 8 EXHIBIT 1 HASTINGS BOOKS, MUSIC & VIDEO, INC. MANAGEMENT INCENTIVE PLAN INCENTIVE TARGET ADJUSTMENT VS. PERFORMANCE: 1996 ROE VERSUS PLAN
1996 SALES VS <60% 60% 70% 80% 90% 100% 110% 120% 130% 140% >150% PLAN >150% 100% 105% 110% 115% 120% 125% 125% 125% 125% 125% 125% 140% 95% 100% 105% 110% 115% 120% 120% 120% 120% 120% 125% 130% 90% 95% 100% 105% 110% 115% 115% 115% 115% 120% 125% 120% 85% 90% 95% 100% 105% 110% 110% 110% 115% 120% 125% 110% 80% 85% 90% 95% 100% 105% 105% 110% 115% 120% 125% 100% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 90% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 80% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 70% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 60% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% <60% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
8 9 EXHIBIT 2 HASTINGS BOOKS, MUSIC & VIDEO, INC. MANAGEMENT INCENTIVE PLAN SAMPLE AWARD CALCULATION ASSUMPTIONS: Management current salary is $50,000. Annual MIP award target is 30% of salary or $15,000. Semi-annual MIP award target is 15% of salary or $7,500. Actual sales are 90% of Plan and ROE is 100% of Plan (95% of Targeted MIP component earned base don matrix). CEO Discretion: Assume individual performance is satisfactory and CEO deducts nothing from earned award.
CALCULATIONS FOR: SEMI-ANNUAL ANNUAL AWARD Current Salary: $50,000 $50,000 Semi-annual Target: x.15 x.30 ------- ------- $ 7,500 $15,000 ------- ------- Performance Adjustment re:Matrix: x.95 x.95 ------- ------- Semi-annual MIP award earned: $ 7,125 $14,250
9 EX-10.13 14 SALARY INCENTIVE PLAN 1 EXHIBIT 10.13 HASTINGS ENTERTAINMENT, INC. SALARY INCENTIVE PLAN BACKGROUND AND OBJECTIVES The overall compensation strategy of Hastings Entertainment, Inc. (Hastings) is to provide key salaried associates with competitive total direct pay opportunity. The two cash components of the Hastings compensation program are base salary and salary incentive opportunity. Periodic base salary adjustments will be used to reward an associate's sustained job performance over time, while also recognizing external salary market movement and increases in job responsibility. The Salary Incentive Plan (the SIP) for Hastings will provide incentive cash pay at risk, with potential SIP rewards tied to performance achievement. When SIP performance goals are met, SIP awards plus base salary will approximate competitive total cash pay opportunity for all plan participants. The following document defines SIP eligibility, the size of potential award opportunities, performance measurement, form and timing of award payments, administrative guidelines and definitions for ongoing SIP management. ELIGIBILITY Award eligibility will be determined by the CEO at the beginning of each performance/award period. Generally, SIP participants will be the key salaried associates (other than Officers and Directors), who primarily are responsible for the annual growth and administration or profitability of the Company. The number of eligible SIP participants is expected to vary from year to year, as Hastings expands and as the Company's compensation strategy and programs are refined. The CEO will determine whether a person 1 2 employed by Hastings less than six months prior to the end of the applicable performance measurement period will be eligible for an award for that period. INCENTIVE TARGETS At the beginning of each performance period, each participant in the SIP will be assigned an INCENTIVE TARGET EXPRESSED AS A PERCENT OF BASE SALARY. This incentive target for the initial performance period can increase to 125% of the targeted amount (or decrease to 50% of the targeted amount) based on performance achievement. SIP incentive targets and minimum/maximum limits may be re-defined from time to time, as modifications are made in Hastings' management compensation strategy. Within 90 days after the end of each performance period, each participant's base salary rate will be multiplied by the actual SIP award percentage earned to determine the dollar value of the award for the prior performance period. For SIP calculations "base salary rate" shall mean the base salary rate in effect at the end of the performance period in which the award is earned. 2 3 SIP AWARD POOL The SIP award pool shall be established at the beginning of each performance measurement period. The size of the SIP pool will equal 100% of all targeted SIP awards for all SIP participants. PERFORMANCE MEASURES At the beginning of each performance period, the Compensation Team or CEO shall establish in writing the performance goals that shall determine the size of the SIP award. For the initial performance period, the primary performance measures for all SIP participants will be sales and return on equity (ROE), as defined in the Hastings annual business plan. ROE is defined as the after-tax rate of return on beginning shareholders' equity. Performance goals for SIP awards may be equal to or exceed the goals in the Hastings business plan, as determined by the Company's Compensation Team or CEO. At the end of the performance period, the Compensation Team or CEO shall certify in writing the extent to which the performance goals were satisfied. In addition to the SIP targets, senior management, the Hastings Compensation Team and CEO jointly will establish minimum acceptable and outstanding SIP goals as follows: o MINIMUM ACCEPTABLE - Hastings performance at 50% of the target level, below which only the minimum incentive will be paid; o TARGET - Hastings performance at 100% of target, where the SIP adjustment factor is 1X, with "X" equal to the target incentive pool; and 3 4 o OUTSTANDING - Hastings performance at or above 150% of target, where the SIP adjustment factor is 1.25X, with "X" equal to the target incentive pool. Semi-annually, the Company will review actual results measured against overall Hastings goals to establish the size of the SIP pool earned. Simultaneously, senior management will recommend to the Compensation Team and CEO appropriate SIP goals for the next performance period. Exhibit 1 presents a sample performance matrix that would be used to modify the initial SIP award pool for performance goal achievement. If, during a performance period, Hastings' Compensation Team or CEO determines that an accounting reserve needs to be set aside to fund a future financial contingency for Hastings, the Board shall establish such a reserve and determine if adjustment(s) in the SIP target(s) for the affected performance period(s) are warranted. Similarly, the Compensation Team or CEO has the authority to modify the SIP targets at the end of a performance period to adjust for extraordinary circumstances, including mergers, acquisitions, re-capitalization, or any other substantial changes in the Hastings business plan(s). The Board of Directors and the Compensation Committee also retain the right and authority to adjust, amend, or suspend any current payments in the SIP for any given performance period, if, in the good faith determination of the Board of Directors or Compensation Committee, the payments of such SIP amounts would result in a material adverse change to, or a material decline in, the financial condition or prospects of Hastings. 4 5 CEO DISCRETIONARY ADJUSTMENTS After the size of each SIP award has been determined based on SIP performance achievement, the CEO shall have the authority to make limited adjustments in SIP awards based on individual performance contributions. Such CEO discretionary adjustments, if any, shall be limited to -30%, and shall be restricted to downward adjustments only. Exhibit 2 presents a sample SIP award calculation. FORM AND TIMING OF AWARDS SIP award calculations will be finalized within 90 days after the end of each performance period. SIP awards will be paid in cash in two distributions annually (initially in April for August through January performance and in October for February through July performance), unless a participant makes an election to voluntary defer a portion of his/her award. o Voluntary deferrals must be submitted to the CEO in writing at the beginning of the fiscal year to avoid constructive receipt, i.e., tax liability before the award is actually paid to the associate. o Cash deferral elections shall be limited to one half or all of the award and should be limited to a maximum of three payments to avoid administrative complexity. ADMINISTRATIVE GUIDELINES AND DEFINITIONS The SIP shall be administered by the CEO, COO, CFO and the Compensation Team ("the Team"), with final approval for all performance goals and award targets resting with the Team or CEO. All decisions made by the Team or CEO shall be final and binding. 5 6 o Employee Termination - A participant must be an employee of the Company on the day the SIP award is finalized and approved for payment by the Hastings Compensation Team. o New Hires - Approved, newly hired participants shall earn SIP awards on a pro-rata basis, based on their date of employment. The CEO will determine whether a person employed by Hastings less than six months prior to the end of the applicable performance measurement period will be eligible for an award for any relevant period. o Base Salary - Base salary for SIP award calculations shall be the ending rate of pay for the performance period in which the award is earned. o Support Documentation - The Team shall be responsible for maintaining all necessary support documentation regarding performance and bonus calculations under the SIP. 6 7 EXHIBIT 1 HASTINGS ENTERTAINMENT, INC. SALARY INCENTIVE PLAN INCENTIVE TARGET ADJUSTMENT VS. PERFORMANCE: 1997 ROE VERSUS PLAN
1997 SALES VS. <60% 60% 70% 80% 90% 100% 110% 120% 1305 140% >150% PLAN >150% 100% 105% 110% 115% 120% 125% 125% 125% 125% 125% 125% 140% 95% 100% 105% 110% 115% 120% 120% 120% 120% 120% 125% 130% 90% 95% 100% 105% 110% 115% 115% 115% 115% 120% 125% 120% 85% 90% 95% 100% 105% 110% 110% 110% 115% 120% 125% 110% 80% 85% 90% 95% 100% 105% 105% 110% 115% 120% 125% 100% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 90% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 80% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 70% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 60% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% <60% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
7 8 EXHIBIT 2 HASTINGS ENTERTAINMENT, INC. SALARY INCENTIVE PLAN SAMPLE AWARD CALCULATION ASSUMPTIONS: Management current salary is $25,000. Annual SIP award target is 10% of salary or $2,500. Semi-annual SIP award target is 5% of salary or $1,250. Actual sales are 90% of Plan and ROE is 100% of Plan (95% of Targeted SIP component earned based on matrix). CEO Discretion: Assume individual performance is satisfactory and CEO deducts nothing from earned award.
CALCULATIONS FOR: SEMI-ANNUAL ANNUAL AWARD Current Salary: $25,000 $25,000 Semi-annual Target: x.5 x.10 --- ---- $1,250 $2,500 ------ ------ Performance Adjustment re: Matrix: x.95 x.95 ---- ---- Semi-annual SIP award earned: $1,188 $2,375
8 EX-10.14 15 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS 1 EXHIBIT 10.14 HASTINGS ENTERTAINMENT, INC. STOCK OPTION PLAN FOR OUTSIDE DIRECTORS 1. Purpose. The purpose of this Stock Option Plan for Outside Directors (the "Program") is to enable Hastings Entertainment, Inc. ("Hastings") to attract and retain persons of outstanding competence to serve on its Board of Directors and strengthen the link between the Directors and Hastings stockholders by paying such persons a portion of their compensation in Hastings common stock and options to purchase such stock (collectively, the "Awards"). 2. Definitions. (a) The terms "Outside Directors" or "Participant" mean a member of the Board of Directors of Hastings who is not an employee (within the meaning of the Employee Retirement Income Security Act of 1974) of Hastings or any of its subsidiaries. A Director of Hastings which is also an employee of Hastings or any of its subsidiaries shall become eligible to participate in the Program and shall be entitled to receive Awards hereunder upon the termination of such employment. (b) The term "Service" shall mean service as an Outside Director. (c) The term "Disability" means a permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. (d) The term "Retirement" shall mean normal retirement as an Outside Director under the policy adopted by Hastings. (e) The term "Committee" shall mean the Administrative Committee established pursuant to Section 10 hereof. (f) The term "Fair Market Value" (i) if the stock is publicly traded, shall be the average of the high and low sale price for Hastings common stock on the date in question (or the most recent date prior thereto that sales take place), or (ii) if Hastings common stock is not publicly traded on a national market on the date in question, the price as determined in the most recent valuation prepared for the Company's ASOP. 3. Eligibility. All Outside Directors of Hastings shall be eligible to receive Awards hereunder. 4. Shares Subject to the Program. Subject to adjustment in accordance with Section 9 hereof, the total number of common stock which may be granted as Options, as defined herein, under the Program is 20,000 shares ("Shares"). The Shares shall be either previously authorized and unissued shares or treasury shares. Any Shares subject to the unexercised portion of any Option granted under the Program which expires or terminates without being exercised shall again be available for Awards under the Program. 2 5. Stock Option Awards. (a) Annual Grants. Subject to the maximum number of Shares available under the Program, each Outside Director shall automatically receive on June 1, 1997, an Option to purchase 500 Shares ("Initial Option"). Subject to the maximum number of Shares available under the Program, Outside Directors who are elected or appointed to the Board of Directors after such date shall automatically receive an Initial Option to purchase 500 Shares on the date of such Outside Director's initial election or appointment to the Board of Directors. Commencing with the first anniversary of the grant of an Initial Option to an Outside Director and annually thereafter, each such Outside Director shall automatically receive an additional Option to purchase 500 Shares ("Annual Option") (Initial Options and Annual Options are referred to as "Options"). (i) Option Terms. Each Option and the issuance of Shares thereunder shall be subject to the following terms: (A) Option Agreement. Each Option shall be evidenced by an option agreement ("Agreement") duly executed on behalf of Hastings. Each Agreement shall comply with and be subject to the terms and conditions of the Program. Any Agreement may contain such other terms, provisions and conditions not inconsistent with the Program as may be determined by the Committee. (B) Option Exercise Price. The Option exercise price shall be the Fair Market Value of the Shares subject to the Option on the date of grant thereof. (ii) Exercisability; Vesting. Subject to paragraph (iv) immediately below and Sections 8 and 9 hereof, each Option shall become exercisable with respect to 100 of the Shares subject thereto on each of the first, second, third, fourth and fifth anniversaries of the date of grant of the Initial Option, provided that the Participant optionee ("Optionee") has continued to serve as an Outside Director until such anniversary date. Upon the date an Optionee ceases to be an Outside Director for any reason, all unvested portion of any Option shall immediately become vested. (The exercise date of each Initial and Annual Option is referred to as the "Exercise Date"). No portion of an Option shall be deemed vested until its Exercise Date. (iii) Time and Manner of Exercise of Option. (a) From and after its Exercise Date, an Option may be exercised in whole or in part at any time and from time to time; provided, however, that only whole Shares will be issued pursuant to the exercise of any Option. (b) Subject to Section 6 hereof, any Option may be exercised by giving written notice, signed by the person exercising the Option, stating the number of Shares with respect to which the Option is being exercised with payment to be made, in whole or in part in (i) cash or (ii) shares of Hastings common stock at their Fair Market Value. The notice of exercise shall be irrevocable. The Committee may provide for other methods of payment, including through broker-assisted same day transactions. 3 (iv) Terms of Options. Each Option shall expire ten (10) years from the date of grant, but shall be subject to earlier expiration under the following circumstances: (A) In the event that an Optionee ceases to be an Outside Director for any reason other than the Optionee's death or resignation from the Board due to a Disability, Retirement, a Merger of Consolidation event (as provided in Section 9 (a)), or a "Change in Control" (as hereinafter defined), the Options granted to such Optionee shall automatically expire nine (9) months following the date such Optionee ceases to be an Outside Director. (B) In the event of an Optionee's death, Disability or Retirement, a Merger or Consolidation event (as provided in Section 9 (a)) or a "Change in Control" (as hereinafter defined), all Options granted to such Optionee shall immediately vest and become exercisable and shall then expire three (3) years thereafter. After the date of the Optionee's death, the Options held by such optionee may be exercised by the Optionee's legal representatives or the estate, by any person or persons whom the optionee shall have designated in writing on forms prescribed by and filed with Hastings or, if no such designation has been made, by the person or persons to whom the Optionee's rights have passed by will or the laws of descent and distribution. (b) Transferability. During an Optionee's lifetime, an Option may be exercised only by the Optionee or the Optionee's legal representative. Options granted under the Program and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or the laws of descent and distribution or a "qualified domestic relations order" as defined in the Internal Revenue Code of 1986 ("Code") or the Employee Retirement Income Security Act ("ERISA") except that, to the extent permitted by applicable law and Rule 16b-3 under Sections 16(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), the Committee may permit an Optionee to designate in writing during the Optionee's lifetime a beneficiary to receive and exercise Options in the event of the Optionee's death, as provided herein. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option under the Program or of any right or privilege conferred thereby, contrary to the provisions of the Program, or the sale or levy or any attachment or similar process upon rights and privileges conferred hereby, shall be null and void. (c) Optionee's or Successor's Rights as Stockholder. Neither an Optionee nor an Optionee's successors in interest shall have any rights as a stockholder of Hastings with respect to any Shares subject to an Optionee granted to such person until such person becomes a holder of record of such Shares. 6. Payment of Taxes. If required to do so by applicable law, Participants shall pay to Hastings, in cash, any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares which (a) shall have vested in accordance herewith, and (b) are acquired upon the exercise of Options on the date such Options are exercised, Hastings, to the extent permitted or required by law, shall have the right to deduct from any payment of any kind otherwise due to a Participant any federal, state or locate taxes of any kind required by law to be withheld with respect to any vested Shares or to the delivery of common stock issued 4 pursuant to the exercise of Options under the Program. Subject to Committee approval, a Participant may elect to (i) apply a portion of fees earned in respect of his or her Service as an Outside Director or (ii) deliver shares of Hastings common stock to satisfy, in whole or in part, the amount of Hastings is required to withhold for taxes in connection with a vesting of Shares or an exercise of an Option under the Program. Such election must be made on or before the date the amount of tax to be withheld is determined, and if applicable, subject to rules, regulations and interpretations of the Commission or the Commission Staff under Section 16(b) of the Exchange Act. Once made, the election shall be irrevocable. The withholding tax obligation that may be paid by the delivery of shares may not exceed Hastings' minimum federal, state and local withholding tax obligations in connection with Shares vested or Options exercised. The value of any Hastings shares to be delivered will be based on the Market Value of such stock on the day of delivery. 7. Limitation As To Directorship. Neither the Program nor the granting of any Awards hereunder nor any other action taken pursuant to the Program shall constitute or be evidence of any agreement or understanding, express or implied, that a Participant has a right to continue as a Director for any period of time. 8. Recapitalizations. If as a result of stock dividend, stock split, recapitalization (or other adjustment in the stated capital of Hastings), or as the result of a merger, consolidation, or other reorganization, the common stock of Hastings is increased, reduced, or otherwise changed, the aggregate number of Shares for which Options may be granted, the number of Shares covered by each grant and each outstanding Option and exercise price per Share shall be appropriately adjusted, and if by virtue thereof a Participant shall be entitled to new or additional or different Options, such options to which the Participant shall be entitled shall be subject to the same terms, conditions, and restrictions herein contained relating to the original date and terms and conditions governing Options. 9. Acceleration Of Vesting of Stock Options. (a) Merger or Consolidation. Subject to the provisions of Section 5(a)(iv) hereof, in the event of a dissolution or a liquidation of Hastings or a merger or consolidation of Hastings in which Hastings is not the surviving corporation, any unexercised Options granted prior to the date of such dissolution, liquidation, merger or consolidation shall automatically become vested and exercisable, respectively, immediately prior to such date. (b) Change in Control. Subject to the provisions of Section 5(a)(iv) hereof, in the event of a Change in Control of Hastings, as hereinafter defined, any unexercised Options granted prior to the date of such event shall automatically become vested and exercisable, respectively, immediately prior to such date; provided, however, that upon an Optionee's request, the Committee shall provide for the purchase of any such unexercised Options for an amount of cash equal to the amount which would have been realized if such Option were exercised and sold on the date immediately preceding a Change in Control at the Market Value. The Committee may, in its discretion, include such further provisions and limitations in any Agreement entered into with respect to an Option as it may deem equitable and in the best interests of Hastings. 5 A "Change in Control" shall be deemed to have occurred if (a) absent prior approval by the Board of Directors, thirty percent (30%) or more of Hastings' outstanding securities entitled to vote in elections of Directors shall be beneficially owned, directly or indirectly, by any person, entity or group; or (b) individuals currently constituting the Board of Directors (or the successors of such individuals nominated by the Board of Directors on which such individuals or such successors constituted a majority) cease to constitute a majority of the Board of Directors. (c) Other. Notwithstanding anything to the contrary contained in the Program, the Committee shall have discretion to accelerate the vesting of Options awarded to an Outside Director on such terms and conditions as the Committee may deem appropriate in the event of extraordinary circumstances. 10. Administrative Committee. The committee shall have full power an authority to construe and administer the Program. Any action taken under the provisions of the Program by the Committee arising out of or in connection with the administration, construction, or effect of the Program or any rules adopted thereunder shall, in each case, lie within the discretion of the Committee and shall be conclusive and binding upon Hastings and upon all Participants, and all persons claiming under or through any of them. The Committee shall have as members the Chief Executive Officer of Hastings and two other officers of Hastings designated by the Chief Executive Officer. In the absence of such designation, the other members of the Committee shall be the Executive Vice President and the Chief Financial Officer of Hastings. 11. Approval; Effective Date. The Program is subject to the approval of a majority of the holders of Hastings' common stock present and entitled to vote at a meeting of shareholders. Subject to the receipt of such approval, the Program shall be effective August 6, 1996. 12. Amendment. The Program may be amended or repealed by the Board of Directors of Hastings, except that any amendment which would materially increase the benefits accruing to Participants, increase the number of Shares which may be issued under the Program, or materially modify the requirements as to eligibility for participation in the Program shall require the approval of a majority of the holders of Hastings' common stock present and entitled to vote at a meeting of shareholders, and provided further, that any such action shall not adversely affect any Participant's rights under the Program with respect to Awards which were made prior to such action. In no event shall the provisions of the Program be amended more than once every six months, other to comport with changes in the Code, ERISA, or the rules thereunder. 13. Expenses Of The Program. All costs and expenses of the adoption and administration of the Program shall be borne by Hastings and none of such expenses shall be charged to any Participant. 14. Compliance With Rule 16b-3. It is the intention of Hastings that the Program comply in all respects with Rule 16b-3 under Section 16(b) of the Exchange Act and that 6 Participants remain disinterested persons ("disinterested persons") for purposes of administering other employee benefit plans of Hastings and having such other plans be exempt from Section 16(b) of the Exchange Act. Accordingly, if any Program provision is later found to not be in compliance with Rule 16b-3 or if any program provision would disqualify Program Participants from remaining disinterested persons, that provision shall be deemed null and void, and in all events the Program shall be construed in favor of its meeting the requirements of Rule 16b-3. EX-10.15 16 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.15 OFFICE LEASE AGREEMENT BY AND BETWEEN OMNI CAPITAL CORPORATION, LANDLORD, AND HASTINGS BOOKS, MUSIC & VIDEO, INC., TENANT 2 OFFICE LEASE AGREEMENT TERMS AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 LEASE CLAUSES AND COVENANTS A. Tenant's Agreements: 1. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Minimum Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5. Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6. Taxes on Tenant's Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7. Tenant's Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8. Tenant's Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9. Repair and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 10. Tenant Finish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 11. Indemnification by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 12. Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 13. Title III of the Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . 5 14. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 15. Cleaning and Snow Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 B. Landlord's Agreements: 1. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. Use of the Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. Maintenance of the Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7. Common Area Maintenance Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8. Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9. Landlord's Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 10. Landlord's Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11. Indemnification by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 12. Delivery of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 13. Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 14. Title III of the Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . 7 15. Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 16. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 17. Right to Protest Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3 C. Landlord and Tenant agree to the following: 1. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2. Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3. Ingress and Egress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7. Removal of Tenant's Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 8. Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 11. Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12. Default by Landlord/Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 13. Default by Landlord/Tenant's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14. Default by Tenant/Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 15. Default by Tenant/Landlord's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 16. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 17. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 18. Alternative Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 19. Annual Statements/Prorations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 20. Emergency Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 21. Commencement Date Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 22. Options to Extend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 23. Blanket Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 24. Zoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 25. Connecting Door . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 26. Preferential Right to Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 27. Retail Store . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 28. Additional HVAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 D. Miscellaneous: (1) Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (2) Non-Waiver/Cumulative Remedies/Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (3) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (4) Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (5) Lease Memorandum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (6) Binding Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 (7) Holdover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (8) Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (9) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (10) Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (11) Relationship of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (12) Waiver of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (13) Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4 (14) Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (15) Prior Termination of this Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (16) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (17) Number/Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (18) Waiver of DTPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 EXHIBIT "A" - Site Plan EXHIBIT "B" - Legal Description
5 OFFICE LEASE AGREEMENT TERMS AND DEFINITIONS DATE: August 3, 1994 LANDLORD: Omni Capital Corporation LANDLORD'S ADDRESS: 1715 West 58th Amarillo, Texas 79110 TENANT: Hastings Books, Music & Video, Inc., a Texas corporation TENANT'S ADDRESS: P.O. Box 35350 Amarillo, Texas 79120-5350 TENANT'S TRADE NAME: Hastings PREMISES: Approximately 33,000 square feet in the Shopping Center. The Premises are outlined in red on Exhibit "A." The address of the Premises is _________________________ . SHOPPING CENTER: That portion of Sunset Center in Amarillo, Potter County, Texas, described on Exhibit "B." MINIMUM RENT: (a) For the eighteen (18) month period beginning on the Commencement Date and ending on the last day of the eighteenth (18th) month following the Commencement Date- $32,400.00 per annum, payable in monthly installments of $2,700.00 each. (b) For the eighteen (18) month period beginning on the first day of the nineteenth (19th) month following the Commencement Date and ending on the last day of the thirty- sixth (36th) month following the Commencement Date - $59,400.00 per annum, payable in monthly installments of $4,950.00 each. ADDITIONAL RENT: Tenant's Proportionate Share of the real estate taxes on the Shopping Center, Landlord's premiums for property insurance on Landlord's improvements in the Shopping Center, and Landlord's premiums for liability insurance on the Common Area, for each calendar year or partial calendar year during the Term of this Lease. INITIAL TERM: Thirty-six (36) months beginning on the Commencement Date. 6 "AFFILIATE" means any person or entity that, directly or indirectly, controls, is controlled by, or is under common control with, Tenant. "BUILDING" means the building in the Shopping Center that contains the Premises. "COMMENCEMENT DATE" means the earlier of (a) October 1, 1994, or (b) the date Tenant begins operating in the Premises; provided, however, if prior to October 1, 1994, Tenant begins operating in the Premises on a day other than the first day of a month, the Commencement Date shall be the first day of the month following the date Tenant begins operating in the Premises. "COMMON AREA" means the areas in the Shopping Center that are available for the common use of Tenant and the other tenants of the Shopping Center, including (without limitation) the parking areas, sidewalks, driveways, loading areas, and service areas. "COMMON AREA MAINTENANCE EXPENSES" means the costs and expenses of operating and maintaining the Common Area. "COMMON AREA MAINTENANCE RECORDS" means the records of the Common Area Maintenance Expenses maintained by Landlord. "DELIVERY DATE" means August 4, 1994. "ENVIRONMENTAL LAWS" means all federal, state, and local environmental statutes, ordinances, rules, regulations, and orders. "LEASE YEAR" means a period of twelve (12) full consecutive months. The first Lease Year shall begin on the Commencement Date. Each successive Lease Year shall begin on the anniversary of the Commencement Date. "LIABILITY INSURANCE PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of Landlord's premiums for liability insurance on the Common Area for each calendar year as reasonably estimated by Landlord based upon the actual liability insurance premiums for the prior calendar year. The Liability Insurance Payments during the first partial calendar year shall be $_________ per month. The Liability Insurance Payments shall be adjusted within thirty (30) days after the end of each calendar year or partial calendar year. "PROPERTY INSURANCE PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of Landlord's premiums for property insurance on Landlord's improvements in the Shopping Center for each calendar year as reasonably estimated by Landlord based upon the actual property insurance premiums for the prior calendar year. The Property Insurance Payments during the first partial calendar year shall be $_______ per month. The Property Insurance Payments shall be adjusted within thirty (30) days after the end of each calendar year or partial calendar year. 2 7 "PROPORTIONATE SHARE" means a fraction, the numerator of which shall be the number of square feet in the Premises, and the denominator of which shall be the number of leasable square feet in the Shopping Center. "RENT" means the Minimum Rent and Additional Rent. "TAX PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of the real estate taxes on the Shopping Center for each calendar year as reasonably estimated by Landlord based upon the actual real estate taxes for the prior calendar year. The Tax Payments during the first partial calendar year shall be $_______ per month. The Tax Payments shall be adjusted within thirty (30) days after the end of each calendar year or partial calendar year, "TERM OF THIS LEASE" means the Initial Term and any extended terms exercised in accordance with this Lease. LEASE CLAUSES AND COVENANTS A. TENANT'S AGREEMENTS: 1. LEASE OF PREMISES. Upon and subject to the provisions of this Lease, Tenant leases the Premises for the Initial Term and any extended terms exercised in accordance with this Lease. 2. COMPLIANCE WITH LAWS. Except as otherwise provided in this Lease, Tenant agrees to comply with all laws, ordinances, rules, regulations, and orders of any governmental authority that are applicable to Tenant's specific use of the Premises; provided, however, Tenant shall not be obligated to make any structural alterations, improvements, or additions to the Premises. 3. MINIMUM RENT. Except as otherwise provided in this Lease, Tenant agrees to make monthly Minimum Rent payments to Landlord in advance on the first day of each month beginning on the Commencement Date. If prior to October 1, 1994, Tenant begins operating in the Premises on a day other than the first day of a month, Tenant agrees to pay Minimum Rent for any partial month preceding the Commencement Date on the basis of 1/30th of the first month's Minimum Rent for each day in the partial month. 4. UTILITIES. Tenant agrees to pay all charges for water, telephone, electricity, gas, and other utilities used by Tenant in the Premises. 5. ADDITIONAL RENT. Except as otherwise provided in this Lease, Tenant agrees to pay the Additional Rent that is due for each calendar year or partial calendar year by making a Tax Payment, Property Insurance Payment, and Liability Insurance Payment, with each payment of Minimum Rent. 6. TAXES ON TENANT'S PERSONAL PROPERTY. Tenant agrees to pay all taxes on Tenant's personal property in the Premises. 3 8 7. TENANT'S PROPERTY INSURANCE. Tenant agrees to keep its personal property in the Premises insured against loss or damage by fire and such other risks as are from time to time included in broad form extended coverage insurance. 8. TENANT'S LIABILITY INSURANCE. Tenant agrees to maintain a commercial general liability insurance policy covering the Premises, under which the Landlord is named as an additional insured. A duplicate original or a certificate of the policy shall be delivered to Landlord within ten (10) days after Landlord's written request therefor. Each policy shall (a) contain a provision that the underwriter will give Landlord at least thirty (30) days prior written notice of any cancellation or lapse of the insurance, and (b) provide (i) bodily injury and property damage coverage of at least $1,000,000.00 for any one occurrence, and (ii) general aggregate coverage of at least $2,000,000.00. 9. REPAIR AND MAINTENANCE. Except as otherwise provided in this Lease and for normal wear and tear, Tenant agrees to maintain (a) the interior of the Premises, (b) the electrical, plumbing, and sewage systems in the Premises, (c) the doors and plate glass in the Premises, (d) the heating, ventilating, and air conditioning systems exclusively servicing the Premises, and (e) Tenant's signs in the Shopping Center, in good order, condition, and repair at Tenant's cost and expense. 10. TENANT FINISH. Promptly after the Premises are delivered to Tenant, Tenant shall (a) finish the Premises, and (b) equip the Premises for the operation of Tenant's business, subject to delays resulting from strikes or other labor disputes, weather, or other causes beyond the reasonable control of Tenant. In addition, Tenant agrees to make all electrical connections to the heating, ventilating, and air conditioning units furnished by Landlord and to install all ducts required to provide heating, ventilating, and air conditioning to the Premises. All alterations, improvements, and additions made by Tenant in finishing the Premises shall (a) be made in accordance with all applicable laws and in a good and workmanlike manner, and (b) remain the property of Tenant until the expiration or termination of this Lease. At the expiration or termination of this Lease, Tenant shall not be required to remove any alterations, improvements, or additions made by Tenant in finishing the Premises or to restore the Premises to the condition in which the Premises existed on the Delivery Date. 11. INDEMNIFICATION BY TENANT. Tenant agrees to indemnify and hold Landlord harmless from and against the costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities resulting from any injury to or death of any person or persons or any damage to property that (a) occurs in the Premises, and (b) arises from the negligence or willful misconduct of Tenant or Tenant's employees or agents. 12. ENVIRONMENTAL. Tenant agrees to comply in all material respects with all applicable Environmental Laws relating to the Premises. Tenant agrees to indemnify and hold Landlord harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Tenant's agreement set forth in this paragraph. 4 9 13. TITLE III OF THE AMERICANS WITH DISABILITIES ACT. Tenant agrees to comply with Tide M of the Americans with Disabilities Act and the rules and regulations issued thereunder, insofar as they apply to the Premises; provided, however, Tenant shall not be obligated to make any structural alterations, improvements, or additions to the Premises. Tenant agrees to indemnify and hold Landlord harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Tenant's agreement set forth in this paragraph. 14. ESTOPPEL CERTIFICATES. On not less than twenty (20) days prior written notice from Landlord, Tenant agrees to execute and deliver to Landlord a statement in writing (a) certifying that this Lease is unmodified and is in full force and effect (or if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect), (b) noting the dates to which the Rent is paid in advance, if any, and (c) acknowledging there are not, to the best of Tenant's knowledge, any uncured defaults on the part of Landlord, or specifying the defaults if any are claimed. 15. CLEANING AND SNOW REMOVAL. Tenant agrees to (a) keep the area outlined in blue on Exhibit "A" clean, and (b) remove any snow in the area outlined in blue on Exhibit "A" that it deems necessary in order to conduct business in the office and the retail store. Tenant shall remove the snow in a manner that will not unreasonably interfere with the use of the Common Area by the other tenants of the Shopping Center. B. LANDLORD'S AGREEMENTS: 1. LEASE OF PREMISES. Upon and subject to the provisions of this Lease, Landlord leases the Premises to Tenant for the Initial Term and any extended terms exercised in accordance with this Lease. 2. USE OF THE COMMON AREA. Landlord grants to Tenant the non-exclusive right to use the Common Area; provided, however, Tenant shall have the exclusive use of those portions of the Common Area to the rear of the Premises that are reasonably necessary for loading areas, trash enclosures, and other service facilities. 3. COMPLIANCE WITH LAWS. Except as otherwise provided in this Lease, Landlord agrees to comply with all laws, ordinaries, rules, regulations, and orders of any governmental authority that are applicable to the use, condition, and occupancy of the Shopping Center, including (without limitation) making any required structural alterations, improvements, or additions to the Premises. 4. QUIET ENJOYMENT. Landlord agrees to provide quiet and exclusive enjoyment of the Premises to Tenant without any claim or interference by Landlord or anyone claiming through Landlord. 5. UTILITIES. Landlord agrees to (a) make all utilities available to the Premises, and (b) have the electricity used by Tenant in the Premises separately metered. 5 10 6. MAINTENANCE OF THE COMMON AREA. (a) Landlord agrees (i) to operate the Common Area in an efficient manner, (ii) to maintain the Common Area in good order, condition, and repair, (iii) to provide adequate lighting in the Common Area, and (iv) not to discriminate against Tenant in Tenant's use of the Common Area. Notwithstanding anything contained in this paragraph to the contrary, Landlord shall not be obligated to clean or remove snow in the area outlined in blue on Exhibit "A." (b) All parking areas, driveways, loading areas, and service areas in the Common Area shall be (i) clearly marked with painted lines, and (ii) repainted as and when required. 7. COMMON AREA MAINTENANCE EXPENSES. Except as otherwise provided in this Lease, Landlord agrees to pay all Common Area maintenance expenses. 8. REAL ESTATE TAXES. Landlord agrees to pay all real estate taxes and assessments on the Shopping Center. Notwithstanding anything contained in this paragraph to the contrary, Tenant shall pay its Proportionate Share of the real estate taxes on the Shopping Center as a part of the Additional Rent. 9. LANDLORD'S PROPERTY INSURANCE. Landlord agrees to keep Landlord's improvements in the Shopping Center (including, without limitation, the Building) insured against loss or damage by fire and such other risks as are from time to time included in broad form extended coverage insurance, in an amount equal to the replacement cost thereof. A duplicate original or a certificate of the policy shall be delivered to Tenant within ten (10) days after Tenant's written request therefor. Each policy shall contain a provision that the underwriter will give Tenant at least thirty (30) days prior written notice of any cancellation or lapse of the insurance. 10. LANDLORD'S LIABILITY INSURANCE. Landlord agrees to maintain a commercial general liability insurance policy covering the Common Area, under which the Tenant is named as an additional insured. A duplicate original or a certificate of the policy shall be delivered to Tenant within ten (10) days after Tenant's written request therefor. Each policy shall (a) contain a provision that the underwriter will give Tenant at least thirty (30) days prior written notice of any cancellation or lapse of the insurance, and (b) provide (i) bodily injury and property damage coverage of at least $1,000,000.00 for any one occurrence, and (ii) general aggregate coverage of at least $2,000,000.00. 11. INDEMNIFICATION BY LANDLORD. Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against the costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities resulting from any injury to or death of any person or persons or any damage to property that (a) occurs in the Common Area and arises from the negligence or willful misconduct of Landlord or Landlord's employees or agents, or (b) arises from structural defects or failures in the Shopping Center, unless the structural defect or failure in the Shopping Center was caused by any alteration, improvement, or addition made by Tenant. 6 11 12. DELIVERY OF THE PREMISES. (a) Landlord agrees to deliver the Premises to Tenant on or before the Delivery Date in broom-clean condition. Tenant shall have fifteen (15) days after the Premises are delivered in which to notify Landlord of any defects Tenant finds in the Premises. Landlord shall notify Tenant whether Landlord will correct the defects within five (5) days after Landlord receives Tenant's notice of any defects. If Landlord elects not to correct the defects, Tenant may terminate this Lease by giving Landlord written notice of termination or waive the defects. If Tenant waives the defects or if Landlord elects to correct the defects, this Lease shall continue and Landlord shall correct the defects within a reasonable time period. If Landlord does not correct the defects within a reasonable time period, Tenant may terminate this Lease by giving Landlord written notice of termination. (b) Landlord agrees to deliver the Premises with four (4) new twenty-five (25) ton heating, ventilating, and air conditioning units on the roof of the Premises to exclusively service the Premises. The four (4) heating, ventilating, and air conditioning units shall be in good operating condition on the Delivery Date. Landlord agrees to make all roof cuts for the four (4) heating, ventilating, and air conditioning units and to set all curbs for the four (4) heating, ventilating, and air conditioning units. (c) Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against the costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities for any injury to or death of any person or persons or any damage to property arising from or related to any work performed by Landlord in or about the Premises. 13. ENVIRONMENTAL. Landlord agrees (a) to comply in all material respects with all applicable Environmental Laws relating to the Shopping Center, and (b) not to engage in or otherwise permit the occurrence of any activity on or relating to the Shopping Center in violation of any Environmental Law. Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Landlord's representation or agreements set forth in this paragraph. During any period of environmental remediation work on the Premises, the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises that is untenable due to the remediation work, and the denominator of which shall be the area of the Premises. 14. TITLE III OF THE AMERICANS WITH DISABILITIES ACT. Landlord agrees to comply with Title III of the Americans with Disabilities Act and the rules and regulations issued thereunder, insofar as they apply to (a) the Common Area, or (b) any required structural alterations, improvements, or additions to the Premises. Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Landlord's representation or agreement set forth in this paragraph. During any period of 7 12 work on the Premises required under Title HI of the Americans with Disabilities Act and the rules and regulations issued thereunder, the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises that is untenable due to the work, and the denominator of which shall be the area of the Premises. 15. MAINTENANCE AND REPAIRS. In addition to maintaining the Common Area in accordance with the provisions of this Lease, Landlord agrees to maintain (a) the exterior, the roof, the foundation, and the structural components of the Premises, and (b) the electrical, plumbing, and sewage systems lying outside of the Premises. Landlord agrees to make annual inspections of the fire sprinkler system servicing the Premises and to repair any defects shown by the inspection. 16. ESTOPPEL CERTIFICATES. Landlord agrees to reimburse Tenant for Tenant's reasonable legal expenses for the second and each subsequent estoppel certificate requested by Landlord during the Term of this Lease. 17. RIGHT TO PROTEST TAXES. Landlord grants to Tenant the right to protest any taxes that Tenant believes are unreasonable. C. LANDLORD AND TENANT AGREE TO THE FOLLOWING: 1. USE. The Premises may be used for any lawful purpose, including (without limitation) the operation of an office. 2. TRADE NAME. Tenant may conduct business in the Premises under the trade name "Hastings" or any other lawful trade name adopted by Tenant. 3. INGRESS AND EGRESS. During the Term of this Lease, there shall be ingress to and egress from the Shopping Center at the locations shown on Exhibit "A," subject to unavoidable temporary closings or relocations necessitated by governmental action or other circumstances beyond Landlord's reasonable control. Notwithstanding anything contained in this Lease to the contrary, if ingress to and egress from the Shopping Center is materially changed as a result of any action by Landlord for a period of thirty (30) days or more without Tenant's written consent, Tenant may terminate this Lease by giving Landlord written notice of termination. If Tenant does not terminate this Lease under this paragraph, the Rent shall be reduced by fifty percent (50%) until the ingress to and egress from the Shopping Center required by this paragraph is restored. 4. PARKING. During the Term of this Lease, Landlord agrees to provide the parking spaces shown in the area outlined in blue on Exhibit "A." Tenant shall have the exclusive use of the parking spaces shown in the area outlined in blue on Exhibit "A." Each parking space shall be single striped on at least a nine (9) foot center. Landlord agrees not to (a) charge for parking in the Common Area, or (b) alter the location of the parking spaces in the area outlined in blue on Exhibit "A," without Tenant's prior written consent. 8 13 5. SIGNS. Tenant may place signs on (a) the exterior of the Premises at Tenant's cost and expense, provided (i) the signs conform with applicable laws, and (H) the design and proposed placement of any exterior sign have been approved by Landlord (which approval shall not be unreasonably withheld), and (b) on the billboard shown on Exhibit "A." 6. ALTERATIONS. Tenant may make non-structural alterations, improvements, and additions to the Premises. All alterations, improvements, and additions made by Tenant shall (a) be made in accordance with all applicable laws and in a good and workmanlike manner, and (b) remain the property of Tenant until the expiration or termination of this Lease. At the expiration or termination of this Lease, Tenant shall not be required to remove any alterations, improvements, or additions made by Tenant or to restore the Premises to the condition in which the Premises existed on the Commencement Date. 7. REMOVAL OF TENANT'S PERSONAL PROPERTY. Tenant's personal property may be removed from the Shopping Center by Tenant at any time during the Term of this Lease, and Tenant agrees to repair any material damage to the Shopping Center caused by the removal. 8. WAIVER OF SUBROGATION. Notwithstanding anything contained in this Lease to the contrary, Landlord and Tenant waive any claims, actions, or causes of action against the other party or their respective shareholders, officers, directors, employees, or agents for any loss or damage that may occur to the Premises or any other portion of the Shopping Center by reason of fire or any other cause that is insured against under the terms of any fire and broad form extended coverage insurance carried in accordance with this Lease or for which Landlord or Tenant may be reimbursed as a result of insurance coverage for any loss suffered by either party to this Lease, regardless of the cause or origin, including the negligence (whether sole, joint, or concurrent) of Landlord or Tenant or their respective shareholders, officers, directors, employees, or agents. In addition, all insurance policies carried by either party covering the Premises or any other portion of the Shopping Center shall be endorsed to expressly waive the insurer's right of recovery under subrogation. 9. INSPECTION. After reasonable notice to Tenant, Landlord may enter the Premises to inspect the Premises or to make repairs. If repairs are required to be made by Tenant under this Lease, and Tenant fails or refuses after written demand from Landlord to make the repairs, then Landlord shall have the right (but not the obligation) to make the repairs or cause the repairs to be made. If Landlord makes the repairs or causes the repairs to be made, Tenant agrees to pay Landlord the reasonable costs and expenses incurred by Landlord. 10. CONDEMNATION. (a) If the Premises are appropriated or taken under the power of eminent domain by any public or quasi-public authority or are sold to the authority under the threat of condemnation, this Lease shall terminate effective as of the date the authority takes lawful possession of the Premises. 9 14 (b) If five percent (5%) or more of the Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or is sold to the authority under the threat of condemnation, Tenant may terminate this Lease effective as of the date the authority takes lawful possession of the portion of the Premises by giving Landlord written notice of termination. If Tenant does not terminate this Lease under this subparagraph, this Lease shall continue and Landlord agrees to restore the Premises at Landlord's cost and expense to an architectural unit as nearly like their condition prior to the appropriation, taking, or sale as shall be practicable within ninety (90) days from the date the authority takes lawful possession. If Landlord fails to restore the Premises to the condition and within the time period provided in this subparagraph, Tenant may terminate this Lease by giving Landlord written notice of termination. (c) If less than five percent (5%) of the Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or is sold to the authority under the threat of condemnation, this Lease shall continue and Landlord agrees to restore the Premises at Landlord's cost and expense to an architectural unit as nearly like their condition prior to the appropriation, taking, or sale as shall be practicable within ninety (90) days from the date the authority takes lawful possession. If Landlord fails to restore the Premises to the condition and within the time period provided in this subparagraph, Tenant may terminate this Lease by giving Landlord written notice of termination. (d) If (i) any portion of the Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or is sold to the authority under the threat of condemnation, and (ii) this Lease continues, then (effective as of the date the authority takes lawful possession of the portion of the Premises) the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises appropriated, taken, or sold, and the denominator of which shall be the area of the Premises prior to the appropriation, taking, or sale. (e) Tenant shall be entitled to any separate award, portion of the lump sum award, or portion of the proceeds attributable to (i) the value of Tenant's leasehold interest in the Premises prior to the appropriation, taking, or sale, (ii) the damage to Tenant's business, (iii) Tenant's moving and relocation expenses, (iv) the taking of any of Tenant's personal property in the Shopping Center, and (v) the unamortized value of Tenant's leasehold improvements. 11. CASUALTY. (a) If (i) any portion of the Premises is damaged by fire or other casualty, and (ii) rebuilding or repairs can be completed within ninety (90) days from the date of the damage, this Lease shall continue and Landlord agrees to rebuild or repair the Premises at Landlord's cost and expense to substantially the condition in which they existed prior to the damage within ninety (90) days from the date of the damage. If Landlord fails to rebuild or repair the Premises to the condition and within the time period provided in this subparagraph, Tenant may terminate this Lease by giving Landlord written notice of termination. 10 15 (b) If (i) any portion of the Premises is damaged by fire or other casualty, and (ii) rebuilding or repairs cannot be completed within ninety (90) days from the date of the damage, Landlord agrees to promptly notify Tenant in writing of the estimated time required to rebuild or repair the Premises. Tenant may terminate this Lease by giving Landlord written notice of termination within thirty (30) days after receipt of Landlord's notice. If Tenant does not terminate this Lease under this subparagraph, this Lease shall continue and Landlord agrees to rebuild or repair the Premises at Landlord's cost and expense to substantially the condition in which they existed prior to the damage within the estimated time. If Landlord fails to rebuild or repair the Premises to the condition provided in this subparagraph and within the estimated time period, Tenant may terminate this Lease by giving Landlord written notice of termination. (c) If (i) any portion of the Premises is damaged by fire or other casualty, and (ii) this Lease continues, then (during the period from the date of the damage to the date the Premises are rebuilt or repaired) the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises damaged and the denominator of which shall be the area of the Premises. 12. DEFAULT BY LANDLORD/EVENTS. Defaults by Landlord are (a) failing to keep or perform any provision of Us Lease required to be kept or performed by Landlord within thirty (30) days after receipt of written notice from Tenant, or (b) the incorrectness of any material representation made by Landlord in this Lease. 13. DEFAULT BY LANDLORD/TENANT'S REMEDIES. Tenant's remedies for Landlord's default are (a) to terminate this Lease by giving Landlord written notice of termination, (b) to cure Landlord's default by any action deemed necessary by Tenant, and in connection with the cure Tenant may pay expenses and incur obligations, provided that no expenditure in excess of $3,000.00 may be made by Tenant under this subparagraph without the prior written approval of Landlord, which approval shall not be unreasonably withheld, or (c) any other remedy available to Tenant at law or in equity. If Tenant pays expenses or incurs obligations to cure Landlord's default, Landlord agrees to reimburse Tenant upon receipt of Tenant's request for reimbursement. If Landlord fails to reimburse Tenant within fifteen (I 5) days after Landlord receives Tenant's request for reimbursement, Tenant may deduct the amount of the sums expended or obligations incurred from the Rent due or to become due under this Lease. 14. DEFAULT BY TENANT/EVENTS. Defaults by Tenant are (a) failing to pay Rent within ten (10) days after receipt of written notice from Landlord, (b) failing to keep or perform any provision of this Lease, other than the payment of Rent required to be kept or performed by Tenant within thirty (30) days after receipt of written notice from Landlord, (c) the filing of an involuntary petition of bankruptcy against Tenant or the appointment of a receiver for all or substantially all the property of Tenant and such petition or order shall not be dismissed or stayed within ninety (90) days after the filing or entry thereof, or (d) if Tenant makes an assignment of all or substantially all of its property for the benefit of creditors or files a voluntary petition of bankruptcy. 11 16 15. DEFAULT BY TENANT/LANDLORD'S REMEDIES. Landlord's remedies for Tenant's default are (a) to terminate this Lease by giving Tenant written notice of termination, (b) to reenter, take possession, and relet the Premises or any part thereof for the balance of the then current initial or extended term of this Lease, or (c) any other remedy available to Landlord at law or in equity. If Landlord elects not to terminate this Lease, Landlord shall use reasonable efforts to relet the Premises and all rental received by Landlord from the reletting during the Term of this Lease shall be applied to the Rent and the other amounts Tenant is obligated to pay under this Lease. If the rental received from the reletting is less than the Rent and the other amounts Tenant is obligated to pay under this Lease, Tenant shall remain liable for the deficiency. 16. ASSIGNMENT AND SUBLETTING. Tenant agrees not to sublet all or any part of the Premises or assign this Lease without the written consent of Landlord, which consent will not be unreasonably withheld. Notwithstanding the foregoing, Tenant may (a) assign this Lease or sublease all or any part of the Premises to an Affiliate, and (b) transfer this Lease by Tenant's merger or consolidation with another corporation, without the written consent of Landlord. If Tenant assigns this Lease with Landlord's written consent, Tenant's liability for the payment of Rent and all other amounts Tenant is obligated to pay under this Lease and for the performance of the provisions of this Lease required to be performed by Tenant shall continue for a period of one (1) year after the assignment, but shall terminate at the end of the one (1) year period. 17. SUBORDINATION. Tenant's interest under this Lease shall be subordinate to any first lien mortgage hereafter covering Landlord's interest in the Premises, provided, however, the foregoing subordination shall apply only to mortgages under which the mortgagee executes a non-disturbance agreement that contains provisions that are reasonably satisfactory to Tenant and the mortgagee. With respect to any existing mortgages, Landlord shall use reasonable efforts to furnish Tenant with a non-disturbance agreement that contains provisions that are reasonably satisfactory to Tenant and the mortgagee. 18. ALTERNATIVE DISPUTE RESOLUTION. Landlord and Tenant agree to submit in good faith to mediation before filing a suit for damages. 19. ANNUAL STATEMENTS/PRORATIONS. (a) Within thirty (30) days after the end of each calendar year or partial calendar year, Landlord shall furnish to Tenant a written statement (in form and substance satisfactory to Tenant) that sets forth (i) the Property Insurance Payments, Liability Insurance Payments, and Tax Payments, made during the calendar year or partial calendar year, and (ii) the actual premiums for the property insurance Landlord carried on Landlord's improvements in the Shopping Center, premiums for the liability insurance Landlord carried on the Common Area, and real estate taxes on the Shopping Center, paid by Landlord during the calendar year or partial calendar year. The Property Insurance Payments, Liability Insurance Payments, and Tax Payments made during the calendar year or partial calendar year shall be reconciled (within thirty (30) days after the date Tenant receives Landlord's written statement) with Tenant's Proportionate Share of the actual premiums for the property insurance Landlord carried on Landlord's improvements in the Shopping 12 17 Center, premiums for the liability insurance Landlord carried on the Common Area, and real estate taxes on the Shopping Center, paid by Landlord during the calendar year or partial calendar year. Tenant agrees to promptly pay to Landlord any deficiency and Landlord agrees to promptly refund to Tenant any excess. (b) Property insurance premiums for insurance carried by Landlord on Landlord's improvements in the Shopping Center, liability insurance premiums for insurance carried by Landlord on the Common Area, and real estate taxes on the Shopping Center, that cover any partial calendar year shall be prorated. 20. EMERGENCY REPAIRS. If the need for emergency repairs to the Premises or to any system servicing the Premises arises, and the repairs are the obligation of Landlord hereunder, Tenant may make the repairs and request reimbursement of the cost of the repairs from Landlord. If Landlord fails to reimburse Tenant within fifteen (15) days after Landlord receives Tenant's request for reimbursement, Tenant may deduct the cost of the repairs from the Rent due or to become due under this Lease. 21. COMMENCEMENT DATE LETTER. On or before thirty (30) days after the Commencement Date, the parties shall execute a letter that sets forth the Commencement Date and the expiration date of the Initial Term of this Lease. 22. OPTIONS TO EXTEND. Landlord grants to Tenant four (4) options to extend the Tenn of this Lease for periods of eighteen (18) months each, with each extended term to begin upon the expiration of the preceding initial or extended term. If Tenant desires to exercise an option to extend the Term of this Lease, it shall do so by giving Landlord written notice of Tenant's election to extend the Tenn of this Lease not later than three (3) months prior to the expiration of the then current initial or extended term. If Tenant timely exercises an option to extend the Term of this Lease, this Lease shall continue on the same provisions, except the Minimum Rent shall be (a) $5,500.00 per month during the first extended term, if exercised, (b) $5,500.00 per month during the second extended term, if exercised, (c) $6,050.00 per month during the third extended term, if exercised, and (d) $6,050.00 per month during the fourth extended term, if exercised. If Tenant fails to timely exercise any option to extend the Term of this Lease, Tenant shall not have the right to exercise any succeeding option to extend the Term of this Lease. 23. BLANKET INSURANCE. The insurance to be provided by Landlord or Tenant may be provided under a blanket insurance policy; provided, however, that in no event shall the protection afforded by the blanket insurance policy be less than that required under this Lease. 24. ZONING. On or before the Delivery Date, Landlord agrees to change the zoning of (a) the Premises to allow the operation of an office in the Premises, and (b) the space outlined in yellow on Exhibit "A" to allow the operation of a retail store. Landlord shall obtain the change in the zoning of the Premises and the space outlined in yellow on Exhibit "A" at its cost and expense. If Landlord fails to obtain the change in the zoning of the Premises and the space outlined in yellow on Exhibit "A" on or before the Delivery Date, Tenant may terminate this Lease by giving Landlord written notice of termination. 13 18 25. CONNECTING DOOR. At any time during the Term of this Lease, Tenant may place (at Tenant's cost and expense) a connecting door between the Premises and the space that is covered by the Warehouse Lease Agreement dated August 3, 1994, between Landlord and Tenant. Notwithstanding anything contained in this paragraph to the contrary, Tenant shall not place a connecting door between the Premises and the warehouse space without Landlord's approval of the plans, which approval shall not be unreasonably withheld. At the expiration or termination of this Lease, Tenant shall restore the wall that contains the connecting door to the condition in which the wall existed prior to the placement of the connecting door in the wall. 26. PREFERENTIAL RIGHT TO LEASE. If Landlord desires to lease any space that adjoins the Premises to a third party, Landlord shall promptly give written notice to Tenant with MI information concerning the proposed lease, which shall include the name and address of the prospective lessee, the rental amount, and all other terms of the lease. Tenant shall have the right for a period of ten (10) days after receipt of the notice, to elect to lease the space on the same terms and conditions. If Tenant elects to lease the space, Tenant shall have thirty (30) days after the date of its election in which to lease the space. If Tenant elects not to lease the space, and Landlord does not lease the space or does not lease the space on the terms and conditions contained in Landlord's notice to Tenant, the space shall remain subject to Tenant's preferential right to lease. If Landlord leases the space and the lease expires or terminates, the space shall again be subject to Tenant's preferential right to lease. 27. RETAIL STORE. (a) Landlord leases 10,000 square feet of the Building to Tenant for the operation of a retail store. The 10,000 square feet of the Building to be used as a retail store is outlined in yellow in Exhibit "A." Tenant agrees to lease the 10,000 square feet of the Building for the operation of a retail store. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have the right to terminate the retail store lease at arty time after the end of one (1) year from the Commencement Date by giving Landlord written notice of termination. (b) The rent for the retail store shall be $18,000.00 per annum, payable in monthly installments of $1,500.00 each. The term of the lease for the retail store shall be thirty-six (36) months with four (4) options to extend the term for periods of eighteen (18) months each. (c) Landlord agrees to furnish adequate heating, ventilating, and air conditioning to the retail store. Tenant agrees to construct and finish the retail store promptly after the space is delivered to Tenant. Tenant shall not be obligated to construct, finish, stock, staff, or otherwise operate the retail store in the Building in the same manner as Tenant constructs, finishes or operates its other retail stores. Tenant shall have the right to construct, finish, stock, staff, and operate the retail store in the Building in the manner Tenant elects in its sole and absolute discretion. 14 19 28. ADDITIONAL HVAC. Tenant shall have the right to add additional heating, ventilating, and air conditioning units to service the Premises at any time during the term of this Lease at Tenant's expense. D. MISCELLANEOUS: (1) NOTICE. Any notice given under this Lease must be in writing, and shall be (a) mailed, postpaid, registered or certified, return receipt requested, and addressed to the party to be notified, or (b) delivered by personal delivery or by overnight courier. Notice shall be deemed given when received by the party to be notified or when the party to be notified refuses to accept delivery of the notice. For purposes of notice the addresses of the parties shall be as set forth in the terms and definitions, except Tenant's address for overnight courier delivery is 421 East 34th, Amarillo, Texas 79103. Any notice to Tenant shall be addressed to Tenant Attn: Real Estate Department. A copy of any notice given to Tenant shall be given to Wayne Moore, SPROUSE, MOZOLA, SMITH & ROWLEY, P.C., 801 S. Fillmore, Suite 600, Amarillo, Texas 79105-5008, The parties shall have the right to change their respective addresses upon at least ten (10) days written notice to the other party. (2) NON-WAIVER/CUMULATIVE REMEDIES/MITIGATION. No failure or delay on the part of either party in exercising any right or remedy under this Lease shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy under this Lease. The exercise of any right or remedy under this Lease by either party shall not prevent the concurrent or subsequent exercise of any other right or remedy under this Lease or otherwise available to that party at law or in equity. Landlord and Tenant have a duty to mitigate damages. (3) COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, and all of which shall constitute one agreement. (4) CHOICE OF LAW. This Lease shall be governed by and construed and enforced in accordance with the laws of the State of Texas. (5) LEASE MEMORANDUM. The parties agree that neither party will record this Lease. However, the parties agree to execute and deliver a memorandum of this Lease, which does not contain the amount of Rent, for recording purposes if either party so requests. (6) BINDING PROVISIONS. This Lease constitutes the entire agreement of Landlord and Tenant regarding the leasing of the Premises and the space for the retail store by Tenant, superseding any prior understandings or agreements (whether written or oral). No modification of or amendment to this Lease shall be binding upon any party unless set forth in writing and executed by the party. The provisions of this Lease shall be binding upon and shall inure to the benefit of Landlord and Tenant and their respective heirs, executors, administrators, successors, and assigns. 15 20 (7) HOLDOVER. If Tenant remains in possession of the Premises after the expiration or termination of this Lease, Tenant shall occupy the Premises as a tenant from month-to-month upon all of the provisions of this Lease, insofar as the provisions of this Lease are applicable to a month-to-month tenancy. (8) ATTORNEYS' FEES. If Landlord or Tenant fails to keep or perform any of the provisions of this Lease required to be kept or performed by that party under this Lease and the non-defaulting party employs an attorney to protect or enforce its rights under this Lease, then the defaulting party shall pay the non-defaulting party's reasonable attorneys' fees. (9) HEADINGS. The paragraph headings throughout this Lease are for convenience of reference only, and the headings shall not be used to aid in the interpretation or construction of this Lease. (10) PARTIAL INVALIDITY. If any provision of this Lease is held to be invalid, illegal, or unenforceable, the invalid, illegal, or unenforceable provision shall not affect any other provision of this Lease, and this Lease shall be construed as if the invalid, illegal, or unenforceable provision had never been contained in this Lease. (11) RELATIONSHIP OF THE PARTIES. Nothing contained in this Lease shall be construed as creating any relationship between Landlord and Tenant other than that of landlord and tenant. (12) WAIVER OF LIENS. Landlord waives its rights, statutory or otherwise, to claim a lien against Tenant's personal property in the Shopping Center. (13) BROKERS. Landlord and Tenant each represent and warrant to the other party that they have not dealt with any realtor, broker, or agent in connection with this Lease. If either party has dealt with a realtor, broker, or agent in connection with this Lease, that party shall indemnify and hold the other party and the other party's shareholders, officers, directors, employees, and agents harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any claim by the realtor, broker, or agent for a fee, commission, or other compensation for services rendered in connection with this Lease. (14) CONSTRUCTION. Landlord and Tenant agree that (a) each party and its counsel have reviewed and revised this Lease, and (b) the rule of construction that any ambiguity is to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any amendment or exhibit hereto. (15) PRIOR TERMINATION OF THIS LEASE. If (a) this, Lease terminates prior to its expiration date, and (b) Tenant is not in default, the Rent shall be prorated. (16) EXHIBITS. The exhibits referred to in this Lease are (a) attached to this Lease, and (b) made a part of this Lease for all purposes. 16 21 (17) NUMBER/GENDER. When used in this Lease, the singular number shall include the plural, the plural number shall include the singular, and the use of any gender shall include all other genders. (18) WAIVER OF DTPA. (a) Recognizing that the parties hereto cannot by matters contained solely in this Lease stipulate conclusively that the Tenant is not in a significantly disparate bargaining position as to the Landlord, nevertheless, the parties do hereby state and acknowledge that the Tenant is not in a disparate bargaining position in comparison to the Landlord for purposes of waiving the provisions of the Texas Deceptive Trade Practices - Consumer Protection Act, Sections 17.41 - 17.62 of the Texas Business and Commerce Code (the "DTPA") with respect to this transaction. (b) The Tenant represents that it is and has been represented by legal counsel of its own choosing in seeking or acquiring the goods and services provided and to be provided to it by the Landlord pursuant to the terms of this Lease, and that the Tenant also represents that it is and has been represented by legal counsel of its own choosing in executing this waiver with respect to the transaction contained in and covered by this Lease. (c) Pursuant to the foregoing stipulations, Tenant waives all of the provisions of the DTPA, except the provisions of Section 17.555 thereof, with respect to this Lease and this transaction (including all negotiations and representations related thereto whether made prior to the execution hereof, simultaneously with the execution hereof and during the performance of the terms of this Lease). LANDLORD: OMNI CAPITAL CORPORATION By: /s/ C.W. CROUCH -------------------------------- C.W. Crouch, President TENANT: HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ JOHN H. MARMADUKE -------------------------------- John H. Marmaduke, President 17 22 Sprouse, Mozola, Smith & Rowley, P.C. has executed this Office Lease Agreement to acknowledge that it has represented Hastings Books, Music & Video, Inc. in connection with the waiver contained in Paragraph D(18). SPROUSE, MOZOLA, SMITH & ROWLEY, P.C. By: /s/ R. WAYNE MOORE ------------------------------- R. Wayne Moore 18 EX-10.16 17 WAREHOUSE LEASE AGREEMENT 1 EXHIBIT 10.16 WAREHOUSE LEASE AGREEMENT By and Between Omni Capital Corporation, Landlord, and Hastings Books, Music & Video, Inc., Tenant 2 WAREHOUSE LEASE AGREEMENT TERMS AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 LEASE CLAUSES AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A. Tenant's Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Minimum Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5. Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6. Taxes on Tenant's Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7. Tenant's Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8. Tenant's Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9. Repair and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 10. Tenant Finish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 11. Indemnification by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 12. Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 13. Title III of the Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . 4 14. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 15. Cleaning and Snow Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 B. Landlord's Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2. Use of the Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. Maintenance of the Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7. Common Area Maintenance Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 8. Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 9. Landlord's Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 10. Landlord's Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11. Indemnification by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 12. Delivery of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 13. Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 14. Title III of the Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . 6 15. Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 16. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 17. Right to Protest Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 C. Landlord and Tenant agree to the following: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4. Ingress and Egress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7. Removal of Tenant's Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8. Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 10. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 11. Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12. Default by Landlord/Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-i- 3 13. Default by Landlord/Tenant's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 14. Default by Tenant/Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 15. Default by Tenant/Landlord's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 16. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 17. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 18. Alternative Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 19. Annual Statements/Prorations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 20. Emergency Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 21. Commencement Date Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 22. Options to Extend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 23. Blanket Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 24. Zoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 25. Curb Cuts/Dock Doors/Connecting Door . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26. Shed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 27. Roof Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 28. Preferential Right to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 29. Additional HVAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 D. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (1) Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (2) Non-Waiver/Cumulative Remedies/Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (3) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (4) Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (5) Lease Memorandum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (6) Binding Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (7) Holdover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (8) Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (9) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (10) Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (11) Relationship of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (12) Waiver of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (13) Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (14) Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (15) Prior Termination of this Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (16) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (17) Number/Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (18) Waiver of DTPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-ii- 4 WAREHOUSE LEASE AGREEMENT TERMS AND DEFINITIONS Date: August 3, 1994 Landlord: Omni Capital Corporation Landlord's Address: 1715 West 58th Amarillo, Texas 79110 Tenant: Hastings Books, Music & Video, Inc., a Texas corporation Tenant's Address: P.O. Box 35350 Amarillo, Texas 79120-5350 Tenant's Trade Name: Hastings Premises: Approximately 100,000 square feet in the Shopping Center. The Premises are outlined in red on Exhibit "A". The address of the Premises is ______________________________. Shopping Center: That portion of Sunset Center in Amarillo, Potter County, Texas, described on Exhibit "B". Minimum Rent: (a) For the eighteen (18) month period beginning on the Commencement Date and ending on the last day of the eighteenth (18th) month following the Commencement Date - $90,000.00 per annum, payable in monthly installments of $7,500.00 each. (b) For the eighteen (18) month period beginning on the first day of the nineteenth (19th) month following the Commencement Date and ending on the last day of the thirty-sixth (36th) month following the Commencement Date - $180,000.00 per annum, payable in monthly installments of $15,000.00 each. Additional Rent: Tenant's Proportionate Share of the real estate taxes on the Shopping Center, Landlord's premiums for property insurance on Landlord's improvements in the Shopping Center, and Landlord's premiums for liability insurance on the Common Area, for each calendar year or partial calendar year during the Term of this Lease. Initial Term: Thirty-six (36) months beginning on the Commencement Date. "AFFILIATE" means any person or entity that, directly or indirectly, controls, is controlled is under common control with, Tenant. "BUILDING" means the building in the Shopping Center that contains the Premises. "COMMENCEMENT DATE" means the earlier of (a) October 1, 1994, or (b) the date Tenant begins operating in the Premises; provided, however, if prior to October 1, 1994, Tenant begins operating in the Premises on a day other than the first day of a month, the Commencement Date shall be the first day of the month following the date Tenant begins operating in the Premises. "COMMON AREA" means the areas in the Shopping Center that are available for the common use of Tenant and the other tenants of the Shopping Center, including (without limitation) the parking areas, sidewalks, driveways, loading areas, and service areas. 5 "COMMON AREA MAINTENANCE EXPENSES" means the costs and expenses of operating, and maintaining the Common Area. "COMMON AREA MAINTENANCE RECORDS" means the records of the Common Area Maintenance Expenses maintained by Landlord. "DELIVERY DATE" means August 4, 1994. "ENVIRONMENTAL LAWS" means all federal, state, and local environmental statutes, ordinances, rules, regulations, and orders. "LEASE YEAR" means a period of twelve (12) full consecutive months. The first Lease Year shall begin on the Commencement Date. Each successive Lease Year shall begin on the anniversary of the Commencement Date. "LIABILITY INSURANCE PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of Landlord's premiums for liability insurance on the Common Area for each calendar year as reasonably estimated by Landlord based upon the actual liability insurance premiums for the prior calendar year. The Liability Insurance Payments during the first partial calendar year shall be $_________ per month. The Liability Insurance Payments shall be adjusted within thirty (30) days after the end of each calendar year or partial calendar year. "PROPERTY INSURANCE PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of Landlord's premiums for property insurance on Landlord's improvements in the Shopping Center for each calendar year as reasonably estimated by Landlord based upon the actual property insurance premiums for the prior calendar year. The Property Insurance Payments during the first partial calendar year shall be $_ per month. The Property Insurance Payments shall be adjusted within thirty (30) days after the end of each calendar year or partial calendar year. "PROPORTIONATE SHARE" means a fraction, the numerator of which shall be the number of square feet in the Premises, and the denominator of which shall be the number of leasable square feet in the Shopping Center. "RENT" means the Minimum Rent and Additional Rent. "TAX PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of the real estate taxes on the Shopping Center for each calendar year as reasonably estimated by Landlord based upon the actual real estate taxes for the prior calendar year. The Tax Payments during the first partial calendar year shall be $_________ per month. The Tax Payments shall be adjusted within thirty (30) days after the end of each calendar year or partial calendar year. "TERM OF THIS LEASE" means the Initial Term and any extended terms exercised in accordance with this Lease. LEASE CLAUSES AND COVENANTS A. TENANT'S AGREEMENTS: 1. LEASE OF PREMISES. Upon and subject to the provisions of this Lease, Tenant leases the Premises for the Initial Term and any extended terms exercised in accordance with this Lease. -2- 6 2. COMPLIANCE WITH LAWS. Except as otherwise provided in this Lease, Tenant agrees to comply with all laws, ordinances, rules, regulations, and orders of any governmental authority that are applicable to Tenant's specific use of the Premises; provided, however, Tenant shall not be obligated to make any structural alterations, improvements, or additions to the Premises. 3. MINIMUM RENT. Except as otherwise provided in this Lease, Tenant agrees to make monthly Minimum Rent payments to Landlord in advance on the first day of each month beginning on the Commencement Date. If prior to October 1, 1994, Tenant begins operating in the Premises on a day other than the first day of a month, Tenant agrees to pay Minimum Rent for any partial month preceding the Commencement Date on the basis of 1/30th of the first month's Minimum Rent for each day in the partial month. 4. UTILITIES. Tenant agrees to pay all charges for water, telephone, electricity, gas, and other utilities used by Tenant in the Premises. 5. ADDITIONAL RENT. Except as otherwise provided in this Lease, Tenant agrees to pay the Additional Rent that is due for each calendar year or partial calendar year by making a Tax Payment, Property Insurance Payment, and Liability Insurance Payment, with each payment of Minimum Rent. 6. TAXES ON TENANT'S PERSONAL PROPERTY. Tenant agrees to pay all taxes on Tenant's personal property in the Premises. 7. TENANT'S PROPERTY INSURANCE. Tenant agrees to keep its personal property in the Premises insured against loss or damage by fire and such other risks as are from time to time included in broad form extended coverage insurance. 8. TENANT'S LIABILITY INSURANCE. Tenant agrees to maintain a commercial general liability insurance policy covering the Premises, under which the Landlord is named as an additional insured. A duplicate original or a certificate of the policy shall be delivered to Landlord within ten (10) days after Landlord's written request therefor. Each policy shall (a) contain a provision that the underwriter will give Landlord at least thirty (30) days prior written notice of any cancellation or lapse of the insurance, and (b) provide (i) bodily injury and property damage coverage of at least $1,000,000.00 for any one occurrence, and (ii) general aggregate coverage of at least $2,000,000.00. 9. REPAIR AND MAINTENANCE. Except as otherwise provided in this Lease and for normal wear and tear, Tenant agrees to maintain (a) the interior of the Premises, (b) the electrical, plumbing, and sewage systems in the Premises, (c) the doors and plate glass in the Premises, (d) the heating, ventilating, and air conditioning systems exclusively servicing the Premises, and (e) Tenant's signs in the Shopping Center, in good order, condition, and repair at Tenant's cost and expense. 10. TENANT FINISH. Promptly after the Premises are delivered to Tenant, Tenant shall (a) finish the Premises, and (b) equip the Premises for the operation of Tenant's business, subject to delays resulting from strikes or other labor disputes, weather, or other causes beyond the reasonable control of Tenant. All alterations, improvements, and additions made by Tenant in finishing the Premises shall (a) be made in accordance with all applicable laws and in a good and workmanlike manner, and (b) remain the property of Tenant until the expiration or termination of this Lease. At the expiration or termination of this Lease, Tenant shall not be required to remove any alterations, or improvements, or additions made by Tenant in finishing the Premises or to restore the Premises to the condition in which the Premises existed on the Delivery Date. -3- 7 11. INDEMNIFICATION BY TENANT. Tenant agrees to indemnify and hold Landlord harmless from and against the costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities resulting from any injury to or death of any person or persons or any damage to property that (a) occurs in the Premises, and (b) arises from the negligence or willful misconduct of Tenant or Tenant's employees or agents. 12. ENVIRONMENTAL. Tenant agrees to comply in all material respects with all applicable Environmental Laws relating to the Premises. Tenant agrees to indemnify and hold Landlord harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Tenant's agreement set forth in this paragraph. 13. TITLE III OF THE AMERICANS WITH DISABILITIES ACT. Tenant agrees to comply with Title III of the Americans with Disabilities Act and the rules and regulations issued thereunder, insofar as they apply to the Premises; provided, however, Tenant shall not be obligated to make any structural alterations, improvements, or additions to the Premises. Tenant agrees to indemnify and hold Landlord harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Tenant's agreement set forth in this paragraph. 14. ESTOPPEL CERTIFICATES. On not less than twenty (20) days prior written notice from Landlord, Tenant agrees to execute and deliver to Landlord a statement in writing (a) certifying that this Lease is unmodified and is in full force and effect (or if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect), (b) noting the dates to which the Rent is paid in advance, if any, and (c) acknowledging there are not, to the best of Tenant's knowledge, any uncured defaults on the part of Landlord, or specifying the defaults if any are claimed. 15. CLEANING AND SNOW REMOVAL. Tenant agrees to (a) keep the area outlined in blue on Exhibit "A" clean, and (b) remove any snow in the area outlined in blue on Exhibit "A" that it deems necessary in order to conduct business in the Premises. Tenant shall remove the snow in a manner that will not unreasonably interfere with the use of the Common Area by the other tenants of the Shopping Center. B. LANDLORD'S AGREEMENTS: 1. LEASE OF PREMISES. Upon and subject to the provisions of this Lease, Landlord leases the Premises to Tenant for the Initial Term and any extended terms exercised in accordance with this Lease. 2. USE OF THE COMMON AREA. Landlord grants to Tenant the non-exclusive right to use the Common Area; provided, however, Tenant shall have the exclusive use of those portions of the Common Area to the rear of the Premises that are reasonably necessary for loading areas, trash enclosures, and other service facilities. 3. COMPLIANCE WITH LAWS. Except as otherwise provided in this Lease, Landlord agrees to comply with all laws, ordinances, rules, regulations, and orders of any governmental authority that are applicable to the use, condition, and occupancy of the Shopping Center, including (without limitation) making any required structural alterations, improvements, or additions to the Premises. -4- 8 4. QUIET ENJOYMENT. Landlord agrees to provide quiet and exclusive enjoyment of the Premises to Tenant without any claim or interference by Landlord or anyone claiming through Landlord. 5. UTILITIES. Landlord agrees to (a) make all utilities available to the Premises, and (b) have the electricity used by Tenant in the Premises separately metered. 6. MAINTENANCE OF THE COMMON AREA. (a) Landlord agrees (i) to operate the Common Area in an efficient manner, (ii) to maintain the Common Area in good order, condition, and repair, (iii) to provide, adequate lighting in the Common Area, and (iv) not to discriminate against Tenant in Tenant's use of the Common Area. Notwithstanding anything contained in this paragraph to the contrary, Landlord shall not be obligated to clean or remove snow in the area outlined in blue on Exhibit "A". (b) All parking areas, driveways, loading areas, and service areas in the Common Area shall be (i) clearly marked with painted lines, and (ii) repainted as and when required. 7. COMMON AREA MAINTENANCE EXPENSES. Except as otherwise provided in this Lease, Landlord agrees to pay all Common Area Maintenance Expenses. 8. REAL ESTATE TAXES. Landlord agrees to pay all real estate taxes and assessments on the Shopping Center. Notwithstanding anything contained in this paragraph to the contrary, Tenant shall pay its Proportionate Share of the real estate taxes on the Shopping Center as a part of the Additional Rent. 9. LANDLORD'S PROPERTY INSURANCE. Landlord agrees to keep Landlord's improvements in the Shopping Center (including, without limitation, the Building) insured against loss or damage by fire and such other risks as are from time to time included in broad form extended coverage insurance, in an amount equal to the replacement cost thereof. A duplicate original or a certificate of the policy shall be delivered to Tenant within ten (10) days after Tenant's written request therefor. Each policy shall contain a provision that the underwriter will give Tenant at least thirty (30) days prior written notice of any cancellation or lapse of the insurance. 10. LANDLORD'S LIABILITY INSURANCE. Landlord agrees to maintain a commercial general liability insurance policy covering the Common Area, under which the Tenant is named as an additional insured. A duplicate original or a certificate of the policy shall be delivered to Tenant within ten (10) days after Tenant's written request therefor. Each policy shall (a) contain a provision that the underwriter will give Tenant at least thirty (30) days prior written notice of any cancellation or lapse of the insurance, and (b) provide (i) bodily injury and property damage coverage of at least $1,000,000.00 for any one occurrence, and (ii) general aggregate coverage of at least $2,000,000.00. 11. INDEMNIFICATION BY LANDLORD. Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against the costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities resulting from any injury to or death of any person or persons or any damage to property that (a) occurs in the Common Area and arises from the negligence or willful misconduct of Landlord or Landlord's employees or agents, or (b) arises from structural defects or failures in the Shopping Center, unless the structural defect or failure in the Shopping Center was caused by any alteration, improvement, or addition made by Tenant. -5- 9 12. DELIVERY OF THE PREMISES. (a) Landlord agrees to deliver the Premises to Tenant on or before the Delivery Date in broom-clean condition. Tenant shall have fifteen (15) days after the Premises are delivered in which to notify Landlord of any defects Tenant finds in the Premises. Landlord shall notify Tenant whether Landlord will correct the defects within five (5) days after Landlord receives Tenant's notice of any defects. If Landlord elects not to correct the defects, Tenant may terminate this Lease by giving Landlord written notice of termination or waive the defects. If Tenant waives the defects or if Landlord elects to correct the defects, this Lease shall continue and Landlord shall correct the defects within a reasonable time period. If Landlord does not correct the defects within a reasonable time period, Tenant may terminate this Lease by giving Landlord written notice of termination. (b) Landlord represents to Tenant that on the Delivery Date the heating, ventilating, and air conditioning system exclusively servicing the Premises shall be in good operating condition. (c) Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against the costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities for any injury to or death of any person or persons or any damage to property arising from or related to any work performed by Landlord in or about the Premises. 13. ENVIRONMENTAL. Landlord agrees (a) to comply in all material respects with all applicable Environmental Laws relating to the Shopping Center, and (b) not to engage in or otherwise permit the occurrence of any activity on or relating to the Shopping Center in violation of any Environmental Law. Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Landlord's representation or agreements set forth in this paragraph. During any period of environmental remediation work on the Premises, the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises that is untenable due to the remediation work, and the denominator of which shall be the area of the Premises. 14. TITLE III OF THE AMERICANS WITH DISABILITIES ACT. Landlord agrees to comply with Title III of the Americans with Disabilities Act and the rules and regulations issued thereunder insofar as they apply to the Common Area, or (b) any required structural alterations, improvements, or additions to the Premises. Landlord agrees to indemnify and hold Tenant and Tenant's shareholders, officers, directors, employees, and agents harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any breach or alleged breach of Landlord's representation or agreement set forth in this paragraph. During any period of work on the Premises required under Title III of the Americans with Disabilities Act and the rules and regulations issued thereunder, the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises that is untenable due to the work, and the denominator of which shall be the area of the Premises. 15. MAINTENANCE AND REPAIRS. In addition to maintaining the Common Area in accordance with the provisions of this Lease, Landlord agrees to maintain (a) the exterior, the roof, the foundation, and the structural components of the Premises, and (b) the electrical, plumbing, and sewage systems lying outside of -6- 10 the Premises. Landlord agrees to make annual inspections of the fire sprinkler system servicing the Premises and to repair any defects shown by the inspection. 16. ESTOPPEL CERTIFICATES. Landlord agrees to reimburse Tenant for Tenant's reasonable legal expenses for the second and each subsequent estoppel certificate requested by Landlord during the Term of this Lease. 17. RIGHT TO PROTEST TAXES. Landlord grants to Tenant the right to protest any taxes that Tenant believes are unreasonable. C. LANDLORD AND TENANT AGREE TO THE FOLLOWING: 1. USE. The Premises may be used for any lawful purpose. 2. TRADE NAME. Tenant may conduct business in the Premises under the trade name "Hastings" or any other lawful trade name adopted by Tenant. 3. PARKING. During the Term of this Lease, Landlord agrees to provide the parking spaces shown in the area outlined in blue on Exhibit "A". Tenant shall have the exclusive use of the parking spaces shown in the area outlined in blue on Exhibit "A". Each parking space shall be single striped on at least a nine (9) foot center. Landlord agrees not to (a) charge for parking in the Common Area, or (b) alter the location of the parking spaces in the area outlined in blue on Exhibit "A", without Tenant's prior written consent. 4. INGRESS AND EGRESS. During the Term of this Lease, there shall be ingress to and egress from the Shopping Center at the locations shown on Exhibit "A", subject to unavoidable temporary closings or relocations necessitated by governmental action or other circumstances beyond Landlord's reasonable control. Notwithstanding anything contained in this Lease to the contrary, if ingress to and egress from the Shopping Center is materially changed as a result of any action by Landlord for a period of thirty (30) days or more without Tenant's written consent, Tenant may terminate this Lease by giving Landlord written notice of termination. If Tenant does not terminate this Lease under this paragraph, the Rent shall be reduced by fifty percent (50%) until the ingress to and egress from the Shopping Center required by this paragraph is restored. 5. SIGNS. Tenant may place signs on (a) the exterior of the Premises at Tenant's cost and expense, provided (i) the signs conform with applicable laws, and (ii) the design and proposed placement of any exterior sign have been approved by Landlord (which approval shall not be unreasonably withheld), and (b) on the billboard shown on Exhibit "A". 6. ALTERATIONS. Tenant may make non-structural alterations, improvements, and additions to the Premises. All alterations, improvements, and additions made by Tenant shall (a) be made in accordance with all applicable laws and in a good and workmanlike manner, and (b) remain the property of Tenant until the expiration or termination of this Lease. At the expiration or termination of this Lease, Tenant shall not be required to remove any alterations, improvements, or additions made by Tenant or to restore the Premises to the condition in which the Premises existed on the Commencement Date. 7. REMOVAL OF TENANT'S PERSONAL PROPERTY. Tenant's personal property may be removed from the Shopping Center by Tenant at any time during the Term of this Lease, and Tenant agrees to repair any material damage to the Shopping Center caused by the removal. 8. WAIVER OF SUBROGATION. Notwithstanding anything contained in this Lease to the contrary, Landlord and Tenant waive any claims, actions, or causes -7- 11 of action against the other party or their respective shareholders, officers, directors, employees, or agents for any loss or damage that may occur to the Premises or any other portion of the Shopping Center by reason of fire or any other cause that is insured against under the terms of any fire and broad form extended coverage insurance carried in accordance with this Lease or for which Landlord or Tenant may be reimbursed as a result of insurance coverage for any loss suffered by either party to this Lease, regardless of the cause or origin, including the negligence (whether sole, joint, or concurrent) of Landlord or Tenant or their respective shareholders, officers, directors, employees, or agents. In addition, all insurance policies carried by either party covering the Premises or any other portion of the Shopping Center shall be endorsed to expressly waive the insurer's right of recovery under subrogation. 9. INSPECTION. After reasonable notice to Tenant, Landlord may enter the Premises to inspect the Premises or to make repairs. If repairs are required to be made by Tenant under this Lease, and Tenant fails or refuses after written demand from Landlord to make the repairs, then Landlord shall have the right (but not the obligation) to make the repairs or cause the repairs to be made. If Landlord makes the repairs or causes the repairs to be made, Tenant agrees to pay Landlord the reasonable costs and expenses incurred by Landlord. 10. CONDEMNATION. (a) If the Premises are appropriated or taken under the power of eminent domain by any public or quasi-public authority or are sold to the authority under the threat of condemnation, this Lease shall terminate effective as of the date the authority takes lawful possession of the Premises. (b) If five percent (5%) or more of the Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or is sold to the authority under the threat of condemnation, Tenant may terminate this Lease effective as of the date the authority takes lawful possession of the portion of the Premises by giving Landlord written notice of termination. If Tenant does not terminate this Lease under this subparagraph, this Lease shall continue and Landlord agrees to restore the Premises at Landlord's cost and expense to an architectural unit as nearly like their condition prior to the appropriation, taking, or sale as shall be practicable within ninety (90) days from the date the authority takes lawful possession. If Landlord fails to restore the Premises to the condition and within the time period provided in this subparagraph, Tenant may terminate this Lease by giving Landlord written notice of termination. (c) If less than five percent (5%) of the Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or is sold to the authority under the threat of condemnation, this Lease shall continue and Landlord agrees to restore the Premises at Landlord's cost and expense to an architecture unit as nearly like their condition prior to the appropriation, taking, or sale as shall be practicable within ninety (90) days from the date the authority takes lawful possession. If Landlord fails to restore the Premises to the condition and within the time period provided in this subparagraph, Tenant may terminate this Lease by giving Landlord written notice of termination. (d) If (i) any portion of the Premises is appropriated or taken under the power of eminent domain by any public or quasi-public authority or is sold to the authority under the threat of condemnation, and (ii) this Lease continues, then (effective as of the date the authority takes lawful possession of the portion of the Premises) the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the -8- 12 area of the Premises appropriated, taken, or sold, and the denominator of which shall be the area of the Premises prior to the appropriation, taking, or sale. (e) Tenant shall be entitled to any separate award, portion of the Jump sum award, or portion of the proceeds attributable to (i) the value of Tenant's leasehold interest in the Premises prior to the appropriation, taking, or sale, (ii) the damage to Tenant's business, (iii) Tenant's moving and relocation expenses, (iv) the taking of any of Tenant's personal property in the Shopping Center, and (v) the unamortized value of Tenant's leasehold improvements, 11. CASUALTY. (a) If (i) any portion of the Premises is damaged by fire or other casualty, and (ii) rebuilding or repairs can be completed within ninety (90) days from the date of the damage, this Lease shall continue and Landlord agrees to rebuild or repair the Premises at Landlord's cost and expense to substantially the condition in which they existed prior to the damage within ninety (90) days from the date of the damage. If Landlord fails to rebuild or repair the Premises to the condition and within the time period provided in this subparagraph, Tenant may terminate this Lease by giving Landlord written notice of termination. (b) If (i) any portion of the Premises is damaged by fire or other casualty, and (ii) rebuilding or repairs cannot be completed within ninety (90) days from the date of the damage, Landlord agrees to promptly notify Tenant in writing of the estimated time required to rebuild or repair the Premises. Tenant may terminate this Lease by giving Landlord written notice of termination within thirty (30) days after receipt of Landlord's notice. If Tenant does not terminate this Lease under this subparagraph, this Lease shall continue and Landlord agrees to rebuild or repair the Premises at Landlord's cost and expense to substantially the condition in which they existed prior to the damage within the estimated time. If Landlord fails to rebuild or repair the Premises to the condition provided in this subparagraph and within the estimated time period, Tenant may terminate this Lease by giving Landlord written notice of termination. (c) If (i) any portion of the Premises is damaged by fire or other casualty, and (ii) this Lease continues, then (during the period from the date of the damage to the date the Premises are rebuilt or repaired) the Rent shall be reduced by an amount equal to the product of the Rent times a fraction, the numerator of which shall be the area of the Premises damaged and the denominator of which shall be the area of the Premises. 12. DEFAULT BY LANDLORD/EVENTS. Defaults by Landlord are (a) failing to keep or perform any provision of this Lease required to be kept or performed by Landlord within thirty (30) days after receipt of written notice from Tenant, or (b) the incorrectness of any material representation made by Landlord in this Lease. 13. DEFAULT BY LANDLORD/TENANT'S REMEDIES. Tenant's remedies for Landlord's default are (a) to terminate this Lease by giving Landlord written notice of termination, (b) to cure Landlord's default by any action deemed necessary by Tenant, and in connection with the cure Tenant may pay expenses and incur obligations, provided that no expenditure in excess of $3,000.00 may be made by Tenant under this subparagraph without the prior written approval of Landlord, which approval shall not be unreasonably withheld, or (c) any other remedy available to Tenant at law or in equity. If Tenant pays expenses or incurs obligations to cure Landlord's default, Landlord agrees to reimburse Tenant upon receipt of Tenant's request for reimbursement. If Landlord fails to reimburse Tenant within fifteen (15) days after Landlord receives Tenant's -9- 13 request for reimbursement, Tenant may deduct the amount of the sums expended or obligations incurred from the Rent due or to become due under this Lease. 14. DEFAULT BY TENANT/EVENTS. Defaults by Tenant are (a) failing to pay Rent within ten (10) days after receipt of written notice from Landlord, (b) failing to keep or perform any provision of this Lease, other than the payment of Rent, required to be kept or performed by Tenant within thirty (30) days after receipt of written notice from Landlord, (c) the filing of an involuntary petition of bankruptcy against Tenant or the appointment of a receiver for all or substantially all the property of Tenant and such petition or order shall not be dismissed or stayed within ninety (90) days after the filing or entry thereof, or (d) if Tenant makes an assignment of all or substantially all of its property for the benefit of creditors or files a voluntary petition of bankruptcy. 15. DEFAULT BY TENANT/LANDLORD'S REMEDIES. Landlord's remedies for Tenant's default are (a) to terminate this Lease by giving Tenant written notice of termination, (b) to reenter, take possession, and relet the Premises or any part thereof for the balance of the then current initial or extended term of this Lease, or (c) any other remedy available to Landlord at law or in equity. If Landlord elects not to terminate this Lease, Landlord shall use reasonable efforts to relet the Premises and all rental received by Landlord from the reletting during the Term of this Lease shall be applied to the Rent and the other amounts Tenant is obligated to pay under this Lease. If the rental received from the reletting is less than the Rent and the other amounts Tenant is obligated to pay under this Lease, Tenant shall remain liable for the deficiency. 16. ASSIGNMENT AND SUBLETTING. Tenant agrees not to sublet all or any part of the Premises or assign this Lease without the written consent of Landlord, which consent will not be unreasonably withheld. Notwithstanding the foregoing, Tenant may (a) assign this Lease or sublease all or any part of the Premises to an Affiliate, and (b) transfer this Lease by Tenant's merger or consolidation with another corporation, without the written consent of Landlord. If Tenant assigns this Lease with Landlord's written consent, Tenant's liability for the payment of Rent and all other amounts Tenant is obligated to pay under this Lease and for the performance of the provisions of this Lease required to be performed by Tenant shall continue for a period of one (1) year after the assignment, but shall terminate at the end of the one (1) year period. 17. SUBORDINATION. Tenant's interest under this Lease shall be subordinate to any first lien mortgage hereafter covering Landlord's interest in the Premises, provided, however, the foregoing subordination shall apply only to mortgages under which the mortgagee executes a non-disturbance agreement that contains provisions that are reasonably satisfactory to Tenant and the mortgagee. With respect to any existing mortgages, Landlord shall use reasonable efforts to furnish Tenant with a non-disturbance agreement that contains provisions that are reasonably satisfactory to Tenant and the mortgagee. 18. ALTERNATIVE DISPUTE RESOLUTION. Landlord and Tenant agree to submit in good faith to mediation before filing a suit for damages. 19. ANNUAL STATEMENTS/PRORATIONS. (a) Within thirty (30) days after the end of each calendar year or partial calendar year, Landlord shall furnish to Tenant a written statement (in form and substance satisfactory to Tenant) that sets forth (i) the Property Insurance Payments, Liability Insurance Payments, and Tax Payments, made during the calendar year or partial calendar year, and (ii) the actual premiums for the property insurance Landlord carried on Landlord's improvements in the Shopping -10- 14 Center, premiums for the liability insurance Landlord carried on the Common Area, and real estate taxes on the Shopping Center, paid by Landlord during the calendar year or partial calendar year. The Property Insurance Payments, Liability Insurance Payments, and Tax Payments made during the calendar year or partial calendar year shall be reconciled (within thirty (30) days after the date Tenant receives Landlord's written statement) with Tenant's Proportionate Share of the actual premiums for the property insurance Landlord carried on Landlord's improvements in the Shopping Center, premiums for the liability insurance Landlord carried on the Common Area, and real estate taxes on the Shopping Center, paid by Landlord during the calendar year or partial calendar year. Tenant agrees to promptly pay to Landlord any deficiency and Landlord agrees to promptly refund to Tenant any excess. (b) Property insurance premiums for insurance carried by Landlord on Landlord's improvements in the Shopping Center, liability insurance premiums for insurance carried by Landlord on the Common Area, and real estate taxes on the Shopping Center, that cover any partial calendar year shall be prorated. 20. EMERGENCY REPAIRS. If the need for emergency repairs to the Premises or to any system servicing the Premises arises, and the repairs are the obligation of Landlord hereunder, Tenant may make the repairs and request reimbursement of the cost of the repairs from Landlord. If Landlord fails to reimburse Tenant within fifteen (15) days after Landlord receives Tenant's request for reimbursement, Tenant may deduct the cost of the repairs from the Rent due or to become due under this Lease. 21. COMMENCEMENT DATE LETTER. On or before thirty (30) days after the Commencement Date, the parties shall execute a letter that sets forth the Commencement Date and the expiration date of the Initial Term of this Lease. 22. OPTIONS TO EXTEND. Landlord grants to Tenant four (4) options to extend the Term of this Lease for periods of eighteen (18) months each, with each extended term to begin upon the expiration of the preceding initial or extended term. If Tenant desires to exercise an option to extend the Term of this Lease, it shall do so by giving Landlord written notice of Tenant's election to extend the Term of this Lease not later than three (3) months prior to the expiration of the then current initial or extended term. If Tenant timely exercises an option to extend the Term of this Lease, this Lease shall continue on the same provisions, except the Minimum Rent shall be (a) $16,666.67 per month during the first extended term, if exercised, (b) $16,666.67 per month during the second extended term, if exercised, (c) $18,333.33 per month during the third extended term, if exercised, and (d) $18,333.33 per month during the fourth extended term, if exercised. If Tenant fails to timely exercise any option to extend the Term of this Lease, Tenant shall not have the right to exercise any succeeding option to extend the Term of this Lease. 23. BLANKET INSURANCE. The insurance to be provided by Landlord or Tenant may be provided under a blanket insurance policy; provided, however, that in no event shall the protection afforded by the blanket insurance policy be less than that required under this Lease. 24. ZONING. On or before the Commencement Date, Landlord agrees to change the zoning of the Premises to allow the operation of a warehouse in the Premises. Landlord shall obtain the change in the zoning of the Premises at its cost and expense. If Landlord fails to obtain the change in the zoning of the Premises on or before the Commencement Date, Tenant may terminate this Lease by giving Landlord written notice of termination. 25. CURB CUTS/DOCK DOORS/CONNECTING DOOR. At any time during the Term of this Lease, Tenant may (at Tenant's cost and expense) (a) enlarge any of the -11- 15 curb cuts on Plains Boulevard so long as the curb cuts conform with applicable local ordinances regarding curb cuts, (b) install six (6) additional dock doors on the South end of the West side of the Premises, and (c) place a connecting door between the Premises and the space that is covered by the Office Lease Agreement dated August 3, 1994, between Landlord and Tenant. If any curb cut enlargement proposed by Tenant does not conform with any local ordinance regarding curb cuts, Tenant shall have the right to obtain a waiver of the local ordinance. Notwithstanding anything contained in this paragraph to the contrary, Tenant shall not enlarge any curb cut, install any additional dock door, or place a connecting door between the Premises and the office space without Landlord's approval of the plans, which approval shall not be unreasonably withheld. At the expiration or termination of this Lease, Tenant shall restore the wall that contains the connecting door to the condition in which the wall existed prior to the placement of the connecting door in the wall. 26. SHED. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have the right to use the shed on the West side of the Premises that is shown on Exhibit "A". 27. ROOF MAINTENANCE. Landlord agrees to repair the roof on the Premises prior to the Commencement Date at Landlord's cost and expense so that it does not leak. After Landlord's repairs are made, Tenant agrees to maintain the roof of the Premises; provided, however, if Tenant makes any repairs to the roof, Tenant shall have the right to deduct fifty percent (50%) of the costs of such repairs from the Rent due or to become due under this Lease. 28. PREFERENTIAL RIGHT TO PURCHASE. If Landlord desires to sell all or any part of the Premises, Landlord shall promptly give written notice to, Tenant with full information concerning the proposed sale, which shall include the name and address of the prospective purchaser, the purchase price, and all other terms of the sale. Tenant shall have the right, for a period of ten (10) days after receipt of the notice, to elect to purchase the interest on the same terms and conditions. If Tenant elects to purchase the interest, Tenant shall have ninety (90) days after the date of its election in which to purchase the interest. If Tenant elects not to purchase the interest, and Landlord does not sell the interest or Landlord does not sell the interest on the terms and conditions contained in Landlord's notice to Tenant, the interest shall remain subject to Tenant's preferential right to purchase. 29. ADDITIONAL HVAC. Tenant shall have the right to add additional heating, ventilating, and air conditioning units to service the Premises at any time during the term of this Lease at Tenant's expense. D. MISCELLANEOUS: (1) NOTICE. Any notice given under this Lease must be in writing, and shall be (a) mailed, postpaid, registered or certified, return receipt requested, and addressed to the party to be notified, or (b) delivered by personal delivery or by overnight courier. Notice shall be deemed given when received by the party to be notified or when the party to be notified refuses to accept delivery of the notice. For purposes of notice the addresses of the parties shall be as set forth in the terms and definitions, except Tenant's address for overnight courier delivery is 421 East 34th, Amarillo, Texas 79103. Any notice to Tenant shall be addressed to Tenant, Attn: Real Estate Department. A copy of any notice given to Tenant shall be given to Wayne Moore, SPROUSE, MOZOLA, SMITH & ROWLEY, P.C., 801 S. Fillmore, Suite 600, Amarillo, Texas 79105-5008. The parties shall have the right to change their respective addresses upon at least ten (10) days written notice to the other party. -12- 16 (2) NON-WAIVER/CUMULATIVE REMEDIES/MITIGATION. No failure or delay on the part of either party in exercising any right or remedy under this Lease shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy under this Lease. The exercise of any right or remedy under this Lease by either party shall not prevent the concurrent or subsequent exercise of any other right or remedy under this Lease or otherwise available to that party at law or in equity. Landlord and Tenant have a duty to mitigate damages. (3) COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, and all of which shall constitute one agreement. (4) CHOICE OF LAW. This Lease shall be governed by and construed and enforced in accordance with the laws of the State of Texas. (5) LEASE MEMORANDUM. The parties agree that neither party will record this Lease. However, the parties agree to execute and deliver a memorandum of this Lease, which does not contain the amount of Rent, for recording purposes if either party so requests. (6) BINDING PROVISIONS. This Lease constitutes the entire agreement of Landlord and Tenant regarding the leasing of the Premises by Tenant, superseding any prior understandings or agreements (whether written or oral). No modification of or amendment to this Lease shall be binding upon any party unless set forth in writing and executed by the party. The provisions of this Lease shall be binding upon and shall inure to the benefit of Landlord and Tenant and their respective heirs, executors, administrators, successors, and assigns. (7) HOLDOVER. If Tenant remains in possession of the Premises after the expiration or termination of this Lease, Tenant shall occupy the Premises as a tenant from month-to-month upon all of the provisions of this Lease, insofar as the provisions of this Lease are applicable to a month-to-month tenancy. (8) ATTORNEY'S FEES. If Landlord or Tenant fails to keep or perform any of the provisions of this Lease required to be kept or performed by that party under this Lease and the non-defaulting party employs an attorney to protect or enforce its rights under this Lease, then the defaulting party shall pay the non-defaulting party's reasonable attorneys' fees. (9) HEADINGS. The paragraph headings throughout this Lease are for convenience of reference only, and the headings shall not be used to aid in the interpretation or construction of this Lease. (10) PARTIAL INVALIDITY. If any provision of this Lease is held to be invalid, illegal, or unenforceable, the invalid, illegal, or unenforceable provision shall not affect any other provision of this Lease, and this Lease shall be construed as if the invalid, illegal, or unenforceable provision had never been contained in this Lease. (11) RELATIONSHIP OF THE PARTIES. Nothing contained in this Lease shall be construed as creating any relationship between Landlord and Tenant other than that of landlord and tenant. (12) WAIVER OF LIENS. Landlord waives its rights, statutory or otherwise, to claim a lien against Tenant's personal property in the Shopping Center. (13) BROKERS. Landlord and Tenant each represent and warrant to the other party that they have not dealt with any realtor, broker, or agent in connection -13- 17 with this Lease. If either party has dealt with a realtor, broker, or agent in connection with this Lease, that party shall indemnify and hold the other party and the other party's shareholders, officers, directors, employees, and agents harmless from and against any costs, claims, expenses (including, without limitation, reasonable attorneys' fees), or liabilities arising from or related to any claim by the realtor, broker, or agent for a fee, commission, or other compensation for services rendered in connection with this Lease. (14) CONSTRUCTION. Landlord and Tenant agree that (a) each party and its counsel have reviewed and revised this Lease, and (b) the rule of construction that any ambiguity is to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any amendment or exhibit hereto. (15) PRIOR TERMINATION OF THIS LEASE. If (a) this Lease terminates prior to its expiration date, and (b) Tenant is not in default, the Rent shall be prorated. (16) EXHIBITS. The exhibits referred to in this Lease are (a) attached to this Lease, and (b) made a part of this Lease for all purposes. (17) NUMBER/GENDER. When used in this Lease, the singular number shall include the plural, the plural number shall include the singular, and the use of any gender shall include all other genders. (18) WAIVER OF DTPA. (a) Recognizing that the parties hereto cannot by matters contained solely in this Lease stipulate conclusively that the Tenant is not in a significantly disparate bargaining position as to the Landlord, nevertheless, the parties do hereby state and acknowledge that the Tenant is not in a disparate bargaining position in comparison to the Landlord for purposes of waiving the provisions of the Texas Deceptive Trade Practices - Consumer Protection Act, Sections 17.41 - 17.62 of the Texas Business and Commerce Code (the "DTPA") with respect to this transaction. (b) The Tenant represents that it is and has been represented by legal counsel of its own choosing in seeking or acquiring the goods and services provided and to be provided to it by the Landlord pursuant to the terms of this Lease, and that the Tenant also represents that it is and has been represented by legal counsel of its own choosing in executing this waiver with respect to the transaction contained in and covered by this Lease. (c) Pursuant to the foregoing stipulations, Tenant waives all of the provisions of the DTPA, except the provisions of Section 17.555 thereof, with respect to this Lease and this transaction (including all negotiations and representations related thereto whether made prior to the execution hereof, simultaneously with the execution hereof and during the performance of the terms of this Lease). LANDLORD: OMNI CAPITAL CORPORATION By: /s/ C.W. COUCH ------------------------------------ C.W. Couch, President -14- 18 TENANT: HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ JOHN H. MARMADUKE ------------------------------------ John H. Marmaduke, President Sprouse, Mozola, Smith & Rowley, P.C. has executed this Warehouse Lease Agreement to acknowledge that it has represented Hastings Books, Music & Video, Inc. in connection with the waiver contained in Paragraph D(18). SPROUSE, MOZOLA, SMITH & ROWLEY, P.C. By: /s/ R. WAYNE MOORE ------------------------------------ R. Wayne Moore -15- EX-10.18 18 LEASE AGREEMENT 1 EXHIBIT 10.18 LEASE AGREEMENT This agreement of lease, made and entered into on the date of the last of the parties hereto to execute this agreement, by and between the City of Amarillo, a municipal corporation situated in Potter and Randall Counties, Texas, hereinafter called "LESSOR," and Hastings Books, Music & Video, Inc., a Texas corporation, hereinafter called "LESSEE"; W I T N E S S E T H That the LESSOR does by these presents lease, let and demise unto the LESSEE under the terms, conditions and considerations herein set forth, the land and premises described herein, situated in Potter County, Texas. The area of the leased premises is depicted as Areas A, B, C and D on the drawing attached to this agreement as Exhibit A. The total lease area consists of 36,000 square feet of useable space, more or less. 1. Term. The term of this lease shall commence on February 1, 1993, and shall be for a primary term of two years. The LESSEE shall have three consecutive options to renew this lease, each for one-year terms. 2. Rental. The LESSEE agrees to pay to the LESSOR. at its offices at 509 E. 7th Avenue, Amarillo, Texas, a rental in the sure, of Thirty-Six Thousand and No/100 Dollars ($36,000.00) per year payable in twelve equal monthly installments of Three Thousand and 00/100 Dollars ($3,000.00) on the first day of each month in advance. In the event that LESSEE shall default in the prompt payment of said rental for any month, the LESSOR, at the LESSOR's option, may declare the entire rentals for the remainder of the 2 term, whether primary or optional, due and payable without further notice, without prejudice to any other right or remedy that tire LESSOR may have under this lease or provided by law. LESSEE agrees to pay twelve percent (12%) per annum interest on all rental payments past due more than ten days. Posting of a check for payment five (5) days prior to the first day of a month shall not be considered default if it is not timely received by the LESSOR. 3. Use of Premises. LESSEE covenants to not use the premises in any manner that is inconsistent with the zoning or other ordinances of the City of Amarillo or inconsistent with law in any manner. The LESSEE agrees that the LESSEE will keep the premises, inside and outside, in a clean and sanitary condition, eliminating trash, wastepaper, rubbish or any scrap materials that may result from LESSEE's operations. 4. Maintenance, Repairs and Restoration. The LESSOR shall maintain and keep in a good state of repair the exterior wails, foundation, roof and main structural parts of the building, but shall not be responsible for any repairs necessitated by any act or omission or commission of the LESSEE, the LESSEE's employees, agents, patrons, visitors or guests. The LESSEE shall take good care of the premises and shall be responsible for the upkeep and maintenance of the premises, including all of the fixtures, and shall suffer no waste, shall keep the plumbing closets, pipes and fixtures free and clear of obstacles and shall be fully responsible for the maintenance of plumbing, light fixtures, air conditioning and heating equipment, except as provided above. LESSEE shall promptly restore to its -2- 3 condition before damage any damages to LESSOR's property, whether leased or not, caused by act, omission or commission of the LESSEE the LESSEE's employee, agents, patrons, visitors or guests. If the LESSEE desires to redecorate the premises, the LESSEE shall have the right to do so at LESSEE's own expense, provided the LESSEE first notifies the LESSOR and outlines briefly the plan for redecoration. 5. LESSEE's Payment obligations. The LESSEE shall pay all utility bills, including lights, water, electricity, gas, sewer, trash disposal and telephone, prior to delinquency, and shall furnish all tubing, globes or any additional lighting fixtures that the LESSEE may desire. LESSEE shall pay all business personal property taxes when due and shall allow no liens to attach to LESSEE's property on the premises. 6. Alterations. The LESSEE shall not make any alterations to the demised premises in excess of One Thousand Dollars ($1,000.00) in any single year except upon the written consent from the LESSOR. All alterations, additions and improvements, including partitions, fixtures, floor coverings and lighting installed by the LESSEE with the consent of the LESSOR at LESSEE's expense shall remain the property of the LESSEE and may be removed by the LESSEE at the expiration of this lease, provided the premises are restored by the LESSEE at the LESSEE's sole cost and expense to their former condition. The LESSEE shall not attach any signs on or about the premises except as where first approved by the LESSOR, which approval shall not be unreasonably withheld. The LESSOR shall have -3- 4 the right to remove any sign or signs in order to maintain or repair the outside of the building without expense to the LESSOR. 7. Assignment. The LESSEE shall not assign this lease or sublet the premises or any part thereof without the written consent of the LESSOR. 8. Damage or Destruction of the Premises. In the event that the premises or any part thereof shall, during any time this lease is in effect, be damaged by fire, explosion, windstorm, or any other accident or calamity, the LESSEE shall give immediate notice to the LESSOR; and if the premises are so damaged as to be rendered unfit for occupancy, then in such case should the LESSOR elect not to rebuild or repair said damages within thirty (30) days from the date of notice by LESSEE, this lease shall terminate and be at an end, and the rental shall be paid to the date of the damages. However, in tire event the premises are only destroyed or damaged in part so the same shall be in part suitable for occupancy and in part not suitable for occupancy, then the LESSOR may cause the premises to be restored and repaired at LESSOR's costs, and during the period of repair or reconstruction, the rent shall abate proportionately in the proportion that the damaged or unsuitable portion bears to the whole of the leased premises; and when the same shall have been so repaired and reconstructed so the entire premises shall be fit for occupancy, then the full rental payments as provided in this lease shall resumed. By this lease, the LESSOR assumes no obligation to insure or be otherwise financially responsible for any damages or harm, to LESSEE's property contained on the promises. -4- 5 9. Remedy for Breach. In case of default in any of covenants herein, LESSOR may enforce the performance of this lease in any mode provided by law, and this lease may be terminated at the LESSOR's discretion if such default continues for a period of (30) days after LESSOR notifies LESSEE of such default and of LESSOR's intention to declare the lease terminated. If such default or failure shall be not corrected before the expiration of thirty (30) days from the date of such notification, then this lease cease and come to an end, except that such termination shall not relieve LESSEE of LESSEE's obligations to pay the rental for the full term. Thereafter, the LESSOR shall have the right, without further notice or demand, to peaceably reenter and remove all persons and LESSEE's property therefrom without being deemed guilty in any manner of trespass and without prejudice to any remedies for arrears of rent or breach of covenant; or LESSOR may resume possession of the premises, and relet the same for the remainder of the term at the best rent obtainable for account of the LESSEE, who shall make good any deficiency. 10. Liability. The LESSOR shall not be liable to the LESSEE or to LESSEE's employees, patrons or visitors for any damage of any kind whatsoever because of the condition of the leased premises or any adjoining premises. The LESSEE expressly waives any defects in the premises and agrees to indemnify and hold the LESSOR harmless from any and all claims by any person whatsoever for any damage of any kind whatsoever arising out of or incidental to the occupancy or use of the demised premises except for structural or latent -5- 6 defects of the leased premises or by the negligence of Lessor's employees. 11. Bankruptcy or Insolvency. Tn the event the LESSEE shall make any assignment for the benefit of creditors, or in the event any proceedings are instituted in any court for or involving the LESSEE's adjudication as a bankrupt or an insolvent, or in the event proceedings are instituted in court for the appointment of a receiving for any property of the LESSEE, it shall be conclusively deemed that the LESSEE has made default under the covenants of this lease, and the LESSOR shall have the right to terminate this lease in the event such default continues for a period of thirty (30) days after LESSOR notifies LESSEE of such default and of LESSOR's intention to declare this lease terminated. In no event shall this lease be deemed an asset of LESSEE after LESSEE's adjudication as a bankrupt or insolvent, or after the Appointment of any receiver of any of the property of LESSEE or after any proceedings are instituted in any court for the reorganization, liquidation or dissolution of the LESSEE. 12. Quiet Enjoyment. LESSOR warrants that LESSOR has full authority to make this lease and is the owner of the premises leased hereunder, and binds and obligates the LESSOR to maintain the LESSEE in peaceable and quiet enjoyment of said premises during the existence of said lease so long as the LESSEE complies with all the covenants and conditions imposed upon the LESSEE under the terms of this lease. 13. Ingress and Egress. The LESSOR reserves the right of ingress and egress at all reasonable hours for the purpose, of -6- 7 inspecting the premises to see that they are maintained and operated in accordance with and in compliance with the terms of this lease. 14. Holding Over. In the event the LESSEE should hold over the leased premises after the expiration of this lease, said holding over shall operate and be construed as a tenancy from month to month at a rental one and one- half times the last monthly lease payment paid. 15. Superseding Lease. This Lease Agreement supersedes that certain Lease Agreement between LESSOR and LESSEE dated September 15, 1988 and that certain Amendment dated March 31, 1989 to said Lease Agreement but any unfulfilled obligations of LESSEE under said Lease and Amendment shall not be cancelled but shall remain as obligations of LESSEE until fulfilled. 16. Notice. Notice, provided under the terms of this lease or otherwise, shall be given to the LESSOR and to the LESSEE by mailing notice thereof to the LESSOR at P.O. Box 1971, Amarillo, Texas 79186, and to the LESSEE at P.O. Box 3220, Amarillo, Texas 79120. -7- 8 WITNESS OUR HANDS as of the date of the last of the parties to sign which is the 28 day of MAY, 1998. LESSOR THE CITY OF AMARILLO By: /s/ JOHN Q. WARD --------------------------------- ATTEST: John Q. Ward, City Manager /s/ DONNA DERIGHT - ----------------------------------- Donna DeRight, City Secretary LESSEE HASTINGS BOOKS, MUSICVIDEO, INC. By: /s/ WALTER MCNEEN ------------------------------ Office: Executive Vice President -------------------------- ATTEST: /s/ GENE P. JONES - ----------------------------------- Corporate Secretary -8- EX-10.19 19 PROMISSORY NOTE DATED 5/23/95 1 EXHIBIT 10.19 PROMISSORY NOTE $1,600,000.00 Fort Worth, Texas May 23, 1995 FOR VALUE RECEIVED, the undersigned, Hasting Books, Music & Video, Inc., a Texas corporation ("Maker"), hereby unconditionally promises to pay to the order of First Interstate Bank of Texas, N.A. ("Payee") at 309 West Seventh Street, Suite 1100, Fort Worth, Texas 76102 or at such other address given to Maker by Payee, the principal sum of one million six hundred thousand dollars ($1,600,000.00), in lawful money of the United States of America, together with interest (calculated on the basis of a 360 day year) on the unpaid principal balance from day-to-day remaining, computed from the date of advance until maturity (whether by acceleration or otherwise) at the rate of 8.36% per annum. Section 1. Definitions. As used herein, the term "Event of Default" shall have the meaning ascribed to it in Section 4 hereof. As used herein, the term "Maximum Rate" shall mean, with respect to the holder hereof, the maximum nonusurious interest rate, if any, that at any time, or from time to time, may be contracted for, taken, reserved, charged, or received on the indebtedness evidenced by this Note, under the laws which are presently in effect of the United States and the State of Texas applicable to such holder and such indebtedness or, to the extent permitted by law, under such applicable laws of the United States and the State of Texas which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. The Maximum Rate which may be charged, collected, received or contracted for under this Note shall be governed by, and the loan evidenced by this Note is made in reliance upon, Section 501(a)(1) of the Depository Institutions Deregulation and Monetary Control Act of 1980 (H.R. 4986). In the event, any law is hereafter enacted prescribing a Maximum Rate that may from time to time be charged, collected, received, or contracted for on the type of loan evidenced by this Note, and, to the extent ___________________ Civ. Stat. Ann. Art. 5069-1.04, as amended (the "Act"), is relevant to any holder of this Note for the purposes of determining the Maximum Rate, Maker and each such holder elect to determine such applicable legal rate under the Act pursuant to the "indicated ceiling," from time to time in effect, as referred to and defined in Article 1.04(a)(1) of the Act; subject, however, to the limitations on such applicable ceiling referred to and defined in Article 1.04(b)(2) of the Act, and further subject to any right such holder may have subsequently, under applicable law, to change the method of determining the Maximum Rate. As used herein, the term "Prime Rate" shall mean the rate of interest announced by Payee from time to time as its general reference rate of interest. Maker acknowledges that Payee may from time to time extend credit to other borrowers at rates of interest varying from, and having no relationship to, such general reference rate. As used herein, the term "Security Agreement" shall mean that certain security agreement covering the Cessna 441 airplane (the "Airplane") owned by Maker. 2 Section 2. Payments. The principal of and interest on this Note shall be due and payable as follows: (a) Principal shall be due and payable in quarterly installments of $57,142.86 each on the first (1st) day of each August, November, February and May beginning August 1, 1995. (b) Interest, calculated on the unpaid principal balance of this Note, shall be due and payable quarterly as it accrues, on the same dates as, but in addition to, said installments of principal. (c) The entire unpaid balance of this Note shall be due and payable on May 1, 2002. Should the principal of, or any installment of the principal of or interest upon, this Note become due and payable on any day other than a business day, the maturity thereof shall be extended to the next succeeding business day, and interest shall be payable with respect to such extension. All payments of principal of and interest on this Note shall be made by Maker to Payee in federal or other immediately available funds. Payments made to Payee by Maker hereunder shall be applied first to accrued interest and then to principal. All past due principal of and, to the extent permitted by applicable law, interest upon this Note shall bear interest at the Prime Rate in effect from day to day, plus five percent (5.0%) per annum. Section 3. Security. This Note is secured by the Security Agreement covering the Airplane. Section 4. Waiver. Maker and each surety, endorser, guarantor and other party ever liable for payment of any sums of money payable upon this Note, jointly and severally waive presentment, protest, notice of protest and non- payment, or other notice of default, notice of acceleration and intention to accelerate, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, or by any release or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes. No waiver by Payee of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise, shall be considered a waiver of any other subsequent right or remedy of Payee; no delay or omission in the exercise or enforcement by Payee of any rights or remedies shall ever be construed as a waiver of any right or remedy of Payee; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Payee. -2- 3 Section 5. Events of Default and Remedies. An "Event of Default" shall exist hereunder if any one or more of the following events shall occur and be continuing: (a) Maker shall fail to pay when due any principal of, or interest upon, this Note; (b) any representation or warranty made by Maker to Payee herein or in any of the documents executed or delivered to Payee in connection herewith shall prove to be untrue or inaccurate in any material respect; (c) default shall occur in the performance of any of the covenants or agreements of Maker contained herein, or in any document executed or delivered to Payee in connection herewith and such default shall continue for a period of at least twenty (20) days after the date Payee notifies Maker of such default; (d) Maker shall (1) apply for or consent to the appointment of a receiver, trustee, intervenor, custodian or liquidator of itself or of all or a substantial part of its assets, (2) be adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (3) make a general assignment for the benefit of creditors, (4) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, or (5) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or take action for the purpose of effecting any of the foregoing; (e) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Maker or appointing a receiver, trustee, intervenor or liquidator of any such person, or of all or substantially all of its assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days, or (f) the occurrence of any default or event of default under that certain Credit Agreement dated December 12, 1994 by and among Maker and The Boatmen's National Bank of St. Louis, et al. (the "Credit Agreement"). Upon the occurrence of any Event of Default, then in any such event the holder hereof may, at its option, do any one or more of the following: (1) declare the entire unpaid balance of principal of and accrued interest upon this Note to be immediately due and payable, (2) reduce any claim to judgment, (3) foreclose all liens and security interests, and/or (4) without notice of default or demand, pursue and enforce any of Payee's other rights and remedies provided under or pursuant to any applicable laws or agreement. Section 6. Notice. Whenever this Note requires or permits any notice, approval, request or demand from one party to another, the notice, approval, request or demand must be in writing and shall be deemed to have been given (whether or not actually received) when personally served or when deposited in the United States mails, registered or certified, return receipt requested, addressed to the party to be notified at the following address (or at such other address as may have been designated by written notice): Payee: First Interstate Bank of Texas, N.A. Suite 1100 309 West Seventh Street Fort Worth, Texas 76102 Attn: Kim White -3- 4 Maker: Hastings Books, Music & Video,, Inc. 3601 Plains Boulevard, Suite 1 Amarillo, Texas 76106 Attn: Chief Financial Officer In the event that the holder hereof shall fail to give notice of default to Maker as provided herein, the sole and exclusive remedy of Maker for such failure shall be to seek appropriate equitable relief to enforce this agreement to give such notice and to have any acceleration of the maturity hereof postponed or revoked and foreclosure proceedings in connection therewith delayed or terminated pending or upon the curing of such default in the manner and during the period of time hereinbefore set out, and Maker shall have no right to damages or any other type of relief not herein specifically set out against the holder hereof, all of which damages or other relief are expressly waived by Maker. The foregoing is not intended and shall not be deemed under any circumstances to require the holder hereof to give notice of any type or nature to Maker not expressly required by other provisions of this Note. Section 7. Prepayment. Maker reserves the right to prepay the outstanding principal balance of this Note, in whole or in part, at any time and from time to time, without premium or penalty. Any such prepayment shall be made together with payment of interest accrued on the amount of principal being prepaid through the date of such prepayment. Any prepayment shall be applied to payments of principal in inverse order of maturity. Section 8. Usury Laws. Any provision herein, or in any document securing this Note, or any other document executed or delivered in connection herewith, or in any other agreement or commitment, whether written or oral, expressed or implied, to the contrary notwithstanding, neither Payee nor any holder hereof shall in any event be entitled to receive or collect, nor shall or may amounts received hereunder be credited, so that Payee or any holder hereof shall be paid, as interest, a sum greater than the maximum amount permitted by applicable law to be charged to the person, partnership, firm or corporation primarily obligated to pay this Note at the time in question. If any construction of this Note or any document securing this Note, or any and all other papers, agreements or commitments, indicate a different right given to Payee or any holder hereof to ask for, demand or receive any larger sum as interest, such is a mistake in calculation or wording which this clause shall override and control, it being the intention of the parties that this Note, and all other instruments securing the payment of this Note or executed or delivered in connection herewith shall in all things comply with applicable law and proper adjustments shall automatically be made accordingly. In the event that Payee or any holder hereof ever receives, collects or applies as interest, any sum in excess of the Maximum Rate, if any, such excess amount shall be applied to the reduction of the unpaid principal balance of this Note, and if this Note is paid in full, any remaining excess shall be paid to Maker. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, if any, Maker and Payee or any holder hereof shall, to the maximum extent permitted under applicable law, (a) characterize any nonprincipal payment as an expense or fee rather than as interest, (b) exclude voluntary prepayments and the effects thereof, (c) "spread" the total amount of interest -4- 5 throughout the entire term of this Note so that the interest rate is uniform throughout the entire term of this Note; provided, that if this Note is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds the maximum lawful rate, if any, Payee or any holder hereof shall refund to Maker the amount of such excess, or credit the amount of such excess against the aggregate unpaid principal balance of all advances made by the Payee or any holder hereof under this Note at the time in question. Section 9. Costs. The loan evidenced by this Note shall be closed without expense to Payee, it being understood and agreed that all expenses necessary and usual to a transaction of this kind shall be paid by Maker, such expenses to include but not to be limited to: (i) recording fees, (ii) all appraisal costs and (iii) all attorneys' fees arising in connection with the negotiation and preparation of this Note and all documents to be executed in connection with this Note. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity, or in bankruptcy, receivership or other court proceedings, Maker agrees to pay all costs of collection, including, but not limited to, court costs and reasonable attorneys' fees, including all costs of appeal. Section 10. Applicable Law. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. In the event of a dispute involving this Note or any other instruments executed in connection herewith, the undersigned irrevocably agree that venue for such dispute shall he in any court of competent jurisdiction in Tarrant County, Texas. Maker and Payee expressly agree, pursuant to Article 15.10(b) of Chapter 15 ("Chapter 15") of the Texas Credit Code, that chapter 15 shall not apply to this Note or to any loan evidenced by this Note and that neither this Note nor any such loan shall be governed by or subject to the provisions of Chapter 15 in any manner whatsoever. Maker warrants and represents to Payee and all other holders of this Note that all loans evidenced by this Note are and will be for business, commercial investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in Chapter One of the Texas Credit Code. Section 11. Covenants of Maker. If at any time Payee is not a party to the Credit Agreement or if the Credit Agreement terminates, Maker shall agree to reasonable reporting and financial covenants relating to the indebtedness evidenced by this Note. If for any reason Maker does not agree to reporting and financial covenants reasonably satisfactory to Payee, the reporting and financial covenants in the Credit Agreement shall apply to the indebtedness evidenced by this Note. If the appraisal of the Airplane prepared by West Star Aviation, Inc. reflects that the Airplane has a value of less than the unpaid principal balance of this Note, Maker agrees to immediately reduce the unpaid principal balance of this Note to an amount equal to or less than -5- 6 the value of the Airplane reflected in the Appraisal, such payment to be applied to principal in inverse order of maturity. Section 12. Arbitration Program. The parties agree to be bound by the terms and provisions of the current Arbitration Program of Payee which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. Section 13. Final Agreement. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ GENE P. JONES ------------------------------ Gene P. Jones, Chief Financial Officer -6- 7 SECURITY AGREEMENT This Security Agreement (this "Security Agreement") is made and entered into by and between Hastings Books, Music & Video, Inc., a Texas corporation whose address is 3601 Plains Boulevard, Suite 1, Amarillo, Texas 79106 (hereinafter referred to as "Debtor") and First Interstate Bank of Texas, N.A., 309 West Seventh Street, Suite 1100, Fort Worth, Texas 76102 (hereinafter referred to as "Secured Party") as follows: WHEREAS, Secured Party has agreed to make a loan to Debtor to be evidenced by a promissory note executed by Debtor in the original principal amount of $1,600,000 payable to Secured Party (said promissory note and all renewals and extensions thereof are hereinafter referred to as the "Note"); and WHEREAS, to induce Secured Party to make the loan evidenced by the Note, Debtor has agreed to grant to Secured Party a security interest in the Collateral. NOW THEREFORE, for good and valuable consideration, the parties hereto agree as follows: 1. Grant of Security Interest. As security for the payment and performance of the Note, including, without limitation, the due and punctual payment of the principal of, and accrued and unpaid interest on the Note, whether at maturity, by acceleration or otherwise, and all renewals, extensions, rearrangements, amendments and modifications thereof, the Debtor hereby grants to the Secured Party a security interest in and lien on (1) one Cessna 441 airplane (Registration No. N68HS, Serial No. 441-0331, (2) the Garrett TPE 33l-1ON-515F engines (Serial Nos. P77666 and P77679) attached to the foregoing Cessna 441 air-plane and any other engines at any time attached to or used in connection with the foregoing Cessna 441 airplane, (3) all avionics and equipment located on, attached to or used in connection with the Cessna 441 airplane, (4) all increases, substitutions, replacements and additions to any of the foregoing, and (5) all proceeds of any sale or other disposition of any of the foregoing (hereinafter referred to collectively as the "Collateral"). 2. Title. The Debtor will, at the Debtor's cost and expense, defend any action which may affect the Secured Party's security interest in or the Debtor's title to, the Collateral. 3. Financing Statement. At the Secured Party's request, the Debtor will join in executing all necessary financing statements in form satisfactory to the Secured Party and will further execute all other necessary instruments deemed necessary by the Secured Party. 4. Insurance. The Debtor will insure the Collateral with companies acceptable to the Secured Party against such casualties and in such amounts as the Secured Party shall reasonably require. At any time upon the request of Secured Party, the Debtor shall promptly furnish to Secured Party copies or certificates of such policies of insurance. Such policies of insurance will reflect Secured Party as loss payee. 8 5. Protection of Collateral. The Debtor will keep the Collateral in good order and repair and will not waste or destroy the Collateral or any part thereof. The Debtor will not use the Collateral in violation of any statute or ordinance and the Secured Party will have the right to examine and inspect the Collateral at any reasonable time. 6. Time of Performance and Waiver. In performing any act under this Security Agreement, time shall be of the essence. The Secured Party's acceptance of partial or delinquent payments, or the failure of the Secured Party to exercise any right or remedy, shall not be a waiver of any obligation of the Debtor or right of the Secured Party or constitute a waiver of any other similar default subsequently occurring. 7. Default. The Debtor shall be in default under this Security Agreement on the happening of any of the following events or conditions (hereinafter sometimes called an "Event of Default"): (a) The occurrence of an event of default (as defined in the Note); or (b) Failure of Debtor to comply with any of the covenants or agreements under this Security Agreement and the continuance of such failure for a period of at least five (5) days after written notice thereof from Secured Party. 8. Remedies. Upon the occurrence of an Event of Default (as defined in the Note), Secured Party may, at its option, without notice, demand, notice of intent to accelerate or notice of acceleration, all of which Debtor hereby expressly waives, declare the Note secured hereby immediately due and payable and Secured Party shall thereupon have the rights and remedies of a secured party under the Texas Business and Commerce Code, including without limitation, the right to sell, lease or otherwise dispose of any or all of the Collateral and to apply the proceeds thereof toward payment of any costs and expenses and attorney's fees and legal expenses thereby incurred by the Secured Party and toward payment of the Note in such order or manner as the Secured Party may elect. Secured Party shall have the right to take immediate possession of the Collateral, with or without process of law, and for that purpose Secured Party may enter upon any premises on which the Collateral or any part thereof may be situated (provided, however, nothing herein shall authorize Secured Party to commit a breach of the peace) and remove the same therefrom. Secured Party may require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will send Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any public sale or other disposition thereof is to be made. The requirement of sending a reasonable notice shall be met if such notice is mailed, postage prepaid, to Debtor at the address designated at the beginning of this Security Agreement at least ten (10) days before the time of the sale or disposition. Expenses of retaking, holding, repairing, improving, maintaining, preparing for sale, selling or the like shall include Secured Party's reasonable attorneys' fees and legal expenses, -2- 9 plus interest thereon at a rate per annum at all times equal to the highest lawful contract rate permitted by applicable law of the State of Texas, and shall become a part of the Notes which shall be due on demand and which shall be secured by and entitled to the benefits of this Security Agreement. 9. Miscellaneous. (a) It is the intention of the parties hereto to comply with all applicable usury laws; accordingly, it is agreed that notwithstanding any provision to the contrary in this Security Agreement, or in the Note or otherwise in any manner relating thereto, no such provision shall require the payment or permit the collection of interest in excess of the maximum permitted by law. If any excess of interest in such respect is provided for, or shall be adjudicated to be so provided for, in this Security Agreement, or in the Note or otherwise relating thereto, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither the Debtor nor its successors or assigns or any other party liable for the payment hereof, shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount permitted by law, (c) any such excess which may have been collected shall be, at the option of the holder, either applied as a credit against the then unpaid principal amount thereof or refunded to the Debtor and (d) the effective rate of interest shall be automatically subject to reduction to the maximum lawful contract rate allowed under the usury laws of the State of Texas as now or hereafter construed by the courts having jurisdiction. (b) To the maximum extent permitted by law, this Agreement shall be construed under and in accordance with the Texas Business and Commerce Code and other applicable laws of the State of Texas. The obligations under this Agreement are performable in Tarrant County, Texas. (c) In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision thereof and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. (d) Debtor agrees to be bound by the current Arbitration Program of Secured Party which is incorporated by reference herein and is acknowledged as received by Debtor pursuant to which any and all disputes in any manner to the Note, this Security Agreement or any other document executed in connection therewith shall be resolved by mandatory binding arbitration upon the request of any party. -3- 10 (e) THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. EXECUTED to be effective as of May 23, 1995. HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ GENE P. JONES --------------------------------- Gene P. Jones, Chief Financial Officer DEBTOR FIRST INTERSTATE BANK OF TEXAS, N.A. By: /s/ KIMBERLY K. WHITE --------------------------------- Kimberly K. White, Banking Officer SECURED PARTY -4- EX-21.1 20 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 List of Subsidiaries 1. Hastings Properties, Inc., a Nevada corporation
EX-23.1 21 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Hastings Entertainment, Inc. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Dallas, Texas March 13, 1998 EX-27.1 22 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED OCTOBER 31, 1997 AND AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEAR ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1. 1,000 USDOLLARS 9-MOS YEAR OCT-31-1997 JAN-31-1997 FEB-01-1997 FEB-01-1996 OCT-31-1997 JAN-31-1997 1,000 1,000 3,146 4,972 0 0 0 0 0 0 126,994 105,185 132,866 113,553 80,983 138,128 0 70,963 214,854 181,721 70,429 56,080 0 0 0 0 0 0 86 86 66,495 62,983 214,854 181,721 240,610 324,291 240,610 324,291 147,930 204,612 83,877 107,604 0 2,374 0 0 3,093 3,585 5,710 6,116 2,282 2,320 3,428 3,796 0 0 0 0 0 0 3,428 3,796 0 0 0 .45
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