-----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, QCtT7ct4JhLKPFMel6W9CgsLaaXJrlU4VAPYByLCkQuLAlxenBgGZgWRPW6cV677 54sxD/4xDTogDlFsQLLv4Q== 0000950134-98-004581.txt : 19980520 0000950134-98-004581.hdr.sgml : 19980520 ACCESSION NUMBER: 0000950134-98-004581 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19980519 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HASTINGS ENTERTAINMENT INC CENTRAL INDEX KEY: 0001054579 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 751386475 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-47969 FILM NUMBER: 98627571 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/A 1 AMENDMENT NO. 1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998 REGISTRATION NO. 333-47969 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO 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(o) (paid upon initial filing). 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 MAY 19, 1998 PROSPECTUS 3,377,333 SHARES HASTINGS ENTERTAINMENT, INC. COMMON STOCK ------------------ Of the 3,377,333 shares of Common Stock, $.01 par value per share (the "Common Stock"), offered hereby, 3,084,000 shares are being sold by Hastings Entertainment, Inc. (the "Company"), and 293,333 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 $14 and $16 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price and the reservation of shares for sale to officers, directors and certain other persons associated with the Company. The Common Stock has been approved for listing on The Nasdaq National Market under the symbol "HAST," subject to official notice of issuance. 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 $1,000,000, of which $922,000 is payable by the Company and $78,000 is payable by the Selling Shareholder. (3) The Company has granted the Underwriters a 30-day option to purchase up to 506,600 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. FURMAN SELZ , 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 5.059-for-1.000 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, 1998 is referred to as "fiscal 1997." This Prospectus contains certain forward-looking statements. 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 120 superstores averaging 21,200 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 13% compound annual growth rate, growing from $218 million in fiscal 1993 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 86% from approximately 1,118,000 square feet in fiscal 1993 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 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 21,200 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 44,000 book, 27,000 music, 1,500 software, 2,000 periodical and 6,000 videotape titles and 1,500 complementary and accessory items for sale and 15,000 videotape and video game selections for rent. 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. See "Business -- Business Strategy -- Superior Multimedia Concept." 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 bases its merchandising strategy for its superstores on in-depth research of its customers and understanding of its individual markets. 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. See "Business -- Business Strategy -- Small to Medium-Sized Superstore Focus." 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. 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. See "Business -- Business Strategy -- Customer-Oriented Superstore Format." 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 1997, Hastings spent $12.8 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. See "Business -- Business Strategy -- Cost-Effective Operations." 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. See "Business -- Business Strategy -- Low Pricing." EXPANSION STRATEGY Expanded Selling Square Footage. The Company has identified as potential locations for future superstores 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 4 6 approximately 2,081,000 by more than 50% by the end of fiscal 2000. See "Business -- Expansion Strategy -- Expanded Selling Square Footage." 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. See "Business -- Business Strategy -- Electronic Commerce." 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......................... 3,084,000 shares Common Stock offered by the Selling Shareholder............. 293,333 shares Common Stock outstanding after the Offering(1).............. 11,549,189 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 2,370,865 shares reserved for issuance under the Company's various stock plans. As of January 31, 1998, options for 1,797,554 shares have been granted under these stock plans with a weighted average exercise price per share of $11.72. 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 1995, 1996 and 1997 and the balance sheet data at January 31, 1998 are derived from the audited financial statements included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1993 and fiscal 1994 are derived from audited financial statements not included herein. See note (4) to the table below concerning the retroactive restatement of earnings per share data in compliance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
FISCAL YEAR ----------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- INCOME STATEMENT DATA(1): Merchandise revenue......................................... $171,049 $197,311 $232,463 $251,934 $283,026 Video rental revenue........................................ 46,674 57,603 66,449 72,357 74,739 -------- -------- -------- -------- -------- Total revenues.............................................. 217,723 254,914 298,912 324,291 357,765 Gross profit(2)............................................. 80,520 95,681 108,871 118,379 136,860 Selling, general and administrative expenses................ 65,769 80,480 88,443 103,883 119,637 Development expenses........................................ 514 2,811 2,791 2,421 -- -------- -------- -------- -------- -------- Operating income............................................ 14,237 12,390 17,637 12,075 17,223 Interest expense, net....................................... (310) (718) (2,588) (3,585) (4,228) Gain (loss) on sale of mall stores, net(1).................. 3,836 4,080 -- (2,500) 734 Other, net.................................................. 2,051(3) 148 221 126 139 -------- -------- -------- -------- -------- Income before income taxes.................................. 19,814 15,900 15,270 6,116 13,868 Income taxes................................................ 7,205 6,090 5,875 2,320 5,270 -------- -------- -------- -------- -------- Net income.................................................. $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 8,598 ======== ======== ======== ======== ======== Diluted earnings per share(4)............................... $ 1.46 $ 1.14 $ 1.09 $ .43 $ .98 Weighted average common shares outstanding -- diluted basis(4).................................................. 8,618 8,614 8,635 8,757 8,736 OTHER DATA: Depreciation and amortization(5)............................ $ 19,110 $ 21,560 $ 31,175 $ 32,967 $ 36,355 Capital expenditures........................................ $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 55,753 STORE DATA(1): Number of Stores: Open at beginning of period............................... 82 91 102 108 111 Opened during period...................................... 13 13 9 4 8 Closed during period...................................... (4) (2) (3) (1) (2) Open at end of period..................................... 91 102 108 111 117 Comparable store revenues increase(6)....................... 17% 10% 4% 6% 7%
JANUARY 31 ------------------------- 1998 1998 ACTUAL AS ADJUSTED(7) -------- -------------- BALANCE SHEET DATA: Working capital............................................. $ 51,193 $ 69,293 Total assets................................................ 215,298 233,398 Total debt.................................................. 51,612 27,612 Total shareholders' equity.................................. 71,718 121,818
- --------------- (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, Inc., which filed for bankruptcy protection in August 1996. In fiscal 1997, the reserve was reduced to $1.5 million. See "Business -- Litigation." (2) 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 $0.10 on a diluted basis, respectively. 6 8 (3) 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. (4) The Company has restated all previous earnings per share data to comply with SFAS No. 128, which became effective on a retroactive basis with the issuance of the fiscal 1997 financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Accounting Pronouncements." (5) 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." (6) Stores open a minimum of 60 weeks. (7) Adjusted to reflect the sale of the 3,084,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share, application of the estimated net proceeds therefrom as set forth in "Use of Proceeds" and the termination of the redemption obligation of the Company under the Stock Redemption Agreement between the Company and the estate of the Company's founder. See "Certain Transactions." 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. THE COMPANY'S ACCELERATING EXPANSION STRATEGY COULD ADVERSELY AFFECT FUTURE OPERATING RESULTS. 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 as potential locations for future superstores 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 some 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, expanded or remodeled 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 COULD RESULT IN 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 and release date 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." THE COMPANY'S EXPANSION INTO ELECTRONIC COMMERCE IS SUBJECT TO THE SUCCESS OF INTERNET RETAILING AND MAY REQUIRE EXPANSION OF THE COMPANY'S INFRASTRUCTURE. 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. 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 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 8 10 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. A DECLINE IN CONSUMER SPENDING OR UNFORESEEN CHANGES IN CONSUMER DEMAND MAY ADVERSELY AFFECT FUTURE RESULTS. 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. A CHANGE IN THE COMPANY'S ABILITY TO PURCHASE DIRECTLY FROM MANUFACTURERS OR IN ITS SUPPLIER RELATIONSHIPS COULD ADVERSELY AFFECT THE COMPANY. 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." INTENSE COMPETITION IN THE ENTERTAINMENT RETAIL INDUSTRY AND CHANGES IN ENTERTAINMENT TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS. 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. The Company historically has operated in small to medium-sized markets, and 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." RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE OF INFORMATION TECHNOLOGY OF THE COMPANY AND THIRD PARTIES EXIST. Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. 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. There can be no assurance that the Company's vendors' information technology will be Year 2000 compliant, and any failure to be so compliant may require additional expenditures by the Company to rectify the noncompliance and/or to identify alternate and compliant vendors. THE COMPANY'S OPERATIONS DEPEND ON ITS EXECUTIVES. 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. 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 management personnel or to attract additional personnel could have a material adverse effect on the Company. See "Management." MANAGEMENT WILL HAVE BROAD DISCRETION IN APPLICATION OF PROCEEDS. The net proceeds to the Company from the sale of the Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share (the midpoint of the range as set forth on the cover page of this Prospectus) are estimated to be $42.1 million, after deducting the estimated underwriting discount and Offering expenses payable by the Company. Although the Company currently anticipates that it will use a portion of such proceeds to fund the opening of new superstores and the expansion of existing superstores and to reduce its outstanding indebtedness, the remainder of such proceeds are currently allocated only for general corporate purposes. Moveover, management will have the discretion to modify the use of net proceeds. Consequently, management will have broad discretion over the use of the net proceeds of the Offering. See "Use of Proceeds." EFFECTIVE CONTROL OF THE COMPANY BY EXISTING SHAREHOLDERS WILL LIMIT THE INFLUENCE OF PUBLIC SHAREHOLDERS. Upon completion of the sale of the shares offered hereby, approximately 51.2% 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 10 12 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 IN THE COMPANY'S ARTICLES AND BYLAWS MAY DETER TAKEOVER ATTEMPTS. 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, 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 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 ASSURANCE EXISTS THAT A PUBLIC MARKET FOR THE COMMON STOCK WILL DEVELOP AFTER THE OFFERING; POTENTIAL 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. NEW SHAREHOLDERS WILL BE SUBJECT TO 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 $15.00 per share, such dilution would have been equal to $5.14 per share at January 31, 1998. In addition, the future exercise of stock options and warrants would result in further dilution. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE MARKET PRICE FOR THE COMMON STOCK. 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 11,549,189 shares of Common Stock outstanding. Of these shares, 8,465,189 shares will be "restricted securities" as defined by 11 13 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 7,982,672 shares, or 94.3% 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." THE COMPANY DOES NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. 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." 12 14 USE OF PROCEEDS Assuming an initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this Prospectus), the net proceeds from the sale of the 3,084,000 shares of Common Stock offered by the Company are estimated to be $42.1 million ($49.2 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 $40.0 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. 13 15 DILUTION As of January 31, 1998, the Company's net tangible book value was $71.7 million or $8.47 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 3,084,000 shares of Common Stock offered by the Company hereby (at an assumed initial offering price of $15.00 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 January 31, 1998 would have been approximately $113.8 million or $9.86 per share before consideration of the termination of the redemption obligation of the Company under the Stock Redemption Agreement between the Company and the estate of the Company's founder, which represents an immediate increase of $1.39 per share to existing shareholders and an immediate dilution of $5.14 per share to persons purchasing shares in the public offering. See "Certain Transactions." The following table illustrates this dilution per share: Assumed initial public offering price....................... $15.00 Net tangible book value per share at January 31, 1998..... $8.47 ----- Increase attributable to new investors.................... 1.39 ----- Net tangible book value per share after offering............ 9.86 ------ Dilution to new investors................................... $ 5.14 ======
The following table sets forth as of January 31, 1998 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 $15.00 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) Existing Shareholders............ 8,465,189 73.3% $ 1,741 3.6% $ 0.21 New Investors.................... 3,084,000 26.7% 46,260 96.4% $15.00 ---------- ----- ------- ----- ------ Total.................. 11,549,189 100.0% $48,001 100.0% $ 4.16 ========== ===== ======= ===== ======
The foregoing assumes no exercise of stock options outstanding at January 31, 1998. At January 31, 1998, there were outstanding stock options to purchase an aggregate of 1,797,554 shares of Common Stock at a weighted average exercise price of $11.72 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. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of January 31, 1998 and (ii) as adjusted to give effect to the issuance and sale by the Company of the 3,084,000 shares of Common Stock being offered by the Company at an assumed initial public offering price of $15.00 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.
JANUARY 31, 1998 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Current maturities of long-term debt and capitalized lease obligations............................................... $ 301 $ 301 -------- -------- Long-term debt and capitalized lease obligations: Revolving Credit Facility(1).............................. 24,000 -- Series A Senior Notes(2).................................. 25,000 25,000 Other, excluding current maturities....................... 2,311 2,311 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; 8,652,914 shares issued, 11,736,914 shares issued as adjusted(4).................................. 87 117 Additional paid-in capital................................ 1,654 43,724 Retained earnings......................................... 80,168 80,168 Less treasury stock, 187,725 shares, stated at cost....... (2,191) (2,191) Redemption value of common stock held by estate of Company's founder...................................... (8,000) -- -------- -------- Total shareholders' equity............................. 71,718 121,818 -------- -------- Total capitalization.............................. $131,330 $149,430 ======== ========
- --------------- (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. The Stock Redemption Agreement will terminate upon consummation of this Offering. (4) Excludes 2,370,865 shares reserved for issuance under the Company's various stock plans. As of January 31, 1998, options for an aggregate 1,797,554 shares have been granted and are outstanding under these stock plans. See "Management -- Stock Plans." 15 17 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 1995, 1996 and 1997 and the balance sheet data at January 31, 1997 and 1998 are derived from the audited financial statements included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1993 and 1994 and the balance sheet data at January 31, 1994, 1995 and 1996 are derived from audited financial statements not included herein. See note (4) to the table below concerning the retroactive restatement of earnings per share data in compliance with SFAS No. 128.
FISCAL YEAR ---------------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) INCOME STATEMENT DATA(1): Merchandise revenue........................................ $ 171,049 $ 197,311 $ 232,463 $ 251,934 $ 283,026 Video rental revenue....................................... 46,674 57,603 66,449 72,357 74,739 --------- --------- --------- --------- --------- Total revenues............................................. 217,723 254,914 298,912 324,291 357,765 Merchandise cost of revenue................................ 119,090 141,910 166,202 183,614 194,359 Rental video cost of revenue............................... 18,113 17,323 23,839 22,298 26,546 --------- --------- --------- --------- --------- Total cost of revenues..................................... 137,203 159,233 190,041 205,912 220,905 Gross profit(2)............................................ 80,520 95,681 108,871 118,379 136,860 Selling, general and administrative expenses................................................. 65,769 80,480 88,443 103,883 119,637 Development expenses....................................... 514 2,811 2,791 2,421 -- --------- --------- --------- --------- --------- Operating income........................................... 14,237 12,390 17,637 12,075 17,223 Interest expense, net...................................... (310) (718) (2,588) (3,585) (4,228) Gain (loss) on sale of mall stores, net(1)................. 3,836 4,080 -- (2,500) 734 Other, net................................................. 2,051(3) 148 221 126 139 --------- --------- --------- --------- --------- Income before income taxes................................. 19,814 15,900 15,270 6,116 13,868 Income taxes............................................... 7,205 6,090 5,875 2,320 5,270 --------- --------- --------- --------- --------- Net income................................................. $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 8,598 ========= ========= ========= ========= ========= Diluted earnings per share(4).............................. $ 1.46 $ 1.14 $ 1.09 $ .43 $ .98 ========= ========= ========= ========= ========= Weighted average common shares outstanding -- diluted basis(4)................................................. 8,618 8,614 8,635 8,757 8,736 OTHER DATA: Depreciation and Amortization(5)........................... $ 19,110 $ 21,560 $ 31,175 $ 32,967 $ 36,355 Capital Expenditures....................................... $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 55,753 STORE DATA(1): Number of stores: Open at beginning of period.............................. 82 91 102 108 111 Opened during period..................................... 13 13 9 4 8 Closed during period..................................... (4) (2) (3) (1) (2) Open at end of period.................................... 91 102 108 111 117 Total selling square footage at end of period................................................... 1,118,049 1,452,945 1,719,867 1,831,657 2,080,668 Comparable store revenues increase(6)...................... 17% 10% 4% 6% 7%
JANUARY 31, -------------------------------------------------------------------- 1998 1998 1994 1995 1996 1997 ACTUAL AS ADJUSTED(7) ------- -------- -------- -------- -------- -------------- BALANCE SHEET DATA: Working capital.................................. $14,528 $ 29,391 $ 40,731 $ 57,473 $ 51,193 $ 69,293 Total assets..................................... 98,354 130,640 167,227 181,721 215,298 233,398 Total debt....................................... 7,461 23,040 38,916 51,873 51,612 27,612 Total shareholders' equity....................... 33,387 45,733 57,105 63,069 71,718 121,818
- --------------- (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 16 18 leases covering the mall stores that were sold to Camelot Music, Inc., which filed for bankruptcy protection in August 1996. In fiscal 1997, the reserve was reduced to $1.5 million. See "Business -- Litigation." (2) 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 $0.10 on a diluted basis, respectively. (3) 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. (4) The Company has restated all previous earnings per share data to comply with SFAS No. 128, which became effective on a retroactive basis with the issuance of the fiscal 1997 financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Accounting Pronouncements." (5) 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." (6) Stores open a minimum of 60 weeks. (7) Adjusted to reflect the sale of the 3,084,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share, application of the estimated net proceeds therefrom as set forth in "Use of Proceeds" and the termination of the redemption obligation of the Company under the Stock Redemption Agreement between the Company and the estate of the Company's founders. See "Certain Transactions." 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains certain forward-looking statements. 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 Stores, Inc. ("Wal-Mart"), and in connection with that transaction, the Company became an independent entity with all shares of the Company being distributed to the former shareholders of Western. Initially, the Company continued to rely on Western for certain 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 spent an aggregate of $12.8 million 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-1980s, 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. 18 20 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 fiscal 1997 were approximately 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, based on the previous four weeks' rental activity, of each videotape title using 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 $8.96, 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. 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. Hastings intends to open a total of approximately 60 superstores during the three years ending with fiscal 2000. 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. 19 21 RESULTS OF OPERATIONS The following discussion of the Company's results of operations for fiscal years 1995, 1996 and 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.
FISCAL YEAR ----------------------- 1995 1996 1997 ----- ----- ----- Merchandise revenue......................................... 77.8% 77.7% 79.1% Video rental revenue........................................ 22.2 22.3 20.9 ----- ----- ----- Total revenues.............................................. 100.0 100.0 100.0 Cost of merchandise revenue................................. 71.5 72.9 68.7 Cost of video rental revenue................................ 35.9 30.8 35.5 Total cost of revenues...................................... 63.6 63.5 61.7 ----- ----- ----- Gross profit................................................ 36.4 36.5 38.3 Selling, general & administrative expenses.................. 29.6 32.0 33.4 Development expenses........................................ 0.9 0.7 -- ----- ----- ----- Operating income............................................ 5.9 3.7 4.8 Other income (expense): Interest expense............................................ (0.9) (1.1) (1.2) Gain (loss) on sale of mall stores, net..................... -- (0.8) .2 Other, net.................................................. 0.1 -- -- ----- ----- ----- Income before income taxes.................................. 5.1 1.9 3.9 Income taxes................................................ 2.0 0.7 1.5 ----- ----- ----- Net income.................................................. 3.1% 1.2% 2.4% ===== ===== =====
FISCAL 1997 COMPARED TO FISCAL 1996 Revenues. Total revenues for fiscal 1997 increased by $33.5 million, or 10.3%, to $357.8 million from $324.3 million for fiscal 1996. The revenue growth consisted of a 12.3% increase in merchandise sales and a 3.3% increase in video rental revenues. Overall comparable store revenues increased 7% during the twelve months ended January 31, 1998. Each significant merchandise category exhibited growth year to year, with software products providing the largest percentage gains. With the help of the Company's new rental marketing program, introduced in the third quarter, video revenues in fiscal 1997 recovered from a weak revenue performance in the first two quarters to post a $2.4 million or 3.3% increase over fiscal 1996 video revenues. In addition, the Company opened eight new superstores and closed two superstores during fiscal 1997. Gross Profit. Gross profit as a percentage of revenues was 38.3% for fiscal 1997 as compared to 36.5% for fiscal 1996. Gross profit as a percentage of revenues for merchandise in fiscal 1997 increased significantly to 31.3% from 27.1% in fiscal 1996 due largely to increased sales of higher margin products and reduced retail music pricing pressures. As a result of increased video cost allocation, rental video gross profit as a percentage of revenues decreased from 69.2% in fiscal 1996 to 64.5% in fiscal 1997. The remaining change in gross profit as a percentage of revenues was a result of a slight increase in lower margin merchandise sales as a percentage of overall revenue. 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 1993, 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 rental video gross profit of $1,336,000 or 1.8% as a percentage of rental revenues. In the fourth quarter of fiscal 1996, the Company recorded a charge 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 establishment of this reserve decreased merchandise gross profit by 1.4% as a percentage of merchandise revenues. 20 22 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $119.6 million or 33.4% of revenues in fiscal 1997 from $103.9 million or 32.0% of revenues in fiscal 1996. Store operating costs as a percentage of revenues increased during fiscal 1997 to 28.7% from 27.0% for fiscal 1996, primarily as a result of higher product 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. During the second quarter of fiscal 1997, the Company re-priced certain stock options granted to its Chief Executive Officer in fiscal 1992. The Company recognized a one-time pre-tax charge of $1,016,800 as deferred compensation expense as a result of this event. See "Management -- Option Grants, Exercises and Holdings." Despite the inclusion in fiscal 1997 of the deferred compensation charge noted above and system-related development charges noted in the "Development Expenses" section below, general and administrative expenses decreased from 5.0% in fiscal 1996 to 4.7% in fiscal 1997. Development Expenses. System development expenses for fiscal 1996 were 0.7% of revenues. Development expenses were not separately classified in fiscal 1997 as most significant elements of its 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 selling, general and administrative expenses classification. Interest Expense. Interest expense increased to $4.2 million for fiscal 1997 from $3.6 million for fiscal 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 recorded a total pre-tax gain of $7.9 million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot Music, Inc. filed for bankruptcy 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. As of January 31, 1998 expenses totalling $266,000 had been charged against the reserve. In the fourth quarter of fiscal 1997, the reserve was reduced to $1.5 million, resulting in an increase to earnings of $734,000. 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 slightly increased to 36.5% in fiscal 1996 from 36.4% in fiscal 1995. This improvement was primarily a result of an increase in rental video gross margin in fiscal 1996 due primarily to lower video depreciation and reduced video pilferage. In addition, 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 1993, 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 rental video gross profit of $1,336,000, or 1.8% as a percentage of rental revenues. 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. In the fourth quarter of fiscal 1996, the Company recorded a charge 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 establishment of this reserve decreased merchandise gross profit by 1.4% as a percentage of merchandise revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $103.9 million in fiscal 1996 from $88.4 million in fiscal 1995 and increased as a percentage of revenues to 32.0% from 29.6%. 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. The Company has implemented a new return process in an effort to better control return- 21 23 related costs. See "Risk Factors -- A Change in the Company's Ability to Purchase Directly from Manufacturers or in its Supplier Relationships Could Adversely Affect the Company." 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 recorded a total pre-tax gain of $7.9 million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot Music, Inc. filed for bankruptcy 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." 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 $33.7 million, $28.8 million and $56.3 million for fiscal 1995, fiscal 1996 and fiscal 1997, respectively. Capital expenditures, including purchase of rental videotapes, were $48.4 million, $40.5 million and $55.8 million for fiscal 1995, fiscal 1996 and fiscal 1997, respectively. As of January 31, 1998, 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 January 31, 1998 under the Note Agreement and the Revolving Credit Facility was $49.0 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 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. This put option will remain in effect following the Offering, and the Company does not have any reason to believe that the share ownership of the designated control group, which will own approximately 54.2% of the outstanding Common Stock following the Offering, will change materially in the foreseeable future. Although not anticipated, if, following certain transactions including future offerings and/or a combination of stock sales by individuals in the designated control group, such control group ownership were to fall below 33 1/3%, the Company would appropriately reclassify any remaining long-term portion of the Series A Senior Notes due 2003 as current and either repay the Series A Senior Notes within the terms of the Note Agreement or renegotiate the put option. 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 January 31, 1998 was 7.0% per annum. This facility terminates in April 1999. The Company estimates that upon the completion of the Offering the outstanding balance on the Revolving Credit Facility will be approximately $40.0 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. 22 24 At January 31, 1998, the Company had one other debt obligation totaling $1.0 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 $1.6 million at January 31, 1998. The Company opened eight superstores through the fiscal year ended January 31, 1998 and plans to open 12 additional superstores in fiscal 1998. Hastings intends to open a total of 60 superstores during the three years ending with fiscal 2000. The Company invests generally between $1 million and $2 million in a new superstore with the largest components of that amount being merchandise, videos, fixtures and leasehold improvements. In addition, the Company expanded eight superstores in 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 were $55.8 million in fiscal 1997, of which approximately $35.4 million were used to purchase rental videos. The Company believes that the net proceeds from this Offering, cash flow from operations and borrowings under the Revolving Credit Facility will be sufficient to fund the Company's ongoing operations, new superstores and superstore expansions through fiscal 1999. In order to fund the Company's new superstores and superstore expansions in fiscal 2000 and thereafter, the Company believes that it may be required to increase its borrowing capacity under the Revolving Credit Facility or otherwise obtain additional third party financing. 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 Could Result in Fluctuations in Operating Results." The seasonality of the Company's business is illustrated in the following tables relating to each quarter of fiscal 1997 and fiscal 1996. The quarterly information included in the table below has not been reviewed by the Company's independent auditors.
Q1 Q2 Q3 Q4 ------- ------- ------- -------- (DOLLARS IN THOUSANDS) FISCAL 1997: Total revenue........................ $78,436 $81,653 $80,521 $117,155 Gross profit......................... 29,146 33,047 30,417 44,250 Operating income..................... 2,419 3,084 1,282 10,438 Operating income as a percentage of revenue............................ 3.1% 3.8% 1.6% 8.9% Net income........................... 921 1,279 89 6,309 Net income as a percentage of revenue............................ 1.2% 1.6% .1% 5.4% FISCAL 1996: Total revenue........................ $73,875 $76,391 $73,764 $100,261 Gross profit......................... 27,599 29,248 29,825 31,707 Operating income..................... 2,104 1,560 1,789 6,622 Operating income as a percentage of revenue............................ 2.8% 2.0% 2.4% 6.6% Net income (loss).................... 833 (1,149) 466 3,646 Net income (loss) as a percentage of revenue............................ 1.1% (1.5%) 0.6% 3.6%
23 25 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 that 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. See "Risk Factors -- Risks Associated with Year 2000 Compliance of Information Technology of the Company and Third Parties Exist." RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) recently issued several Statements of Financial Accounting Standards (SFAS's) that may impact the Company's accounting treatment and/or its disclosure obligations. The new SFAS's impacting the Company are as follows: 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. Adoption of this statement will not result in significant additional disclosures by the Company. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" was issued in June 1997 and supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The new rules change the manner in which operating segments are defined and reported externally to be consistent with the basis on which they are reported and evaluated internally. The new rules are effected for periods beginning after December 15, 1997. Adoption of this statement will not result in significant additional disclosures by the Company. However, the Company considers the anticipated initiation of the sale of products on its Web site to be a separate segment and when and if such operations are material will include the disclosure required by the statement. The American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5 in April 1998. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption will not have a material impact on the Company. 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 120 superstores averaging 21,200 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 13% compound annual growth rate, growing from $218 million in fiscal 1993 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 86% from approximately 1,118,000 square feet in fiscal 1993 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 Web site with Internet commerce capabilities during the second quarter of fiscal 1998. See "Risk Factors -- The Company's Accelerating Expansion Strategy Could Adversely Affect Future Operating Results" and "-- The Company's Expansion into Electronic Commerce is Subject to the Success of Internet Retailing and May Require Expansion of the Company's Infrastructure." 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 -- The Company's Operations Depend on its Executives." 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 25 27 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, 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, and as a condition of the sale, the Company became an independent entity owned with all shares of the Company being distributed to the former shareholders of Western. Following the sale, the Company continued to depend on Western for certain 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 $62.2 billion, a compound annual growth rate of 6.3%. According to the Veronis, Suhler & Associates Inc. 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 -- A Decline in Consumer Spending or Unforeseen Changes in Consumer Demand May Adversely Affect Future Results." 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 26 28 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 service. Hastings superstores average approximately 21,200 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 44,000 book, 27,000 music, 1,500 software, 2,000 periodical and 6,000 videotape titles and 1,500 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 1997, Hastings spent $12.8 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 27 29 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 as potential locations for future superstores 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. 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. 28 30 The following table sets forth the approximate amount of total Company revenues contributed by each of the following product categories for the periods presented:
FISCAL YEAR ------------------------------------------------------------------------------- 1994 1995 1996 1997 ---------------- ---------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) Merchandise Revenues: Music....................... $ 97,585 38.3% $112,827 37.7% $119,474 36.8% $131,109 36.6% Books....................... 64,658 25.4 76,684 25.7 85,404 26.3 93,860 26.2 Video....................... 16,280 6.4 21,488 7.2 23,420 7.2 26,546 7.4 Software.................... 8,845 3.4 10,767 3.6 13,465 4.2 19,240 5.4 Other....................... 9,943 3.9 10,697 3.6 10,171 3.2 12,271 3.5 -------- ----- -------- ----- -------- ----- -------- ----- Total Merchandise Revenue..... $197,311 77.4 $232,463 77.8 $251,934 77.7 $283,026 79.1 Video Rental Revenue.......... 57,603 22.6 66,449 22.2 72,357 22.3 74,739 20.9 -------- ----- -------- ----- -------- ----- -------- ----- Total Revenues................ $254,914 100.0% $298,912 100.0% $324,291 100.0% $357,765 100.0%
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 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 44,000 current book titles in a variety of subject categories, 27,000 music titles in a broad range of music categories, 2,000 periodical titles, 6,000 new and previously viewed videotape titles and 1,500 software titles. Additionally, the typical Hastings superstore carries approximately 15,000 videotape and video game rental titles. The typical Hastings superstore also offers approximately 1,500 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 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 -- Intense Competition in 29 31 the Entertainment Retail Industry and Changes in Entertainment Technology Could Adversely Affect the Company's Results of Operations." 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 Layout] 30 32 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 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 21,200 square feet, which typically includes retail selling space, receiving and stocking areas and 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. 31 33 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 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 32 34 while maintaining desired levels of customer service by preventing overscheduling or underscheduling sales, stocking and customer service associates. 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. 33 35 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. 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 9 Fiscal Year 1999............................................ 11 10 Fiscal Year 2000............................................ 15 13 Fiscal Year 2001............................................ 7 7 Fiscal Year 2002............................................ 19 17 Thereafter.................................................. 55 54 --- --- Total....................................................... 117 110 === ===
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 48,000 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 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 -- A Change in the Company's Ability to Purchase Directly from Manufacturers or in its Supplier Relationships Could Adversely Affect the Company." 34 36 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, 140 were employed at the Company's distribution center and 240 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 -- Intense Competition in the Entertainment Retail Industry and Changes in Entertainment Technology Could Adversely Affect the Company's Results of Operations." 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 35 37 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. 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 January 31, 1998, 20 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. In fiscal 1996 the Company established a reserve of $2.5 million for amounts payable by Hastings in connection with these leases. As of January 31, 1998 expenses totalling $266,000 had been charged against the reserve. In the fourth quarter of fiscal 1997 the reserve was reduced to $1.5 million, resulting in an increase to earnings of $734,000. Management believes that the existing reserve is adequate for any amounts that may be payable by the Company 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. However, in the opinion of the Company any liability resulting from such leases will not have a material adverse effect on the Company. 36 38 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)....................... 51 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........................... 49 Vice President of Store Operations Michael Woods.............................. 36 Vice President of Information Systems 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 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 28 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. 37 39 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. 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, N.A., a position held since January 1991. Mr. Dallas has served as an officer of NationsBank, N.A. and its predecessors, Boatmen's First National Bank of Amarillo and The First National Bank of Amarillo, since 1965. 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, 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. 38 40 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. 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 $239,085 470,487(2) Chairman of the Board, President and Chief Executive Officer Phillip Hill.................................. 97,355 108,727 111,298 Senior Vice President, Chief Operating Officer and Director Dennis McGill................................. 91,748 83,835 50,590 Vice President of Finance, Chief Financial Officer, Treasurer and Secretary Robert A. Berman.............................. 86,550 27,752 55,649 Vice President of Store Operations Michael Woods................................. 74,418 45,333 15,177 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 404,720 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 $11.07 for the term of the option. 39 41 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.... 25,118 2.8% $15.00(6) 08/28/02 $ 104,115 $ 230,067 40,649 4.6% 13.64 08/28/07 348,669 883,595 404,720(5) 45.9% 11.07(5) 01/31/07 4,833,598 14,234,072 Phillip Hill......... 25,295 2.9% 13.64 05/22/07 216,969 549,841 35,413 4.0% 13.64 08/28/07 303,756 769,778 50,590 5.7% 14.03(7) 01/31/10 766,039 2,255,846 Dennis McGill........ 10,118 1.1% 13.64 05/22/07 86,787 219,936 20,236 2.3% 13.64 08/28/07 173,575 439,873 20,236 2.3% 14.03(7) 01/31/10 306,416 902,338 Robert A. Berman..... 30,354 3.4% 13.64 05/22/07 260,362 659,809 25,295 2.9% 14.03(7) 01/31/12 383,020 1,127,923 Michael Woods........ 15,177 1.7% 13.64 08/28/07 130,181 329,905
- --------------- (1) The Company granted options to other associates to purchase an aggregate of 128,236 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 $11.07 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 -- Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended January 31, 1997." (6) Option granted with exercise price of $15.00 or 110% of the 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. 40 42 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................. 485,462 177,060 $1,495,130 $404,948 Phillip Hill...................... 48,991 176,033 335,728 168,432 Dennis McGill..................... 2,530 83,474 -- 31,500 Robert A. Berman.................. 0 55,649 -- 0 Michael Woods..................... 10,917 58,487 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 632,375 shares of Common Stock, representing 5.5% 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 411,676 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. 41 43 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 42 44 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 505,900 shares of Common Stock, each representing 4.4% 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, 476,457 of the shares authorized for issuance under the 1991 Plan were subject to options and 465,200 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 the ISO is granted, provided the ISO granted to any owner of 10% or more of the total combined voting power 43 45 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 participant's beneficiary in shares of the Company's Common Stock or cash at the election of the participant. 44 46 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 404,720 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 404,720 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 $7.75 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 $11.07 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, with respect to participants other than the Chief Executive Officer of the Company, 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 January 31, 1998, 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. 45 47 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 227,655 shares of Common Stock, representing 2.0% 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 $50,000 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 46 48 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. EMPLOYMENT AGREEMENTS The Company is a party to employment agreements with each of Messrs. Marmaduke, Hill, McGill, Woods and Berman (each, an "Executive"). Each employment agreement provides that the Executive's salary shall be determined by the Board of Directors and that the Executive's employment shall continue until terminated by either the Executive or the Company. Either the Company or the Executive has the right to terminate the employment at any time with or without cause (as defined in each agreement) by delivering written notice of termination to the other party. Each agreement provides for a severance payment if the agreement is terminated by the Company without cause. Under such circumstances, Mr. Marmaduke would receive his base annual salary and bonus for a period of 36 months, Messrs. Hill and McGill each would receive their base annual salary and bonus for a period of 24 months and Messrs. Woods and Berman each would receive their base annual salary and bonus for a period of 18 months following the date of termination, payable over such period at such times as executives of the Company receive their regular salary and bonus payments, and any benefits under any plans of the Company in which the Executive is a participant to the full extent of such Executive's rights under such plans. If the agreements are terminated either voluntarily by the Executive or by the Company with cause, or by reason of death or disability, then the Executive will not be entitled to payments under his employment agreement. Upon a change in control of the Company, each Executive will receive a payment to compensate him for the loss of long-term capital gains treatment of certain options granted to him. Each employment agreement provides that, in the event the Executive terminates his employment with the Company, he may not, for a period of 18 months following termination, work for or assist a competitor of the Company, use certain information obtained from the Company, or induce any other employees of the Company to terminate their relationship with the Company. DIRECTOR COMPENSATION The Company reimburses all directors for expenses incurred in connection with their activities as directors. Non-employee 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 has adopted a Stock Option Plan for Outside Directors (the "Directors Option Plan") for its non-employee directors and has reserved 101,180 shares of Common Stock for issuance thereunder and in February 1998 adopted a Stock Grant Plan for its non-employee directors and has reserved 25,295 shares of Common Stock for issuance thereunder. The Directors Option Plan provides that each non-employee director receives an initial option for 2,530 shares of Common Stock upon election as a director, and an annual grant of 2,530 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 35,413 shares have been granted under the Directors Option Plan. The Stock Grant Plan for Outside Directors provides for a 47 49 grant as of May 1 of each year to each non-employee director of Common Stock with a fair market value of $5,000 on the date of grant. As of the date of this Prospectus, 2,550 shares of Common Stock have been granted to non-employee directors under the Stock Grant Plan for Outside Directors. The Company also granted options covering 7,811 shares under a previous director compensation plan that was terminated in fiscal 1997, of which options covering 4,088 shares remain outstanding. 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, Smith & Rowley, P.C. in Amarillo, Texas, which has provided legal services to the Company since 1993. 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. The Company believes that these leases are on terms as favorable as those which the Company could have obtained from a non-affiliated third party. Jeffrey G. Shrader, a director of the Company, is a shareholder in the law firm of Sprouse, Smith & Rowley, P.C., Amarillo, Texas, which has provided legal services to the Company since 1993. The Company believes that these services have been provided on terms as favorable as those which the Company could have obtained from a non-affiliated third party. 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 108,460 shares of Common Stock for $1,479,291 paid in cash. The per share redemption price was based upon the then most-recent annual valuation of the Company's Common Stock performed by A.G. Edwards & Sons, Inc. for the ASOP. 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. The Stock Redemption Agreement will terminate upon consummation of this Offering. 48 50 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)....... 4,609,427 54.5% 293,333(5) 4,316,094(4) 37.4% Estate of Sam Marmaduke(4).... 1,367,736 16.2% 293,333 1,074,403 9.3% P.O. Box 33251 Amarillo, Texas 79120 Robert Schneider(6)........... 588,357 7.0% -- 588,357 5.1% P.O. Box 32270 Amarillo, Texas 79120 Stephen S. Marmaduke(7)....... 1,449,398 17.1% -- 1,449,398 12.5% Phillip Hill.................. 66,698 * -- 66,698 * Dennis McGill................. 9,450 * -- 9,450 * Robert A. Berman.............. 506 * -- 506 * Mike Woods.................... 12,344 * -- 12,344 * Leonard L. Berry.............. 12,324 * -- 12,324 * Peter A. Dallas............... 17,221 * -- 17,221 * Gaines L. Godfrey............. 20,742 * -- 20,742 * Craig R. Lentzsch(8).......... 13,811 * -- 13,811 * Jeffrey G. Shrader(9)......... 26,514 * -- 26,514 * Ron G. Stegall(10)............ 7,943 * -- 7,943 * All directors and executive officers as a group (12 persons)(2)................. 6,246,378 73.8% -- 5,953,045 51.5%
- --------------- * 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 8,465,189 shares of Common Stock outstanding prior to the Offering and 11,549,189 shares outstanding upon completion of the Offering and includes 570,706 shares subject to options exercisable within sixty (60) days. (3) Includes 1,367,736 shares held by the Estate of Sam Marmaduke, of which John H. Marmaduke is the Independent Executor, and 2,255,525 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, 55,128 shares held by Martha A. Marmaduke, Mr. John H. Marmaduke's wife, 8,651 shares held by Margaret Hart Marmaduke, John H. Marmaduke's daughter, 10,118 shares held by Owen M. Marmaduke, Mr. Marmaduke's son, and 485,462 shares subject to stock options exercisable within 60 days, and excludes shares held in trusts for John H. Marmaduke's children of which NationsBank, 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 293,333 shares as a Selling Shareholder in this Offering. (5) Based on Mr. Marmaduke's beneficial ownership of shares held by the Estate of San Marmaduke, of which John H. Marmaduke is the Independent Executor. 49 51 (6) Includes 30,354 shares held by trusts for the benefit of Mr. Schneider's children for which Mr. Schneider is trustee, and excludes 12,040 shares held by other trusts for the benefit of Mr. Schneider's children. (7) Includes 1,381,785 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, 60,840 shares held by Shelley R. Marmaduke, Stephen S. Marmaduke's wife, and 4,128 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, 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. (8) Includes 3,541 shares held by the Lentzsch Special Trust 1, of which Craig R. Lentzsch is a co-trustee. (9) Includes 19,857 shares held in an individual retirement account for the benefit of Mr. Shrader and 3,086 shares held in a defined benefit plan for the account of Mr. Shrader. (10) Includes 7,083 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 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 -- Certain Provisions in the Company's Articles and Bylaws May Deter Takeover Attempts." 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 50 52 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 -- Effective Control of the Company by Existing Shareholders Will Limit the Influence of Public Shareholders; Certain Provisions in the Company's Articles of Incorporation and Bylaws May Deter Takeover Attempts." 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, 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, 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 51 53 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. The Common Stock has been approved for listing on The Nasdaq National Market under the symbol "HAST," subject to official notice of issuance. 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 11,549,189 shares of Common Stock outstanding (12,055,789 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 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 6,500,000 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 1,797,554 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 (11,549,189 shares immediately following this Offering) or (ii) the average weekly trading volume of the Company's outstanding Common 52 54 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. Subject to compliance with the terms of the applicable 180-day lock-up agreements, the Company believes that approximately 6,500,000 shares of its currently outstanding Common Stock will be eligible for sale under Rule 144 immediately following the completion of the Offering. 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 2,370,865 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. 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.................................... Furman Selz LLC............................................. ----- 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 53 55 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., A.G. Edwards & Sons, Inc. and Furman Selz LLC 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 506,600 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 7,982,672 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 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. The Common Stock has been approved for issuance on The Nasdaq National Market under the symbol "HAST," subject to official notice of issuance. At the request of the Company, the Underwriters have reserved up to 253,300 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 54 56 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, including annual valuations of the Company's Common Stock for the Company's ASOP, 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. EXPERTS The financial statements and financial statement schedule of Hastings Entertainment, Inc. as of January 31, 1997 and 1998, and for each of the years in the three-year period ended January 31, 1998, have been included herein and elsewhere in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon authority of said firm as experts in auditing and accounting. 55 57 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. 56 58 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Balance Sheets as of January 31, 1997 and 1998.............. F-3 Statements of Income for the years ended January 31, 1996, 1997 and 1998............................................. F-4 Statements of Shareholders' Equity for the years ended January 31, 1996, 1997 and 1998........................... F-5 Statements of Cash Flows for the years ended January 31, 1996, 1997 and 1998....................................... F-6 Notes to Financial Statements............................... F-7
F-1 59 WHEN THE TRANSACTION REFERRED TO IN NOTE 12 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, 1997 and 1998, and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended January 31, 1998. 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, 1997 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 1998, in conformity with generally accepted accounting principles. Dallas, Texas March 20, 1998, except as to note 12, which is as of , 1998 F-2 60 HASTINGS ENTERTAINMENT, INC. BALANCE SHEETS JANUARY 31, 1997 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE) ASSETS
FISCAL -------------------- 1996 1997 -------- -------- Current assets: Cash...................................................... $ 4,972 $ 3,840 Merchandise inventories................................... 105,185 126,835 Other current assets...................................... 3,396 3,889 -------- -------- Total current assets.............................. 113,553 134,564 Property and equipment, net................................. 67,165 80,703 Deferred income taxes....................................... 976 -- Other assets................................................ 27 31 -------- -------- $181,721 $215,298 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt...................... $ 301 $ 301 Trade accounts payable.................................... 41,388 60,747 Accrued expenses and other liabilities.................... 11,120 17,590 Deferred income taxes..................................... 3,158 1,305 -------- -------- Income taxes payable...................................... 113 3,428 -------- -------- Total current liabilities......................... 56,080 83,371 Long-term debt, excluding current maturities................ 51,572 51,311 Deferred income taxes....................................... -- 898 Other long-term liability................................... 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; 8,652,914 shares issued; 8,557,135 shares in 1996, and 8,465,189 shares in 1997 outstanding...... 87 87 Additional paid-in capital................................ 1,584 1,654 Retained earnings......................................... 71,721 80,168 Treasury stock, at cost................................... (823) (2,191) Redemption value of common stock held by estate of Company's founder...................................... (9,500) (8,000) -------- -------- 63,069 71,718 Commitments and contingencies -------- -------- $181,721 $215,298 ======== ========
See accompanying notes to financial statements. F-3 61 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF INCOME YEARS ENDED JANUARY 31, 1996, 1997 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEAR -------------------------------- 1995 1996 1997 -------- -------- -------- Merchandise revenue........................................ $232,463 $251,934 $283,026 Video rental revenue....................................... 66,449 72,357 74,739 -------- -------- -------- Total revenues................................... 298,912 324,291 357,765 Merchandise cost of revenue................................ 166,202 183,614 194,359 Rental video cost of revenue............................... 23,839 22,298 26,546 -------- -------- -------- Total cost of revenues........................... 190,041 205,912 220,905 -------- -------- -------- Gross profit..................................... 108,871 118,379 136,860 -------- -------- -------- Selling, general and administrative expenses............... 88,443 103,883 119,637 Development expenses....................................... 2,791 2,421 - -------- -------- -------- 91,234 106,304 119,637 -------- -------- -------- Operating income................................. 17,637 12,075 17,223 -------- -------- -------- Other income (expenses): Interest expense......................................... (2,588) (3,585) (4,228) Gain (loss) on sale of mall stores....................... - (2,500) 734 Other, net............................................... 221 126 139 -------- -------- -------- (2,367) (5,959) (3,355) -------- -------- -------- Income before income taxes....................... 15,270 6,116 13,868 Income taxes............................................... 5,875 2,320 5,270 -------- -------- -------- Net income....................................... $ 9,395 $ 3,796 $ 8,598 ======== ======== ======== Basic earnings per share................................... $ 1.10 $ .44 $ 1.01 ======== ======== ======== Diluted earnings per share................................. $ 1.09 $ .43 $ .98 ======== ======== ======== Weighted-average common shares outstanding -- basic........ 8,528 8,552 8,520 Dilutive effect of stock options........................... 107 205 216 -------- -------- -------- Weighted-average common shares outstanding -- diluted...... 8,635 8,757 8,736 ======== ======== ========
See accompanying notes to financial statements. F-4 62 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1996, 1997 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT 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, 1995... 8,652,914 $87 $1,395 $58,790 126,880 $(1,039) $(13,500) $45,733 Purchase of treasury stock..... -- -- -- -- 15,733 (186) -- (186) Sale of treasury stock......... -- -- 24 -- (6,683) 56 -- 80 Exercise of stock options...... -- -- 3 -- (1,098) 9 -- 12 Shares transferred to fund ASOP......................... -- -- 59 -- (15,637) 133 -- 192 Change in redemption value..... -- -- -- -- -- -- 2,000 2,000 Dividends ($.014 per share).... -- -- -- (121) -- -- -- (121) Net income..................... -- -- -- 9,395 -- -- -- 9,395 --------- --- ------ ------- ------- ------- -------- ------- Balances at January 31, 1996... 8,652,914 87 1,481 68,064 119,195 (1,027) (11,500) 57,105 Exercise of stock options...... -- -- 9 -- (6,425) 55 -- 64 Shares transferred to fund ASOP......................... -- -- 94 -- (17,292) 149 -- 243 Change in redemption value..... -- -- -- -- -- -- 2,000 2,000 Dividends ($.017 per share).... -- -- -- (139) -- -- -- (139) Net income..................... -- -- -- 3,796 -- -- -- 3,796 --------- --- ------ ------- ------- ------- -------- ------- Balances at January 31, 1997... 8,652,914 87 1,584 71,721 95,478 (823) (9,500) 63,069 Purchase of treasury stock..... -- -- -- -- 11,035 (182) -- (182) Sale of treasury stock......... -- -- 2 -- (10,544) 13 -- 15 Exercise of stock options...... -- -- 5 -- (6,612) 160 -- 165 Shares transferred to fund ASOP......................... -- -- 63 -- (10,092) 120 -- 183 Redemption of common stock held by estate of Company's founder...................... -- -- -- -- 108,460 (1,479) 1,500 21 Dividends ($.018 per share).... -- -- -- (151) -- -- -- (151) Net income..................... -- -- -- 8,598 -- -- -- 8,598 --------- --- ------ ------- ------- ------- -------- ------- Balances at January 31, 1998... 8,652,914 $87 $1,654 $80,168 187,724 $(2,191) $ (8,000) $71,718 ========= === ====== ======= ======= ======= ======== =======
See accompanying notes to financial statements. F-5 63 HASTINGS ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 1996, 1997 AND 1998 (DOLLARS IN THOUSANDS)
FOR THE FISCAL YEAR --------------------------------- 1995 1996 1997 -------- --------- -------- Cash flows from operating activities: Net income.............................................. $ 9,395 $ 3,796 $ 8,598 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation and amortization........................ 23,661 24,939 28,944 (Gain) loss on sale of mall stores, net.............. - 2,500 (734) Loss on rental videos transferred to inventory....... 3,337 3,596 4,632 Loss on rental videos lost, stolen and defective..... 3,281 4,066 2,035 Loss on disposal of assets........................... 896 366 744 Deferred income tax.................................. 1,149 741 21 Changes in operating assets and liabilities: Merchandise inventories............................ (18,183) (6,521) (15,822) Other current assets............................... (353) 996 (493) Trade accounts payable and accrued expenses........ 9,782 (3,678) 25,095 Income taxes payable............................... 726 (1,953) 3,315 -------- --------- -------- Net cash provided by operations................. 33,691 28,848 56,335 -------- --------- -------- Cash flows from investing activities: Purchases of property and equipment..................... (48,358) (40,510) (55,753) (Increase) decrease in other assets..................... (93) 771 (4) -------- --------- -------- Net cash used in investing activities........... (48,451) (39,739) (55,757) -------- --------- -------- Cash flows from financing activities: Borrowings under revolving credit facility.............. -- 287,550 22,100 Repayments under revolving credit facility.............. -- (299,300) (22,000) Advances under long-term debt and capital lease obligations.......................................... 11,600 25,000 -- Principal payments under long-term debt and capital lease obligations.................................... (174) (293) (361) Payments of dividends................................... (121) (139) (151) Purchase of treasury stock.............................. (186) -- (1,661) Proceeds from sale of treasury stock.................... 284 307 363 -------- --------- -------- Net cash provided by (used in) financing activities.................................... 15,853 13,125 (1,710) -------- --------- -------- Net increase (decrease) in cash and cash equivalents...... 1,093 2,234 (1,132) Cash and cash equivalents at beginning of year............ 1,645 2,738 4,972 Cash at end of year....................................... $ 2,738 $ 4,972 $ 3,840 ======== ========= ========
See accompanying notes to financial statements. F-6 64 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1997 AND 1998 (1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Hastings Entertainment, Inc. (the "Company") operates a chain of retail stores located in 16 states, primarily in the southwestern and Rocky Mountain portions of the United States, with revenues originating primarily from music, books 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, 1996, 1997 and 1998 are referred to as fiscal 1995, 1996 and 1997, respectively. (b) Basis of Presentation Certain prior year amounts have been reclassified to conform with fiscal 1997 presentation. (c) 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. (d) Merchandise Inventories Merchandise inventories (music, books and videos) have been restated for all periods presented and are recorded at the lower of cost (using standard cost which approximates 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. (e) 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. (f) 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 13 months. The Company initially depreciates the video cost using the straight line method over an 18 month period. After an introductory rental period of twenty weeks, 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. F-7 65 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 1995, a full month's depreciation and no residual value was provided in the month the rental videos were received. These changes resulted in an increase in fiscal 1996 net income of $829,000 and an increase in basic and diluted earnings per share of $.10. The Company reviews long-lived assets and certain identifiable intangibles 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. (g) 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. (h) Financial Instruments Long-term debt of the Company has been stated at values which approximate fair value as of January 31, 1997 and 1998 due to the instruments bearing interest at market rates. The carrying amount of accounts payable approximates fair value because of the short maturity of the instruments. (i) 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. (j) 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. 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 to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123. F-8 66 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (k) Advertising Costs Advertising costs for newspaper, television and other media are expensed as incurred. Advertising expenses for the years ended January 31, 1996, 1997 and 1998 were $1.7 million, $1.5 million and $1.8 million, respectively. (l) Development Expenses Development expenses include costs to develop various information and other systems for buying, distribution, finance, inventory, and store operations. (m) Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which became effective on a retroactive basis with the issuance of the Company's financial statements for fiscal 1997. The Company has restated its prior years earnings per share data to conform with the provisions of SFAS No. 128. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share include additional shares that would have resulted from potentially dilutive securities. For purposes of computing dilution of securities under the treasury stock method, the price of the Company's stock is based upon annual appraisals of the value of the Company. Options to purchase 688,656 shares of common stock at exercise prices ranging from $13.64 per share to $19.29 per share were outstanding at January 31, 1998 but were not included in the computation of diluted EPS because the option's exercise price was greater than or equal to the appraised price of the common shares. (n) 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):
1996 1997 -------- -------- Merchandise inventories: Music..................................................... $ 39,538 $ 46,283 Books..................................................... 40,785 51,494 Videos.................................................... 10,408 15,890 Other..................................................... 18,354 18,300 -------- -------- 109,085 131,967 Less allowance for inventory returns and shrinkage.......... 3,900 5,132 -------- -------- $105,185 $126,835 ======== ========
F-9 67 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During fiscal 1996 and 1997, the Company purchased approximately 32% and 26%, respectively, of all products (defined herein as merchandise inventories and rental videos) from three suppliers. During fiscal 1995, the Company purchased approximately 18% of all products from Anderson Merchandisers, Inc., ("Anderson"), successor to Western Merchandisers, Inc., a former affiliate of the Company. Management of the Company believes that all transactions with Anderson were conducted on an arms length basis. Merchandise inventories that are not sold can normally be returned to the suppliers. At January 31, 1998, the allowance for inventory returns and shrinkage includes a reserve for estimated costs related to merchandise returned or to be returned to suppliers for which credit is pending. 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. (3) PROPERTY AND EQUIPMENT Property and equipment consist of the following (dollars in thousands):
1996 1997 -------- -------- Rental videos............................................... $ 57,940 $ 64,289 Furniture and equipment..................................... 49,257 58,595 Leasehold improvements...................................... 28,983 35,985 Property under capital lease................................ 1,948 1,948 -------- -------- 138,128 160,817 Less accumulated depreciation and amortization.............. (70,963) (80,114) -------- -------- $ 67,165 $ 80,703 ======== ========
Accumulated depreciation and amortization of property and equipment includes $582,000 and $706,000 of accumulated amortization of equipment under capital lease at January 31, 1997 and 1998, respectively. (4) LONG-TERM DEBT Long-term debt and capitalized lease obligations consisted of the following (dollars in thousands):
1996 1997 ------- ------- Revolving credit facility................................... $23,900 $24,000 Series A senior notes....................................... 25,000 25,000 Capitalized lease obligations (note 5)...................... 1,714 1,637 Other....................................................... 1,259 975 ------- ------- 51,873 51,612 Less current maturities..................................... 301 301 ------- ------- $51,572 $51,311 ======= =======
At January 31, 1997 and 1998, the Company had borrowing outstanding of $23.9 million and $24.0 million, respectively, under an unsecured credit agreement with a group of banks. As amended, the unsecured credit agreement provides for a $45 million revolving credit facility which bears interest at variable rates based on the lender's base rate and LIBOR (7.2% and 7.0% at January 31, 1997 and 1998, respectively) and expires on April 30, 1999. The unsecured credit agreement includes provisions which, among other things, require the maintenance of specified financial ratios and net worth requirements. F-10 68 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Further, the unsecured 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. The Company's only derivative portion is 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, 1998, taking into consideration current interest rates and assuming the creditworthiness of the counterparties. The fair value of the agreement at January 31, 1998 was immaterial. 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 interest rate of 7.75%. 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 1997 are as follows (dollars in thousands): 1998........................................................ $ 301 1999........................................................ 29,341 2000........................................................ 5,354 2001........................................................ 5,370 2002........................................................ 5,238 Thereafter.................................................. 6,008 ------- $51,612 =======
(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):
1995 1996 1997 ------- ------- ------- Minimum rentals..................................... $10,032 $10,941 $11,555 Contingent rentals.................................. 1,655 1,643 1,710 Less: Sublease income............................... (115) (184) (151) ------- ------- ------- Rental expense............................ $11,572 $12,400 $13,114 ======= ======= =======
F-11 69 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments under noncancellable operating leases, excluding certain leases assumed by another party (see note 12), and the present value of future minimum capital lease payments as of January 31, 1998 are (dollars in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 1998........................................................ $ 241 $11,819 1999........................................................ 251 11,331 2000........................................................ 254 10,499 2001........................................................ 256 9,483 2002........................................................ 259 7,824 Thereafter.................................................. 1,238 18,464 ------- ------- Total minimum lease payments...................... 2,499 $69,420 Less net present value of sublease income................... (451) ------- Net minimum lease payments under operating leases.......................................... $68,969 ======= Less amount representing imputed interest................... 862 ------- Total obligations under capital leases............ 1,637 Less current principal maturities of capital lease obligations............................................... 92 ------- Obligations under capital leases, excluding current maturities.............................. $ 1,545 =======
The Company has relocated from 12 store leases which remain in effect. Included in accrued expenses and other liabilities is $2.0 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 1995, 1996 and 1997, the Company made lease payments of $479,392, $480,019 and $500,256, respectively, to these partnerships. (6) INCOME TAXES Income tax expense (benefit) consists of the following (dollars in thousands):
1995 1996 1997 ------ ------ ------ Current federal.......................................... $3,967 $1,566 $4,139 Current state and local.................................. 759 13 1,110 Deferred federal......................................... 1,014 281 328 Deferred state and local................................. 135 460 (307) ------ ------ ------ $5,875 $2,320 $5,270 ====== ====== ======
F-12 70 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The difference between expected income tax expense (computed by applying the statutory rate of 35% for fiscal 1995, 34% for fiscal 1996, and 35% for fiscal 1997 to earnings before income taxes) and actual income tax expense is as follows (dollars in thousands):
1995 1996 1997 ------ ------ ------ Computed "expected" tax expense.......................... $5,345 $2,079 $4,854 State and local income taxes, net of federal income tax benefit................................................ 581 312 522 Other.................................................... (51) (71) (106) ------ ------ ------ $5,875 $2,320 $5,270 ====== ====== ======
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):
1996 1997 ------- ------- Deferred tax assets: Provision for merchandise return costs.................... $ 1,178 $ -- Provision for contingent lease costs...................... 922 566 Alternative minimum tax carryforward...................... 905 -- Provision for abandoned leases............................ 459 739 Provision for deferred rent............................... 426 474 Compensated absences...................................... 208 189 Deferred compensation..................................... -- 392 Other..................................................... 390 591 ------- ------- Total deferred tax assets......................... 4,488 2,951 Deferred tax liabilities: Inventories, principally due to the measurement of cost using LIFO for income tax purposes prior to fiscal 1997................................................... $ 4,656 3,492 Freight costs............................................. 674 615 Property and equipment, principally due to different depreciation methods for financial reporting and income tax purposes........................................... 1,340 1,047 ------- ------- Total deferred tax liabilities.................... 6,670 5,154 ------- ------- Net deferred tax assets (liabilities)............. $(2,182) $(2,203) ======= =======
The Company did not record a valuation allowance for deferred tax assets at January 31, 1997 or 1998. 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, 1998. In fiscal 1997 the Company elected to change from the LIFO cost method to the FIFO cost method of inventory accounting for financial reporting and income tax purposes. The $4.7 million deferred tax liability related to the tax LIFO reserve at January 31, 1997 will be included in taxable income ratably over a four year period beginning in fiscal 1997. (7) PROFIT SHARING PLAN Employees who have attained age 21 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 F-13 71 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) those employees who are participating in the plan and have completed one year of service. Amounts expensed related to the plan were $0.4 million, $0.6 million and $0.6 million during fiscal 1995, 1996 and 1997, respectively. (8) SHAREHOLDERS' EQUITY 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 505,900 shares may be granted under each of the 1991 and 1994 Stock Option Plans, and 632,375 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 appraised price 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 included fixed annual increases which were eliminated in fiscal 1997. The 1996 Incentive Stock Plan also authorizes the granting of stock appreciation rights, restricted stock, dividend equivalent rights, stock awards, and other stock-based awards to officers, other associates, directors, and consultants of the Company. There have been no grants of these awards under this plan. 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 404,720 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. In fiscal 1997, the exercise price of these options was reduced from $13.64 to $11.07 and fixed annual increases of the option exercise price were eliminated. The Company recorded compensation expense of $1,040,000 and an income tax benefit of $392,000 for the change in exercise price for the year ended January 31, 1998. In fiscal 1996, the Company adopted the management stock purchase plan that authorizes the issuance of up to 227,655 shares of common stock, pursuant to agreements providing for the purchase of Restricted Stock Units (RSU's). The cost of each RSU is equal to 75% of the fair market value of the common stock of the Company on the date the RSU is awarded. As of January 31, 1998, no RSU's have been awarded under the Plan. F-14 72 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, 1995....................... 1,016,591 $ 9.65 Granted............................................. 402,125 17.31 Exercised........................................... (1,098) 0.20 Forfeited........................................... (73,002) 7.10 --------- ------ Outstanding at January 31, 1996....................... 1,344,616 12.08 Granted............................................. 217,254 13.70 Exercised........................................... (6,425) 10.09 Forfeited........................................... (23,777) 10.84 --------- ------ Outstanding at January 31, 1997....................... 1,531,668 12.33 Granted............................................. 932,617 13.20 Exercised........................................... (6,612) 6.48 Forfeited........................................... (660,119) 15.30 --------- ------ Outstanding at January 31, 1998....................... 1,797,554 $11.72 ========= ====== Reserved and available for grant at January 31, 1998............................................. 573,311
At January 31, 1998, the options outstanding and options exercisable, and their related weighted average exercise price, and the weighted average remaining contractual life for the ranges of exercise prices are shown in the table below. The table does not include 4,088 shares issued to outside directors at an exercise price of $.20.
WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING RANGE: $5.34 -- $6.92 OPTIONS EXERCISE PRICE CONTRACTUAL LIFE - --------------------- --------- -------------- ---------------- Options outstanding at January 31, 1998....... 248,862 5.56 4 years Options exercisable at January 31, 1998....... 189,161 5.45 RANGE: $10.28 -- $14.03 Options outstanding at January 31, 1998....... 1,393,011 12.20 7 years Options exercisable at January 31, 1998....... 574,884 11.23 RANGE: $15.00 -- $19.28 Options outstanding at January 31, 1998....... 151,593 18.23 8 years Options exercisable at January 31, 1998....... 3,516 15.00
At January 31, 1996, 1997 and 1998, the number of options exercisable was 115,300, 201,743 and 771,649, respectively, and the weighted average exercise price of those options was $6.66, $7.31 and $9.77, respectively. The Company applies APB 25 in accounting for its Plans. Since the Company grants substantially all stock options, except for options granted to the Company's Chief Executive Officer as described above, 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 F-15 73 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) based on the minimum value at the date of grant for its stock options under SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 ------ ------ ------ Net income As reported.......................................... $9,395 $3,796 $8,598 Pro forma............................................ 9,319 3,478 6,894 Earnings per share: As reported -- basic:................................ 1.10 .44 1.01 As reported -- diluted............................... 1.09 .43 .98 Pro forma -- basic................................... 1.10 .41 .81 Pro forma -- diluted................................. 1.08 .40 .79
The calculation of the effect on net income includes only options granted during fiscal 1995, 1996 and 1997. 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 1997 1995 1996 1997 ------ ------ ------ ------ ------ ------ Options granted at appraised price......................... $12.26 $14.03 $13.64 $ 5.83 $ 6.84 $ 6.48 Options granted at prices exceeding appraised price..... 24.19 -- 16.53 .27 -- 4.14 Options granted at prices below appraised price............... .20 11.13 11.06 12.16 6.25 7.25 Total options granted........... 17.31 13.70 13.20 3.48 6.77 6.26
The following assumptions were used in the calculation:
1995 1996 1997 ---- ---- ---- Expected dividend yield..................................... -- -- -- Risk-free interest rate..................................... 6.43% 6.68% 6.47% Expected life in years...................................... 10 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 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 $0.3 million, $0.2 million and $.4 million were made in the accompanying financial statements for 1995, 1996 and 1997, respectively. Cumulative common shares allocated to the ASOP were 39,430, 56,722 and 66,814 at January 31, 1996, 1997 and 1998, 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 1998 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 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. F-16 74 HASTINGS ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In fiscal 1997, the Company purchased $1,500,000 of shares pursuant to this agreement. The agreement will terminate should the Company's stock become publicly traded. (9) SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest during fiscal 1995, 1996 and 1997, totaled $2.5 million, $3.3 million and $3.3 million, respectively. Cash payments for income taxes during fiscal 1995, 1996 and 1997 totaled $4.0 million, $3.6 million, $2.8 million, respectively. Noncash investing activities during fiscal 1995, 1996 and 1997 include the transfer of videos with a depreciated cost of $4.4 million, $4.1 million and $5.8 million, respectively, from property and equipment to merchandise inventory. (10) 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 reported have been accrued in the accompanying financial statements. Health insurance expense during fiscal 1995, 1996 and 1997 were $0.5 million, $1.0 million and $1.1 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 reported have been accrued in the accompanying financial statements. Workers' compensation expense during fiscal 1995, 1996 and 1997 was $0.5 million, $0.6 million and $0.1 million, respectively. 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. (11) 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. In August 1996, Camelot filed for protection from creditors under the federal bankruptcy code and the bankruptcy court approved its plan in December 1997. The Company has been named in suits by lessors alleging that Camelot has defaulted on certain of its obligations under these leases. As of January 31, 1998, 20 of such leases remained in effect where the Company may have contingent liability, of which Camelot has assumed 14 leases. In 1996, the Company recorded a loss reserve of $2.5 million for the future lease obligations of these stores. Based on these events, the Company reduced their recorded loss reserve to $1.5 million which is included in accrued expenses and other liabilities at January 31, 1998. Because the ultimate liability is dependent, in part, on the Company's ability to sublease the stores, enter into agreements with lessors, and other events, it is reasonably possible that the Company's estimate of the liability may change in the near term. (12) SUBSEQUENT EVENTS The Company effected a 5.059 for 1 stock split on , 1998, the effects of which have been retroactively applied to the financial statements. F-17 75 ====================================================== 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.................... 3 Risk Factors.......................... 8 Use of Proceeds....................... 13 Dividend Policy....................... 13 Dilution.............................. 14 Capitalization........................ 15 Selected Financial and Operating Data................................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 18 Business.............................. 25 Management............................ 37 Certain Transactions.................. 48 Principal Shareholders and Selling Shareholder......................... 49 Description of Capital Stock.......... 50 Shares Eligible for Future Sale....... 52 Underwriting.......................... 53 Legal Matters......................... 55 Experts............................... 55 Available Information................. 56 Index to Financial Statements......... F-1
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. ====================================================== ====================================================== 3,377,333 SHARES HASTINGS ENTERTAINMENT, INC. COMMON STOCK [Issuer's Logotype] ------------ PROSPECTUS , 1998 ------------ SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. FURMAN SELZ ====================================================== 76 SCHEDULE II HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (AMOUNTS IN THOUSANDS)
JANUARY 31, JANUARY 31, JANUARY 31, DESCRIPTION 1998 1997 1996 ----------- ----------- ----------- ----------- RESERVES DEDUCTED FROM ASSETS Allowance for inventory returns and shrinkage: Balance at beginning of period.......... $ 3,900 $ 330 $ 2,108 Additions charged to costs and expenses........ 5,289 5,727 1,463 Deductions of write-offs...... (4,057) (2,157) (3,241) ------- ------- ------- Balance at end of period.......... $ 5,132 $ 3,900 $ 330 ======= ======= =======
S-1 77 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........................................ $17,302 NASD Filing Fee............................................. 6,365 Nasdaq National Market Listing Fee.......................... 81,625 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 78 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 79 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 5.059 for 1.000 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 2,201 $12.26 $ 26,970.00 ASOP(1)................................. October 12, 1995 15,637 12.26 191,642.00 Owen Marmaduke.......................... November 1, 1995 2,443 12.26 29,946.00 Samuel Marmaduke........................ November 1, 1995 2,039 12.26 24,986.00 Jeffrey G. Shrader(2)................... January 31, 1996 668 .20 132.00 Roxanne Conant-Spradlin(3).............. May 15, 1996 506 10.28 5,200.00 ASOP(1)................................. July 19, 1996 17,292 14.03 242,678.00 Kelly Wood(4)........................... October 21, 1996 7,831 14.03 109,908.00 Marilyn McCrary Wilson(4)............... November 27, 1996 1,351 14.03 18,957.00 Howard Miller(3)........................ December 16, 1996 354 6.92 2,450.00 Sherry Scoggins(4)...................... January 8, 1997 5 14.03 71.00 Theresa Rooney(4)....................... January 8, 1997 66 14.03 923.00 Jeffrey D. Sumpter(3)................... January 14, 1997 506 10.28 5,200.00 Walter McNeer........................... January 30, 1997 5,059 10.28 52,000.00 Marilyn Foos(3)......................... February 4, 1997 354 12.26 4,340.00 Richard Williamson(2)................... February 28, 1997 825 .20 163.00 William J. Morey(3)..................... February 28, 1997 202 10.28 2,080.00 Brenda D. Kuykendall(3)................. May 5, 1997 506 10.28 5,200.00 Darrell Kendall(3)...................... May 30, 1997 506 10.28 5,200.00 Darrell Kendall(3)...................... May 30, 1997 101 12.26 1,240.00 ASOP(1)................................. July 16, 1997 13,427 13.64 183,126.00 Vinny Losasso(3)........................ July 22, 1997 718 6.92 4,970.00 James Fritz(3).......................... August 8, 1997 718 6.92 4,970.00 James Fritz(3).......................... August 8, 1997 1,012 10.28 10,400.00 James Fritz(3).......................... August 8, 1997 228 12.26 2,790.00 Michael Terk............................ October 1, 1997 506 13.64 6,900.00 Leonard L. & Nancy Berry................ October 1, 1997 5,059 13.64 69,000.00 Matthew J. Berry........................ October 1, 1997 506 13.64 6,900.00 Jonathan E. Berry....................... October 1, 1997 506 13.64 6,900.00 Robert A. & Vickie Berman............... October 1, 1997 506 13.64 6,900.00 Stanley Marsh 3 Special Trust........... October 7, 1997 3,334 13.64 45,471.00 Stanley Marsh 3 Special Trust........... October 9, 1997 3,556 13.64 48,507.00 Gaines L. Godfrey(2).................... October 10, 1997 3,541 .20 700.00 Carroll Rogers.......................... October 31, 1997 126 13.64 1,725.00 Kent Andrews Life Est. Trust............ December 3, 1997 212 13.64 2,898.00 Howard Miller(3)........................ December 15, 1997 182 6.92 1,260.00
- --------------- (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 80 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* -- Form of 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, as amended, 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. 10.20* -- Form of Employment Agreement by and between the Company and certain of its executives. 10.21* -- Stock Grant Plan for Outside Directors. 10.22* -- Form of Directed Share Program materials. 21.1* -- Subsidiaries of the Company. 23.1* -- Consent of KPMG Peat Marwick LLP and Report on Schedule. 23.2++ -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (to be included in Exhibit 5.1). 24.1+ -- Powers of Attorney (included on signature pages). 27.1* -- Financial Data Schedule for fiscal 1997. 27.2* -- Financial Data Schedule for fiscal 1996.
- --------------- * Filed herewith. + Previously filed. ++ To be filed by amendment. II-4 81 (b) Financial Statement Schedules. II Valuation and Qualifying Accounts and Reserves for the Years ended January 31, 1996, 1997 and 1998. 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 pursuant to the foregoing provisions, or otherwise, 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 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Amarillo, State of Texas, on this 18th day of May, 1998. HASTINGS ENTERTAINMENT, INC. By: /s/ DENNIS MCGILL ---------------------------------- Name: Dennis McGill Title: Vice President of Finance, Chief Financial Officer, Treasurer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ JOHN H. MARMADUKE* Chairman of the Board, President and May 18, 1998 - ----------------------------------------------------- Chief Executive Officer (principal John H. Marmaduke executive officer) /s/ DENNIS MCGILL Vice President of Finance, Chief May 18, 1998 - ----------------------------------------------------- Financial Officer, Treasurer and Dennis McGill Secretary (principal financial officer and principal accounting officer) /s/ PHILLIP HILL* Senior Vice President, Chief May 18, 1998 - ----------------------------------------------------- Operating Officer and Director Phillip Hill /s/ LEONARD L. BERRY* Director May 18, 1998 - ----------------------------------------------------- Leonard L. Berry /s/ PETER A. DALLAS* Director May 18, 1998 - ----------------------------------------------------- Peter A. Dallas /s/ GAINES L. GODFREY* Director May 18, 1998 - ----------------------------------------------------- Gaines L. Godfrey /s/ CRAIG R. LENTZSCH* Director May 18, 1998 - ----------------------------------------------------- Craig R. Lentzsch /s/ STEPHEN S. MARMADUKE* Director May 18, 1998 - ----------------------------------------------------- Stephen S. Marmaduke /s/ JEFFREY G. SHRADER Director May 18, 1998 - ----------------------------------------------------- Jeffrey G. Shrader /s/ RON G. STEGALL* Director May 18, 1998 - ----------------------------------------------------- Ron G. Stegall
*By: /s/ DENNIS MCGILL ------------------------------- Dennis McGill Attorney-in-Fact II-6 83 INDEX TO 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* -- Form of 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, as amended, 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. 10.20* -- Form of Employment Agreement by and between the Company and certain of its executives. 10.21* -- Stock Grant Plan for Outside Directors. 10.22* -- Form of Directed Share Program materials. 21.1* -- Subsidiaries of the Company. 23.1* -- Consent of KPMG Peat Marwick LLP and Report on Schedule. 23.2++ -- Consent of Locke Purnell Rain Harrell (A Professional Corporation) (to be included in Exhibit 5.1). 24.1+ -- Powers of Attorney (included on signature pages). 27.1* -- Financial Data Schedule for fiscal 1997. 27.2* -- Financial Data Schedule for fiscal 1996.
- --------------- * Filed herewith. + Previously filed. ++ To be filed by amendment. EX-4.1 2 SPECIMEN OF CERTIFICATE OF COMMON STOCK OF THE CO 1 EXHIBIT 4.1 COMMON STOCK COMMON STOCK NUMBER SHARES C- [HASTINGS LOGO] HASTINGS ENTERTAINMENT, INC. CUSIP 418365 10 2 INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY OR RIDGEFIELD PARK, NJ SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT IS THE OWNER OF FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF HASTINGS ENTERTAINMENT, INC. CERTIFICATE OF STOCK a corporation organized under the laws of the State of Texas transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and shares represented hereby are subject to all the terms, conditions and limitations of the Third Restated Articles of Incorporation and the Amended and Restated Bylaws of the Corporation and amendments thereto copies of which are on file with the Corporation and the Transfer Agent to all of which the holder, by acceptance hereof, assents. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile signatures of the duly authorized officers of the Corporation. Dated: /s/ DENNIS MCGILL /s/ JOHN H. MARMADUKE SECRETARY [SEAL] PRESIDENT COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. BY TRANSFER AGENT AND REGISTRAR, AUTHORIZED SIGNATURE
2 HASTINGS ENTERTAINMENT, INC. A FULL STATEMENT OF (A) ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR SERIES OF HASTINGS ENTERTAINMENT, INC. (THE "COMPANY") TO THE EXTENT THEY HAVE BEEN FIXED AND DETERMINED AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE COMPANY TO FIX AND DETERMINE THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF SUBSEQUENT SERIES, (B) THE DENIAL TO THE COMPANY'S SHAREHOLDERS OF PREEMPTIVE RIGHTS AND (C) THE DENIAL TO THE COMPANY'S SHAREHOLDERS OF THE RIGHT TO CUMULATIVE VOTING IS SET FORTH IN THE COMPANY'S THIRD RESTATED ARTICLES OF INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS, AS SUCH DOCUMENT MAY BE AMENDED FROM TIME TO TIME. THE COMPANY WILL FURNISH A COPY OF ANY SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. ANY SUCH REQUEST SHOULD BE ADDRESSED TO THE SECRETARY OF THE COMPANY. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors Act survivorship and not as tenants in common __________________ (State)
Additional abbreviations may also be used though not in the above list. For value received, __________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE INCLUDING POSTAL ZIP CODE OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ ________________________________________________________________________ Shares of the Capital Stock represented by the within certificate, and do hereby irrevocably constitute and appoint ____________________________________________ _______________________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated: ___________________________ NOTICE: ____________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT (Signature) MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY ____________________________________ CHANGE WHATEVER. (Signature) ________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. ________________________________________ SIGNATURE(S) GUARANTEED BY: ________________________________________ EX-5.1 3 OPINION OF LOCKE PURNELL RAIN HARRELL 1 EXHIBIT 5.1 (214) 740-8416 , 1998 (DRAFT) Hastings Entertainment, Inc. 3601 Plains Blvd. Suite #1 Amarillo, TX 79102 Re: Registration Statement on Form S-1 (No. 333-47969) Dear Sirs: We have acted as counsel for Hastings Entertainment, Inc., a Texas corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of an aggregate of 3,377,333 shares of the Company's Common Stock, $.01 par value per share (the "Securities"). We have examined such documents and questions of law as we have deemed necessary to render the opinion expressed below. Based upon the foregoing, we are of the opinion that the Securities, when issued and sold as described in the above-referenced Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm in the prospectus under the caption "Legal Matters." In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Sincerely, LOCKE PURNELL RAIN HARRELL (A Professional Corporation) By: /s/ ----------------------- Kent Jamison EX-10.3 4 CREDIT AGREEMENT 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: --------------------------------- 118 SIXTH AMENDMENT TO CREDIT AGREEMENT This Sixth Amendment to Credit Agreement (this "Amendment") is entered into as of April 15, 1998, among (a) HASTINGS ENTERTAINMENT, INC. (formerly HASTINGS BOOKS, MUSIC & VIDEO, INC,), a Texas corporation ("Borrower"), (b) NATIONSBANK, N.A., successor to The Boatmen's National Bank of St. Louis, a national banking association ("NationsBank"), 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, NationsBank individually, as the Issuing Bank and as the Agent, and the other Banks are parties to that certain 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, the Fourth Amendment to Credit Agreement dated June 12, 1996, and the Fifth Amendment to Credit Agreement dated September 5, 1996 (as amended, modified, restated and supplemented from time to time, the "Credit Agreement"). B. Borrower has requested that the Banks agree to extend the Revolving Commitment Termination Date to June 30, 1999. 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 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: 119 "Revolving Commitment Termination Date" means the earlier to occur of (i) June 30, 1999 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 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, 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 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 - 2 - 120 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. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK - 3 - 121 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 ENTERTAINMENT, INC. (formerly HASTINGS BOOKS, MUSIC & VIDEO, INC.) By: /s/ DENNIS MCGILL ----------------------------------- Name: DENNIS MCGILL ------------------------------ HASTINGS ENTERTAINMENT, INC. ------------------------------ Title: VICE PRESIDENT-FINANCE & CFO ------------------------------ AGENT/BANKS: NATIONSBANK, N.A. (successor to The Boatmen's National Bank of St. Louis) Individually, as the Agent and as the Issuing Bank By: /s/ KIMBERLEY A. KNOP ----------------------------------- Name: KIMBERLEY A. KNOP ------------------------------ Title: VICE PRESIDENT -------------------------------- CHASE BANK OF TEXAS NATIONAL ASSOCIATION (formerly Texas Commerce Bank National Association) By: /s/ JOHN P. DEAN --------------------------------- Name: JOHN P. DEAN ---------------------------- Title: SR. VICE PRESIDENT --------------------------- - 4 - 122 WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ SUSAN B. SHEFFIELD -------------------------------- Name: SUSAN B. SHEFFIELD --------------------------- Title: VICE PRESIDENT -------------------------- - 5 - EX-10.5 5 HASTINGS 1994 STOCK OPTION PLAN 1 EXHIBIT 10.5 HASTINGS BOOKS, MUSIC & VIDEO, INC. 1994 STOCK OPTION PLAN ARTICLE 1 - GENERAL 1.1 Purpose. The purposes of this 1994 Stock Option Plan (the "Plan") are to: (1) closely associate the interests of the management of Hastings Books, Music & Video, Inc. ("Hastings") and its subsidiaries and affiliates (collectively referred to as the "Company") with the shareholders by reinforcing the relationship between participants' rewards and shareholder gains; (2) provide management with an equity ownership in the Company commensurate with Company performance, as reflected in increased shareholder value; (3) maintain competitive compensation levels; and (4) provide an incentive to management for continuous employment with the Company. 1.2 Administration. (a) The Plan shall be administered by the Board of Directors of Hastings or by a committee named by the Board (either being referred to herein as the "Committee"). (b) The Committee shall have the authority, in its sole discretion and from time to time to: (i) designate the employees, classes of employees, directors, or other individuals eligible to participate in the Plan; (ii) award options under the Plan in form and amount as the Committee shall determine; (iii) impose limitations, restrictions and conditions upon any award as the Committee shall deem appropriate; and (iv) interpret the Plan, adopt, amend, and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 1.3 Eligibility for Participation. Participants in the Plan shall be selected by the Committee from the directors, the 2 executive officers and other key employees of the Company who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of the Company, or any other individual whose participation the Committee determines is in the best interest of the Company. In making this selection and in determining the form and amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company, and past and potential contributions to the Company's profitability and sound growth. 1.4 Types of Awards Under Plan. Awards under the Plan may be in the form of: (i) Stock Options, as described in Article 2; or (ii) Incentive Stock Options, as described in Article 3. 1.5 Aggregate Limitation on Awards.Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of Hastings ("Common Stock"). The maximum number of shares of Common Stock which may be issued under the Plan shall be 100,000. 1.6 Effective Date and Term of Plan. (a) The Plan shall become effective on the date approved by the holders of a majority of the shares of Common Stock present in person or by proxy and entitled to vote at the 1994 Annual Meeting of Shareholders of Hastings. (b) No awards of Incentive Stock Options shall be made under the Plan after the tenth anniversary of its effective date, provided, however, that the Plan and all awards made under the Plan prior to that date shall remain in effect until the awards have been satisfied or terminated in accordance with the Plan and the terms of the awards. ARTICLE 2 - STOCK OPTIONS 2.1 Award of Stock Options. The Committee may from time to time, and subject to the provisions of the Plan and the other terms and conditions the Committee prescribes, grant to any participant in the Plan one or more options to purchase for cash or shares of previously owned Common Stock the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. 2.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Award of Stock Option ("Agreement"), executed by the Company and the employee receiving the Stock Option (the "optionee"), in the form the Committee determines. 3 2.3 Stock Option Price. The option price per share of Common Stock shall be established by the Committee for the particular award. 2.4 Term and Exercise. Each Stock Option shall be exercisable at the times and in the amounts the Committee specifies in the Agreement and unless a different period is provided by the Committee or another section of this Plan, may be exercised during a period of ten (10) years from the date of grant (the "option term"). No Stock Option shall be exercisable after the expiration of its option term. 2.5 Manner of Payment. Each Agreement shall set forth the procedure governing its exercise, and shall provide that, upon exercise the optionee shall pay to the Company, in full, the option price with cash or with previously owned Common Stock. ARTICLE 3 - INCENTIVE STOCK OPTIONS 3.1 Award of Incentive Stock Options. The Committee may, from time to time and subject to the provisions of the Plan and other terms and conditions the Committee prescribes, grant to any participant in the Plan one or more incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) ("Incentive Stock Options") to purchase for cash or shares of previously owned Common Stock the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted means the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting powers of Hastings unless the option price per share shall be 110% of the fair market value of a share of Common Stock on the date of grant and the option states that it is not exercisable after the expiration of 5 years from the date of its grant. 3.2 Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement ("Agreement"), executed by the Company and the employee receiving the Incentive Stock Option (the "optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option in the form the Committee determines. 3.3 Incentive Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted, provided that Incentive Stock Options granted to any owner of 10% or more of the total combined voting powers of Hastings shall be 110% of the fair market value of a share of common stock on the date of grant. 4 3.4 Term and Exercise. Each Incentive Stock Option shall be exercisable at such times and in the amounts the Committee specifies in the Incentive Stock Option Agreement and unless a shorter period is provided by the Committee or another section of this Plan, may be exercised during a period of ten years from the date of grant (the "option term"). No Incentive Stock Option shall be exercisable after the expiration of its option term. 3.5 Applicability of Stock Options Sections.Section 2.5, Manner of Payment, applicable to Stock Options, shall apply equally to Incentive Stock Options. 3.6 Maximum Amount of Incentive Stock Options.The aggregate fair market value (determined on the date the option is granted) of Common Stock with respect to which an Incentive Stock Option may become exercisable for the first time during any calendar year by an optionee shall not exceed $100,000. 3.7 Death of an Optionee. (a) Upon the death of the optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the optionee's estate or by a person who acquires the right to exercise Incentive Stock Option by bequest or inheritance or by reason of the death of the optionee, provided that the exercise occurs within both the remaining option term and one year after the optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. 3.8 Retirement or Disability.Upon the termination of the optionee's employment by reason of permanent disability (as determined by the Committee), the optionee may, within 12 months from the date of termination, exercise any Incentive Stock Options to the extent such options are exercisable during the 12-month period. Upon termination of optionee's employment due to retirement with the consent of the Company, the optionee may, within 3 months after termination, exercise any Options to the extent the options were exercisable on the date of termination of employment. 3.9 Termination for Other Reasons.Except as provided in Sections 3.7 and 3.8 or except as otherwise determined by the Committee, all Incentive Stock Options shall terminate upon the termination of the optionee's employment. ARTICLE 4 - MISCELLANEOUS 4.1 General Restriction. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration, or 5 qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of the award or the issue or purchase of shares of Common Stock thereunder, the award may not be consummated in whole or in part unless the listing, registration, qualification, consent, approval, or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 4.2 Non-Assignability. No award under the Plan shall be assignable or transferable by the optionee, except by will or by the laws of descent and distribution. During the life of the optionee, an award shall be exercisable only by the optionee or by optionee's guardian or legal representative. 4.3 Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate for the shares. Alternatively, the Company may issue or transfer the shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued at their fair market value on the date the withholding obligation is incurred. 4.4 Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continued employment by the Company or effect any right which the Company may have to terminate the employment of the participant. 4.5 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not the persons are similarly situated. 4.6 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect to the award unless and until certificates for shares of Common Stock are issued to the recipient. 4.7 Definitions. In this Plan: (a) "Subsidiary" means any corporation of which, at the time more than 50% of the shares entitled to vote generally in an 6 election of directors are owned directly or indirectly by Hastings or any subsidiary thereof. (b) "Affiliate" means any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Hastings. (c) "Fair market value" as of any date of any share of Common Stock means the fair market value of shares determined by the Committee in the manner it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. (d) "Option" means Stock Option and Incentive Stock Option. (e) "Option price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. (f) "Change of Control" means any merger, transfer of assets, or transfer of voting shares in the Company resulting in members of the Marmaduke family owning, directly or indirectly, less than 50% of the voting shares of the Company. 4.8 Leaves of Absence. The Committee shall be entitled to make such rules, and regulations, and determinations as it deems appropriate under the Plan in respect to any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any leave of absence shall constitute a termination of employment within the meaning of the Plan, and (ii) the impact, if any, of any leave of absence on awards under the Plan theretofore made to any recipient who takes leave of absence. 4.9 Adjustments. If the outstanding Common Stock changes by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares, or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plant, and any and all other matters deemed appropriate by the Committee. 4.10 Acceleration. Unless the Committee provides otherwise in an Option Agreement, the exercise date of all Options shall be accelerated and such options may be exercised immediately if a Change of Control occurs. 4.11 Amendment of the Plan. The Committee may, without further action by the shareholders and without receiving further 7 consideration from the participants, amend this Plan or condition or modify awards under this Plan except for amendments which applicable law or regulation require approval by the Shareholders. EX-10.6 6 HASTINGS 1991 STOCK OPTION PLAN 1 EXHIBIT 10.6 HASTINGS BOOKS, MUSIC & VIDEO, INC. 1991 STOCK OPTION PLAN ARTICLE 1 - GENERAL 1.1 PURPOSE. The purposes of this 1991 Stock Option Plan (the "Plan") are to: (1) closely associate the interests of the management of Hastings Books, Music & Video, Inc. ("Hastings") and its subsidiaries and affiliates (collectively referred to as the "Company") with the shareholders by reinforcing the relationship between participants' rewards and shareholder gains; (2) provide management with an equity ownership in the Company commensurate with Company performance, as reflected in increased shareholder value; (3) maintain competitive compensation levels; and (4) provide an incentive to management for continuous employment with the Company. 1.2 ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of Hastings or by a committee named by the Board (either being referred to herein as the "Committee"). (b) The Committee shall have the authority, in its sole discretion and from time to time to: (i) designate the employees, classes of employees, directors, or other individuals eligible to participate in the Plan; (ii) award options under the Plan in form and amount as the Committee shall determine; (iii) impose limitations, restrictions and conditions upon any award as the Committee shall deem appropriate; and (iv) interpret the Plan, adopt, amend, and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 1.3 ELIGIBILITY FOR PARTICIPATION. Participants in the Plan shall be selected by the Committee from the directors, the 1 2 executive officers and other key employees of the Company who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of the Company, or any other individual whose participation the Committee determines is in the best interest of the Company. In making this selection and in determining the form and amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company, and past and potential contributions to the Company's profitability and sound growth. 1.4 TYPES OF AWARDS UNDER PLAN. Awards under the Plan may be in the form of: (i) Stock Options, as described in Article 2; or (ii) Incentive Stock Options, as described in Article 3. 1.5 AGGREGATE LIMITATION ON AWARDS. Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of Hastings ("Common Stock"). The maximum number of shares of Common Stock which may be issued under the Plan shall be 100,000. 1.6 EFFECTIVE DATE AND TERM OF PLAN. (a) The Plan shall become effective on the date approved by the holders of a majority of the shares of Common Stock present in person or by proxy and entitled to vote at the 1992 Annual Meeting of Shareholders of Hastings. (b) Awards may be made under the Plan prior to its effective date, provided that all awards so made will be subject to approval of the Plan by the shareholders of Hastings within 12 months after the Plan is adopted by the Board of Directors of Hastings. (c) No awards of Incentive Stock Options shall be made under the Plan after the tenth anniversary of its effective date, provided, however, that the Plan and all awards made under the Plan prior to that date shall remain in effect until the awards have been satisfied or terminated in accordance with the Plan and the terms of the awards. ARTICLE 2 - STOCK OPTIONS 2.1 AWARD OF STOCK OPTIONS. The Committee may from time to time, and subject to the provisions of the Plan and the other terms and conditions the Committee prescribes, grant to any participant in the Plan one or more options to purchase for cash or shares of previously owned Common Stock the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. 2 3 2.2 STOCK OPTION AGREEMENTS. The grant of a Stock Option shall be evidenced by a written Award of Stock Option ("Agreement"), executed by the Company and the employee receiving the Stock Option (the "optionee") in the form the Committee determines. 2.3 STOCK OPTION PRICE. The option price per share of Common Stock shall be established by the Committee for the particular award. 2.4 TERM AND EXERCISE. Each Stock Option shall be exercisable at the times and in the amounts the Committee specifies in the Agreement and unless a different period is provided by the Committee or another section of this Plan, may be exercised during a period of ten (10) years from the date of grant (the "option term"). No Stock Option shall be exercisable after the expiration of its option term. 2.5 MANNER OF PAYMENT. Each Agreement shall set forth the procedure governing its exercise, and shall provide that, upon exercise the optionee shall pay to the Company, in full, the option price with cash or with previously owned Common Stock. ARTICLE 3 - INCENTIVE STOCK OPTIONS 3.1 AWARD OF INCENTIVE STOCK OPTIONS. The Committee may, from time to time and subject to the provisions of the Plan and other terms and conditions the Committee prescribes, grant to any participant in the Plan one or more incentive stock options (intended to qualify Section 422 of the Internal Revenue Code of 1986, as amended) ("Incentive Stock Options") to purchase for cash or shares of previously owned Common Stock the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted means the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting powers of Hastings unless the option price per share shall be 110% of the fair market value of a share of Common Stock on the date of grant and the option states that it is not exercisable until the expiration of 5 years from the date of its grant. 3.2 INCENTIVE STOCK OPTION AGREEMENTS. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement ("Agreement"), executed by the Company and the employee receiving the Incentive Stock Option (the "optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option in the form the Committee determines. 3.3 INCENTIVE STOCK OPTION PRICE. The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock 3 4 Option shall be 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted. 3.4 TERM AND EXERCISE. Each Incentive Stock Option shall be exercisable at such times and in the amounts the Committee specifies in the Incentive Stock Option Agreement and unless a shorter period is provided by the Committee or another section of this Plan, may be exercised during a period of ten years from the date of grant (the "option term"). No Incentive Stock Option shall be exercisable after the expiration of its option term. 3.5 APPLICABILITY OF STOCK OPTIONS SECTIONS. Section 2.5, Manner of Payment, applicable to Stock options, shall apply equally to Incentive Stock Options. 3.6 MAXIMUM AMOUNT OF INCENTIVE STOCK OPTIONS. The aggregate fair market value (determined on the date the option is granted) of Common Stock with respect to which an Incentive Stock Option may become exercisable for the first time during any calendar year by an optionee shall not exceed $100,000. 3.7 DEATH OF AN OPTIONEE. (a) Upon the death of the optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the optionee's estate or by a person who acquires the right to exercise Incentive Stock Option by bequest or inheritance or by reason of the death of the optionee, provided that the exercise occurs within both the remaining option term and one year after the optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. 3.8 RETIREMENT OR DISABILITY. Upon the termination of the optionee's employment by reason of permanent disability (as determined by the Committee), the optionee may, within 12 months from the date of termination, exercise any Incentive Stock Options to the extent such options are exercisable during the 12-month period. Upon termination of optionee's employment due to retirement with the consent of the Company, the optionee may, within 3 months after termination, exercise any Options to the extent the options were exercisable on the date of termination of employment. 3.9 TERMINATION FOR OTHER REASONS. Except as provided in Sections 3.7 and 3.8 or except as otherwise determined by the Committee, all Incentive Stock Options shall terminate upon the termination of the optionee's employment. 4 5 ARTICLE 4 - MISCELLANEOUS 4.1 GENERAL RESTRICTION. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration, or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state of federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of the award or the issue or purchase of shares of Common Stock thereunder, the award may not be consummated in whole or in part unless the listing, registration, qualification, consent, approval, or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 4.2 NON-ASSIGNABILITY. No award under the Plan shall be assignable or transferable by the optionee, except by will or by the laws of descent and distribution. During the life of the optionee, an award shall be exercisable only by the optionee or by optionee's guardian or legal representative. 4.3 WITHHOLDING TAXES. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate for the shares. Alternatively, the Company may issue or transfer the shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued at their fair market value on the date the withholding obligation is incurred. 4.4 RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continued employment by the Company or effect any right which the Company may have to terminate the employment of the participant. 4.5 NON-UNIFORM DETERMINATIONS. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not the persons are similarly situated. 4.6 RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall have no rights as a shareholder with respect 5 6 to the award unless and until certificates for shares of common Stock are issued to the recipient. 4.7 DEFINITIONS. In this Plan: (a) "SUBSIDIARY" means any corporation of which, at the time more than 50% of the shares entitled to vote Generally in an election of directors are owned directly or indirectly by Hastings or any subsidiary thereof. (b) "AFFILIATE" means any person or entity which directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Hastings. (c) "FAIR MARKET VALUE" as of any date of any share of Common Stock means the fair market value of shares determined by the Committee in the manner it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. (d) "OPTION" means Stock Option and Incentive Stock Option. (e) "OPTION PRICE" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. (f) "CHANGE OF CONTROL" means any merger, transfer of assets, or transfer of voting shares in the Company resulting in members of the Marmaduke family owning, directly or indirectly, less than 50% of the voting shares of the Company. 4.8 LEAVES OF ABSENCE. The Committee shall be entitled to make such rules, and regulations, and determination's as it deems appropriate under the Plan in respect to any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing the Committee shall be entitled to determine (i) whether or not any leave of absence shall constitute a termination of employment within the meaning of the Plan, and (ii) the impact, if any, of any leave of absence on awards under the Plan theretofore made to any recipient who takes leave of absence. 4.9 ADJUSTMENTS. If the outstanding Common Stock changes by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination exchange of shares, or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plant, and any and all other matters deemed appropriate by the Committee. 6 7 4.10 ACCELERATION. Unless the Committee provides otherwise in an Option Agreement, the exercise date of all Options shall be accelerated and such options may be exercised immediately if a Change of Control occurs. 4.11 AMENDMENT OF THE PLAN. (a) The Committee may, without further action by the shareholders and without receiving further consideration from the participants, amend this Plan or condition or modify awards under this Plan except for amendments which applicable law or regulation require approval by the Shareholders. 7 EX-10.9 7 CHIEF EXECUTIVE OFFICER STOCK OPTION, AS AMENDED 1 EXHIBIT 10.9 STOCK OPTION AGREEMENT Option Agreement made May 12, 1992, between Hastings Books, Music & Video, Inc., a Texas corporation, hereinafter referred to as the corporation, and John H. Marmaduke the Chief Executive Officer of the Corporation, hereinafter referred to as Marmaduke. RECITALS The corporation deems Marmaduke to be an important and valuable Chief Executive Officer and deems it to be in the corporation's best interest and in the interest of its shareholders to provide Marmaduke an incentive to increase his proprietary interest in the corporation and desires to enter into this Agreement to grant to him an option to purchase 80,000 shares of the common shares of the corporation on certain terms and conditions. In consideration of the mutual covenants and promises hereinafter set forth and for other good and valuable consideration, the corporation and Marmaduke agree as follows: 1. The corporation hereby irrevocably grants to Marmaduke, as a matter of separate agreement and not in lieu of salary or other compensation for services, the right and option, hereinafter called the "Option" to purchase all or any part of an aggregate of 80,000 full shares of authorized by non-issued common stock of the corporation on the terms and conditions herein set forth. Unless otherwise provided herein, this Option may not be exercised prior to February 1, 1997. Thereafter, the Option shall be exercisable in full or in part from time to time until January 31, 2007, at which time this Option shall terminate. 2 2. The purchase price of the shares of common stocks subject to this option shall be as follows:
Fiscal Year Option is Exercised Purchase Price per Share ------------------------------- ------------------------ (ending January 31) 1993 $39.20 1994 43.90 1995 49.17 1996 55.07 1997 61.68 1998 69.08 1999 77.37 2000 86.66 2001 97.06 2002 (and thereafter) 108.70
3. If the corporation shall issue any additional shares of stock by way of a stock dividend on, or split up, subdivision, or reclassification of outstanding common shares, then this Option shall be deemed to cover such additional shares to the extent that the same would have been issued to Marmaduke had such option been exercised in its entirety at the time of such issuance of additional shares, and there shall be a corresponding proportionate adjustment of the option price per share so that in the aggregate the option price for all shares then covered shall be the same as the aggregate option price for the shares remaining subject to the Option immediately prior to the issuance of such additional shares. 4. Anything contained herein to the contrary, upon the dissolution or liquidation of the corporation or upon any merger or consolidation in which the company is not the surviving corporation, prior to the time that this Option shall become exercisable, Marmaduke shall have the right, immediately prior to -2- 3 such dissolution, liquidation, merger, or consolidation, to exercise the Option in full even though not otherwise exercisable. 5. This Option shall not be transferrable by Marmaduke otherwise than by will and by the laws of dissent and distribution. During the lifetime of Marmaduke, the Option shall be exercised only by him. 6. If Marmaduke shall die at any time prior to the expiration of this Option, the person or persons to whom the Option shall have been transferred by Will or the laws of dissent or distribution shall have the right within one year from the date of Marmaduke's death, to exercise in whole or in part the unexercised portion of this Option, but only to the extent that this Option is exercisable on the date of Marmaduke's death. 7. Upon the termination of Marmaduke's employment by reason of permanent disability (as determined by the Board of Directors), Marmaduke may, within twelve (12) months from the date of termination exercise any portion of this option to the extent that such option is exercisable during the twelve (12) month period. Upon termination of Marmaduke's employment due to retirement with the consent of the Board of Directors, Marmaduke may, within three (3) months after termination, exercise any option to the extent this Option is exercisable on the date of termination of employment. Except as provided above, this Option shall terminate upon the termination of Marmaduke's employment with the corporation. 8. Payment for shares of stock purchased upon exercise of this Option shall be made in full in cash. -3- 4 9. The corporation will at all times during the terms of this Option reserve and keep available for issue such number of shares of its authorized and unissued common stock as will be sufficient to satisfy the requirements of this Option Agreement. 10. This Option may not be exercised until this Agreement shall have been submitted to and approved by the shareholders of the corporation or until the shareholders of the corporation have otherwise waived their preemptive rights, if any, with respect to the shares issuable upon exercise of this Option. 11. This Option Agreement shall be subject to and governed by the laws of the State of Texas. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Amarillo, Texas, the day and year of first above written. HASTINGS BOOKS, VIDEO, INC. By: /s/ ILLEGIBLE ------------------------------------ Chairman of the Board /s/ JOHN H. MARMADUKE --------------------------------------- John H. Marmaduke -4- 5 AMENDMENT TO STOCK OPTION AGREEMENT WHEREAS, Hastings Entertainment, Inc. (the "Company") granted to JOHN H. MARMADUKE ("Recipient") a stock option for 80,000 shares of stock dated May 12, 1992, pursuant to that certain Option Grant Agreement No. 5; and WHEREAS, the grant agreement provided that the exercise price of the option would increase over time; and WHEREAS, the Board of Directors of the Company determined that it would be in the best interest of the Company to amend the exercise price for such option and fix it for the term of the option; and WHEREAS, Recipient is agreeable to the establishment of a fixed price for the option. NOW, THEREFORE, for and in consideration of the sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Recipient have agreed as follows: 1. Option Grant Agreement No. 5 is amended as of January 15, 1998 to provide for a fixed exercise price of $56 per share for all shares granted under such Option Grant Agreement. 2. Except as amended herein, all terms and conditions of the Option Grant Agreement No. 5 shall remain in full force and effect. WHEREFORE, the parties have executed this Amendment to Option Grant Agreement No. 5 as of January 15, 1998. COMPANY: HASTINGS ENTERTAINMENT, INC. By: /s/ PHILLIP HILL ----------------------------------- Phillip Hill, Senior Vice President RECIPIENT: /s/ JOHN H. MARMADUKE ---------------------------- John H. Marmaduke EX-10.15 8 LEASE AGREEMENT DATED AUGUST 3, 1994 AS AMENDED 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 23 AMENDMENT TO OFFICE LEASE AGREEMENT This Amendment to Office Lease Agreement (the "Amendment") is entered into this 23rd day of January, 1995, by and between Omni Capital Corporation, a Texas corporation ("Omni"), and Hastings Books, Music & Video, Inc., a Texas corporation ("Hastings"). RECITALS A. By that certain Office Lease Agreement (the "Lease") dated August 3, 1994, Omni leased approximately 43,000 square feet of space in a building located in Lot 1, Block 2, Sears Park Addition Unit No. 3, Amarillo, Potter County, Texas, to Hastings. B. The Lease has a thirty-six (36) month initial term and four (4) options to extend the term of the Lease for periods of eighteen (18) months each. C. Omni and Hastings desire to amend the Lease. AGREEMENT For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Omni and Hastings agree as follows: 1. The Lease is amended as follows: a. The definition of Premises in the Terms and Definitions section of the Lease is amended by inserting "3601 Plains Boulevard, Suite 1, Amarillo, Texas 79102" in the blank. b. The definition of Shopping Center in the Terms and Definitions section of the Lease is deleted in its entirety and the following definition is substituted therefor: That portion of Lot 1, Block 2, Sears Park Addition Unit No. 3, Amarillo, Potter County, Texas, that is outlined in green on Exhibit "B". c. Exhibit "B" of the Lease shall be the Exhibit "B" that is attached to this Amendment. 24 d. PARAGRAPH C(22) of the Lease is deleted in its entirety and the following paragraph is substituted therefor: OPTIONS TO EXTEND. Landlord grants to Tenant seven (7) 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) $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, (d) $6,050.00 per month during the fourth extended term, if exercised, (e) $6,050.00 per month during the fifth extended term, if exercised, (f) $6,050.00 per month during the sixth extended term, if exercised, and (g) $6,050.00 per month during the seventh 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. 2. Except as modified by this Amendment, the Lease shall remain in full force and effect, enforceable in accordance with its terms. 3. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of Texas. 4. This Amendment shall be binding upon and shall inure to the benefit of the parties to this Amendment and their respective successors and assigns. OMNI CAPITAL CORPORATION BY: /s/ C.W. CROUCH -------------------------- C. W. Crouch, President HASTINGS BOOKS, MUSIC & VIDEO, INC. By: /s/ JOHN H. MARMADUKE -------------------------- John H. Marmaduke, President 2 EX-10.20 9 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made the _____day of _________, ________, by and among HASTINGS ENTERTAINMENT, INC., a Texas corporation ("Hastings") and _______________ ("Executive"). W I T N E S S E T H: WHEREAS, Hastings and its affiliates are engaged in the retail sale of books, music, video tapes, periodicals, and software and the rental of video tapes; and WHEREAS, Executive has expertise, experience and capability in the business of Hastings; WHEREAS, Executive has been, and now is serving Hastings as its ______________________________________________; and WHEREAS, Hastings desires to enter into this Agreement to provide severance and other benefits for Executive and obtain Executive's agreements regarding confidentiality and post- employment restrictive covenants for Hastings; and WHEREAS, Executive is willing to provide such agreements to Hastings. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration is mutually acknowledged by the parties, it is hereby agreed as follows: 1. Duties and Responsibilities. The duties and responsibilities of Executive are and shall continue to be of an executive nature as shall be required by Hastings in the conduct of its business. Executive's powers and authority shall include all those presently delegated to him or such other duties and responsibilities as from time to time may be assigned to him. Executive recognizes, that during his employment hereunder, he owes an undivided duty of loyalty to Hastings, and agrees to devote substantially all of his business time, skills, efforts, and attention to the performance of said duties and responsibilities and to use his best efforts to promote and develop the business of Hastings. 2. Employment Term. Executive's employment shall continue until terminated by either party in accordance with Sections 4, 5, 6, or 7 herein. Except as may otherwise be expressly provided herein, regardless of the basis of any termination, Executive's obligations under Sections 10, 11, 12, and 13 hereof shall continue. 3. Compensation and Benefits. During employment, Executive shall be entitled to receive a base annual salary as established by the Board of Directors of Hastings, participate in the Corporate Officer Incentive Plan ("COIP") at a level established by the Board of Directors of Hastings, shall be reimbursed for reasonable expenses incurred and accounted for in accordance with the policies and procedures of Hastings, and shall be entitled to 2 vacation pay and other benefits applicable to employees generally, each as may from time to time be established, amended or terminated. In addition, upon execution of this Agreement, Executive shall be entitled to the Special Compensation set forth in Section 4 hereof in accordance with the terms of this Agreement. 4. Termination by Hastings; Special Compensation. (a) At any time, Hastings may terminate Executive's employment for any reason. If Executive's termination is other than pursuant to Section 5, Executive shall, subject to the other provisions of this Section 4, be entitled to the following Special Compensation (as that term is defined in this Section 4) in lieu of any benefits available under any and all Hastings separation plans or policies. (b) For purposes of this Agreement, "Special Compensation" shall entitle Executive: (i) to continue to receive for a period of _____________ (__) months from the date of termination (the "Severance Period") monthly compensation at the rate equal to the monthly amount of his base annual salary in effect at the date of termination of employment; (ii) to receive a bonus, based on actual performance results under the COIP throughout the Severance Period provided that the amount, if any, payable under such plan for the award period including the last day of the Severance Period shall be pro rated based upon the number of months of the Severance Period that fall within the award period and the total number of months in such award period; (iii) to continue to receive throughout the Severance Period any executive medical, dental, life, and qualified or nonqualified retirement benefits which the Executive was receiving or was entitled to receive at the time of termination, except that long term disability and short term disability benefits cease on the last day worked; (c) Hastings shall pay or cause to be paid the amounts payable under paragraph (b)(i) above in equal installments, monthly in arrears, and the amount payable under paragraph (b)(ii) in accordance with the terms of such plan. All payments pursuant to this Section shall be subject to applicable federal and state income and other withholding taxes. (d) In addition to the Special Compensation described above, Executive shall also be entitled to any vacation pay for vacation accrued by Executive in the calendar year of termination but not taken at the time of termination. (e) In the event Executive becomes employed full time during the Severance Period, Executive's entitlement to continuation of the benefits described in paragraph (b)(iii) shall 2 3 immediately cease, however, Executive shall retain any rights to continue medical insurance coverage under the COBRA continuation provisions of the group medical insurance plan by paying the applicable premium therefor. The payments and benefits provided for in this Section shall be in addition to all other sums then payable and owing to Executive hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Executive for employment or services provided after termination of employment hereunder, and shall be in full settlement and satisfaction of all of Executive's claims and demands. (f) In all events, Executive's right to receive severance and/or other benefits pursuant to this Section shall cease immediately in the event Executive is reemployed by Hastings or an affiliate or Executive or breaches any provision of Sections 10, 11, 12 or 13 hereof. In all cases, Hastings' rights under Section 14 shall continue. (g) In the event that the Special Compensation is determined to be an "excess parachute payment" under section 280G of the Internal Revenue Code of 1986, as amended (the "Code") or any successor provision, subject to the excise tax imposed by section 4999 of the Code or any successor provision (the "Excise Tax"), Hastings agrees to pay to Executive an additional sum (the "Gross Up") in an amount such that the net amount retained by Executive, after receiving both the Special Compensation and the Gross Up and after paying: (i) any Excise Tax on the Payment and the Gross Up, and (ii) any Federal, state and local income taxes on the Gross Up, is equal to the amount of the Special Compensation. For purposes of determining the Gross Up, Executive shall be deemed to pay state and local income taxes at the highest marginal rate of taxation in his filing status for the calendar year in which the Special Compensation is to be made based upon Executive's domicile on the date of the payment. The determination of whether such Excise Tax is payable and the amount of such Excise Tax shall be based upon the opinion of tax counsel selected by Hastings subject to the approval of Executive. If such opinion is not finally accepted by the Internal Revenue Service, then appropriate adjustments shall be calculated (with Gross Up, if applicable) by such tax counsel based upon the final amount of Excise Tax so determined. The final amount shall be paid, if applicable, within thirty (30) days after such calculations are completed. 5. Voluntary Resignation by Executive; Termination for Cause; Total Disability; Death. Upon termination of Executive's employment by either Voluntary Resignation or Termination for Cause (as those terms are defined in this Section 5), Executive shall have no right to compensation, severance pay or other benefits described herein but Executive's obligations under Sections 10, 11, 12 and 13 hereof shall continue. Upon termination for total disability, Executive's obligations under Sections 10, 11, 12, and 13 hereof shall continue. (a) Voluntary Resignation by Executive. At any time, Executive has the right, by written notice to Hastings, to terminate his services hereunder ("Voluntary Resignation"), effective as of sixty (60) days after such notice. 3 4 (b) Termination for Cause by Hastings. At any time, Hastings has the right to terminate Executive's employment for cause. Termination upon the occurrence of any of the following shall be deemed termination for cause ("Termination for Cause"): (i) any act, or failure to act, by Executive involving fraud or willful malfeasance in the performance of his duties under this Agreement, including, but not limited to, Executive's willful failure to serve as a full time employee of Hastings pursuant to the terms and provisions of Section 1 of this Agreement; or (ii) Executive's willful engagement in conduct which is demonstrably and materially injurious to Hastings. Termination for failure to meet performance expectations, unless willful, continuing and substantial, shall not be deemed a Termination for Cause. For Termination for Cause, written notice of the termination of Executive's employment by Hastings shall be served upon Executive and shall be effective as of the date of such service. Such notice given by Hastings shall specify the act or acts of Executive underlying such termination. (c) Total Disability. Upon the total disability of Executive, as disability is defined in the disability policies and plans applicable to Executive, Executive shall have no right to compensation or severance pay described herein but shall be entitled to long term disability and other such benefits afforded under Hastings' applicable policies and plans. (d) Death. Upon the death of Executive, Executive estate shall have no right to receive compensation or other severance pay described herein, but shall be entitled to receive any benefits afforded under Hastings' applicable policies and plans. 6. Resignation Following Constructive Discharge. If at any time, except in connection with a termination pursuant to Sections 4, 5, or 7, Executive is Constructively Discharged (as that term is defined in this Section 6) then Executive shall have the right, by written notice to Hastings within sixty (60) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice. Executive shall in such event be entitled to the compensation and benefits as if such employment were terminated pursuant to Section 4 of this Agreement. For purposes of this Agreement, Executive shall be "Constructively Discharged" upon the occurrence of any one of the following events: (a) Executive is removed from his position with Hastings other than as a result of Executive's appointment to a position of equal or superior scope and responsibility; or (b) Executive's targeted total compensation is reduced by more than 20% (other than across-the-board reductions similarly affecting all executive officers of Hastings). 4 5 7. Effect of Change in Control. (a) Upon a Change in Control, Executive will be entitled to a payment (the "Change of Control Gross-Up") for all unexercised incentive stock options, and shares owned immediately prior to the Change of Control that were acquired as a result of incentive stock options exercised within 12 months prior to the Change in Control and non- qualified options exercised within 18 months prior to the Change in Control. Payments will be determined separately for each option, and type of option, granted. The Change of Control Gross-Up shall be determined in accordance with the following formula: (i) For all unexercised incentive stock options G = [((P - E) x N) x L] / M Where G = Change of Control Gross-Up Payment P = The price per share paid in the tender offer or merger agreement that results in the Change in Control. If no such tender offer or merger agreement occurs in connection with a Change in Control, then the price per share shall be determined by a majority of disinterested incumbent members of the Board of Directors of Hastings in office immediately prior to the Change in Control. E = The exercise price per share of the incentive stock option. N = The number of unexercised shares of such incentive stock option. L = The long term capital gains tax rate in effect for the calendar year in which the Change of Control Gross-Up is to be made. M = The highest marginal rate of taxation in the Executive's filing status for the calendar year in which the Change of Control Gross-Up is to be made. (ii) For all Incentive Stock Options exercised within the 12-month period prior to the Change in Control and owned by Executive immediately prior to the Change in Control. G = [((P - F) x Q) x L] / M Where G = Change of Control Gross-Up Payment 5 6 P = The price per share paid in the tender offer or merger agreement that results in the Change in Control. If no such tender offer or merger agreement occurs in connection with a Change in Control, then the price per share shall be determined by a majority of disinterested incumbent members of the Board of Directors of Hastings in office immediately prior to the Change in Control. F = The exercise price of such option. Q = The number of shares exercised in such Incentive Stock Option. L = The long term capital gains tax rate in effect for the calendar year in which the Change of Control Gross-Up is to be made. M = The highest marginal rate of taxation in the Executive's filing status for the calendar year in which the Change of Control Gross-Up is to be made. (iii) For all non qualified stock options exercised within the 18-month period prior to the Change in Control and owned by Executive immediately prior to the Change in Control. G = [((P - V) x Q) x L] / M Where G = Change of Control Gross-Up Payment P = The price per share paid in the tender offer or merger agreement that results in the Change in Control. If no such tender offer or merger agreement occurs in connection with a Change in Control, then the price per share shall be determined by a majority of disinterested incumbent members of the Board of Directors of Hastings in office immediately prior to the Change in Control. V = The fair market value of the stock at time of exercise of the non-qualified option (determined as of the closing price of the stock on the date such option is exercised). Q = The number of shares exercised in such Incentive Stock Option. L = The long term capital gains tax rate in effect for the calendar year in which the Change of Control Gross-Up is to be made. M = The highest marginal rate of taxation in the Executive's filing status for the calendar year in which the Change of Control Gross-Up is to be made. 6 7 The Change in Control Gross-Up for unexercised incentive stock options shall be paid upon surrender and cancellation of the incentive stock options. The Change in Control Gross-Up for incentive stock options exercised in the 12-month period prior to the Change in Control and for non-qualified stock options exercised in the 18-month period prior to the Change in Control shall be paid upon the Change in Control. (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than John H. Marmaduke, the John H. Marmaduke Family Limited Partnership, the Stephen S. Marmaduke Family Limited Partnership, the Estate of Sam Marmaduke, deceased, a trustee or other fiduciary holding securities under an employee benefit plan of Hastings or any of its affiliates, and other than Hastings or a corporation owned, directly or indirectly, by the stockholders of Hastings in substantially the same proportions as their ownership of stock of Hastings, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Hastings representing 33 1/3% or more of the combined voting power of Hastings' then outstanding securities, or (ii) during any period of two consecutive years (not including any period prior to the date of this Agreement), incumbent members cease for any reason to constitute a majority of the members of the Board of Directors of Hastings; A member of the Board of Directors of Hastings shall be an "incumbent member" if such individual is as of the date of this Agreement or at the beginning of the applicable two consecutive year period a member of the Board of Directors of Hastings, and any new director after the date of this Agreement (other than a director designated by person who has entered into an agreement to effect a transaction described in subparagraph (i) above) whose election to the Board or nomination for election by the stockholders of Hastings was approved by a vote of at least two-thirds (2/3) of the directors still in office who either were directors as of the date hereof or as of the first day of the applicable two consecutive year period or whose election or nomination for election was previously so approved. A Change of Control shall include any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 7. (c) In the event that within one year of a Change in Control (as that term is defined in this Section 7) Executive's employment is terminated by Hastings other than pursuant to Section 5 hereof; then Executive shall be entitled to the Special Compensation and, if applicable, the Gross-Up described in Section 4. 7 8 (d) Except as otherwise specifically provided, amounts paid under this Section 7 shall be paid, if applicable, within thirty (30) days after such calculations are completed. (e) In the event Executive's employment is terminated pursuant to this Section 7, Executive shall be bound by Sections 10, 12, and 13, but shall not have any continuing obligations under Section 11, except as otherwise required by common law or statute. 8. Dispute Resolution. All disputes arising under this Agreement, other than those disputes relating to Executive's alleged violations of Sections 10 through 13 herein, shall be submitted to arbitration by the American Arbitration Association of Dallas, Texas. Costs of arbitration shall be borne equally by the parties. The decision of the arbitrators shall be final and there shall be no appeal from any award rendered. Any award rendered may be entered as a judgment in any court of competent jurisdiction. In any judicial enforcement proceeding, the losing party shall reimburse the prevailing party for its reasonable costs and attorneys' fees for enforcing its rights under this Agreement, in addition to any damages or other relief granted. This Section 8 does not apply to any action by Hastings to enforce Sections 10 through 13 of this Agreement and does not in any way restrict Hastings' rights under Section 14 herein. 9. Enforcement. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by Hastings if Executive is successful pursuant to a legal judgment, arbitration or settlement. 10. Confidential Information. Executive acknowledges that during the course of his employment he has learned or will learn or develop Confidential Information (as that term is defined in this Section 10). Executive further acknowledges that unauthorized disclosure or use of such Confidential Information, other than in discharge of Executive's duties, will cause Hastings irreparable harm. For purposes of this Section, Confidential Information means trade secrets (such as technical and non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process) and other proprietary information concerning the business of Hastings, or its affiliates, including but not limited to: pricing and financial information computer programs; unpatented inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development; business plans; sales forecasts; personnel information, including the identity of other employees of Hastings, their responsibilities, competence, abilities, and compensation; current and prospective suppliers' lists and information on suppliers; information concerning planned or pending acquisitions or divestitures; and information concerning purchases or leasing of major equipment or property, which information: (a) has not been made generally available to the public; and (b) is useful or of value to the current or anticipated business, or research or development activities of Hastings or of any supplier of Hastings, or (c) has been identified to Executive as confidential by Hastings, either orally or in writing. 8 9 Except in the course of his employment and in the pursuit of the business of Hastings or any of its subsidiaries or affiliates, Executive shall not, during the course of his employment, or for a period of eighteen (18) months following termination of his employment for any reason, directly or indirectly, disclose, publish, communicate or use on his behalf or another's behalf, any proprietary information or data of Hastings or any of its subsidiaries or affiliates. Executive acknowledges that Hastings operates and competes nationally, and that Hastings will be harmed by unauthorized disclosure or use of Confidential Information regardless of where such disclosure or use occurs, and that therefore this confidentiality agreement is not limited to any single state or other jurisdiction. 11. Non-Competition. (a) Executive acknowledges that use or disclosure of Confidential Information described in Section 10 is likely if Executive were to perform services on behalf of a competitor of Hastings. Therefore, Executive shall not, for eighteen (18) months following termination of employment for any reason (the "Non-Compete Period"), accept any position, where the performance of duties in that position will involve managing, controlling, participating in, investing in, acting as consultant or advisor to, rendering services for, or otherwise assisting any person or entity that engages in or owns any business that is in the retail multi-media entertainment business. For purposes of this Agreement, "retail multi-media entertainment business" means any company or other entity that derives more than 5% of its gross revenues from the retail sale of any one or more of the following: the sale of books, the sale of pre-recorded music, the sale of pre-recorded video tapes, the sale of software, or the rental of pre-recorded video tapes. Executive acknowledges that Hastings operates and competes nationally, and that therefore this non-competition agreement is not limited to any single state or other jurisdiction. (b) This section shall not prevent Executive from using general skills and experience developed during employment with Hastings or other Hastings; or from accepting a position of employment with another company, firm, or other organization which competes with Hastings, if its business is diversified and Executive is employed in a part of the business that is not related to the multi-media entertainment business and provided that such position does not require or permit the disclosure or use of Confidential Information. (c) The ownership by Executive of less than five percent (5%) or less of a publicly-traded class of securities shall not be deemed a violation of this Section 11. (d) Executive represents and warrants to Hastings that the enforcement of the restriction contained in this Section 11 will not be unduly burdensome to Executive and is part of the inducement for Hastings to pay the Special Compensation. Executive further represents and acknowledges that Executive is willing and able to be employed by other employers not prohibited by this Section 11. In the event that a court of competent jurisdiction determines that this covenant does not meet the requirements of Section 15.50 of the Texas Business & Commerce 9 10 Code ("TBCC"), then Hastings and Executive each agree that Hastings and Executive are deemed to have requested reformation by such court pursuant to Section 15.51 of the TBCC. (e) Executive agrees that a breach or violation of this covenant not to compete by Executive shall entitle Hastings, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies which Hastings may have if Executive is in breach of this covenant not to compete, and that the time period of this covenant shall be extended for an amount of time that Executive is in breach thereof. (f) If Executive violates any covenant contained in Section 11 and Hastings brings legal action for injunctive or other relief, Hastings shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenant of Executive contained in this Section 11 shall be deemed to have duration as specified above, which period shall continue until the later of (i) the last day of the eighteen (18) month period described above, or (ii) the date specified in a final judgment of a court of competent jurisdiction enforcing the covenants of Executive in this Section 11. 12. Inducement of Other Employees. For an eighteen (18) month period following termination of employment, Executive will not directly or indirectly solicit, induce or encourage any employee or agent of Hastings to terminate his relationship with Hastings. 13. Return of Hastings' Property. All notes, reports, sketches, plans, published memoranda or other documents created, developed, generated or held by Executive during employment concerning or related to Hastings' business, and whether containing or relating to Confidential Information or not, are the property of Hastings and will be promptly delivered to Hastings upon termination of Executive's employment for any reason whatsoever. During the course of employment, Executive shall not remove any of the above property containing Confidential Information, or reproductions or copies thereof, or any apparatus from Hastings' premises without authorization. 14. Remedies. Executive acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of Sections 10, 11, 12 and 13 will not cause him undue hardship and that said provisions are reasonably necessary and commensurate with the need to protect Hastings and its legitimate and proprietary business interests and property from irreparable harm. Executive acknowledges that failure to comply with the terms of this Agreement will cause irreparable damage to Hastings. Therefore, Executive agrees that, in addition to any other remedies at law or in equity available to Hastings for Executive's breach or threatened breach of this Agreement, Hastings is entitled to specific performance or injunctive relief, without bond, against Executive to prevent such damage or breach, and the existence of any claim or cause of action Executive may have against Hastings will not constitute a defense thereto. Executive further agrees to pay reasonable attorney fees and costs of litigation 10 11 incurred by Hastings in any proceeding relating to the enforcement of the Agreement or to any alleged breach thereof in which Hastings shall prevail in whole or in part. In the event of a breach or a violation by Executive of any of the covenants and provisions of this Agreement, the running of the Non-Compete Period (but not of Executive's obligation thereunder), shall be tolled during the period of the continuance of any actual breach or violation. 15. Entire Understanding. This Agreement constitutes the entire understanding between the parties relating to Executive's employment hereunder and supersedes and cancels all prior written and oral understandings and agreements with respect to such matters. 16. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. 17. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto, Executive's executors, administrators, legal representatives, heirs, successors, and assigns and the successors and assigns of Hastings. Hastings shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of Hastings, expressly and unconditionally to assume and agree to perform Hastings' obligations under this Agreement, in the same manner and to the same extent that Hastings would be required to perform if no such succession or assignment had taken place. 18. Partial Invalidity. The various provisions of this Agreement are intended to be severable and to constitute independent and distinct binding obligations. Should any provision of this Agreement be determined to be void and unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other provision or part thereof, and such provision or part thereof shall be deemed modified to the extent required to permit enforcement. Without limiting the generality of the foregoing, if the scope of any provision contained in this Agreement is too broad to permit enforcement to its full extent, but may be made enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Executive hereby agrees that such scope may be judicially modified accordingly. 19. Strict Construction. The language used in this Agreement will be deemed to be the language chosen by Hastings and Executive to express their mutual intent and no rule of strict construction shall be applied against any person. 20. Waiver. The waiver of any party hereto of a breach of any provision of this Agreement by any other party shall not operate or be construed as a waiver of any subsequent breach. 11 12 21. Notices. Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party (a) upon delivery to the address of such party specified below if delivered personally or by courier; (b) upon dispatch if transmitted by telecopy or other means of facsimile, provided a copy thereof is also sent by regular mail or courier; or (c) within forty-eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, for delivery as certified mail, return receipt requested, addressed, in any case to the party at the following address(es) or telecopy numbers: 12 13 If to Executive: ___________________________ c/o Hastings Entertainment, Inc. P.O. Box 35350 Amarillo, TX 79120 Facsimile: (806) 351-2299 If to Hastings: Hastings Entertainment, Inc. P.O. Box 35350 Amarillo, TX 79120 Facsimile: (806) 351-2299 Attention: Corporate Secretary or to such other address(es) or telecopy number(s) as any party may designate by written notice in the aforesaid manner. 22. Governing Law. This Agreement shall be governed by, and interpreted, construed and enforced in accordance with, the laws of the State of Texas. 23. Gender. Wherever from the context it appears appropriate, each term stated in either the singular of plural shall include the singular and the plural, and the pronouns stated in either the masculine, the feminine or the neuter gender shall include the masculine, feminine or neuter. 24. Headings. The headings of the Sections of this Agreement are for reference purposes only and do not define or limit, and shall not be used to interpret or construe the contents of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date above set forth. HASTINGS ENTERTAINMENT, INC. By: ----------------------------- Name and Title -------------------------------- [Executive] 13 EX-10.21 10 STOCK GRANT PLAN FOR OUTSIDE DIRECTORS 1 EXHIBIT 10.21 HASTINGS ENTERTAINMENT, INC. STOCK GRANT PLAN FOR OUTSIDE DIRECTORS 1. PURPOSE. The purpose of this Stock Grant Plan for Outside Directors (the "Plan") 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 (the "Award"). 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 ("ERISA") 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 Plan and shall be entitled to receive Award hereunder upon the termination of such employment. (b) The term "Committee" shall mean the Administrative Committee established pursuant to Section 9 hereof. (c) The term "Market Value" 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). 3. ELIGIBILITY. All Outside Directors of Hastings shall be eligible to receive an Award hereunder. 4. SHARES SUBJECT TO THE PLAN. Subject to adjustment in accordance with Section 8 hereof, the total number of shares of common stock which may be granted under the Program is 5,000 (the "Shares"). The Shares shall be either previously authorized and unissued or treasury shares. 5. STOCK GRANT AWARD. (a) Annual Grants. Effective May 1, 1998, each Outside Director shall automatically receive a grant of Company stock with a value of $5,000.00, with such value based upon the offering price of the common stock of Hastings in its initial public offering. Outside Directors who are elected or appointed to the Board of Directors after such date shall automatically receive a grant of stock with a Market Value of $5,000.00 on the date of each such director's initial election or appointment to the Board of Directors. (The initial grant to an Outside Director is defined as the "Initial Grant"). Subject to the provisions hereof, on May 1st of each and every year after the Initial Grant, each Outside Director shall automatically receive an additional grant of common stock of the Company with a Market Value of $5,000.00 ("Annual Grant"). Initial Grants and Annual Grants are referred to as "Grants." 2 (b) Effectiveness. All shares granted shall be fully vested without restrictions. (c) Service as a Director. In the event that an Outside Director is subject to re-election in a year but does not intend to stand for re-election in such year, he shall not receive an Annual Grant for such year. 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 granted hereunder. 7. LIMITATION AS TO DIRECTORSHIP. Neither the Plan nor the granting of any Award hereunder nor any other action taken pursuant to the Plan 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 shall be appropriately adjusted. 9. ADMINISTRATIVE COMMITTEE. The Committee shall have full power an authority to construe and administer the Plan. Any action taken under the provisions of the Plan by the Committee arising out of or in connection with the administration, construction, or effect of the Plan 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 Senior Vice President and the Chief Financial Officer of Hastings. 10. EFFECTIVE DATE. The Plan shall be effective as of February 15, 1998. 11. AMENDMENT. The Plan may be amended or repealed by the Board of Directors of Hastings, provided that any such action shall not adversely affect any Participant's rights under the Plan with respect to Award which were made prior to such action. In no event shall the provisions of the Plan be amended more than once every six months, other to comport with changes in the Internal Revenue Code of 1986, as amended, ERISA, or the rules thereunder. 12. EXPENSES OF THE PLAN. All costs and expenses of the adoption and administration of the Plan shall be borne by Hastings and none of such expenses shall be charged to any Participant. 13. COMPLIANCE WITH RULE 16b-3. It is the intention of Hastings that the Plan comply in all respects with Rule 16b-3 under Section 16(b) of the Securities Exchange Act of 1933 (the 3 "Exchange Act") and that 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 Plan provision is later found to not be in compliance with Rule 16b-3 or if any Plan provision would disqualify Plan Participants from remaining disinterested persons, that provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. EX-10.22 11 FORM OF DIRECTED SHARE PROGRAM MATERIALS 1 EXHIBIT 10.22 April 8, 1998 Dear Hastings Associate: As you know, Hastings Entertainment, Inc. (the "Company") has recently filed a registration statement with the Securities and Exchange Commission relating to a proposed initial public offering of the Company's Common Stock. In connection with this public offering, the Company has set aside a certain number of shares to be issued at the initial public offering price for our associates, our associates' families, current shareholders, and friends of the Company in what is commonly referred to as a "Direct Share Program". If you are interested in receiving more information about the proposed public offering or the Direct Share Program, please submit by mail, fax, or E-mail the information requested on the attached sheet by April 22, 1998. Return addresses are as follows: Mail: Hastings Entertainment, Inc. Fax #: (806) 351-2424 Investor Relations PO Box 35350 E-mail address: irelations@hastings-ent.com Amarillo, TX 79120-5350 Hastings E-mail: Investor Relations mailbox As soon as the preliminary prospectus is available, any associate who returned the requested information will be sent a packet of information which will include a copy of the preliminary prospectus. The preliminary prospectus will include information about the public offering including information regarding charges and expenses. It is expected that the preliminary prospectus will be available in early May 1998. PLEASE READ THE PRELIMINARY PROSPECTUS CAREFULLY PRIOR TO MAKING YOUR INVESTMENT DECISION. Thank you for your continuing efforts at Hastings. Sincerely, /s/ Dennis McGill Dennis McGill Vice President-Finance and Chief Financial Officer A registration statement relating to these securities has been filed with the United States Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This communication shall not constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. No offer to buy these securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date. An indication of interest in response to this communication will involve no obligation or commitment of any kind. 2 HASTINGS ENTERTAINMENT, INC. DIRECT SHARE PROGRAM INITIAL INFORMATION SHEET Date ------------------------------- Associate Name --------------------------------------------- Associate Number --------------------------- Store Location and Number ----------------------------------- Home Address -------------------------------------------------------------------- - -------------------------------------------------------------------------------- Daytime Telephone Number ( ) - ---- -------------------- Nighttime Telephone Number ( ) - ---- -------------------- Fax Telephone Number ( ) - ---- -------------------- E-mail address -------------------------------------------- Mail: Hastings Entertainment, Inc. Fax #: (806) 351-2424 Investor Relations PO Box 35350 E-mail address: irelations@hastings-ent.com Amarillo, TX 79120-5350 Hastings E-mail: Investor Relations mailbox Please return by April 22, 1998 3 April 8, 1998 Mr. John Shareholder XXX First Place Amarillo, TX 79120 Dear Mr. Shareholder: As you know, Hastings Entertainment, Inc. (the "Company") has recently filed a registration statement with the Securities and Exchange Commission relating to a proposed initial public offering of the Company's Common Stock. In connection with this public offering, the Company has set aside a certain number of shares to be issued at the initial public offering price for current shareholders, our associates, our associates' families, and friends of the Company in what is commonly referred to as a "Direct Share Program". If you are interested in receiving more information about the proposed public offering or the Direct Share Program, please submit by mail, fax, or E-mail the information requested on the attached sheet by April 22, 1998. Return addresses are as follows: Mail: Hastings Entertainment, Inc. Fax #: (806) 351-2424 Investor Relations PO Box 35350 E-mail address: irelations@hastings-ent.com Amarillo, TX 79120-5350 Hastings E-mail: Investor Relations mailbox As soon as the preliminary prospectus is available, any shareholder who returned the requested information will be sent a packet of information which will include a copy of the preliminary prospectus. The preliminary prospectus will include information about the public offering including information regarding charges and expenses. It is expected that the preliminary prospectus will be available in early May 1998. PLEASE READ THE PRELIMINARY PROSPECTUS CAREFULLY PRIOR TO MAKING YOUR INVESTMENT DECISION. If you have any questions, please call me at (806) 351-2300 ext. 6000. Sincerely, /s/ Dennis McGill Dennis McGill Vice President-Finance and Chief Financial Officer A registration statement relating to these securities has been filed with the United States Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This communication shall not constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. No offer to buy these securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date. An indication of interest in response to this communication will involve no obligation or commitment of any kind. 4 HASTINGS ENTERTAINMENT, INC. DIRECT SHARE PROGRAM INITIAL INFORMATION SHEET Date ------------------------------- Shareholder Name ------------------------------------------- Home Address -------------------------------------------------------------------- - -------------------------------------------------------------------------------- Daytime Telephone Number ( ) - ---- -------------------- Nighttime Telephone Number ( ) - ---- -------------------- Fax Telephone Number ( ) - ---- -------------------- E-mail address -------------------------------------------- Mail: Hastings Entertainment, Inc. Fax #: (806) 351-2424 Investor Relations PO Box 35350 E-mail address: irelations@hastings-ent.com Amarillo, TX 79120-5350 Please return by April 22, 1998. EX-21.1 12 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 Subsidiaries of the Company 1. Hastings Internet, Inc. 2. Hastings Properties, Inc. 3. College Stores, Inc.
EX-23.1 13 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 Independent Auditors' Consent and Report on Schedule The Board of Directors Hastings Entertainment, Inc.: The audits referred to in our report dated March 20, 1998, except as to note 12, which is as of _______________, 1998, included the related financial statement schedule as of January 31, 1998, and for each of the years in the three-year period ended January 31, 1998, included in the registration statement. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Dallas, Texas May 18,1998 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AMENDMENT NO. 2 TO FORM S-1. 0001054579 HASTINGS ENTERTAINMENT, INC. 1,000 YEAR JAN-31-1998 FEB-01-1997 JAN-31-1998 3,840 0 0 0 126,835 3,889 160,817 80,114 215,298 83,371 0 0 0 87 71,631 215,298 357,765 357,765 220,905 220,905 (139) 0 4,228 13,868 5,270 8,598 0 0 0 8,598 1.01 .98
EX-27.2 15 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AMENDMENT NO. 2 TO FORM S-1. 0001054579 HASTINGS ENTERTAINMENT, INC. 1,000 YEAR JAN-31-1997 FEB-01-1996 JAN-31-1997 4,972 0 0 0 105,185 3,396 138,128 70,963 181,721 56,080 0 0 0 87 62,982 181,721 324,291 324,291 205,912 205,912 (126) 0 3,585 6,116 2,320 3,796 0 0 0 3,796 .44 .43
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